SEC Filing | Caribou Biosciences, Inc.

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crbu-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________________________

FORM 10-Q

______________________________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40631

______________________________________

Caribou Biosciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

______________________________________


Delaware						45-3728228
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2929 7th Street, Suite 105 Berkeley, California						94710
(Address of principal executive offices)						(Zip Code)

Registrant’s telephone number, including area code: (510) 982-6030

______________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

CRBU

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 3, 2022, the registrant had 61,001,561 shares of common stock, $0.0001 par value per share, outstanding.

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		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION	39
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	40
Signatures		41

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CARIBOU BIOSCIENCES, INC. AND ITS SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)


	September 30, 2022		December 31, 2021
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	82,085	$	240,420
Marketable securities, short-term	211,284		135,412
Accounts receivable	397		1,153
Contract assets	1,899		1,488
Other receivables	2,699		5,483
Prepaid expenses and other current assets	8,558		7,236
Total current assets	306,922		391,192
NON-CURRENT ASSETS
Investments in equity securities	7,759		7,626
Marketable securities, long-term	49,221		37,676
Property and equipment, net	8,959		4,887
Operating lease, right of use assets	24,626		—
Other assets	1,336		975
TOTAL ASSETS	$	398,823	$	442,356
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,228	$	3,990
Accrued expenses and other current liabilities	14,638		13,136
Lease liabilities, current	912		—
Deferred revenue ($150 and $0 from related party, respectively)	12,036		8,703
Total current liabilities	28,814		25,829
LONG-TERM LIABILITIES
Deferred revenue, net of current portion ($0 and $100 from related party, respectively)	15,423		22,032
Deferred rent and lease incentive liability	—		2,097
MSKCC success payments liability	3,039		4,080
Lease liabilities, non-current	26,958		—
Other liabilities	—		17
Deferred tax liabilities	475		476
Total liabilities	74,709		54,531
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized at September 30, 2022 and December 31, 2021; no shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	—		—
Common stock, par value $0.0001 per share, 300,000,000 shares authorized at September 30, 2022 and December 31, 2021, respectively; 60,986,936 and 60,263,158 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	6		6
Additional paid-in-capital	496,369		485,748
Accumulated other comprehensive loss	(2,035)		(135)
Accumulated deficit	(170,226)		(97,794)
Total stockholders’ equity	324,114		387,825
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	398,823	$	442,356

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CARIBOU BIOSCIENCES, INC. AND ITS SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Licensing and collaboration revenue	$	3,303	$	3,977	$	10,159	$	7,039
Operating expenses:
Research and development	19,991		15,833		56,494		37,144
General and administrative	9,849		6,760		29,486		16,469
Total operating expenses	29,840		22,593		85,980		53,613
Loss from operations	(26,537)		(18,616)		(75,821)		(46,574)
Other income (expense):
Change in fair value of equity securities	31		—		(73)		—
Change in fair value of the MSKCC success payments liability	(1,607)		(2,403)		1,041		(3,584)
Gain on extinguishment of PPP Loan	—		—		—		1,584
Other income, net	1,466		45		2,421		130
Total other income (expense)	(110)		(2,358)		3,389		(1,870)
Net loss	(26,647)		(20,974)		(72,432)		(48,444)
Other comprehensive loss:
Net unrealized loss on available-for-sale marketable securities, net of tax	(454)		—		(1,900)		—
Net comprehensive loss	$	(27,101)	$	(20,974)	$	(74,332)	$	(48,444)
Net loss per share, basic and diluted	$	(0.44)	$	(0.46)	$	(1.19)	$	(2.20)
Weighted-average common shares outstanding, basic and diluted	60,886,921		45,889,646		60,731,520		22,052,944

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CARIBOU BIOSCIENCES, INC. AND ITS SUBSIDIARIES

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share amounts)


	Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount
BALANCE—December 31, 2021	—	$	—	60,263,158	$	6	$	485,748	$	(135)	$	(97,794)	$	387,825
Issuance of common stock under employee stock plans	—	—		36,596	—		361		—		—		361
Issuance of common stock on exercise of options	—	—		389,855	—		629		—		—		629
Stock-based compensation expense	—	—		—	—		3,024		—		—		3,024
Net loss	—	—		—	—		—		—		(19,088)		(19,088)
Other comprehensive loss	—	—		—	—		—		(954)		—		(954)
BALANCE—March 31, 2022	—	$	—	60,689,609	$	6	$	489,762	$	(1,089)	$	(116,882)	$	371,797
Issuance of common stock on exercise of options	—	—		148,761	—		363		—		—		363
Stock-based compensation expense	—	—		—	—		2,918		—		—		2,918
Net loss	—	—		—	—		—		—		(26,697)		(26,697)
Other comprehensive loss	—	—		—	—		—		(492)		—		(492)
BALANCE—June 30, 2022	—	$	—	60,838,370	$	6	$	493,043	$	(1,581)	$	(143,579)	$	347,889
Issuance of common stock on exercise of options	—	—		148,566	—		654		—		—		654
Stock-based compensation expense	—	—		—	—		2,672		—		—		2,672
Net loss	—	—		—	—		—		—		(26,647)		(26,647)
Other comprehensive loss	—	—		—	—		—		(454)		—		(454)
BALANCE—September 30, 2022	—	$	—	60,986,936	$	6	$	496,369	$	(2,035)	$	(170,226)	$	324,114

BALANCE—December 31, 2020	7,766,582	$	41,323	9,710,830	$	1	$	7,433	$	—	$	(30,871)	$	(23,437)
Issuance of Series C convertible preferred stock, net of issuance costs of $6.2 million	6,663,940	108,827		—	—		—		—		—		—
Issuance of common stock on exercise of options	—	—		584,614	—		564		—		—		564
Stock-based compensation expense	—	—		—	—		343		—		—		343
Net loss	—	—		—	—		—		—		(13,159)		(13,159)
BALANCE—March 31, 2021	14,430,522	$	150,150	10,295,444	$	1	$	8,340	$	—	$	(44,030)	$	(35,689)
Repayment of promissory note	—	—		—	—		1,150		—		—		1,150
Issuance of common stock on exercise of options	—	—		1,037,979	—		566		—		—		566
Stock-based compensation expense	—	—		—	—		593		—		—		593
Net loss	—	—		—	—		—		—		(14,311)		(14,311)
BALANCE—June 30, 2021	14,430,522	$	150,150	11,333,423	$	1	$	10,649	$	—	$	(58,341)	$	(47,691)
Conversion of convertible preferred stock into common stock	-14,430,522	(150,150)		26,234,654	3		150,147		—		—		150,150
Issuance of common stock upon initial public offering, net of issuance costs of $28.6 million	—	—		21,850,000	2		321,018		—		—		321,020
Issuance of common stock on exercise of options	—	—		603,246	—		961		—		—		961
Stock-based compensation expense	—	—		—	—		935		—		—		935
Net loss	—	—		—	—		—		—		(20,974)		(20,974)
BALANCE—September 30, 2021	—	$	—	60,021,323	$	6	$	483,710	$	—	$	(79,315)	$	404,401

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CARIBOU BIOSCIENCES, INC. AND ITS SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(72,432)	$	(48,444)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,116		711
Loss on disposal of fixed assets	—		3
Non-cash consideration for licensing and collaboration revenue	(205)		—
Change in fair value of equity securities	73		—
Stock-based compensation expense	8,615		1,871
Change in fair value of MSKCC success payments liability	(1,041)		3,584
Acquired in-process research and development	300		1,000
Extinguishment of PPP Loan	—		(1,578)
Amortization of investment premiums	106		—
Non-cash lease expense	1,622		—
Changes in operating assets and liabilities:
Accounts receivable	756		(428)
Contract assets	(411)		(525)
Other receivables	2,783		(1,673)
Prepaid expenses and other current assets	(1,613)		(2,759)
Other assets	(361)		(151)
Accounts payable	(2,568)		848
Accrued expenses and other current liabilities	909		4,855
Deferred revenue, current and long-term	(3,277)		30,669
Deferred rent and lease incentive liability	—		909
Operating lease liabilities	(279)		(22)
Other liabilities	(15)		—
Net cash used in operating activities	(65,922)		(11,130)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities	163,130		—
Purchases of marketable securities	(252,552)		—
Purchases of property and equipment	(4,697)		(1,436)
Payments to acquire in-process research and development	(300)		(1,000)
Net cash used in investing activities	(94,419)		(2,436)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering of common stock, net of offering costs	—		321,020
Proceeds from issuance of Series C convertible preferred stock, net of issuance costs	—		108,827
Proceeds from exercise of stock options and purchases of common stock under employee stock purchase plan	2,006		2,091
Repayment of promissory note	—		1,150
Payments on capital lease	—		(119)
Net cash provided by financing activities	2,006		432,969
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(158,335)		419,403
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — BEGINNING OF PERIOD	240,466		15,953
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — END OF PERIOD	$	82,131	$	435,356
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash and cash equivalents	$	82,085	$	435,310
Restricted cash	46		46
TOTAL CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	$	82,131	$	435,356

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes	$	—	$	11

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment included in accrued expenses and other current liabilities	$	757	$	268
Acquired in-process research and development accrued	$	—	$	—
Extinguishment of PPP Loan	$	—	$	1,578
Conversion of convertible preferred stock to common stock at closing of initial public offering	$	—	$	150,150
Right-of-use-assets obtained in exchange for new operating lease liabilities	$	26,249	$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CARIBOU BIOSCIENCES, INC. AND ITS SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of the Business, Organization, and Liquidity

Business and Organization

Caribou Biosciences, Inc. (the “Company” or “we”) is a clinical-stage CRISPR genome-editing biopharmaceutical company dedicated to developing innovative, transformative therapies for patients with devastating diseases. CRISPR is an acronym for Clustered Regularly Interspaced Short Palindromic Repeats. Our novel CRISPR platform, CRISPR hybrid RNA-DNA (“chRDNA,” pronounced “chardonnay”), enables high genome-editing precision to develop cell therapies that are specifically engineered to target cancer and are armored for enhanced persistence. We are advancing a pipeline of allogeneic, or off-the-shelf, chimeric antigen receptor (“CAR”)-T (“CAR-T”) and CAR-natural killer (“CAR-NK”) cell therapies for the treatment of patients with hematologic malignancies and solid tumors.

We incorporated in October 2011 as a Delaware corporation and are headquartered in Berkeley, California. We have four wholly owned subsidiaries: Antler Holdco, LLC, incorporated in Delaware in April 2019; Microbe Holdco, LLC, incorporated in Delaware in June 2020; Arboreal Holdco, LLC, incorporated in Delaware in November 2020; and Biloba Holdco, LLC, incorporated in Delaware in April 2021. Our wholly owned subsidiaries hold interests in our equity investments and do not have operating activities.

Liquidity

We have incurred net losses and negative cash flows from operations since our inception and we had an accumulated deficit of $170.2 million as of September 30, 2022. During the nine months ended September 30, 2022, we incurred a net loss of $72.4 million and used $65.9 million of cash in operating activities. We expect to continue to incur substantial losses, and our ability to achieve and sustain profitability will depend on the successful development, approval, and commercialization of our product candidates and on our achievement of sufficient revenue to support our cost structure. We may never achieve profitability and, unless and until we do, we will need to continue to raise additional capital. Our management expects that existing cash, cash equivalents, and marketable securities of $342.6 million as of September 30, 2022, will be sufficient to fund our current operating plan for at least the next 12 months from the date of issuance of our condensed consolidated financial statements.

2. Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies disclosed in Note 2 to the annual consolidated financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K, other than changes to our leasing policy described below in connection with the adoption of the guidance under the Accounting Standards Codification (“ASC”) 842, Leases.

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Caribou Biosciences, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements; and the reported amounts of revenue, income, and expenses during the applicable reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, common stock valuation, stock-based compensation expense, accrued expenses related to research and development activities, valuation of the Memorial Sloan Kettering Cancer Center (“MSKCC”) success payments liability, and income taxes. Our management bases its estimates on historical experience and on various other assumptions that they believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates.

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Segments

We operate and manage our business as one reportable operating segment, which is the business of developing a pipeline of allogeneic CAR-T and CAR-NK cell therapies. Our president and chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for allocating resources and evaluating financial performance. All long-lived assets are maintained in the United States.

Concentrations of Credit Risk and Other Uncertainties

Financial instruments that potentially subject us to concentration of credit risk consist of cash and cash equivalents, accounts receivable, contract assets, other receivables, and investments in marketable securities and equity securities. Substantially all of our cash and cash equivalents are deposited in accounts at two financial institutions, and account balances may at times exceed federally insured limits. We mitigate the risks by investing in high-grade instruments, limiting our exposure to one issuer, and we monitor the ongoing creditworthiness of the financial institutions and issuers. We believe these financial institutions to be of high credit quality.

Licensees that represent 10% or more of our revenue and accounts receivable and contract assets were as follows:


	Revenue				Revenue				Accounts Receivable and Contract Assets
	Three Months Ended				Nine Months Ended				As of September 30, 2022		As of December 31, 2021
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Licensee A	17.2	%	14.0	%	16.4	%	23.2	%	24.2	%	24.6	%
Licensee B	51.7	%	57.2	%	54.2	%	39.5	%	33.7	%	45.1	%
Licensee C	*		*		*		*		12.0	%	*
Total	68.9	%	71.2	%	70.6	%	62.7	%	69.9	%	69.7	%

*Less than 10%

We monitor economic conditions to identify facts or circumstances that may indicate if any of our accounts receivable are not collectible or if the contract assets should be impaired. No allowance for doubtful accounts or contract asset impairment was recorded as of September 30, 2022 or December 31, 2021.

Property and Equipment, Net

Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The useful lives of property and equipment are as follows:


Computers			3 years
Furniture and fixtures			5 years
Laboratory equipment			5 years
Leasehold improvements			Shorter of remaining lease term or estimated useful life

Upon retirement or sale of the assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recorded in the statements of operations. Repairs and maintenance are expensed as incurred.

Leases

We adopted the guidance under ASC 842 on January 1, 2022 using the modified retrospective approach with a cumulative-effect adjustment as of January 1, 2022 in accordance with the Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842). We determine whether an arrangement is or contains a lease at the inception of the arrangement and whether such a lease is classified as a finance lease or operating lease at the commencement date of the lease. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities, and long-term lease liabilities. We elected not to recognize the right-of-use assets and lease liabilities for leases with lease terms of 12 months or less (short-term leases). Lease liabilities and their corresponding right-of-use assets are recorded based on the present

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value of lease payments over the expected lease term. As the interest rate implicit in our lease contracts is not readily determinable, we utilize a collateralized incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received and impairment charges if we determine the right-of-use assets are impaired. There was no cumulative-effect adjustment recorded to retained earnings on January 1, 2022.

We consider the lease term to be the noncancellable period that we have the right to use the underlying asset, together with any periods where it is reasonably certain we will exercise an option to extend (or not terminate) the lease. Periods covered by an option to extend (or not terminate) the lease in which the exercise of the option is controlled by the lessor are included in the lease term.

Rent expense for operating leases is recognized on a straight-line basis over the lease term and is presented in operating expenses on the statements of operations and comprehensive loss. We have elected to not separate lease and non-lease components for our facilities leases and leases of electroporation devices and, instead, we account for each separate lease component and the non-lease components associated with that lease component as a single lease component. Variable lease payments are recognized as incurred and are presented in operating expenses on the statements of operations and comprehensive loss.

As of September 30, 2022 and December 31, 2021, we had no finance leases. See Note 9 to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional information about the impact of adoption and disclosures on our leases.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standard-setting bodies and are adopted by us as of the specified effective date.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires a lessee to recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. We adopted the new standard as of January 1, 2022, using the modified retrospective approach. Comparative periods were not adjusted and continue to be presented under the previous accounting guidance. We elected the package of practical expedients permitted under the transition guidance, which allows us to carry forward the historical lease classification of contracts entered into prior to January 1, 2022.

Our adoption of the new standard impacted the condensed consolidated balance sheets as follows (in thousands):


	January 1, 2022
	Pre-ASC 842 Balance		ASC 842 Adoption Impact		Post-ASC 842 Balance
Operating lease right-of-use assets	$	—	$	22,818	$	22,818
Prepaid rent	$	291	$	(291)	$	—
Accrued expenses and other current liabilities*	$	13,136	$	683	$	13,819
Long-term operating lease liabilities	$	—	$	23,941	$	23,941
Deferred rent and lease incentive liability	$	2,097	$	(2,097)	$	—

*Adjustment represents the current portion of operating lease liabilities of $0.8 million and reclassification of the current portion of the lease incentive liability of $0.1 million to reduce the operating lease right-of-use assets.

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). This ASU provides guidance on the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the current incurred loss impairment approach with a methodology to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. This ASU is to be applied on a modified retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, and interim reporting periods within fiscal years beginning after December 15,

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2023. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, and interim periods therein. We are currently evaluating the impact of adoption of ASU 2016-13 on our condensed consolidated financial statements and related disclosures.

3. Fair Value Measurements and Fair Value of Financial Instruments

The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entireties based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires our management to make judgments and consider factors specific to the asset or liability.

Our financial instruments consist of Level 1, Level 2, and Level 3 financial instruments. We generally classify our marketable securities as Level 2. Instruments are classified as Level 2 when observable market prices for identical securities that are traded in less active markets are used. When observable market prices for identical securities are not available, such instruments are priced using benchmark curves, benchmarking of like securities, sector groupings, matrix pricing, and valuation models. These valuation models are proprietary to the pricing providers or brokers and incorporate a number of inputs, including in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. For certain security types, additional inputs may be used, or some of the standard inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on any given day. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. We recognize transfers into and out of levels within the fair value hierarchy in the period in which the actual event or change in circumstances that caused the transfer occurs. No such transfers occurred during the three and nine months ended September 30, 2022. Level 1 financial instruments are comprised of money market fund investments and U.S. Treasury bills. Level 2 financial instruments are comprised of commercial paper, corporate debt securities, and U.S. government agency bonds. Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Level 3 financial instruments consist of the MSKCC success payments liability.

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The following table sets forth our financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):


	Fair Value Measurements as of September 30, 2022
	Total		Level 1		Level 2		Level 3
Assets:
Commercial paper ($52,821 included in cash and cash equivalents)	$	149,970	$	—	$	149,970	$	—
U.S. Treasury bills	87,863		87,863		—		—
Corporate debt securities	46,635		—		46,635		—
Money market fund investments (included in cash and cash equivalents)	29,264		29,264		—		—
U.S. government agency bonds	28,858		—		28,858		—
Total fair value of assets	$	342,590	$	117,127	$	225,463	$	—
Liabilities:
MSKCC success payments liability	$	3,039	$	—	$	—	$	3,039
Total fair value of liabilities	$	3,039	$	—	$	—	$	3,039


	Fair Value Measurements as of December 31, 2021
	Total		Level 1		Level 2		Level 3
Assets:
Money market fund investments (included in cash and cash equivalents)	$	181,528	$	181,528	$	—	$	—
Commercial paper ($58,892 included in cash and cash equivalents)	141,676		—		141,676		—
Corporate debt securities	38,649		—		38,649		—
U.S. Treasury bills	26,590		26,590		—		—
U.S. government agency bonds	25,065		—		25,065		—
Total fair value of assets	$	413,508	$	208,118	$	205,390	$	—
Liabilities:
MSKCC success payments liability	$	4,080	$	—	$	—	$	4,080
Total fair value of liabilities	$	4,080	$	—	$	—	$	4,080

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The fair value and amortized cost of cash equivalents and available-for-sale marketable securities by major security type as of September 30, 2022 and December 31, 2021 are presented in the following tables (in thousands):


	As of September 30, 2022
	Amortized Cost Basis		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Commercial paper ($52,821 included in cash and cash equivalents)	$	150,135	$	—	$	(165)	$	149,970
U.S. Treasury bills	89,027		—		(1,164)		87,863
Corporate debt securities	47,022		—		(387)		46,635
Money market investments (included in cash equivalents)	29,264		—		—		29,264
U.S. government agency bonds	29,178		1		(321)		28,858
Total cash equivalents and marketable securities	$	344,626	$	1	$	(2,037)	$	342,590

Classified as:
Cash and cash equivalents							$	82,085
Marketable securities, short-term							211,284
Marketable securities, long-term							49,221
Total cash equivalents and marketable securities							$	342,590


	As of December 31, 2021
	Amortized Cost Basis		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Money market investments (included in cash equivalents)	$	181,528	$	—	$	—	$	181,528
Commercial paper ($58,892 included in cash equivalents)	141,726		1		(51)		141,676
U.S. government agency bonds	25,102		—		(37)		25,065
Corporate debt securities	38,661		4		(16)		38,649
U.S. Treasury bills	26,626		1		(37)		26,590
Total cash equivalents and marketable securities	$	413,643	$	6	$	(141)	$	413,508

Classified as:
Cash and cash equivalents							$	240,420
Marketable securities, short-term							135,412
Marketable securities, long-term							37,676
Total cash equivalents and marketable securities							$	413,508

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liability (in thousands):


	MSKCC Success Payments Liability
Balance at December 31, 2021	$	4,080
Change in fair value	(1,041)
Balance at September 30, 2022	$	3,039

Our liability for the MSKCC success payments is carried at fair value and changes are recognized as expense or income as part of other income (expense) until the success payments liability is paid or expires (Note 4). We recorded a

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$1.6 million and $2.4 million change in fair value of the MSKCC success payments liability as a loss in other income (expense) in our condensed consolidated statements of operations and comprehensive loss for the three months ended September 30, 2022 and 2021, respectively. We recorded a $1.0 million and $3.6 million change in fair value of the MSKCC success payments liability as a gain and a loss, respectively, in other income (expense) and research and development expense in our condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2022 and 2021, respectively.

We utilize a Monte Carlo simulation model that models the future movement of stock prices based on several key variables. This model requires significant estimates and assumptions in determining the estimated fair value of the MSKCC success payments liability at each balance sheet date. The assumptions used to calculate the fair value of the MSKCC success payments are subject to a significant amount of judgment including the expected volatility that was estimated using available information about the historical volatility of stocks of publicly traded companies that are similar to us, the estimated term, and the estimated number and timing of valuation measurement dates. The table below summarizes key assumptions used in the valuation of MSKCC success payments liability:


	As of September 30, 2022		As of December 31, 2021
Fair value of common stock	$	10.55	$	15.09
Risk-free interest rate	3.83%		1.52%
Expected volatility	81%		75%
Probability of achieving multiple of Initial Share Price	5.7% to 17.9%		7.0% to 20.9%
Expected term (years)	3.9 to 5.3		4.2 to 5.5

The computation of expected volatility is estimated using a combination of available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption and the historical and implied volatility of our stock. The risk-free interest rate, expected volatility, and expected term assumptions depend on the estimated timing of our phase 1 clinical trial for our CB-012 product candidate utilizing the know-how, biological materials, and intellectual property licensed under the MSKCC Agreement and the estimated timing of marketing approval for this product candidate from the U.S. Food and Drug Administration (“FDA”). In addition, we incorporated the estimated number and timing of valuation measurement dates in the calculation of the MSKCC success payments liability.

A small change in the assumptions and other inputs, such as the fair value of our common stock, may have a relatively large change in the estimated valuation and associated liability and expense or income.

4. Significant Agreements

The Regents of the University of California and the University of Vienna

We entered into an Exclusive License Agreement, dated April 16, 2013 (as amended, the “UC/Vienna Agreement”) with The Regents of the University of California (“UC”) and the University of Vienna (“Vienna”) (together, “UC/Vienna”) wherein UC/Vienna granted us an exclusive worldwide license, with the right to sublicense, in all fields to the foundational CRISPR-Cas9 patent family co-owned by UC, Vienna, and Dr. Emmanuelle Charpentier (the “CVC IP”). Dr. Charpentier has not granted us any rights, either directly or indirectly. The UC/Vienna Agreement continues until the last-to-expire patent or last-to-be-abandoned patent application within the CVC IP; provided, however, that UC/Vienna may terminate the UC/Vienna Agreement upon the occurrence of certain events and we may terminate the UC/Vienna Agreement at our sole discretion upon written notice. Without patent term adjustment or patent term extension, the CVC IP will expire in 2033. The UC/Vienna Agreement includes certain diligence milestones that we must meet. For products and services sold by us that are covered by the CVC IP, we will owe low- to mid-single-digit percent royalties on net sales, subject to a minimum annual royalty. Prior to the time that we are selling products, we owe UC/Vienna an annual license maintenance fee. We may owe UC/Vienna up to $3.4 million in certain regulatory and clinical milestone payments in the field of human therapeutics and diagnostics for products that are covered by the CVC IP and developed by us, an affiliate, or a sublicensee. Additionally, we pay UC/Vienna a specified percentage of sublicensing revenue, including cash and equity, we receive from sublicensing the CVC IP, subject to certain exceptions. If we include intellectual property owned or controlled by us in a sublicense to the CVC IP, we pay UC/Vienna a low double-digit percentage of sublicensing revenues received under the sublicense. If we do not include intellectual property owned or controlled by us in a sublicense to the CVC IP, we pay UC/Vienna 50% of sublicensing revenues received under the sublicense. To date, we have entered

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into over 25 sublicensing agreements in a variety of fields such as human therapeutics, forestry, agriculture, research reagents, transgenic animals, certain livestock targets, internal research, bioproduction, cell lines, and microbial applications that include the CVC IP as well as other Cas9 intellectual property owned or controlled by us. We are obligated to reimburse UC for its prosecution and maintenance costs of the CVC IP.

For each of the three-month periods ended September 30, 2022 and 2021, we incurred $0.3 million for payments we owe to UC related to sublicensing revenues, which we recorded in research and development expenses in our condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2022 and 2021, we incurred $0.8 million and $1.3 million, respectively, for payments we owe to UC related to sublicensing revenues, which we recorded in research and development expenses in our condensed consolidated statements of operations and comprehensive loss.

For the three months ended September 30, 2022 and 2021, we reimbursed UC $1.4 million and $2.4 million, respectively, for prosecution and maintenance costs of the CVC IP, which were recorded in general and administrative expenses in our condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2022 and 2021, we reimbursed UC $4.7 million and $8.9 million, respectively, for prosecution and maintenance costs of the CVC IP, which were recorded in general and administrative expenses in our condensed consolidated statements of operations and comprehensive loss.

On December 15, 2016, we entered into a Consent to Assignments, Licensing and Common Ownership and Invention Management Agreement (“IMA”) relating to the CVC IP. Under the IMA, CRISPR Therapeutics AG (“CRISPR”) reimburses us 50% of the amounts we reimburse UC for patent prosecution and maintenance costs of the CVC IP. For the three months ended September 30, 2022 and 2021, CRISPR reimbursed us $0.7 million and $1.2 million, respectively, which we recorded as reductions of general and administrative expenses in our condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2022 and 2021, CRISPR reimbursed us $2.4 million and $4.4 million, respectively, which we recorded as reductions of general and administrative expenses in our condensed consolidated statements of operations and comprehensive loss.

Memorial Sloan Kettering Cancer Center

On November 13, 2020, we entered into an Exclusive License Agreement with MSKCC (the “MSKCC Agreement”), under which we exclusively licensed know-how, biological materials, and patent families relating to fully-human single-chain variable fragments targeting C-type lectin-like molecule-1 (CLL-1; also known as CD371) for use in T cells, NK cells, and genome-edited induced pluripotent stem cells (“iPSCs”) for allogeneic CLL-1-targeted cell therapies (currently used in our CB-012 product candidate). We paid MSKCC an upfront payment of $0.5 million in cash and $2.1 million in stock. For each licensed CLL-1 product, we may owe potential clinical, regulatory, and commercial milestone payments totaling $112.0 million. In addition, in the event we, our affiliates, or sublicensees, receive regulatory approval for a licensed CLL-1 product, we will owe low- to mid-single-digit percent royalties on net sales by us, our affiliates, and our sublicensees. Our license from MSKCC includes the right to sublicense through multiple tiers and we will owe MSKCC a percentage of upfront cash or equity received from our sublicensees. The percentage owed decreases as our licensed CLL-1 product candidate moves through development, starting at a low-double-digit percentage if clinical trials have not yet begun and decreasing to a mid-single-digit percentage if our licensed CLL-1 product candidate is in later clinical trial stages. We are also responsible for paying a percentage of licensed patent costs. The MSKCC Agreement includes certain diligence milestones that we must meet by specified dates, which may be extended upon payment of additional fees.

MSKCC is entitled to certain success payments if our common stock fair value increases by certain multiples of increasing value based on a comparison of the fair market value of our common stock to $5.1914 per share, adjusted for any future stock splits (the “Initial Share Price”), during a specified time period. Under the MSKCC Agreement, as a publicly traded company, our common stock fair value is determined by any given 45-day volume weighted-average trading price. At our option, success payments to MSKCC may be made in cash or common stock. The relevant time period commences when the first patient is dosed with a licensed CLL-1 product candidate in the first phase 1 clinical trial and ends upon the earlier of the third anniversary from the approval of our, or our affiliate’s, or sublicensee’s biologics license application (“BLA”) by the FDA or 10 years from the date the first patient was dosed with a licensed CLL-1 product candidate in the first phase 1 clinical trial. The aggregate success payments will not exceed $35.0 million. Additionally, if we undergo a change of control during the specified time period, we may owe a change of control payment, depending upon the increase in our stock price due to the change of control and also to what extent success payments have already been paid by us to MSKCC. In no event will the combination of success payments and the change of control payment owed to MSKCC exceed $35.0 million.

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The following table summarizes the amounts of the MSKCC success payments:

Multiple of Initial Share Price giving rise to a success payment