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Fair Value Measurement

12 Months Ended

Dec. 31, 2022

4. Fair Value Measurement

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


			Fair Value Measurements at December 31, 2022 Using:
Assets:	Total		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	24,082	$	24,082	$	—	$	—
Short-term investments:
U.S. Treasury securities		32,143		32,143		—		—
U.S. government-sponsored enterprise securities		66,089		—		66,089		—
Long-term investments:
U.S. Treasury securities		7,238		7,238		—		—
U.S. government-sponsored enterprise securities		34,643		—		34,643		—
Total assets	$	164,195	$	63,463	$	100,732	$	—


			Fair Value Measurements at December 31, 2021 Using:
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents:
Money market funds	$	79,000	$	79,000	$	—	$	—
Total assets	$	79,000	$	79,000	$	—	$	—

The Company classifies its money market funds and U.S. Treasury securities as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets without any valuation adjustment. The Company classifies its U.S. government-sponsored enterprise securities as Level 2 assets under the fair value hierarchy as these assets have been valued using information obtained through a third-party pricing service as of the balance sheet date, using observable market inputs that may include trade information, broker or dealer quotes, bids, offers, or a combination of these data sources.

During the years ended December 31, 2022 and 2021, there were no transfers between levels. The Company uses the carrying amounts of its restricted cash, prepaid expenses and other current assets, accounts payable and accrued expenses to approximate their fair value due to the short-term nature of these amounts.

Preferred Stock Tranche Rights

In October 2020, the Company issued Series A-1 convertible preferred stock (“Series A-1 Preferred Stock”). According to the Series A-1 Preferred Stock subscription agreement, the Company was obligated to issue second and third tranches of Series A-1 Preferred Stock upon the Company’s successful completion of future science-driven milestone events, such as entering into in-licensing agreements, contracting with a CRO to conduct Phase 2 clinical trials, and identifying compounds for lead drug candidates. As a result, the Company’s obligation to issue additional Series A-1 Preferred Stock was recognized as a tranche obligation (the “Preferred Stock Tranche Rights”), which was subject to revaluation at each balance sheet date. Changes in fair value were recorded as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss until the Preferred Stock Tranche Rights were settled in January 2021.

The Company determined that the Preferred Stock Tranche Rights were freestanding financial instruments. The freestanding financial instruments were classified as a liability on the Company’s consolidated balance sheets and initially recorded at fair value. The liability was subsequently remeasured to fair value at each reporting date until settled in January 2021, and changes in the fair value of the preferred stock tranche liability were recognized as a component of other income (expense) in the consolidated statements of operations and comprehensive loss. The fair value of the Preferred Stock Tranche Rights was based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy.

The Preferred Stock Tranche Rights were valued as a forward contract. The value was determined using a probability-weighted present value calculation. In determining the fair value of the tranche rights obligation, estimates and assumptions impacting the fair value included the per share estimated fair value of the Company’s Series A-1 Preferred Stock, discount rates, estimated time to tranche closing, and probability of each tranche closing. The Company determined the per share estimated fair value of the Series A-1 Preferred Stock by back-solving to the initial proceeds of the Series A-1 Preferred Stock financing. The Company remeasured the Preferred Stock Tranche Rights at each reporting period and prior to the settlement of the Preferred Stock Tranche Rights in January 2021.

The following reflects the ranges of significant quantitative inputs used in the valuation of the Preferred Stock Tranche Rights during the year ended December 31, 2021, which reflects the inputs used at remeasurement prior to settlement in January 2021:


	Year Ended December 31, 2021
Implied fair value of Series A-1 Preferred Stock	$2.35
Discount rate	N/A
Time to milestone event (years)		0.00
Probability of tranche closing	100%

The following provides a roll forward of the fair value of the Preferred Stock Tranche Rights measured at fair value on a recurring basis using Level 3 significant unobservable inputs (in thousands):


Balance at December 31, 2020	$	318
Change in fair value		50
Fair value recognized as Series A-1 Preferred Stock upon settlement of Preferred Stock Tranche Rights		(368	)
Balance at December 31, 2021	$	—

Anti-dilution Right

In accordance with a license agreement and stock issuance agreement between Eli Lilly and Company (“Lilly”) and the Company (collectively, the “Lilly Agreement”) entered into in January 2021, the Company was obligated to issue capital stock in a subsequent financing to Lilly in order to maintain a specified, single-digit percentage ownership of the Company upon specified conditions (the “Anti-dilution Right”).

The Company determined that the Anti-dilution Right is a freestanding financial instrument. The freestanding financial instrument was classified as an asset or liability on the Company’s consolidated balance sheets and initially recorded at fair value. The fair value of the Anti-dilution Right was based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. A change in the assumptions related to the valuation of the Anti-dilution Right could have a significant impact on the value of the obligation.

The Anti-dilution Right was valued as a forward contract. The value was determined using a probability-weighted present value calculation. In determining the fair values of the obligation, estimates and assumptions impacting fair value included the per share estimated fair value of the Company’s Series B convertible preferred stock (“Series B Preferred Stock”), discount rates, estimated time to share issuance and probability of each share issuance.

The Anti-dilution Right was subsequently revalued until anti-dilution shares were issued in November 2021, with changes in fair value for each reporting period recognized in other income (expense), net in the consolidated statements of operations and comprehensive loss. Upon issuance of the anti-dilution shares, the fair value of the Anti-dilution Right was recognized as Series B Preferred Stock.

In full satisfaction of the Anti-dilution Right, the Company issued Lilly 46,058 shares of Series B Preferred Stock in November 2021.

The following reflects the ranges of significant quantitative inputs used in the valuation of the Anti-dilution Right during the year ended December 31, 2021:


		Year Ended December 31, 2021
Volatility		125%
Risk-free rate		0.0% - 0.1%
Discount rate		47.5%
Implied issuance price of Series B Preferred Stock		$0.84 - $6.11
Probability of settlement		10% - 100%

The following provides a roll forward of the fair value of the Anti-dilution Right measured at fair value on a recurring basis using Level 3 significant unobservable inputs (in thousands):


Balance at December 31, 2020	$	—
Issuance of Anti-dilution Right		233
Change in fair value of Anti-dilution Right		30
Fair value recognized as Series B Preferred Stock upon settlement of Anti-dilution Right		(263	)
Balance at December 31, 2021	$	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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