Fair Value Measurements and Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements and Fair Value of Financial Instruments

3. Fair Value Measurements and Fair Value of Financial Instruments

The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entireties based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires our management to make judgments and consider factors specific to the asset or liability.

Our financial instruments consist of Level 1, Level 2, and Level 3 financial instruments. We generally classify our marketable securities as Level 2. Instruments are classified as Level 2 when observable market prices for identical securities that are traded in less active markets are used. When observable market prices for identical securities are not available, such instruments are priced using benchmark curves, benchmarking of like securities, sector groupings, matrix pricing, and valuation models. These valuation models are proprietary to the pricing providers or brokers and incorporate a number of inputs, including in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. For certain security types, additional inputs may be used, or some of the standard inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on any given day. Level 1 financial instruments are comprised of money market funds and U.S. Treasury bills. Level 2 financial instruments are comprised of commercial paper and corporate debt securities. Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Level 3 financial instruments consist of the MSKCC success payments liability.

The following table sets forth our financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

	Fair Value Measurements as of March 31, 2022
	Total		Level 1		Level 2		Level 3
Assets:
Commercial paper ($46,516 included in cash and cash equivalents)	$	129,369	$	—	$	129,369	$	—
U.S. Treasury bills ($26,990 included in cash and cash equivalents)		110,358		110,358		—		—
Money market fund investments (included in cash and cash equivalents)		64,730		64,730		—		—
Corporate debt securities ($2,999 included in cash and cash equivalents)		64,207		—		64,207		—
U.S. government agency bonds ($6,395 included in cash and cash equivalents)		22,159		—		22,159		—
Total fair value of assets	$	390,823	$	175,088	$	215,735	$	—
Liabilities:
MSKCC success payments liability	$	2,484	$	—	$	—	$	2,484
Total fair value of liabilities	$	2,484	$	—	$	—	$	2,484

	Fair Value Measurements as of December 31, 2021
	Total		Level 1		Level 2		Level 3
Assets:
Money market fund investments (included in cash and cash equivalents)	$	181,528	$	181,528	$	—	$	—
Commercial paper ($58,892 included in cash and cash equivalents)		141,676		—		141,676		—
Corporate debt securities		38,649		—		38,649		—
U.S. Treasury bills		26,590		26,590		—		—
U.S. government agency bonds		25,065		—		25,065		—
Total fair value of assets	$	413,508	$	208,118	$	205,390	$	—
Liabilities:
MSKCC success payments liability	$	4,080	$	—	$	—	$	4,080
Total fair value of liabilities	$	4,080	$	—	$	—	$	4,080

The fair value and amortized cost of cash equivalents and available-for-sale marketable securities by major security type as of March 31, 2022 and December 31, 2021 are presented in the following tables (in thousands):

	As of March 31, 2022
	Amortized Cost Basis		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Commercial paper ($46,516 included in cash and cash equivalents)	$	129,544	$	3	$	(178	)	$	129,369
U.S. Treasury bills ($26,990 included in cash and cash equivalents)		110,867		1		(510	)		110,358
Money market investments (included in cash equivalents)		64,730		—		—			64,730
Corporate debt securities ($2,999 included in cash and cash equivalents)		64,479		3		(275	)		64,207
U.S. government agency bonds ($6,395 included in cash and cash equivalents)		22,291		—		(132	)		22,159
Total cash equivalents and marketable securities	$	391,911	$	7	$	(1,095	)	$	390,823
Classified as:
Cash and cash equivalents								$	147,630
Marketable securities, short-term									206,101
Marketable securities, long-term									37,092
Total cash equivalents and marketable securities								$	390,823

	As of December 31, 2021
	Amortized Cost Basis		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Money market investments (included in cash equivalents)	$	181,528	$	-	$	—		$	181,528
Commercial paper ($58,892 included in cash equivalents)		141,726		1		(51	)		141,676
U.S. government agency bonds		25,102		-		(37	)		25,065
Corporate debt securities		38,661		4		(16	)		38,649
U.S. Treasury bills		26,626		1		(37	)		26,590
Total cash equivalents and marketable securities	$	413,643	$	6	$	(141	)	$	413,508
Classified as:
Cash and cash equivalents								$	240,420
Marketable securities, short-term									135,412
Marketable securities, long-term									37,676
Total cash equivalents and marketable securities								$	413,508

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liability (in thousands):

	MSKCC Success Payments Liability
Balance at December 31, 2021	$	4,080
Change in fair value		(1,596	)
Balance at March 31, 2022	$	2,484

Our liability for the MSKCC success payments is carried at fair value and changes are recognized as expense or income as part of other income (expense) until the success payments liability is paid or expires (Note 4). We recorded $1.6 million and $0.7 million change in fair value of the MSKCC success payments liability in other income (expense) and research and development expense in our condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2022 and 2021, respectively.

We utilize a Monte Carlo simulation model that models the future movement of stock prices based on several key variables. This model requires significant estimates and assumptions in determining the estimated fair value of the MSKCC success payments liability at each balance sheet date. The assumptions used to calculate the fair value of the MSKCC success payments are subject to a significant amount of judgment including the expected volatility that was estimated using available information about the historical volatility of stocks of publicly traded companies that are similar to us, the estimated term, and the estimated number and timing of valuation measurement dates. The table below summarizes key assumptions used in the valuation of MSKCC success payments liability:

	As of March 31, 2022			As of December 31, 2021
Fair value of common stock	$	9.180		$	15.090
Risk-free interest rate		2.32	%		1.52	%
Expected volatility		75	%		75	%
Probability	4.2% to 14.2%			7.0% to 20.9%
Expected term (years)	4.6 to 6.0			4.2 to 5.5

The computation of expected volatility was estimated using a combination of available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption and the historical and implied volatility of our stock. The risk-free interest rate, expected volatility, and expected term assumptions depend on the estimated timing of our phase 1 clinical trial for our CB-012 product candidate utilizing the know-how, biological materials, and intellectual property licensed under the MSKCC Agreement and the estimated timing of marketing approval for this product candidate from the U.S. Food and Drug Administration (“FDA”). In addition, we incorporated the estimated number and timing of valuation measurement dates in the calculation of the MSKCC success payments liability.

A small change in the assumptions and other inputs, such as the fair value of our common stock, may have a relatively large change in the estimated valuation and associated liability and expense or income.