Fair Value Measurements

3 Months Ended

Mar. 31, 2024

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

The carrying values of the Company’s prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities approximate their fair value due to their short-term nature. The carrying value of the Company’s term loan as of March 31, 2024 (see Note 11) approximated fair value based on interest rates currently available to the Company.

The tables below present information about the Company’s assets and liabilities that are regularly measured and carried at fair value on a recurring basis at March 31, 2024 and December 31, 2023 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, Summary of Significant Accounting Policies.

Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 are summarized as follows (in thousands):

Description	Balance as of March 31, 2024		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets
Cash equivalents:
Money market funds	$	114,737	$	114,737	$	—	$	—
Total cash equivalents	$	114,737	$	114,737	$	—	$	—
Short-term investments:
US Treasury securities	$	19,803	$	—	$	19,803	$	—
Total short-term investments	$	19,803	$	—	$	19,803	$	—
Total financial assets	$	134,540	$	114,737	$	19,803	$	—
Liabilities
CVR liability	$	5,080	$	—	$	—	$	5,080
Total financial liabilities	$	5,080	$	—	$	—	$	5,080

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 are summarized as follows (in thousands):

Description	Balance as of December 31, 2023		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets
Cash equivalents:
Money market funds	$	24,100	$	24,100	$	—	$	—
Total cash equivalents	$	24,100	$	24,100	$	—	$	—
Restricted cash equivalents:
Money market funds	$	5,000	$	5,000	$	—	$	—
Total restricted cash equivalents	$	5,000	$	5,000	$	—	$	—
Total financial assets	$	29,100	$	29,100	$	—	$	—
Liabilities
Convertible notes	$	38,595	$	—	$	—	$	38,595
Total financial liabilities	$	38,595	$	—	$	—	$	38,595

Money market funds were valued by the Company using quoted prices in active markets for identical securities, which represent a Level 1 measurement within the fair value hierarchy. Short-term investments are valued using models or other valuation methodologies that use Level 2 inputs. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, default rates, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

As discussed in Note 1, at the effective time of the Merger, each person who as of immediately prior to the effective time of the Merger was a stockholder of record of Homology or had the right to receive Homology’s common stock received a CVR, issued by Homology subject to and in accordance with the terms and conditions of a CVR Agreement, representing the contractual right to receive cash payments from the combined company upon the receipt of certain proceeds from a disposition of Homology’s pre-merger assets, calculated in accordance with the CVR Agreement. The Company concluded that the CVR liability is a derivative liability and is accounted for at fair value. The fair value of the CVR liability is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. For the portion of the CVR liability that is related to Homology's equity interest in OXB (US) LLC, the Company utilized a monte carlo simulation model, also known as a probability simulation, to estimate the fair value of the CVR liability. This model requires the use of significant judgment, estimates and assumptions, including estimated future revenues and discount rates. For the portion of the CVR liability related to Homology's HMI-103, HMI-204, capsids and AAVHSC platform, the Company's fair value assessment includes judgments around the probability of progressing the in-process research and development assets, and in the case of one of the draft agreements, to certain milestones.

During the three months ended March 31, 2024 and 2023, there were no transfers between Level 1, Level 2 and Level 3. There have been no impairments of the Company’s assets measured and carried at fair value during the three months ended March 31, 2024 and 2023.

Legacy Q32 issued convertible notes (the “Convertible Notes”) totaling $30.0 million during the year ended December 31, 2022. Legacy Q32 concluded that the Convertible Notes and its related features are within the scope of FASB Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments (“ASC 825”), as a combined financial instrument, and Legacy Q32 elected the fair value option where changes in fair value of the Convertible Notes are measured through the accompanying condensed consolidated statement of operations until settlement. The Convertible Notes liability represents a Level 3 measurement within the fair value hierarchy as it has been valued using certain unobservable inputs. These inputs include the underlying fair value of the equity instrument into which the Convertible Notes are convertible. The fair value is based on significant inputs not observable in the market, namely potential financing scenarios, the likelihood of such scenarios, the expected time for each scenario to occur, and the required market rates of return utilized in modeling these scenarios.

Year Ended December 31, 2023	Scenario 1	Scenario 2	Scenario 3
Probability of each scenario	80%	15%	5%
Expected Term (years)	0.25	0.25	0.42
Required market rates of return	15.0%	15.0%	15.0%

The Convertible Notes had an estimated fair value of $38.6 million as of December 31, 2023. The Company recorded in other income (expense), net, an interest expense of $1.5 million and a charge of $4.7 million on the change in estimated fair value during the year ended December 31, 2023. There was no change in fair value attributable to the instrument-specific credit risk for the year ended December 31, 2023.

Upon closing of the Merger, Legacy Q32 converted the outstanding Convertible Notes plus accrued interest into shares of common stock at 90% of the purchase price of the mandatory conversion event. As the Convertible Notes are recorded at fair value, a gain of $15.9 million on the change in the fair value prior to the conversion of convertible notes is reflected in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2024 (see Note 11).