SEC Filing - Third Harmonic Bio

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10-Q

ROC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number: 001-41498

THIRD HARMONIC BIO, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		83-4553503
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1700 Montgomery Street, Suite 210
San Francisco, California		94111
(Address, including zip code of registrant’s principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (209) 727-2457

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

THRD

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 5, 2023, the registrant had 40,364,375shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents


		Page

	Special Note Regarding Forward-Looking Statements	1
	Risk Factor Summary	2

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	71
Item 6.	Exhibits	72
	Signatures	73

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and section 27A of the Securities Act of 1933, as amended, or the Securities Act. All statements contained in this Quarterly Report other than statements of historical fact, including but not limited to statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, nonclinical and clinical development activities, efficacy and safety profile of any future product candidates, potential therapeutic benefits and economic value of our product candidates, use of net proceeds from our initial public offering, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of nonclinical studies and clinical trials, commercial collaboration with third parties, the expected impact of the ongoing COVID-19 pandemic on our operations, and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “predict,” “target,” “intend,” “could,” “would,” “should,” “project,” “plan,” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors,” and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law. You should read this Quarterly Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Unless the context indicates otherwise, as used in this Quarterly Report, the terms “the Company,” “we,” “us,” and “our” refer to Third Harmonic Bio, Inc., a Delaware corporation, and its consolidated subsidiaries taken as a whole, unless otherwise noted. The mark “Third Harmonic Bio” is our registered common law trademark. This Quarterly Report contains additional trade names, trademarks and service marks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

RISK FACTOR SUMMARY

Our business is subject to a number of risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report. The principal risks and uncertainties affecting our business includes, among others, the following:

•

We have a limited operating history, have not completed any clinical trials beyond Phase 1, and have not had any product candidates approved for commercial sale. We have a history of significant net losses since our inception and expect to continue to incur significant losses for the foreseeable future.

•

In December 2022, we announced the discontinuation of our Phase 1b clinical trial of our product candidate THB001 in chronic inducible urticaria following observation of asymptomatic liver transaminitis in two patients enrolled in the first dose cohort.

•

We will need substantial additional funds to pursue our business objectives, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development programs, commercialization efforts or other operations.

•

Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or nonperformance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations, financial condition and results of operations.

•

We have identified a material weakness in our internal control over financial reporting. If we do not remediate the material weakness in our internal control over financial reporting, or if we fail to establish and maintain effective internal control, we may not be able to accurately report our financial results or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in the market price of our common stock.

•

Our future performance is substantially dependent on our ability to identify and develop future product candidates.

•

Drug development is a lengthy and expensive process, and the outcome of clinical testing is inherently uncertain, and results of earlier studies and trials may not be predictive of future trial results. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of an oral KIT inhibitor or any future product candidates.

•

Our future clinical trials may reveal significant adverse events not seen in our nonclinical studies and may result in a safety profile that could inhibit regulatory approval or market acceptance of any future product candidates.

•

We face competition from entities that have made substantial investments into the rapid development of novel treatments for allergic and inflammatory diseases, including large and specialty pharmaceutical and biotechnology companies developing novel treatments and technology platforms. If these companies develop technologies or product candidates more rapidly than we do or their technologies are more effective, our ability to develop and successfully commercialize, if approved, product candidates may be adversely affected.

•

We rely, and intend to continue to rely, on third parties to conduct our clinical trials and perform all of our research and nonclinical studies. If these third parties do not satisfactorily carry out their contractual duties, fail to comply with applicable regulatory requirements or do not meet expected deadlines, our development programs may be delayed or subject to increased costs or we may be unable to obtain regulatory approval, each of which may have an adverse effect on our business, financial condition, results of operations and prospects.

•

If we are not able to obtain, maintain and enforce patent protection for our technologies or product candidates, development and commercialization, if approved, of any future oral KIT inhibitor product candidates may be adversely affected.

•

The regulatory approval process is highly uncertain, and we may be unable to obtain, or may be delayed in obtaining, U.S. or foreign regulatory approval and, as a result, unable to commercialize any future oral KIT inhibitor product candidates. Even if we believe our development plans are successful, regulatory authorities may not agree that they provide adequate data on safety or efficacy.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

THIRD HARMONIC BIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	December 31, 2022			March 31, 2023
Assets
Current assets:
Cash and cash equivalents	$	288,877		$	282,202
Prepaid expenses and other current assets		3,958			3,544
Total current assets		292,835			285,746
Restricted cash		441			441
Property and equipment, net		35			60
Right of use asset		4,327			4,258
Other assets		1,037			882
Total assets	$	298,675		$	291,387
Liabilities, redeemable convertible preferred stock and stockholders’ deficit
Current liabilities:
Accounts payable	$	2,087		$	2,670
Accrued expenses and other current liabilities		3,181			1,609
Operating lease liability, current		385			668
Total current liabilities		5,653			4,947
Operating lease liability, noncurrent		3,954			3,775
Total liabilities		9,607			8,722
Commitments and contingencies (Note 12)
Stockholders’ deficit:
Common stock, $0.0001 par value, 500,000,000 shares authorized at December 31, 2022 and March 31, 2023; 39,377,222 and 39,484,403 shares issued and outstanding at December 31, 2022 and March 31, 2023, respectively		4			4
Additional paid-in capital		372,460			375,142
Accumulated deficit		(83,396	)		(92,481	)
Total stockholders’ (deficit) equity		289,068			282,665
Total liabilities and stockholders’ (deficit) equity	$	298,675		$	291,387

The accompanying notes are an integral part of these condensed consolidated financial statements.

THIRD HARMONIC BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2022			2023
Operating expenses:
Research and development	$	6,212		$	6,737
General and administrative		1,575			5,251
Total operating expenses		7,787			11,988
Loss from operations		7,787			11,988
Other income, net:
Other income		(3	)		(2,903	)
Total other income, net		(3	)		(2,903	)
Net loss	$	7,784		$	9,085
Net loss per share of common stock, basic and diluted	$	0.81		$	0.40
Weighted-average common stock outstanding, basic and diluted		9,643,963			22,792,781

The accompanying notes are an integral part of these condensed consolidated financial statements.

THIRD HARMONIC BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)


	Redeemable Convertible Preferred Stock
	Series A-1				Series A-2				Series A-3				Series B				Common Stock				Additional Paid-In		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit) and Equity
Balance at December 31, 2021		13,970,000	$	12,574		13,750,000	$	19,476		7,812,501	$	33,288		14,091,686	$	104,846		4,237,290	$	1	$	1,534	$	(48,241	)	$	(46,706	)
Vesting of restricted stock		—		—		—		—		—		—		—		—		84,024		—		—		—			—
Stock-based compensation expense		—		—		—		—		—		—		—		—		—		—		450		—			450
Net loss		—		—		—		—		—		—		—		—		—		—		—		(7,784	)		(7,784	)
Balance at March 31, 2022		13,970,000	$	12,574		13,750,000	$	19,476		7,812,501	$	33,288		14,091,686	$	104,846		4,321,314	$	1	$	1,984	$	(56,025	)	$	(54,040	)

THIRD HARMONIC BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited) (continued)


	Redeemable Convertible Preferred Stock
	Series A-1				Series A-2				Series A-3				Series B				Common Stock				Additional Paid-In		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit) and Equity
Balance at December 31, 2022		—	$	—		—	$	—		—	$	—		—	$	—		39,377,222	$	4	$	372,460	$	(83,396	)	$	289,068
Vesting of restricted stock		—		—		—		—		—		—		—		—		107,181		—		—		—			—
Stock-based compensation expense		—		—		—		—		—		—		—		—		—		—		2,682		—			2,682
Net loss		—		—		—		—		—		—		—		—		—		—		—		(9,085	)		(9,085	)
Balance at March 31, 2023		—	$	—		—	$	—		—	$	—		—	$	—		39,484,403	$	4	$	375,142	$	(92,481	)	$	282,665

The accompanying notes are an integral part of these condensed consolidated financial statements.

THIRD HARMONIC BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2022			2023
Cash flows from operating activities:
Net loss	$	(7,784	)	$	(9,085	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		450			2,682
Depreciation expense		—			3
Noncash operating lease expense		—			69
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(88	)		413
Other assets		(69	)		155
Accounts payable		(202	)		571
Accrued expenses and other current liabilities		(420	)		(1,587	)
Changes in operating lease liabilities		—			104
Net cash used in operating activities		(8,113	)		(6,675	)
Cash flows from investing activities:
Purchase of property and equipment		—			—
Net cash used in investing activities		—			—
Cash flows from financing activities:
Net cash provided by financing activities		—			—
Net increase in cash, cash equivalents and restricted cash		(8,113	)		(6,675	)
Cash, cash equivalents and restricted cash at beginning of period		128,280			289,318
Cash, cash equivalents and restricted cash at end of period	$	120,167		$	282,643

Supplemental disclosure of cash flows:
Fixed assets recorded in accounts payable and accrued expenses	$	—		$	27

The accompanying notes are an integral part of these condensed consolidated financial statements.

THIRD HARMONIC BIO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of the Business

Third Harmonic Bio, Inc., or the Company, is a biopharmaceutical company focused on advancing the next wave of medicine for the treatment of inflammatory disease, including dermal, respiratory, and gastrointestinal diseases.

The Company was incorporated in 2019 as a Delaware corporation, and it has two offices located in San Francisco, California and Cambridge, Massachusetts. In December 2021, the Company formed THB MS, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, which is classified as a Security Corporation in Massachusetts.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, completion and success of clinical testing, development by competitors of new technological innovations, compliance with governmental regulations, dependence on key personnel and protection of proprietary technology and the ability to secure additional capital to fund operations. The development of a drug candidate requires extensive research, development and clinical testing prior to regulatory approval and commercialization. These efforts require significant amounts of additional capital, adequate personnel, and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

Initial public offering

On September 19, 2022, the Company closed its initial public offering, or the IPO, and issued 12,535,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase up to 1,635,000 additional shares of common stock, at a public offering price of $17.00 per share. The Company received $198.2 million, net of underwriting discounts and commissions, but before deducting offering costs payable by the Company, which were $2.3 million. Immediately prior to the closing of the IPO, all outstanding shares of redeemable convertible preferred stock converted into 21,967,316 shares of common stock (see Note 7). In connection with the closing of its IPO, on September 19, 2022, the Company amended its certificate of incorporation to authorize the issuance of up to 500,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of $0.0001 par value preferred stock.

Reverse stock split

On September 7, 2022, the Company effected a 1-for-2.259 reverse stock split of the Company’s outstanding common stock. All common stock, stock options and per share information presented in the condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis for all periods presented. There was no change in the par value of the Company’s common stock. The ratio by which shares of preferred stock are convertible into shares of common stock was adjusted to reflect the effects of the reverse stock split.

Liquidity

In accordance with Accounting Standards Codification, or ASC 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying condensed consolidated financial statements were issued.

As an emerging growth entity, the Company has devoted substantially all of its resources since inception to organizing and staffing the Company, business planning, raising capital, establishing its intellectual property portfolio, acquiring or discovering product candidates, research and development activities for an oral KIT inhibitor and other compounds, establishing arrangements with third parties for the manufacture of its product candidates and component materials, and providing general and administrative support for these operations. As a result, the Company has incurred significant operating losses and negative cash flows from operations since its inception and anticipates such losses and negative cash flows will continue for the foreseeable future.

Since its inception, the Company has funded its operations primarily with proceeds from sales of shares of its redeemable convertible preferred stock and most recently with proceeds from the IPO. The Company has incurred recurring losses since its inception, including net losses of $7.8 million and $9.1 million and for the three months ended March 31, 2022 and 2023, respectively. As of March 31, 2023, the Company had an accumulated deficit of $92.5 million. To date the Company has not generated any revenues and expects to continue to generate operating losses for the foreseeable future. As of the issuance date of these condensed consolidated financial statements, the Company expects that its existing cash and cash equivalents of $282.2 million as of March 31, 2023, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from the issuance date of these condensed consolidated financial statements.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated annual financial statements for the years ended December 31, 2022, and notes thereto, which are included in the Company's Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on March 29, 2023. Since the date of those annual financial statements, there have been no changes to the Company’s significant accounting policies, except as noted below.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting and as required by Regulation S-X, Rule 10-01. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated annual financial statements for the years ended December 31, 2021 and 2022 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the Company’s condensed consolidated balance sheet as of March 31, 2023, the condensed consolidated statements of operations for the three months ended March 31, 2022 and 2023, the condensed consolidated statement of stockholders' equity (deficit) as of March 31, 2023 and condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2023. The financial data and other information disclosed in these notes related to the three months ended March 31, 2022 and 2023 are unaudited. The results for the three months ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods, or any future year or period.

Recently Issued Accounting Pronouncements Not Yet Adopted

Management evaluated recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on the condensed consolidated financial statements and related disclosures.

3. Fair Value Measurements

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis (in thousands):


			December 31, 2022
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Observable Inputs (Level 3)
Money market funds	$	286,580	$	286,580	$	—	$	—
Total financial assets	$	286,580	$	286,580	$	—	$	—


			March 31, 2023
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Observable Inputs (Level 3)
Money market funds	$	280,812	$	280,812	$	—	$	—
Total financial assets	$	280,812	$	280,812	$	—	$	—

As of December 31, 2022 and March 31, 2023, the Company had no financial liabilities that required fair value measurement. As of December 31, 2022 and March 31, 2023, the Company’s cash equivalents consisted of money market funds, classified as Level 1 financial assets, as these assets are valued using quoted market prices in active markets without any valuation adjustment.

During the year ended December 31, 2022 and three months ended March 31, 2023 there were no transfers or reclassifications between fair value measurement levels of assets or liabilities. The carrying values of prepaid and other current assets, accounts payable and accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities.

4. Property, Plant and Equipment

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


	December 31, 2022			March 31, 2023
Construction in progress	$	16		$	—
Leasehold Improvement		—			12
Computer equipment		20			51
Property, plant and equipment, gross		36			63
Less: Accumulated depreciation		(1	)		(3	)
Property, plant and equipment, net	$	35		$	60

Depreciation expense was $1.0 thousand for the year ended December 31, 2022 and $3.0 thousand for three months ended March 31, 2023, which has been recorded within general and administrative expenses.

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	December 31, 2022		March 31, 2023
Accrued research and development expenses	$	1,444	$	705
Professional fees		339		124
Employee compensation and related benefits		1,165		754
Other		233		26
Total accrued expenses and other current liabilities	$	3,181	$	1,609

6. Novartis License Agreement

On June 28, 2019, the Company entered into a License Agreement, or the Novartis License Agreement, with Novartis Pharma AG, formerly known as Novartis International Pharmaceutical Ltd, or Novartis. Pursuant to the Novartis License Agreement, the Company has been granted an exclusive, worldwide, royalty-bearing, sublicensable license under specified patent rights and know-how related to two licensed compounds, to develop, make, use and sell certain products incorporating or comprising a licensed compound, including THB001, to certain intellectual property rights owned or controlled by Novartis, or the Licensed IP, to research, develop, make, use, sell, and commercialize products containing the Licensed IP.

Under the Novartis License Agreement, the Company is solely responsible for all research, development, regulatory and commercialization activities related to the Licensed IP. The Company is required to use commercially reasonable efforts to develop and seek regulatory approval for, and commercialize, at least one licensed product in each of the United States, France, Germany, Italy, Spain, the United Kingdom, and Japan.

In exchange for these rights, the Company made an upfront cash payment of $0.4 million and issued 3,449,808 shares of Series A-1 Preferred Stock with a fair value of $3.0 million to Novartis. Upon entering into the Novartis License Agreement in 2019, the total initial consideration of $3.4 million transferred to Novartis was charged to expenses as research and development expense. The Company determined that the Novartis License Agreement represented an asset acquisition as it did not meet the definition of a business. The Company recorded the initial consideration transferred to Novartis as research and development expense in the statement of operations because the acquired Licensed IP represented in-process research and development with no alternative future use.

In addition, under the Novartis License Agreement, an anti-dilution right was issued to Novartis, in which Novartis is entitled to receive shares of Series A-1 Preferred Stock, guaranteeing them a 15% ownership interest of the fully diluted capitalization of the Company. The Company was obligated to issue additional shares of Series A-1 Preferred Stock until the Company had (1) raised aggregate cumulative proceeds of $30.0 million from sales of equity securities since its inception; or (2) issued and sold any securities that generate proceeds in excess of $30.0 million. Additionally, the Company was not obligated to issue more than 6,383,142 shares of the Series A-1 Preferred Stock to Novartis under the anti-dilution right. The Company assessed the Novartis anti-dilution right and determined that the right (i) meets the definition of a freestanding financial instrument that is not indexed to the Company’s own stock and (ii) meets the definition of a derivative and does not qualify for equity classification. The initial fair value of the anti-dilution right liability of $1.0 million w