SEC Filing | Codiak BioSciences

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-39615

CODIAK BIOSCIENCES, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware	47-4926530
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
35 CambridgePark Drive, Suite 500 Cambridge, MA	02140
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (617) 949-4100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

CDAK

Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 29, 2022, the registrant had 22,661,900 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents


		Page
PART I.
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	4
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021	5
	Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44
PART II.		45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
Signatures		47

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains express or implied forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•

the success, cost and timing of our product development activities, preclinical studies and clinical trials, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;

•

the design and conduct of our clinical trials of exoSTING, exoIL-12 and exoASO-STAT6;

•

our ability to successfully advance any of our engEx product candidates into and through clinical trials, or obtain marketing approval;

•

the potential and capabilities of our engEx Platform, engEx product candidates and engEx discovery programs;

•

the potential and capability of our engEx Platform to generate additional engEx product candidates;

•

our ability to secure from Lonza Rockland, Inc. (“Lonza”), under our manufacturing arrangement with them, sufficient supply of our product candidates for, clinical trials or commercial use, if approved;

•

our ability to successfully procure from third parties sufficient supply of, our product candidates for preclinical studies, clinical trials or commercial use, if approved;

•

our ability to utilize our engEx Platform to engineer exosomes to carry various biologically active drug molecules, target specific cell types or cellular pathways or enhance the value of existing drug modalities;

•

the potential indications that we may be able to target with engineered exosomes generated from our engEx Platform;

•

the size, composition and growth potential of the patient populations and markets we intend to target with our engEx product candidates and our ability to develop and commercialize engEx product candidates to address those patient populations and markets;

•

the ability and willingness of our current and future collaborators to continue research and development activities relating to our engEx exosomes;

•

our ability to maintain regulatory approval, if obtained, of any of our current or future engEx product candidates, and any related restrictions, limitations and/or warnings in the label of an approved product candidate;

•

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates;

•

our ability to license intellectual property relating to our product candidates and to comply with our existing license and collaboration agreements;

•

our ability to commercialize our products, if approved, in light of the intellectual property rights of others;

•

developments relating to the use of exosomes to develop therapeutics;

•

the success of competing therapies that are or become available;

•

our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;

•

the commercialization of our product candidates, if approved;

•

our plans to research, develop and commercialize our engEx product candidates and enhance the capabilities of our engEx Platform;

•

our ability to attract collaborators with development, regulatory and commercialization expertise;

•

future agreements with third parties in connection with the commercialization of our product candidates and any other approved product;

•

the rate and degree of market acceptance of our product candidates;

•

regulatory developments in the United States and foreign countries;

•

our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;

•

our ability to attract and retain key scientific or management personnel;

•

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

•

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

•

the impact of laws and regulations; and

•

the direct or indirect impact of the COVID-19 pandemic on our business, operations, development timelines and the markets and communities in which we and our partners, collaborators, vendors and customers operate.

In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Summary of the Material Risks Associated with Our Business” and under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Annual Report"), and elsewhere in this Quarterly Report on Form 10-Q. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission as exhibits hereto completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10‑Q.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for our product candidates. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances that may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from our own internal estimates and research as well as from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. While we are not aware of any misstatements regarding any third-party information presented in this Quarterly Report on Form 10-Q, their estimates, in particular as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties and are subject to change based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in our 2021 Annual Report, and this Quarterly Report on Form 10-Q.

NOTE REGARDING COMPANY REFERENCES

Unless the context otherwise requires, the terms “Codiak,” “the Company,” “we,” “us,” and “our” in this Form 10-Q refer to Codiak BioSciences, Inc. and its consolidated subsidiaries.

Item 1. Financial Statements

CODIAK BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share and per share data)


	JUNE 30,			DECEMBER 31,
	2022			2021
Assets
Current assets:
Cash and cash equivalents	$	41,785		$	76,938
Prepaid manufacturing services		9,063			7,315
Prepaid expenses and other current assets		5,161			5,918
Total current assets		56,009			90,171
Property and equipment, net of accumulated depreciation of $13,938 and $11,809		21,557			23,479
Restricted cash		4,170			4,170
Operating right-of-use assets		21,304			21,957
Prepaid manufacturing services, net of current portion		29,670			31,893
Total assets	$	132,710		$	171,670
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,131		$	1,838
Accrued expenses		7,699			9,703
Deferred revenue		292			12,963
Operating lease liabilities		2,891			2,661
Total current liabilities		12,013			27,165
Long-term liabilities:
Deferred revenue, net of current portion		17,341			30,686
Note payable, net of discount		25,596			25,430
Operating lease liabilities, net of current portion		33,362			34,884
Total liabilities		88,312			118,165
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, $0.0001 par value; 150,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 22,545,531 and 22,383,830 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		2			2
Additional paid-in capital		384,446			378,750
Accumulated deficit		(340,050	)		(325,247	)
Total stockholders’ equity		44,398			53,505
Total liabilities and stockholders’ equity	$	132,710		$	171,670

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODIAK BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share data)


	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2022			2021			2022			2021
Revenue:
Collaboration revenue	$	13,145		$	890		$	25,849		$	14,081
Total revenue		13,145			890			25,849			14,081
Operating expenses:
Research and development		12,798			15,419			27,045			31,969
General and administrative		7,364			6,937			14,071			13,525
Total operating expenses		20,162			22,356			41,116			45,494
Loss from operations		(7,017	)		(21,466	)		(15,267	)		(31,413	)
Other income (expense):
Interest expense		(649	)		(704	)		(1,250	)		(1,401	)
Interest income		34			9			38			14
Other income		848			352			1,667			683
Realized gain		9			—			9			—
Total other income (expense), net		242			(343	)		464			(704	)
Net loss	$	(6,775	)	$	(21,809	)	$	(14,803	)	$	(32,117	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.30	)	$	(0.99	)	$	(0.66	)	$	(1.51	)
Weighted average common shares outstanding, basic and diluted		22,493,879			22,117,593			22,444,799			21,230,424

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODIAK BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited, in thousands, except share data)


	COMMON STOCK				ADDITIONAL PAID-IN			ACCUMULATED			TOTAL STOCKHOLDERS
	SHARES		AMOUNT		CAPITAL			DEFICIT			EQUITY
Balance at December 31, 2021		22,383,830	$	2	$	378,750		$	(325,247	)	$	53,505
Stock-based compensation		—		—		2,349			—			2,349
Issuance of common stock in at-the-market offering, net of issuance costs of $17		110,037		—		553			—			553
Net Loss		—		—		0			(8,028	)		(8,028	)
Balance at March 31, 2022		22,493,867	$	2	$	381,652		$	(333,275	)	$	48,379
Common stock issued under Employee Stock Purchase Plan (ESPP)		51,664		—		126			—			126
Stock-based compensation		—		—		2,668			—			2,668
Net Loss		—		—		—			(6,775	)		(6,775	)
Balance at June 30, 2022		22,545,531	$	2	$	384,446		$	(340,050	)	$	44,398


	COMMON STOCK				ADDITIONAL PAID-IN			ACCUMULATED			TOTAL STOCKHOLDERS
	SHARES		AMOUNT		CAPITAL			DEFICIT			EQUITY
Balance at December 31, 2020		18,787,579	$	2	$	302,655		$	(288,090	)	$	14,567
Exercise of options to purchase common stock		46,807		—		316			—			316
Stock-based compensation		—		—		2,273			—			2,273
Issuance of common stock upon public offering, net of issuance costs of $560		3,162,500		—		61,868			—			61,868
Net loss		—		—		—			(10,308	)		(10,308	)
Balance at March 31, 2021		21,996,886	$	2	$	367,112		$	(298,398	)	$	68,716
Exercise of options to purchase common stock		276,089		—		2,454			—			2,454
Stock-based compensation		—		—		2,690			—			2,690
Issuance costs related to common stock		—		—		(187	)		—			(187	)
Net loss		—		—		—			(21,809	)		(21,809	)
Balance at June 30, 2021		22,272,975	$	2	$	372,069		$	(320,207	)	$	51,864

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODIAK BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	SIX MONTHS ENDED JUNE 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(14,803	)	$	(32,117	)
Adjustments to reconcile net loss to net cash from operating activities:
Stock-based compensation expense		5,017			4,963
Non-cash interest expense		182			270
Depreciation and amortization expense		2,128			2,759
Non-cash manufacturing expense		462			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		757			(947	)
Prepaid manufacturing services		13			—
Operating right-of-use assets		654			484
Accounts payable		(650	)		(54	)
Accrued expenses		(1,900	)		(459	)
Deferred revenue		(26,016	)		(11,835	)
Operating lease liabilities		(1,292	)		(384	)
Net cash used in operating activities		(35,448	)		(37,320	)
Cash flows from investing activities:
Purchases of property and equipment		(353	)		(2,365	)
Net cash used in investing activities		(353	)		(2,365	)
Cash flows from financing activities:
Proceeds from exercise of common stock options		—			2,770
Net cash received from Employee Stock Purchase Program (ESPP)		126			—
Proceeds from issuance of common stock, net of issuance costs		522			61,681
Net cash provided by financing activities		648			64,451
Net (decrease) increase in cash, cash equivalents and restricted cash		(35,153	)		24,766
Cash, cash equivalents and restricted cash, beginning of period		81,108			93,085
Cash, cash equivalents and restricted cash, end of period	$	45,955		$	117,851
Supplemental disclosures:
Cash paid for interest	$	516		$	1,138
Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued expenses	$	4		$	368
Deferred offering costs included in accrued expenses	$	—		$	16

	AS OF JUNE 30,
Reconciliation to amounts within the consolidated balance sheets	2022			2021
Cash and cash equivalents	$	41,785		$	113,681
Restricted cash		4,170			4,170
Cash, cash equivalents and restricted cash at end of period	$	45,955		$	117,851

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODIAK BIOSCIENCES, INC.

Notes to CONDENSED Consolidated Financial Statements

(Unaudited)

1. Nature of the Business

Codiak BioSciences, Inc. (collectively, with its consolidated subsidiaries, any of "Codiak", "we", "us", or the "Company") was incorporated in Delaware on June 12, 2015 and is headquartered in Cambridge, Massachusetts. Codiak is a clinical-stage biopharmaceutical company focused on pioneering the development of exosome-based therapeutics, a new class of medicines with the potential to transform the treatment of a wide spectrum of diseases with high unmet medical need. Exosomes have evolved as intercellular transfer mechanisms for complex, biologically active macromolecules and have emerged in recent years as a compelling potential drug delivery vehicle. By leveraging its deep understanding of exosome biology, the Company has developed its engineering and manufacturing platform (the "engEx Platform"), to expand upon the innate properties of exosomes to design, engineer and manufacture novel exosome therapeutics. Codiak has utilized its engEx Platform to generate a deep pipeline of engineered exosomes ("engEx exosomes") aimed at treating a broad range of diseases, including oncology and infectious disease and rare disease. In September 2020, Codiak initiated clinical trials for two of its lead product candidates, exoSTING and exoIL-12, which are being developed to address oncology indications. In June 2022, the Company initiated a Phase 1 clinical trial of exoASO-STAT6, Codiak’s first systemically delivered exosome therapeutic candidate. To the Company's knowledge, exoSTING, exoIL-12 and exoASO-STAT6 are the first engineered exosomes to enter clinical development.

Since its inception, the Company has devoted substantially all of its resources to its research and development efforts, including activities to develop its engEx Platform, advance engEx product candidates into clinical trials, to perform preclinical research to identify potential engEx product candidates, to perform process development to refine Codiak’s exosome engineering and manufacturing processes, and to provide general and administrative support for these operations.

The Company has primarily funded its operations with proceeds from the sales of common stock, redeemable convertible preferred stock, collaborative and research arrangements with Jazz Pharmaceuticals Ireland Limited ("Jazz") and Sarepta Therapeutics, Inc. ("Sarepta") and its Loan and Security agreement with Hercules Capital, Inc. ("Hercules"). As of June 30, 2022, the Company has raised an aggregate of $168.2 million through the issuance of its redeemable convertible preferred stock and convertible debt, net of issuance costs, $24.6 million from its term loan facility with Hercules, net of issuance costs, and received $66.0 million in payments from its collaborations with Jazz and Sarepta. On October 16, 2020, the Company completed its initial public offering ("IPO"), pursuant to which it issued and sold 5,500,000 shares of its common stock at a public offering price of $15.00 per share, resulting in net proceeds of $74.4 million, after deducting underwriting discounts and commissions and other offering expenses. On February 17, 2021, the Company completed a follow-on public offering, pursuant to which it issued 3,162,500 shares of its common stock (inclusive of the exercise of the underwriter’s option to purchase 412,500 additional shares of common stock) at a public offering price of $21.00 per share, resulting in aggregate net proceeds of $61.7 million, after deducting underwriting discounts and commissions and other offering expenses. During the six-month period ended June 30, 2022, the Company raised $0.6 million utilizing an "at-the-market" offering facility, pursuant to which it sold 110,037 shares of its common stock.

The Company has incurred significant operating losses and negative cash flows from operations since inception and expects to continue to incur operating losses for the foreseeable future. In addition, the Company anticipates that its expenses will increase significantly in connection with ongoing activities to support its engEx Platform development, drug discovery and preclinical and clinical development, in addition to creating a portfolio of intellectual property and providing administrative support.

The Company does not expect to generate significant revenue from sales of its engEx product candidates unless and until clinical development has been successfully completed and regulatory approval is obtained. If the Company obtains regulatory approval for any of its investigational products, it expects to incur significant commercialization expenses.

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company expects that its cash and cash equivalents of $41.8 million as of June 30, 2022 will be insufficient to allow the Company to fund its current operating plan through at least the next 12 months from the issuance of these financial statements. Maintaining the Company's ongoing operations is dependent upon its ability to obtain additional financing, as to which it can make no assurance. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of at least one year from the date these financial statements are issued. Accordingly, the Company will be required to raise additional funds through a public equity financing, establish collaborations with or license its technology to other companies, or seek alternative means of financial support, in order to continue to fund its operations in the future. There can be no assurance, however, that additional fund raising will be successful and available on terms acceptable to the Company, or at all. If the Company is unable to raise capital when needed or on attractive terms, it may be forced to delay, reduce or eliminate certain costs related to its operations and research and development programs.

The Company is subject to those risks associated with any biopharmaceutical company that has substantial expenditures for research and development. There can be no assurance that the Company’s research and development projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially viable. In addition, the Company operates in an environment of rapid technological change and is largely dependent on the services of its employees and consultants. If the Company fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and be forced to reduce its operations.

2. Summary of Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements that accompany these notes have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting, consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Annual Report") as filed with the SEC on March 10, 2022. Any reference in these notes to applicable guidance is meant to refer to the authoritative accounting principles generally accepted in the U.S. as found in the Accounting Standard Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB"). This report should be read in conjunction with the consolidated financial statements in our 2021 Annual Report.

The consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

We have made estimates and judgments affecting the amounts reported in our consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including critical accounting policies or estimates related to revenue recognition, stock-based compensation, accrued expenses, leases, gain upon derecognition, contingent consideration, prepaid manufacturing assets and impairment assessments. We base our estimates on historical experience and various relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results that we experience may differ materially from our estimates.

Accounting Pronouncements and Significant Accounting Policies

The Company reviews new accounting standards as they are issued by the FASB or other standard-setting bodies. As of June 30, 2022, the Company has not identified any new standards that it believes will have a material impact on the Company’s financial statements.

There were no changes to the Company’s significant accounting policies during the six months ended June 30, 2022.

3. Derecognition of Business

Arrangement Summary

On November 1, 2021, the Company entered into an Asset Purchase Agreement ("APA") with Lonza Rockland, Inc. ("Lonza"). Under the terms of the APA, Lonza acquired all of the assets, properties and rights related to the Company’s business of manufacturing exosomes for use in clinical and non-clinical studies and the associated laboratory facility, with the exception of any activities associated with exosome modification and formulation. The closing of the transactions contemplated by the APA (the "Lonza Closing") occurred on November 15, 2021. In connection with the Lonza Closing, certain specialized manufacturing and quality personnel of the Company became employees of Lonza (the "Transferred Employees").

In connection with the Lonza Closing, the Company entered into a Manufacturing Services Agreement ("MSA") with Lonza which became effective on November 15, 2021. Pursuant to the terms of the MSA, Lonza became the exclusive manufacturing partner for the production of the Company’s exosome products, subject to limited exceptions. As consideration for the transactions contemplated by the APA and the associated ancillary agreements, the Company is entitled to approximately $65.0 million worth of exosome manufacturing services for its clinical programs during the next four years. To the extent the Company elects to use any free and/or discounted manufacturing services available under the MSA, it would be responsible for bearing any accompanying materials costs, external costs and a handling fee. Lonza is permitted to terminate the MSA with 12 months advance notice provided at any time after November 15, 2023. Accordingly, the Company’s ability to utilize the free and discounted manufacturing services available under the MSA in periods beyond November 15, 2024 is subject to Lonza’s right to terminate. The MSA may also be terminated upon the occurrence of certain other events, including customary termination provisions.

Concurrently with the Lonza Closing, the Company and Lonza executed a License and Collaboration Agreement (the "License Agreement") on November 15, 2021. Pursuant to the terms of the License Agreement, the Company granted to Lonza an exclusive, worldwide, perpetual and sublicensable license to its high-throughput exosome manufacturing intellectual property in the contract development and manufacturing field. The Company is eligible to receive from Lonza a double-digit percentage of future sublicensing revenues per the terms of the License Agreement. No sublicensing revenue had been received by the Company or earned by Lonza as of June 30, 2022.

Also contemporaneous with the Lonza Closing, the Company and Lonza entered into a Sublease Agreement (the "Sublease Agreement"), pursuant to which Lonza subleased the premises at which the Company’s exosome manufacturing operations were located. The initial lease term commenced on November 15, 2021 and continues through November 30, 2024. Under the terms of the Sublease Agreement, Lonza is obligated to pay the Company approximately $1.0 million of fixed rent charges per year, subject to a 2.8% annual increase, plus certain operating expenses and other costs. The Company retained the primary obligation under the original lease upon execution of the Sublease Agreement.

Upon termination of the MSA on or prior to December 31, 2025, some aspects of the transactions contemplated by the APA and related ancillary agreements are required to be reverted, including with respect to certain assets, properties and rights that were transferred to Lonza. Upon termination or expiration of the Sublease Agreement at any time after December 31, 2025, some aspects of the transactions contemplated by the APA and related ancillary agreements are subject to potential reversion at Lonza’s option, including with respect to certain assets, properties and rights that were transferred to Lonza.

Accounting Analysis

The APA and pertinent elements of the MSA, the License Agreement and the Sublease Agreement comprise a single transaction because they were entered into in contemplation of one another and designed to achieve an overall commercial effect. Together, the related transactions consummated amongst the multiple contracts culminate in the transfer of the Company’s exosome manufacturing operations to Lonza (the "Lonza Transfer Transaction").

The Lonza Transfer Transaction represents the disposition of a business. Accordingly, the Company applied the derecognition guidance in ASC 810 in accounting for the transaction since Lonza is not a customer for any aspect of the arrangement. The Company’s control over the exosome manufacturing business transferred to Lonza was lost upon the closing of the APA and related ancillary agreements on November 15, 2021. Therefore, the Company recognized a gain upon derecognition on November 15, 2021.

The gain was calculated as the difference between: (i) the fair value of the non-cash consideration and (ii) the carrying amount of the underlying group of assets. Because Lonza is entitled to terminate the MSA for any or no reason with 12 months’ notice after November 15, 2023, the Company determined that any non-cash consideration scheduled beyond November 15, 2024 is contingent consideration since its ability to utilize the associated free and discounted manufacturing services is subject to Lonza’s right to terminate. The Company also treated the sublicensing revenue that may become payable under the License Agreement as contingent consideration as the receipt of any such amounts is dependent on Lonza engaging in sublicensing transactions, which is not expected to be material. Neither of the elements of contingent consideration is required to be accounted for as a derivative instrument because either the payments do not meet the definition of a derivative or qualify for a scope exception from derivative accounting.

Consequently, the consideration attributable to the Lonza Transfer Transaction is limited to the non-cash consideration due to the Company under the MSA and the sublicensing fees to which the Company is entitled under the License Agreement. The Company recorded the aggregate consideration, including the contingent consideration, at its fair value as of November 15, 2021. The aggregate fair value of the non-cash consideration represents the total discounted cash flows associated with the manufacturing expenditures expected to be avoided over the period the free and discounted services are available. The value of the costs that would otherwise be incurred was determined in reference to comparable costs charged by unrelated third parties. The Company also incorporated a breakage factor in deriving the estimated fair value of the non-cash consideration to reflect expectations around utilization by the Company and termination by Lonza. The Company classified the MSA as a Level 3 fair value measurement at the date of the closing of the transaction. The discounted cash flow approach relies primarily on Level 3 unobservable inputs, whereby expected future cash flows are discounted using a rate that includes assumptions regarding an entity’s average cost of debt and equity, incorporates expected future cash flows based on internal business plans, and applies certain assumptions about risk and uncertainties. As of November 15, 2021, the Company estimated the aggregate fair value of such non-cash consideration, including the associated contingent consideration, to be approximately $39.2 million. The Company does not expect to earn any significant sublicensing fees or other consideration from the transaction.

Amounts payable under the Sublease Agreement based on the contractually stated rates approximate the fair value of the associated rights conveyed as of November 15, 2021. Therefore, the Company has accounted for the Sublease Agreement separately from the disposition of the business. No amount has been allocated from the other consideration in the arrangement to this element.

The Company has recorded the aggregate fair value of the non-cash consideration as a prepaid manufacturing services asset as of November 15, 2021. The Company will amortize the prepaid manufacturing services asset as requested services are rendered by Lonza under the MSA, subject to impairment assessments. Such amount is classified as current or noncurrent based on the timing of when the associated services are expected to be utilized by the Company. Amounts expected to be consumed within the 12 months following June 30, 2022 are classified within current assets as prepaid manufacturing services as of June 30, 2022, while the remainder was classified as a noncurrent asset as of June 30, 2022. The Company has utilized $0.5 million of the prepaid manufacturing services for preliminary work as of June 30, 2022.

4. Fair Value Measurements

The following tables present information about the Company’s assets measured at fair value on a recurring basis, and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):


	JUNE 30, 2022
	TOTAL		LEVEL 1		LEVEL 2		LEVEL 3		NOT SUBJECT TO LEVELING(1)
Assets:
Cash equivalents:
Money market funds	$	1	$	—	$	—	$	—	$	1
	$	1	$	—	$	—	$