Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions, and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A. Risk Factors. The forward-looking statements contained in this Annual Report on Form 10-K are made as of the date of this Annual Report on Form 10-K, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
Overview
We are 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 our deep understanding of exosome biology, we have developed our engineering and manufacturing platform, or the engEx Platform, to expand upon the innate properties of exosomes to design, engineer and manufacture novel exosome therapeutics. We have utilized our engEx Platform to generate a deep pipeline of engineered exosomes, or engEx exosomes, aimed at treating a broad range of diseases, including oncology, neuro-oncology, infectious disease and rare disease.
In September 2020, we initiated clinical trials of our lead engEx product candidates, exoSTING and exoIL-12, which are being developed to address tumors. In November 2021, we announced that the FDA cleared our IND for exoASO-STAT6. This will be our first systemically delivered exosome therapeutic candidate. To our knowledge, exoSTING, exoIL-12 and exoASO-STAT6 are the first engineered exosomes to enter clinical development.
In December 2020 and February 2021, we reported positive results from Part A of our Phase 1 clinical trial of exoIL-12 in healthy human volunteers. In this randomized, placebo controlled, double-blind study, exoIL-12 demonstrated a favorable safety and tolerability profile, with no local or systemic treatment-related adverse events and no detectable systemic exposure of IL-12. Results also confirmed retention of active IL-12 at the injection site and prolonged pharmacodynamic effects. These results in healthy volunteers, which are consistent with our preclinical observations, provide validation of our engEx Platform and one of the founding principles of Codiak—that engineered exosomes can offer the opportunity to tailor therapeutic payloads to provide an active biological response while at the same time limiting unwanted side effects.
In November 2021, we reported initial data from the first three dose escalating cohorts (0.3 mcg, 1.0 mcg, and 3.0 mcg) enrolled in the Phase 1/2 study of exoSTING. Trial participants (n=11) were administered exoSTING intratumorally and all subjects had received at least two prior therapies prior to study entry, with most (73%) having progressed on checkpoint inhibitors. Plasma pharmacokinetic, or PK, measurements of subjects that received exoSTING showed no systemic exposure to the agonist. Further, analyses of available plasma biomarkers indicated a lack of systemic inflammatory cytokines detectable in blood after exoSTING administration. exoSTING appeared to be generally well-tolerated. Blood biomarker assessments conducted post-dosing showed evidence of dose-dependent activation of the STING pathway and Type I INF induction along with CXCL10, indicating activation of the innate immune response. Paired tumor biopsies available from two subjects showed evidence of an adaptive immune response and CD8 effector T cell infiltration into the tumor, as well as an increase in PD-L1 expression. Finally, in subjects evaluable for early signs of antitumor activity (n=8), tumor shrinkage was observed in injected as well as distal, non-injected tumors, in a subset of subjects.
Enrollment in cohorts 4 (6 mcg) and 5 (12 mcg) of the exoSTING trial is ongoing. Data from all five cohorts including objective response data are expected in the late first half of 2022, which will enable identification of a recommended Phase 2 dose. We also expect to receive safety, biomarker and preliminary pharmacodynamics and efficacy results from Part B (treatment of early stage CTCL patients) of our Phase 1 clinical trial of exoIL-12 by late first half 2022. Furthermore, we have multiple preclinical and discovery programs of our engEx exosomes that we are or have previously been advancing either independently or through our strategic collaborations with Jazz Pharmaceuticals Ireland Limited, or Jazz, and Lonza Rockland, Inc., or Lonza.
Sarepta notified us that it was terminating the two-year Research License and Option Agreement, dated June 17, 2020, between Sarepta and us, effective as of December 3, 2021.
We were incorporated and commenced operations in 2015. Since inception, we have devoted substantially all of our resources to developing our engEx Platform, our engEx product candidates and engEx exosomes, clinical and preclinical candidates; building our intellectual property portfolio, process development and manufacturing function; business planning; raising capital and providing general and administrative support for these operations. To date, we have financed our operations primarily with proceeds from sales of our common stock and redeemable convertible preferred stock, and our term loan facility with Hercules Capital, Inc., or Hercules, and our collaborations with Jazz and Sarepta. As of December 31, 2021, we raised an aggregate of $168.2 million through the issuance of our redeemable convertible preferred stock, net of issuance costs, $24.6 million from our term loan facility with Hercules, net of issuance costs, and received $66.0 million in payments from our collaborations with Jazz and Sarepta. On October 16, 2020, we completed our initial public offering, or IPO, pursuant to which we issued and sold 5,500,000 shares of our 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, we completed a follow-on public offering, pursuant to which we issued and sold 3,162,500 shares of our 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.
On November 1, 2021, we and Lonza entered into an Asset Purchase Agreement, or the APA, pursuant to which Lonza acquired our exosome manufacturing facility and related assets, and subleased the premises, located at 4 Hartwell Place, Lexington, Massachusetts. On November 15, 2021, we and Lonza closed the transactions contemplated by the APA, or the Lonza Closing. In connection with the Lonza Closing, and as consideration for the APA, we and Lonza entered into a Manufacturing Services Agreement, or the MSA. Pursuant to the MSA, Lonza will become the exclusive manufacturing partner for future clinical and commercial manufacturing of our exosome products pipeline, subject to limited exceptions. As consideration for the transactions contemplated by the APA and the associated ancillary agreements, we are entitled to approximately $65.0 million worth of exosome manufacturing services for our clinical programs during the next four years. Commencing in 2026, we shall purchase from Lonza a contractually agreed minimum amount of exosome manufacturing services per year for ten years, or if earlier, until the fifth (5 th ) anniversary of the first commercial sale of a Codiak exosome product, subject to limited exceptions.
Also in connection with the Lonza Closing, we and Lonza entered into a Licensing and Collaboration Agreement, or the License. Pursuant to the License, we granted Lonza a worldwide, exclusive and sub-licensable license to our high-throughput exosome manufacturing intellectual property in the contract development and manufacturing field, and a worldwide, non-exclusive and sub-licensable license to such intellectual property for non-therapeutical uses outside the contract development and manufacturing field. Pursuant to the License, we are eligible to receive from Lonza a double-digit percentage of future sublicensing revenues. We shall retain our pipeline of therapeutic candidates and core exosome engineering, drug-loading expertise and related intellectual property. The companies will collaborate to establish a joint Center of Excellence for further development of exosome manufacturing technology, with a shared oversight committee. The Center of Excellence will leverage the strengths of both companies to pursue developments in exosome production, purification and analytics.
We have not generated any revenue from product sales and do not expect to do so for several years, and may never do so. We advanced our first two engEx product candidates, exoSTING and exoIL-12, into clinical trials in September 2020 and in November 2021, we announced that the FDA had cleared our IND for exoASO-STAT6, which will allow us to begin dosing study subjects in the first half of 2022. All of our other engEx exosomes are still in preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our engEx product candidates. Since our inception, we have incurred significant losses, including net losses of $37.2 million and $91.7 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $325.2 million. We expect to incur substantial additional losses in the future as we expand our research and development activities. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:
initiate and conduct clinical trials for exoSTING, exoIL-12 and exoASO-STAT6 and any other engEx product candidates we identify and choose to develop;
continue our current research programs and preclinical development of our potential engEx product candidates;
seek to identify additional research programs and additional engEx product candidates;
further develop and expand the capabilities of our engEx Platform;
secure supply chain capacity sufficient to support our planned preclinical studies and early-stage clinical trials;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, scientific, manufacturing, and general and administrative personnel;
acquire or in-license other biologically active molecules, potential engEx product candidates or technologies;
seek regulatory approvals for any engEx product candidates that successfully complete clinical trials;
establish a sales, marketing and distribution infrastructure to commercialize any engEx products for which we may obtain regulatory approval;
add operational, financial and management information systems and personnel, including personnel to support our product development and any future commercialization efforts, as well as to support our continued operations as a public company; and
take temporary precautionary measures to minimize the risk of COVID-19 to our employees, contractors and those who may participate in our studies.
We do not anticipate generating revenue from product sales for the foreseeable future, if ever, unless and until we successfully complete clinical development and obtain marketing approvals for our engEx product candidates. In addition, if we obtain marketing approval for any of our engEx product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our engEx product candidates or delay our pursuit of potential in-licenses or acquisitions.
Further, business interruptions resulting from the COVID-19 pandemic or similar public health crises could cause a significant disruption in the development of our engEx product candidates and our business operations. Securing the necessary approvals for new drugs requires the expenditure of substantial time and resources and any delay or failure to obtain such approvals could materially adversely affect our development efforts. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are to sustain on a continuing basis, then we may be to continue our operations at planned levels and be to reduce or our operations.
As of December 31, 2021, we had cash and cash equivalents of $76.9 million. We expect that our existing cash and cash equivalents as of December 31, 2021 will not enable us to fund our current operating plan and capital expenditure requirements for twelve months following the date of this filing. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. These factors raise substantial doubt about our ability to continue as a going concern. See ‘‘—Liquidity and capital resources’’ for further information.
Financial operations overview
Revenue
We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our current or future engEx product candidates are successful and result in marketing approval or additional collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from current or additional collaboration or license agreements.
In January 2019, we entered into a Collaboration and License Agreement with Jazz, pursuant to which we granted Jazz an exclusive, worldwide, royalty-bearing license to use our engEx Platform for the purposes of developing, manufacturing and commercializing exosome therapeutic candidates directed at up to five targets. In April 2021, we and Jazz mutually agreed to discontinue our work on STAT3, one of five oncogene targets subject to the Collaboration and License Agreement. On June 30, 2021, Jazz formally nominated the fifth collaboration target. In January 2022, we and Jazz mutually agreed to discontinue work on the NRAS program. As a result of this discontinuation, Jazz may nominate a replacement target, subject to nomination requirements as outlined in the collaboration agreement.
In June 2020, we entered into a Research License and Option Agreement with Sarepta, pursuant to which we received funding to conduct collaborative research, and provided Sarepta with options to obtain exclusive licenses for exosome therapeutic candidates directed at up to five targets. Sarepta notified us that it was terminating early the two-year Research License and Option Agreement, effective as of December 3, 2021. In the future, we expect substantially all of our revenue to be generated from our collaboration with Jazz and any other collaboration and license agreements we may enter into going forward.
The following is a summary of revenue recognized for the years ended December 31, 2021 and 2020 (in thousands):
YEAR ENDED
DECEMBER 31,
Revenue:
Jazz revenue
Sarepta revenue
Total collaboration revenue
Total revenue for the years ended December 31, 2021 and 2020 was $22.9 million and $2.9 million, respectively. The timing of revenue recognition is not directly correlated to the timing of cash receipts. Total deferred revenue related to our collaborative agreements as of December 31, 2021 and 2020 was $43.6 million and $62.7 million, respectively.
Operating expenses
Research and development expense
The nature of our business and primary focus of our activities generate a significant amount of research and development costs. Research and development expenses represent costs incurred by us for the following:
initiation of the clinical development of exoSTING in a Phase 1/2 clinical trial;
initiation of the clinical development of exoIL-12 in a Phase 1 clinical trial;
Initiation of the clinical development of exoASO-STAT6 in a Phase 1 clinical trial;
costs to develop our engEx Platform;
discovery efforts leading to the selection and advancement of engEx product candidates for clinical development;
preclinical development costs for our programs; and
costs to develop our manufacturing technology and infrastructure.
The costs above comprise the following categories:
personnel-related expenses, including salaries, benefits and stock-based compensation expense;
expenses incurred under agreements with third parties, such as contract research organizations, or CROs, that conduct our preclinical studies;
licensing costs;
costs of acquiring, developing and manufacturing materials for preclinical studies, including both internal manufacturing and third-party contract manufacturing organizations, or CMOs;
costs of outside consultants and advisors, including their fees, stock-based compensation and related travel expenses;
expenses incurred for the procurement of materials, laboratory supplies and non-capital equipment used in the research and development process; and
facilities, depreciation, amortization and other direct and allocated expenses incurred as a result of research and development activities.
Our primary focus of research and development since inception has been the development of our engEx Platform and our pipeline of engEx product candidates, including our initial product candidates, exoSTING, exoIL-12, exoASO-STAT6 and discovery programs. Our research and development costs consist of personnel costs, external costs, such as fees paid to CMOs, CROs, and consultants in connection with our clinical and preclinical studies and experiments, and other internal costs, including rent, depreciation, and other miscellaneous costs. We do not allocate employee-related costs and other internal costs to specific research and development programs because these costs are used across all programs under development. We present external research and development costs for any individual engEx product candidate when we obtain Investigational New Drug, or IND, approval. As IND approval was received for exoSTING and exoIL-12 in 2020 and exoASO-STAT6 in 2021, we have presented our research and development costs below.
The following table reflects our research and development expenses for each period presented:
YEAR ENDED
DECEMBER 31,
Personnel-related (including stock-based compensation)
engEx Platform
exoIL-12
exoSTING
exoASO-STAT6
Other research and development expenses
Total research and development expenses
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we conduct clinical trials for our lead engEx product candidates, exoSTING, exoIL-12 and exoASO-STAT6, continue to discover and develop additional engEx product candidates, continue to invest in manufacturing technologies, enhance our engEx Platform, expand into additional therapeutic areas and incur expenses associated with hiring additional personnel to support our research and development efforts.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our engEx product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our engEx product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our engEx product candidates;
our successful enrollment in and completion of clinical trials, including our ability to generate positive data from any such clinical trials;
the costs associated with the development of any additional development programs we identify in-house or acquire through collaborations;
our ability to add and retain key research and development personnel;
our ability to establish an appropriate safety profile with IND-enabling toxicology and other preclinical studies;
our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression, as applicable, of our engEx product candidates;
our ability to establish and maintain agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our engEx product candidates are approved;
our ability to secure from Lonza, under our manufacturing arrangement with them, sufficient supply of our product candidates for clinical trials or commercial use, if approved;
our ability to maintain our collaborative arrangements with Jazz and earn milestone payments thereunder;
the terms and timing of any additional collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our engEx product candidates if and when approved;
our receipt of marketing approvals from applicable regulatory authorities; and
the continued acceptable safety profiles of any engEx product following approval.
A change in any of these variables with respect to the development of any of our engEx product candidates would significantly change the costs, timing and viability associated with the development of that engEx product candidate.
General and administrative expense
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. These costs relate to the operation of the business unrelated to the research and development function or any individual program.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our engEX product candidates, if approved. We also expect to continue to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs. We also expect to incur additional intellectual property-related expenses as we file patent applications to protect innovations arising from our research and development activities.
Other income (expense), net
Gain on Disposition
Gain on disposition consists of our APA with Lonza, an arrangement related to the sale of certain assets and rights associated with the exosome manufacturing and supply business.
Interest income
Interest income consists of interest income earned from our cash, cash equivalents and investments.
Interest expense
Interest expense consists of interest expense incurred from our term loan facility with Hercules.
Other income
Other income primarily consists of the sublease income under the sublease portion of our 35 CambridgePark Drive office and laboratory space and 4 Hartwell Place manufacturing facility.
Income taxes
Since our inception in 2015, we have not recorded any US federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2021, we had federal and state net operating loss carryforwards of $189.4 million and $188.7 million, respectively, which may be available to offset future taxable income. During the year ended December 31, 2021, we generated a federal net operating loss of $152.9 million, which has an indefinite carryforward period. The remaining $36.4 million of federal net operating loss carryforwards and our state net operating loss carryforwards would begin to expire in 2035. As of December 31, 2021, the Company had federal and state research and development credit carryforwards of $10.5 million and $5.0 million, respectively, which may be available to offset future income tax liabilities and which would begin to expire in 2035 and 2031, respectively.
Results of operations
The following table summarizes our consolidated statements of operations for the years ended December 31, 2021 and 2020 (in thousands):
YEAR ENDED
DECEMBER 31,
Revenue:
Collaboration revenue
Total revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Gain on disposition
Other income
Interest income
Interest expense
Total other income (expense), net
Net loss
Collaboration revenue
Collaboration revenue increased by approximately $20.0 million from $2.9 million for the year ended December 31, 2020 to $22.9 million for the year ended December 31, 2021. This increase was primarily driven by us and Jazz mutually agreeing to discontinue their work on STAT3, one of the five oncogene targets subject to the Jazz Collaboration Agreement, for $10.9 million, in addition to the early termination of the Research License and Option Agreement, with Sarepta for $7.0 million. The remaining $2.2 million is a result of operations with Sarepta prior to the termination of the Research License and Option Agreement. The agreement with Sarepta was executed in June 2020 and was terminated effective as of December 3, 2021.
Research and development expense
The following table summarizes our research and development expenses for years ended December 31, 2021 and 2020, along with the changes in those items (in thousands):
YEAR ENDED
DECEMBER 31,
ABSOLUTE INCREASE
PERCENTAGE INCREASE
(DECREASE)
(DECREASE)
Personnel-related (including stock-based compensation)
engEx Platform
exoIL-12
exoSTING
exoASO-STAT6
Other research and development expenses
Total research and development expenses
Research and development expenses decreased $9.1 million from $74.0 million for the year ended December 31, 2020 to $64.9 million for the year ended December 31, 2021.
The decrease in research and development expenses was primarily attributable to the following:
$4.6 million increase in personnel-related costs primarily driven by an increase in headcount to support increased research and development activities;
$3.0 million increase in costs related to our engEx Platform, driven primarily by a $1.8 million increase in consultant and professional service expenses and a $1.0 million increase in laboratory expenses due to the resumption of normal laboratory operations following a temporary shutdown during COVID-19 pandemic in 2020;
$2.2 million increase in expenses incurred to advance exoIL-12, driven primarily by an increase in manufacturing costs related to the exoIL-12 resupply manufacturing run;
$18.0 million decrease in expenses incurred to advance exoSTING, driven primarily by a milestone payment of $17.7 million triggered under our license agreement with Kayla Therapeutics in September 2020 and a decrease of $1.5 million in exoSTING manufacturing costs, partially offset by an increase of $1.2 million of clinical costs as the program entered the clinical stage in September 2020 ;
$2.2 million decrease in expenses incurred to advance exoASO-STAT6, driven primarily by a decrease of $4.2 million for clinical manufacturing expenses for exosomes, partially offset by an increase of $1.2 million GLP Tox studies and other external research and pre-clinical studies and an increase of $0.6 million for clinical costs; and
$1.3 million increase in other research and development costs, including rent, depreciation, and other miscellaneous costs, primarily due to increased depreciation on new equipment
General and administrative expense
The following table summarizes our general and administrative expenses for the years ended December 31, 2021 and 2020, along with the changes in those items (in thousands):
YEAR ENDED
DECEMBER 31,
ABSOLUTE INCREASE
PERCENTAGE INCREASE
(DECREASE)
(DECREASE)
Personnel-related (including stock-based compensation)
Professional fees
Facility-related and other general and administrative
Total general and administrative expenses
General and administrative expenses increased $7.8 million from $19.9 million for the year ended December 31, 2020 to $27.6 million for the year ended December 31, 2021.
The increase in general and administrative expenses was primarily attributable to the following:
$3.3 million increase in personnel-related costs primarily driven by an increase in general and administrative headcount to support our overall growth and our transition to becoming a public company;
$0.5 million increase in professional fees, driven primarily by increases in accounting services incurred in connection with operating as a public company; and
$4.1 million increase in facility related and other general and administrative expenses primarily driven by an increase in corporate insurance costs of $2.4 million, general business expenses of $0.8 million related to hiring, training, and COVID testing, and facilities and office expenses of $0.6 million
Gain on disposition
Gain on disposition increased from zero for the year ended December 31, 2020 to $33.3 million for the year ended December 31, 2021. The increase was driven by the gain recognized upon the sale of certain assets and rights associated with exosome manufacturing and supply business in the APA with Lonza (Note 3).
Interest income
Interest income for the years ended December 31, 2021 and 2020 was less than $0.1 million and $0.3 million, respectively. The $0.2 million decrease in interest income was driven primarily by the maturity of all our investments in April 2020, along with a broader overall decline in interest rates on money market securities.
Interest expense
Interest expense increased $0.8 million from $1.9 million for the year ended December 31, 2020 to $2.7 million for the year ended December 31, 2021. The increase was primarily driven by an additional draw down under the Hercules term loan facility of $15.0 million in July 2020.
Other income
Other income increased by $0.9 million from $0.9 million for the year ended December 31, 2020 to $1.8 million for the year ended December 31, 2021. The increase in other income was driven by rental income received from our sublease that began in May 2020, offset by reduction in the amortization of purchased premiums and discounts associated with our investments, as a result of the maturity of all of our investments in April 2020 and the disposal of fixed assets during 2021.
Liquidity and capital resources
Sources of liquidity
Since our inception, we have incurred significant losses in each period and on an aggregate basis. We have not yet commercialized any of our engEx product candidates, which are in various phases of early-stage and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. We have funded our operations through December 31, 2021 with aggregate net proceeds of $168.2 million from sales of our redeemable convertible preferred stock, $24.6 million from our term loan facility with Hercules, net of issuance costs, and $66.0 million received from our collaborations with Jazz and Sarepta. On October 16, 2020, we completed our IPO for net proceeds of $74.4 million, after deducting underwriting discounts and commissions and other offering expenses. On February 17, 2021, we completed a follow-on public offering for net proceeds of $61.7 million, after deducting underwriting discounts and commissions and other offering expenses. As of December 31, 2021, we had cash and cash equivalents of $76.9 million.
Hercules Loan Agreement
On September 30, 2019, or the Hercules Closing Date, we entered into a Loan and Security Agreement, or the Loan Agreement, with Hercules pursuant to which a term loan in an aggregate principal amount of up to $75.0 million, or the Term Loan Facility, was made available to us in four tranches, subject to certain terms and conditions. Ten million of the first tranche was advanced to us on the Hercules Closing Date and an additional $15.0 million under the first tranche was drawn down on July 24, 2020. Under the Loan Agreement, there were three additional tranches made available to us of $10.0 million (tranche two), $10.0 million (tranche three), and $30.0 million (tranche four). As of December 31, 2021, tranche two and tranche three had expired under the Loan Agreement.
Upon issuance, the initial advance under the first tranche was recorded as a liability with an initial carrying value of $9.5 million, net of debt issuance costs. The July 24, 2020, advance under the first tranche was recorded as a liability with an initial carrying value of $15.0 million. The initial carrying value of all outstanding advances is accreted to the repayment amount, which includes the outstanding principal plus the end of term charge, through interest expense using the effective interest rate method over the term of the loan.
Effective September 17, 2021, or the Second Hercules Closing Date, we amended the Loan Agreement with Hercules (the Amended Loan Agreement), increasing the aggregate principal amount available from $75.0 million under the Term Loan Facility to $85.0 million, or the Amended Term Loan Facility.
Under the Amended Term Loan Facility, a new third tranche of $10.0 million was established and was available immediately at our option through December 15, 2021. Tranche four was amended such that the $30.0 million available is now available through the interest only period, subject to future Lender investment Committee Approval. Tranche five of up to $20.0 million was established under the Amended Loan Agreement and is available through September 30, 2023, upon satisfaction of certain clinical milestones. Tranche five is only available in minimum draws of $5.0 million.
Advances under the Amended Term Loan Facility bear interest at a rate equal to the greater of (i) 8.25% plus the Prime Rate (as reported in The Wall Street Journal) less 3.25%, and (ii) 8.25%. The interest only period under the Term Loan Facility was extended from November 1, 2022 to October 1, 2023 under the Amended Term Loan Facility and is further extendable to October 1, 2024 upon achievement of certain clinical milestones. Under the Amended Term Loan Facility, following the interest only period, we will repay the principal balance and interest on the advances in equal monthly installments through October 1, 2025, compared to October 1, 2024 under the Term Loan Facility.
We may prepay advances under the Amended Loan Agreement, in whole or in part, at any time subject to a prepayment charge (Prepayment Premium) equal to: (i) 2.0% of amounts so prepaid, if such prepayment occurs during the first year following the Second Hercules Closing Date, (ii) 1.5% of the amount so prepaid, if such prepayment occurs during the second year following the Second Hercules Closing Date, or (iii) 1.0% of the amount so prepaid, if such prepayment occurs after the second year following the Second Hercules Closing Date.
Upon prepayment or repayment of all or any of the term loans under the Amended Term Loan Facility, we will pay (in addition to any Prepayment Premium) an end of term charge of 5.5% of the aggregate funded amount
under the Amended Term Loan Facility. With respect to the first tranche, an end of term charge of $1.4 million will be payable upon any prepayment or repayment.
The end of term charge of $1.4 million, or 5.5% of the $25.0 million of principal advanced under the Term Loan Facility, remains payable at the maturity date under the original term Loan Facility of October 1, 2024. To the extent that we are provided with additional advances under the Amended Term Loan Facility, the 5.5% end of term charge will be applied to any such additional amounts, payable on October 1, 2025, the amended maturity date of the Amended Term Loan Facility.
The Amended Term Loan Facility remains secured by a lien on substantially all of our assets, other than our intellectual property. We have agreed not to pledge or grant a security interest on our intellectual property to any third party. The Term Loan Facility also contains customary covenants and representations, including a liquidity covenant, whereby we are obligated to maintain, in an account covered by Hercules’ account control agreement, an amount equal to the lesser of: (i) 110% of the amount of our obligations under the Term Loan Facility or (ii) our then-existing cash and cash equivalents; financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries.
The events of default under the Amended Loan Agreement include, without limitation, and subject to customary grace periods, the following: (i) any failure by us to make any payments of principal or interest under the Amended Loan Agreement, (ii) any breach or default in the performance of any covenant under the Amended Loan Agreement, (iii) the occurrence of a material adverse effect, (iv) any making of false or misleading representations or warranties in any material respect, (v) our insolvency or bankruptcy, (vi) certain attachments or judgments on our assets, or (vii) the occurrence of any material default under certain of our agreements or obligations involving indebtedness. If an event of default occurs, Hercules is entitled to take enforcement action, including acceleration of amounts due under the Amended Loan Agreement.
Historical cash flows
The following table provides information regarding our cash flows for each period presented:
YEAR ENDED
DECEMBER 31,
(In thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash
Operating activities
The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of operating assets and liabilities, which are generally attributable to timing of payments, and the related effect on certain account balances, operational and strategic decisions and contracts to which we may be a party.
During the year ended December 31, 2021, operating activities used $74.1 million of cash, primarily due to a net loss of $37.2 million, a gain on disposition of $33.3 million related to our APA with Lonza, partially offset by non-cash charges of $10.1 million for stock-based compensation, $5.3 million for depreciation, and $0.5 million for non-cash interest expense.
Additionally, changes in our operating assets and liabilities primarily consisted of a $1.5 million decrease in our operating lease liabilities, a $19.0 million decrease in deferred revenue, a $1.0 million net increase in accounts payable and accrued expenses and a $1.2 million net increase in prepaid expenses and other current assets. The change in our deferred revenue was primarily driven by us and Jazz mutually agreeing to discontinue their work on STAT3, in addition to the early termination of the Research License and Option Agreement, with Sarepta. The change in our operating lease liabilities and operating lease right-of-use assets were driven by our 4 Hartwell Place and 35 CambridgePark Drive leases in the year ended December 31, 2021.
During the year ended December 31, 2020, operating activities used $63.4 million of cash, primarily due to a net loss of $91.7 million, partially offset by non-cash charges of $7.1 million for stock-based compensation, $4.4 million for depreciation, $2.7 million for common stock earned by Kayla Therapeutics in connection with our license agreement, and $0.4 million for non-cash interest expense. Additionally, changes in our operating assets and liabilities primarily consisted of a $10.1 million increase in our operating lease liabilities, a $7.1 million increase in deferred revenue, a $1.2 million decrease related to our operating lease right-of-use assets, a $4.4 million net decrease in accounts payable and accrued expenses and a $0.1 million net increase in prepaid expenses and other current assets. The change in our deferred revenue was due to proceeds from our Research License and Option Agreement with Sarepta. The change in our operating lease liabilities and operating lease right-of-use assets were driven by our 4 Hartwell Place and 35 CambridgePark Drive leases and lease incentive payments of $13.0 million received in the year ended December 31, 2020.
Investing activities
During the year ended December 31, 2021, net cash used in investing activities was $3.2 million for purchases of property and equipment.
During the year ended December 31, 2020, net cash provided by investing activities was $52.0 million, consisting of maturities of short-term investments of $73.1 million, partially offset by $21.1 million of purchases of property and equipment.
Financing activities
During the year ended December 31, 2021, net cash provided by financing activities was $65.4 million, driven by our follow-on public offering, completed on February 17, 2021, resulting in aggregate net proceeds of $61.7 million, and $3.7 million resulting from the proceeds from the exercise of common stock options.
During the year ended December 31, 2020, net cash provided by financing activities was $89.6 million, consisting of $74.4 million in net proceeds from the issuance of common stock upon completion of our initial public offering, $15.0 million in proceeds from a drawn down on our long-term debt and $0.2 million for proceeds from the issuance of common stock in connection with the exercise of stock options.
Plan of operation and future funding requirements
We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance our clinical trials of exoSTING, exoIL-12, exoASO-STAT6 and our preclinical activities for our engEx development programs. In addition, we expect to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.
Based on our current operating plan, we expect that our cash and cash equivalents as of December 31, 2021 will be insufficient to allow us to fund our current operating plan through at least the next twelve months from the filing of this Annual Report on Form 10-K. Accordingly, we will be required to raise additional funds through public equity financing, establish collaborations with, or license our technology to other companies, seek alternative means of financial support or both, in order to continue to fund our operations in the future. There can be no assurance, however, that additional fund raising will be successful and available on terms acceptable to us, or at all. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate certain costs related to our operations and research and development programs.
On November 1, 2021, we and Lonza entered into the APA, pursuant to which Lonza acquired our exosome manufacturing facility and related assets, and subleased the premises, located at 4 Hartwell Place, Lexington, Massachusetts. In connection with the Lonza Closing, and as consideration for the APA, we and Lonza entered into a Manufacturing Services Agreement, or the MSA. Pursuant to the MSA, Lonza will become the exclusive manufacturing partner for future clinical and commercial manufacturing of our exosome products pipeline, subject to limited exceptions. Under the MSA, we shall receive approximately $65.0 million worth of exosome manufacturing services for our clinical programs during the next four years. Commencing in 2026, we shall purchase from Lonza a contractually agreed minimum amount of exosome manufacturing services per year for ten years, or if earlier, until the fifth (5 th ) anniversary of the first commercial sale of a Codiak exosome product, subject to limited exceptions.
Also in connection with the Lonza Closing, we and Lonza entered into a Licensing and Collaboration Agreement, or the License. Pursuant to the License, we granted Lonza a worldwide, exclusive and sub-licensable license to our high-throughput exosome manufacturing intellectual property in the contract development and manufacturing field, and a worldwide, non-exclusive and sub-licensable license to such intellectual property for non-therapeutical uses outside the contract development and manufacturing field. Pursuant to the License, we are eligible to receive from Lonza a double-digit percentage of future sublicensing revenues. We shall retain our pipeline of therapeutic candidates and core exosome engineering, drug-loading expertise and related intellectual property. The companies will collaborate to establish a joint Center of Excellence for further development of exosome manufacturing technology, with a shared oversight committee. The Center of Excellence will leverage the strengths of both companies to pursue developments in exosome production, purification and analytics.
Because of the numerous risks and uncertainties associated with the development of our engEx Platform, exoSTING, exoIL-12, exoASO-STAT6 and other engEx development programs, and because the extent to which we may receive payments under our existing collaboration agreements or enter into collaborations with third parties for development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
the rate of progress in the development of our engEx Platform, engEx product candidates and development programs;
the scope, progress, results and costs of preclinical studies and clinical trials for any engEx product candidates and development programs;
the number and characteristics of programs and technologies that we develop or may in-license;
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
the costs necessary to obtain regulatory approvals, if any, for any approved products in the US and other jurisdictions, and the costs of post-marketing studies that could be required by regulatory authorities in jurisdictions where any such approval is obtained;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
the continuation of our existing strategic collaborations and licensing arrangements and entry into new collaborations and licensing arrangements;
the costs we incur in maintaining business operations;
the costs associated with being a public company;
the revenue, if any, received from commercial sales of our engEx product candidates for which we receive marketing approval;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our engEx product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our common stock. Additional debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially result in dilution to the holders of our common stock.
If we raise additional funds through strategic collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
Contractual obligations
Payments due by period
Total
Less than
1 year
years
years
More than
5 years
Operating lease commitments(1)(2)
Long-term debt obligations(3)
Total
The following table summarizes our contractual obligations as of December 31, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
On March 5, 2019, we entered into a non-cancelable property lease for 18,707 square feet of manufacturing space in Lexington, Massachusetts. The lease term commenced in July 2019 and is expected to end in December 2029. We have the option to extend the lease twice, each for a five-year period, at market-based rent. We fully occupied the space in late-2020. Included in the table above are the future lease payments, which exclude operating expenses and real estate taxes. Lease payments began in January 2020 and are expected to be approximately $1.1 million in each of 2022, 2023, 2024, and 2025, $1.2 million in 2026, and $3.7 million thereafter. The landlord contributed a total of up to $1.3 million toward the cost of tenant improvements. We were required to provide a $0.4 million security deposit, which we provided in the form of a letter of credit in the favor of the landlord. These amounts are excluded from the table above. In November 2021, we executed a Second Amendment to the lease (Master Lease Amendment). The only substantive change made to the terms and conditions of the master lease as instituted by the Master Lease Amendment relates to the fact that base rent charges increased by $7 per square foot per year for the remainder of the lease term.
On March 22, 2019, we entered into a non-cancelable property lease for 68,258 square feet of office and laboratory space in Cambridge, Massachusetts. The lease term commenced upon execution of the lease on March 26, 2019 and is expected to end in November 2029. We have the option to extend the lease once for a ten-year period at market-based rent. We occupied the space in February 2020 as our new corporate headquarters. Included in the table above are the future lease payments, which exclude operating expenses and real estate taxes. Lease payments began in November 2019 and are expected to be approximately $5.2 million in 2022, $5.3 million in 2023, $5.5 million in 2024, $5.7 million in 2025, $5.8 million in 2026, and $18.1 million thereafter. The landlord has contributed a total of $12.3 million toward the cost of tenant improvements. We were required to provide a $3.7 million security deposit, which we provided in the form of a letter of credit in the favor of the landlord. These amounts are excluded from the table above.
On September 30, 2019 and amended on September 17, 2021, we entered into the Hercules Loan Agreement pursuant to which we may receive advances in four separate tranches based on specified terms and provisions, of up to an aggregate principal amount of $85.0 million. As of December 31, 2021, we received advances under the first tranche totaling $25.0 million and paid issuance costs of $0.6 million. Advances under the Amended Term Loan Facility bear interest at a rate equal to the greater of (i) 8.25% plus the Prime Rate (as reported in The Wall Street Journal) less 3.25%, and (ii) 8.25%. The interest only period under the Term Loan Facility was extended from November 1, 2022 to October 1, 2023 under the Amended Term Loan Facility. We will now make interest only payments through October 1, 2023, and is further extendable to October 1, 2024 upon achievement of certain clinical milestones. Under the Amended Term Loan Facility, following the interest only period, we will repay the principal balance and interest on the advances in equal monthly installments through October 1, 2025, compared to October 1, 2024 under the Term Loan Facility.
Commencing on May 18, 2020, we entered into a sublease for 23,280 square feet of our leased space in Cambridge, Massachusetts. The term of the sublease is two years with one option to extend for one year at the sublessee’s option at a rate equal to the greater of (i) an increase of 3.0% of the annual rent owed by the sublessee in year two and (ii) market rent for the subleased premises. Effective July 1, 2021, we received notice of the sublessee's intent to exercise its option to extend the sublease for a one-year period through May 2023. Anticipated cash receipts under the sublease are $1.9 million and $0.9 million for the years ended December 31, 2022 and 2023, respectively, excluding reimbursement for a ratable portion of operating expenses. We remain jointly and severally liable under the terms of the head lease and therefore present the cash payments, inclusive of our obligation under the head lease for the subleased premises, in the table above. As such, the operating lease commitments in the table above do not include the expected cash receipts under the sublease.
On November 15, 2021, we entered into a sublease agreement for the entirety of its leased space at 4 Hartwell Place in Lexington, Massachusetts. Under the terms of the sublease the tenant is obligated to pay us base rent of approximately $1.0 million per year, subject to a 2.8% annual increase, plus certain operating expenses and other costs. The initial lease term commenced on November 15, 2021 and continues through November 30, 2024. The tenant has the option to extend the sublease term for five 12-month periods on the same terms and conditions as the current sublease, subject to an increase of 2.8% in the annual fixed rent charges. Additionally, the tenant has the right to have the associated master lease assigned to it beginning on January 1, 2026, subject to the landlord’s consent. We remain jointly and severally liable under the terms of the master lease and therefore present the cash payments, inclusive of our obligation under the master lease for the subleased premises, in the table above. As such, the operating lease commitments in the table above do not include the expected cash receipts under the sublease.
We have a license agreement with MDACC under which, pursuant to exclusive license rights granted to us under certain patents owned or co-owned by MDACC, we are obligated to pay milestone payments upon the achievement of development and regulatory milestones and the execution of sublicenses for qualifying products covered by rights granted under the agreement. MDACC is eligible to receive, on a product-by-product basis, milestone payments upon the achievement of development and regulatory milestones totaling up to $2.4 million for diagnostic products and up to $9.5 million for therapeutic products. Under this agreement, we may also be obligated to pay royalty payments on commercial products, on a product-by-product basis. Due to the variable and contingent nature of these payments, they are excluded from the table above as they are not fixed and estimable. We may terminate the license for convenience upon 180 days prior written notice to MDACC. The license automatically terminates upon our bankruptcy, if we challenge the validity or enforceability of any of the licensed patent rights, or our failure to make a number of payments in a timely manner over a specified period of time. Additionally, MDACC may the license for our subject to certain specified cure periods.
We have a license agreement with Kayla Therapeutics, pursuant to which we obtained a co-exclusive worldwide, sublicensable license, under certain patent rights and to related know-how and methods to research, develop, manufacture and commercialize compounds and products covered by such patent rights in all diagnostic, prophylactic and therapeutic uses. Such license rights include certain exclusive rights to the STING agonist compound in our exoSTING product candidate. Under the terms of the agreement, we are obligated to use commercially reasonable efforts to develop and commercialize products under the licensed patent rights, and are obligated to pay up to $100.0 million in cash payments and up to $13.0 million payable in shares of our common stock upon the achievement of specified clinical and regulatory milestones. The milestone was achieved upon the first dosing of exoSTING to the first subject in a Phase 1/2 clinical trial in September 2020. Upon the achievement of the milestone, we were obligated to make a nonrefundable payment of $15.0 million in cash and issue 177,318 shares of common stock to Kayla. The common stock was issued as of the date of dosing, and the cash payment of $15.0 million and was paid in October 2020. In addition, we are required to pay Kayla a percentage of the payments that we receive from sublicensees of the rights licensed to us by Kayla, excluding any royalties. The royalty term is determined on a product-by-product and country-by-country basis and continues until the later of (i) the expiration of the last valid claim of the licensed patent rights that covers such product in such country, (ii) the or expiration of any period of marketing for such product in such country, or (iii) ten years after the first commercial sale of such product in such country; provided that if the royalty is payable when no valid claim covers a given product in a given country, the royalty rate for sales of such product in such country is decreased. We do not include these variable and contingent payments in the table above as they are not fixed and estimable. We may the license agreement on a licensed compound-by-licensed compound basis and on a region-by region basis for any reason upon 30 days prior written notice to Kayla. We or
Kayla may terminate the license agreement for the other’s material breach that remains uncured for 60 days after receiving notice thereof .
We have agreements with certain vendors for various services, including services related to preclinical operations and support, for which we are not contractually able to terminate for convenience and avoid any and all future obligations to the vendors. Certain agreements provide for termination rights subject to termination fees or wind down costs. Under such agreements, we are contractually obligated to make certain payments to vendors, mainly, to reimburse them for their unrecoverable outlays incurred prior to cancellation. The exact amounts of such obligations are dependent on the timing of termination, and the exact terms of the relevant agreement and cannot be reasonably estimated. We do not include these payments in the table above as they are not fixed and estimable.
Off-balance sheet arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Critical accounting policies and significant judgments and estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the US, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues recognized and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results could differ from our estimates.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates.
Revenue recognition
To date, we have entered into a collaboration and license arrangement for the research, development and commercialization of product candidates, from which we expect to generate revenue in the foreseeable future. Accordingly, the contracts with our customers include promises related to licenses of intellectual property, research and development services and options to purchase additional goods and/or services. We recognize revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers (ASC 606) . The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods and/or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and/or services. To determine the appropriate amount of revenue to be recognized, we perform the following steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) each performance obligation is satisfied.
Pursuant to the guidance in ASC 606, we account for a contract with a customer that is within the scope of ASC 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party’s rights regarding the goods and/or services to be transferred can be identified, (iii) the payment terms for the goods and/or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods and/or services that will be transferred to the customer is probable.
We assess the goods and/or services promised within a contract which contains multiple promises to evaluate which promises are distinct. Promises are considered to be distinct and therefore, accounted for as separate performance obligations, provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) the promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. We determine that a customer can benefit from a good or service if it could be used, consumed, sold for an amount that is greater than scrap value, or otherwise held in a way that generates economic benefits. Factors that are considered in determining whether or not two or more promises are not separately identifiable include, but are not limited to, the following: (i) we provide a significant service of integrating goods and/or services with other goods and/or services promised in the contract, (ii) one or more of the goods and/or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods and/or services promised in the contract and (iii) the goods and/or services are highly interdependent or highly interrelated. Individual goods or services (or bundles of goods and/or services) that meet both criteria for being distinct are accounted for as separate performance obligations. Promises that are not distinct at contract inception are combined into a single performance obligation. Options to acquire additional goods and/or services are evaluated to determine if such option provides a material right to the customer that it would not have received without entering into the contract. If so, the option is accounted for as a separate performance obligation. If not, the option is considered a marketing offer which would be accounted for as a separate contract upon the customer’s election.
The terms of our arrangements include the payment of one or more of the following: (i) non-refundable, up-front fees, (ii) cost reimbursements, (iii) development, regulatory and commercial milestone payments, (iv) royalties on net sales of licensed products and (v) profit share for co-commercialized products. The transaction price generally comprises fixed fees due at contract inception and an estimate of variable consideration for cost reimbursements and milestone payments due upon the achievement of specified events. Additionally, we may earn sales milestones, tiered royalties earned when the licensee recognizes net sales of licensed products and potentially profit share related to co-commercialized products. We measure the transaction price based on the amount of consideration to which we expect to be entitled in exchange for transferring the promised goods and/or services to the customer. We utilize either the expected value method or the most likely amount method to estimate the amount of variable consideration, depending on which method is expected to better predict the amount of consideration to which we will be entitled. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. With respect to development and regulatory milestone payments, at the inception of the arrangement, we evaluate whether the associated event is considered probable of and estimate the amount to be included in the transaction price using the most likely amount method. As part of the evaluation for development milestone payments, we consider several factors, including the stage of development of the targets included in the arrangement, the risk associated with the remaining development work required to the milestone and
whether or not the achievement of the milestone is within our control. Milestone payments that are not within our control or the control of the licensee, such as those dependent upon receipt of regulatory approval, are not considered to be probable of achievement until the triggering event occurs. With respect to sales-based royalties and profit share payments, including milestone payments based upon the achievement of a certain level of product sales, wherein the license is deemed to be the sole or predominant item to which the payments relate, we recognize revenue upon the later of: (i) when the related sales occur or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any development, regulatory or commercial milestones, royalty or profit share revenue resulting from our arrangements with customers. We considered the existence of a significant financing component in our arrangements and have determined that a significant financing component does not exist due to the applicability of available practical expedients, existence of substantive business purposes and/or presence of other compelling factors. We update our assessment of the estimated transaction price, including the constraint on variable consideration, at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. Any adjustments to the transaction price are recorded on a cumulative catch-up basis, which would affect revenue and net in the period of adjustment.
We generally allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. However, certain components of variable consideration are allocated specifically to one or more particular performance obligations to the extent both of the following criteria are met: (i) the terms of the payment relate specifically to the efforts to satisfy the performance obligation or transfer the distinct good or service and (ii) allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective of the standard whereby the amount allocated depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services. We develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. The key assumptions utilized in determining the standalone selling price for the performance obligations may include forecasted revenues, development timelines, estimated research and development costs, discount rates, other comparable transactions, likelihood of exercise and probabilities of technical and regulatory success.
Revenue is recognized based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good and/or service to the customer. For performance obligations that are satisfied at a point in time, we recognize revenue when control of the goods and/or services is transferred to the customer. For performance obligations that are satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of the performance obligation using a single method of measuring progress which depicts the performance in transferring control of the associated goods and/or services to the customer. We generally use input methods to measure the progress toward the complete satisfaction of performance obligations satisfied over time. With respect to promises related to licenses to intellectual property that is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from amounts allocated to the license when the license is transferred to the licensee and the licensee is to use and from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is over time or at a point in time and, if over time, the appropriate method of measuring for purposes of recognizing revenue. We evaluate the measure of each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net in the period of adjustment.
Research and development expenses and related accruals
Research and development expenses include costs directly attributable to the conduct of research and development programs, including personnel-related expenses such as salaries, benefits, and stock-based compensation expense, materials, supplies, depreciation on and maintenance of research equipment, manufacturing and external costs related to outside vendors engaged to conduct clinical and preclinical studies and the allocable portions of facility costs, such as rent, utilities, repairs and maintenance, depreciation, and general support services. All costs associated with research and development activities are expensed as incurred.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:
CROs in connection with performing research services, clinical and preclinical studies;
other providers and vendors in connection with clinical and preclinical development activities; and
vendors related to product manufacturing, development and distribution of clinical and preclinical supplies.
Disposition of Business
We account for the derecognition of a group of assets that is a business in transactions with noncustomers in accordance with ASC 810-10-40. We measure the gain or loss upon derecognition as the difference between: (i) aggregate fair value of any consideration received and (ii) carrying amount of the group of assets, net of transaction and other costs directly attributable to the transaction. Gains and losses are recognized as of the date we cease to have a controlling financial interest in the associated group of assets. Consideration received, including contingent consideration, is initially measured at fair value. Contingent consideration is subsequently remeasured by recognizing increases using a gain contingency approach and impairments based on the loss contingency model. Both the fair value of the consideration received and any potential future contingent gains contain 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.
Stock-based compensation
We issue stock-based awards to employees, directors and non-employee consultants and founders, generally in the form of stock options and restricted stock. We account for our stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all share-based payments to employees and qualifying directors to be recognized as expense based on the fair value on the date of grant.
We primarily issue stock options and restricted stock with service-based vesting conditions. Compensation expense related to awards to employees, directors and non-employees with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated requisite service period of the award, which is generally the vesting term. For awards to employees with performance-based vesting conditions, we recognize expense based on the grant date fair value over the associated requisite service period of the award using the accelerated attribution model if, and to the extent that, achievement of the performance condition is determined to be probable. The cumulative effect on current and prior periods of a change in the estimated time to vesting for awards that contain performance-based conditions will be recognized as compensation cost in the current period. We recognize forfeitures as they occur.
We classify stock-based compensation expense in our consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified. In future periods, we expect stock-based compensation expense to increase, due in part to our existing unrecognized stock-based compensation expense and as we grant additional stock-based awards to continue to attract and retain our employees.
Fair value of stock-based awards
We determine the fair value of restricted stock awards in reference to the fair value of our common stock less any applicable purchase price. We estimate the fair value of our sto ck options granted with service-based and/or performance-based vesting conditions using the Black-Scholes option pricing model, which requires inputs of subjective assumptions, including: (i) the expected volatility of our common stock, (ii) the expected term of the award, (iii) the risk-free interest rate, (iv) expected dividends and (v) prior to our IPO, the fair value of our common stock. Due to the historic lack of a public market for the trading of our common stock prior to our IPO, and a lack of company-specific historical and implied volatility data, we base the estimate of expected volatility on the historical volatilities of a representative group of publicly traded guideline companies. For these analyses, we select companies with comparable characteristics to ours and with historical share price information that approximates the expected term of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period that approximates the calculated expected term of our stock options. We will continue to apply this method until a sufficient amount of historical information regarding the of our own stock price becomes available. We estimate the expected term of our stock options granted to employees and directors using the simplified method, whereby the expected term equals the average of the vesting term and the original contractual term of the option. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. Similarly, following the adoption of ASU 2018-07 on January 1, 2019, we have elected to use the expected term for stock options granted to non-employees, using the simplified method, as the basis for the expected term assumption. However, we may elect to use either the contractual term or the expected term for stock options granted to non-employees, on an award-by-award basis. Prior to the adoption of ASU 2018-07, for stock options granted to non-employees, we utilized the contractual term of the option as the basis for the expected term assumption. For the determination of the risk-free interest rates, we utilize the U.S. Treasury yield curve for instruments in effect at the time of measurement with a term commensurate with the expected term assumption. The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on our common stock. Historically, for periods prior to our IPO, the fair value of our equity instruments underlying our stock-based awards was determined on each grant date by our board of directors, or the compensation committee thereof, based on valuation estimates from management considering our most recently available independent third-party valuation of our equity instruments. Our board of directors, or the compensation committee thereof, also assessed and considered, with input from management, additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the grant date. Subsequent to our IPO, the fair value of our common stock is determined based on the relevant trading price on the Nasdaq Global Market on the grant date of the associated award.
Determination of fair value of common stock
Determination of fair value of common stock prior to our IPO
For periods prior to our IPO, as there was no public market for our common stock, the fair values of the shares of common stock underlying our stock-based awards were determined on each grant date by our board of directors, or compensation committee thereof, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’, or compensation committee’s, assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Historically, these independent third-party valuations of our equity instruments were performed contemporaneously with identified value inflection points.
The independent third-party valuations were prepared in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , or the Practice Aid. The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, the Probability-Weighted Expected Return Method, or PWERM, and the Option-Pricing Method, or OPM, were the most appropriate methods for determining the fair value of our common stock, based on our stage of development and other relevant factors. Our valuations subsequent to December 15, 2016 were based on market approaches using the hybrid method, which is a combination of the PWERM and the OPM, to allocate the value to the equity securities, and a previous valuation was based on the Recent Transactions Method utilizing the OPM to allocate the equity value to the respective share classes.
In addition to considering the results of these third-party valuations, our board of directors, or compensation committee thereof, considered various objective and subjective factors to determine the fair value of our equity instruments as of each grant date, which may be later than the most recently available third-party valuation date, including:
the lack of liquidity of our equity as a private company;
the prices of our redeemable convertible preferred stock sold to or exchanged between outside investors in arm’s length transactions, and the rights, preferences, and privileges of our redeemable convertible preferred stock as compared to those of our common stock, including the liquidation preferences of our redeemable convertible preferred stock;
the progress of our research and development efforts, including the status of preclinical studies for our engEx exosomes and product candidates;
our stage of development and business strategy and the material risks related to our business and industry;
the achievement of enterprise milestones, including entering into strategic alliance and license agreements;
the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;
any external market conditions affecting the biotechnology industry, and trends within the biotechnology industry;
the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or a sale of our Company, given prevailing market conditions; and
the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.
For financial statement purposes, we performed common stock valuations at various dates, which resulted in valuations of our common stock of $14.78 per share as of January 2, 2019, $16.11 per share as of January 17, 2019, $21.89 per share as of March 6, 2019, $24.32 per share as of April 3, 2019, $10.25 per share as of July 1, 2019, $15.33 per share as of June 19, 2020, $16.81 per share as of July 14, 2020 and $19.47 per share as of August 6, 2020, each after giving effect to the 1-for -7.8170 reverse stock split of our common stock effected on October 2, 2020. There are significant judgments and estimates inherent in these valuations. These judgments and estimates include assumptions regarding our future operating performance, the stage of development of our product candidates, the timing of a potential IPO or other liquidity event and the determination of the appropriate valuation methodology at each valuation date. If we had made different assumptions, our stock-based compensation expense, net loss attributable to common stockholders and net loss per share attributable to common stockholders could have been significantly different.
Determination of fair value of common stock after our IPO
Subsequent to our IPO, the fair value of our common stock is determined based on the relevant trading price on the Nasdaq Global Market on the grant date of the associated stock option.
Emerging growth company and smaller reporting company status
In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. As an emerging growth company, or EGC, under the JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. We have elected to avail ourselves of the exemption regarding the timing of the adoption of accounting standards and, therefore, while we are an emerging growth company we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not EGCs.
We will remain classified as an EGC until the earlier of: (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of the fiscal year following the fifth anniversary of our IPO, (iii) the date on which we have issued more than $1.0 billion of non-convertible debt instruments during the previous three fiscal years, or (iv) the date on which we are deemed a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding equity securities held by non-affiliates.
We are also a “smaller reporting company” and may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Recently issued accounting pronouncements
We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.
Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk.
Interest rate fluctuation risk
We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our cash equivalents are primarily invested in short-term U.S. Treasury obligations, and our Term Loan Facility bears interest at a variable rate.
Given the short-term nature of the instruments in our portfolio, an immediate change in market interest rates of 100 basis points would not have a material impact on the fair market value of our portfolio or on our financial position or results of operations.
Our Term Loan Facility bears interest at a rate equal to the greater of (i) 8.25% plus the prime rate as reported in the Wall Street Journal less 3.25% and (ii) 8.25%. Accordingly, increases in such prime rate could increase our interest payments under the Term Loan Facility. An increase of 100 basis points in the interest rate of the Term Loan Facility would not have a material impact on our financial position or results of operations.
Foreign currency fluctuation risk
We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with foreign vendors. Our operations may be subject to fluctuations in foreign currency exchange rates in the future.
Inflation fluctuation risk
Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the years ended December 31, 2021 or 2020.
Item 8. Financial Statement s and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those financial statements is found in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.
