ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biopharmaceutical company focused on the discovery, development, and commercialization of novel treatments for patients suffering from serious hematologic diseases. We have assembled a portfolio of clinical and preclinical product candidates that aim to modify fundamental biological pathways associated with the formation and function of red blood cells, specifically heme biosynthesis and iron homeostasis. Our current pipeline includes bitopertin for the treatment of erythropoietic porphyrias, or EPs, including erythropoietic protoporphyria, or EPP, and X-linked protoporphyria, or XLP, and Diamond-Blackfan Anemia, or DBA; DISC-0974 for the treatment of anemia of myelofibrosis, or MF, and anemia of chronic kidney disease, or CKD; and DISC-3405 (formerly MWTX-003) for the treatment of polycythemia vera, or PV, and other hematologic disorders. In addition, our preclinical programs also include DISC-0998, for the treatment of anemia associated with inflammatory diseases. Our approach to product candidate development leverages well-understood molecular mechanisms that have been validated in humans. We believe that each of our product candidates, if approved, has the potential to improve the lives of patients suffering from hematologic diseases.
Bitopertin is the lead product candidate in our heme biosynthesis modulation portfolio. Bitopertin was previously evaluated by F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc., or collectively, Roche, in a comprehensive clinical program in over 4,000 individuals in other indications which demonstrated the activity of bitopertin as a glycine transporter 1, or GlyT1, inhibitor and its effect on heme biosynthesis. We are initially developing bitopertin for the treatment of EPs, including EPP and XLP. In July 2022, we initiated BEACON, a Phase 2 open-label, parallel-dose clinical trial of bitopertin in EPP and XLP patients that is being conducted at sites in Australia. In October 2022, we initiated AURORA, a Phase 2, randomized, double-blind, placebo-controlled clinical trial of bitopertin in EPP patients that is being conducted at sites in the United States. We presented interim data from BEACON in June and December 2023, and we expect topline data from AURORA in March or April 2024. Additional analysis of the full population in the BEACON trial is anticipated to be presented in 2024. We entered into a collaborative research and development agreement with the National Institutes of Health, or NIH, to conduct an NIH-sponsored clinical trial of bitopertin in DBA. The FDA authorized the clinical trial to proceed and the trial began in July 2023. We are planning additional trials of bitopertin in other indications.
DISC-0974 is the lead product candidate in our iron homeostasis portfolio and was in-licensed from AbbVie Deutschland GmbH & Co. KG, or AbbVie. DISC-0974 is designed to suppress hepcidin production and increase serum iron levels. We submitted an IND to the FDA for DISC-0974 in June 2021, received clearance in July 2021, and participants completed a Phase 1 clinical trial in healthy volunteers in the U.S. in June 2022 with results showing an acceptable tolerability profile and evidence of target engagement, iron mobilization and augmented erythropoiesis. We initiated a Phase 1b/2 clinical trial in June 2022 in patients with anemia of MF, and initiated a separate Phase 1b/2 clinical trial in February 2023 in patients with non-dialysis dependent CKD and anemia. We presented interim data from both of these trials in December 2023 and anticipate additional interim data presentations in 2024. In addition, we are developing a preclinical anti-hemojuvelin, or HJV, monoclonal antibody, DISC-0998, which also targets hepcidin suppression and was in-licensed from AbbVie. DISC-0998 is designed to increase serum iron levels and has an extended serum half-life as compared to DISC-0974. We believe this profile may be desirable in certain subsets of patients with anemia associated with inflammatory diseases.
Lastly, we are developing DISC-3405, a monoclonal antibody against Transmembrane Serine Protease 6, or TMPRSS6, that we licensed from Mabwell Therapeutics, Inc., or Mabwell. DISC-3405 is part of our iron homeostasis portfolio and is designed to induce hepcidin production and reduce serum iron levels. An IND for DISC-3405 was cleared by the FDA, and a Phase 1 clinical trial in healthy adult volunteers was initiated in October 2023. Interim data is anticipated to be presented in the first and second halves of 2024. We expect to develop DISC-3405 for the treatment of PV and other hematologic disorders.
97
Reverse Merger with Gemini
On August 9, 2022, Disc Medicine, Inc., a Delaware corporation, or Private Disc, entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, with Gemini Therapeutics, Inc., a Delaware corporation, or Gemini, Gemstone Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Gemini, or Merger Sub.
On December 29, 2022, Private Disc completed the merger with Gemini, or the merger. Gemini changed its name to Disc Medicine Inc., and Private Disc changed its name to Disc Medicine Opco, Inc., a wholly-owned subsidiary of Disc Medicine, Inc. On December 30, 2022, our common stock began trading on The Nasdaq Capital Market under the ticker symbol “IRON.”
Financial Operations Overview
Revenue
We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts are successful and result in commercialization of one or more product candidates or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales, payments from such collaboration or license agreements or a combination thereof.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the research and development of our product candidates. These expenses include:
•
employee-related expenses, including salaries, benefits, and stock-based compensation expense, for personnel engaged in research and development functions;
•
expenses incurred in connection with our research and development activities, including under agreements with third parties such as consultants, contractors and CROs;
•
costs related to contract development and manufacturing organizations, or CDMOs, that are primarily engaged to provide drug substance and product for our preclinical studies, clinical trials and research and development programs, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
•
the costs of acquiring and manufacturing preclinical study and clinical trial materials, including manufacturing registration and validation batches;
•
costs related to compliance with quality and regulatory requirements; and
•
payments made under third-party licensing agreements.
We expense research and development costs as incurred. Costs incurred for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and may be reflected in our consolidated financial statements as prepaid or accrued expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed or when it is no longer expected that the goods will be delivered or the services rendered.
We typically use our employee and infrastructure resources across product candidates and development programs. We track external development costs by product candidate or development program, but we do not allocate personnel costs or other internal costs to specific product candidates or development programs.
We expect that our research and development expenses will increase substantially as we advance our programs into and through clinical development. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any product candidates we may develop. A change in the outcome of any number of variables with respect to product candidates we may develop could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any
98
product candidates we may develop. The successful development of any product candidate is highly uncertain. This is due to the numerous risks and uncertainties associated with product development, including the following:
•
the timing and progress of preclinical and clinical development activities;
•
the number and scope of preclinical and clinical programs we decide to pursue;
•
the ability to raise additional funds necessary to complete clinical development of and commercialize our product candidates;
•
our ability to establish new licensing or collaboration arrangements and the progress of the development efforts of third parties with whom we may enter into such arrangements;
•
our ability to maintain our current research and development programs and to establish new programs;
•
the successful initiation, enrollment and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
•
the receipt and related terms of regulatory approvals from applicable regulatory authorities for any product candidates;
•
the availability of raw materials for use in production of our product candidates;
•
establishing agreements with third-party manufacturers for supply of product candidate components for our clinical trials;
•
our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;
•
our ability to protect our other rights in our intellectual property portfolio;
•
commercializing product candidates, if and when approved, whether alone or in collaboration with others; and
•
obtaining and maintaining third-party insurance coverage and adequate reimbursement for any approved products.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters, including noncapitalizable transaction costs; professional fees for accounting, auditing, tax compliance and administrative consulting services; investor and public relations expenses; director and officer insurance costs and other insurance costs; and facility related expenses including maintenance and allocated expenses for rent and other operating costs.
We anticipate that our general and administrative expenses will increase substantially in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates.
Other Income
Interest Income
Interest income primarily consists of interest earned on cash equivalents, consisting of money market funds, U.S. treasury notes and certificates of deposit.
Change in Fair Value of Contingent Value Right Liability
In December 2022, we entered into the CVR Agreement, described in more detail in Notes 1 and 4 to our consolidated financial statements, which provided a CVR to Gemini’s pre-merger common stockholders to receive common stock from the Company upon its receipt of certain proceeds, calculated in accordance with the CVR Agreement, resulting from a disposition of Gemini’s pre-merger assets within one year after the closing of the merger. The disposition period ended December 29, 2023 and no dispositions of Gemini's pre-merger assets were made during the disposition period. Therefore, there were no CVR payments made to the holders and there will not be any future CVR payments to the holders. The CVR liability was measured at fair value as of each reporting date and the change in the fair value for the period was recorded in the consolidated statements of operations and comprehensive loss in the change in fair value of contingent value right liability.
Change in Fair Value of Derivative Liability
In May 2021, we entered into the Roche Agreement, described in more detail in Notes 4 and 8 to our consolidated financial statements, which included an obligation to issue a variable number of shares of our common stock to Roche for no additional consideration upon the completion of a Roche Qualified Transaction as defined by the Roche Agreement. The liability was measured
99
at fair value as of each reporting date and the change in the fair value for the period was recorded in the consolidated statements of operations and comprehensive loss in the change in fair value of derivative liability. The liability was settled upon the completion of the merger on December 29, 2022.
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands):
Year EndedDecember 31,
Operating expenses:
Other income (expense), net:
Change in fair value of derivative liability — (61 ) 61
Other expense (2 ) — (2 )
Income tax expense (99 ) — (99 )
Research and Development Expenses
The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2022 (in thousands):
Year EndedDecember 31,
Personnel-related (including equity-based compensation) 15,623 9,177 6,446
Research and development expenses were $69.3 million for the year ended December 31, 2023, compared to $33.4 million for the year ended December 31, 2022. The increase of $35.8 million in research and development expenses was primarily due to a $20.2 million increase related to the DISC-3405 program which incurred $15.0 million in upfront and milestone license fees in 2023, a $8.5 million increase in bitopertin development expense related to increased clinical study and drug manufacturing activity, and a $6.4 million increase in personnel-related costs related to higher research and development headcount, including an increase of $1.2 million in stock-based compensation.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the years ended December 31, 2023 and 2022 (in thousands):
Year EndedDecember 31,
Legal, consulting and professional fees 7,448 6,252 1,196
Total general and administrative expenses $ 21,861 $ 14,038 $ 7,823
100
General and administrative expenses were $21.9 million for the year ended December 31, 2023, compared to $14.0 million for the year ended December 31, 2022. The increase of $7.8 million in general and administrative expenses was primarily due to an increase of $3.5 million in personnel-related costs due to higher general and administrative headcount, including an increase of $2.3 million in stock-based compensation, and an increase of $3.1 million in other expenses related to increased costs as a public company.
Other Income (Expense), Net
Other income, net was $14.8 million for the year ended December 31, 2023, compared to other income, net of $0.6 million for the year ended December 31, 2022. The change of $14.1 million in other income (expense), net was primarily due to an increase in interest income based on a larger cash and cash equivalents balance and higher interest rates.
Income Tax Expense
Income tax expense was $0.1 million for the year ended December 31, 2023, compared to no expense for the year ended December 31, 2022. The increase in expense relates to state income tax resulting from an increase in interest income.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses. We expect to continue to incur significant expenses and operating losses in the foreseeable future as we advance the clinical development of our product candidates. We expect that our research and development and general and administrative costs will continue to increase significantly, including in connection with conducting clinical trials and manufacturing for our product candidates to support commercialization and providing general and administrative support for our operations, including the costs associated with operating as a public company. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements or other sources. See “Risk Factors” for additional risks associated with our substantial capital requirements.
To date, we have funded our operations primarily with proceeds from the sale of our convertible preferred stock and common stock, the proceeds from the merger with Gemini, proceeds from at-the-market offerings, proceeds from a registered direct offering and proceeds from a follow-on public offering. Through December 31, 2023, we have received net proceeds of $144.5 million from sales of our Series Seed, Series A and Series B convertible preferred stock, $89.5 million from the merger with Gemini, $53.5 million from sales of common stock in a pre-closing private financing, $62.4 million from sales of common stock and pre-funded warrants in a registered direct offering, $147.9 million from sales of common stock and pre-funded warrants in a public follow-on offering and $26.4 million from at-the-market offerings. As of December 31, 2023, we had cash and cash equivalents of $360.4 million.
We have incurred significant operating losses since inception and, as of December 31, 2023, had an accumulated deficit of $188.6 million. In addition, we expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future. We believe that our current cash resources will enable us to fund our current planned operating expense and capital expenditure requirements well into 2026. We may also pursue additional cash resources through public or private equity offerings, collaborations or debt financings.
Cash Flows
The following table provides information regarding our cash flows for each period presented (in thousands):
Year EndedDecember 31,
Net cash provided by (used in):
Investing activities (89 ) (151 )
Operating Activities
Our cash flows from operating activities are greatly influenced by our use of cash for operating expenses and working capital requirements to support our business. We have historically experienced negative cash flows from operating activities as we
101
invested in developing our portfolio, drug discovery efforts, conducting clinical trials and manufacturing, and related infrastructure. The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of operating assets and liabilities, which are primarily the result of increased expenses and timing of vendor payments.
During the year ended December 31, 2023, net cash used in operating activities of $73.5 million was primarily due to our net loss of $76.4 million and changes in operating assets and liabilities of $3.0 million, offset by non-cash expenses of $5.9 million primarily related to stock-based compensation expense of $5.5 million.
During the year ended December 31, 2022, net cash used in operating activities of $42.3 million was primarily due to our net loss of $46.8 million, offset by non-cash expenses of $2.4 million and changes in operating assets and liabilities of $2.1 million primarily related to accounts payable and accrued expenses assumed in the merger.
Investing Activities
During the years ended December 31, 2023 and 2022, net cash used in investing activities was due to purchases of property and equipment.
Financing Activities
During the year ended December 31, 2023, net cash provided by financing activities of $239.4 million consisted primarily of net proceeds of $147.9 million from sales of common stock and pre-funded warrants in a public follow-on offering, net proceeds of $62.4 million from sales of common stock and pre-funded warrants in a registered direct offering and aggregate net proceeds of $26.4 million from the at-the-market offerings.
During the year ended December 31, 2022, net cash provided by financing activities of $149.0 million consisted primarily of $97.4 million of net cash proceeds from the completion of the merger with Gemini and $53.5 million of net cash proceeds from the pre-closing financing.
Future Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into and through clinical development and operate as a public company. Our funding requirements and the timing and amount of our operating expenditures will depend largely on:
•
the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates or any future product candidates we may develop;
•
the costs, timing and outcome of regulatory review of our product candidates;
•
changes in laws or regulations applicable to any product candidates we may develop, including but not limited to clinical trial requirements for approvals;
•
the cost and timing of obtaining materials to produce adequate product supply for any preclinical or clinical development of any product candidate we may develop;
•
the effect of competing technological and market developments;
•
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;
•
the payment or receipt of milestones, royalties and other collaboration-based revenues, if any;
•
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any product candidate we may develop for which we obtain marketing approval;
•
the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; and
•
the legal costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial
102
success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations as of December 31, 2023 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
Payments Due by Period
Total Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years
Operating lease commitments(1) $ 2,424 $ 845 $ 1,579 $ — $ —
(1) Amounts reflect payments due for our leased and subleased office spaces in Watertown, Massachusetts as of December 31, 2023. The lease terms began in November 2021 and June 2023, and both end in November 2026.
We enter into contracts in the normal course of business with CROs, CDMOs and other third parties for preclinical studies, clinical trials and manufacturing services. These contracts typically do not contain minimum purchase commitments and are generally cancelable by us upon written notice. Payments due upon cancellation consist of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation and, in the case of certain arrangements with CROs and CDMOs, may include non-cancelable fees. These payments are not included in the table above as the amount and timing of such payments are not fixed and estimable.
We have also entered into license agreements under which we are obligated to make specified milestone and royalty payments. We have not included future payments under these agreements in the table of contractual obligations above since the payment obligations under these agreements are contingent upon future events such as regulatory milestones or generating product sales. We are unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. For additional information about our license agreements and amounts that could become payable in the future under such agreements, see our consolidated financial statements.
Critical Accounting Policies 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 our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Research and Development Contract Costs and Accruals
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued and prepaid research and development expenses. This process involves reviewing open contracts and purchase orders, communicating
103
with applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and makes adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
•
vendors in connection with preclinical development activities;
•
CROs and investigative sites in connection with preclinical studies and clinical trials; and
•
CDMOs in connection with the production of preclinical study and clinical trial materials.
The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.
Fair Value of Derivative Liability
In May 2021, we entered into a license agreement (the “Roche Agreement”) with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (together, “Roche”) pursuant to which Roche granted us an exclusive and sublicensable worldwide license under certain patent rights and know-how to develop, manufacture and commercialize certain compounds (the “Compounds”) as further described in Note 8. We recognized a liability in connection with the Roche Agreement which included an obligation to issue a variable number of shares of our common stock to Roche for no additional consideration upon our completion of an initial public offering or certain merger transactions (a “Roche Qualified Transaction”). Prior to settlement in Q4 2022, the fair value measurement of the derivative liability was classified as Level 3 under the fair value hierarchy as it was valued using certain unobservable inputs. These inputs included: (1) our estimated shares outstanding and fair value per share upon completion of a Roche Qualified Transaction and (2) the probability of us completing a Roche Qualified Transaction. The number of shares of common stock to be issued to Roche was estimated to be approximately 2.85% of the outstanding shares of common stock of the combined company as of immediately after the completion of a Roche Qualified Transaction, including the exercise by the underwriters thereof of any overallotment option, if applicable. We remeasured the derivative liability based on the stock price of its publicly-traded common stock on December 29, 2022. The change in the fair value for the period was recorded in the consolidated statements of operations and comprehensive loss in the change in fair value of derivative liability. Upon completion of the merger, we issued 482,313 shares of common stock to Roche, thereby settling the derivative liability, with the fair value of the common stock at the time of issuance recorded as additional paid-in capital.
Stock-Based Compensation Expense
We measure stock-based awards granted to employees, directors, and nonemployees based on their fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. For stock-based awards with service-based vesting conditions, we recognize compensation expense using the straight-line method. For stock-based awards with performance-based vesting conditions, we use the accelerated attribution method to expense the awards over the implicit service period based on the probability of achieving the performance conditions. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the fair value of our common stock, the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the expected dividend yield. Due to the lack of company-specific historical and implied volatility data, we determine the volatility for awards granted based on an analysis of reported data for a group of guideline companies that issued options with substantially similar terms. The expected volatility has been determined using a weighted average of the historical volatility measures of this group of guideline companies. We expect to continue to do so until such time that we have adequate historical data regarding the volatility of our own traded stock price. The expected term of our stock options granted to employees has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options, using the average between the vesting date and the contractual term. The fair value of each restricted common stock award is estimated on the date of grant based on the estimated fair value of our common stock on the date of grant.
104
Determination of the Fair Value of Common Stock
Prior to the merger closing, the estimated fair value of our common stock had been determined by our board of directors as of the date of each option grant with input from management, considering our most recently available third-party valuation of common stock, and our board of directors’ assessment of additional objective and subjective factors that we believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Our common stock valuations were prepared using either an option pricing method, or OPM, or a hybrid method, both of which used market approaches to estimate our enterprise value. The OPM treats common stock and convertible preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the convertible preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock.
The hybrid method is a probability-weighted expected return method, or PWERM, by which the equity value in one or more scenarios is calculated using an OPM. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for the company, assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock.
The assumptions underlying these valuations were highly complex and subjective and represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and stock-based compensation expense could be materially different.
Upon closing of the merger, a public trading market for our common stock has been established and it is no longer necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the fair value of our common stock is now determined based on the quoted market price of our common stock.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued and certain recently adopted accounting pronouncements that have or may potentially impact our financial position and results of operations is included in Note 2 to our consolidated financial statements.
Emerging Growth Company and Smaller Reporting Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company under Section 107 of the JOBS Act, which provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to avail ourselves of the extended transition period and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies, unless we choose to early adopt a new or revised accounting standard. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of our initial public offering which occurred in August 2020, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements.
105
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As of December 31, 2023 and 2022, we had cash and cash equivalents of $360.4 million and $194.6 million, respectively, which consisted of cash, money market funds and U.S. treasury notes. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, an immediate 10% change in market interest rates would not have a material effect on the fair market value of our cash or cash equivalents.
Our employees and operations are primarily located in the United States. We have, from time to time, engaged in contracts with contractors or other vendors in a currency other than the U.S. dollar. To date, we have had minimal exposure to fluctuations in foreign currency exchange rates as the time period between the date that transactions are initiated, and the date of payment or receipt of payment is generally of short duration. Accordingly, we believe we do not have a material exposure to foreign currency risk.
Inflation generally affects us by increasing our cost of labor and contract research. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the twelve months ended December 31, 2023 and 2022.
106
ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DISC MEDICINE, INC.
Index to Consolidated Financial Statements
Page(s)
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 108
Consolidated Balance Sheets 109
Consolidated Statements of Operations and Comprehensive Loss 110
Consolidated Statements of Cash Flows 112
Notes to Consolidated Financial Statements 113
107
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors of Disc Medicine, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Disc Medicine, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Boston, Massachusetts
March 21, 2024
108
DISC MEDICINE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, December 31,
Assets
Current assets:
Prepaid expenses and other current assets 5,280 3,880
Property and equipment, net 170 168
Right-of-use assets, operating leases 1,930 1,430
Liabilities and Stockholders’ Equity
Current liabilities:
Operating lease liabilities, current 665 307
Operating lease liabilities, non-current 1,436 1,027
Commitments and contingencies (Note 14)
Stockholders’ equity:
Total liabilities and stockholders’ equity $ 367,996 $ 200,205
The accompanying notes are an integral part of these consolidated financial statements.
109
DISC MEDICINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
Year EndedDecember 31,
Operating expenses:
Other income (expense), net:
Change in fair value of derivative liability — (61 )
Other expense (2 ) —
Total other income (expense), net 14,795 648
Income tax expense (99 ) —
Net loss and comprehensive loss $ (76,429 ) $ (46,827 )
The accompanying notes are an integral part of these consolidated financial statements.
110
DISC MEDICINE, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
Convertible Preferred Stock
Net loss — — — — — — — — — (46,827 ) (46,827 )
Convertible Preferred Stock
Net loss — — — — — — — — — (76,429 ) (76,429 )
The accompanying notes are an integral part of these consolidated financial statements.
111
DISC MEDICINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year EndedDecember 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 100 89
Change in fair value of derivative liability — 61
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (1,166 ) 352
Other assets — 64
Operating lease liabilities (54 ) (319 )
Net cash used in operating activities (73,462 ) (42,252 )
Cash flow from investing activities
Purchases of property and equipment (89 ) (151 )
Net cash used in investing activities (89 ) (151 )
Cash flow from financing activities
Proceeds from the issuance of common stock in pre-closing financing — 53,500
Cash acquired in connection with the reverse recapitalization — 97,403
Payment of reverse recapitalization transaction costs — (2,144 )
Proceeds from stock option exercises 2,722 219
Net increase in cash, cash equivalents and restricted cash 165,828 106,575
Cash, cash equivalents and restricted cash, beginning of period 194,788 88,213
Cash, cash equivalents and restricted cash, end of period $ 360,616 $ 194,788
Supplemental cash flow information
Cash paid for income taxes $ 112 $ —
Supplemental disclosure of non-cash activities
The accompanying notes are an integral part of these consolidated financial statements.
112
DISC MEDICINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of the Business
Disc Medicine, Inc. (together with its subsidiaries, the “Company”) is a clinical-stage biopharmaceutical company focused on the discovery, development, and commercialization of novel treatments for patients suffering from serious hematologic diseases. The Company has assembled a portfolio of clinical and preclinical product candidates that aim to modify fundamental biological pathways associated with the formation and function of red blood cells, specifically heme biosynthesis and iron homeostasis. The Company’s current pipeline includes, bitopertin for the treatment of erythropoietic porphyrias (“EPs”) including erythropoietic protoporphyria (“EPP”), and X-linked protoporphyria (“XLP”), and Diamond-Blackfan Anemia (“DBA”); DISC-0974 for the treatment of anemia of myelofibrosis (“MF”), and anemia of chronic kidney disease (“CKD”); and DISC-3405 for the treatment of polycythemia vera (“PV”), and other hematologic disorders. In addition, the Company’s preclinical programs also include DISC-0998, for the treatment of anemia associated with inflammatory diseases. The Company’s approach to product candidate development leverages well-understood molecular mechanisms that have been validated in humans. The Company believes that each of its product candidates, if approved, has the potential to improve the lives of patients suffering from hematologic diseases. The Company was founded in October 2017. The Company’s principal offices are in Watertown, Massachusetts.
The Company is subject to a number of risks and uncertainties common to development stage companies in the biotechnology industry, including, but not limited to, risks associated with completing preclinical studies and clinical trials, receiving regulatory approvals for product candidates, development by competitors of new biopharmaceutical products, dependence on key personnel, reliance on third-party organizations, protection of proprietary technology, compliance with government regulations, the impact of public health crises such as pandemics and the ability to secure additional capital to fund operations. The Company’s research and development programs will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize revenue from product sales.
Reverse Merger with Gemini
On August 9, 2022, Gemini Therapeutics, Inc., a Delaware corporation (“Gemini”), Gemstone Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Gemini (“Merger Sub”), and Disc Medicine, Inc., a Delaware corporation (“Private Disc”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). The merger was completed on December 29, 2022. In accordance with the Merger Agreement, the Merger Sub merged with and into Private Disc, with Private Disc surviving as a wholly-owned subsidiary of the Company (the “merger”). Gemini changed its name to Disc Medicine Inc., and Private Disc, which remains as a wholly-owned subsidiary of the Company, changed its name to Disc Medicine Opco, Inc. On December 30, 2022, the combined company’s common stock began trading on The Nasdaq Capital Market under the ticker symbol “IRON.”
Except as otherwise indicated, references herein to “Disc,” the “Company,” or the “combined company”, refer to Disc Medicine, Inc. on a post-merger basis, and the term “Private Disc” refers to the business of privately-held Disc Medicine, Inc., prior to completion of the merger. References to Gemini refer to Gemini Therapeutics, Inc. prior to completion of the merger.
Pursuant to the terms of the Merger Agreement, at the effective time of the merger (the “Effective Time”), each then outstanding share of Private Disc common stock (including shares of common stock issued upon conversion of the Company’s preferred stock (see Note 9) and shares of the Company’s common stock issued in the Private Disc pre-closing financing defined below) was exchanged for 0.1096 shares of Gemini’s common stock (the “Exchange Ratio”), after taking into account the Reverse Stock Split, as defined below. In addition, each option to purchase Private Disc shares that was outstanding and unexercised immediately prior to the Effective Time was converted into an option to purchase shares of Gemini based on the Exchange Ratio. Immediately following the merger, stockholders of Private Disc owned approximately 74% of the outstanding common stock of the combined company. The merger was intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
At the Effective Time, each person who as of immediately prior to the Effective Time was a stockholder of record of Gemini or had the right to receive Gemini’s common stock received a contractual contingent value right (“CVR”) issued by Gemini subject to and in accordance with the terms and conditions of a Contingent Value Rights Agreement between Gemini, the holder’s representative and the rights agent (the “CVR Agreement”), representing the contractual right to receive consideration from the post-closing combined company upon the receipt of certain proceeds from a disposition of Gemini’s pre-merger assets (specifically, Gemini’s intellectual property assets (“Gemini IP”), which the Company assumed in the merger) during the period that is one year after the closing of the merger, calculated in accordance with the CVR Agreement. In accordance with the CVR Agreement, the holders of the CVRs would receive proceeds from any disposition of the Gemini pre-merger assets, net of costs incurred by the Company in performance of its obligations under the CVR Agreement in excess of $250,000, paid in the form of common stock in
113
the Company based on the weighted average stock price of the Company for the five trading days prior to the issuance of the payment to the holders of the CVRs.
To satisfy its obligations with respect to the CVRs and the Gemini IP, the Company hired an outside firm to attempt to sell the Gemini IP, which firm previously was unsuccessful in finding a buyer for the Gemini IP. In June 2023, the Company received an offer for the Gemini IP and recorded a $1.5 million liability representing the estimated fair value of the Company’s obligation to the holders of the CVRs based on the offer. However, the counterparty and the Company were unable to come to an agreement on the terms of the offer.
The disposition period ended December 29, 2023 and no dispositions of Gemini's pre-merger assets were made during the disposition period. Therefore, there were no CVR payments made to the holders and there will not be any future CVR payments to the holders (See Note 4). As such, the Company’s obligations under the CVR Agreement have expired and the CVRs are valueless. In December 2023, the Company recognized the reversal of the $1.5 million liability in the consolidated statements of operations and comprehensive loss within the change in fair value of contingent value right liability.
The Company has no additional obligations or plans with respect to Gemini’s pre-merger assets. The Company has generated no revenue from Gemini’s pre-merger assets and has incurred approximately $1.6 million in aggregate costs (including maintenance of license agreements, storage, legal and other fees) for the twelve months ended December 31, 2023, to maintain Gemini’s pre-merger assets solely in order to fulfill the Company’s obligations under the CVR Agreement.
In connection with the Merger Agreement, certain third parties entered into a subscription agreement with Private Disc to purchase shares of Private Disc’s common stock for an aggregate purchase price of $53.5 million (the “pre-closing financing”). Shares of Private Disc’s common stock issued pursuant to the pre-closing financing were converted into shares of the Company’s common stock based on the Exchange Ratio.
The merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. For accounting purposes, Private Disc was considered to be acquiring the assets and liabilities of Gemini in the merger based on the terms of the Merger Agreement and other factors, including: (i) Private Disc’s stockholders own a majority of the voting rights in the combined company; (ii) Private Disc designated a majority (eight of nine) of the initial members of the board of directors of the combined company; (iii) Private Disc’s executive management team became the management of the combined company; (iv) the pre-combination assets of Gemini were primarily cash and cash equivalents and other non-operating assets (the in-process research and development assets potentially remaining as of the combination were considered to be of de minimis value); and (v) the combined company was named Disc Medicine, Inc. and is headquartered in Private Disc’s office in Watertown, Massachusetts. Accordingly, the merger was treated as the equivalent of Private Disc issuing stock to acquire the net assets of Gemini. As a result of the merger, the net assets of Gemini were recorded at their acquisition-date fair value in the financial statements of the Company and the reported operating results prior to the merger are those of Private Disc.
Pursuant to the terms of the Roche Agreement (see Note 4), immediately following the Effective Time, the Company issued 482,313 shares of the combined company to Roche for no consideration.
Reverse Stock Split and Exchange Ratio
On December 29, 2022, in connection with, and prior to the completion of, the merger, Gemini effected a one-for-ten reverse stock split of its then outstanding common stock (the “Reverse Stock Split”). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. All of Gemini’s issued and outstanding common stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.
All issued and outstanding Private Disc common stock, convertible preferred stock and options prior to the effective date of the merger have been retroactively adjusted to reflect the 0.1096 Exchange Ratio, which reflects the impact of the reverse stock split, for all periods presented.
Liquidity and Capital Resources
The Company’s consolidated financial statements have been prepared on the basis of the Company continuing as a going concern. The Company expects that its existing cash and cash equivalents as of December 31, 2023 of $360.4 million will enable the Company to fund its planned operating expense and capital expenditure requirements for at least twelve months from the date of issuance of these consolidated financial statements. The Company has incurred recurring losses and negative cash flows from operations since inception. As of December 31, 2023, the Company had an accumulated deficit of $188.6 million. The Company expects its operating losses and negative operating cash flows to continue into the foreseeable future. The future viability of the Company is dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations. There can be no assurance that the Company will ever earn revenues or achieve profitability, or if achieved, that the revenues or profitability will be sustained on a continuing basis. In addition, the Company’s preclinical and clinical development activities, manufacturing and commercialization of the Company’s product candidates, if approved, will require significant additional financing.
114
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative accounting principles generally accepted in the United States as found in the Accounting Standard Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to accrued research and development expenses; stock-based compensation expense; the fair value of the common stock prior to the effective date of the merger; the fair value determinations for instruments accounted for at fair value including contingent amounts payable to third parties upon the consummation of specified transactions, including a Roche Qualified Transaction (see Note 4); the fair value of Gemini’s development programs at the Effective Time; the fair value of the CVR; the incremental borrowing rate for determining lease liabilities and right-of-use assets and income taxes. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it has concluded to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ materially from those estimates or assumptions.
Segment Information
The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions, resulting in a single reportable segment. The Company has assembled a portfolio of clinical and preclinical product candidates that aim to modify fundamental biological pathways associated with the formation and function of red blood cells, specifically heme biosynthesis and iron homeostasis. The Company has determined that its chief operating decision maker is its Chief Executive Officer. The Company’s chief operating decision maker reviews the Company’s financial information on a consolidated basis for purposes of allocating resources and assessing financial performance. All of the Company’s tangible assets are held in the United States.
Concentration of Credit Risk and of Significant Suppliers
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits and limits its exposure to cash risk by placing its cash with high credit quality accredited financial institutions. The Company has concluded that it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company relies, and expects to continue to rely, on a small number of vendors to manufacture supplies and to process its product candidates for its development programs. These programs could be adversely affected by a significant interruption in the manufacturing process or supply chain.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts and U.S. treasury notes with original maturities of three months or less at the date of purchase. Cash equivalents are reflected at fair value based on quoted market prices as further described in Note 4.
Restricted Cash
The Company maintains letters of credit totaling $0.2 million for the benefit of its landlords related to its current leased and subleased office space in Watertown, Massachusetts which is classified within other assets. The Company is required to maintain a separate cash balance to secure its letters of credit.
115
The Company maintained a letter of credit of less than $0.1 million for leased space in Cambridge, Massachusetts, which was classified within prepaids and other current assets as of December 31, 2022. This lease was terminated in 2021 and the letter of credit was subsequently returned and released from restricted cash.
Deferred Transaction Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred transaction costs until such financings are consummated. After consummation of an equity financing, these costs are recorded as a reduction of the proceeds from the transaction, either as a reduction of the carrying value of the preferred stock or in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the transaction. Should the in-process equity financing be abandoned, the deferred transaction costs would be expensed immediately as a charge to operating expenses in the consolidated statements of operations and comprehensive loss.
As of December 31, 2021, Private Disc had capitalized deferred transaction costs of $1.7 million related to a planned equity financing. During 2022, Private Disc concluded not to proceed with the planned equity financing and expensed the related deferred transaction costs of $2.2 million to general and administrative expenses. During 2022, the Company capitalized deferred transaction costs related to the merger of $7.9 million. At the Effective Time, the Company reclassified the capitalized deferred transaction costs to reduce additional paid-in capital generated as a result of the merger. As of December 31, 2023, the Company capitalized deferred costs related to its at-the-market program and shelf registration of $0.5 million.
Fair Value Measurements
The Company categorizes its assets and liabilities measured at fair value in accordance with the authoritative accounting guidance that establishes a consistent framework for measuring fair value and expands disclosures for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
•
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities;
•
Level 2—Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
•
Level 3—Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
The fair value of the Company’s cash equivalents are determined according to the fair value hierarchy described above (see Note 4). The carrying values of the Company’s prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Depreciation on leasehold improvements is recognized over the shorter of the useful life of the assets or the estimated remaining term of the associated lease.
ESTIMATED USEFULLIFE
Computer equipment 3.0 years
Furniture and fixtures 3.0 years
Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated in accordance with the above guidelines once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are expensed as incurred.
The Company capitalizes internal costs incurred to develop software for internal use during the application development stage. The Company includes capitalized internally developed software subject to a cloud computing arrangement within other assets. Amortization of capitalized internally developed software costs is recorded in depreciation expense over the estimated useful life of the related asset of 3.0 years.
116
Impairment of Long-lived Assets
As required under the applicable accounting guidance, the Company periodically reevaluates the original assumptions and rationale used in the establishment of the carrying value and estimated lives of all of its long-lived assets, including property and equipment. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual disposition, are less than its carrying amount. Impairment, if any, would be assessed using discounted cash flows or other appropriate measures of fair value. There were no impairments for the twelve months ended December 31, 2023 and 2022.
Leases
The Company accounts for its leases under ASC 842. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease. Leases with a term greater than one year are recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and current and non-current lease liabilities, as applicable. The Company has made an accounting policy election, known as the short-term lease recognition exemption, which allows the Company to not recognize ROU assets and lease liabilities that arise from short-term leases (12 months or less) for any class of underlying asset. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew or options to cancel a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew or will not cancel, respectively. The Company monitors its material leases on a quarterly basis.
Leases are classified at their lease commencement date, which is defined as the date on which the lessor makes the underlying asset available for use by the lessee, as either operating or finance leases based on the economic substance of the agreement. All of the Company’s leases are classified as operating leases. Operating lease liabilities and their corresponding ROU assets are recorded based on the present value of future lease payments over the expected remaining lease term. Fixed lease cost for operating leases is recognized on a straight-line basis over the lease term as an operating expense. Variable lease costs, such as common area maintenance expenses, are recognized in the period incurred. Certain adjustments to the ROU asset may be required for items such as lease prepayments or incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its estimated incremental borrowing rate, which reflects the estimated fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.
The Company has elected to account for the lease and non-lease components together for existing classes of underlying assets.
Preferred Stock
The Company applies the guidance of ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”), when determining the classification and measurement of its preferred stock. Preferred stock subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies contingently redeemable preferred stock (if any), which includes preferred stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred stock in stockholders’ equity (deficit).
Prior to the merger, Private Disc classified its convertible preferred stock as temporary equity due to terms that allowed for redemption of the shares upon the occurrence of a contingent event that was not solely within the Private Disc's control. Private Disc did not accrete the carrying values of the preferred stock to the redemption values since the contingent event was not considered probable prior to their conversion to common stock at the Effective Time.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, stock-based compensation, employee benefits, facilities costs, depreciation, external costs of vendors engaged to conduct preclinical development activities and clinical trials, manufacturing expenses, as well as the costs of licensing technology.
Nonrefundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services rendered.
If the Company acquires an asset or group of assets under an in-licensing arrangement that does not meet the definition of a business under ASC Topic 805, Business Combinations, and the acquired in-process research and development does not have an alternative future use, any related upfront license payment is expensed as incurred in accordance with guidance in ASC Topic
117
730, Research and Development. In general, contingent payments are recognized when it becomes probable the payment will be required. Any contingent payments that qualify as a derivative liability are recognized at fair value on the Company’s consolidated balance sheets. Annual maintenance fees under license agreements are expensed in the period in which they are incurred. Contingent payments for assets acquired are expensed as incurred or capitalized and amortized based on the nature of the associated asset at the date the payment is recognized. Royalties owed on sales of the products licensed pursuant to license agreements are expensed in the period the related revenues are recognized.
The Company has entered into various research, development and manufacturing contracts with research institutions and other companies primarily in the United States, including contracts with third-party contract research organizations and contract development and manufacturing organizations. These agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. The Company records accrued liabilities for estimated ongoing research, development and manufacturing costs and prepaid expenses for payments made in advance of work performed. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations to those third parties as of period end. Any accrual estimates are based on a number of factors, including the Company’s knowledge of the progress towards completion of the research, development and manufacturing activities, invoicing to date under the contracts, communication from the research institutions and other companies of any actual costs incurred during the period that have not yet been invoiced and the costs included in the contracts. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results may differ from the estimates made by the Company.
Patent Costs
The Company expenses all costs as incurred in connection with patent applications, including direct application fees, and the legal and consulting expenses related to making such applications due to the uncertainty about the recovery of the expenditure. These costs are included in general and administrative expenses within the Company’s consolidated statements of operations and comprehensive loss.
Stock-Based Compensation
The Company accounts for all stock-based awards granted to employees and non-employees as stock-based compensation expense at fair value. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the fair value of the Company’s common stock on the date of grant, the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option and the Company’s expected dividend yield. The fair value of each restricted stock award is estimated on the date of grant based on the fair value of the Company’s common stock on that same date. Due to the lack of company-specific historical and implied volatility data, the Company determines the volatility for awards granted based on an analysis of reported data for a group of guideline companies that issued options with substantially similar terms. The expected volatility has been determined using a weighted-average of the historical volatility measures of this group of guideline companies. The Company expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options granted to employees has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.
The Company recognizes compensation expense for employees and non-employees over the requisite service period, which is generally the vesting period of the respective award, based on the grant date fair value of the award. For awards that include performance-based vesting conditions expense is recognized using the accelerated attribution method when the performance condition is deemed to be probable. The Company accounts for forfeitures as they occur.
The Company classifies stock-based compensation expense in the consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.
See Note 11 for a summary of the stock-based award activity under the Company’s stock-based compensation plan.
Determination of Fair Value of Common Stock on Grant Dates
Prior to the merger, due to the absence of an active market for Private Disc’s common stock, Private Disc and its Board were required to determine the fair value of Private Disc’s common stock at the time of each grant of a stock-based award. Private Disc estimated the fair value of its common stock utilizing methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued
118
as Compensation. In determining the exercise prices for options granted, Private Disc considered the estimated fair value of the common stock as of the measurement date. The estimated fair value of the common stock has been determined at each grant date based upon a variety of factors, including prices paid for Private Disc’s convertible preferred stock and the rights, preferences, and privileges of Private Disc’s Preferred Stock and common stock; Private Disc’s stage of development and status of technological developments within Private Disc’s research; the illiquid nature of securities in a private company; the prospects of a liquidity event; and the current business climate in the marketplace. Significant changes to the key assumptions underlying the factors used could result in different fair values of common stock at each valuation date.
Private Disc’s common stock valuations were prepared using either an option pricing method (“OPM”), or a hybrid method, both of which used market approaches to estimate our enterprise value. The OPM treats common stock and convertible preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeds the value of the convertible preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock.
The hybrid method is a probability-weighted expected return method (“PWERM”), by which the equity value in one or more scenarios is calculated using an OPM. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for the company, assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. In addition to a scenario using the OPM, the hybrid method also considers an initial public offering scenario in which the shares of convertible preferred stock are assumed to convert to common stock. The future value of the common stock in the initial public offering scenario was discounted back to the valuation date at an appropriate risk adjusted discount rate. In the hybrid method, the present value indicated for each scenario was probability weighted to arrive at an indication of value for the Private Disc’s common stock. Private Disc utilized significant estimates and assumptions in determining the fair value of its equity and equity-based awards.
Substantially all of the awards granted by the Company are either new hire grants or routine annual grants. Management evaluates its award grants and modifications contemporaneously and if any are determined to be spring-loaded, the Company will adjust the fair value.
Comprehensive Loss
Comprehensive loss includes net loss, as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. The Company’s comprehensive loss was equal to net loss for the twelve months ended December 31, 2023 and 2022.
Income Taxes
Income taxes have been accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Since the Company has generated operating losses and expects to continue to incur future losses, the net deferred tax assets have been fully offset by a valuation allowance.
The Company accounts for income taxes in accordance with authoritative accounting guidance which states the impact of an uncertain income tax position is recognized at the largest amount that is “more likely than not” to be sustained upon audit by the relevant taxing authority. There are no unrecognized tax benefits included in the Company’s consolidated balance sheets at December 31, 2023 or 2022. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company has not recognized interest or penalties related to income tax matters in its consolidated statements of operations and comprehensive loss since inception.
The Company files income tax returns in the United States and in Massachusetts. The Company’s income tax returns are subject to review and tax assessment from an income tax examination. As of December 31, 2023, the Company was not under examination by the Internal Revenue Service or other jurisdictions for any tax year.
119
Net Loss Per Share
Net loss per share attributable to common stockholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per share for the holders of the Company’s common shares and participating securities. The Company’s Preferred Stock contained participation rights in any dividend paid by the Company and was deemed to be a participating security. Net income attributable to common stockholders and participating preferred shares, if applicable, are allocated to each share as if all of the earnings for the period had been distributed. The participating securities did not include a contractual obligation to share in losses of the Company and were not included in the calculation of net loss per share in the periods in which a net loss is recorded. Net loss attributable to common stockholders is equal to the net loss for the period.
Diluted net loss per share is computed using the more dilutive of (a) the two-class method or (b) the treasury stock method and if-converted method. The Company allocates earnings first to preferred stockholders, if applicable, based on dividend rights and then to common and preferred stockholders, if applicable, based on ownership interests. The weighted-average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options and Preferred Stock. Common stock equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is generally the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Subsequent Events
The Company considers events or transactions that occur after the consolidated balance sheet date but prior to the issuance of the consolidated financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. The Company has evaluated events occurring after the date of its consolidated balance sheet, through March 21, 2024, the date these consolidated financial statements were available to be issued (see Note 17).
Emerging Growth Company Status
The Company qualifies as an “emerging growth company” (“EGC”), as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. The Company may take advantage of these exemptions until it is no longer an EGC under Section 107 of the JOBS Act, which provides that an EGC can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to avail itself of the extended transition period and, therefore, while the Company is an EGC it will not be subject to new or revised accounting standards the same time that they become applicable to other public companies that are not EGCs, unless it chooses to early adopt a new or revised accounting standard. As a result of this election, the consolidated financial statements may not be comparable to companies that comply with public company FASB standards’ effective dates.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which has been subsequently amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-03, and ASU 2022-02 (“ASU 2016-13”). This standard requires that credit losses be recorded using an expected losses model rather than the incurred losses model that was previously used and establishes additional credit risk disclosures associated with financial assets. The amendments in this standard should be applied on a modified retrospective basis to all periods presented. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
120
3. Reverse Merger with Gemini
As described in Note 1, Private Disc merged with Gemini on December 29, 2022. The merger was accounted for as a reverse recapitalization with Private Disc as the accounting acquirer. The primary pre-combination assets of Gemini were cash and cash equivalents. Under reverse recapitalization accounting, the assets and liabilities of Gemini were recorded at their fair value which approximated book value due to the short-term nature of the accounts. No goodwill or intangible assets were recognized. Consequently, the consolidated financial statements of the Company reflect the operations of Private Disc for accounting purposes, together with a deemed issuance of shares equivalent to the shares held by the former stockholders of Gemini, the legal acquirer, and a recapitalization of the equity of Private Disc, the accounting acquirer.
As part of the reverse recapitalization, the Company acquired $97.4 million of cash and cash equivalents. The Company also obtained prepaids and other assets of $1.8 million and assumed accounts payable and accrued expenses of $7.8 million. Gemini’s development programs had ceased prior to the merger and were deemed to be de minimis in value at the transaction date.
In addition, the Company recognized $0.6 million in share-based compensation expense as a result of the acceleration of vesting of stock options, performance stock units and restricted stock units at the time of merger. This amount was recorded in general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss for the year ended December 31, 2022. The Company also incurred transaction costs of $7.9 million and this amount is recorded in additional paid-in capital in the accompanying consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the year ended December 31, 2022.
4. Fair Value Measurements
The following tables present information about the Company’s assets and liabilities that are regularly measured and carried at fair value on a recurring basis and indicate the level within the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value, which is described further within Note 2.
Financial assets and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands):
Level 1 Level 2 Level 3
Assets
Cash equivalents:
Money market funds $ 55,001 $ — $ —
U.S. Treasury notes — 255,419 —
Level 1 Level 2 Level 3
Assets
Cash equivalents:
Money market funds $ 40,783 $ — $ —
The fair value of the Company’s Level 1 cash equivalents, consisting of money market funds, is based on quoted market prices in active markets with no valuation adjustment. The fair value of the Company’s Level 2 cash equivalents, consisting of U.S. Treasury notes with original maturities of three months or less, is determined through third-party pricing services. The amortized cost of the U.S. treasury notes approximates the fair value. There have been no impairments of the Company’s assets measured and carried at fair value during the twelve months ended December 31, 2023 and 2022. In addition, there were no changes in valuation techniques or transfers between Level 1, Level 2 and Level 3 financial assets during the twelve months ended December 31, 2023 and 2022. The Company did not have any non-recurring fair value measurements on any assets or liabilities during the twelve months ended December 31, 2023 and 2022.
In May 2021, the Company entered into a license agreement (the “Roche Agreement”) with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (together, “Roche”) pursuant to which Roche granted the Company an exclusive and sublicensable worldwide license under certain patent rights and know-how to develop, manufacture and commercialize certain compounds (the “Compounds”) as further described in Note 8. The Company recognized a liability in connection with the Roche Agreement which included an obligation to issue a variable number of shares of the Company’s common stock to Roche for no additional
121
consideration upon the Company’s completion of an initial public offering or certain merger transactions (a “Roche Qualified Transaction”). Prior to settlement in Q4 2022, the fair value measurement of the derivative liability was classified as Level 3 under the fair value hierarchy as it was valued using certain unobservable inputs. These inputs included: (1) the Company’s estimated shares outstanding and fair value per share upon completion of a Roche Qualified Transaction and (2) the probability of the Company completing a Roche Qualified Transaction. The number of shares of common stock to be issued to Roche was estimated to be approximately 2.85% of the outstanding shares of common stock of the combined company as of immediately after the completion of a Roche Qualified Transaction, including the exercise by the underwriters thereof of any overallotment option, if applicable. The Company remeasured the derivative liability based on the stock price of its publicly-traded common stock on December 29, 2022. The change in the fair value for the period was recorded in the consolidated statements of operations and comprehensive loss in the change in fair value of derivative liability. Upon completion of the merger, the Company issued 482,313 shares of common stock to Roche, thereby settling the derivative liability, with the fair value of the common stock at the time of issuance recorded as additional paid-in capital.
The following table provides a summary of changes in fair value of the Level 3 liabilities related to the Roche Agreement (in thousands):
Derivative liability
Balance at the beginning of the year $ 6,450
Change in fair value of derivative liability 61
Balance at the end of the year $ —
As described in Note 1, in connection with the merger, the stockholders of Gemini at the Effective Time received a CVR to receive consideration from the Company upon its receipt of certain proceeds, resulting from a disposition of Gemini’s pre-merger assets within one year after the closing of the merger, calculated in accordance with the CVR Agreement. The disposition period ended December 29, 2023 and no dispositions of Gemini's pre-merger assets were made during the disposition period. Therefore, there were no CVR payments made to the holders and there will not be any future CVR payments to the holders. The fair value of the CVR liability was zero and de minimis as of December 31, 2023 and 2022, respectively. The fair value of the CVR liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used a discounted cash flow approach to value the CVR liability. As inputs into the valuation, the Company considered the probabilities of success of certain potential payments, the amount of the payments, and a discount rate of 13.2% determined using an implied credit spread adjusted based on companies with similar credit risk.
5. Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following (in thousands):
December 31, December 31,
6. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
December 31, December 31,
Less: Accumulated depreciation (245 ) (145 )
Property and equipment, net $ 170 $ 168
122
7. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31, December 31,
Accrued employee-related expenses $ 5,790 $ 3,623
Accrued research and development 1,986 1,817
Accrued professional fees 317 463
8. Development and License Agreements
License Agreement and Master Service Agreement with Aurigene Discoveries Technology Limited (“Aurigene”)
In February 2018, the Company entered into a license agreement with Aurigene, pursuant to which Aurigene granted the Company an exclusive worldwide license, with the right to grant sublicenses, to certain Aurigene intellectual property. Concurrent with the execution of the Aurigene license agreement, the parties entered into a master services agreement, which provided for Aurigene to provide future development services to the Company on a full-time equivalent cost basis and consumable costs incurred basis. The Company terminated the master service agreement effective in March 2023.
Pursuant to the license agreement, the Company agreed to pay an upfront fee of $0.1 million and annual maintenance fees up to $0.2 million for the licensed intellectual property. The Company may also be obligated to make future milestone payments of up to $7.1 million for the first licensed product based on the achievement of certain development and regulatory milestones. The term of the license agreement expires on a licensed product-by-licensed product and country-by-country basis on the expiration of the last-to-expire valid claim under the licensed intellectual property rights in such country. The Company can terminate the agreement, for convenience, with 90 days’ notice to Aurigene. The agreement can also be terminated by either party due to insolvency or by Aurigene due to a material breach after a specified cure period.
During the twelve months ended December 31, 2023 and 2022, the Company recorded research and development expense of $0.3 million and $0.8 million, respectively, related to its arrangements with Aurigene.
License and Stock Purchase Agreement with AbbVie Deutschland GmbH & Co. KG (“AbbVie”)
In September 2019, Private Disc entered into an agreement with AbbVie, pursuant to which AbbVie granted Private Disc an exclusive license, with the right to grant sublicenses, to certain AbbVie intellectual property.
Under this agreement, Private Disc paid a non-refundable, non-creditable upfront fee of $0.6 million. The Company is also obligated to make future payments upon the achievement of certain development, commercialization and sales-based milestones up to $18.0 million, $45.0 million and $87.5 million, respectively on a licensed product-by-licensed product basis. In addition, the Company is also obligated to pay royalties based on net sales of the licensed products on a licensed product-by-licensed product and country-by-country basis. As of December 31, 2023, none of the milestones had been achieved.
The Company’s royalty obligation expires on a licensed product-by-licensed product and country-by-country basis upon the expiration of the last-to-expire valid claim under the licensed intellectual property rights in such country. Unless terminated earlier, the agreement expires upon the expiration of the Company’s royalty obligation for all licensed products. AbbVie can terminate the agreement if the Company fails to make any payments within a specified period after receiving written notice of such failure, or in the event of a material breach by the Company and failure to cure such breach within a certain period of time.
License Agreement with Roche
In connection with the Roche Agreement, the Company paid Roche an upfront, non-refundable exclusivity payment of $0.5 million in March 2021. Upon execution of the Roche Agreement in May 2021, the Company paid Roche an additional upfront, non-refundable payment of $4.0 million.
The Company is obligated to make contingent payments to Roche up to an aggregate of $50.0 million in development and regulatory milestone payments for development and approval in a first indication and up to an aggregate of $35.0 million in development and regulatory milestone payments for development and approval in a second indication. The Company is also obligated to make contingent payments to Roche up to an aggregate of $120.0 million based on achievement of certain thresholds for annual net sales of licensed products. As of December 31, 2023, none of the milestones had been achieved. Roche is also eligible to receive tiered royalties on net sales of commercialized products, at rates ranging from high single-digits to high teens.
123
A description of the derivative liability related to the Roche agreement settled in 2022 is included in Note 4.
License Agreement with Mabwell
In January 2023, the Company entered into an exclusive license agreement with Mabwell Therapeutics, Inc. (“Mabwell”), pursuant to which Mabwell granted the Company an exclusive and sublicensable license to certain Mabwell intellectual property.
In connection with the agreement, the Company paid Mabwell an upfront payment of $10.0 million in March 2023. In October 2023, the Company dosed the first patient in the Phase 1 clinical trial of polycythemia vera for DISC-3405, resulting in a milestone payment of $5.0 million due to Mabwell. In addition, the Company is obligated to pay certain development and regulatory milestone payments for the licensed products, for up to three indications, up to a maximum aggregate amount of $127.5 million, as well as certain commercial milestone payments for certain licensed product net sales achievements, up to a maximum aggregate amount of $275.0 million. The Company is further obligated to pay a tiered percentage of revenue that the Company receives from its sublicensees ranging from a low third decile percentage to a low first decile percentage. In addition, the Company is obligated to pay Mabwell a royalty on annual net sales of all licensed products at a tiered rate ranging from low single-digits to high single-digits.
9. Convertible Preferred Stock
As of December 31, 2023 and 2022, the Company was authorized to issue up to 10,000,000 shares of preferred stock at a par value of $0.0001, with no shares issued or outstanding.
Immediately prior to the Effective Time, each share of Private Disc’s preferred stock was converted into a share of Private Disc’s common stock. At the closing of the merger, the shares of Private Disc’s common stock were converted into shares of the Company’s common stock based on the Exchange Ratio.
10. Common Stock
At the closing of the merger, the shares of Private Disc’s common stock were converted into shares of the Company’s common stock based on the Exchange Ratio.
As of December 31, 2023, the authorized capital stock of the Company included 100,000,000 shares of common stock, $0.0001 par value per share. Prior to the merger, the holders of Private Disc’s common stock were subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock. Each share of common stock entitles the holder to one vote on all matters submitted to the stockholders for a vote.
As of December 31, 2023 and 2022, the Company reserved 2,459,037 and 2,640,590, respectively, of common stock for the exercise of stock options and 204,081 shares of common stock were reserved for the exercise of pre-funded warrants.
Registration Statements Resulting from the Merger
In January 2023, as a result of the merger, the Company filed a resale registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which covered the proposed resale or other disposition by certain stockholders of up to an aggregate of 12,635,956 shares of the Company’s common stock. The Company also filed a registration statement on Form S-8 with the SEC, which registered 1,672,599 shares of common stock issuable with respect to Private Disc options assumed by the Company pursuant to the Merger Agreement as well as 2,035,103 additional shares of common stock reserved and available for future issuance under the 2021 Plan and 180,894 additional shares of common stock reserved and available for future issuance under the 2021 Employee Stock Purchase Plan (the “2021 ESPP”).
ATM Program
In January 2023, the Company filed a shelf registration statement on Form S-3 with the SEC, which covered the offering, issuance and sale by the Company of up to an aggregate of $300.0 million of the Company’s common stock, preferred stock, debt securities, warrants or units (the “January 2023 Shelf”). Subsequently in January 2023, the Company entered into a Sales Agreement (the “Sales Agreement”) with SVB Securities LLC, as sales agent, to provide for the offering, issuance and sale by the Company of up to $100.0 million of the Company’s common stock from time to time in “at-the-market” (“ATM”) offerings under the January 2023 Shelf. Effective June 12, 2023, the ATM program with SVB Securities LLC was suspended. Following the date of the ATM suspension, the Company did not make any further sales of its common stock pursuant to the Sales Agreement. The Sales Agreement was terminated effective September 28, 2023. In connection with the ATM suspension, the Company recognized the remaining
124
capitalized issuance costs of $0.3 million as general and administrative expense in the consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2023.
As of September 30, 2023, the Company had sold an aggregate of 825,350 shares of common stock in ATM offerings under the January 2023 Shelf and pursuant to the Sales Agreement. Aggregate gross proceeds from the transactions were $20.0 million and the Company received $19.5 million in net proceeds, after deducting placement agent fees and offering expenses.
In October 2023, the Company entered into an Open Market Sale Agreement with Jefferies LLC as sales agent (the “ATM Agreement”) to provide for the offering, issuance and sale by the Company of up to $59.7 million of the Company’s common stock from time to time in ATM offerings under the January 2023 Shelf.
In November 2023, the Company filed a shelf registration statement on Form S-3 with the SEC, which covered the offering, issuance and sale by the Company of up to an aggregate of $400.0 million of the Company’s common stock, preferred stock, debt securities, warrants or units (the “November 2023 Shelf”). On December 5, 2023, the Company and Jefferies LLC entered into an amendment to the ATM Agreement to increase the aggregate offering price of the shares of common stock that the Company may offer under the ATM Agreement from $59.7 million to $200.0 million. The material terms and conditions of the ATM Agreement otherwise remained unchanged.
As of December 31, 2023, the Company had sold an aggregate of 141,914 shares of common stock in ATM offerings under the November 2023 Shelf and pursuant to the ATM Agreement. Aggregate gross proceeds from the transactions were $7.2 million and the Company received $7.0 million in net proceeds, after deducting placement agent fees and offering expenses.
Registered Direct Offering
In February 2023, the Company entered into a securities purchase agreement, with certain investors. Pursuant to the securities purchase agreement, the Company sold an aggregate of 1,488,166 shares of the Company’s common stock, at a purchase price of $23.00 per share, and with respect to a certain investor, in lieu of shares of the Company’s common stock, pre-funded warrants to purchase an aggregate of 1,229,224 shares of the Company’s common stock, at a purchase price of $22.9999 per pre-funded warrant, for aggregate net proceeds of $62.4 million, after deducting offering expenses of $0.1 million.
The pre-funded warrants provide that the holder will not have the right to exercise any portion of its warrants if such holder, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that the holder may increase or decrease the Beneficial Ownership Limitation by giving 61 days’ notice, but not to any percentage in excess of 19.99%. The investors or their affiliates are beneficial holders of more than 5% of the Company’s capital stock. The pre-funded warrants meet the condition for equity classification and were therefore recorded as a component of stockholders’ equity within additional paid-in capital at the time of their issuance.
During the twelve months ended December 31, 2023, all of the pre-funded warrants were exercised in a cashless transaction which resulted in 1,229,221 shares of common stock being issued to the investor.
Follow-On Public Offering
In June 2023, the Company issued 3,015,919 shares of its common stock upon the completion of its public follow-on offering, which included the exercise in full by the underwriters of their option to purchase up to 420,000 additional shares of common stock, at a public offering price of $49.00 per share. The Company also sold, in lieu of shares of the Company’s common stock, pre-funded warrants to purchase an aggregate of 204,081 shares of common stock at a price of $48.9999 per pre-funded warrant. The Company received aggregate net proceeds of $147.9 million, after deducting offering expenses of $9.9 million. As of December 31, 2023, none of the 204,081 pre-funded warrants had been exercised.
The pre-funded warrants provide that the holder will not have the right to exercise any portion of its warrants if such holder, together with its affiliates, would beneficially own in excess of 24.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise (the “Ownership Limit”). Purchasers of the pre-funded warrants may also elect to set the initial Ownership Limit at 4.99%, 9.99% or 19.99%. Upon at least 61 days’ prior notice from the holder to the Company, the holder may increase or decrease the Ownership Limit up to 24.99%, provided however that purchasers that select an Ownership Limit of 19.99% or less will only be allowed to increase the Ownership Limit above 19.99% if such increase would not result in a change of control under the rules and regulations of the Nasdaq Stock Market LLC. The pre-funded warrants meet the condition for equity classification and were therefore recorded as a component of stockholders’ equity within additional paid-in capital.
11. Stock-Based Compensation
2017 Stock Option and Grant Plan
125
Private Disc adopted the 2017 Stock Option and Grant Plan (the “Private Disc Plan”) in November 2017 reserving shares of common stock for issuance to employees, directors, and consultants. The Private Disc Plan allowed for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and other stock awards. Recipients of stock options or stock appreciation rights were eligible to purchase shares of Private Disc’s common stock at an exercise price equal to the estimated fair market value of such stock on the date of grant. The exercise price could have been less than fair market value if the stock award was granted pursuant to an assumption or substitution for another stock award in the event of a merger or sale of Private Disc. The maximum term of options granted under the Private Disc Plan was ten years, and stock options typically vested over a four-year period. The Board could have assigned vesting terms to the stock options grants as deemed appropriate. Private Disc also had the right of first refusal to purchase any proposed disposition of shares issued under the Private Disc Plan. As it relates to restricted stock awards, Private Disc had the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary termination. At the discretion of the Board, unvested shares held by employees, directors and consultants could have accelerated vesting in the event of a change of control of Private Disc unless assumed or substituted by the acquirer or surviving entity.
The number of shares of common stock reserved for issuance as of December 31, 2023 and 2022 was 1,505,624 and 1,672,599 shares, respectively. As of December 31, 2023 and 2022, there are no options available for grant. Upon completion of the merger, the Company ceased granting awards under the Private Disc Plan.
2021 Stock Option and Incentive Plan
In February 2021, Gemini adopted the 2021 Stock Option and Incentive Plan ("the 2021 Plan") reserving shares of common stock to grant incentive stock options or nonqualified stock options for the purchase of common stock, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, cash-based awards and dividend equivalent rights to employees, officers, directors and consultants. Upon approving the 2021 Plan in February 2021, Gemini ceased granting awards under its then existing 2017 Stock Option and Grant Plan. Incentive stock options may only be granted to employees. The 2021 Plan is administered by the plan administrator, which is the compensation committee of the Company’s board of directors, provided therein, which has discretionary authority, subject only to the express provisions of the 2021 Plan, to interpret the 2021 Plan; determine eligibility for and grant awards; determine form of settlement of awards (whether in cash, shares of stock, other property or a combination of the foregoing), determine, modify or waive the terms and conditions of any award; prescribe forms, rules and procedures; and otherwise do all things necessary to carry out the purposes of the 2021 Plan. As of December 31, 2023, 1,561,926 shares remained available for future issuance under the 2021 Plan. The number of shares of common stock reserved for issuance under the 2021 Plan automatically increases on January 1 of each calendar year, starting on January 1, 2022 and continuing through January 1, 2031, in an amount equal to 4% of the total number of shares of the Company’s capital stock outstanding on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by the Company’s board of directors.
The exercise price of each stock option granted under the 2021 Plan is 100% of the fair market value of the underlying stock subject to the award, determined as of the date of the grant, or such higher amount as the plan administrator may determine in connection with the grant, and the term of stock option may not be greater than ten years. The vesting and other restrictions are determined at the discretion of the plan administrator.
2021 Employee Stock Purchase Plan
In July 2021, Gemini’s board of directors approved the 2021 Employee Stock Purchase Plan (the "2021 ESPP"). The first offering period under the 2021 ESPP began on December 1, 2021. As of December 31, 2023, 222,953 shares remained available for future issuance under the 2021 ESPP. The number of shares of common stock reserved for issuance under the 2021 ESPP automatically increases on January 1 of each calendar year, starting on January 1, 2023 and continuing through January 1, 2031, in an amount equal to the least of (a) 1% of the total number of shares of the Company’s capital stock outstanding on the last day of the calendar month before the date of each automatic increase, (b) 43,055 shares of common stock, or (c) such number of shares determined by the Company’s board of directors.
2021 Inducement Plan
In February 2021, Gemini’s board of directors approved the 2021 Inducement Plan. The 2021 Inducement Plan is a non-stockholder approved stock plan under which equity awards are granted to induce highly-qualified prospective officers and employees who are not currently employed by the Company to accept employment and provide them with a proprietary interest in the Company. From the completion of the merger through December 31, 2023, the Company had not granted awards under the 2021 Inducement Plan. As of December 31, 2023, 153,712 shares remained available for future issuance under the plan.
Reverse Merger with Gemini
In connection with the merger, each option to purchase shares of Private Disc common stock that was outstanding and unexercised under the Private Disc Plan immediately prior to the Effective Time, whether or not vested, was converted into an option to purchase shares of Gemini common stock and became eligible to be registered on Form S-8. Gemini assumed the
126
Private Disc Plan, as amended, and each such outstanding option to purchase shares of Private Disc common stock in accordance with the terms (as in effect as of the date of the Merger Agreement) of the Private Disc Plan and the terms of the stock option agreement by which such option to purchase shares of Private Disc common stock is evidenced.
On December 29, 2022, Gemini's shareholders approved amendments to the 2021 Plan and the 2021 ESPP to (i) increase the number of shares of common stock reserved for issuance under the 2021 Plan to a number of shares representing approximately 9% of the fully diluted capitalization of the Company, determined as of immediately following the merger and (ii) increase the number of shares of common stock reserved for issuance under the 2021 ESPP to a number of shares representing approximately 0.84% of the fully diluted capitalization of the Company, determined as of immediately following the merger.
Stock Options
For purposes of calculating stock-based compensation, the Company estimates the fair value of stock options using the Black-Scholes option-pricing model. This model incorporates various assumptions, including the expected volatility, expected term, and interest rates.
Prior to the merger, Private Disc lacked company-specific historical and implied volatility information. Therefore, Private Disc estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer public companies and the Company expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the option. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected dividend yield of 0% is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
The following table summarizes stock option activity for the year ended December 31, 2023.
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the end of the period. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2023 and 2022 was $8.3 million and $0.6 million, respectively.
The weighted-average assumptions used to estimate the fair value of stock options granted were as follows:
Year EndedDecember 31,
Risk-free interest rate 4.03 % 3.54 %
Expected term (in years) 6.88 5.94
Expected volatility 59 % 60 %
Expected dividend yield 0 % 0 %
Fair value per share of common stock $ 43.42 $ 13.94
The weighted-average grant date fair value of options granted in the years ended December 31, 2023 and 2022 was $26.54 and $8.13 per share, respectively.
The total fair value of options vested during the years ended December 31, 2023 and 2022 was $3.7 million and $1.9 million, respectively.
127
Shares of Restricted Common Stock
As of December 31, 2023, the Company had issued a total of 63,061 shares of restricted common stock to the founders of Private Disc pursuant to subscription agreements and to certain key employees pursuant to the Private Disc Plan at $0.0001 per share. The stock restrictions relate to the sale and transferability of the stock and lapse over the defined vesting period in the restricted stock agreement. The vesting period is generally contingent upon continued employment or consulting services being provided to the Company. In the event of termination, the Company has the right, but not the obligation to repurchase the unvested shares at the original purchase price. As of December 31, 2023, all awards of restricted common stock were fully vested.
A summary of restricted common stock activity is as follows:
Year EndedDecember 31,
Unvested at the beginning of the year 1,916 10,170
Unvested at the end of the period — 1,916
Stock-Based Compensation Expense
Total stock-based compensation expense recorded as research and development and general and administrative expenses, respectively, for employees, directors and non-employees is as follows (in thousands):
Year EndedDecember 31,
Research and development $ 1,767 $ 581
General and administrative 3,763 1,508
Total stock-based compensation expense $ 5,530 $ 2,089
As of December 31, 2023, the total unrecognized stock-based compensation expense related to outstanding awards was $11.5 million and is expected to be recognized over a weighted-average period of 2.63 years.
12. Income Taxes
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Year Ended December 31,
Federal statutory income tax rate 21.0 % 21.0 %
State income taxes, net of federal benefit 8.0 6.3
Federal and state research and development tax credits 4.0 3.5
Stock-based compensation 1.3 (0.4 )
Change in deferred tax asset valuation allowance (33.6 ) (30.5 )
Effective income tax rate 0 % 0 %
For the twelve months ended December 31, 2023, the Company recorded income tax expense of $0.1 million due to state income tax resulting from higher interest income. For the twelve months ended December 31, 2022, the Company recorded no income tax expense due to the Company’s net operating loss (“NOL”) and full valuation allowance.
128
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s net deferred income taxes are as follows (in thousands):
December 31,
Deferred tax assets:
Net operating loss carryforwards $ 24,312 $ 18,882
Research and experimental expenditures 20,598 7,608
Stock-based compensation 1,234 565
Operating lease liabilities 574 359
Total deferred tax assets, net of valuation allowance 555 420
Deferred tax liabilities:
Operating right-of-use assets (527 ) (385 )
Depreciation (28 ) (35 )
Total deferred tax liabilities (555 ) (420 )
Net deferred tax assets $ — $ —
The Company's income tax provision for the twelve months ended December 31, 2023 related to state and foreign income taxes. The Company has evaluated the positive and negative evidence bearing upon the reliability of its deferred tax assets. Based on this, the Company has provided a valuation allowance for the full amount of the net deferred tax assets as the realization of the deferred tax assets is not determined to be more likely than not. During the year ended December 31, 2023, the valuation allowance increased by $25.7 million primarily due to the increase in the Company’s net operating loss, capitalized expenditures and tax credit carryforwards during the period.
As of December 31, 2023, the Company had $88.1 million and $91.7 million of federal and state operating loss carryforwards, respectively. The pre-merger net operating loss carryforwards of Gemini were written off in the transaction as these would be permanently restricted from use as a result of Section 382 of the Internal Revenue Code of 1986 (“Section 382”). Substantially all of the federal NOLs are not subject to expiration and the state NOLs begin to expire in 2037. These loss carryforwards are available to reduce future federal taxable income, if any. As of December 31, 2023, the Company also had federal and state research and development tax credit carryforwards of $5.8 million and $1.8 million respectively, to offset future income taxes, which will begin to expire beginning in December 2032. These loss carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.
Utilization of the Company’s NOL carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 as well as similar state provisions. These ownership changes may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change as defined by Section 382 results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. Since its formation, the Company has raised capital through the issuance of capital stock on several occasions. These financings could result in a change of control as defined by Section 382. The Company has not yet conducted an analysis under Section 382 to determine if historical changes in ownership through December 31, 2023, would limit or otherwise restrict its ability to utilize its NOL and research and development credit carryforwards. In addition, future changes in ownership occurring after December 31, 2023 could affect the limitation in future years, and any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization.
Beginning in 2022, the Tax Cuts and Jobs Act ("TCJA") amended Section 174 and now requires U.S.-based and non-U.S.-based research and experimental expenditures to be capitalized and amortized over a period of five or 15 years, respectively, for amounts paid in tax years starting after December 31, 2021. Prior to the TCJA amendment, Section 174 allowed taxpayers to immediately deduct research and experimental expenditures in the year paid or incurred. The Company has applied this required change in accounting method beginning in 2022 and the computation may be adjusted pending future IRS guidance.
On December 18, 2015, the Protecting Americans from Tax Hikes (“PATH”) Act of 2015 was signed into law. The PATH Act has created several research and development credit provisions, including allowing a qualified small business to utilize the research credit against the employer portion of payroll tax (i.e., FICA tax) not exceeding $0.3 million per year. This provision is
129
available for credits generated in tax years beginning after 2015. The Company does not qualify as a small business for 2023 and will not elect to make a small business election.
The Company follows the provisions of ASC Topic 740-10, Accounting for Uncertainty in Income Taxes, which specifies how tax benefits for uncertain tax positions are to be recognized, measured, and recorded in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the consolidated balance sheets; and provides transition and interim period guidance, among other provisions. As of December 31, 2023 and 2022, the Company has not recorded any amounts for uncertain tax positions. The Company’s policy is to recognize interest and penalties accrued on any uncertain tax positions as a component of income tax expense, if any, in its consolidated statements of operations and comprehensive loss. As of December 31, 2023 and 2022, the Company had no reserves for uncertain tax positions. For the years ended December 31, 2023 and 2022, no estimated interest or penalties were recognized on uncertain tax positions.
The Company’s tax returns for the years ended December 31, 2019 to December 31, 2023 remain open and subject to examination by the Internal Revenue Service and state taxing authorities.
13. Net Loss Per Share
Basic and diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding. The weighted-average common shares outstanding used in the basic and diluted net loss per share calculation includes the pre-funded warrants issued in connection with the Company’s follow-on public offering in June 2023 and registered direct offering in February 2023 as the pre-funded warrants are exercisable for nominal cash consideration. In September 2023, 1,229,224 of the pre-funded warrants were exercised in a cashless transaction which resulted in 1,229,221 shares of common stock being issued to the investor. As of December 31, 2023, 204,081 pre-funded warrants were outstanding. The following table sets forth the computation of the Company’s basic and diluted net loss per share (in thousands, except share and per share data):
Year EndedDecember 31,
Numerator:
Denominator:
The Company has generated a net loss in all periods presented, so the basic and diluted net loss per share are the same, as the inclusion of the potentially dilutive securities would be anti-dilutive. The Company excluded the following from the computation of diluted net loss per share attributable to common stockholders because including them would have had an anti-dilutive effect:
December 31,
Unvested restricted common stock — 1,916
Employee stock purchase program 4,878 —
14. Commitments and Contingencies
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to its vendors, lessors, contract research organizations, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its Board that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company has not incurred any material costs as a result of such indemnifications and is not currently aware of any indemnification claims.
130
Legal Proceedings
The Company, from time to time, may be party to litigation arising in the ordinary course of business. The Company was not subject to any material legal proceedings during the twelve months ended December 31, 2023 and 2022 and, to the best of its knowledge, no material legal proceedings are currently pending or threatened.
Payments Upon Termination
The Company enters into contracts in the normal course of business with CROs, CDMOs and other third parties for preclinical studies, clinical trials and manufacturing services. These contracts typically do not contain minimum purchase commitments and are generally cancelable by the Company upon written notice. Payments due upon cancellation consist of payments for services provided or expenses incurred, including noncancelable obligations of the Company's service providers, up to the date of cancellation and, in the case of certain arrangements with CROs and CDMOs, may include noncancelable fees. Under such agreements, the exact amounts owed by the Company in the event of termination will be based on the timing of the termination and the exact terms of the agreement.
15. Leases
In October 2021, Private Disc entered into a five-year lease through November 2026 of 7,566 square feet of office space located at 321 Arsenal Street, Watertown, Massachusetts to be used as its corporate headquarters. In June 2023, the lease was amended to allow the landlord to perform certain maintenance activities expected to be completed by the end of 2023 and to provide rent abatement of $0.2 million. The amendment was accounted for as a modification resulting in a new incremental borrowing rate and a reduction to the right-of-use asset and lease liability of $0.2 million. In September 2023, the Company recognized a reassessment event which was accounted for as a modification resulting in a new incremental borrowing rate and a reduction to the right-of-use asset and lease liability of an additional $0.2 million. In November 2023, the Company recognized another reassessment event which was accounted for as a modification resulting in an increase to the right-of-use asset and lease liability of $0.1 million.
In June 2023, the Company entered into a sublease for a term of approximately three and a half years through November 2026, consisting of 9,281 square feet of office space on the second floor of the corporate headquarters in Watertown, Massachusetts. Fixed lease payments include base rent, subject to annual rent increases, and a management fee. Variable lease payments include the Company’s allocated share of costs incurred for real estate taxes, utilities, and other operating expenses applicable to the leased premises. Pursuant to the lease, the Company is also obligated to pay for certain administrative costs, taxes and operating expenses.
The components of lease expense were as follows (in thousands):
Year EndedDecember 31,
Operating lease costs $ 422 $ 422
Variable lease costs 159 177
Total lease expense $ 581 $ 599
Other information related to the Company’s leases is as follows (in thousands, except term and discount rate amounts):
Year EndedDecember 31,
Weighted average remaining lease term 2.92 years 3.91 years
Weighted average discount rate 10.0 % 5.5 %
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases $ 186 $ 480
A maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of December 31, 2023, reflective of the Company’s election to account for lease and non-lease components together, is as follows (in thousands):
Year Ending December 31, Operating Leases
Total minimum lease payments 2,424
Less imputed interest (323 )
Present value of lease liabilities $ 2,101
131
16. Related Party Transactions
The landlord of the Company’s leased office space in Watertown, Massachusetts is a related party of the Company due to its equity ownership.
In February 2023, certain existing investors participated in the Company’s registered direct offering (see Note 10).
In March 2023, the Company executed a promissory note for an aggregate principal amount of $0.5 million from an existing investor. The Company did not use these funds and repaid the note four days later, recording a de minimis amount of interest expense based on the then Federal funds rate for short term loans of 4.5% per annum.
In June 2023, an existing investor participated in the Company’s follow-on offering (see Note 10).
17. Subsequent Events
The Company has completed an evaluation of all subsequent events after the audited consolidated balance sheet date of December 31, 2023 through the date these consolidated financial statements were issued to ensure that these consolidated financial statements include appropriate disclosure of events both recognized in the consolidated financial statements as of December 31, 2023, and events which occurred subsequently but were not recognized in the consolidated financial statements. Non-recognizable subsequent events are summarized below.
ATM Program
As of March 21, 2024, the issuance date of these consolidated financial statements, the Company has sold an aggregate of 234,449 shares of common stock in ATM offerings under the November 2023 Shelf and pursuant to the ATM Agreement for aggregate gross proceeds of $15.3 million.
132
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.