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Fair value of financial instruments

6 Months Ended

Jun. 30, 2022

5. fair value of financial instruments

The Company’s financial instruments that are measured at fair value on a recurring basis consist of money market funds, marketable securities, and a derivative liability (success payment liability) pursuant to our license agreements with the President and Fellows of Harvard College, or Harvard, and The Broad Institute, Inc., or Broad, which license agreements are referred to herein as the Harvard/Broad License Agreement and Broad License Agreement.

The following tables set forth the fair value of the Company’s financial instruments by level within the fair value hierarchy:


	As of June 30, 2022
(in thousands)	Fair value		Level 1		Level 2		Level 3
Assets
Money market funds	$	36,302	$	36,302	$	—	$	—
Marketable securities:
U.S. treasury bills and notes		214,477		—		214,477		—
U.S. agency securities		6,195		—		6,195		—
Total assets	$	256,974	$	36,302	$	220,672	$	—
Liabilities
Success payment liability	$	1,756	$	—	$	—	$	1,756
Total liabilities	$	1,756	$	—	$	—	$	1,756


	As of December 31, 2021
(in thousands)	Fair value		Level 1		Level 2		Level 3
Assets
Money market funds	$	58,127	$	58,127	$	—	$	—
Marketable securities:
U.S. treasury bills and notes		277,341		—		277,341		—
U.S. agency securities		18,771		—		18,771		—
Total assets	$	354,239	$	58,127	$	296,112	$	—
Liabilities
Success payment liability	$	4,371	$	—	$	—	$	4,371
Total liabilities	$	4,371	$	—	$	—	$	4,371

Cash Equivalents—Cash equivalents of $36.3 million and $58.1 million as of June 30, 2022 and December 31, 2021, respectively, consisted of money market funds and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Marketable Securities—The Company measures its marketable securities at fair value on a recurring basis and classifies those instruments within Level 2 of the fair value hierarchy. Marketable securities are classified within Level 2 of the fair value hierarchy because pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

Antidilution Rights Liability—The antidilution rights liability represented the obligation to issue additional shares of common stock to Harvard and Broad following the completion of (1) a defined aggregate level of preferred stock financing and (2) either a sale of the Company’s preferred stock, an initial public offering, or a company sale meeting a certain value threshold. The antidilution rights liability is stated at fair value and is considered Level 3 in the fair value hierarchy because its fair value measurement is based, in part, on significant inputs not observed in the market. The antidilution rights liability related to meeting a defined aggregate level of preferred stock financing was valued using a probability-weighted present value model that considered the probability of meeting the defined aggregate level of preferred stock financing, as well as the fair value of the Company’s common stock. The antidilution rights liability related to the achievement of a specified valuation through either a sale of the Company’s preferred stock, an initial public offering, or a company sale was valued using a Monte Carlo simulation model, which models the value of the liability based on several key variables, including probability of event occurrence, timing of event occurrence, as well as the fair value of the Company’s common stock.

In June 2021, upon completion of its IPO, the Company settled the antidilution rights liability in full through the issuance of 878,098 shares of the Company's common stock for a settlement amount of $32.5 million. Prior to settlement, the Company remeasured the liability with a corresponding increase of $26.0 million and $25.6 million to other expense for

the three and six months ended June 30, 2021, respectively. As the antidilution rights liability was settled in full in June 2021, there were no amounts for such liability included in the condensed consolidated balance sheet as of June 30, 2022 or December 31, 2021.

Success Payment Liability—The Company is obligated to pay to Harvard and Broad tiered success payments in the event its average market capitalization exceeds specified thresholds for a specified period of time ascending from a high nine-digit dollar amount to $10.0 billion, or sale of the Company for consideration in excess of those thresholds. In the event of a change of control or a sale of the Company, the Company is required to pay success payments in cash within a specified period following such event. Otherwise, the success payments may be settled at the Company’s option in either cash or shares of its common stock, or a combination of cash and shares of its common stock. The maximum aggregate success payments that could be payable by the Company is $31.3 million (after termination of the Broad License Agreement).

The success payments liability is stated at fair value and is considered Level 3 because its fair value measurement is based, in part, on significant inputs not observed in the market. The Company used a Monte Carlo simulation model, which models the value of the liability based on several key variables, including probability of event occurrence, timing of event occurrence, as well as the value of the Company’s common stock. The Company also estimated the likelihood that it would maintain the Harvard/Broad License Agreement based on its ongoing research efforts.

The Company remeasured the liability at fair value with decreases of $0.9 million and $2.6 million recorded to other income for the three and six months ended June 30, 2022, respectively, and increases of $10.0 million and $9.7 million recorded to other expense for the three and six months ended June 30, 2021, respectively.

In September 2021, multiple success payments were triggered and amounts due to Harvard and Broad totaled $6.3 million. These amounts were settled in cash in November 2021. The Company will continue to adjust the remaining success payment liability for changes in fair value until the earlier of the achievement or expiration of the obligation.

The primary inputs used in valuing the success payments liability associated with the Company’s realization of a certain valuation threshold, were as follows:


	At June 30, 2022			At December 31, 2021
Fair value of common stock (per share)	$	15.28		$	36.87
Equity volatility		88	%		77	%

In February 2021, the Company provided written notice to Broad of its election to terminate the Broad License Agreement, which termination became effective in June 2021.

The reconciliation of changes in the fair value of financial instruments based on Level 3 inputs for the six months ended June 30, 2022 is as follows:


(in thousands)	Success payment liability
Balance at December 31, 2021	$	4,371
Changes in fair value		(2,615	)
Balance at June 30, 2022	$	1,756

The reconciliation of changes in the fair value of financial instruments based on Level 3 inputs for the six months ended June 30, 2021 is as follows:


(in thousands)	Antidilution rights liability			Success payment liability		Total
Balance at December 31, 2020	$	6,916		$	2,806	$	9,722
Issuance of common stock		(32,490	)		-		(32,490	)
Changes in fair value		25,574			9,654		35,228
Balance at June 30, 2021	$	—		$	12,460	$	12,460

- 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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