Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section 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.
Overview
We are a clinical-stage healthcare company with a differentiated, chemistry-driven approach focused on leveraging the microbiome to treat disease and improve human health. We have built a human-centric proprietary product platform for discovery and development that we believe will enable the rapid advancement of a broad portfolio of novel product candidates using either human clinical studies under regulations supporting research with food or clinical trials as drug candidates. Our product candidates are Microbiome Metabolic Therapies (“MMT” or “MMTs”) which are designed to modulate the metabolic output and profile of the microbiome by driving the function and composition of existing microbes. We have an industrialized approach to the discovery and development of MMTs, and our initial MMTs are targeted glycans. Each targeted glycan is an ensemble of complex carbohydrates that is intended to modulate microbial metabolism and community composition to drive a specific biological response. We believe our MMTs have the potential to be novel treatments across a variety of diseases and conditions.
W e have initiated a process to explore a range of strategic alternatives to maximize shareholder value and have engaged professional advisors, including an investment bank to act as a strategic advisor for this process. Potential strategic alternatives that may be evaluated include a sale or merger of the Company or securing additional financing or partnerships that would enable further development of our programs. There can be no assurance that this strategic review process will result in our pursuing any transaction or that any transaction, if pursued, will be completed. We aim to run this strategic review process into mid-April 2022. Additionally, there can be no assurances that any particular course of action, business arrangement or transaction, or series of transactions, will be pursued, successfully consummated or lead to increased stockholder value. If the strategic process is unsuccessful, our Board may decide to pursue a dissolution and liquidation. In the event of such liquidation or other wind-down event, holders of our securities will likely suffer a total loss of their investment.
We have or have had active programs in discovery, including work in ulcerative colitis, psoriasis, atopic immune disease, COPD, pathogens, and immuno-oncology aimed at expanding our MMT platform and clinical pipeline in 2022 and beyond.
Since our inception in 2015, we have devoted substantially all of our resources to building our proprietary product platform, developing our pipeline of MMT candidates, building our intellectual property portfolio and process development and manufacturing function, business planning, raising capital and providing general and administrative support for these operations. To date, we have primarily financed our operations through public offering of our equity securities, private placement of our convertible preferred stock and borrowings of long-term debt.
We have incurred significant net losses since inception and expect to continue to incur net operating losses for the foreseeable future. If we are able to continue as a going concern, we expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:
conduct preclinical studies, clinical studies and clinical trials for our product candidates;
advance the development of our product candidate pipeline;
continue to discover and develop additional product candidates;
continue to build out our proprietary product platform and to increase its throughput for the discovery and nomination of product candidates;
develop, acquire or in-license other product candidates and technologies;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, scientific and commercial personnel;
expand manufacturing capabilities, including in-house and third-party commercial manufacturing, through the purchase, renovation, customization and operation of a manufacturing facility and securing supply chain capacity sufficient to provide clinical study and clinical trial materials and commercial quantities of any product candidates which we may commercialize;
seek regulatory approvals for any product candidates for therapeutic indications that successfully complete clinical trials;
establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval or identify alternate commercial pathways for such products; and
add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts, as well as to support our transition to a public reporting company.
We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for or identify alternate non-drug pathways for our product candidates. If we obtain regulatory approval for or otherwise commercialize any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution.
As of December 31, 2021, we had $38.5 million in cash and cash equivalents and an accumulated deficit of $364.5 million. Based on our current operating plans, we have sufficient cash and cash equivalents to fund our operating expenses and capital expenditures into the beginning of the second quarter of 2022. We will require substantial additional capital to sustain our operations and pursue our growth strategy, including the development of our MMT candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through equity or debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. These factors raise substantial doubt about our ability to continue as a going . For more information, refer to “—Liquidity and Capital Resources” below and Note 1 to our condensed consolidated financial statements included elsewhere in this Annual Report.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
Recent Developments
In January 2022, we enacted a restructuring plan to reduce our operations to preserve financial resources, resulting in a reduction of our workforce by up to 20 positions. As a result, we incurred costs of $0.30 million that consisted of severance benefits for the affected employees and other restructuring costs.
On March 25, 2022, we entered into an amendment to our Loan and Security Agreement with Hercules, pursuant to which we made an immediate payment of $15 million of the Tranche 1 Advance without any prepayment penalty.
This amendment also extended the interest only period of the term loan through April 1, 2023 and removed the minimum cash covenant that was previously in place.
Additionally, we have initiated a process to evaluate strategic alternatives in order to maximize shareholder value. There can be no assurance that this strategic review process will result in us pursuing any transaction or that any transaction, if pursued, will be completed on attractive terms or at all. We aim to run this process into mid-April 2022. If the strategic process is unsuccessful, our Board may decide to pursue a dissolution and liquidation. In the event of such liquidation or other wind-down event, holders of our securities will likely suffer a total loss of their investment.
As of the date of this Annual Report on Form 10-K and given the strategic process we are running, our active development initiatives are extremely limited.
Financial Overview
Revenue
We have recently begun to generate collaboration revenue but have not generated and do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and can be commercialized, or if we enter into future collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.
The collaboration revenue recognized in 2020 and 2021 relates to a research collaboration with Janssen’s World Without Disease Accelerator, part of the Janssen Pharmaceutical Companies of Johnson & Johnson. The collaboration explores the potential for Kaleido’s Microbiome Metabolic Therapies (MMT) to prevent the onset of childhood allergy and other atopic, immune and metabolic conditions by driving specific microbiome features which support an appropriate maturation of the infant immune system. We do not expect the total revenue under this arrangement to be material in the aggregate.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. These expenses include:
development and operation of our proprietary product platform;
employee-related expenses, including salaries, related benefits and stock-based compensation expense, for employees engaged in research and development functions;
expenses incurred in connection with the preclinical and clinical development of our product candidates, including under agreements with third parties, such as consultants and contract research organizations, or CROs;
the cost of laboratory supplies and acquiring, developing and manufacturing products for use in our preclinical studies, clinical studies and clinical trials, including under agreements with third parties, such as consultants and contract manufacturing organizations, or CMOs;
facilities, depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and insurance; and
costs related to compliance with regulatory requirements.
We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.
Our direct external research and development expenses are tracked on a program-by-program basis and consist of costs that include fees, reimbursed materials and other costs paid to consultants, contractors, CMOs and CROs in connection with our preclinical and clinical development and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform technology and, as such, are not separately classified.
Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:
the timing and progress of preclinical and clinical development activities;
the number and scope of programs we decide to pursue and their regulatory paths to market;
raising additional funds necessary to complete preclinical and clinical development of and commercialize our product candidates;
the progress of the development efforts of parties with whom we have entered into and may enter into collaboration arrangements;
our ability to maintain our current research and development programs and to establish new ones;
our ability to maintain existing and establish new licensing or collaboration arrangements;
the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
the receipt and related terms of regulatory approvals from applicable regulatory authorities for any product candidates for therapeutic indications;
the availability of specialty raw materials for use in production of our product candidates;
establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our product candidates is approved or commercialized on an alternate regulatory pathway;
meeting demand in a timely fashion with sufficient supply at appropriate quality levels;
our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;
our ability to protect our rights in our intellectual property portfolio;
the commercialization of our product candidates, if and when approved if approval to market is required;
obtaining and maintaining third-party insurance coverage and adequate reimbursement;
the acceptance of our product candidates, if commercialized, by patients, consumers, the medical community and third-party payors;
competition with other products; and
a continued acceptable safety profile of our therapies following commercialization.
A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval or commercialization for any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
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.
Results of Operations
Comparison of Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Change
(in thousands)
Revenue:
Collaboration Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense)
Interest income
Interest expense
Other expense
Total other income (expense), net
Net loss
Research and Development Expenses
Year Ended December 31,
Change
(in thousands)
Personnel-related
Stock-based compensation expense
External manufacturing and research
Laboratory supplies and research materials
Professional and consulting fees
Facility-related and other
Total research and development expenses
Research and development expenses increased by $11.8 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase in external manufacturing and research of $7.3 million was primarily due to an increase in production of material for use in our clinical studies. The increase in professional and consulting fees of $2.0 million was primarily the result of increased spend related to our studies.
General and Administrative Expenses
Year Ended December 31,
Change
(in thousands)
Personnel-related
Stock-based compensation expense
Professional and consulting fees
Facility-related and other
Total general and administrative expenses
General and administrative expenses decreased by $2.9 million for the year ended December 31, 2021 as compared to the same period in 2020. The decrease in personnel-related costs of $1.0 million was primarily due to reduced headcount in our general and administrative functions. The decrease in stock-based compensation expense of $3.0 million was primarily due to the modification of the vesting provision of stock options and restricted stock units related to the resignation of our former CEO in July 2020.
Interest Income
Interest income for the year ended December 31, 2021 was $0.1 million compared to $0.2 million in the year ended December 31, 2020. Interest income decreased primarily as a result of lower average cash balance during 2021 and lower interest rates due to market conditions. Interest income in future periods will fluctuate based upon the amount of invested cash available and interest rates.
Interest expense
Interest expense for the year ended December 31, 2021 and 2020 was $2.8 million. The 2021 interest expense is related to our credit agreement with Hercules Capital, Inc.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years, if at all. To date, we have primarily financed our operations through the public offering of our equity securities, private placement of our convertible preferred stock and borrowings of long-term debt. As of December 31, 2021, $22.5 million was outstanding under the debt facility. In March 2019, we completed our IPO, pursuant to which we issued and sold 5,000,000 shares of common stock. We received aggregate net proceeds of $69.8 million, after deducting underwriting discounts and commissions, but before deducting offering costs totaling $3.8 million. On June 4, 2020, the Company completed a public offering (the “Offering”), pursuant to which it issued and sold 4,750,000 shares of the common stock. The aggregate net proceeds received by the Company from the Offering were $34.5 million, including 185,000 shares exercised on July 1, 2020 for the Underwriters’ option. On August 4, 2020, the Company entered into an Equity Distribution Agreement (the “Sales Agreement”) with a sales agent for the sale of up to $50.0 million of the Company’s shares of common stock, from time to time in an at-the-market public offering (the “ATM”). The sales agent is entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds from the sale of the Company’s common stock pursuant to the Sales Agreement. During the year ended December 31, 2020, the Company sold 361,299 shares of its common stock under the ATM which resulted in aggregate net proceeds of $3.4 million after payment of related commissions. During the year ended December 31, 2021, the Company has sold 309,656 shares of its common stock under the ATM which resulted in aggregate net proceeds of $4.9 million. As of December 31, 2021, there was $41.6 million available under the ATM.
On February 8, 2021, the Company completed a public offering (the “2021 Offering”) including the Underwriters’ overallotment option, pursuant to which it issued and sold 6,037,500 shares our common stock for aggregate net proceeds of $65.3 million.
As of December 31, 2021, we had $38.5 million in cash and cash equivalents and an accumulated deficit of $364.5 million. Based on our current operating plans inclusive of the January 2022 restructuring plan, March 2022 Loan
and Security Agreement Amendment, and strategic review process, we have sufficient cash and cash equivalents to fund our operating expenses and capital expenditures into the beginning of the second quarter of 2022. We will require substantial additional capital to sustain our operations and pursue our growth strategy, including the development of our MMT candidates. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. These factors raise substantial doubt about our ability to continue as a going concern. For more information, refer t o “—Liquidity and Capital Resources” below and Note 1 to our condensed consolidated financial statements included elsewhere in this Annual Report.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Year December 31,
(in thousands)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net decrease in cash, cash
equivalents and restricted cash
Net Cash Used in Operating Activities
During the year ended December 31, 2021, operating activities used $77.1 million of cash, due to our net loss of $90.3 million and net cash used by changes in our operating assets and liabilities of $0.3 million, partially offset by non-cash charges of $13.5 million. Net cash used by our operating assets and liabilities primarily consisted a $0.4 million decrease in accrued expenses and other liabilities and a $0.2 million increase in prepaid and other assets, partially offset by a $0.3 million increase in accounts payable.
During the year ended December 31, 2020, operating activities used $61.5 million of cash, due to our net loss of $81.6 million, partially offset by non-cash charges of $15.6 million and net cash provided by changes in our operating assets and liabilities of $4.5 million. Net cash provided by our operating assets and liabilities primarily consisted of a $5.0 million increase in accounts payable, accrued expenses and other liabilities, partially offset by a $0.5 million increase in prepaid expenses and other assets.
Changes in prepaid expenses and other current assets, accounts payable and accrued expenses and other liabilities were generally due to the advancement of our research programs and the timing of vendor invoices and payments.
N et Cash Used in Investing Activities
During the years ended December 31, 2021, net cash used in investing activities was $0.7 million due to $1.1 million due to purchases of property and equipment, partially offset by $0.4 million cash proceeds from sale of property and equipment.
During the years ended December 31, 2020, net cash used in investing activities was $4.0 million, respectively, due to purchases of property and equipment.
Net Cash Provided by Financing Activities
During the year ended December 31, 2021, net cash provided by financing activities was $70.0 million, consisting primarily of proceeds from the 2021 Offering in February 2021, ATM, and proceeds from the exercise of stock options.
During the year ended December 31, 2020, net cash provided by financing activities was $40.4 million, consisting primarily of proceeds from the Offering in June 2020, proceeds from the sale of shares under the ATM in 2020, and proceeds from the exercise of stock options.
On December 31, 2019, we entered into a Credit Agreement (the “Credit Agreement”) with Hercules Capital, Inc. (the “Lender”). Under the Credit Agreement, the Lenders extended an initial $22.5 million to us, with the option to draw down an additional $12.5 million if certain milestones and conditions are met. The Credit Agreement includes an end of term charge equal to 7.55% of the aggregate principal amount of all advances. The end of term charge is being accrued and recorded to interest expense over the life of the Credit Agreement using the effective interest method.
The Credit Agreement contains customary representations and warranties, events of default and affirmative and negative covenants, including, among others, covenants that limit or restrict the Borrower’s ability to, among other things, incur additional indebtedness, merge or consolidate, make acquisitions, pay dividends or other distributions or repurchase equity, make investments, dispose of assets and enter into certain transactions with affiliates, in each case subject to certain exceptions. As security for its obligations under the Credit Agreement, the Borrowers granted the Lender a first priority security interest on substantially all of the Borrowers’ assets (other than intellectual property), subject to certain exceptions.
The facility carries a 48-month term with interest only payments on the outstanding principal for the first 18 months, which can be extended to up to 24 months, depending on the achievement of certain performance milestones. The Term Loan will mature in January 2024 and bears an interest rate of equal to the greater of (a) 9.35% and (b) 9.35% plus the Wall Street Journal prime rate minus 3.25%. The Credit Agreement contains a $15 million Minimum Cash Covenant and is subject to mandatory prepayment provisions that require prepayment upon the occurrence of a Change in Control event (as defined in the Credit Agreement). The Credit Agreement was amended on March 25, 2022. See “- Recent Developments .”
Funding Requirements
If we are able to continue as a going concern, over the next several quarters we will focus our activities on key exploratory and clinical studies and clinical trials which we expect will reduce our overall expense rate. In the periods that follow, assuming the success of our clinical studies and clinical trials, we anticipate our expenses to increase as we progress towards larger and more pivotal clinical studies and clinical trials of our product candidates, with the potential for larger clinical studies, clinical trials and associated manufacturing. The timing and amount of our operating expenditures will depend largely on:
the commencement, enrollment or results of the planned clinical studies or clinical trials of our product candidates or any future clinical studies or clinical trials we may conduct, or changes in the development status of our product candidates;
the timing and outcome of regulatory review of our product candidates;
our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;
changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial requirements for approvals;
developments concerning our CMOs;
our ability to obtain materials and to produce adequate cGMP compliant product supply for any approved or commercialized product or inability to do so at acceptable prices;
our ability to establish and maintain collaborations, if needed;
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we obtain marketing approval or identify an alternate regulatory pathway to market;
the costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims;
additions or departures of key scientific or management personnel;
unanticipated serious safety concerns related to the use of our product candidates; and
the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to , reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Off-Balance Sheet Arrangements
As of December 31, 2021, we did not have any off-balance sheet arrangements as defined under applicable SEC rules.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs 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.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, 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 research and development expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable 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 invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. 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 these
estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
vendors in connection with preclinical development activities;
CROs and investigative sites in connection with preclinical, human clinical studies and clinical trials; and
CMOs in connection with the production of preclinical, human clinical studies and clinical trial materials.
We measure the expense recognized based on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CMOs and CROs that supply, conduct and manage preclinical studies, human clinical studies and clinical trials 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. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of certain milestones. 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 the amount of prepaid expenses 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 changes in estimates that increase or decrease amounts recognized in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Recent Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.
Emerging Growth 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. Section 107 of the JOBS Act 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 use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.
Item 7A. Qualitative and Quantitat ive Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b‑2 of the Exchange Act and are not required to provide the information required under this item.
Item 8. Consolidated Financial St atements and Supplementary Data
KALEIDO BIOSCIENCES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 )
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPEND ENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and Board of Directors of Kaleido Biosciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kaleido Biosciences, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses from operations and recurring negative operating cash flows that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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/ Deloitte & Touche LLP
Boston, Massachusetts
March 31, 2022
We have served as the Company’s auditor since 2017.
PART I—FINANCI AL INFORMATION
Item 1. Consolidated F inancial Statements
KALEIDO BIOSCIENCES, INC. AND SUBSIDIARIES
Consolidated Ba lance Sheets
(in thousands, except share and per share data)
As of December 31,
Assets
Current assets:
Cash and cash equivalents
Asset held for sale
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Restricted cash
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current term debt, net of unamortized debt discount
Total current liabilities
Long term debt, net of unamortized debt discount
Other liabilities
Total liabilities
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred shares, $ 0.001 par value, 10,000,000 authorized;
no shares issued or outstanding
Common shares, $ 0.001 par value, 150,000,000 shares
authorized; 42,596,037 and 36,022,811 shares issued and shares outstanding at December 31, 2021 and 2020,
respectively
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
KALEIDO BIOSCIENCES, INC. AND SUBSIDIARIES
Consolidated Stateme nts of Operations
(in thousands, except share and per share data)
Years Ended December 31,
Revenue:
Collaboration revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other (expense) income:
Interest income
Interest expense
Other income (expense)
Total other income (expense), net
Net loss
Net loss per share —basic and diluted
Weighted-average common shares outstanding —basic and diluted
The accompanying notes are an integral part of these consolidated financial statements.
KALEIDO BIOSCIENCES, INC. AND SUBSIDIARIES
Consolidated Statements of Stoc kholders ’ Equity
(in thousands, except share data)
Common Stock
Additional
Paid-In
Accumulated
Stockholders’
Equity
Shares
Amount
Capital
Deficit
(Deficit)
Balance at January 1, 2020
Issuance of common stock, net of issuance costs of $ 2,731
Exercise of stock options
Stock-based compensation
Vesting of restricted shares
Net loss
Balance at December 31, 2020
Issuance of common stock, net of issuance costs of $ 4,512
Exercise of stock options
Stock-based compensation
Common stock issued upon vesting of restricted stock units, net of 45,102 shares withheld for employee taxes
Net loss
Balance at December 31, 2021
The accompanying notes are an integral part of these consolidated financial statements.
KALEIDO BIOSCIENCES, INC. AND SUBSIDIARIES
Consolidated Statemen ts of Cash Flows
(in thousands)
Years Ended December 31,
Operating activities:
Net loss
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization
Stock-based compensation
Amortization of debt discount
Non-cash interest expense
(Gain) loss on disposal of fixed asset
Changes in operating assets and liabilities:
Prepaid expenses and other assets
Accounts payable
Accrued expense and other liabilities
Net cash used in operating activities
Investing activities:
Purchase of property and equipment
Cash proceeds from sale of property and equipment
Net cash used in investing activities
Financing activities:
Payments of issuance and extinguishment costs related to debt
Proceeds from exercise of stock options
Payments related to capital lease
Issuance of common stock, net of issuance costs
Net settlement of vested restricted stock units to fund related employee statutory tax withholdings
Net cash provided by financing activities
Net decrease in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of year
Cash, cash equivalents, and restricted cash, end of year
Supplemental cash flow information
Interest paid
Supplemental disclosure of non-cash investing and financing activities
Vesting of restricted stock
Purchase of property and equipment in accounts payable and accrued expenses
Receivables for sale of property and equipment in prepaid expenses and other current assets
The accompanying notes are an integral part of these consolidated financial statements.
KALEIDO BIOSCIENCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolid ated Financial Statements
1. Nature of the Business, Basis of Presentation, and Going Concern
Kaleido Biosciences, Inc. and its wholly owned subsidiaries (the “Company”) is a clinical-stage healthcare company that was incorporated in Delaware on January 27, 2015 and has a principal place of business in Lexington, Massachusetts. The Company was formed to use its differentiated, chemistry-driven approach to leverage the potential of the microbiome to treat disease and improve human health.
The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, successful development of technology, obtaining additional funding, protection of proprietary technology, compliance with government regulations, risks of failure of preclinical studies (including ex vivo assays), clinical studies and clinical trials, the need to obtain marketing approval for its drug candidates and if applicable, its consumer products, fluctuations in operating results, economic pressure impacting therapeutic pricing, dependence on key personnel, risks associated with changes in technologies, development by competitors of technological innovations and the ability to supply sufficient amounts of its Microbiome Metabolic Therapies (“MMTs”) at an acceptable quality level.
On June 4, 2020, the Company completed a public offering (the “Offering”), pursuant to which it issued and sold 4,750,000 shares of the common stock. The aggregate net proceeds received by the Company from the Offering were $ 33.2 million. On July 1, 2020, 185,000 shares were exercised under the Underwriter’s overallotment option for net proceeds of $ 1.3 million.
On August 4, 2020, the Company entered into an Equity Distribution Agreement (the “Sales Agreement”) with a sales agent for the sale of up to $ 50.0 million of the Company’s shares of common stock, from time to time in an at-the-market public offering (the “ATM”). The sales agent is entitled to compensation at a fixed commission rate of 3.0 % of the gross proceeds from the sale of the Company’s common stock pursuant to the Sales Agreement. During the year ended December 31, 2020, the Company sold 361,299 shares of its common stock under the ATM which resulted in aggregate net proceeds of $ 3.4 million after payment of related commissions. During the year ended December 31, 2021, the Company has sold 309,656 shares of its common stock under the ATM which resulted in aggregate net proceeds of $ 4.9 million. As of December 31, 2021, there was $ 41.6 million available under the ATM.
On February 8, 2021, the Company completed a public offering (the “2021 Offering”) including the Underwriters’ overallotment option, pursuant to which the Company issued and sold 6,037,500 shares of common stock for net proceeds of $ 65.3 million.
During the years ended December 31, 2021 and 2020, the Company incurred net losses of $ 90.3 million and $ 81.6 million, respectively, and reported cash used in operations totaling $ 77.1 million and $ 61.5 million, respectively. As of December 31, 2021, the Company had cash and cash equivalents of $ 38.5 million. Management believes the Company has sufficient cash and cash equivalents or borrowing capacity to fund operating expenses and capital expenditures into the beginning of the second quarter of 2022.
In January 2022, we enacted a restructuring plan to reduce our operations to preserve financial resources, resulting in a reduction of our workforce by up to 20 positions. As a result, we incurred costs of $280,000 that consisted of severance benefits for the affected employees and other restructuring costs.
On March 25, 2022, we entered into an amendment to our Loan and Security Agreement with Hercules, pursuant to which we made an immediate payment of $15 million of the Tranche 1 Advance without any prepayment penalty. This amendment also extended the interest only period of the term loan through April 1, 2023 and removed the minimum cash covenant that was previously in place.
Additionally, we have initiated a process to evaluate strategic alternatives in order to maximize shareholder value. There can be no assurance that this strategic review process will result in us pursuing any transaction or that any transaction, if pursued, will be completed on attractive terms or at all. We aim to run this process into mid-April 2022.
Based on its recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future, and need to raise additional capital to finance its future operations, the Company has
concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company will require substantial additional capital to fund its research and development and ongoing operating expenses. These capital requirements are expected to be funded through debt and equity offerings as well as possible strategic collaborations with other companies. If the Company is unable to raise additional funds when needed, it may be required to delay, reduce or eliminate its product development or future commercialization efforts, or grant rights to develop and market product candidates that the Company would otherwise prefer to develop and market itself.
A novel strain of coronavirus (COVID-19) was first identified in late 2019, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, many companies have experienced disruptions in their operations and in markets served. The Company has instituted some and may take additional temporary precautionary measures intended to help minimize the risk of the virus to its employees, including implementing a work-at-home policy, providing flexibility for working parents and suspending all business-related travel.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
Principles of Consolidation
The accompanying consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash includes cash in readily available checking accounts. The Company’s cash deposits on hand at one financial institution often exceed federally insured limits. Cash equivalents include all highly liquid investments maturing within 90 days from the date of purchase.
Restricted Cash
Restricted cash is cash that is restricted as to withdrawal or use under the terms of certain contractual agreements. The restricted cash consists of cash collateral for secured letters of credit for the security deposit on the Company’s leased laboratory and office facilities.
Concentrations of Credit Risk and of Significant Suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company’s cash equivalents as of December 31, 2021 consisted only of money market funds. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company relies, and expects to continue to rely, on a small number of vendors to manufacture supplies and raw materials for its development programs. These programs could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Laboratory and office equipment, computer equipment and furniture and fixtures are depreciated over a period of five years , and leasehold improvements are amortized over the lesser of the asset’s estimated useful life or the remaining lease term. Major additions and betterments are capitalized; maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operating expenses as incurred.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is an impairment, the amount of the impairment is calculated as the difference between the carrying value and the fair value. The Company has not recorded any impairment charges in the periods presented.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer (“CEO”). The Company and CEO view the Company’s operations and manage its business as one operating segment.
Collaboration Revenue
The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC Topic 808, Collaborative Arrangements (ASC 808), to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. To the extent the arrangement is within the scope of ASC 808, the Company will assess whether aspects of the arrangement between it and their collaboration partner are within the scope of other accounting literature. If the Company concludes that some or all aspects of the arrangement represent a transaction with a customer, it will account for those aspects of the arrangement within the scope of ASC Topic 606, Revenue from Contracts with Customers , the Company applies the five-step model described below. If the Company concludes that some or all aspects of the arrangement are within the scope of ASC 808 and do not represent a transaction with a customer, the Company will recognize its allocation of the shared costs incurred with respect to the jointly conducted activities as a component of the related expense in the period incurred.
The Company recognizes revenue after applying the following five steps:
Identification of the contract, or contracts, with a customer,
Identification of the performance obligations in the contract, including whether they are distinct within the context of the contract
Determination of the transaction price, including the constraint on variable consideration
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, performance obligations are satisfied
If a contract is determined to be within the scope of ASC 606 at inception, the Company assesses the goods or services promised within such contract, determines which of those goods and services are performance obligations, and assesses whether each promised good or service is distinct. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The Company also considers the intended of the contract in assessing whether a promised or service is separately identifiable from other promises in the contract. If a promised or service is not distinct, an entity is required to combine that or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.
The Company may provide options to additional goods or services in such arrangements exercisable at a customer’s discretion. The Company assesses if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying good and services to the option exercise price.
The Company determines transaction price based on the amount of consideration the Company expects to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. The Company then allocates the transaction price to each performance obligation based on the relative standalone selling prices (“SSP”). SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. In developing the SSP for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.
If the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled by using the expected value method or the most likely amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied, either at a point in time or over time, and if over time recognition is based on the use of an output or input method.
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated balance sheets. If the related performance obligation is expected to be satisfied within the next twelve months this will be classified in current liabilities. Amounts recognized as revenue prior to receipt are recorded as other current assets in the Company's balance sheets. If the Company expects to have an unconditional right to receive the consideration in the next twelve months, this will be classified in other current assets.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, stock‑based compensation, employee benefits, facilities costs, laboratory supplies, depreciation, manufacturing expenses and external costs of vendors engaged to conduct preclinical development activities and clinical trials, as well as the cost of licensing technology.
Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred. Advance payments for goods or services to be received in the
future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.
Research and Manufacturing Contract Costs and Accruals
The Company has entered into various research and development and manufacturing contracts. These agreements are generally cancelable, and related payments are recorded as the corresponding expenses are incurred. The Company records accruals for estimated ongoing costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the research studies or clinical trials and manufacturing activities, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be required in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.
Patent Costs
All patent‑related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided to reduce the deferred tax asset to an amount, which, more likely than not, will be realized.
The Company recognizes the tax benefit from any uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Fair Value Measurements
Certain assets and liabilities are carried at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1 – Unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets and liabilities.
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
quoted prices for similar assets and liabilities in active markets
quoted prices for identical or similar assets or liabilities in markets that are not active
observable inputs other than quoted prices that are used in the valuation of the asset or liabilities (e.g., interest rate and yield curve quotes at commonly quoted intervals)
inputs that are derived principally from or corroborated by observable market data by correlation or other means
Level 3 – Unobservable inputs for the assets or liability (i.e., supported by little or no market activity). Level 3 inputs include management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). The carrying amount of the Company’s other financial assets and liabilities including cash, accounts payable and long-term debt approximate fair value because of the relatively short period of time between origination and expected realization or settlement.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss is computed by adjusting net loss to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share is computed by dividing the diluted net loss by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares assuming the dilutive effect of common stock equivalents.
The following table presents securities that have been excluded from the computations of diluted weighted-average shares outstanding as they would be anti-dilutive due to the net losses:
As of December 31,
Options to purchase common stock
Unvested restricted stock units
Stock-Based Compensation
For stock-based awards, the Company measures the estimated fair value of the stock-based award on the date of grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. For stock-based awards with service-based vesting conditions, the Company records the expense for these awards using the straight-line method. For stock options with performance-based vesting conditions, the Company records the expense for these awards over the requisite service period using an accelerated attribution method to the extent the achievement of the performance condition is probable. The Company accounts for forfeitures as they occur.
The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s cash compensation costs are classified.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. The Company’s comprehensive net loss equals the reported net loss for all periods presented.
Subsequent events
The Company evaluates events and/or transactions occurring after the balance sheet date and before the issue date of the financial statements to determine if any of those events and/or transactions require adjustment to or disclosure in the financial statements.
Accounting Pronouncements Issued and Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require lessees to record most leases on the balance sheet but recognize expense in a manner similar to the current standard. The Company will use a modified retrospective approach of adoption for leases.
The Company adopted the new leasing standard effective January 1, 2022, using the modified retrospective transition approach and utilizing the effective date as the date of initial application. As a result, prior periods will be presented in accordance with the previous guidance in ASC 840. The Company has elected to apply the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or the capitalization of initial direct costs for any existing leases. In connection with the adoption of ASC 842, the Company will record a lease liability of $ 36.6 million related to its existing office lease and a corresponding right-of-use asset of $ 33.9 million. Existing deferred rent and prepaid rent amounts will be removed from the consolidated balance sheets at the date of adoption. The adoption of the standard will have a material impact on our consolidated balance sheet but will not have material impact to the Company's consolidated statements of operations or statement of cash flows.
3. Fair Value Measurements
The following tables set forth by level, within the fair value hierarchy, the assets and liabilities carried at fair value on a recurring basis (in thousands):
Fair Value Measurement as of December 31, 2021
Level 1
Level 2
Level 3
Total
Assets:
Money market funds included within cash
and cash equivalents
Total
Fair Value Measurement as of December 31, 2020
Level 1
Level 2
Level 3
Total
Assets:
Money market funds included within cash
and cash equivalents
Total
The fair value of money market funds was measured by the Company based on quoted market prices. There were no transfers among Level 1, Level 2, or Level 3 categories in the periods presented.
Financial Instruments Not Recorded at Fair Value The carrying value of cash, cash equivalents, restricted cash, accounts payable and accrued expenses that are reported on the consolidated balance sheets approximate their fair value due to the short-term nature of these assets and liabilities. The carrying value of the long-term debt approximates fair value as evidenced by the 2021 amendment to the loan and security agreement and the latest refinancing.
4. Property and Equipment, net
Property and equipment consist of the following (in thousands):
As of December 31,
Laboratory equipment
Office and computer equipment
Leasehold improvements
Construction in process
Property and equipment – at cost
Less accumulated depreciation and amortization
Property and equipment – net
Depreciation and amortization expense was $ 2.4 million and $ 1.8 million for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, the Company recorded gross fixed asset disposal of $ 1.6 million and related accumulated depreciation of $ 0.4 million. The Company also had a fixed asset sale with proceeds of $ 1.4 million of which $ 0.9 million was included in prepaid and other current assets as a receivable. During the year ended December 31, 2020, the Company recorded gross fixed asset disposal of $ 1.1 million and related accumulated depreciation of $ 0.9 million.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
As of December 31,
Payroll and benefits
Consulting service
Legal service
Research and development
Deferred revenue
Interest
Other
6. Debt Financing
2019 Credit Agreement
On December 31, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”) with Hercules Capital, Inc. (the “Lender”). Under the Credit Agreement, the Company borrowed $ 22.5 million, and the Company has the option to draw down an additional $ 12.5 million if certain milestones and conditions are met. The Company incurred fees of $ 0.3 million, which was paid to the lender on the closing date. These amounts were recorded as a debt discount and are being amortized as interest expense using the effective interest method over the life of the Credit Agreement. The Credit Agreement also includes an end of term charge equal to 7.55 % of the aggregate principal amount of all advances. The end of term charge, totaling $ 1.7 million at December 31, 2019, was recognized as a debt discount and is reflected as a reduction in the carrying value of the debt and recorded in other long-term liabilities. The debt discount created by the end of term charge is being accreted and will be recognized as additional interest expense over the term of the Credit Agreement using the effective interest method.
The Credit Agreement contains customary representations and warranties, events of default and affirmative and negative covenants, including, among others, covenants that limit or restrict the Company’s ability to, among other things, incur additional indebtedness, merge or consolidate, make acquisitions, pay dividends or other distributions or repurchase equity, make investments, dispose of assets and enter into certain transactions with affiliates, in each case subject to certain exceptions. As security for its obligations under the Credit Agreement, the Company granted the Lender a first priority security interest on substantially all of the Company’s assets (other than intellectual property), and subject to certain exceptions.
The outstanding principal under the Credit Agreement has a 48 -month term with interest only payments for the first 15 months, which period can be extended to up to 24 months, depending on the achievement of certain performance milestones. The principal bears an interest rate of equal to the greater of (i) 8.95 % plus the prime rate minus 4.75 % and (ii) 8.95%. The Credit Agreement includes mandatory prepayment provisions that require prepayment upon the occurrence of a change in control event.
On June 15, 2020, the Company entered into a Second Amendment to Loan and Security Agreement (the “Amendment”). The Amendment was entered into for the primary purpose of amending the Credit Agreement as follows: (i) the second tranche of the term loan (the “Term Loan”) is terminated; (ii) amounts available under Tranche 3 of the Term Loan is increased to $ 12.5 million from the previous $ 7.5 million availability amount and its availability period is extended through December 15, 2021 , subject to future approval by the Agent’s investment committee; (iii) the interest-only period is extended through July 31, 2021 ; (iv) the interest rate on borrowings is increased by 0.4 %, such that the per annum interest rate on outstanding borrowings will be the greater of (a) 9.35 % and (b) 9.35% plus the Wall Street Journal prime rate minus 3.25% ; (v) the variable amount and duration of a minimum cash covenant in the Agreement are amended. The interest rate at December 31, 2020 is 9.35 %. The Amendment has been accounted for as a modification and the Company incurred fees of $ 79,000 , which was paid to the lender on the closing date and were recorded as a debt discount, which will be amortized as interest expense using the effective interest method.
On April 30, 2021, the Company entered into a Third Amendment to Loan and Security Agreement (the "Third Amendment"). The Third Amendment was entered into for the primary purpose of amending the Credit Agreement as follows: (i) the interest-only period was extended through January 31, 2022 ; (ii) the second tranche for the term loan (the "Term Loan") was reinstated and the related $ 5 million was available to be drawn at the Company's option on or before June 1, 2021; and (iii) the Minimum Cash Covenant was reduced from $ 22.5 million to $ 15 million. The Company incurred fees of $20,000, which was paid to the Lender on the closing date and were recoded as debt discount, which will be amortized as interest expense using the effective interest method. The Company did not exercise its option to drawn down the second tranche of the term loan.
Future principal payments under the Credit Agreement as of December 31, 2021 are as follows (in thousands):
Total future principal payments
Less unamortized debt discount
Total balance
On March 25, 2022, the Company entered into a Fourth Amendment to Loan and Security Agreement ("the Amendment"). The Amendment was entered into for the primary purpose of amending the Agreement as follows: (i) an immediate payment of $ 15 million of the Tranche 1 Advance without prepayment penalty, (ii) extended the interest only period of the term loan through April 1, 2023 , (iii) removed the minimum cash covenant that was previously in place, and (iv) the ability to drawn down an additional $ 1.7 million tranche if Kaleido completes either an equity raise or convertible debt financing of at least $ 15 million of net cash proceeds following the close of the Amendment. The Company paid the immediate payment of $ 15 million to the lender on the closing date.
7. Commitments and contingencies
In March 2018, the Company entered into a non-cancelable ten-year lease agreement for laboratory and office space in Lexington, Massachusetts. In March 2019, the Company exercised its option to lease additional space in the building. The lease expires in 2029 , subject to one option to extend the lease for 10 years.
Rent expense for the years ended December 31, 2021 and 2020 was $ 6.5 million and $ 6.9 million, respectively. Future minimum lease payments under the non-cancelable operating leases consisted of the following as of December 31, 2021 (in thousands):
Year Ending December 31,
Thereafter
8. Stockholders’ Equity
Stock-based compensation
2019 Stock Incentive Plan
The Company’s 2015 Stock Incentive Plan (the “2015 Plan”) provided for the Company to sell or issue incentive stock options or nonqualified stock options, restricted stock, and other equity awards to employees, directors and consultants of the Company.
The 2019 Stock Option and Incentive Plan (the “2019 Plan”) became effective in February 27, 2019. Upon effectiveness of the 2019 Plan, the remaining shares available under the 2015 Plan ceased to be available for issuance and no future issuances will be made under the 2015 Plan.
The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers, employees, directors and consultants. Awards generally vest over a period up to 4 years and have a maximum term of 10 years. The number of shares initially reserved for issuance under the 2019 Plan is 2,168,976 , has increased on January 1, 2020 and will continue to increase each January 1 thereafter by 4 % of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of directors. There were 3,930,009 shares available for future issuance at December 31, 2021.
2019 Employee Stock Purchase Plan
The 2019 Employee Stock Purchase Plan (the “2019 ESPP”) became effective on February 27, 2019. A total of 180,748 shares of common stock were reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the ESPP automatically increased on January 1, 2020, and will continue to increase each January 1 thereafter, by the lesser of (i) 542,244 shares of common stock, (ii) 1 % of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or (iii) such lesser number of shares as determined by the administrator of the 2019 ESPP. No shares were issued under the 2019 ESPP in 2019. There were 842,253 shares available for future issuance at December 31, 2021.
Stock Option Valuation
The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
The Company typically grants stock options at exercise prices deemed by the Board to be equal to the fair value of the common stock at the time of grant. In the periods prior to the IPO, the fair value of the common stock has been determined by the Board at each measurement date based on a variety of different factors, including the results obtained from independent third-party appraisals, the Company’s financial position and historical financial performance, the status of development of the Company’s programs, the current climate in the marketplace, the illiquid nature of the common stock, the effect of the rights and preferences of the preferred stockholders, and the
prospects of a liquidity event, among others. In the periods following the IPO, the fair value is determined based upon the quoted price of the Company’s common stock.
The assumptions that the Company used to determine the grant-date fair value of options granted were as follows:
Years Ended December 31,
Expected volatility
Risk-free interest rate
Expected term (in years)
Expected dividend yield
Stock Options Activity
A summary of the Company’s stock option activity and related information is as follows:
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (in Years)
Aggregate
Intrinsic
Value
Outstanding as of January 1, 2021
Granted
Exercised
Canceled
Outstanding as of December 31, 2021
Options exercisable as of December 31, 2021
Options vested or expected to vest as of December 31, 2021
The weighted-average grant date fair value of the options granted during the years ended December 31, 2021 and 2020 was $ 5.22 and $ 5.51 per share, respectively. As of December 31, 2021, there was $ 13.4 million of unrecognized compensation expense for stock options, which the Company expects to recognize over the weighted-average remaining term of 2.62 years.
Restricted Stock Unit Activity
A summary of the Company’s restricted stock unit activity and related information is as follows:
Options
Weighted
Average
Grant Date Fair Value Per Share
Outstanding as of January 1, 2021
Granted
Released
Canceled
Outstanding as of December 31, 2021
As of December 31, 2021, there was $ 1.2 million of unrecognized compensation expense for the restricted stock units, which the Company expects to recognize over the weighted-average remaining term of 2.04 years.
Stock- Based Compensation Expense
The Company recorded stock-based compensation expense in the following expense categories of its consolidated statements of operations:
Year Ended December 31,
Research and development
General and administrative
On January 20, 2021, the Company entered into a separation agreement with the former Chief Medical Officer and Head of Research and Development of the Company, which amended an existing employment agreement and provided for changes in the term of service and compensation under the agreement. The outstanding options and restricted stock units held by the former Chief Medical Officer were modified to accelerate certain vesting provisions and the period of exercisability. As a result, the Company recorded stock-based compensation expense of $ 2.0 million related to the incremental fair value of the modified awards during the first quarter of 2021.
9. Income Taxes
There is no provision for income taxes because the Company has historically incurred net operating losses and maintains a full valuation allowance against its deferred tax assets. The reported amount of income tax benefit for the years ended December 31, 2021 and 2020 differs from the amount that would result from applying domestic federal statutory rates to pretax losses primarily because of changes in the valuation allowance, state taxes, and the generation of research and development credits.
Significant components of the Company’s net deferred tax assets at December 31, 2021 and 2020 are as follows:
Years ended December 31,
Deferred tax assets
Stock-based compensation
Net operating loss carryforwards
Credit carryforwards
Intangible assets
Charitable contributions
Accrued expenses
Total deferred tax assets
Valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Fixed assets
Total net deferred tax liability
Total deferred tax assets (liability)
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Years ended December 31,
Federal income tax expense at statutory rate
Stock compensation expense
Fair value change in warrant liability
Permanent differences
Federal research and development credit
State research and development credit
State income tax, net of federal benefit
Other
Change in valuation allowance
Effective income tax rate
As of December 31, 2021, the Company had net operating loss (NOL) carryforwards for U.S. federal and state tax purposes of $ 318.6 million and $ 348.4 million, respectively. Federal NOLs of $ 38.8 million, generated before 2018, will begin expiring in varying amounts in 2035 unless utilized and the remaining NOL of $ 279.8 million, generated after 2018 will be carried forward indefinitely and could be used up to 80% of taxable income of each future tax year. The Commonwealth of Massachusetts does not follow federal on NOL carryforwards and as such the Company’s Massachusetts NOLs of $ 271.6 million will expire in at various times starting in 2035. As of December 31, 2021, the Company also has federal research and development tax credit carryforwards of approximately $ 6.5 million, and state research and development tax credit carryforwards of approximately $ 3.6 million, which may be available to reduce future tax liabilities, and which expire at various dates through 2040 .
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect our stockholders or us. We assess the impact of various tax reform proposals and modifications to existing tax treaties in all jurisdictions where we have operations to determine the potential effect on our business and any assumptions we have made about our future taxable income. We cannot predict whether any specific proposals will be enacted, the terms of any such proposals or what effect, if any, such proposals would have on our business if they were to be enacted. Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the currently available option to deduct research and development expenditures and requires taxpayers to amortize them over five years. The U.S. Congress is considering legislation that would defer the amortization requirement to future periods, however, we have no assurance that the provision will be repealed or otherwise modified
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards research and development tax credit carryforwards and capitalized expenditures. Under the applicable accounting standards, management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and concluded that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets.
Accordingly, a full valuation allowance has been established, and the valuation allowance increased $ 42.3 million and $ 22.8 million in the years ended December 31, 2021 and 2020, respectively.
Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Code due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company has not completed a study to assess whether a change of ownership has occurred, or
whether there have been multiple ownership changes since its formation, due to the significant cost and complexity associated with a study. There could also be additional ownership changes in the future which may result in additional limitations on the utilization of net operating loss carryforwards and tax credits.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. Since the Company is in a loss carryforward position, it is generally subject to examination by the U.S. federal, state, and local income tax authorities for all tax years in which a loss carryforward is available.
The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense. The Company has no amounts recorded for any unrecognized tax positions, accrued interest or penalties as of December 31, 2021 and 2020.
10. Revenue
In December 2019, the Company entered into a research collaboration agreement with Janssen’s World Without Disease Accelerator (“Janssen”), part of the Janssen Pharmaceutical Companies of Johnson & Johnson, to explore the potential for a MMT to prevent the onset of childhood allergy and other atopic, immune and metabolic conditions.
The collaboration includes three milestones of research and development with results of those efforts due to Janssen at end of the milestone at which point Janssen will have 60 days to decide to proceed with the next milestone.
The Company assessed the Janssen collaboration agreement in accordance with ASC 808 and ASC 606 and concluded that the arrangement represents a contract with a customer and is within the scope of ASC 606. The promised goods and services represent one combined performance obligation and the entire transaction price will be allocated to that single combined performance obligation. In addition, the Company concluded the right to proceed with the following milestones does not provide any discounts to Janssen if it decides to proceed with the next milestones. As such, the Company concluded the milestone is not considered to be a material right. Each milestone is considered a separate contract and reflects applicable standalone selling prices.
Under the Janssen collaboration agreement, Janssen is obligated to reimburse the Company for the costs incurred under an agreed upon research plan. Costs incurred are billed by the Company to Janssen at completion of each milestone. The Company recognizes revenue over the research period and as the performance obligation is satisfied. using total estimated hours to be incurred throughout each milestone. For the year ended December 31, 2021, the Company recognized $ 1.1 million as collaboration revenue under the agreement. Further, as of December 31, 2021, the Company recorded $ 828 as deferred revenue within other current liabilities on the Company’s consolidated balance sheets related to the Janssen collaboration agreement. The expected research term of this arrangement is expected to be completed in the second half of 2022 , and the aggregate consideration is not expected to be material.
