Fair Value Measurements

9 Months Ended

Jul. 31, 2024

Fair Value Disclosures [Abstract]

Fair Value Measurements

4.Fair Value Measurements

The Company did not have any financial assets or liabilities that required fair value measurement on a recurring basis as of July 31, 2024 or October 31, 2023.

During the three and nine months ended July 31, 2024 and during the year ended October 31, 2023, there were no transfers or reclassifications between fair value measure levels of liabilities. The carrying values of all financial current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.

During the three and nine months ended July 31, 2023, and as of July 31, 2023, the Company had the following instruments which were measured at fair value.

April 2023 Notes

The Company elected the fair value option of accounting for the April 2023 Notes (see Note 8). The Company recorded the April 2023 Notes at fair value upon the date of issuance, which was determined to be the total cash proceeds received of $8.0 million. The April 2023 Notes were repaid through the issuance of $8.0 million in aggregate amount of convertible notes and warrants issued as part of the 2023 Financing. No change in fair value was recorded on the April 2023 Notes during the three and nine months ended July 31,

2023, given the close proximity between the issuance date of the notes and the repayment date. As of July 31, 2023, the April 2023 Notes were no longer outstanding.

Convertible Debentures Embedded Derivative Liabilities

Prior to the Reverse Recapitalization, the Company’s convertible debentures contained equity conversion options, and certain repayment features, that have been identified as a single compound embedded derivative requiring bifurcation from the host contract for the convertible debentures for which the fair value has not been elected. The Company estimated the fair value of the convertible debenture embedded derivative liabilities on issuance using a probability weighted scenario expected return model. The estimated probability and timing of underlying events triggering the conversion and liquidity repayment features and probability of exercise of the extension features within the convertible debentures as well as discount rates, volatility and share prices are inputs used to determine the estimated fair value of the embedded derivative.

Upon the close of the Reverse Recapitalization the 2022 Notes were converted and exchanged for common shares of the Company, resulting in an extinguishment of the 2022 Notes and related embedded derivative liability. Further the BDC Note (as defined below) was repaid in full. Refer to Note 3 and Note 9.

The following table provides a summary of the change in the estimated fair value of the Company’s convertible debentures embedded derivative liabilities for three and nine months ended July 31, 2023.

	Total
Balance as of October 31, 2022	$	3,791
Change in fair value of convertible debenture embedded    derivative liabilities		307
Foreign exchange (gain)/loss		5
Balance as of January 31, 2023		4,103
Change in fair value of convertible debenture embedded    derivative liabilities		(625	)
Foreign exchange (gain)/loss		(4	)
Balance as of April 30, 2023	$	3,474
Change in fair value of convertible debenture embedded    derivative liabilities		(435	)
Foreign exchange (gain)/loss		15
Balance as of July 31, 2023	$	3,054

Warrant Liabilities

Prior to the consummation of the Reverse Recapitalization, Old enGene issued warrants to purchase redeemable convertible preferred shares as part of the issuance of certain redeemable convertible preferred shares, convertible debentures, and the term loan (the “Preferred Share Warrants”). Upon the close of the Reverse Recapitalization, the Preferred Share Warrants were surrendered for no consideration and the fair value was determined to be zero. The Company estimated the fair value of its Preferred Share Warrant liabilities using a Modified Black-Scholes option-pricing model, which included assumptions that are based on the individual characteristics of the Preferred Share Warrants on the valuation date, and assumptions related to the fair value of the underlying redeemable convertible preferred shares, expected volatility, expected life, dividends, risk-free interest rate and discount for lack of marketability (“DLOM”). Due to the nature of these inputs, the Preferred Share Warrants are considered a Level 3 liability.

The weighted average expected life of the Preferred Share Warrants was estimated based on the weighting of scenarios considering the probability of different terms up to the contractual term of 10 years in light of the expected timing of a future exit event, which includes a SPAC transaction. The Company determines the expected volatility based on an analysis of reported data for a group of guideline companies that have issued instruments with substantially similar terms. The expected volatility has been determined using a weighted average of the historical volatility measures of this group of guideline companies. The risk-free interest rate is determined by reference to the Canadian treasury yield curve in effect at the time of measurement of the warrant liabilities for time periods approximately equal to the weighted average expected life of the warrants. The Company has not paid, and did not anticipate paying, cash dividends on its redeemable convertible preferred shares; therefore, the expected dividend yield is assumed to be zero.

Because there was no public market for the underlying redeemable convertible preferred shares, the Company determined their fair value based on third-party valuations. Initially, the estimated enterprise equity value of the Company was determined using a market approach and/or cost approach by considering the weighting of scenarios estimated using a back-solve method based on recent financing transactions of the Company. This value was then allocated towards the Company’s various securities of its capital structure using an option pricing method, or “OPM”, and a waterfall approach based on the order of the superiority of the rights and preferences of the various securities relative to one another. Significant assumptions used in the OPM to determine the fair value of redeemable convertible preferred shares include volatility, DLOM, and the expected timing of a future liquidity event such as an IPO, SPAC transaction or sale of the Company, in light of prevailing market conditions. This valuation process creates a range of equity values both between and within scenarios.

In addition to considering the results of these valuations, the Company considered various objective and subjective factors to determine the fair value of the Company's preferred shares as of each valuation date, including the prices at which the Company sold redeemable convertible preferred in the most recent transactions, external market conditions, the progress of the Company's research and development programs, the Company's financial position, including cash on hand, and its historical and forecasted performance and operating results, and the lack of an active public market for the Company's redeemable convertible preferred shares, among other factors.

The following table provides a summary of the change in the estimated fair value of the Company’s warrant liabilities for the three and nine months ended July 31, 2023:

	Total
Balance as of October 31, 2022	$	11,456
Change in fair value of warrant liabilities		1,185
Foreign exchange (gain)/loss		217
Balance as of January 31, 2023		12,858
Change in fair value of warrant liabilities		341
Foreign exchange (gain)/loss		(196	)
Balance as of April 30, 2023	$	13,003
Warrant liability recognized upon 2023 Financing		1,420
Change in fair value of warrant liabilities		(5,521	)
Foreign exchange (gain)/loss		400
Balance as of July 31, 2023	$	9,302

May 2023 Notes

The Company elected the fair value option of accounting for the May 2023 Notes. The Company estimated the fair value of the May 2023 Notes using a probability weighted scenario expected return model. The estimated probability and timing of underlying events within the convertible debentures as well as discount rates, volatility and share prices are inputs used to determine the estimated fair value of the May 2023 Notes. As part of the issuance of the May 2023 Notes, the Company also issued warrants which were determined to be freestanding, liability classified and measured at fair value, as discussed further below. The Company recorded both the May 2023 Notes and warrants issued as part of the 2023 Financing at inception and subsequently at fair value.

The assumptions that the Company used to determine the fair value of the May 2023 Notes as of the issuance date and as of July 31, 2023 are as follows:

	As Of			As Of
	31-Jul-23			Issuance Date
Probability of qualified financing*		75	%		60	%
Volatility		85	%		85	%
Class C Preferred Share Price (CAD)	$	2.074		$	2.074
Liquidity price at conversion of listing event**	$	8.42		$	8.42
Fair value of common share at conversion of listing event**	$	10.25		$	10.25
Discount rate		38.70	%		40.80	%
Expected time to respective scenarios	0.2 years			0.3 years

* The probability represents the cumulated probabilities of conversion at various dates before maturity. The probability includes the probability of a SPAC transaction (which corresponds to a listing event for the 2023 Notes).

** The liquidity price at the conversion of a listing event represents the conversion price of the 2023 Notes upon the business combination with FEAC, and the fair value per common share at conversion of a listing event represents the price per share of the Newco upon the business combination with FEAC, as set forth in the business combination agreement.

The Company recorded the May 2023 Notes upon issuance at fair value and will subsequently remeasure the notes to fair value at each reporting period until settled. The following table provides a summary of the change in the estimated fair value of the Company’s 2023 Notes for the three and nine months ended July 31, 2023 as follows:

	Total
Balance as of October 31, 2022	$	—
Issuance of May 2023 Notes		37,044
Change in fair value of convertible debentures		2,941
Balance as of July 31, 2023	$	39,985