| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, and include the operations of Third Harmonic Bio, Inc. and its wholly-owned subsidiary. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the ASC and as amended by Accounting Standards Updates, or ASUs, of the Financial Accounting Standards Board, or FASB. All intercompany accounts, transactions, and balances have been eliminated in consolidation. Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of research and development expenses, and the valuations of common stock, preferred stock tranche liability, and anti-dilution right liability. The Company bases its estimates on historical experience when available, known trends and other market-specific data, or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates. Segment Information Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company has one operating segment. The Company’s focus is the research and development of the treatment of mast cell driven inflammatory diseases. The Company’s chief operating decision maker, its chief executive officer, manages the Company’s operations on a consolidated basis for the purpose of allocating resources. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include standard checking accounts and amounts held in money market funds. These accounts are guaranteed by the Federal Deposit Insurance Corporation, or FDIC, up to $ 250,000 per account per institution. At December 31, 2022, we held deposits in excess of FDIC insured limits. Restricted Cash As of December 31, 2022 , the Company was required to maintain a separate cash balance of $ 0.3 million and $ 0.2 million in the form of a letter of credit, for the benefit of the landlord in connection with the Company's Prospect Street office space lease in Cambridge, Massachusetts, or the Prospect Street Lease, and the Company's Montgomery Street office space lease in San Francisco, California, or the Montgomery Street Lease, respectively, which are each classified as restricted cash (non-current) on the consolidated balance sheets (see Note 12).
December 31, December 31,
Cash and cash equivalents $ 128,280 $ 288,877
Restricted cash — 441
Cash, cash equivalents and restricted cash $ 128,280 $ 289,318 Concentration of Credit Risk and Off-Balance Sheet Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and short term marketable securities. The Company regularly maintains deposits in accredited financial institutions in excess of federally insured limits. The Company invests its excess cash primarily in money market funds, U.S. treasury notes, and high quality, marketable debt instruments of corporations in accordance with the Company’s investment policy. The Company’s investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. The Company has not experienced any losses related to its cash equivalents and marketable securities and management believes the Company is not exposed to significant risks of losses. As of December 31, 2022, the Company held cash deposits at Silicon Valley Bank, or SVB, in excess of FDIC insured limits. On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, and the Federal Dep osit Insurance Corporation, or FDIC, was appointed as receiver. No losses were incurred by the Company on deposits that were held at SVB. Management believes that the Company is not currently exposed to significant credit risk as the vast majority of the Company’s deposits were either owned directly by the Company or held in custody at a third-party financia l institution. As of March 27, 2023, the Company has approximately $ 3.4 million on deposit with SVB and is currently evaluating its banking relationships in light of recent events. The Company is dependent on third-party CDMO’s and CROs with whom it does business. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements of active pharmaceutical ingredients and formulated drugs in order to perform research and development activities in its programs. The Company also relies on a limited number of third-party CROs to perform research and development activities on its behalf. These programs could be adversely affected by significant interruption from these providers. Fair Value Measurements Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: Level 1— Quoted prices in active markets for identical assets or liabilities. Level 2— Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company’s preferred stock tranche liability and anti-dilution right liability were carried at fair value, determined according to Level 3 inputs in the fair value hierarchy described above. An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. Research and Development Expenses Research and development costs are charged to expense as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including personnel-related costs, stock-based compensation expense, clinical trial costs, contracted research services, research-related manufacturing, and other external costs. The Company has entered into various research and development and other agreements with commercial firms, researchers, universities, and others for provisions of goods and services. These agreements are generally cancellable, and the related costs are recorded as research and development expenses as incurred. Research and development expenses include costs for salaries, employee benefits, subcontractors, facility-related expenses, depreciation and amortization, stock-based compensation, laboratory supplies, and external costs of outside vendors engaged to conduct discovery, nonclinical and clinical development activities, and clinical trials as well as to manufacture clinical trial materials, and other costs. Nonrefundable advance payments for goods and services to be received in the future for use in research and development activities are recorded as prepaid expenses and expenses as the related goods are delivered or the services are performed. Accrued Research and Development Expenses The Company has entered into various research and development contracts. The payments under these contracts are generally cancellable and are recorded as research and development expenses as incurred. The Company records accrued liabilities for estimated ongoing research and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes the progress of the research and development activities, including the phase or completion of events, invoices received and contracted costs. Significant judgements and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs. Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications such as direct application fees, and legal and consulting expenses are expensed as incurred due to the uncertainty about the recovery of the expenditure. Patent-related costs are classified as general and administrative expenses within the Company’s consolidated statements of operations. Property, Plant and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization, and comprise of furniture and equipment for use in the Company's office space, as well as leasehold improvements made by the Company to the leased office space. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is generally five years for furniture and equipment and three years for computer equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Depreciation and amortization begin at the time the asset is placed in service. Leases The Company adopted FASB ASC 842 with an effective date of January 1, 2020, using the modified retrospective transition approach which uses the effective date as the date of initial application. In accordance with ASC 842, the Company determines whether an arrangement is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date, when control of the underlying asset is transferred from the lessor to the lessee, as operating or finance leases and records a right-of-use, or ROU, asset and a lease liability on the consolidated balance sheet for all leases with an initial lease term of greater than 12 months. The Company has elected to not recognize leases with a lease term of 12 months or less on the balance sheet. The Company enters into contracts that contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. For leases of real estate, the Company combines the lease and associated non-lease components in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs. Lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease if readily determinable. If the rate implicit is not readily determinable, the Company utilizes an estimate of its incremental borrowing rate based upon the available information at the lease commencement date. ROU assets are further adjusted for initial direct costs, prepaid rent, or incentives received. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Redeemable Convertible Preferred Stock The Company classified redeemable convertible preferred stock, or Preferred Stock, as temporary equity in the accompanying consolidated balance sheets due to terms that allowed for redemption of the shares upon certain events that are outside of the Company’s control. Costs incurred in connection with the issuance of redeemable convertible preferred stock, as well as the recognition of the preferred stock tranche liability, were recorded as a reduction of gross proceeds from issuance. The Company did not accrete the carrying values of the preferred stock to the redemption values since the occurrence of these events were not considered probable as of December 31, 2021. Immediately prior to the closing of the initial public offering on September 19, 2022, all outstanding shares of our redeemable convertible preferred stock were converted into common stock (see Note 7). Preferred Stock Tranche Liability The Company classified the preferred stock tranche liability for the future purchase, and option to purchase, preferred stock as a liability on its balance sheets as the preferred stock tranche liability was a freestanding financial instrument that would have required the Company to transfer equity instruments upon subsequent closings of the preferred stock financings. The preferred stock tranche liability was initially recorded at fair value upon the date of issuance and was subsequently remeasured to fair value at each reporting date. Changes in the fair value of the preferred stock tranche liability were recognized as a component of other income and expense in the statements of operations. Changes in the fair value of the preferred stock tranche liability were recognized until the tranche liability was fulfilled or otherwise extinguished. As of December 31, 2021, the preferred stock tranche liability has been fulfilled or otherwise extinguished (see Note 7) in full. Anti-Dilution Right Liability The Company classified the anti-dilution right under its license agreement with Novartis International Pharmaceutical Ltd., or Novartis, as a derivative liability on its consolidated balance sheets as the anti-dilution right represented a freestanding financial instrument that may have required the Company to transfer equity instruments upon future equity closings. The anti-dilution right liability was initially recorded at fair value upon the date of issuance and was subsequently remeasured to fair value at each reporting date. The issuance date fair value of the anti-dilution right liability was recognized as a research and development expense upon entering into the agreement with Novartis. Changes in the fair value of the anti-dilution right liability were recognized as a component of other income and expense in the statements of operations. Changes in the fair value of the antidilution right liability were recognized until the anti-dilution right with Novartis was satisfied in the first quarter of 2021, in connection with the closing of the second tranche of the Series A-2 redeemable convertible preferred stock, or Series A-2 Preferred Stock, and the issuance and sale of the Series A-3 redeemable convertible preferred stock, or Series A-3 Preferred Stock. As of December 31, 2021, the anti-dilution liability was fulfilled (see Note 6). Stock-Based Compensation The Company accounts for all share-based payment awards granted to employees and non-employees as stock-based compensation expense at fair value, based on the date of the grant, and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The Company’s share-based payments include stock options and grants of restricted stock awards. For stock-based awards with service-based vesting conditions, the Company recognizes compensation expense using the straight-line method. For awards with both performance and service-based vesting conditions, the Company records expense using an accelerated attribution method, once the performance conditions are considered probable of being achieved, using management’s best estimates. The fair value of each stock option is estimated on the grant date using the Black-Scholes option pricing model, which requires inputs based on certain subjective assumptions, including: • Fair Value of Common Stock —Prior to the Company's IPO, the Company determined that based on the stage of development and other relevant factors, it was most appropriate to prepare the common stock valuations using the option-pricing method, or OPM, which used a market approach to estimate our enterprise value. After the completion of the Company’s IPO, the Company will determine the fair value of the common stock based on the quoted market price of the common stock. • Expected Term —The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified method to determine the expected term, which is based on the average of the time-to-vesting and the contractual life of the options. • Expected Volatility —Due to our limited operating history and lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in life cycle or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. • Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the awards. • Dividend Yield —We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date. The Company adopted ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, or ASU No. 2018-07, at inception of the 2019 Stock Incentive Plan, prior to the issuance of any stock option grants. The measurement date for non-employee awards is the date of grant. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. Stock-based compensation expense is classified in the accompanying consolidated statement of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients service payments are classified. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (i) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Interest and penalties are recognized related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2021 and 2022 , no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet. Comprehensive Loss Comprehensive loss includes net loss as well as other changes in stockholders’ deficit that result from transactions and economic events other than those with stockholders. For the years ended December 31, 2021 and 2022 , there was no difference between net loss and comprehensive loss and accordingly a statement of comprehensive loss is not presented. Net Income (Loss) Per Share The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities, which included the Company’s redeemable convertible preferred stock, according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s redeemable convertible preferred stock contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is 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 antidilutive. The Company reported a net loss attributable to common stockholders for years ended December 31, 2021, and 2022. Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of diluted securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares. For the purpose of this calculation, unvested restricted common stock, outstanding stock options, and redeemable convertible preferred stock are considered potential dilutive common shares. Emerging Growth Company Status The Company is an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. Recently Adopted Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB, or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act, the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with certain new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. In December 2019, the FASB issued ASU No. 2019-12, or ASU-2019-12, Simplifying the Accounting for Income Tax , which contains several provisions that reduce financial statement complexity including removing the exception to the incremental approach for intra-period tax expense allocation when a company has a loss from continuing operations and income from other items not included in continuing operations. The Company adopted this accounting standard as of January 1, 2022 with no material impact on its consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted Management evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on the consolidated financial statements and related disclosures. |
