3. Fair value of financial assets and liabilities

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 that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The following table summarizes our financial assets measured at fair value on a recurring basis as of December 31, 2019:


	Fair Value Measurements as of December 31, 2019 Using:
	Total		Level 1		Level 2		Level 3
Money market funds	$	49,948	$	49,948	$	—	$	—
Commercial paper		49,114		—		49,114		—
U.S. treasury securities		6,048		6,048		—		—
Corporate debt securities		20,143		—		20,143		—
	$	125,253	$	55,996	$	69,257	$	—

At December 31, 2018, the Company did not have any financial assets or liabilities measured at fair value on a recurring basis. The carrying values of the Company’s prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.

In November 2018, in connection with the Company’s issuance and sale of Series A Preferred Stock under the Second Tranche Closing, the Company satisfied its obligation to issue additional shares at the Second Tranche Closing and accordingly reclassified the carrying value of the preferred stock tranche obligation associated with the future purchase obligation, equal to the then current fair value of $32,750, to the carrying value of the Series A Preferred Stock. In November 2018, in connection with the Company’s Second Tranche Closing, the Company issued 3,205,128 shares of Series A Preferred Stock to Amgen for a total value of $7,404 satisfying its anti‑dilution obligation under the Amgen Agreement. The Company reclassified the carrying value of the anti‑dilution right liability, equal to the then current fair value of $7,404, to the carrying value of the Series A Preferred Stock.

In December 2018, in connection with the Company’s issuance and sale of Series B Preferred Stock, the Company terminated the option to purchase Series A Preferred Stock provided under the 2018 Series A Agreement. The Company accounted for the termination of the call option associated with the preferred stock tranche obligation as a liability extinguishment between related parties and recognized a gain on extinguishment of $36,750, equal to the then current fair value, within additional paid‑in capital in the statement of stockholder’s equity (deficit).

During the years ended December 31, 2019 and December 31, 2018, there were no transfers between Level 1, Level 2 and Level 3.

Valuation of cash equivalents and short-term investments

Commercial paper and corporate debt securities were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.

Valuation of preferred stock tranche obligation

The fair value of the preferred stock tranche obligation recognized in connection with the Company’s issuance of Series A Preferred Stock in June 2018 (see Note 6) was determined based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The fair value of the liability was estimated based on results of a third‑party valuation performed in connection with the June 2018 Series A issuance. The Company determined that this valuation represented the fair value of the liability at the reporting date. The liability included (i) an obligation to issue shares in a second tranche of Series A Preferred Stock and (ii) an obligation to issue shares under the call option to purchase Series A Preferred Stock following the Second Tranche Closing.

The fair value of the obligation to purchase a second tranche of Series A Preferred Stock was estimated by utilizing the future value of the underlying Series A Preferred stock, the Series A original issue price and the number of shares subject to future purchase. The future value of the Series A Preferred Stock was determined through a backsolve calculation. The present value of the forward contract was then multiplied by a probability of occurrence for the Second Tranche Closing.

The fair value of the obligation for the call option to purchase Series A Preferred Stock was estimated using the hybrid model, which employed the Black‑Scholes option‑pricing model adjusted to reflect the timing and probability of closing a second tranche of Series A Preferred Stock. The hybrid method incorporates assumptions and estimates, to value the obligation. Estimates and assumptions impacting the fair value measurement include the fair value of the underlying shares of Series A Preferred Stock, the remaining contractual term of the preferred stock tranche obligation, risk‑free interest rate, expected dividend yield, expected volatility of the price of the underlying preferred stock, the remaining years to liquidity, the discount rate and probability (expressed as a percentage) of closing a second tranche. The most significant assumption in the hybrid model impacting the fair value of the call option is the fair value of the preferred stock as of each remeasurement date. The Company determined the fair value per share of the underlying preferred stock by taking into consideration the most recent sales of preferred stock, results obtained from third‑party valuations and additional factors that are deemed relevant. The Company has historically been a private company and lack company‑specific historical and implied volatility information of its stock. Therefore, the Company estimated expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the call option. The risk‑free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining years to liquidity. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends.

Valuation of anti‑dilution right liability

The fair value of the anti‑dilution right liability recognized in connection with the anti‑dilution provisions set forth in the Company’s license agreement with Amgen (see Note 9) was determined based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy.

The fair value of the anti‑dilution right was estimated using a probability weighted scenario which considered as inputs the probability of occurrence of events that would trigger the issuance of shares, including a (i) Second Tranche Closing of Series A Preferred Stock, (ii) initial public offering, and (ii) no future sale of equity securities. The weighted average fair values of each scenario were calculated utilizing the fair value per share of the underlying Series A Preferred Stock and common stock. Changes in the estimated fair value and the probability of achieving different financing scenarios can have a significant impact on the fair value of the anti‑dilution right liability.

The following table presents a roll forward of the fair values of the Company’s preferred stock tranche obligation and anti‑dilution right liability for the year ended December 31, 2018, for which fair value is determined using Level 3 inputs:


	Preferred stock		Anti‑dilution
	tranche		right
	obligation		liability
Balance as of December 31, 2017	$	—	$	—
Initial fair value of anti‑dilution right liability in connection with Amgen license agreement		—		1,639
Initial fair value of preferred stock tranche obligation in connection with the issuance of Series A Preferred Stock		7,350		—
Change in fair value		62,150		5,765
Settlement of future purchase obligation		(32,750)		—
Settlement of anti‑dilution right liability upon issuance of Series A preferred stock		—		(7,404)
Extinguishment of call option liability		(36,750)		—
Balance as of December 31, 2018	$	—	$	—