Disc Medicine Inc

NOTES TO CONDENSED 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”), 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 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.

Liquidity and Capital Resources

The Company’s condensed consolidated financial statements have been prepared on the basis of the Company continuing as a going concern. The Company expects that its existing cash, cash equivalents, and marketable securities as of September 30, 2024 of $487.4 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 condensed consolidated financial statements. The Company has incurred recurring losses and negative cash flows from operations since inception. As of September 30, 2024, the Company had an accumulated deficit of $268.5 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.

2. Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

The significant accounting policies used in preparation of the condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2023 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The Company’s condensed 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”).

Unaudited Interim Condensed Consolidated Financial Information

The accompanying condensed consolidated financial statements as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 are unaudited. The financial data and other information contained in the notes hereto as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 are also unaudited. The condensed consolidated balance sheet data as of December 31, 2023 was derived from the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2024 and the results of its operations and cash flows for the three and nine months ended September 30, 2024 and 2023. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2023, and the notes thereto, included in the Company’s Annual Report on Form 10-K.

The results for the three and nine months ended September 30, 2024 and 2023 are not necessarily indicative of results to be expected for the full years, or any other interim periods, or any future year or period.

Use of Estimates

The preparation of the Company’s condensed 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 condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to accrued research and development expenses; stock-based compensation expense; the fair value determinations for instruments accounted for at fair value; the fair value of the contingent value right (“CVR”) (see Note 3); 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 theperiod in which they become known. Actual results may differ materially from those estimates or assumptions.

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, cash equivalents, and marketable securities. 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.

Comprehensive Income (Loss)

Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) includes net income (loss) and the change in accumulated other comprehensive income (loss) for the period. Accumulated other comprehensive income (loss) consisted of foreign currency translation adjustments and unrealized gains (losses) on available-for-sale marketable securities during the three and nine months ended September 30, 2024 and 2023.

Marketable Securities

The Company classifies its marketable securities as available-for-sale. All of the Company’s marketable securities are available to the Company for use in current operations. As a result, the Company classified all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date. Marketable securities are maintained by an investment manager and consist of U.S. government securities. Marketable securities are carried at fair value with the unrealized gains and losses included in accumulated other comprehensive income (loss) as a component of stockholders’ equity until realized. Any premium or discount arising at purchase is amortized and/or accreted to interest income and/or expense over the life of the underlying marketable security.

Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other income (expense), net within the condensed consolidated statements of operations and comprehensive loss.

The Company reviews its portfolio of available-for-sale securities, using both quantitative and qualitative factors, to determine if declines in fair value below cost have resulted from a credit loss or other factors. If the decline in fair value is due to credit loss factors, a loss is recognized. To date, the Company has not experienced any credit losses and does not expect it is exposed to any significant credit risk on these investments.

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 condensed consolidated financial statements upon adoption.

3. 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 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Financial assets and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands):

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 and marketable securities, consisting of U.S. treasury and U.S. government agency securities, with original maturities of three months or less and twelve months or less, respectively, are determined through third-party pricing services. The amortized cost of the cash equivalents approximates the fair value. There have beenno impairments of the Company’s assets measured and carried at fair value nor changes in valuation techniques during thethree and nine months ended September 30, 2024 and 2023. The Company did not have any non-recurring fair value measurements on any assets or liabilities during the three and nine months ended September 30, 2024 and 2023.

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. As described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, in connection with the merger, the stockholders of Gemini at the effective time of the merger 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 Contingent Value Rights Agreement (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, the CVR obligation no longer existed as of September 30, 2024 and December 31, 2023, respectively.

The following table provides a summary of changes in fair value of the CVR liability for the nine months ended September 30, 2023 (in thousands):

4. Marketable Securities

Marketable securitiesas of September 30, 2024 consisted of the following (in thousands):

Marketable securities as of December 31, 2023 were zero. As of September 30, 2024, all marketable securities had an original maturity date of twelve months or less. The aggregate fair value of marketable securities with unrealized losses was $7.0 million as of September 30, 2024 andzero as of December 31, 2023. As of September 30, 2024 and December 31, 2023, one investment andno investments, respectively, were in an unrealized loss position. All such investments have been in an unrealized loss position for less than a year and these losses are considered temporary. The Company has the ability and intent to hold these investments until a recovery of their amortized cost, which may not occur until maturity. The Company expects that U.S. treasury and U.S. government agency securities are subject to minimal credit risk. As a result, the Company didnot record any charges for credit-related impairments for its available-for-sale securities for thethree and nine months ended September 30, 2024 and 2023.

5. Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash consisted of the following (in thousands):

The Company's restricted cash balance, which is classified within other assets on the condensed consolidated balance sheets, consists of letters of credit related to leased and subleased office space in Watertown, Massachusetts. The Company is required to maintain a separate cash balance to secure its letters of credit.

6. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

7. Other Accrued Expenses

Other accrued expenses consisted of the following (in thousands):

8. Development and License Agreements

License and Stock Purchase Agreement with AbbVie Deutschland GmbH & Co. KG (“AbbVie”)

In September 2019, the Company entered into an agreement with AbbVie, pursuant to which AbbVie granted the Company an exclusive license, with the right to grant sublicenses, to certain AbbVie intellectual property.

Under this agreement, the Company 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 September 30, 2024, 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 F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (collectively “Roche”)

In connection with a license agreement with Roche, (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 September 30, 2024, 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.

License Agreement with Mabwell Therapeutics, Inc. (“Mabwell”)

In January 2023, the Company entered into an exclusive license agreement with 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 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.

During the three and nine months ended September 30, 2024, the Company recorded less than $0.1 million of research and development expense related to its arrangement with Mabwell. During thethree and nine months ended September 30, 2023, the Company recorded research and development expense related to its arrangement with Mabwell ofzero and $10.0 million, respectively.

9. Convertible Preferred Stock

As of September 30, 2024 and December 31, 2023, the Company was authorized to issue up to 10,000,000 shares of preferred stock at a par value of $0.0001, withno shares issued or outstanding.

10. Common Stock

As of September 30, 2024 and December 31, 2023, the authorized capital stock of the Company included 100,000,000 shares of common stock, $0.0001 par value per share. As of September 30, 2024, the Company has 2,972,432 shares of common stock reserved for the exercise of stock options and 204,081 shares of common stock reserved for the exercise of pre-funded warrants.

Underwritten Offering

In June 2024, the Company entered into an underwriting agreement with Leerink Partners related to an underwritten offering of 4,944,000 shares of common stock of the Company, par value $0.0001 per share, at a price to the public of $36.00 per share. The Company received net proceeds of $172.5 million, after deducting the underwriting discount and offering expenses of $5.5 million.

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.

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.

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. In September 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.

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 capitalized issuance costs of $0.3 million as general and administrative expense in the condensed 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 sharesof common stock in ATM offerings under the January 2023 Shelf. Aggregate gross proceeds fromthe 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.

During the three months ended March 31, 2024, the Company sold an aggregate of 234,449 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 $15.3 million and the Company received $14.8 million in net proceeds, after deducting placement agent fees and offering expenses. During the three months ended June 30, 2024 and September 30, 2024, respectively, the Company soldno shares in ATM offerings. As of September 30, 2024, the Company had sold an aggregate of 376,363 shares of common stock in ATM offerings under the November 2023 Shelf for aggregate gross proceeds of $22.5 million and aggregate net proceeds received of $21.8 million, after deducting placement agent fees and offering expenses.

11. Stock-Based Compensation

The Company grants stock-based awards under its 2021 Stock Option and Incentive Plan (the “2021 Plan”), which was approved by its stockholders in February 2021 and amended and restated in January 2023. The Company also has outstanding stock option awards under its 2017 Stock Option and Grant Plan (the “Private Disc Plan”), the 2017 Stock Option and Grant Plan (the “Gemini 2017 Plan”), and the 2021 Inducement Plan, but is no longer granting awards under these plans. The Company also grants awards under its 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which was approved by the Company's stockholders in July 2021 and amended and restated in January 2023. In addition, subject to approval by the Company's board of directors, the Company may grant stock-based awards outside of the 2021 Plan as an inducement to its executives.

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):

The following table summarizes unrecognized stock-based compensation expense as of September 30, 2024.

Restricted Stock Units

For purposes of calculating stock-based compensation, the Company determines the fair value of the restricted stock units based on the fair value of the Company’s common stock at the time of grant.

On February 7, 2024, the Company granted a restricted stock unit award for 36,666 shares of common stock outside of the 2021 Plan to its newly appointed Chief Financial Officer, Jean Franchi, as an inducement for entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). The restricted stock unit award vests with respect to 25%of the underlying shares on each of the first, second, third and fourth anniversaries of the vesting date as set by the Company policy, subject to Ms. Franchi’s continued employment with the Company.

On February 26, 2024, the Company granted a restricted stock unit award for 36,666 shares of common stock outside of the 2021 Plan to its newly appointed Chief Commercial Officer, Pamela Stephenson, as an inducement for entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). The restricted stock unit award vests with respect to 25% of the underlying shares on each of the first, second, third and fourth anniversaries of the vesting date as set by the Company policy, subject to Ms. Stephenson’s continued employment with the Company.

On September 16, 2024, the Company granted a restricted stock unit award for 36,666 shares of common stock outside of the 2021 Plan to its newly appointed Chief Regulatory Officer, Dr. Steven Caffé, as an inducement for entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). The restricted stock unit award vests with respect to 25% of the underlying shares on each of the first, second, third and fourth anniversaries of the vesting date as set by the Company policy, subject to Dr. Caffé’s continued employment with the Company.

The following table summarizes restricted stock unit activity for thenine months ended September 30, 2024.

Stock Options

For purposes of calculating stock-based compensation, the Company estimates the fair value of stock options on the grant date using the Black-Scholes option-pricing model. This model incorporates various assumptions, including the expected volatility, expected term, and interest rates.

On February 7, 2024, the Company granted an option to purchase 55,000 shares of common stock outside of the 2021 Plan to its newly appointed Chief Financial Officer, Jean Franchi, as an inducement for entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). The option award has aten-year term, with 25% of the underlying shares vesting and becoming exercisable on February 7, 2025, and the balance of the option award vesting in equal monthly installments over 36 months thereafter, subject to Ms. Franchi’s continued employment with the Company, and has an exercise price of $65.25.

On February 26, 2024, the Company granted an option to purchase 55,000 shares of common stock outside of the 2021 Plan to its newly appointed Chief Commercial Officer, Pamela Stephenson, as an inducement for entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). The option award has aten-year term, with 25% of the underlying shares vesting and becoming exercisable on February 26, 2025, and the balance of the option award vesting in equal monthly installments over 36 months thereafter, subject to Ms. Stephenson’s continued employment with the Company, and has an exercise price of $64.66.

On September 16, 2024, the Company granted an option to purchase 55,000 shares of common stock outside of the 2021 Plan to its newly appointed Chief Regulatory Officer, Dr. Steven Caffé, as an inducement for entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). The option award has aten-year term, with 25% of the underlying shares vesting and becoming exercisable on September 16, 2025, and the balance of the option award vesting in equal monthly installments over 36 months thereafter, subject to Dr. Caffé’s continued employment with the Company, and has an exercise price of $47.68.

The following table summarizes stock option activity for thenine months ended September 30, 2024.

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 nine months ended September 30, 2024 and 2023 was $8.3 million and $4.5 million, respectively. The total fair value of options vested during thenine months ended September 30, 2024 and 2023 was $7.9 million and $2.9 million, respectively.

The weighted-average assumptions used to estimate the fair value of stock options granted were as follows:

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2024 and 2023 was $35.55 and $25.68, respectively.

Shares of Restricted Common Stock

As of September 30, 2024, the Company had issued 63,061 shares of restricted common stock to the founders of Disc Medicine, Inc. prior to the merger (now known as Disc Medicine OpCo, Inc.), 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 September 30, 2024, these awards of restricted common stock were fully vested.

A summary of restricted common stock activity is as follows:

Employee Stock Purchase Plan

During the nine months ended September 30, 2024 and 2023,11,082 shares andzero shares of common stock were issued under the 2021 ESPP, respectively.

12. Income Taxes

The Company didnot record a provision or benefit for federal income taxes during thethree and nine months ended September 30, 2024 and 2023. The Company recorded state income tax expense of $0.2 million and less than $0.1 million for thenine months ended September 30, 2024 and 2023, respectively, due to interest income. The Company continues to maintain a full valuation allowance against all of its deferred tax assets.

The Company has evaluated the positive and negative evidence involving its ability to realize its deferred tax assets and has considered its history of cumulative net losses incurred since inception and its lack of any commercially ready products. The Company has concluded that it is more likely than not that it will not realize the benefits of its deferred tax assets. The Company reevaluates the positive and negative evidence at each reporting period.

The Company has never been examined by the Internal Revenue Service or any other jurisdiction for any tax years and, as such, all years within the applicable statutes of limitations are potentially subject to audit.

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 of 204,081 and registered direct offering in February 2023 of 1,229,224, 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 September 30, 2024,204,081 pre-funded warrants were outstanding.

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:

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.

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 nine months ended September 30, 2024 and 2023 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 contract research organizations (“CROs”), and contract development and manufacturing organizations (“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. As of September 30, 2024, the Company has not recognized any amounts related to these contingencies as the amount and timing of such payments are not fixed and estimable.

15. Leases

The Company is a tenant under a lease and sublease of office space in Watertown, Massachusetts, both operating leases.

In August 2024, the Company amended its lease of 7,566 square feet of office space which serves as the Company’s corporate headquarters. The lease was amended to extend the term from November 30, 2026 through December 31, 2029. The Company accounted for this amendment as a modification which resulted in the application of a new incremental borrowing rate and the recognition of an additional right-of-use asset and lease liability of $0.1 million, inclusive of a tenant improvement allowance of $0.5 million.

In connection with the August 2024 amendment, the Company entered into a forward-starting lease of 9,281 square feet of office space on the second floor of its corporate headquarters, which the Company is currently subleasing through November 30, 2026. The forward-starting lease is expected to commence on December 1, 2026 immediately following the conclusion of the sublease, and has a term date of December 31, 2029. The Company expects to make undiscounted payments of $1.0 million over the term of the lease, inclusive of a tenant improvement allowance of $0.3 million. The impact of the forward-starting lease is not currently recorded on the Company’s condensed consolidated balance sheets as of the reporting date. The Company will record the impact upon lease commencement.

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 its corporate headquarters. 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.

16. Related Party Transactions

In June 2024, certain existing investors participated in the Company's underwritten offering (see Note 10).

In June 2023, an existing investor participated in the Company’s follow-on 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 February 2023, certain existing investors participated in the Company’s registered direct offering (see Note 10).

17. Subsequent Events

On November 6, 2024, the Company and certain of its subsidiaries (collectively, the “Borrower”) entered into a Loan and Security Agreement (the “Hercules Loan Agreement”) with the lenders party thereto (the “Lenders”) and Hercules Capital, Inc., as administrative agent and collateral agent (the “Agent”). The Hercules Loan Agreement provides for up to $200.0 million of senior secured term loans (the “Term Loan”) available to Borrower in multiple tranches consisting of: (a) an initial $30.0 million advance funded on the November 6, 2024; (b) up to $30.0 million of additional advances that may be drawn on or prior to September 15, 2026; (c) up to $50.0 million of additional advances that may be drawn on or prior to December 15, 2026; (d) subject to Borrower’s achievement of the Tranche 2 Milestone (as defined in the Hercules Loan Agreement), up to $25.0 million of additional advances that may be drawn on or prior to June 15, 2027; (e) subject to Borrower’s achievement of the Tranche 3 Milestone (as defined in the Hercules Loan Agreement), up to $40.0 million of additional advances that may be drawn on or prior to December 15, 2027; and (f) subject to approval by the Lenders’ investment committees in their discretion, up to $25.0 million of additional advances that may be drawn by Borrower.

The Term Loan will mature on December 1, 2029. The outstanding principal balance of the Term Loan bears cash interest at a floating annual rate equal to the greater of (a)8.25% and (b) the prime rate plus 1.75%. Borrower may elect to reduce the cash interest rate by up to 2.00% per annum, in which case, subject to the terms and conditions of the Hercules Loan Agreement, the principal balance of the Term Loan also will bear “payment-in-kind” interest (“PIK Interest”) at a rate equal to 1.10 times such interest reduction amount, and with the PIK Interest added to the outstanding principal balance of the Term Loan. The Term Loan is payable in monthly interest-only payments through December 1, 2028, or, if Borrower achieves the Tranche 3 Milestone (as defined in the Hercules Loan Agreement), the interest-only period will be extended through December 1, 2029. At the end of the interest-only period, borrowings under the Hercules Loan Agreement are repayable in monthly payments of principal and accrued interest until the maturity date.

Borrower's obligations under the Hercules Loan Agreement are secured, subject to customary permitted liens and other agreed-upon exceptions, by a first-priority perfected security interest in all of the tangible and intangible assets of the Borrower, other than intellectual property. The Hercules Loan Agreement includes customary repayment and prepayment terms, affirmative and negative covenants and representations and warranties. The Hercules Loan Agreement also includes customary events of default. Additionally, the Hercules Loan Agreement contains a minimum cash covenant that requires Borrower to maintain certain levels of cash in accounts subject to a control agreement in favor of the Agent at all times beginning on the first day on or after January 1, 2027 (or January 1, 2028, if Borrower achieves a certain milestone) on which the aggregate principal amount of the Term Loan advances is then more than $50.0 million; provided, however, the minimum cash covenant will be waived during all times that Borrower’s market capitalization is greater than or equal to $1.0 billion.