Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, stock price appreciation milestones, accounts payable, and accrued liabilities. The carrying amounts of accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the relatively short-term nature of those instruments.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, which are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in reclassification of levels for certain securities within the fair value hierarchy.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands):

			Fair Value Measurements at Reporting Date Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
As of September 30, 2023
Financial assets:
Money market funds	$	33,334	$	33,334	$	—	$	—
U.S. Treasury debt securities		73,383		73,383		—		—
Municipal securities		32,153		—		32,153		—
Corporate debt securities		54,073		—		54,073		—
Commercial paper		156,791		—		156,791		—
Total financial assets measured at fair value on a recurring basis	$	349,734	$	106,717	$	243,017	$	—
Financial liabilities:
Stock price appreciation milestones	$	701	$	—	$	—	$	701
Total financial liabilities measured at fair value on a recurring basis	$	701	$	—	$	—	$	701
As of December 31, 2022
Financial assets:
Money market funds	$	61,333	$	61,333	$	—	$	—
U.S. Treasury debt securities		79,025		79,025		—		—
Non-U.S. government securities		2,423		—		2,423		—
Municipal securities		23,697		—		23,697		—
Corporate debt securities		122,861		—		122,861		—
Commercial paper		151,830		—		151,830		—
Total assets measured at fair value on a recurring basis	$	441,169	$	140,358	$	300,811	$	—
Financial liabilities:
Stock price appreciation milestones	$	3,861	$	—	$	—	$	3,861
Total financial liabilities measured at fair value on a recurring basis	$	3,861	$	—	$	—	$	3,861

Level 1 assets consisted of money market funds and U.S. Treasury securities measured at fair value based on quoted prices in active markets as provided by the Company’s investment managers.

Level 2 assets consisted of corporate debt securities, commercial paper, municipal securities, and non-U.S. government securities measured at fair value using standard observable inputs, including reported trades, broker/dealer quotes, and bids and/or offers. The Company validates the quoted market prices provided by its investment managers by comparing the investment managers’ assessment of the fair values of the Company's investment portfolio balance against the fair values of the Company's investment portfolio balance obtained from an independent source.

There were no Level 3 assets held by the Company as of September 30, 2023.

Level 3 liabilities consisted of stock price appreciation milestones associated with the Amended MSK License as described in detail in Note 2. To determine the estimated fair value of the stock price appreciation milestones, the Company uses a Monte Carlo simulation methodology which models future Company common stock prices based on several key variables. The assumptions used to calculate the fair value of the stock price appreciation milestones are subject to a significant amount of judgment including the expected volatility of the Company’s common stock and estimated term, which is based in part on the last valid patent claim date. Fair value measurements are highly sensitive to changes in these inputs and significant changes could result in a significantly higher or lower fair value and resulting expense or gain. Further, because the stock price appreciation milestones are first contingent upon the achievement of a specified clinical milestone, the Company also estimates the fair value of the stock price appreciation milestones

based on the probability of achieving the clinical milestone. This assessment is based on several factors including the successful achievement of technological, manufacturing, and regulatory requirements.

A small change in the assumptions and other inputs, such as the price of the Company’s common stock, may have a relatively large change in the estimated fair value of the stock price appreciation milestones and associated liability and expense. For example, keeping all other variables constant, a hypothetical 10% increase in the stock price at September 30, 2023 from $2.12 to $2.33 per share would have decreased the income recorded during the three months ended September 30, 2023 by $0.1 million related to the stock price appreciation milestones. Keeping all other variables constant, a hypothetical 10% decrease in the stock price at September 30, 2023 from $2.12 to $1.91 per share would have increased the income recorded during the three months ended September 30, 2023 by $0.1 million related to the stock price appreciation milestones.

The following table presents the changes in fair value of the Company’s Level 3 stock price appreciation milestones liability (in thousands):

Balance at December 31, 2022	$	3,861
Changes in fair value of stock price appreciation milestones liability		(3,160	)
Balance at September 30, 2023	$	701

None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.