Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
We are a biopharmaceutical company with a mission to discover, develop and commercialize a new class of genetic medicines based on editing RNA, enabling the treatment of both rare and highly prevalent diseases.
We are generating a portfolio of differentiated programs that are designed to harness the body’s natural RNA editing process to effect a precise yet transient single base edit. By editing RNA instead of DNA, we are expanding the reach of genetic medicines by delivering additional precision and tunability, which has the potential for increased specificity and improved long-term tolerability. Using an oligonucleotide-based approach, we expect to bring our medicines to patients by leveraging our proprietary platform with precedented delivery modalities, manufacturing know-how, and established regulatory pathways of approved oligonucleotide drugs. However, the scientific evidence to support the feasibility of developing product candidates using our RNA editing technology is both preliminary and limited. Moreover, regulators have not yet established any definitive guidelines related to overall development considerations for RNA editing therapies and no clinical data has been generated to date.
The versatility of RNA editing combined with our OPERA platform broadens the therapeutic target space significantly. While our approach can be used to repair pathogenic single nucleotide variants, or SNVs, as demonstrated by our most advanced program, our Alpha-1 Antitrypsin Deficiency, or AATD, product candidate, we can also engineer de novo SNVs and change amino acids on proteins to endow them with desired properties while preserving their broader functional capabilities, as exemplified by three of our other programs (severe Alcoholic Hepatitis, or SAH, amyotrophic lateral sclerosis, or ALS, Pain). In preclinical studies, we have demonstrated that single RNA changes can disrupt protein-protein interactions, prevent protein aggregation, selectively modulate ion channels and activate kinases. These modification approaches can unlock validated target classes that have historically been difficult to drug, enabling us to pursue a broad range of diseases traditionally out-of-scope for other genetic medicine approaches and current traditional drug modalities.
Our most advanced program is a development candidate, KRRO-110, for the treatment of AATD where, using our proprietary RNA editing approach, we are repairing a pathogenic variant on RNA. KRRO-110 has the potential to be disease-modifying and provide a differentiated therapeutic option. Preclinical development of KRRO-110 is ongoing in preparation for a potential regulatory filing in the second half of 2024 and an anticipated interim clinical readout in the second half of 2025.
Since inception, we have focused primarily on organizing and staffing our company, business planning, raising capital, securing related intellectual property, and conducting research and development activities for our potential programs and product candidates. Since inception, we have funded our operations primarily through the private placement of our equity securities. To date, we have raised approximately $223.6 million of aggregate gross proceeds from the sale of our convertible preferred stock, and $117.3 million from the sale of shares of common stock issued in a private placement that closed immediately prior to the Merger (as defined below), or the Pre-Closing Financing.
We have incurred significant operating losses since inception. Our net losses were $81.2 million and $58.0 million for the years ended December 31, 2023 and 2022, respectively. We had an accumulated deficit of $183.0 million as of December 31, 2023. We expect to continue to incur significant and increasing expenses and operating losses and negative operating cash flows for the foreseeable future as we continue our research and development efforts, advances product candidates through clinical stages, and seeks regulatory approvals for its pipeline candidates. As a result of the Merger (as defined below), we also expect to incur additional costs associated with maintaining compliance with Nasdaq listing rules and the requirements of the U.S. Securities and Exchange Commission, or SEC, director and officer liability insurance, investor and public relations activities and other expenses associated with operating as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of its preclinical studies, initiation and conduct of any clinical trials, and its expenditures on other research and development activities, including the expansion of its pipeline.
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We do not have any product candidates approved for sale and have not generated any revenue from product sales. We will not generate revenue from product sales unless and until we successfully obtain regulatory approval for our product candidates, if ever, and as appropriate, move pipeline candidates into the clinic and complete clinical development. We have yet to commence clinical trials on any of our program candidates. If we obtain regulatory approval for our product candidates and do not enter into third-party commercialization partnerships, we expect to incur significant expenses related to developing commercialization capabilities to support product sales, marketing, manufacturing and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our development and growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private offerings of securities, debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when needed, could have a negative effect on its business, results of operations and financial condition.
Recent Developments
Merger Agreement & Pre-Closing Financing
On July 14, 2023, we entered into the Merger Agreement with the private company formerly known as Korro Bio, Inc., or Legacy Korro, and Frequency Merger Sub, Inc., our wholly-owned subsidiary, or Merger Sub. Pursuant to the Merger Agreement, on November 3, 2023, or the Closing Date, following approval by our stockholders and Legacy Korro's stockholders, Merger Sub merged with and into Legacy Korro, or the Merger, with Legacy Korro continuing as our wholly owned subsidiary and the surviving corporation of the Merger. The Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The Merger Agreement was approved by the members of the board of directors of both our company and Legacy Korro. In connection with the completion of the Merger, we changed our name from Frequency Therapeutics, Inc. to Korro Bio, Inc. The merger was accounted for as a reverse recapitalization and accordingly, the financial statements of Legacy Korro became our financial statements. Except as otherwise indicated, references herein to “we”, “us” or the “Company”, refer to Korro Bio, Inc. on a post-merger basis; references to “Legacy Korro” refer to the business of privately held Korro Bio, Inc., prior to completion of the merger; and references to Frequency refer to Frequency Therapeutics, Inc. prior to completion of the merger.
Immediately prior to the execution of the Merger Agreement, certain new and existing investors of Legacy Korro agreed to purchase shares of Legacy Korro's common stock at $2.78 per share for the aggregate amount of $117.3 million in the Pre-Closing Financing. The Pre-Closing Financing was contingent on and closed immediately prior to consummation of the Merger.
Subject to the terms and conditions of the Merger Agreement, immediately prior to the Closing Date, each then outstanding share of Legacy Korro's common stock (including common stock issued upon the conversion of Legacy Korro's preferred stock but excluding the common stock issued in the Pre-Closing Financing) converted into the right to receive 5,161,114 shares of our common stock calculated in accordance with the Merger Agreement (which takes into account the 1-for-50 reverse stock split of our common stock effected immediately prior to the Merger).
Shares of Legacy Korro's common stock issued pursuant to the Pre-Closing Financing were converted into the right to receive 2,077,864 shares of our common stock calculated in accordance with Merger Agreement at the effective time of the Merger (which takes into account the 1-for-50 reverse stock split of our common stock effected immediately prior to the Merger).
Financial Operations Overview
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery of novel genetic medicines and the development of our product candidates, salaries and benefits, and third-party license fees. We expense research and development costs as incurred, which include:
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employee-related expenses, including salaries, bonuses, benefits, stock-based compensation and other related costs for those employees involved in research and development efforts;
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external research and development expenses incurred under agreements with contract research organizations, or CROs as well as with consultants;
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laboratory supplies and research materials;
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payments made under third-party licensing agreements; and
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direct and allocated expenses for facilities.
Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks using data such as information provided to us by our vendors and analyzing the progress of our preclinical studies or other services performed. Significant judgment and estimates are made in determining the accrued expense balances at the end of any reporting period.
Our external research and development expenses consist primarily of fees paid to CROs and outside consultants in connection with our preclinical development activities. Our external research and development expenses also include fees incurred under license agreements. As a pre-clinical company, we do not yet track these external research and development costs on a program-by-program basis. We plan to track program costs on our lead development candidate KRRO-110 upon filing of an Investigational New Drug, or IND, application.
We characterize research and development costs incurred prior to the identification of a product candidate as discovery costs. We use internal resources primarily to conduct our research and discovery activities as well as for managing our preclinical development activities.
The successful development of our product candidates is highly uncertain. We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of our product candidates, conducts discovery and research activities for our preclinical programs, and expands our pipeline. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. Our clinical development costs are expected to increase significantly as we commence clinical trials. We anticipate that our expenses will increase substantially, particularly due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
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the scope, rate of progress, and expenses of our ongoing research activities as well as any preclinical studies, clinical trials and other research and development activities;
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establishing an appropriate safety profile with IND enabling studies;
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successful enrollment in and completion of clinical trials;
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whether our product candidates show safety and efficacy in our clinical trials;
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receipt of marketing approvals from applicable regulatory authorities;
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making arrangements with third-party manufacturers;
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obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
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commercializing product candidates, if and when approved, whether alone or in collaboration with others; and
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continued acceptable safety profile of products following any regulatory approval.
Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on other product candidates. For example, if the U.S. Food and Drug Administration, or FDA, European Medicines Agency, or EMA, or another regulatory authority were to delay the planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any planned clinical trial, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.
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General and Administrative Expenses
General and administrative expenses consist primarily of employee related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs for our executive and administrative functions. General and administrative expenses also include professional services, including legal, accounting, auditing, tax services and other consulting fees. General and administrative expenses also include facility costs not otherwise included in research and development expenses.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur significantly increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.
Other Income, Net
Other income, net primarily consists of interest income earned on money market fund accounts.
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022:
Year Ended December 31, Change
Operating expenses:
Other income, net
Provision for income taxes 27 10 17
Research and Development Expenses
The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2022:
Year Ended December 31, Change
Research and development expenses increased by $15.0 million from $42.2 million for the year ended December 31, 2022 to $57.2 million for the year ended December 31, 2023. The increase in research and development expenses was primarily attributable to the following:
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$4.8 million of increased external research and development expenses primarily attributable to increased oligonucleotide synthesis costs, screening and sequencing expenses and in vivo studies;
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$5.3 million of increased personnel-related expenses driven by an increase in headcount to support the expansion of our research and development function;
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$1.7 million of decreased lab supplies and consumables, primarily attributable to reduction consumables purchased for screening and sequencing;
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$4.7 million of increased facilities-related costs primarily due to the expansion of our mixed-use office spaces and depreciation of lab equipment;
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$0.3 million decrease in consulting costs attributed to the increase in internal resources which led to a reduction in our reliance on external consulting services.;
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$1.7 million of increased sponsored research and license fees primarily attributable to an upfront cash payment made to Genevant in March 2023 upon execution of a collaboration and license agreement; and
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$0.5 million of increased other expense primarily attributable to increased research and development software licensing fees and lab maintenance services.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the years ended December 31, 2023 and 2022:
Year Ended December 31, Change
General and administrative expenses increased by $10.5 million from to $16.8 million for the year ended December 31, 2022 to $27.3 million for the year ended December 31, 2023. The increase in general and administrative expenses was primarily attributable to the following:
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$4.5 million of increased personnel-related expenses is primary driven by $2.5 million of severance cost to Frequency employees related to the Merger. The remaining increase of $2.0 million is driven by an increase in headcount to support growth in research and development and increased public company regulation;
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$4.0 million of increased professional service fees primarily attributable to recruiting efforts and increased intellectual property legal fees;
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$1.7 million of increased facilities expenses primarily attributable to the expansion of our mixed-use office space; and
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$0.4 million of increased other general and administrative expense primarily attributable to increased software licensing fees and corporate expenses.
Other Income, Net
Total other income, net increased by $2.4 million from $1.0 million for the year ended December 31, 2022 to $3.4 million for the year ended December 31, 2023. The increase in other income, net was primarily attributable to an increase of $2.4 million in interest income earned on money market fund accounts driven by rising interest rates and higher cash and cash equivalent balance.
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Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have generated recurring net losses. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. Since inception, we have funded our operations primarily through proceeds from the issuance of convertible preferred stock and common stock. To date, we have raised approximately $223.6 million of aggregate gross proceeds from the sale of convertible preferred stock and $117.3 million from the Pre-Closing Financing. As of December 31, 2023, we had cash and cash equivalents of $166.1 million.
Since inception, we have incurred significant operating losses and, as of December 31, 2023, had an accumulated deficit of $183.0 million. We expect to continue to incur significant expenses, operating losses, and negative operating cash flows for the foreseeable future. In addition, we have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all.
As of December 31, 2023, we had cash and cash equivalents of $166.1 million. We expect that our cash and cash equivalents outstanding as of December 31, 2023, will be sufficient to fund our operating expenses and capital expenditure requirements into 2026. We have based this estimate on assumptions that may prove to be wrong, and we could expend our capital resources sooner than we expect. We may also pursue additional cash resources through public or private equity, collaborations or debt financings. There is no assurance that we will be successful in obtaining sufficient financing on acceptable terms to continue funding our operations.
Funding Requirements
We expect to continue to incur significant expenses, operating losses, and negative operating cash flows for the foreseeable future as we continue our novel genetic medicine discovery efforts, advance our pipeline candidates into the clinic and through clinical trials, seek regulatory approval of our product candidates and pursue commercialization of any approved product candidates. In addition, we expect to continue to incur costs associated with operating as a public company.
Because of the numerous risks and uncertainties associated with research, development and commercialization of our product candidates, we are unable to estimate the exact amount of our working capital requirements.
Our future capital requirements will depend on many factors, including:
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the cost of continuing to build our OPERA platform and discover additional novel genetic medicines;
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the scope, progress, results, and costs of discovery, preclinical development, laboratory testing, manufacturing and clinical trials for the product candidates we may develop;
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the extent to which we partner our programs, acquires or in-licenses other product candidates and technologies or enters into additional collaborations;
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the outcome, timing and cost of meeting regulatory requirements established by the FDA, EMA and other regulatory authorities;
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the timing and amount of milestone and royalty payments that we are required to make or eligible to receive under any future collaboration and license agreements;
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Our headcount growth and associated costs as we expand our research and development efforts;
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the cost of expanding, maintaining and enforcing our intellectual property portfolio, including filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
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the cost of defending potential intellectual property disputes, including patent infringement actions brought by third parties against us or any of our product candidates;
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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any product candidates for which we receive marketing approval;
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the cost and timing of completion of commercial-scale manufacturing activities;
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the effect of competing technological and market developments; and
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the costs of operating as a public company.
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Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar 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 and/or may reduce the value of our common shares. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product research and development or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
Cash Flows
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022:
Year Ended December 31,
Net cash used in operating activities $ (67,283 ) $ (53,645 )
Net cash provided by investing activities 11,164 11,060
Net cash provided by financing activities 187,761 18
Cash Used in Operating Activities
Net cash used in operating activities for the year ended December 31, 2023 was $67.3 million, compared to net cash used in operating activities of $53.6 million for the year ended December 31, 2022. The increase of $13.7 million in cash used in operating activities was primarily due to the overall increase in our operating expenses during that same period, including an increase in payments made for external research and development activities.
Cash Provided by Investing Activities
Net cash provided by investing activities for the year ended December 31, 2023 was $11.2 million, compared to net cash provided by investing activities of $11.0 million for the year ended December 31, 2022. Net cash provided by investing activities primarily consists of proceeds from maturities of investments partially offset by cash used to purchase property and equipment.
Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $187.8 million, compared to less than $0.1 million for the year ended December 31, 2022. The increase of $187.8 million in cash provided by financing activities is primarily due to $117.3 million of gross proceeds from the Pre-Closing Financing, $45.5 million of net cash proceeds received from the sale of Legacy Korro's Series B-2 convertible preferred stock and $24.4 million net cash acquired from completion of the Merger, which was accounted for as a reverse recapitalization. No comparable proceeds were received from financing activities during the year ended December 31, 2022.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimate in light of changes in circumstances, facts, and experience. The effects of material
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revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates.
While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Accrued and Prepaid Research and Development Expenses
As part of the process of preparing the 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 internal personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers require advance payments; however, some providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary.
We recognize expenses related to preclinical studies and other studies on our estimates of the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and other studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Contractual Obligations and Other Commitments
Our contractual obligations and commitments relate primarily to our operating leases and non-cancelable purchase obligations under agreements with various research and development organizations and suppliers in the ordinary course of business. See Note 14, "Commitments and Contingencies" to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Recent Accounting Pronouncements
A description of recently issued and recently adopted accounting pronouncements applicable to our financial position and results of operations is included in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Emerging Growth Company and Smaller Reporting Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company under Section 107 of the JOBS Act, which provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to avail ourselves of the extended transition period 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 emerging growth companies, unless we choose to early adopt a new or revised accounting standard. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of our initial public offering, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by
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non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the prior June 30, or (ii) our annual revenues exceed $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As of December 31, 2023, we had cash and cash equivalents of $166.1 million, which consist of bank deposits and money market funds. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, an immediate 10% change in market interest rates would not have a material effect on the fair market value of our cash or cash equivalents.
Our employees and operations are primarily located in the United States. We have, from time to time, engaged in contracts with contractors or other vendors in a currency other than the U.S. dollar. To date, we have had minimal exposure to fluctuations in foreign currency exchange rates as the time period between the date that transactions are initiated, and the date of payment or receipt of payment is generally of short duration. Accordingly, we believe it does not have a material exposure to foreign currency risk.
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Item 8. Financial Statements and Supplementary Data
Korro Bio, Inc
INDEX TO FINANCIAL STATEMENTS
Page(s)
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) F-110
Consolidated Balance Sheets as of December 31, 2023 and 2022 F-111
Notes to Consolidated Financial Statements F-115
F-109
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Korro Bio, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Korro Bio, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Boston, Massachusetts
March 26, 2024
F-110
Korro Bio, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share and par value amounts)
December 31,
Assets:
Current assets:
Short-term investments — 18,915
Prepaid expenses and other current assets 3,015 1,232
Operating lease right-of-use assets 27,150 2,024
Restricted Cash, net of current portion 3,406 4,541
Liabilities, convertible preferred stock and stockholders’ equity (deficit)
Current liabilities:
Accrued expenses and other current liabilities 10,212 3,175
Operating lease liabilities, current portion 1,991 2,921
Operating lease liabilities, net of current portion 31,216 209
Other non-current liabilities 1,053 —
Commitments and contingencies (Note 13)
Stockholders’ equity (deficit)
Accumulated other comprehensive loss — (5 )
The accompanying notes are an integral part of these consolidated financial statements.
F-111
Korro Bio, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(amounts in thousands, except share and per share amounts)
Years Ended December 31,
Operating expenses:
Other income:
Loss before provision for income taxes (81,145 ) (58,022 )
Provision for income taxes 27 10
Other comprehensive income
Unrealized gain on available-for-sale investments — 2
Net loss per share, basic and diluted $ (53.08 ) $ (227.42 )
The accompanying notes are an integral part of these consolidated financial statements.
F-112
Korro Bio, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(amounts in thousands, except share amounts)
Issuance of common stock for services rendered — — — — — — — — 497 — 11 — — 11
Exercises of stock options — — — — — — — — 8,722 — 62 — — 62
Vesting of restricted common stock — — — — — — — — 21,377 — 5 — — 5
Stock-based compensation expense — — — — — — — — — — 1,129 — — 1,129
Other comprehensive income — — — — — — — — — — — 2 — 2
Net loss — — — — — — — — — — — — (58,032 ) (58,032 )
Issuance of common stock for services rendered — — — — — — — — 292 — 6 — — 6
Exercises of stock options — — — — — — — — 73,394 — 702 — — 702
Vesting of restricted common stock — — — — — — — — 2,902 — — — — —
Stock-based compensation expense — — — — — — — — — — 2,375 — — 2,375
Other comprehensive income — — — — — — — — — — — 5 — 5
Net loss — — — — — — — — — — — — (81,172 ) (81,172 )
The accompanying notes are an integral part of these consolidated financial statements.
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Korro Bio, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
Years Ended December 31,
Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 2,381 1,140
Non-cash interest expense — 118
Net amortization of premiums and discounts on investments (80 ) (145 )
Loss on disposal of property and equipment 65 —
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 559 (28 )
Operating lease liabilities 1,341 (2,198 )
Other non-current assets (1,987 ) (123 )
Net cash used in operating activities (67,283 ) (53,645 )
Investing Activities:
Purchases of investments — (37,213 )
Proceeds from maturities of investments 19,000 53,485
Purchases of property and equipment (7,836 ) (5,136 )
Advance payments for property and equipment not yet received — (76 )
Net cash provided by investing activities 11,164 11,060
Financing Activities:
Proceeds from exercises of stock options 702 62
Proceeds from the issuance of common stock in pre-closing financing 117,250 —
Cash acquired in connection with the reverse recapitalization 36,600 —
Payment of reverse recapitalization transaction costs (12,247 ) —
Other financing activities, net (2 ) (44 )
Net cash provided by financing activities 187,761 18
Cash, cash equivalents and restricted cash, beginning of period 41,477 84,044
Cash, cash equivalents and restricted cash, end of period $ 173,119 $ 41,477
Non-cash investing and financing activities:
Operating lease liabilities arising from right-of-use assets $ 26,777 $ 5,629
Operating lease liabilities arising from lease modification $ 1,959 $ —
Supplemental cash flow information:
Cash paid for income taxes $ 27 $ 11
Cash paid for operating lease liabilities $ 2,978 $ 2,335
The accompanying notes are an integral part of these consolidated financial statements.
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Korro Bio, Inc.
Notes to Consolidated Financial Statements
1. The Company and Liquidity
Nature of Business
Korro Bio, Inc. (together with its subsidiaries, the “Company”) is a biopharmaceutical company with a mission to discover, develop and commercialize a new class of genetic medicines based on editing RNA, enabling the treatment of both rare and highly prevalent diseases. The Company was incorporated in November 2014 as a Delaware corporation. The Company's principal offices are in Cambridge, Massachusetts.
Risks and Uncertainties
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Product candidates currently under development will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize revenue from product sales.
Reverse Merger with Legacy Korro
On July 14, 2023, Frequency Merger Sub, Inc.(“Merger Sub”) a Delaware corporation, a wholly-owned subsidiary of Frequency Therapeutics, Inc. (“Frequency”), a Delaware corporation and Korro Bio, Inc (“Legacy Korro”), a Delaware corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”). The merger was completed on November 3, 2023 (the “Merger” or the "Transaction"). In accordance with the Merger Agreement, the Merger Sub merged with and into Legacy Korro, with Legacy Korro surviving as a wholly-owned subsidiary of the Company. In connection with the completion of the Merger, the Company changed its name from Frequency Therapeutics, Inc. to Korro Bio, Inc. On November 6, 2023, the combined company’s common stock began trading on The Nasdaq Capital Market under the ticker symbol “KRRO”.
Except as otherwise indicated, references herein to the “Company,” or the “combined company”, refer to Korro Bio, Inc. on a post-merger basis, and the term “Legacy Korro” refers to the business of privately held Korro Bio, Inc., prior to completion of the merger. References to Frequency refer to Frequency Therapeutics, Inc. prior to completion of the merger.
Concurrently with the execution and delivery of the Merger Agreement, Legacy Korro entered into a subscription agreement with a number of accredited investors. Immediately prior to consummation of the Merger, Legacy Korro issued and sold an aggregate of 42,176,255 shares of its common stock at a purchase price of approximately $2.78 per share, for an aggregate purchase price of approximately $117.3 million. Shares of Legacy Korro common stock issued pursuant to the Pre-Closing Financing were converted into shares of the Company’s common stock based on an exchange ratio (as defined below).
Pursuant to the terms of the Merger Agreement, immediately prior to the effective time of the Merger, each share of Legacy Korro preferred stock was converted into a share of Legacy Korro common stock, and then exchanged in the Merger for shares of Frequency common stock using an exchange ratio of 0.049688 (the “Exchange Ratio”).
At the effective time of the Merger, the Company issued (or reserved for issuance upon exercise of options assumed in the Merger) an aggregate of approximately 7,848,776 shares of its common stock to Legacy Korro securityholders (before eliminating fractions), calculated as provided in the Merger Agreement, (the “Exchange”), resulting in approximately 8,623,645 shares of its common stock being issued and outstanding on a fully diluted basis immediately following the effective time of the Merger. This number includes shares of the Company’s common stock that was issued upon vesting and settlement of certain outstanding equity awards at the effective time of the Merger. Immediately following the completion of the Merger, Frequency securityholders prior to the Merger owned approximately 9% of the outstanding shares of common stock on a fully diluted basis and Legacy Korro’s securityholders, including those securityholders who purchased shares in Legacy Korro’s pre-closing financing, owned approximately 91% of the outstanding shares on a fully diluted basis. The Merger was intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "IRC").
Upon closing of the Merger, the Company assumed the Legacy Korro 2019 Stock Incentive Plan, and each outstanding and unexercised option to purchase Legacy Korro shares at such time, each of which converted into an option to purchase shares of the Company’s common stock, with necessary adjustments to the number of shares and exercise price to reflect the Exchange Ratio. In addition, upon the closing of the Merger, the Company assumed each outstanding and unexercised warrant to purchase
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Legacy Korro shares at such time, each of which converted into a warrant to purchase shares of the Company’s common stock, with necessary adjustments to the number of shares and exercise price to reflect the Exchange Ratio.
At the effective time of the Merger, the Company entered into a contingent value rights agreement (the “CVR Agreement”) with Computershare Trust Company, N.A. and Computershare Inc., collectively as rights agent providing for the payment of certain contingent cash payments equal to the net amount (calculated in accordance with GAAP consistently applied) of proceeds actually received by the Company or its subsidiaries after the end of each fiscal quarter following the first anniversary of the closing of the Transaction related to the disposition of assets related to Frequency’s former multiple sclerosis programs, with the time periods and subject to deductions as provided therein. Concurrently, the Company entered into an asset purchase agreement with Progentos Therapeutics (“Progentos”), whereby Progentos acquired the rights, title and interest in certain assets related to Freqeuncy’s MS program ("MS APA"). The MS APA included initial consideration of $0.5 million in proceeds that were settled through net cash at the merger closing and will be entitled to future milestone payments of up to $17.5 million as well as a $0.7 million payment in the event of Progentos closing of an equity financing at or above a specified amount.
The Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. For accounting purposes, Legacy Korro was considered to be acquiring the assets and liabilities of Frequency in the Merger based on the terms of the Merger Agreement and other factors, including: (i) Legacy Korro controlling the majority of outstanding voting shares; (ii) Legacy Korro controlling the Board of Directors; (iii) Legacy Korro’s executive management team became the management of the combined company; and (iv) the pre-combination assets of Frequency were primarily cash and cash equivalents and other non-operating assets. Accordingly, the Merger was treated as the equivalent of Legacy Korro issuing stock to acquire the net assets of Frequency. As a result of Legacy Korro being treated as the accounting acquirer, Legacy Korro’s assets and liabilities were recorded at their pre-combination carrying amounts. Frequency’s assets and liabilities were measured and recognized at their fair values, which approximated their carrying values as of the effective date of the Merger, and combined with the assets, liabilities, and results of operations of Legacy Korro after the consummation of the Merger. As a result, upon consummation the historical financial statements of Legacy Korro became the historical consolidated financial statements of the combined company.
Reverse Stock Split and Exchange Ratio
In connection with, and prior to the completion of, the merger, Frequency effected a one-for-fifty reverse stock split of its then outstanding common stock (the “Reverse Stock Split”). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding Legacy Korro common stock, convertible preferred stock and options prior to the effective date of the merger have been retroactively adjusted to reflect the merger 0.049688 Exchange Ratio, which reflects the impact of the reverse stock split, for all periods presented.
Liquidity and Capital Resources
The Company’s consolidated financial statements have been prepared on the basis of the Company continuing as a going concern. The Company expects that its existing cash and cash equivalents as of December 31, 2023 of $166.1 million will enable the Company to fund its planned operating expense and capital expenditure requirements for at least twelve months from the date of issuance of these consolidated financial statements. The Company has incurred recurring losses and negative cash flows from operations since inception. As of December 31, 2023, the Company had an accumulated deficit of $183.0 million. The Company expects its operating losses and negative operating cash flows to continue into the foreseeable future. The future viability of the Company is dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations. There can be no assurance that the Company will ever earn revenues or achieve profitability, or if achieved, that the revenues or profitability will be sustained on a continuing basis. In addition, the Company’s preclinical and clinical development activities, manufacturing and commercialization of the Company’s product candidates, if approved, will require significant additional financing. However, if the Company is unable to obtain additional financing, the Company would be forced to delay, reduce or eliminate its research and development programs and/or relinquish valuable rights to its technology and product candidates. There is no assurance that the Company will be successful in obtaining sufficient financing on acceptable terms to continue funding its operations.
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2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These consolidated financial statements have been prepared on the going concern basis of accounting, which assumes continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.
The consolidated financial statements include the accounts of Korro Bio, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company’s chief operating decision maker, the Company’s chief executive officer, views the Company’s operations and manages its business as a single operating segment. The Company operates only in the United States.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to the fair value of the common stock prior to the effective date of the merger; the fair value of the CVR liability and the incremental borrowing rate for determining lease liabilities and right-of-use assets. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it has concluded to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ materially from those estimates or assumptions.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement, (“ASC 820”) establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
•
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•
Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
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Cash Equivalents
Cash equivalents are highly-liquid investments that are readily convertible into cash with original maturities of three months or less when purchased. These assets include investments in money market funds that invest in U.S. Treasury obligations. Cash equivalents are reflected at fair value based on quoted market prices, as further described in Note 3, “Fair Value Measurements”.
Investments
Investments consist of securities with original maturities greater than three months when purchased. Short-term investments consist of investments that are available for use in current operations. Long-term investments consist of investments with maturities of greater than one year that are not available for use in current operations. The Company did not maintain any long-term investments as of December 31, 2023 or 2022.
The Company classifies all of its investments as available-for-sale securities. Accordingly, these investments are recorded at fair value. Realized gains and losses and amortization and accretion of discounts and premiums are included in “Other income, net”. Unrealized gains and losses on available-for-sale securities are included in “Accumulated other comprehensive loss” as a component of stockholders’ deficit until realized.
The Company reviews its investment portfolio to identify and evaluate investments that have indicators of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Property and Equipment
Property and equipment are recorded at cost and consists of laboratory equipment, furniture and office equipment, computer equipment, leasehold improvements, and construction in progress. The Company capitalizes property and equipment that is acquired for research and development activities and that has alternative future use. Expenditures for repairs and maintenance are recorded to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. Property and equipment not yet placed into service is capitalized as construction in progress and is depreciated once placed into service. Leasehold improvements are depreciated over the lesser of their useful lives or the term of the lease. Depreciation, including depreciation for assets recorded under finance leases, is calculated over the estimated useful lives of the assets using the straight-line method.
Impairment of Long-lived Assets
The Company reviews long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by comparing the carrying value of the asset to the future undiscounted cash flows from the use and eventual disposition of the asset. If an asset is considered to be impaired, the impairment loss to be recognized is measured as the amount by which the carrying value of the asset exceeds its fair value.
Leases
Under ASC Topic 842, Leases (“ASC 842”), the Company determines whether an arrangement is or contains a lease at inception. For leases with a term of 12 months or less, the Company does not recognize a right-of-use asset or lease liability. The Company’s operating leases are recognized on its consolidated balance sheets as noncurrent assets, current liabilities and noncurrent liabilities. The Company does not have any finance leases.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases typically do not provide an implicit rate, the Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew or options to terminate a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will exercise such options, respectively.
The Company has elected to account for the lease and non-lease components together for existing classes of underlying assets.
Preferred Stock
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The Company applies the guidance of ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”), when determining the classification and measurement of its preferred stock. Preferred stock subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies contingently redeemable preferred stock (if any), which includes preferred stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred stock in stockholders’ equity (deficit).
Prior to the merger, Legacy Korro classified its convertible preferred stock as temporary equity due to terms that allowed for redemption of the shares upon the occurrence of a contingent event that was not solely within the Legacy Korro’s control. Legacy Korro did not accrete the carrying values of the preferred stock to the redemption values since the contingent event was not considered probable.
Research and Development Expenses
Expenditures relating to research and development are expensed as incurred. Research and development expenses include external expenses incurred under arrangements with third parties, academic and non-profit institutions and consultants; salaries and personnel-related costs, including non-cash stock-based compensation expense; license fees to acquire in-process technology and other expenses, which include direct and allocated expenses for laboratory, facilities and other costs. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
As part of the process of preparing the consolidated financial statements, the Company is required to estimate its accrued research and development expenses as of each balance sheet date. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. This process involves reviewing open contracts and purchase orders, communicating with internal personnel to identify services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The Company periodically confirms the accuracy of its estimates with its service providers and makes adjustments if necessary. The majority of the Company’s service providers invoice monthly in arrears for services performed or when contractual milestones are met. The financial terms of agreements with these service providers are subject to negotiation, vary from contract-to-contract and may result in uneven payment flows. In circumstances where amounts have been paid in excess of costs incurred, the Company records a prepaid expense.
Intellectual Property Expenses
The Company expenses legal costs related to patent applications as they are incurred. Such costs are classified as general and administrative expenses within the consolidated statements of operations and comprehensive loss.
Stock-based Compensation
The Company accounts for stock-based payments in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”).This guidance requires all stock-based payments, including grants of stock options and restricted common stock, to be recognized as expense in the consolidated statements of operations and comprehensive loss based on their grant date fair values. For stock options granted to employees, non-employees and members of the Company’s Board of Directors for their services on the Board of Directors, the Company estimates the grant date fair value of each stock option using the Black-Scholes option-pricing model. For restricted common stock granted to employees and non-employees, the Company estimates the grant date fair value of each award using the intrinsic value, which is based on the value of the underlying common stock less any purchase price. For stock-based payments subject to service-based vesting conditions, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock-based payment on a straight-line basis over the requisite service period.
Prior to the merger, due to the absence of an active market for Legacy Korro’s common stock, Legacy Korro and its Board were required to determine the fair value of Legacy Korro’s common stock at the time of each grant of a stock-based award. Legacy Korro estimated the grant date fair value of its common stock using an appropriate valuation methodology, in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. Historically, the Company has utilized a market approach to determine its total equity value and the option pricing method (“OPM”) to allocate this equity value among various classes of securities. The OPM treats common stock and convertible preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under the OPM, the common stock has value only if the funds available for distribution to stockholders exceeds the value of the
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convertible preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock.
Each valuation methodology includes estimates and assumptions that required the Legacy Korro’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, guideline public company information, the prices at which Legacy Korro sold convertible preferred stock to third parties in arms’ length transactions, the rights and preferences of securities senior to Legacy Korro’s common stock at the time and the likelihood of achieving a liquidity event such as an initial public offering or sale. Significant changes to the assumptions used in the valuations could result in different fair values of stock options and restricted stock at each valuation date, as applicable.
In addition to the grant date fair value of the Company’s common stock, the Black-Scholes option pricing model requires the input of certain subjective assumptions, including (i) the calculation of expected term of the stock-based payment, (ii) the risk-free interest rate, (iii) the expected stock price volatility and (iv) the expected dividend yield. The Company uses the simplified method as proscribed by SEC Staff Accounting Bulletin No. 107 to calculate the expected term for stock options granted to employees as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The Company determines the risk-free interest rate based on a treasury instrument whose term is consistent with the expected term of the stock options. Due to the lack of Company-specific historical and implied volatility data, the Company bases its estimates of expected volatility on the historical volatility of a group of publicly-traded companies with similar characteristics to itself, including stage of product development and therapeutic focus within the life sciences industry. The expected volatility has been determined using a weighted-average of the historical volatility measures of this group of companies. The Company expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. Historical volatility is calculated over a period of time commensurate with the expected term of the stock-based payment. The Company uses an assumed dividend yield of zero as the Company has never paid dividends on its common stock, nor does it expect to pay dividends on its common stock in the foreseeable future.
The Company accounts for forfeitures of all stock-based payments when such forfeitures occur.
Income Taxes
Income taxes are recorded in accordance with ASC Topic 740, Income Taxes, which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company accounts for uncertain tax positions using a more-likely-than-not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors, including, but not limited to, changes in the law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position.
Interest and penalty charges, if any, related to income taxes would be classified as a component of the “Provision for income taxes” in the consolidated statements of operations and comprehensive loss.
Net Loss per Share
Net loss per share attributable to common stockholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per share for the holders of the Company’s common shares and participating securities. The Company’s Preferred Stock contains participation rights in any dividend paid by the Company and is deemed to be a participating security. Net income attributable to common stockholders and participating preferred shares are allocated to each share as if all of the earnings for the period had been distributed. The participating securities do not include a contractual obligation to share in losses of the Company and are not included in the calculation of net loss per share in the periods in which a net loss is recorded. Net loss attributable to common stockholders is equal to the net loss for the period.
Diluted net loss per share is computed using the more dilutive of (a) the two-class method or (b) the treasury stock method and if-converted method. The Company allocates earnings first to preferred stockholders based on dividend rights and then to common and preferred stockholders based on ownership interests. The weighted-average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock
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options and Preferred Stock. Common stock equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is generally the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Concentration of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash, cash equivalents and investments. Cash balances are deposited with federally-insured financial institutions in the United States and may, at times, exceed federally-insured limits. The Company maintains its cash, cash equivalents and investments with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company’s cash equivalents are comprised of money market funds that are invested in U.S. Treasury and government agency obligations. The Company’s investments are comprised of commercial paper and government securities. Credit risk in these securities is reduced as a result of the Company’s investment policy to limit the amount invested in any single issuer and to only invest in securities of a high credit quality.
The Company relies, and expects to continue to rely, on a small number of vendors to manufacture supplies and to process its product candidates for its development programs. These programs could be adversely affected by a significant interruption in the manufacturing process or supply chain.
The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
Emerging growth company status
The Company qualifies as an “emerging growth company” (“EGC”), as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. The Company may take advantage of these exemptions until it is no longer an EGC under Section 107 of the JOBS Act, which provides that an EGC can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to avail itself of the extended transition period and, therefore, while the Company is an EGC it will not be subject to new or revised accounting standards the same time that they become applicable to other public companies that are not EGCs, unless it chooses to early adopt a new or revised accounting standard. As a result of this election, the consolidated financial statements may not be comparable to companies that comply with public company FASB standards’ effective dates.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which has been subsequently amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-03, and ASU 2022-02 (“ASU 2016-13”). This standard requires that credit losses be recorded using an expected losses model rather than the incurred losses model that was previously used and establishes additional credit risk disclosures associated with financial assets. The amendments in this standard should be applied on a modified retrospective basis to all periods presented. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or disclosures.
Recent Accounting Pronouncements—Yet to be Adopted
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
In November 2023, the FASB issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, which is intended to provide enhanced segment disclosures. The standard will require disclosures about significant segment expenses and other segment items and identifying the Chief Operating Decision Maker and how they use the reported segment profitability measures to assess segment performance and allocate resources. These enhanced disclosures are required for all public entities on an interim and annual basis, even if they have only a single reportable segment. The standard is effective for years beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating this standard to determine if adoption will have a material impact on the Company's consolidated financial statements.
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3. Reverse Merger
As described in Note 1, Legacy Korro merged with Frequency on November 3, 2023. The merger was accounted for as a reverse recapitalization with Legacy Korro as the accounting acquirer. The primary pre-combination assets of Frequency were cash and cash equivalents. Under reverse recapitalization accounting, the assets and liabilities of Frequency were recorded at their fair value which approximated book value due to the short-term nature of the accounts. No goodwill or intangible assets were recognized. Consequently, the consolidated financial statements of the Company reflect the operations of Legacy Korro for accounting purposes, together with a deemed issuance of shares equivalent to the shares held by the former stockholders of Frequency, the legal acquirer, and a recapitalization of the equity of Legacy Korro, the accounting acquirer.
As part of the reverse recapitalization, the Company acquired $36.6 million of cash and cash equivalents. The Company also obtained prepaids and other assets of $1.9 million and assumed accounts payable and accrued expenses of $5.4 million. Frequency’s development programs had ceased prior to the merger and were deemed to be de minimis in value at the transaction date.
In addition, the Company recognized $0.3 million in share-based compensation expense as a result of the acceleration of vesting of stock options, performance stock units and restricted stock units at the time of merger. This amount was recorded in general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss for the year ended December 31, 2023. The company recognized $2.5 million in personnel cost related to the severance payment to Frequency employees and this amount was recorded in general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss for the year ended December 31, 2023. The Company also incurred transaction costs of $12.2million and this amount is recorded in additional paid-in capital in the accompanying consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the year ended December 31, 2023.
4. Fair Value Measurements
The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. Investments also include commercial paper and government securities that are valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. The carrying amounts reflected in the consolidated balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature.
Assets measured at fair value on a recurring basis as of December 31, 2023 were as follows (in thousands):
Assets measured at fair value on a recurring basis as of December 31, 2022 were as follows (in thousands):
Short-term investments:
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As noted previously in Note 1, at the effective time of the Transaction, the Company entered into the CVR Agreement providing for the payment of certain contingent cash payments equal to the net amount of proceeds actually received by the Company or its subsidiaries after the end of each fiscal quarter following the first anniversary of the closing of the Transaction related to the disposition of assets related to the Company’s former multiple sclerosis programs, with the time periods and subject to deductions as provided therein. The Company concluded that the CVR is a derivative liability and is accounted for at fair value, which was $1.4 million as of December 31, 2023 of which $0.4 million is included in accrued expenses and other current liabilities and the remaining $1.0 million in other non-current liabilities in the consolidated balance sheet. Concurrently, the Company entered into the MS APA with Progentos, whereby Progentos acquired the rights, title and interest in certain assets related to the Company’s MS program. The MS APA included initial consideration of $0.5 million in proceeds that were settled through net cash at the merger closing and will be entitled to future milestone payments of up to $17.5 million as well as a $0.7 million payment in the event of Progentos closing of an equity financing at or above a specified amount. The Company concluded that the MS APA is a derivative asset and is accounted for at fair value, which was $1.4 million as of December 31, 2023 of which $0.4 million is included in prepaid and other current assets and the remaining $1.0 million in other long-term assets in the consolidated balance sheet.
The fair value of the CVR liability and the MS APA are based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the CVR liability and the MS APA asset, the Company used the income approach, primarily discounted cash flow models. The discounted cash flow models require the use of significant judgment, estimates and assumptions, including the probability of technical and regulatory success, and discount rates. For the year ended December 31, 2023, the aggregate change in fair value of the CVR liability and MS APA asset was $0.08 million.
There were no liabilities measured at fair value on a recurring basis as of December 31, 2022.
There were no changes in valuation techniques, nor were there any transfers among the fair value hierarchy levels during the years ended December 31, 2023 or 2022.
5. Investments
The Company did not have investments as of December 31, 2023.
Short-term investments as of December 31, 2022 were comprised as follows (in thousands):
AmortizedCost UnrealizedGains UnrealizedLosses FairValue
As of December 31, 2022, the aggregate fair value of securities that were in an unrealized loss position for less than twelve months was $4.0 million. As of December 31, 2022, the Company held no securities that were in an unrealized loss position for more than twelve months. As of December 31, 2022, the Company did not intend to sell, and would not be more likely than not required to sell, the securities in an unrealized loss position before recovery of their amortized cost bases. Furthermore, the Company determined that there was no material change in the credit risk of these securities. As a result, the Company determined it did not hold any securities with any other-than-temporary impairment as of December 31, 2022.
6. Restricted Cash
As of December 31, 2023, the Company maintained current restricted cash of $3.6 million and non-current restricted cash of $3.4 million. As of December 31, 2022, the Company maintained current restricted cash of $0.6 million and non-current restricted cash of $4.5 million. All restricted cash amounts are comprised solely of letters of credit required pursuant to the Company’s facility leases.
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The following table provides a reconciliation of cash, cash equivalents and restricted cash as of December 31, 2023 and 2022 that sums to the total of the same amounts shown in the consolidated statements of cash flows (in thousands):
December 31,
Cash, cash equivalents and restricted cash $ 173,119 $ 41,477
7. Property and Equipment, Net
Property and equipment, net, as of December 31, 2023 and 2022 was comprised as follows (in thousands):
December 31,
Estimated Useful Life (in Years) 2023 2022
Furniture and office equipment 4 481 477
Less: accumulated depreciation (7,842 ) (4,255 )
Total property and equipment, net $ 15,665 $ 9,866
As of December 31, 2023 and 2022, the Company had construction in progress of $8.2 million and $2.0 million, predominately related to laboratory equipment received but not yet installed and capitalizable costs related to the Company’s future corporate headquarters.
Depreciation expense for the years ended December 31, 2023 and 2022 was $3.6 million and $2.5 million, respectively.
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 2023 and 2022 were comprised as follows (in thousands):
December 31,
Employee compensation and benefits $ 7,896 $ 2,624
External research and development services 1,255 274
Other operating expenses 447 207
CVR liability, current 395 —
Total accrued expenses and other current liabilities $ 10,212 $ 3,175
9. Common Stock
At the closing of the merger, the shares of Legacy Korro common stock were converted into shares of the Company's common stock based on the exchange ratio determined in the Merger Agreement.
As of December 31, 2023, the Company was authorized to issue 200,000,000 shares of common stock, $0.001 per value per share. Prior to the merger, the holders of Legacy Korro’s common stock were subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth in Note 10. Holders of common stock are entitled to one vote per share. In addition, holders of common stock are entitled to receive dividends, if and when declared by the Company’s Board of Directors. As of December 31, 2023, no dividends had been declared.
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As of December 31, 2023 and 2022, the Company had reserved for future issuance the following number of shares of common stock:
December 31,
Conversion of outstanding Legacy Korro Series Seed Preferred Stock — 684,739
Conversion of outstanding Legacy Korro Series A Preferred Stock — 2,029,666
Conversion of outstanding Legacy Korro Series B-1 Preferred Stock — 1,104,178
Conversion of outstanding Legacy Korro Series B-2 Preferred Stock — 223,417
Future issuances of Legacy Korro Series B-2 Preferred Stock — 813,239
Vesting of restricted common stock — 2,902
Exercise of outstanding warrant 8,049 8,049
Future issuances under 2019 Stock Incentive Plan — 159,890
Future issuances under 2023 Stock Incentive Plan 255,694 —
Future issuances under 2023 ESPP Plan 88,502 —
10. Preferred Stock
As of December 31, 2023, the Company was authorized to issue up to 10,000,000 shares of preferred stock at a par value of $0.001 with no preferred stock shares issued or outstanding.
Pursuant to the terms of the Merger Agreement, immediately prior to closing of the Merger, each share of Legacy Korro's Preferred Stock issued and outstanding immediately prior to the Closing of the Merger was converted into shares of the Legacy Korro’s common stock, and then exchanged in the Merger for shares of the Company's common stock using an exchange ratio of 0.049688. The conversion was approved by greater than 66% of the then-outstanding shares of Preferred Stock, voting as a single class on an as-converted to common stock basis.
As of December 31, 2022, Legacy Korro was authorized to issue up to 10,000,000 shares of preferred stock at a par value of $0.001 with no preferred stock shares issued or outstanding. As of December 31, 2022, Legacy Korro Preferred Stock authorized, issued and outstanding consisted of the following (in thousands, except share amounts):
Rights, Preferences and Privileges of Legacy Korro Preferred Stock
The Legacy Korro Preferred Stock as of December 31, 2022 had the following rights and preferences. In the discussion below, the Legacy Korro Series Seed Preferred Stock and the Legacy Korro Series A Preferred Stock, the Legacy Korro Series B-1 Preferred Stock and the Legacy Korro Series B-2 Preferred Stock are collectively referred to as the “ Legacy Korro Preferred Stock” unless specifically noted.
Conversion
Each share of Legacy Korro Preferred Stock were convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of common stock as is determined by dividing the original issuance price by the conversion price in effect at the time of conversion. The original conversion price of the Legacy Korro Series Seed 1 Preferred Stock and Legacy Korro Series Seed 2 Preferred Stock was $20.13, the original conversion price of the Legacy Korro Series Seed 3 Preferred Stock was $26.16, the original conversion price of the Legacy Korro Series A Preferred Stock was $45.08, the original conversion price of the Legacy Korro Series B-1 Preferred Stock was $52.53 and the original conversion price of the Legacy Korro Series B-2 Preferred Stock was $55.95. Shares of Legacy Korro preferred stock are subject to adjustments to reflect the issuance of common stock,
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options, warrants, or other rights to subscribe for or to purchase common stock for a consideration per share, less than the conversion price then in effect and subsequent stock dividends, stock splits, combinations, or recapitalizations.
The Legacy Korro Preferred Stock was subject to mandatory conversion upon the closing of a sale of common stock to the public at a price of at least $111.90 per share (subject to appropriate adjustment in the event of a stock dividend, stock split, combination or other similar recapitalization) in a firm-commitment underwritten public offering resulting in at least $75.0 million of gross proceeds to Legacy Korro. The Legacy Korro Preferred Stock was also subject to mandatory conversion upon the vote or written consent of the holders of at least 66% of the then-outstanding shares of Legacy Korro Preferred Stock, voting as a single class on an as-converted to common stock basis.
Dividends
The holders of Legacy Korro Preferred Stock, in preference to common stockholders, were entitled to receive, when, as and if declared by the Company’s Board of Directors, dividends at a rate of 8% annually. Dividends on Legacy Korro Preferred Stock were non-cumulative and were payable only when and if declared by Legacy Korro’s Board of Directors. The holders of Legacy Korro Preferred Stock were entitled to participate in dividends on common stock on an as-converted basis when and if declared by Legacy Korro's Board of Directors. Since Legacy Korro’s inception, no dividends have been declared.
Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution, winding up or deemed liquidation event of Legacy Korro, the holders of shares of Legacy Korro Preferred Stock then outstanding were entitled to be paid out of the assets of Legacy Korro available for distribution to its stockholders before any payment shall be made to the holders of common stock, an amount equal to the original issue price per share plus any dividends declared but unpaid thereon. For clarity, the original issue price of the Legacy Korro Series Seed 1 Preferred Stock and Legacy Korro Series Seed 2 Preferred Stock was $20.13 per share, the original issue price of the Legacy Korro Series Seed 3 Preferred Stock was $26.16 per share, the original issue price of the Legacy Korro Series A Preferred Stock was $45.08 per share, the original issue price of the Legacy Korro Series B-1 Preferred Stock was $52.53 per share and the original issue price of the Legacy Korro Series B-2 Preferred Stock was $55.95 per share.
If upon any voluntary or involuntary liquidation, dissolution, winding up or deemed liquidation event of Legacy Korro, the assets of Legacy Korro available for distribution were insufficient to pay the holders of Legacy Korro Preferred Stock the full amount to which they were entitled, the holders of shares of Legacy Korro Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.
Redemption
The Legacy Korro Preferred Stock was contingently redeemable upon the occurrence of a deemed liquidation event, which included a merger or a sale of substantially all of the assets of Legacy Korro. As of December 31, 2022, a deemed liquidation event was not considered to be probable.
Voting Rights
The holders of Legacy Korro Preferred Stock were entitled to vote based on the number of common shares that their preferred shares converted into on as-converted basis at the time of such vote. Except in specific circumstances, holders of Legacy Korro Preferred Stock shall vote as a single class with the common stockholders.
The holders of record of the shares of the Legacy Korro Series Seed Preferred Stock, voting exclusively and as a separate class on an as-converted to common stock basis, were entitled to elect two members to Legacy Korro’s Board of Directors. The holders of record of the shares of the Legacy Korro Series A Preferred Stock, voting exclusively and as a separate class on an as-converted to common stock basis, were entitled to elect two members to the Legacy Korro’s Board of Directors. The holders of record of the shares of the Legacy Korro Series B Preferred Stock, voting exclusively and as a separate class on an as-converted to common stock basis, were entitled to elect two members to the Legacy Korro’s Board of Directors.
11. Stock-based Compensation
2023 Stock Option and Incentive Plan
In November 2023, the Company’s board of directors adopted the Company’s 2023 Stock Option and Incentive Plan (the “2023 Plan”). The 2023 Plan was approved by the Company’s stockholders in November 2023 and became effective in November 2023
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in connection with completion of the Merger. The 2023 Plan initially reserved 885,028 shares for the issuance of stock awards. In addition, the number of shares of common stock available for issuance under the 2023 Plan will be automatically increased on the first day of each calendar year during the ten-year term of the 2023 Plan, beginning with January 1, 2024 and ending with January 1, 2033, by the amount equal to 5% of the outstanding number of shares of the Company’s common stock on December 31 of the preceding calendar year or such lesser amount as determined by the Company’s board of directors. Awards granted under the 2023 Plan expire no later than ten years from the date of grant. For stock options, the option price shall generally not be less than 100% of the fair market value on the day of grant.As of December 31, 2023, there were in aggregate 889,922 shares of common stock reserved for issuance and 255,694 shares available to grant under the 2023 Plan.
2019 Stock Incentive Plan
In January 2019, the Legacy Korro's Board of Directors adopted the 2019 Stock Incentive Plan (as amended from time to time, the “Legacy Korro Plan”). The Legacy Korro Plan provides for the grant of stock options, stock awards and restricted stock units to employees, members of the Company’s Board of Directors and non-employee consultants and advisors. The Legacy Korro Plan initially provided for the issuance of up to 110,285 shares of common stock. The Legacy Korro Plan was subsequently amended in May 2019, June 2020, October 2020, April 2021, November 2021 and March 2023 to modify the number of shares of common stock issuable under the Legacy Korro Plan. Subsequent to the March 2023 amendment to the Legacy Korro Plan, Legacy Korro could issue up to 747,752 shares of common stock under the Legacy Korro Plan.
In connection with the merger, each option to purchase shares of Legacy Korro common stock that was outstanding and unexercised under the Legacy Korro Plan immediately prior to the Effective Time, whether or not vested, was converted into an option to purchase shares of the Company’s common stock and became eligible to be registered on Form S-8. The Company assumed each outstanding option to purchase shares of Legacy Korro common stock in accordance with the terms (as in effect as of the date of the Merger Agreement) of the Legacy Korro Plan and the terms of the stock option agreement by which such option to purchase shares of Legacy Korro common stock is evidenced. The number of shares under the Legacy Korro Plan subject to outstanding awards as of the effective date of the 2023 Plan that are subsequently canceled, forfeited or repurchased by the Company will be added to the shares reserved under the 2023 Plan.
The number of shares of common stock reserved for issuance pursuant to outstanding awards under the Legacy Korro Plan as of December 31, 2023 and 2022 was 600,977 shares and 683,156 shares, respectively. The number of shares available for grant under the Legacy Korro Plan was 0 and 159,890 at December 31, 2023 and 2022, respectively. Upon completion of the Merger and effectiveness of the 2023 Plan, the Company ceased granting awards under the Legacy Korro Plan.
2014 Stock Incentive Plan
On November 13, 2014, Frequency adopted the 2014 Stock Incentive Plan (as amended from time to time,the "2014 Plan"). All of Frequency’s employees, officers, directors, and consultants were eligible to be granted options to purchase common shares, restricted stock units and restricted stock under the terms of the 2014 Plan. Frequency, reserved an aggregate of 424,853 shares of common stock for issuance under the 2014 Plan. The number of shares under the 2014 Plan subject to outstanding awards as of the effective date of the 2023 Plan that are subsequently canceled, forfeited or repurchased by the Company will be added to the shares reserved under the 2023 Plan. As of December 31, 2023, there were no shares of common stock available for future grants under the 2014 Plan and there were 36,455 shares subject to outstanding option awards under the 2014 Plan.
2019 Incentive Award Plan
On September 17, 2019, Frequency’s board of directors and on September 19, 2019, its stockholders approved and adopted the 2019 Incentive Award Plan (the "2019 Plan"). Under the 2019 Plan, Frequency may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock and cash-based awards to individuals who are then employees, officers, directors or consultants of the Company, and employees and consultants of the Company’s subsidiaries. A total of 154,032 shares of common stock were approved to be initially reserved for issuance under the 2019 plan. The number of shares under the 2019 Plan subject to outstanding awards as of the effective date of the 2023 Plan that are subsequently canceled, forfeited or repurchased by the Company will be added to the shares reserved under the 2023 Plan. Upon completion of the Merger and effectiveness of the 2023 Plan, the Company ceased granting awards under the 2019 Plan. Accordingly, as of December 31, 2023, there were no shares of common stock available for future grants under the 2019 Plan and there were 51,491 shares subject to outstanding option awards under the 2019 Plan.
All stock option grants are non-statutory stock options except option grants to employees (including officers and directors) intended to qualify as incentive stock options under the IRC. Incentive stock options may not be granted at less than the fair
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market value of the Company’s common stock on the date of grant. Nonqualified stock options may be granted at an exercise price established by the Board of Directors at its sole discretion (which has not been less than fair market value on the date of grant) and the vesting periods may vary. Vesting periods are generally four years and are determined by the Board of Directors. Stock options generally become exercisable as they vest. Options granted under the Legacy Korro Plan, 2014 Plan and the 2019 Plan expire no more than ten years from the date of grant.
Stock-based Compensation Expense
Total stock-based compensation expense recognized in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022 was as follows (in thousands):
Year Ended December 31,
Research and development $ 759 $ 243
General and administrative 1,622 897
Total stock-based compensation expense $ 2,381 $ 1,140
Restricted Common Stock Activity
Prior to the adoption of the 2019 Plan, Legacy Korro issued shares of restricted common stock to its founders as well as to certain employees. The restrictions on the common stock generally lapse over two to four years. In the event that a recipient ceases to provide service to Legacy Korro, Legacy Korro has the right to repurchase any unvested shares of restricted common stock at their original purchase price. As a result of this repurchase right, Legacy Korro recorded the issuance of such restricted common stock as a liability in the consolidated balance sheets. Amounts are reclassified to common stock at par and additional paid-in capital as the restricted common stock vests and restrictions lapse.
The following table summarizes Legacy Korro restricted common stock activity during the year ended December 31, 2023:
Shares Weighted-AverageGrant DateFair Valueper Share
Granted — $ —
Repurchased — $ —
Unvested as of December 31, 2023 — $ —
The aggregate fair value of Legacy Korro restricted common stock that vested during the years ended December 31, 2023 and 2022, based upon the fair value of the underlying restricted common stock on the day of vesting, was $0.1 million and $0.5 million, respectively.
Stock Option Activity
The fair value of stock options granted during the years ended December 31, 2023 and 2022 was calculated on the date of grant using the following weighted-average assumptions:
Year Ended December 31,
Risk-free interest rate 4.3 % 2.5 %
Expected dividend yield —% —%
Expected term (in years) 6.0 6.0
Expected volatility 72.8 % 72.9 %
Using the Black-Scholes option pricing model, the weighted-average grant date fair value of stock options granted during the years ended December 31, 2023 and 2022 was $23.49 and $14.95 per share, respectively.
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The following table summarizes changes in stock option activity during the year ended December 31, 2023 (in thousands, except per share amounts):
Assumed in reverse recapitalization 93,153 $ 121.91
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the end of the period. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2023 and 2022 was $0.3 million and $0.1 million, respectively.
As of December 31, 2023, there was unrecognized stock-based compensation expense related to unvested stock options of $10.1 million, which the Company expects to recognize over a weighted-average period of approximately 3.1 years.
12. Income Taxes
The provision for income taxes for the years ended December 31, 2023 and 2022 was comprised as follows (in thousands):
Year Ended December 31,
Current taxes:
Federal $ — $ —
Total current taxes 27 10
Deferred taxes:
Federal — —
State — —
Total deferred taxes — —
Total provision for income taxes $ 27 $ 10
A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:
December 31,
Income tax computed at federal statutory rate 21.0 % 21.0 %
State taxes, net of federal benefit 7.1 % 6.1 %
Tax credit carryforwards 3.6 % 6.2 %
Permanent items (1.0 )% (0.2 )%
Change in valuation allowance (30.8 )% (32.7 )%
Effective tax rate — % — %
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The principal components of the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 were comprised as follows (in thousands):
December 31,
Deferred tax assets:
Accrued expenses and other temporary differences 1,543 707
Deferred tax liabilities:
Operating right-of-use asset (7,401 ) (552 )
Total deferred tax liabilities (7,715 ) (1,123 )
Net deferred taxes $ — $ —
As of December 31, 2023, the Company had federal and state net operating loss (“NOL”) carryforwards of $302.5 million and $266.3 million, respectively. Under current law, the Company's federal NOLs generated in taxable years ending after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal NOLs is limited to 80% of the Company's taxable income annually for tax years beginning after December 31, 2018. Federal NOLs generated in taxable years ending on or prior to December 31, 2017, however, have a 20-year carryforward period, but are not subject to the 80% limitation. The Company has federal NOLs of $22.4 million that are subject to expiration between 2036 and 2037 and has $280.1 million of federal NOLs that do not expire.
State NOLs expire at various dates from 2035 through 2043. As of December 31, 2023, the Company had federal research and development tax credit carryforwards of $15.6 million that expire at various dates from 2036 through 2043. In addition, as of December 31, 2023, the Company had state research and development tax credit carryforwards of $8.7 million that expire at various dates from 2032 through 2038.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which primarily pertain to NOL carryforwards, tax credit carryforwards and capitalized research and development. The Company has determined that it is more likely than not that it will not realize the benefits of its deferred tax assets, and as a result, a valuation allowance of $145.8 million has been established at December 31, 2023. The increase in the valuation allowance of $109.7 million during the year ended December 31, 2023 was primarily due to the additional operating loss generated by the Company and the combination of deferred tax assets as a result of the Merger.
NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the IRC. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change. As a result of ownership changes in the Company from its inception through December 31, 2023, the Company’s NOL and tax credit carryforwards allocable to the periods preceding each such ownership change could be subject to limitations under IRC Section 382, however the Company has not yet completed an IRC Section 382 study.
The Company had no unrecognized tax benefits as of either December 31, 2023 or 2022. The Company has not conducted a study of its research and development credit carryforwards generated during any year. This study, once completed, may result in an adjustment to the Company’s research and development credit carryforwards.
However, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credit carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated statements of operations and comprehensive loss if an adjustment were required.
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The Company files income tax returns in the United States federal tax jurisdiction and the Connecticut and Massachusetts state tax jurisdictions. Because the Company is in a loss carryforward position, it is generally subject to examination by federal and state tax authorities for all tax years in which a loss carryforward is available.
As of December 31, 2023, the Company has not incurred any material interest or penalty charges.
13. Genevant Agreement
In March 2023, Legacy Korro entered into a collaboration and license agreement (the “Genevant Agreement”) with Genevant Sciences GmbH (“Genevant”). Key financial terms under the Genevant Agreement are as follows:
•
The Company made a $2.5 million payment to Genevant in March 2023 upon execution of the Genevant Agreement and recorded the payment within research and development expense in the consolidated statement of operations for the year ended December 31, 2023.
•
The Company will reimburse Genevant for certain out-of-pocket and full-time equivalent costs incurred as a result of research and development activities performed under the Genevant Agreement.
•
Genevant is entitled to receive payments from the Company upon the achievement of certain milestones, including potential clinical milestone payments of up to $13.5 million, potential regulatory and development milestone payments of up to $27.0 million, and potential commercial milestone payments up to an aggregate total of $57.0 million.
•
Genevant is eligible to receive royalties at percentage rates in the mid-single-digits, based on future annual net sales of licensed products within the scope of the Genevant Agreement.
As of December 31, 2023, no milestones have been achieved and the Company has recorded payments to Genevant of $1.2 million within research and development expense in the consolidated statement of operations during the year ended December 31, 2023.
14. Commitments and Contingencies
Leases
The Company is party to an operating lease at One Kendall Square, Cambridge, Massachusetts and occupies 22,561 square feet of laboratory and office space (the “OKS Facility”). On October 20, 2023, the Company entered into an amendment to the Lease Agreement that extended the lease expiration date from December 31, 2023 to September 30, 2024 and provided the Company with no option to further extend the lease expiration date. The Company is also party to an operating sublease agreement at Cummings Park in Woburn, Massachusettsand occupies18,148 square feet of laboratory and office space (the “Cummings Park Sublease”) which expires on July 31, 2024.
The Company is party to an operating lease for 50,453 square feet of office and laboratory space at 60 First Street, Cambridge, Massachusetts (the “60 First Street Lease”). In May 2023, the Company obtained control over the space and the Company recognized the operating lease right-of-use asset and the operating lease liability of $26.8 million on the commencement date of the lease. The total rental payments over the 11 year lease are expected to be $62.1 million, including rent credits and other lease incentives per the terms of the lease. Specifically, the 60 First Street Lease provides the Company with a tenant improvement allowance of $13.1 million. The Company utilized $2.3 million of the $13.1 million tenant improvement allowance as of December 31, 2023. The lease has remaining term approximately 10 years. The Company has an option to extend the lease for an additional period of five years with the rent during the option period being the then fair market rent.
Future minimum lease payments for all three leases, net of $10.8 million expected to be received and intended to be used related to the remaining tenant improvement allowance and rent credits associated with the 60 First Street Lease, as of December 31, 2023 were as follows (in thousands):
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Total Future Minimum Leases Payments 66,416
Present Value of Operating Lease Liabilities 33,207
As of December 31, 2023, the weighted average remaining lease term was 10.0 years and the weighted average incremental borrowing rate used to determine the operating lease liability was 11.2%.
The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities and maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.
The following table summarizes the effect of lease costs in the Company’s consolidated statement of operations and comprehensive loss of its operating leases (in thousands):
Year Ended December 31,
Legal Contingencies
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that the Company can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made.
In addition, in accordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, the Company will provide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect. The Company expenses legal costs as they are incurred.
On June 3, 2021 and June 22, 2021, purported stockholders of the Company filed putative class action lawsuits in the U.S. District Court for the District of Massachusetts against the Frequency and the Frequency’s Chief Executive Officer, President, and Director, David Lucchino. On March 21, 2022, the two lawsuits were consolidated into a single lawsuit, Quinones et al. v. Frequency Therapeutics, Inc. et al. and on May 16, 2022, the Company’s Chief Development Officer, Dr. Carl Le Bel, was added as a defendant. The plaintiffs alleged violations of Sections 10(b), 20(a) and Rule 10b5 of the Securities Exchange Act of 1934, as amended (the Exchange Act), due to allegedly false and misleading statements and omissions about the Company’s Phase 2a clinical trial (FX-322-202) for its product candidate FX-322 in the Company’s public disclosures between October 29, 2020 and March 22,2021. The lawsuit sought, among other things, damages in connection with the Company’s allegedly artificially inflated stock price between October 29,2020 and March 22, 2021 as a result of those allegedly false and misleading statements and omissions, as well as interest, attorneys’ fees and costs. The Company filed a motion to dismiss the Amended Complaint on July 15, 2022. On March 29, 2023, the Company’s motion to dismiss was granted and the lawsuit was dismissed in its entirety. On April 27, 2023, Plaintiff filed a notice of appeal to the United States Court of Appeals for the First Circuit from the order dismissing the lawsuit. On August 2, 2023, Plaintiff-Appellant submitted its opening brief to the First Circuit. The Company filed its response brief on October 27, 2023. The First Circuit heard oral argument on January 8, 2024, and has not yet issued a decision on plaintiff’s appeal. This matter is at the very early stages of the legal process, and as a result, the Company is not able to estimate a range of possible loss. Since an estimate of the possible loss or range of loss cannot be made at this time, no accruals have been recorded as of December 31, 2023.
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Indemnifications
The Company indemnifies each of its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with the Company’s amended and restated certificate of incorporation and bylaws. The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity.
The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance allows the transfer of risk associated with the Company’s exposure and may enable the Company to recover a portion of any future amounts paid. The Company believes that the fair value of these potential indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.
15. 401(k) Savings Plan
The Company has a defined-contribution savings plan under Section 401(k) of the IRC (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation, subject to statutory limitations. Beginning on April 1, 2022, the Company matches 100% of an employee’s 401(k) contributions up to a maximum of 3% of the participant’s salary, subject to employer match limitations under the IRC. As such, the Company made $0.5 million and $0.2 million of matching contributions to the 401(k) Plan during the year ended December 31, 2023 and December 31, 2022, respectively.
16. Related Party Transactions
As a result of Atlas’ ownership of the Legacy Korro’s Series Seed Preferred Stock, Series A Preferred Stock and Series B Preferred Stock which was exchanged in the Merger for the Company's common stock, Atlas represents an affiliate of the Company. During the years ended December 31, 2023 and 2022, the Company incurred no expense and expenses of less than $0.1 million, respectively, related to consulting services provided by an affiliate of Atlas. As of December 31, 2023 and 2022, the Company had no amounts due to this affiliate.
17. Net Loss per Share
The following common stock equivalents have been excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive:
Year Ended December 31,
Legacy Korro Series Seed Preferred Stock — 684,739
Legacy Korro Series A Preferred Stock — 2,029,666
Legacy Korro Series B-1 Preferred Stock — 1,104,178
Legacy Korro Series B-2 Preferred Stock — 223,417
Unvested Legacy Korro restricted common stock — 2,902
Outstanding Legacy Korro warrant 8,049 8,049
Basic and diluted loss per share is computed by dividing net loss by the weighted-average common shares outstanding. The following table sets forth the computation of the Company's basic and diluted net loss per share (in thousands, except share and per share data):
Years Ended December 31,
Numerator:
Denominator:
Net loss per share, basic and diluted $ (53.08 ) $ (227.42 )
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, who serve as our principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2023.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal control that is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Notwithstanding that we do not qualify for the relief afforded by Instruction 1 to Item 308 of Regulation S-K to newly public companies, management has not assessed nor attested to our internal control over financial reporting as is set forth in Item 308 of Regulation S-K promulgated under the Exchange Act, and Section 404 of the Sarbanes-Oxley Act as of December 31, 2023, the end of our last fiscal year. We will do so initially as of December 31, 2024.
We were unable to conduct the required assessment primarily due to the Merger occurring on November 3, 2023 and the resulting substantial change in operational focus, management and the internal control environment. Following the Merger, Legacy Korro’s historical operations, and not that of our predecessor business, represent virtually the entirety of the combined business. In addition, following the Merger, our accounting and financial systems, as well as personnel, were replaced by those of Legacy Korro. Due to the extensive changes to our internal control environment, it was impractical for us to develop, implement, and assess our system of internal control over financial reporting, and conduct management’s assessment of internal control over financial reporting as of December 31, 2023.
Changes in Internal Control over Financial Reporting
Other than changes due to the Merger, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
(a) On March 21, 2024, our board of directors established that our 2024 Annual Meeting of Stockholders will be held on Tuesday, June 11, 2024. The record date for the determination of stockholders entitled to receive notice of and to vote at our 2024 Annual Meeting will be the close of business on Wednesday, April 17, 2024. Because the date of our 2024 Annual Meeting differs by more than thirty (30) days from the anniversary date of our 2023 Special Meeting in lieu of an Annual Meeting of Stockholders, which was held on November 3, 2023, we ares hereby providing notice, pursuant to Rule 14a-5(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, of the deadlines for any stockholder proposals pursuant to Rule 14a-8 under the Exchange Act and for any stockholder nomination or proposal outside of Rule 14a-8 via this Form 10-K.
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To be considered for inclusion in this year’s proxy materials for our 2024 Annual Meeting, stockholder proposals must be submitted in writing by the close of business on Tuesday, April 9, 2024, to our Corporate Secretary at our principal executive offices at One Kendall Square, Building 600-700, Suite 6-401, Cambridge, MA 02139. In addition to complying with this deadline, stockholder proposals intended to be considered for inclusion in the proxy materials for our 2024 Annual Meeting must also comply with our bylaws and all applicable rules and regulations promulgated by the Securities and Exchange Commission under the Exchange Act. Additionally, any stockholder who intends to submit a proposal regarding a director nomination or any other matter of business at our 2024 Annual Meeting not to be included in our proxy materials for our 2024 Annual Meeting, must also ensure that notice of any such proposal (including any additional information specified in our bylaws) is received by our Corporate Secretary at our principal executive offices by the close of business on April 9, 2024.