Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors” included elsewhere in this Annual Report.
Overview
We are a biotechnology company developing a portfolio of novel and proprietary MGDs. MGDs are small molecule drugs that employ the body’s natural protein destruction mechanisms to selectively degrade therapeutically relevant proteins. MGDs work by inducing the engagement of defined surfaces identified on target proteins by an E3 ligase, such as cereblon. We have developed a proprietary and industry-leading protein degradation platform, called QuEENTM, to enable our unique, target-centric, MGD discovery and development and our rational design of MGD products. We believe our small molecule MGDs may give us significant advantages over existing therapeutic modalities, including other protein degradation approaches. We prioritize our product development on therapeutic targets backed by strong biological and genetic rationale with the goal of discovering and developing novel medicines.
Monte Rosa Therapeutics AG, a Swiss operating company, was incorporated under the laws of Switzerland in April 2018. Monte Rosa Therapeutics, Inc. was incorporated in Delaware in November 2019. In 2020, Monte Rosa Therapeutics, Inc. and Monte Rosa Therapeutics AG, entities under common control since the incorporation of Monte Rosa Therapeutics, Inc., consummated a contribution and exchange agreement, or the Contribution and Exchange, whereby Monte Rosa Therapeutics, Inc. acquired the net assets and shareholdings of Monte Rosa Therapeutics AG via a one-for-one exchange of equity between Monte Rosa Therapeutics, Inc. and the shareholders of Monte Rosa Therapeutics AG in a common control reorganization. We are headquartered in Boston, Massachusetts with research operations in both Boston and Basel, Switzerland. To date, we have been financed primarily through the issuance of convertible promissory notes, convertible preferred stock, and common stock.
Liquidity
To date, we have financed our operations primarily through the issuance and sale of convertible promissory notes and our convertible preferred stock to outside investors in private equity financings, sales of our common stock, and through our collaboration with Roche. From our inception through the date hereof, we raised an aggregate of $524.8 million of gross proceeds from such transactions. Since inception, we have had significant operating losses. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures and, to a lesser extent, general and administrative expenditures. Our net loss was $135.4 million and $108.5 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023 we had an accumulated deficit of $365.9 million and $237.0 million of cash, cash equivalents, restricted cash, and marketable securities.
Impact of global economic and political developments
The development of our product candidates could be disrupted and materially adversely affected in the future by global economic or political developments. In addition, economic uncertainty in global markets caused by political instability and conflict, and economic challenges caused by global pandemics or other public health events, may lead to market disruptions, including significant volatility in commodity prices, credit and capital market instability and supply chain interruptions. Our business, financial condition and results of operations could be materially and adversely affected by negative impacts on the global economy and capital markets resulting from these global economic conditions, particularly if such conditions are prolonged or worsen.
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Components of operating results
Research and development expenses
Our research and development expenses include:
•
expenses incurred under agreements with consultants, third-party service providers that conduct research and development activities on our behalf;
•
personnel costs, which include salaries, benefits, pension and stock-based compensation;
•
laboratory and vendor expenses related to the execution of preclinical and clinical studies;
•
laboratory supplies and materials used for internal research and development activities; and
•
facilities and equipment costs.
Most of our research and development expenses have been related to the development of our QuEENTM platform and advancement of our GSPT1 program, advancement of our disclosed and undisclosed programs including for CDK2, NEK7, and VAV1. We have not reported program costs since our inception because we have not historically tracked or recorded our research and development expenses on a program-by-program basis. We use our personnel and infrastructure resources across the breadth of our research and development activities, which are directed toward identifying and developing product candidates.
We expense all research and development costs in the periods in which they are incurred. Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as we advance our programs and conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects, the costs of related clinical development costs or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and administrative expenses
Our general and administrative expenses consist primarily of personnel costs and other expenses for outside professional services, including legal fees relating to patent and corporate matters, professional fees for accounting, auditing, tax and administrative consulting services, insurance costs and other operating costs. We expect our general and administrative expenses to increase over the next several years to support our continued research and development activities, manufacturing activities, and the potential commercialization of our product candidates and development of commercial infrastructure. We also anticipate our general and administrative costs will increase and with respect to the hiring of additional personnel, fees to outside consultants, lawyers and accountants, and increased costs associated with being a public company, such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and SEC reporting requirements, insurance and investor relations costs.
Non-operating income and (expense)
Our non-operating income and (expense) includes (i) interest earned on our investments, including principally U.S. government-backed money-market funds; (ii) gains and losses on transactions of our Swiss subsidiary denominated in currencies other than the U.S. Dollar; (iii) proceeds from the sale of fixed assets; and (iv) realized losses on the sale of marketable securities.
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Results of operations for the years ended December 31, 2023 and 2022
The following sets forth our results of operations:
Year Ended endedDecember 31,
Operating expenses:
Provision for income taxes (338 ) — (338 )
Research and development expenses
Research and development expenses were comprised of:
Year endedDecember 31,
As of December 31, 2023 and December 31, 2022, respectively, we had 105 and 100 employees engaged in research and development activities in our facilities in the U.S. and Switzerland.
These increases were driven by the successful achievement of key milestones in our R&D organization, including the continuation of the MRT-2359 clinical study, the preparation of MRT-6160 to enter the clinic, the progression of our preclinical pipeline, and the continued development of the Company’s QuEENTM discovery engine, and reflect increased personnel expense and external R&D costs including laboratory-related expenses to achieve these milestones. The increase for the year ended December 31, 2023 as compared to 2022 was primarily due to the expansion of research and development activities in the United States and Switzerland including increased headcount and facilities as well as corresponding increases in laboratory related expenses. Research and development expenses included non-cash stock-based compensation of $8.9 million and $5.6 million for the years end December 31, 2023 and 2022, respectively.
General and administrative expenses
General and administrative expenses to support our business activities were comprised of:
Year endedDecember 31,
As of December 31, 2023 and December 31, 2022, respectively, we had 28 and 23 employees engaged in general and administrative activities principally in our U.S. facility. Personnel and professional service costs increased in the year ended December 31, 2023, as compared to 2022 as a result of increased headcount and expenses in support of our growth and operations as a public company. General and administrative expenses included non-cash stock-based compensation of $7.7 million and $6.1 million for the years end December 31, 2023 and 2022, respectively.
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Other expenses, net
Other income (expense), net was comprised of:
Year endedDecember 31,
Foreign currency exchange gain (loss), net (930 ) 10
Gain on disposal of fixed assets 24 109
Loss on sale of marketable securities (131 ) —
The increase in interest income for the year ended December 31, 2023 is principally attributable to higher interest rates on marketable securities.
Foreign exchange losses on transactions of our Swiss subsidiary denominated in currency other than the U.S. dollar increased in the year ended December 31, 2023 as to compared to the gain for year ended December 31, 2022, principally due to the weakening of the U.S Dollar with respect to, principally, the Swiss Franc.
Liquidity and capital resources
Overview
Due to our significant research and development expenditures, we have generated operating losses since our inception. We have funded our operations primarily through the sale of convertible promissory notes, convertible preferred stock, public offerings of our common stock and through our collaboration with Roche.
On October 30, 2023, the Company sold in a registered direct offering pursuant to a securities purchase agreement pre-funded warrants to purchase 10,000,400 shares of the Company’s common stock to an accredited investor at a purchase price of $2.4999 per pre-funded warrant for aggregate gross proceeds of $25.0 million, before paying estimated offering expenses. The pre-funded warrants are immediately exercisable at an exercise price of $0.0001 per share, and may be exercised at any time until the pre-funded warrants are exercised in full.
As of December 31, 2023, we had cash, cash equivalents, restricted cash, and marketable securities, of $237.0 million and an accumulated deficit of $365.9 million. We believe that our cash, cash equivalents, restricted cash, and marketable securities will be sufficient to fund our planned operations for at least one year past the issuance date of these financial statements.
Cash flows
The following table summarizes our cash flows for the periods indicated:
Year endedDecember 31,
Net cash provided by (used in):
Operating activities
During the year ended December 31, 2023, net cash used in operating activities of $43.8 million was attributable to our net loss of $135.4 million off-set by an increase in deferred revenue of $50.0 million, $19.1 million in non-cash charges, and changes in our working capital accounts of $22.5 million. Non-cash charges primarily include stock-based compensation expense of $16.7 million and depreciation expense of $6.2 million.
During the year ended December 31, 2022, net cash used in operating activities of $92.5 million was attributable to our net loss of $108.5 million and a $2.1 million net change in our operating assets and liabilities, off-set by $18.2 million in non-cash charges. Non-cash charges primarily include stock-based compensation expense of $11.7 million, depreciation expense of $3.7 million, and non-cash lease expense of $4.8 million.
Investing activities
Cash provided by investing activities of $88.8 million during the year ended December 31, 2023, was primarily attributable to proceeds from maturities of marketable securities of $165.3 million and proceeds from the sale of
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marketable securities of $45.6 million, off-set by purchases of marketable securities of $103.2 million and property and equipment of $19.0 million.
Cash used in investing activities of $219.2 million for the year ended December 31, 2022, was primarily attributable to purchases of marketable securities of $384.4 million and purchases of property and equipment of $12.9 million, off-set by proceeds from the maturity of marketable securities of $178.0 million.
Financing activities
Net cash provided by financing activities for the year ended December 31, 2023, amounted to $27.5 million principally attributable to the sale of warrants for aggregate net proceeds of $24.9 million and $2.6 million of proceeds from the exercise of employee stock options and proceeds from the issuance of shares under our employee stock purchase plan.
Net cash provided by financing activities for the year ended December 31, 2022, amounted to $20.5 million principally attributable to the sale of 2,482,008 shares of common stock sold in an at-the-market offering pursuant to the Sales Agreement for aggregate net proceeds $19.7 million after deducting underwriters discounts and commissions and other offering costs, proceeds from the exercise of stock options of $0.4 million, and proceeds from the issuance of shares under our employee stock purchase plan of $0.3 million.
Funding requirements
Any product candidates we may develop may never achieve commercialization and we anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. As a result, 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 or other capital sources, including potentially collaborations, licenses and other similar arrangements. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research, manufacturing and development services, costs relating to the build-out of our headquarters, laboratories and manufacturing facility, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs.
Based upon our current operating plan, we believe that the existing cash, cash equivalents, restricted cash, and marketable securities of $237.0 million, will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We base this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at
all. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders, will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
•
the scope, progress, results and costs of researching, developing and manufacturing our current product candidates or any future product candidates, and conducting preclinical studies and clinical trials;
•
the timing of, and the costs involved in, obtaining regulatory approvals or clearances for our lead product candidates or any future product candidates;
•
the number and characteristics of any additional product candidates we develop or acquire;
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•
the cost of manufacturing our lead product candidate or any future product candidates and any products we successfully commercialize, including costs associated with building-out our manufacturing capabilities;
•
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter;
•
the expenses needed to attract and retain skilled personnel;
•
the costs associated with being a public company;
•
the timing, receipt and amount of sales of any future approved or cleared products, if any; and
•
the effect of global economic uncertainty and financial market volatility caused by economic effects of rising inflation and interest rates, global health crises, geopolitical events, changes in international trade relationships and military conflicts on any of the foregoing or other aspects of our business or operations.
Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.
Critical accounting policies and significant judgments and estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Research and development expense and accruals
We record research and development expenses to operations as incurred. Research and development expenses represent costs incurred by us for development of our technology platform and the discovery and development of our product candidates and include: employee-related expenses, including salaries, benefits and non-cash stock-based compensation expense; external research and development expenses incurred under arrangements with third parties, including preclinical testing organizations, non-profit institutions and consultants; and other expenses, which include direct and allocated expenses for laboratory, facilities and other costs.
As part of the process of preparing financial statements, we are required to estimate and accrue expenses. We estimate costs of research and development activities conducted by service providers. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. If the costs have been prepaid, this expense reduces the prepaid expenses in the balance sheet, and if not yet invoiced, the costs are included in accrued expenses in the balance sheet. We classify such prepaid assets as current or non-current assets based on our estimates of the timing of when the goods or services will be realized or consumed. These costs are a significant component of our research and development expenses.
We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with our agreements with established third-party service providers. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued expense balance in each reporting period. As actual costs become known, we adjust our estimates. 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 may vary from our
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estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from external third-party service providers. Amounts ultimately incurred in relation to amounts accrued for these services at a reporting date may be substantially higher or lower than our estimates.
We have and may continue to enter into license agreements to access and utilize certain technology. We evaluate if the license agreement is an acquisition of an asset or a business. To date none of our license agreements have been considered to be an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects.
Recently issued and adopted accounting pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report for a discussion of recent accounting pronouncements.
Contractual obligations and commitments
Roche Collaboration and License Agreement
On October 16, 2023, the Company entered into a Collaboration and License Agreement with Roche, for the discovery and development of molecular glue degraders against targets in cancer and neurological diseases. Under the Collaboration Agreement, the Company will lead the discovery and certain preclinical activities against multiple select targets. Following the completion of certain preclinical studies, Roche has the option to continue the further development and potential commercialization of compounds identified and generated under the collaboration and products containing such compounds at its sole responsibility and at its own cost. The initial scope of the agreement is limited to a specified number of targets but may be expanded to include additional targets subject to certain conditions and additional compensation payable to the Company. Pursuant to the terms of the Collaboration Agreement, the Company granted to Roche an exclusive license to use certain of its platform technology for the exploitation of compounds and products discovered and developed under the agreement. The Company received an upfront payment of $50.0 million from Roche under the terms of the Collaboration Agreement. Additionally, the Company is eligible to receive contingent payments from Roche upon the occurrence of defined research, development, regulatory and sales-based events exceeding $3 billion. The Company is also entitled to tiered royalties on sales of products containing compounds identified and generated from activities conducted under the arrangement. The Collaboration Agreement term commences on the execution date and continues until no payment obligations remain, unless otherwise terminated earlier. See the section entitled “Business—Our services, collaboration and licenses agreements” elsewhere in this Annual Report as well as Note 9 to our annual consolidated financial statements appearing elsewhere in this Annual Report for a description of our collaboration and license agreements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company, as defined in Rule 12b-2 under the Exchange Act, for this reporting period and are not required to provide the information required under this item.
Item 8. Financial Statements and Supplementary Data
The financial information required by Item 8 is located beginning on page F-1 of this Annual Report.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of disclosure controls and procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of December 31, 2023, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2023, our disclosure controls and procedures as of such date are effective at the reasonable assurance level.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for “emerging growth companies”.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Rule 10b5-1 Trading Plans
On December 8, 2023, Owen Wallace, our Chief Scientific Officer, entered into a trading plan pursuant to Rule 10b5-1 of the Exchange Act. Mr. Wallace's Rule 10b5-1 trading plan provides for the sale from time to time of a maximum of 100,000 shares of our common stock pursuant to the terms of the plan. Mr. Wallace's Rule 10b5-1 trading plan expires on March 1, 2025, or earlier if all transactions under the trading arrangement are completed. The trading arrangement is intended to satisfy the affirmative defense in Rule 10b5-1(c).
During the fiscal quarter ended December 31, 2023, other than described in the statement above, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading agreement (as defined in Item 408(c) of Regulation S-K).
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10 will be set forth in the “Proposal No. 1 – Election of Class II Directors” and “Corporate Governance” sections of our definitive proxy statement relating to our 2024 annual meeting of shareholders, or the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Annual Report.
Item 11. Executive Compensation
Information required by this Item 11 will be set forth in the “Corporate Governance” section of the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item 12 will be set forth in the “Principal Stockholders” section of the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Annual Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item 13 will be set forth in the “Corporate Governance” and “Certain Relationships and Related Party Transactions” sections of the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Annual Report.
Item 14. Principal Accountant Fees and Services
Our independent public accounting firm is Deloitte & Touche LLP, Boston, Massachusetts, PCAOB Auditor ID No. 34. Information required by this Item 14 will be set forth in our Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Annual Report.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(1)
For a list of the financial statements included herein, see Index to the Consolidated Financial Statements on page F-1 of this Annual Report on Form 10-K, incorporated into this Item by reference.
(2)
Financial statement schedules have been omitted because they are either not required or not applicable or the information is included in the consolidated financial statements or the notes thereto.
(3)
Exhibits:
ExhibitNumber Description
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21.1* List of Subsidiaries of the Registrant
97.1* Monte Rosa Therapeutics, Inc. Compensation Recovery Policy
101.SCH Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
** Deemed to be furnished with this Annual Report on Form 10-K and will not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
# Management compensatory plan, contract, or arrangement
† Portions of this exhibit (indicated by asterisks) will be omitted in accordance with the rules of the SEC.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Monte Rosa Therapeutics, Inc
Date: March 14, 2024 By: /s/ Markus Warmuth
Markus Warmuth
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date
/s/ Edmund Dunn VP, Corporate Controller March 14, 2024
Edmund Dunn, CPA (Principal Accounting Officer)
/s/ Alexander Mayweg Director March 14, 2024
Alexander Mayweg
/s/ Ali Behbahani Director March 14, 2024
Ali Behbahani
/s/ Kimberly L. Blackwell Director March 14, 2024
Kimberly L. Blackwell
/s/ Andrew Schiff Director March 14, 2024
Andrew Schiff
/s/ Chandra P. Leo Director March 14, 2024
Chandra P. Leo
/s/ Christine Siu Director March 14, 2024
Christine Siu
/s/ Jan Skvarka Director March 14, 2024
Jan Skvarka
/s/ Anthony Manning Director March 14, 2024
Anthony Manning
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Index to Consolidated financial statements
Page
Report of independent registered public accounting firm (PCAOB ID No. 34) F-2
Audited consolidated financial statements
Consolidated balance sheets F-3
-
Consolidated statements of operations and comprehensive loss F-4
Consolidated statements of stockholders’ equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Monte Rosa Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Monte Rosa Therapeutics, Inc. and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
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 14, 2024
We have served as the Company's auditor since 2021.
F-2
Monte Rosa Therapeutics, Inc.
Consolidated balance sheets
December 31, December 31,
(in thousands, except share and per share amounts) 2023 2022
Assets
Current assets:
Prepaid expenses and other current assets 3,294 4,444
Current restricted cash — 960
Restricted cash, net of current 4,580 4,318
Liabilities and stockholders’ equity
Current liabilities:
Accrued expenses and other current liabilities 14,600 14,580
Current deferred revenue 17,678 —
Current portion of operating lease liability 3,162 3,127
Deferred revenue, net of current 32,323 —
Defined benefit plan liability 2,713 1,533
Commitments and contingencies (Note 8)
Stockholders’ equity
Accumulated other comprehensive loss (2,724 ) (1,752 )
Total liabilities and stockholders’ equity $ 303,755 $ 342,389
See accompanying notes to the consolidated financial statements.
F-3
Monte Rosa Therapeutics, Inc.
Consolidated statements of operations and comprehensive loss
Year ended December 31,
(in thousands, except share and per share amounts) 2023 2022
Operating expenses:
Other income (expense):
Foreign currency exchange gain (loss), net (930 ) 10
Gain on disposal of fixed assets 24 109
Loss on sale of marketable securities (131 ) —
Provision for income taxes (338 ) —
Comprehensive loss:
Other comprehensive income (loss):
Provision for pension benefit obligation (1,369 ) 718
Unrealized gain (loss) on available-for-sale securities 397 (449 )
See accompanying notes to the consolidated financial statements.
F-4
Monte Rosa Therapeutics, Inc.
Consolidated statements stockholders’ equity
Common stock
Restricted common stock vesting 136,058 — — — — —
Stock-based compensation expense — — 11,664 — — 11,664
Provision for pension benefit obligation — — — 718 — 718
Unrealized loss on available-for-sale securities — — — (449 ) — (449 )
Issuance of shares under employee stock purchase plan 51,947 — 336 — — 336
Restricted common stock vesting 145,455 — — — — —
Stock-based compensation expense — — 16,669 — — 16,669
Provision for pension benefit obligation — — — (1,369 ) — (1,369 )
Unrealized gain on available-for-sale securities — — — 397 — 397
Issuance of shares under employee stock purchase plan 109,342 — 578 — — 578
See accompanying notes to the consolidated financial statements.
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Monte Rosa Therapeutics, Inc.
Consolidated statements of cash flows
Year endedDecember 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities
Noncash lease expense — 4,814
Net accretion of discounts/premiums on marketable securities (3,914 ) (1,945 )
Loss on sale of marketable securities 131 —
Gain on disposal of property and equipment (24 ) (109 )
Changes in operating assets and liabilities
Prepaid expenses and other current assets 1,077 (2,127 )
Accrued expenses and other current liabilities 3,557 1,031
Defined benefit plan liability (188 ) 74
Right-of-use assets and operating lease liabilities 10,365 (181 )
Net cash used in operating activities $ (43,802 ) $ (92,466 )
Cash flows from investing activities:
Purchases of property and equipment (19,041 ) (12,911 )
Proceeds from sale of property and equipment 62 109
Proceeds from sale of marketable securities 45,631 —
Proceeds from maturities of marketable securities 165,300 178,000
Net cash provided by (used in) investing activities $ 88,801 $ (219,219 )
Cash flows from financing activities:
Proceeds from issuance of pre-funded warrants 25,000 —
Proceeds from exercise of employee stock options 2,030 439
Proceeds from employee stock purchase plan 578 336
Payment of common stock issuance costs — (364 )
Payment of pre-funded warrant issuance costs (116 ) —
Net cash provided by financing activities $ 27,492 $ 20,466
Net decrease in cash, cash equivalents and restricted cash $ 72,491 $ (291,219 )
Cash, cash equivalents and restricted cash—beginning of period 60,190 351,409
Cash, cash equivalents and restricted cash—end of period $ 132,681 $ 60,190
Reconciliation of cash, cash equivalents and restricted cash
Total cash, cash equivalents and restricted cash $ 132,681 $ 60,190
Supplemental disclosure of noncash items
Reduction of right-of-use assets for lease incentives receivable $ 5,253 $ 7,469
See accompanying notes to the consolidated financial statements.
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Monte Rosa Therapeutics, Inc.
Notes to the consolidated financial statements
1. Description of business and liquidity
Business
Monte Rosa Therapeutics, Inc. is a biotechnology company developing a portfolio of novel small molecule precision medicines that employ the body’s natural mechanisms to selectively degrade therapeutically-relevant proteins. As used in these consolidated financial statements, unless the context otherwise requires, references to the Company or Monte Rosa refer to Monte Rosa Therapeutics, Inc. and its wholly owned subsidiaries Monte Rosa Therapeutics AG and Monte Rosa Therapeutics Securities Corp. Monte Rosa Therapeutics AG, a Swiss operating company, was incorporated under the laws of Switzerland in April 2018. Monte Rosa Therapeutics, Inc. was incorporated in Delaware in November 2019. The Company is headquartered in Boston, Massachusetts with research operations in both Boston and Basel, Switzerland.
Risks and uncertainties
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, the successful discovery and development of its product candidates, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing.
Liquidity considerations
Since inception, the Company has devoted substantially all its efforts to business planning, research and development, recruiting management and technical staff, and raising capital and has financed its operations primarily through the issuance of convertible preferred shares and public offerings of the Company's common stock.
The Company’s continued discovery and development of its product candidates will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
As of December 31, 2023, the Company had an accumulated deficit of $365.9 million. The Company has incurred losses and negative cash flows from operations since inception, including net losses of $135.4 million and $108.5 million for the years ended December 31, 2023 and 2022, respectively. The Company expects that its operating losses and negative cash flows will continue for the foreseeable future as the Company continues to develop its product candidates. The Company currently expects that its cash, cash equivalents and marketable securities of $232.4 million as of December 31, 2023, will be sufficient to fund operating expenses and capital requirements for at least 12 months from the date the consolidated financial statements are issued. However, additional funding will be necessary to fund future discovery research, pre-clinical and clinical activities. The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances and licensing arrangements. Although it has been successful in raising capital in the past, there is no assurance that the Company will be successful in obtaining such additional financing on terms acceptable to it, if at all, and the Company may not be able to enter into collaborations or other arrangements. If the Company is unable to obtain funding, it could be forced to delay, reduce or eliminate its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect the Company’s business prospects, even the ability to continue operations.
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, or GAAP, and are stated in U.S. dollars. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification and Accounting Standards Updates, or ASUs, of the Financial Accounting Standards Board, or FASB. All intercompany balances and transactions have been eliminated in consolidation.
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Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to accrued research and development expenses, other long-lived assets, pension benefit obligation, stock-based compensation and the valuation of deferred tax assets. The Company bases its estimates using historical experience, Company forecasts and future plans, current economic conditions, and information from third-party professionals that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and recorded amounts of expenses that are not readily apparent from other sources and adjusts those estimates and assumptions when facts and circumstances dictate.
Currency and currency translation
The consolidated financial statements are presented in U.S. dollars, the Company’s reporting currency. The functional currency of the Company’s wholly owned subsidiary, Monte Rosa Therapeutics AG, is the U.S. dollar. Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the functional currency are included in foreign currency exchange gain (loss), net in the consolidated statements of operations.
Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value and may include money market funds, U.S. Treasury and U.S. government-sponsored agency securities, corporate debt, commercial paper and certificates of deposit. The Company’s cash equivalents at December 31, 2023 and 2022 consist of bank demand deposits and money market fund investments.
The Company had restricted cash of $4.6 million as of December 31, 2023 and 2022, primarily related to security deposits on its leases for offices in Boston, Massachusetts and Basel, Switzerland.
Marketable securities
Investments in marketable securities are classified as available-for-sale. Available-for-sale securities are measured and reported at fair value using quoted prices in active markets for similar securities. Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity. Premiums or discounts from par value are amortized to investment income over the life of the underlying investment. All of the Company’s available-for-sale securities are available to the Company for use in current operations. As a result, the Company classified all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date.
The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other income (expense) within the consolidated statements of operations and comprehensive loss. If any adjustment is required to reflect a decline in the value of the investment that the Company considers to be “other than temporary”, the Company recognizes a charge to the consolidated statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented.
Concentrations of credit risk and off-balance sheet risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents. The Company has invested in cash and cash equivalents at December 31, 2023 and 2022, held in a financial institution that management believes is creditworthy. These deposits may exceed federally insured limits. The Company has not experienced any losses historically in these accounts and believes it in not exposed to significant credit risk in its cash and cash equivalents. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements.
Fair value of financial instruments
Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market
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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. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value instrument.
Property and equipment
Property and equipment are stated at cost, subject to adjustments for impairments, less accumulated depreciation. Purchased assets that are not yet in service are classified as construction-in-process and no depreciation expense is recorded. Depreciation is calculated using the straight-line method over the estimated useful life of the asset as follows:
Asset Estimated useful life
Laboratory equipment Five years
Computer hardware Three years
Furniture and fixtures Five Years
Leasehold Improvements Shorter of useful life or remaining lease term
Maintenance and repairs that do not improve or extend the life of the respective asset are expensed as incurred. Upon disposal of an asset, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Leasehold improvements are amortized over the shorter of the useful life or remaining term of the lease.
Impairment of long-lived assets
The Company evaluates whether current facts or circumstances indicate that the carrying values of its long-lived assets may not be recoverable. If such facts or circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets is compared to the carrying value the assets to determine whether impairment exists. If the assets are determined to be impaired, the loss is measured based on the difference between the fair value and carrying value of the assets. No material impairment losses were recorded during the periods presented.
Research and development expenses
Research and development costs are expensed as incurred. The Company’s research and development expenses consist primarily of costs incurred for the research and development of its product candidates and include expenses incurred under agreements with consultants to conduct preclinical and clinical studies, costs to acquire supplies for preclinical and clinical studies, salaries and related personnel costs, including stock-based compensation, depreciation and other allocated facility-related and overhead expenses.
Accrued research and development costs
The Company records accruals for estimated costs of discovery research activities, preclinical, and clinical studies. A portion of the Company’s research and development activities are conducted by third-party service providers. The financial terms of these contracts are subject to negotiation, which vary by contract and may result in payments that do not match the periods over which materials or services are provided. The Company accrues the costs incurred under the agreements based on an estimate of actual work completed in accordance with the agreements. In the event the Company makes advance payments for goods or services that will be used or rendered for future research and development activities, the payments are deferred and capitalized as a prepaid
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expense and recognized as expense as the goods are received or the related services are rendered. Such payments are evaluated for current or long-term classification based on when they are expected to be realized. If the Company does not identify costs that have begun to be incurred or if the Company underestimates or overestimates the level of services performed or the costs of these services, actual expenses could differ from the Company’s estimates.
Stock-based compensation
Stock-based compensation expense related to stock options granted to employees, directors and non-employees is recognized based on the grant-date estimated fair values of the awards using the Black-Scholes option pricing model, or Black-Scholes. Stock-based compensation expense related to stock options and other stock based awards granted to employees and non-employees is recognized based on the grant-date fair value of the Company’s common stock. The value is recognized as expense ratably over the requisite service period, which is generally the vesting term of the award. For stock options with performance-based vesting conditions, the Company records the expense for these awards based upon the fair value of the awards on the date of grant and the number of shares expected to vest based on the terms of the underlying award agreement and the requisite service periods. The Company adjusts the expense for actual forfeitures as they occur. Stock-based compensation expense is classified in the accompanying consolidated statements of operations based on the function to which the related services are provided.
Income taxes
The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company assesses the likelihood of deferred tax assets being realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible.
The Company files U.S. federal and state income tax returns, as well as Swiss income tax returns. The Company’s tax positions are subject to audit. Financial statement effects of uncertain tax positions are recognized when it is more likely than not, based on the technical merits of the position, that it will be sustained upon examination. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax. To date, the Company has not been subject to any interest and penalties.
Defined pension benefit obligation
The Company maintains a mandatory pension for its employees in Switzerland through affiliation with the Swiss Life Collective BVG Foundation. All benefits in accordance with the regulations are reinsured in their entirety with Swiss Life Ltd within the framework of the corresponding contract. This plan is considered to be a defined benefit plan under GAAP.
The Company recognizes an asset for the plan’s overfunded status or a liability for the plan’s underfunded status in its consolidated balance sheets. Additionally, the Company measures the plan’s assets and obligations that determine its funded status as of the end of the year and recognizes the change in the funded status within the consolidated statements of operations and comprehensive loss.
The Company uses an actuarial valuation to determine its pension benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates and expected return on plan assets. Details of the assumptions used to determine the net funded status are described in Note 13. The Company’s pension plan assets are assigned to their respective levels in the fair value hierarchy in accordance with the valuation principles described in the Fair Value of Financial Instruments section above.
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Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the chief operating decision maker, or CODM, in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its chief executive officer. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions.
Revenue recognition
On October 16, 2023, the Company entered into a Collaboration and License Agreement with Roche for the discovery, generation and research of compounds that may become product candidates. The Company’s arrangement with Roche includes promises related to licenses of intellectual property, research services and options to purchase additional goods and/or services. The Company recognizes revenue in accordance with ASC No. 606, Revenue from Contracts with Customers, or ASC 606. ASC 606 applies to all contracts with customers, except for certain contracts that are within the scope of other guidance. Accordingly, the Company recognizes revenue when its customer obtains control of the promised goods and/or services in an amount that reflects the consideration it expects to receive in exchange for those goods and/or services. To determine the appropriate amount of revenue to be recognized, the Company performs the following steps: (i) Identify the contract(s) with the customer, (ii) Identify the promised goods and/or services in the contract and determine which promised goods and/or services represent performance obligations, (iii) Measure the transaction price, (iv) Allocate the transaction price to the performance obligations in the contract and (v) Recognize revenue when (or as) each performance obligation is satisfied.
Pursuant to the guidance in ASC 606, the Company accounts for a contract with a customer that is within the scope of ASC 606 when all of the following criteria are met: (i) The arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) Each party’s rights regarding the goods and/or services to be transferred can be identified, (iii) The payment terms for the goods and/or services to be transferred can be identified, (iv) The arrangement has commercial substance and (v) Collection of substantially all of the consideration to which the Company will be entitled in exchange for the goods and/or services that will be transferred to the customer is probable.
The Company assesses the goods and/or services promised within a contract that contains multiple promises to evaluate which promises are distinct. Promises are considered to be distinct and therefore, accounted for as separate performance obligations, provided that: (i) The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) The promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The Company determines that a customer can benefit from a good or service if it could be used, consumed, or sold for an amount that is greater than scrap value, or otherwise held in a way that generates economic benefits. Factors that are considered in determining whether or not two or more promises are not separately identifiable include, but are not limited to, the following: (i) The Company provides a significant service of integrating goods and/or services with other goods and/or services promised in the contract, (ii) One or more of the goods and/or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods and/or services promised in the contract and (iii) The goods and/or services are highly interdependent or highly interrelated. In assessing whether promised goods and/or services are distinct from the other promises, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the collaborative partner and the availability of the associated expertise in the marketplace. The Company also considers whether the customer can benefit from a promise for its intended purpose without the receipt of the remaining promises, whether the value of a promise is dependent on the unsatisfied promises, whether there are other vendors that could provide the remaining promises and whether a promise is separately identifiable from the remaining promises. Individual goods or services (or bundles of goods and/or services) that meet both criteria for being distinct are accounted for as separate performance obligations. Promises that are not distinct at contract inception are combined into a single performance obligation.
The Company considers a customer’s right to elect to obtain additional goods and/or services at such customer’s discretion to be an option if it is not presently obligated to provide the goods and/or services and it is not entitled to compensation in exchange for the associated goods and/or services. Options to acquire additional goods and/or services are evaluated to determine if the option provides a material right to the customer that it would not have received without entering into the contract. If so, the option is accounted for as a separate performance obligation. If not, the option is considered a marketing offer which would be accounted for as a separate contract upon the customer’s exercise. Situations in which a customer has an ability to acquire additional goods and/or
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services for free or at significantly discounted rates are considered to provide the customer with a material right. Options to purchase goods and/or services at prices that reflect the standalone selling prices of the associated goods and/or services are accounted for as marketing offers.
The Company’s arrangement with Roche provides for payments of the following: (i) Non-refundable, up-front fee, (ii) Research, development, regulatory and first sale milestones, (iii) Sales-based milestones, (iv) Royalties on net sales of licensed products and (v) Customer option fees for additional goods and/or services. Accordingly, the transaction price is comprised of a fixed fee due a specified number of days from contract execution and an estimate of variable consideration. The Company measures the transaction price based on the amount of consideration to which it expects to be entitled in exchange for transferring the promised goods and/or services to the customer. The Company utilizes either the expected value method or the most likely amount method to estimate the amount of variable consideration, depending on which method is expected to better predict the amount of consideration to which it will be entitled. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. With respect to research, development, regulatory and first sale milestone payments, at the inception of the arrangement, the Company evaluates whether the associated event is considered probable of achievement and estimates the amount to be included in the transaction price using the most likely amount method. As part of the evaluation for research and development milestone payments, the Company considers several factors, including the stage of development of the targets included in the arrangement, the risk associated with the remaining research and development work required to achieve the particular milestone and whether or not the achievement of the specific milestone event is within the Company’s control. Milestone events that are not within the control of the Company or the licensee, such as those dependent upon receipt of regulatory approval or the first sale of a commercialized product, are not considered to be probable of achievement until the triggering event occurs. With respect to royalties, including milestone payments based upon the achievement of a certain level of product sales, wherein the license is deemed to be the sole or predominant item to which the payments relate, the Company recognizes revenue upon the later of: (i) When the related sales occur or (ii) When the performance obligation to which some or all of the payment has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any research, development, regulatory or sales-based milestone payments or royalty revenue resulting from its collaboration arrangement.
The Company updates its assessment of the estimated transaction price, including the constraint on variable consideration, at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. Any adjustments to the transaction price are recorded on a cumulative catch-up basis, which affect revenue and net loss in the period of adjustment. Amounts to be received with respect to customer options are included in the transaction price upon exercise. And payments associated with milestone events that may only be achieved after the exercise of a customer option are excluded from the initial determination of the transaction price.
The Company generally allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. However, certain components of variable consideration are allocated specifically to one or more particular performance obligations to the extent both of the following criteria are met: (i) The terms of the payment relate specifically to the efforts to satisfy the performance obligation or transfer the distinct good or service and (ii) Allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective of the standard whereby the amount allocated depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services. Option exercise fees are allocated to the goods and/or services underlying the associated option. The Company develops assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. The key assumptions utilized in determining the standalone selling price for each performance obligation include projected development timelines, estimated research costs, likelihood of exercise and probabilities of technical success.
Revenue is recognized based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good and/or service to the customer. For performance obligations that are satisfied at a point in time, the Company recognizes revenue when control of the goods and/or services are transferred to the customer. For performance obligations that are satisfied over time, the Company recognizes revenue by measuring the progress toward complete satisfaction of the performance obligation using a single method of measuring progress which depicts the performance in transferring control of the associated goods and/or services to the customer. The Company uses
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input methods to measure the progress toward the complete satisfaction of performance obligations satisfied over time. With respect to promises related to licenses to intellectual property that is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from amounts allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which affect revenue and net loss in the period of adjustment. Amounts allocated to material rights are recognized as revenue the earlier of: (i) When or as the option is exercised and the underlying future goods and/or services are transferred or (ii) When the option expires.
Significant judgments and estimates made in accounting for contracts with customers include: identifying the performance obligations in the contract, measuring the amount of variable consideration to include in the transaction price, estimating the standalone selling prices of the individual performance obligations, assessing the nature of a combined performance obligation to determine whether control is transferred over time or at a point in time, selecting the appropriate method of measuring progress used to recognize revenue for performance obligations satisfied over time and updating measures of progress to reflect revisions in the outcome of performance obligations. Certain of these judgments and estimates are subject to change over the course of the arrangement, particularly with respect to estimating variable consideration and updating the measure of progress, which would impact the revenue recognized. Significant changes in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
The Company receives payments from its licensee based on billing schedules established in the contract. Amounts received or due prior to the Company performing its obligations under the arrangement are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to the consideration is unconditional.
Warrants
The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity, or ASC 480, and ASC 815, Derivatives and Hedging, or ASC 815. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether the warrants meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance and remeasured each balance sheet date thereafter. Changes in the estimated fair value of the liability-classified warrants are recognized as a non-cash gain or loss in the accompanying consolidated statements of operations and comprehensive loss.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income (loss) includes adjustments to unrecognized pension benefit costs for Monte Rosa Therapeutics AG and changes in unrealized gains and losses from available-for-sale investments. The Company reported other comprehensive loss of $1.0 million for the year ended December 31, 2023 and other comprehensive income of $0.3 million for the year ended December 31, 2022.
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Recently issued accounting pronouncements
The Company has elected to use the extended transition period for complying with new or revised accounting standards as available under the Jumpstart Our Business Startups Act (JOBS Act).
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity s Own Equity (Subtopic 815-40): Accounting forConvertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (i) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (ii) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective for the Company beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect for ASU 2020-06 to have a material impact on its financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to provide enhanced segment disclosures. The standard will require disclosures about significant segment expenses and other segment items and identifying the Chief Operating Decision Maker and how they use the reported segment profitability measures to assess segment performance and allocate resources. These enhanced disclosures are required for all entities on an interim and annual basis, even if they have only a single reportable segment. The standard is effective for years beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024 and early adoption is permitted. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to provide enhancements to annual income tax disclosures. The standard will require more detailed information in the rate reconciliation table and for income taxes paid, among other enhancements. The standard is effective for years beginning after December 15, 2024 and early adoption is permitted. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.
Recently adopted accounting pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, or ASU 2016-13. The guidance is effective for fiscal years beginning after December 15, 2022. The Company adopted ASU 2016-13 on January 1, 2023. The adoption of the standard was immaterial to the accompanying consolidated financial statements.
3. Fair value measurements
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
Level 1 Level 2 Level 3 Total
Current assets
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Level 1 Level 2 Level 3 Total
Current assets
Money market funds are highly liquid investments and are actively traded. The pricing information on the Company’s money market funds are based on quoted prices in active markets for identical securities. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
The fair value of pension plan assets has been determined as the surrender value of the portfolio of active insured members held within the Swiss Life Collective BVG Foundation collective investment fund and are classified within Level 2 of the fair value hierarchy.
Marketable securities consist of corporate debt securities and U.S. Treasury securities which are classified as available-for-sale pursuant to ASC 320, Investments—Debt and Equity Securities. Marketable securities are classified within Level 2 of the fair value hierarchy because pricing inputs are other than quoted prices in active markets. The fair values of these investments are estimated by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities based on historical data and other observable inputs.
There were no transfers among Level 1, Level 2 or Level 3 categories in the years ended December 31, 2023 or 2022.
4. Marketable securities
Marketable securities as of December 31, 2023 consisted of the following (in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Description
Marketable securities as of December 31, 2022 consisted of the following (in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Description
As of December 31, 2023, the Company held 28 marketable securities, 20 of which were in an unrealized loss position. The aggregate fair value of securities in a loss position was $72.9 million. As of December 31, 2022, the Company held 40 marketable securities, 31 of which were in an unrealized loss position. The aggregate fair value of securities in a loss position was $164.9 million. There were no individual securities that were in a significant unrealized loss position as of December 31, 2023 or 2022. The Company evaluates securities for other-than-temporary impairments based on quantitative and qualitative factors, and considers the decline in market value as of December 31, 2023 and 2022, to be primarily attributable to the then current economic and market conditions. The Company neither intends to sell these investments nor concludes that it is more-likely-than-not that the Company will have to sell them before recovery of their carrying values. The Company also believes that it will be able to collect both principal and interest amounts due to it at maturity.
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5. Property and equipment, net
Property and equipment, net, consist of the following (in thousands):
Computer hardware and software 1,052 499
Total property and equipment, at cost $ 46,047 $ 33,326
Less: accumulated depreciation (12,244 ) (6,251 )
Depreciation expense for the years ended December 31, 2023 and 2022 was $6.2 million and $3.7 million, respectively.
6. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
December 31, December 31,
Compensation and benefits $ 7,593 $ 5,624
Accrued research and development 5,336 3,936
7. Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use or ROU assets and operating lease liabilities in the consolidated balance sheets. The Company has no finance leases as of December 31, 2023.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, management estimated the incremental borrowing rate based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term.The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Klybeck Lease
In March 2021, the Company entered into an operating lease agreement for office and lab space with Wincasa AG, or the landlord, that occupies approximately 21,422 square feet located at Klybeckstrasse 191, 4057 Basel, Basel-City, Switzerland. In April 2023, the Company and the Landlord amended the Klybeck Lease which increased the office and lab space square footage from 21,422 square feet to 44,685 square feet and extended the term of the lease through June 30, 2027. The amendment was accounted for as a lease modification and resulted in an increases to the related ROU asset and operating lease liability of $1.8 million.
Harrison Avenue Lease
In December 2021, the Company entered into a non-cancelable lease agreement for 63,327 square feet of office and laboratory space to support its expanding operations, or the Harrison Avenue Lease. The term of the lease commenced on April 1, 2022 and the Company’s obligation to pay rent began on December 21, 2022. The initial term of the lease is 128 months following the commencement date at which point the Company has the option to extend the lease an additional 5 years. As of the lease commencement date, the Company has determined that it is not reasonably certain to exercise the option to extend the lease and has not included the extension period in the lease term. The annual base rent under the Harrison Avenue Lease is $95.00 per square foot for the first year, which is subject to scheduled annual increases of 3%, plus certain costs, operating expenses and property management fees.
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Pursuant to the terms of the Harrison Avenue Lease, the landlord reimbursed the Company for $13 million of tenant improvements. The Company reduced the related ROU asset by the amounts reimbursed by the landlord and capitalized the leasehold improvements as fixed assets on the consolidated balance sheet.
The components of lease expense for the year ended December 31, 2023, are as follows (in thousands):
Year endedDecember 31,
The variable lease expenses generally include common area maintenance and property taxes. Of the total lease expense recorded in the consolidated statements of operations and comprehensive income (loss), $7.9 million and $7.8 million were recorded within research and development expenses and $1.6 million and $1.0 million were recorded in general and administrative expenses for the years ended December 31, 2023 and 2022, respectively. There were no short-term lease costs in the years ended December 31, 2023 and 2022.
The weighted average remaining lease term and discount rate related to the Company's leases are as follows:
Weighted average remaining lease term (years) 8.6 9.7
Weighted average discount rate 9.8 % 9.9 %
Supplemental cash flow information relating to the Company's leases for the year ended December 31, 2023 are as follows (in thousands):
Year endedDecember 31,
The amortization of the ROU assets for the year ended December 31, 2023 and 2022 was $2.5 million and $3.3 million, respectively.
Future undiscounted lease payments under non-cancelable leases as of December 31, 2023 for each of the years ending December 31st are as follows (in thousands):
Undiscounted lease payments
Total undiscounted minimum lease payments 69,171
Less: Imputed interest (23,132 )
Total operating lease liability $ 46,039
8. Commitments and contingencies
Legal Proceedings
From time to time, the Company may be subject to legal proceedings, claims and disputes that arise in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and that such expenditures can be reasonably estimated. As of December 31, 2023, the Company is not a party to any litigation and does not have a contingency reserve established for any litigation liabilities.
Indemnification
The Company, as permitted under Delaware law and in accordance with its certification of incorporation and bylaws and pursuant to indemnification agreements with certain of its officers and directors, indemnifies its
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officers and directors for certain events or occurrences, subject to certain limits, which the officer or director is or was serving at the Company’s request in such capacity.
The Company enters into certain types of contracts that contingently require the Company to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company’s bylaws, under which the Company must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers and consultants for liabilities arising out of their relationship, and (iii) procurement, service or license agreements under which the Company may be required to indemnify vendors, service providers or licensees for certain claims, including claims that may be brought against them arising from the Company’s acts or omissions with respect to the Company’s products, technology, intellectual property or services.
From time to time, the Company may receive indemnification claims under these contracts in the normal course of business. In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or settlement, may cause a material adverse effect on the Company’s future business, operating results or financial condition. As of December 31, 2023 and 2022, the Company was not aware of any claims under indemnification arrangements and does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible. Therefore, no related reserves have been established.
9. Collaboration and license agreements
Roche Collaboration and License Agreement
Description
In October 2023, Monte Rose Therapeutics AG, a wholly-owned subsidiary of Monte Rosa Therapeutics, Inc, or the Company, entered into a collaboration and license agreement with Roche. Pursuant to the agreement, the parties will seek to identify and develop molecular glue degraders, or MGDs, against cancer or neurological disease targets using the Company’s proprietary drug discovery platform for an initial set of targets in oncology and neuroscience selected by Roche, with Roche having an option to expand the collaboration to include additional option targets, wherein a certain number of targets selected by Roche are subject to replacement rights owned by Roche. The Company will lead pre-clinical discovery and research activities with Roche leading late pre-clinical and clinical development activities.
Under the Agreement, Roche will have a worldwide, exclusive license under patents and know-how controlled by the Company to develop and commercialize products directed to applicable targets. The license exclusivity is subject to the Company’s retained rights solely to fulfill its obligations under the arrangement.
The research collaboration activities governed by the Agreement will be overseen by a joint research committee.
Unless earlier terminated, the Agreement will remain in effect for each product licensed under the Agreement until expiration of the royalty term for the applicable product. The parties have included termination provisions in the agreement, allowing termination of the Agreement in its entirety, on a country-by-country or a target-by-target basis.
Pricing
In November 2023, the Company received a $50.0 million non-refundable upfront payment for the initial set of targets. Pursuant to the terms of the agreement, the Company expects to be entitled to receive from Roche certain variable consideration including potential pre-clinical milestones up to $172 million, and potential clinical, commercial and sales milestones exceeding $2 billion. For the additional option targets, upon Roche’s exercise of their option, the Company is entitled to receive an upfront payment of up to $28 million and potential pre-clinical, clinical, commercial and sales milestones exceeding $1 billion. The Company is also eligible to receive tiered royalties ranging from high-single-digits to low-teens on any products that are commercialized by Roche as a result of the collaboration.
As of December 31, 2023 the Company is not entitled to any of the variable consideration because all of such payments are due subsequent to the exercise of Roche's options.
Accounting
This agreement represents a transaction with a customer and therefore is accounted for under ASC 606.
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The Company determined that the development and commercialization licenses for each of the collaboration targets is neither capable of being distinct nor distinct within the context from the promised initial research services. In addition, the Company has determined that each target in the agreement is distinct from other targets because: (i) Roche can benefit from the license and research services for a given target on their own since the results related thereto can be evaluated discretely and (ii) the results of the research and development of each target does not affect either the Company’s ability to perform or Roche’s ability to assess the results for any other target. As such, the Company has identified certain performance obligations within the agreement as follows:
•
Performance obligations for the research and development of initial targets
•
Performance obligations for the research and development services related to Roche’s option to replace certain targets
The total transaction price of the Roche Agreement is allocated to the performance obligations based on their relative standalone selling price. The allocated transaction price is recognized as revenue from collaboration agreements in one of two ways:
•
Research and development of the initial targets: The Company recognizes the portion of the transaction price allocated to each of the research and development performance obligations as the research and development services are provided, using an input method, in proportion to costs incurred to date for each research development target as compared to total costs incurred and expected to be incurred in the future to satisfy the underlying obligation related to said research and development target. The transfer of control occurs over this period and, in management’s judgment, is the best measure of progress towards satisfying the performance obligation.
•
Option rights: The transaction price allocated to the options rights, which are considered material rights, is deferred until the period that Roche elects to exercise or elects to not exercise its option right to license and commercialize the underlying research and development target. Upon Roche's exercise of an option right, the Company will recognize the portion of the transaction price allocated using the input method described above. Any payments made to exercise option rights will be added to the allocated value and recognized as the related services are performed.
The transaction price is determined to be $50.0 million upfront payment received in November 2023. As of December 31, 2023, the $50.0 million upfront payment is recorded as deferred revenue in the liabilities section of the consolidated balance sheets. No customer options had been exercised through December 31, 2023.
10. Equity
Undesignated Preferred Stock
The Company had 10,000,000 shares authorized of undesignated preferred stock, par value of $0.0001, of which no shares were issued and outstanding as of December 31, 2023.
Common Stock
The Company had 500,000,000 shares of common stock authorized, of which 50,154,929 shares were issued and 50,140,233 shares were outstanding at December 31, 2023.
The holders of common stock are entitled to dividends when and if declared by the board of directors, subject to the preferences applicable to outstanding shares of Convertible Preferred Stock. The board of directors has not declared any dividends and the Company has not paid any dividends.
The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders.
The Company has issued restricted stock to founders, employees and consultants, and expense for this restricted stock is recognized on a straight-line basis (see Note 11). The restricted stock generally vests monthly over 4 years.
Pre-Funded Warrant
On October 30, 2023, the Company sold in a registered direct offering pursuant to a securities purchase agreement pre-funded warrants to purchase 10,000,400 shares of the Company’s common stock to an accredited investor at a purchase price of $2.4999 per pre-funded warrant resulting in proceeds to the Company of $24.9
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million, net of offering costs of $0.1 million. The pre-funded warrants are immediately exercisable at an exercise price of $0.0001 per share, and may be exercised at any time until the pre-funded warrants are exercised in full.
The Company has assessed the Pre-Funded Warrant for appropriate equity or liability classification pursuant to the Company’s accounting policy described in Note 2, “Summary of Significant Accounting Policies.” During this assessment, the Company determined the Pre-Funded Warrant is a freestanding instrument that does not meet the definition of a liability pursuant to ASC 480 and does not meet the definition of a derivative pursuant to ASC 815. The Pre-Funded Warrant is indexed to the Company’s common stock and meets all other conditions for equity classification under ASC 480 and ASC 815. Based on the results of this assessment, the Company concluded that the Pre-Funded Warrant is a freestanding equity-linked financial instrument that meets the criteria for equity classification under ASC 480 and ASC 815. Accordingly, the Pre-Funded Warrant is classified as equity and is accounted for as a component of additional paid-in capital at the time of issuance. The Company also determined that the Pre-Funded Warrant should be included in the determination of basic and diluted earnings per share in accordance with ASC 260, Earnings per Share.
At-the-Market Offering
In July 2022, the Company entered into a sales agreement, (the “Sales Agreement”), with Jefferies LLC, or Jefferies, pursuant to which the Company may offer and sell shares of its common stock having aggregate gross proceeds of up to $100 million from time to time in “at-the-market” offerings through Jefferies, as the Company’s sales agent. The Company agreed to pay Jefferies a commission of up to 3.0% of the gross proceeds of any shares sold by Jefferies under the Sales Agreement. During the year ended December 31, 2022, the Company sold 2,482,008 shares of its common stock resulting in proceeds to the Company of $19.7 million, net of offering costs of $1.0 million. No shares were sold under the Sales Agreement for the year ended December 31, 2023.
11. Stock-based compensation
2020 Stock incentive plan
The Company's 2020 Stock Option and Grant Plan, or the 2020 Plan, provided for the Company to grant stock options, restricted stock, and other stock awards, to employees, non-employee directors, and consultants. Upon effectiveness of the 2021 Plan (as defined below), no further issuances will be made under the 2020 plan.
2021 Stock incentive plan
The Company’s 2021 Stock Option and Incentive Plan, or the 2021 Plan, was approved by the Company’s board of directors on May 28, 2021, and the Company’s stockholders on June 17, 2021, and became effective on the date immediately prior to the date on which the registration statement for the Company’s IPO was declared effective. The 2021 Plan provides for the grant of incentive stock options, non-qualified 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. The number of shares initially reserved for issuance under the 2021 Plan was 4,903,145, which will be automatically increased on each January 1st by 5% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31st or such lesser number of shares as determined by the Company’s compensation, nomination and corporate governance committee. As of December 31, 2023, 3,323,465 shares of common stock were available for issuance under 2021 Plan.
2021 Employee stock purchase plan
The Company’s 2021 Employee Stock Purchase Plan, or the 2021 ESPP, was approved by the Company’s board of directors on May 28, 2021, and the Company’s stockholders on June 17, 2021, and became effective on the date immediately prior to the date on which the registration statement for the Company’s IPO was declared effective. A total of 439,849 shares of the Company’s common stock were initially reserved for issuance under the 2021 ESPP which will be automatically increased on each January 1st through January 1, 2031, by the least of (i) 439,849 shares of the Company’s common stock, (ii) 1% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or (iii) such lesser number of shares of the Company’s common stock as determined by the plan administrator of the 2021 ESPP. As of December 31, 2023, 1,158,258 shares of common stock remained available for issuance under the 2021 ESPP.
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Stock option activity
The following summarizes stock option activity:
The aggregate intrinsic value of options granted is calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock. The weighted average grant date fair value of options granted in during the years ended December 31, 2023 and 2022 was $5.40 and $8.44 per share, respectively.
Fair value of stock option awards
The Company estimates the fair value of stock option awards on the grant date using Black-Scholes. The fair value of options granted were estimated using the following weighted-average assumptions:
Year endedDecember 31,
Expected term (years) 6.24 6.25
Risk-free interest rate 3.95 % 2.02 %
Expected dividend yield — % — %
Black-Scholes requires the use of subjective assumptions which determine the fair value of stock-based awards. These assumptions include:
Expected term: The Company’s expected term represents the period that options are expected to be outstanding and is determined using the simplified method. The Company does not have sufficient historical data to use any other method to estimate expected term.
Expected volatility: The Company has limited information on the volatility of stock options as the shares were not actively traded on any public markets prior to June 24, 2021. The expected volatility was derived from historical stock volatilities of comparable peer public companies within its industry based on their similarities to the Company, including life cycle stage, therapeutic focus and size over a period equivalent to the expected term of the stock-based awards.
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock option grants.
Expected dividend: The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.
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Restricted stock award activity
Unvested restricted stock awards, or RSAs, as of December 31, 2023 and 2022, were granted to employees under the 2020 Plan. Restricted stock awards generally vest over a four year period provided the individual remains in continuous service of the Company.
The following summarizes restricted stock activity:
Numberofshares Weightedaveragegrant datefair value
The aggregate fair value of restricted stock that vested during the year ended December 31, 2023 and 2022 was $0.7 million and $1.5 million, respectively. The weighted average grant date fair value of restricted stock that vested during the year ended December 31, 2023 and 2022 was $0.82 and $0.78 per share, respectively.
Restricted stock unit activity
Starting in 2022, the Company granted restricted stock units, or RSUs, to employees under the 2021 Plan. Each of the RSUs represents the right to receive one share of the Company’s common stock upon vesting. The RSUs granted over two years provided the individual remains in continuous service of the Company. Accordingly, stock-based compensation expense for each RSU is recognized on a straight-line basis over the vesting term. The fair value of each RSU is based on the closing price of the Company’s common stock on the date of grant.
The following summarizes restricted stock unit activity:
Numberofshares Weightedaveragegrant datefair value
The aggregate fair value of restricted stock that vested during the year ended December 31, 2023 was $0.3 million. The weighted average grant date fair value of restricted stock that vested during the year was $10.11 per share. No RSUs vested during the year ended December 31, 2022.
Stock-based compensation expense
Stock-based compensation expense is classified as follows (in thousands):
Year endedDecember 31,
Total stock-based compensation expense $ 16,669 $ 11,664
As of December 31, 2023, total unrecognized stock–based compensation cost related to unvested stock options and restricted stock units was $33.8 million and $1.3 million, respectively. The Company expects to recognize this remaining cost over a weighted average period of 2.4 years and 1.3 years, respectively. Total unrecognized stock-based compensation cost related to unvested restricted stock awards is immaterial.
12. Income Taxes
The Company has incurred net operating losses for all the periods presented. The Company has not reflected the benefit of any such net operating loss carryforwards in the accompanying consolidated financial statements. Domestic and foreign components of net loss are as follows (in thousands):
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Year ended December 31,
The effective tax rate for the years ended December 31, 2023 and 2022 is different from the federal statutory rate primarily due to the valuation allowance against deferred tax assets as a result of insufficient sources of income. The reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Year ended December 31,
Income tax benefit at the federal statutory rate 21.0 % 21.0 %
State income taxes, net of federal benefit 6.2 % 6.2 %
Research and development tax credits (0.1 )% 0.0 %
Foreign rate differential (6.8 )% (6.7 )%
Other (0.7 )% (0.7 )%
Change in valuation allowance (19.5 )% (19.8 )%
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The principal components of the Company’s deferred tax assets consisted of the following (in thousands):
December 31,
Deferred tax assets
Federal and state net operating loss carryforwards $ 41,888 $ 26,136
Research and development tax credits 2,245 1,715
Capitalized research and development 3,679 1,151
Deferred tax liabilities
Defined benefit plan adjustment (332 ) (375 )
Prepaid insurance — (252 )
Net deferred tax assets $ — $ —
The Company has incurred annual net operating losses in each year since inception. The Company has not reflected the benefit of any such net operating loss carryforwards in the financial statements. Due to the Company’s history of losses, and lack of other positive evidence, the Company has determined that it is more likely than not that its net deferred tax assets will not be realized, and therefore, the net deferred tax assets are fully offset by a valuation allowance at December 31, 2023 and 2022. The Company increased its valuation allowance by $21.4 million for the year ended December 31, 2023 in order to maintain a full valuation allowance against its deferred tax assets.
As of December 31, 2023, the Company had federal net operating loss carryforwards, or NOLs, of $0.5 million and federal tax credits of $1.0 million available to offset tax liabilities. The Company’s federal NOLs have an indefinite life and federal tax credit carryforwards begin to expire in 2040. The Company also had gross foreign
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NOLs of $288.0 million that begin to expire in 2026. The Company also had gross state tax credits of $0.5 million which are available to offset state tax liabilities and begin to expire in 2034. Federal and state NOLs and tax credit carryforwards are also subject to annual limitations in the event that cumulative changes in the ownership interests of significant stockholders exceed 50% over a three-year period, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986. The Company has not completed an analysis to determine if the NOLs and tax credits are limited due to a change in ownership. Should there be ownership changes that occurred, the Company’s ability to utilize existing carryforwards could be substantially restricted.
The Company determines its uncertain tax positions based on whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be sustained upon examination by the relevant income tax authorities.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Year ended December 31,
Unrecognized tax benefits, beginning of year $ 2,235 $ —
Additions for tax positions of prior years 2,369 2,235
Reductions for tax provisions of prior years (129 ) —
Unrecognized tax benefits, end of year $ 4,475 $ 2,235
The Company recognizes interest and penalties related to unrecognized tax benefits in U.S. Federal, state, and foreign income tax expense. For the years ended December 31, 2023 and 2022, the unrecognized tax benefits generated was related to a reserve for the Federal and State Research and Development Credit. The Company had approximately $4.5 million and $2.2 million of unrecognized tax benefit as of December 31, 2023 and 2022, respectively.
The Company files income tax returns in the U.S., Switzerland and Massachusetts. The Company is not currently under examination by any taxing authority for any open tax year. Due to net operating loss carryforwards, all years remain open for income tax examination. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, or IRS, or state tax authorities to the extent utilized in a future period. No federal, foreign, or state tax audits are currently in process.
13. Employee retirement plans
Defined benefit plan
The Company, in compliance with Swiss Law, is contracted with the Swiss Life Collective BVG Foundation for the provision of pension benefits. All benefits are reinsured in their entirety with Swiss Life Ltd within the framework of the contract.
The technical administration and management of the savings account are guaranteed by Swiss Life on behalf of the collective foundation. Insurance benefits due are paid directly to the entitled persons by Swiss Life in the name of and for the account of the collective foundation. The pension plan is financed by contributions of both employees and employer.
The contract between the Company and the collective foundation can be terminated by either side. In the event of a termination, the Company would have an obligation to find alternative pension arrangements for its employees. Because there is no guarantee that the employee pension arrangements would be continued under the same conditions, there is a risk, albeit remote, that a pension obligation may fall on the Company.
The pension assets are pooled for all affiliated companies; the investment of assets is done by the governing bodies of the collective foundation or by mandated parties. The risks of disability, death and longevity are reinsured in their entirety with Swiss Life Ltd.
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The following table represents the changes in benefit obligations and plan assets and the net amount recognized on the consolidated balance sheets (in thousands):
Year ended December 31,
Change in benefit obligation:
Benefit obligation—beginning of period $ 6,851 $ 5,975
Contributions paid by employees 657 299
Contributions paid by plan participants 2,752 1,302
Benefit obligation—end of period $ 12,029 $ 6,851
Change in plan assets:
Fair value of plan assets—beginning of period $ 5,318 $ 3,799
Actual return on plan assets (96 ) (240 )