Metagenomi Inc

Notes to the consol idated financial statements

DESCRIPTION OF BUSINESS, ORGANIZATION AND LIQUIDITY

Organization and business

Metagenomi Technologies, LLC (“Metagenomi”), together with its wholly owned subsidiary Metagenomi, Inc. (“Metagenomi, Inc.”) (together, the “Company”) is a precision genetic medicines company committed to developing curative therapeutics for patients using our proprietary, comprehensive metagenomics-derived genome editing toolbox.

Formation and group reorganizations

Metagenomi.co was incorporated in September 2016 in the State of Delaware and is headquartered in Emeryville, California. In September 2018, Metagenomi.co formed a subsidiary, Metagenomi as its sole member. In November 2018, the two companies completed a reorganization where Metagenomi Technologies, LLC became the parent of Metagenomi.co. The reorganization was a transaction of entities under common control and did not change the group.

In December 2018, Metagenomi formed another wholly owned subsidiary, Metagenomi IP Technologies, LLC. Metagenomi IP Technologies, LLC did not have any operations except for the initial transfer of IP from Metagenomi.co and an ongoing license of its technology to Metagenomi.co. Key activities of Metagenomi were raising capital to support operations of Metagenomi.co.

In April 2020, Metagenomi.co changed its name to Metagenomi, Inc.

In December 2021, the group completed another tax-free reorganization, whereby Metagenomi IP Technologies, LLC merged with and into Metagenomi, Inc. As of December 31, 2023, the group consisted of two entities: Metagenomi Technologies, LLC and its subsidiary, Metagenomi Inc. Both 2018 and 2021 reorganizations were accounted as transactions under common control at historical carrying values.

On January 24, 2024, the Company completed a series of transactions pursuant to which Metagenomi merged with and into its wholly-owned subsidiary, Metagenomi, Inc., with Metagenomi, Inc. continuing as the surviving corporation (the “Reorganization”). In connection with the Reorganization, (i) all of the outstanding common unitholders received shares of common stock of Metagenomi, Inc., (ii) all of the outstanding preferred unitholders received shares of redeemable convertible preferred stock of Metagenomi, Inc. with the same rights and privileges and (iii) certain holders of profits interest units received shares of common stock and unvested restricted common stock in Metagenomi, Inc. as determined by the applicable provisions of the Amended and Restated Limited Liability Company Agreement dated December 20, 2022, as amended on July 31, 2023 (the “LLC Agreement”) in effect immediately prior to the Reorganization. In connection with the Reorganization, by operation of law, Metagenomi, Inc. acquired all assets of Metagenomi, and assumed all of its liabilities and obligations. The Reorganization is expected to be a non-taxable transaction to Metagenomi, Inc. for U.S. income tax purposes.

Reverse Stock Split of Metagenomi, Inc.

On January 26, 2024, following the Reorganization, Metagenomi, Inc. effected a reverse stock splitof the shares of common stock at a ratio of 1-for-1.74692 (the “Reverse Stock Split”). The number of authorized shares and par value per share were not adjusted as a result of the Reverse Stock Split.

Initial Public Offering

On February 8, 2024, Metagenomi, Inc.’s Form S-1 Registration Statement for its initial public offering (the “IPO”) was declared effective and the common stock of Metagenomi, Inc. began trading on the Nasdaq Global Select Market under the symbol “MGX.” On February 13, 2024, the closing date of IPO, the Company issued 6,250,000 shares of common stock at a price to the public of $15.00 per share. In connection with the closing of the IPO, the Company received gross proceeds of approximately $93.8 million and net proceeds of approximately $81.1 million, after deducting underwriting discounts and commissions and other offering costs totaling approximately $12.7 million.

Immediately prior to the IPO closing, each share of Metagenomi, Inc.’s redeemable convertible preferred stock then outstanding converted into a number of shares of common stock based on the formula set forth in Metagenomi Inc.’s amended and restated certificate of incorporation in effect immediately prior to the closing of the IPO and giving effect to the reverse stock split.

Liquidity and going concern

The Company has incurred significant losses from operations since its inception. During the years ended December 31, 2023 and 2022, the Company incurred net losses of $68.3 million and $43.6 million, respectively. As of December 31, 2023, the Company had an accumulated deficit of $144.9 million.

The Company has historically financed its operations primarily through issuance of redeemable convertible preferred units, convertible promissory notes and its collaboration agreements with Moderna TX, Inc. (“Moderna”), Affini-T Therapeutics, Inc. (“Affini-T”) and Ionis Pharmaceuticals, Inc. (“Ionis”) (see Note 7). After the Reorganization, Metagenomi was liquidated and Metagenomi Inc., surviving entity, closed the IPO for approximately $81.1 million net proceeds. Metagenomi, Inc. expects to continue to incur substantial losses, and its ability to achieve and sustain profitability will depend on the successful development, approval, and commercialization of any product candidates it may develop, and on the achievement of sufficient revenue to support its cost structure. Metagenomi, Inc. may never achieve profitability and, unless and until it does, it will need to continue to raise additional capital. Management expects that existing cash, cash equivalents and available-for-sale marketable securities of the Company of $271.2 million as of December 31, 2023, together with the Metagenomi, Inc. IPO proceeds will be sufficient to fund its current operating plan for at least the next 12 months from the date of issuance of these consolidated financial statements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchanges Commission (“SEC”) regarding financial reporting. The accompanying consolidated financial statements include the accounts of Metagenomi LLC and Metagenomi Inc., a wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires 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 the financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, the Company evaluates estimates and assumptions, including but not limited to those related to revenue recognition under its collaboration agreements, the fair value of its common and redeemable convertible preferred units, unit-based compensation expense, accruals for research and development expenses, the fair value of long-term investments, the valuation of deferred tax assets and uncertain income tax positions. Management bases its estimates on historical experience and on various other assumptions that are believed 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.

Segment and geographical information

The Company operates and manages its business as one reportable and operating segment, which is the business of developing curative therapeutics for patients using the Company’s proprietary, comprehensive metagenomics-derived genome editing toolbox. The chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All of the Company’s long-lived assets are located in the United States.

Risks and uncertainties

The Company is subject to certain risks and uncertainties, including, but not limited to, changes in any of the following areas that the Company believes could have a material adverse effect on the future financial position or results of operations: the Company’s ability to advance the development of its next generation gene-editing platform, timing and ability to advance any product candidates it may develop into and through pre-clinical and clinical development; costs and timelines associated with the manufacturing of clinical supplies of any product candidates the Company may develop; regulatory approval, market acceptance of, and reimbursement for any product candidates the Company may develop; performance of third-party vendors; competition from pharmaceutical or other gene-editing companies with greater financial resources or expertise; protection of intellectual property; litigation or claims against the Company based on intellectual property or other factors; and its ability to attract and retain employees necessary to support its growth.

The Company’s business and operations may be affected by worldwide economic conditions, which may continue to be impacted by global macroeconomic challenges such as the effects of the ongoing geopolitical conflict in Ukraine and the Israel-Hamas war, tensions in U.S.-China relations, the COVID-19 pandemic, uncertainty in the markets, including disruptions in the banking industry, and inflationary trends. Fiscal year 2023 was marked by significant market uncertainty, increasing inflationary pressures. These market dynamics may continue into 2024 and these and similar adverse market conditions may negatively impact the Company’s operations and financial position.

Cash and cash equivalents

Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase. As of December 31, 2023 and 2022, the Company’s cash and cash equivalents consisted of deposit accounts and investments in money market funds.

Marketable securities

Investments with original maturities of greater than 90 days are classified as available-for-sale marketable securities on the consolidated balance sheets and consist primarily of U.S. Treasury, corporate debt obligations, commercial paper, government agency obligations, asset-backed securities and foreign debt securities. As the Company’s entire investment portfolio is considered available for use in current operations, the Company classifies all investments as available-for-sale and as current assets, even though the stated maturity may be more than one year from the current consolidated balance sheets date. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss, which is a separate component of members’ deficit in the consolidated balance sheets.

The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity, which are both recorded to interest income in the consolidated statements of operations and comprehensive loss.

Changes in the fair value of available-for-sale securities are reflected within unrealized loss on available-for-sale marketable securities, net in the consolidated statements of operations and comprehensive loss. Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis. The Company regularly reviews its investment portfolio to determine if any security is impaired, which would require it to record an allowance for credit losses or an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among other things, the extent to which the fair value of a security is less than its amortized cost, its intent to sell or whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the financial condition of the issuer and any changes thereto, and, as necessary, the portion of a decline in fair value that is credit-related. This assessment could change in the future due to new developments or changes in assumptions related to any particular security. Realized gains and losses, allowances for credit losses and impairments on available-for-sale securities, if any, are recorded to interest expense in the consolidated statements of operations and comprehensive loss.

Long-term investments

The Company determines at the inception of each arrangement whether an investment or other interest is considered a variable interest entity (“VIE”). If the investment or other interest is determined to be a VIE, the Company evaluates whether it is considered the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) has the obligation to absorb losses or the right to receive benefits from the VIE. For investments in VIEs in which the Company is considered the primary beneficiary, the assets, liabilities and results of operations of the VIE are included in the Company’s consolidated financial statements. As of December 31, 2023 and 2022, there were no VIEs for which the Company was the primary beneficiary.

If the Company concludes that it exercises significant influence over an investees’ operations, it may account for its investment either using the equity method of accounting or fair value method. The election to account for an investment at fair value is irrevocable unless an event occurs creating a new election date.

If the Company does not have a significant influence, it accounts for its investment at fair value and may elect to account for an equity security without a readily determinable fair value using the measurement alternative method. The measurement alternative method allows the Company to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Changes in fair value and impairment losses are recognized as other income (expense) in the consolidated statements of operations and comprehensive loss.

Restricted cash

Restricted cash of $5.2 million and $6.1 million as of December 31, 2023 and 2022, respectively, represents security deposits in the form of a letter of credit issued in connection with the Company’s leases (see Note 8).

Concentration of credit risk

Cash and cash equivalents, available-for-sale marketable securities and preferred and common stock shares related to our investment in Affini-T (Note 5) are financial instruments that potentially subject the Company to concentrations of credit risk. As of December 31, 2023 and 2022, cash consists of cash deposited with three financial institutions, and account balances exceed federally insured limits.

The Company also has investments in money market funds, U.S. Treasuries, corporate debt obligations, commercial paper, government agency obligations and asset-backed securities, which can be subject to certain credit risks. The Company mitigates the risks by investing in high-grade instruments, limiting its exposure to any one issuer and monitoring the ongoing creditworthiness of the financial institutions and issuers. The Company has not experienced any losses on its financial instruments.

Concentration of collaboration revenue, accounts receivable and contract assets

The following table summarizes the percentages of collaboration revenues, accounts receivable and contract assets from each of the Company’s customers that individually accounted for 10% or more of its collaboration revenues, accounts receivable and contract assets:

*the customer did not account for 10% or more of the Company’s collaboration revenues, accounts receivable or contract assets during the respective fiscal period

The Company reviews its accounts receivable and contract assets for impairment and credit loss allowance. No impairment or credit loss allowance was recorded as of December 31, 2023 and 2022.

Fair value measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amounts of cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses and other liabilities, approximate fair value due to their short-term maturities. Financial instruments, such as money market funds, marketable securities and certain equity and long-term investments are measured at fair value at each reporting date (see Note 3).

Deferred finance issuance costs

Deferred finance issuance costs, consisting of legal fees relating to in-process equity financings and initial public offering are capitalized. The deferred finance issuance costs will be offset against offering proceeds upon the completion of the financing or the offering. In the event the financing or the offering is terminated or delayed, deferred finance issuance costs will be expensed immediately as a charge to general and administrative expenses in the consolidated statements of operations and comprehensive loss. The Company had $5.1 million and no deferred finance issuance costs capitalized as of December 31, 2023 and 2022, respectively, included in other assets in the consolidated balance sheets.

Property and equipment, net

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property and equipment, are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the consolidated balance sheets and the resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss in the period realized.

Leases

The Company determines whether an arrangement is or contains a lease at the inception of the arrangement and whether such a lease should be classified as a financing lease or operating lease at the commencement date of the lease. Leases with a term greater than one year are recognized on the consolidated balance sheets as operating right-of-use asset (“ROU asset”) and operating lease liabilities. We elected not to recognize the right-of-use assets and lease liabilities for leases with lease terms of one year or less (short-term leases). Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the lease term. The Company considers the lease term to be the noncancelable period that it has the right to use the underlying asset, together with any periods where it is reasonably certain it will exercise an option to extend (or not terminate) the lease. As the interest rate implicit in the Company’s lease contracts is not readily determinable, the Company utilizes its incremental borrowing rate (“IBR”) based on the information available at the commencement date to determine the present value of lease payments.

Rent expense for operating leases is recognized on a straight-line basis over the lease term. The Company has elected to not separate lease and non-lease components for its real estate leases and instead accounts 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.

As of December 31, 2023 and 2022, the Company had no finance leases.

Impairment of long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future undiscounted net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows generated by the assets. There have been no such impairments of long-lived assets in the years ended December 31, 2023 and 2022.

Redeemable convertible preferred units

The Company records redeemable convertible preferred units at their respective fair values on the dates of issuance, net of issuance costs. The redeemable convertible preferred units are recorded outside of permanent equity because while it is not mandatory, redemption is contingent upon the occurrence of certain events considered not solely within the Company’s control. The Company has not adjusted the carrying values of the redeemable convertible preferred units to the liquidation preferences of such units because it is uncertain whether or when a deemed liquidation event would occur that would obligate the Company to pay the liquidation preferences to holders of redeemable convertible preferred units. Subsequent adjustments to the carrying values to the liquidation preferences will be made only when it becomes probable that such a deemed liquidation event will occur.

Collaboration arrangements and revenue recognition

At the inception of an agreement, the Company evaluates if an agreement is a collaborative arrangement within the scope of ASC 808, Collaborative Arrangements(“ASC 808”). For collaborative arrangements that fall within the scope of ASC 808, the Company first determines which elements of the collaboration are deemed to be a performance obligation with a customer within the scope of ASC Topic 606, Revenue from Contracts with Customers(“ASC 606”). For elements of collaboration arrangements that are accounted for pursuant to ASC 808 and are not subject to the guidance in ASC 606, the Company applies the revenue recognition model under ASC 606 or other guidance, as deemed appropriate.

The Company re-evaluates whether the license agreement continues to be a collaborative arrangement, or whether the license agreement becomes a collaborative arrangement, whenever there is a change in either the roles of the participants in the arrangement or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor.

Under ASC 606, the Company recognizes revenue when the Company’s customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods and services. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as the Company satisfies a performance obligation.

The Company’s revenue is primarily derived through its license, research, development and option agreements. These agreements may include the following types of promised goods or services: (i) grants of licenses; (ii) performance of research and development services; and (iii) participation on joint research and/or development committees. They also may include options to obtain licenses to the Company’s intellectual property or to extend the term of the research activities. Payments to the Company under these arrangements typically include one or more of the following: non-refundable upfront payments; reimbursement for research services; research, development or regulatory milestone payments; profit-sharing arrangements; and royalty and commercial sales milestone payments. The event-based milestone payments, royalties and cost reimbursements represent variable consideration. The Company evaluates the probability that the event-based milestones will be achieved and estimates the amount to be included in the transaction price using the most likely amount method. The Company includes cost reimbursement in the transaction price using the expected value method.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The Company allocates the total transaction price, including variable consideration that is not constrained, to each performance obligation based on the estimated standalone selling price and recognizes revenue when, or as, the performance obligation is satisfied. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. At the end of each reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.

The Company’s collaboration and license agreements include contingent payments related to sales-based milestones and royalties. Sales-based milestones and royalties are typically payable when annual sales of a covered product reach specified levels and sales occur. When intellectual property license is determined to be a predominant promise in the arrangement, sales-based milestones and royalties are recognized at the later of when the associated performance obligation has been satisfied or when the sales occur. Unlike other contingency payments, such as regulatory milestones, sales-based milestones and royalties are not included in the transaction price based on estimates at the inception of the contract, but rather, are included when the sales or usage occur.

In cases when upfront payment contains a material right for the optional services the Company may provide in the future, the material right is treated as a separate performance obligation. The value allocated to such material right is deferred and recognized as revenue when the performance obligation is satisfied, and the optional services are provided, or when the right expires.

Contract assets and contract liabilities

A contract asset is a right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional and is not just subject to the passage of time. A receivable is recorded on the consolidated balance sheets when the Company has unconditional rights to consideration. As of December 31, 2023, the Company had no contract assets. As of December 31, 2022, the contract asset balance of $1.3 million related to revenue recognized and unbilled under the Affini-T Agreement (Note 7).

A contract liability is an obligation to transfer goods or services for which the Company has received consideration, or for which an amount of consideration is due from the customer. Contract liabilities consist of deferred revenue and relate to amounts invoiced to, or advance consideration received from, licensees that precede the Company’s satisfaction of the associated performance obligations. The Company’s deferred revenue primarily results from upfront payments received relating to the performance obligations that are satisfied over time under the Company’s revenue arrangements (Note 7).

The Company’s contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period. Changes in the contract assets and the contract liabilities balances during the period are the result of the issuance of invoices, receipts of non-refundable upfront payments and recognition of deferred revenues.

Research and development expenses

Research and development costs are expensed as incurred. Research and development costs include salaries, unit-based compensation, and benefits for employees performing research and development activities, an allocation of facility and overhead expenses, expenses incurred under agreements with consultants, third-party organizations and vendors that conduct research and pre-clinical activities, regulatory support activities, manufacturing process development activities and provide supplies.

Research and development expenses accruals are estimated based on the level of services performed, progress of the work orders, including the phase or completion of events, and contracted costs. The estimated costs of research and development services provided, but not yet invoiced, are included in accrued expenses and other current liabilities in the consolidated balance sheets. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. To date, there have been no material differences between estimates of such expenses and the amounts actually incurred.

Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are capitalized and recorded in prepaid expenses and other current assets, and then expensed as the related goods are delivered or the services are performed.

Patent costs

All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty of the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the consolidated statements of operations and comprehensive loss.

Unit-based compensation expense

The Company’s unit-based equity awards include issuance of profits interests that are granted to employees and consultants under the 2019 Equity Incentive Plan. Profits interests usually vest over four years and are a separate class of equity with defined rights within the LLC Agreement. A profits interest is an interest in the increase in the value of the Company over the threshold amount, as determined at the time of grant on a per unit basis. The holder, therefore, has the right to participate in distributions of profits only in excess of the threshold amount. The threshold amount is based on the valuation of the common units on or around the grant date.

The Company accounts for profits interests granted in accordance with ASC 718, Compensation-Stock Compensation(ASC 718). In accordance with ASC 718, compensation expense is measured at the estimated fair value of the profits interest using the Black-Scholes option-pricing model and is included as compensation expense over the vesting period during which an employee or a consultant provides service in exchange for the award. Unit-based compensation expense is recognized over the awards’ vesting period on a straight-line basis and recorded as either research and development or general and administrative expenses in the consolidated statements of operations and comprehensive loss based on the function to which the related services are provided. Forfeitures are accounted for as they occur.

Income taxes

Metagenomi is taxed under the provisions of Sub chapter K- Partners and Partnerships of the Internal Revenue Code. Under those provisions, Metagenomi does not pay federal or state corporate income taxes on its taxable income. Instead, each member includes net operating income or loss for Metagenomi on its individual return. Metagenomi Inc. uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

Metagenomi Inc. assesses the likelihood of deferred tax assets being realized. It provides a valuation allowance when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible.

Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Tax positions that meet the more-likely-than-not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the taxing authority. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax.

Net loss per share

The Company calculates basic and diluted net loss per share in conformity with the two-class method required for participating securities. Under the two-class method, basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the dilutive effects of potentially dilutive securities outstanding during the period. Potentially dilutive securities include unvested common units, profits interests and redeemable convertible preferred units. The dilutive effect of unvested common units and profits interests is computed using the treasury stock method, and the dilutive effect of redeemable convertible preferred units is calculated using the if-converted method. For all periods presented, diluted net loss per share is the same as basic net loss per share since the effect of including potential dilutive securities is anti-dilutive and profits interests’ participation thresholds were not met. In connection with the Reorganization and in accordance with ASC 260, Earnings Per Share, the conversion of common units has been retrospectively reflected in the Company’s net loss per share calculation, see Note 14.

Comprehensive loss

Comprehensive income (loss) is defined as a change in equity of a business enterprise during a period resulting from transactions from non-owner sources. The Company’s other comprehensive income (loss) is comprised solely of unrealized gains (losses) on available-for-sale marketable securities. The Company has not recorded any reclassifications from other comprehensive income (loss) to net loss during the periods presented.

Recently issued accounting pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact the adoption of this standard on its financial statements.

FAIR VALUE MEASUREMENTS

Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. The accounting guidance establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1— Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2— Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities 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 related assets or liabilities; and

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

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. An assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. The Company recognizes 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.

The Company’s financial instruments measured at fair value on a recurring basis consist of Level 1, Level 2, and Level 3 financial instruments. Usually, marketable securities are considered Level 2 when their fair values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis. U.S. Government bonds, corporate debt obligations, commercial paper, government agency obligations and asset-backed securities are valued primarily using market prices of comparable securities, bid/ask quotes, interest rate yields and prepayment spreads and are included in Level 2.

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. The Company’s investments in preferred stock and common stock shares of Affini-T Therapeutics Inc. (“Affini-T”) (see Note 5) are Level 3 financial assets.

The following tables summarize the estimated fair value of the financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

(1)

Certain prior period amounts have been reclassified to conform to the current period presentation

In addition, restricted cash of $5.2 million and $6.1 million as of December 31, 2023 and 2022, respectively, collateralized by the Company’s cash equivalents, are financial assets measured at fair value and are Level 1 financial instruments under the fair value hierarchy.

The Company’s investments in shares of Affini-T common stock and preferred stock are accounted at fair value and are Level 3 investments. As of December 31, 2022, the fair value was estimated based on information available to management including recent financing transactions, capitalization and rights and preferences of outstanding securities. As of December 31, 2023, the Company applied an option-pricing model backsolve method for inferring the total equity value implied by a recent Series A preferred stock financing round of Affini-T. Key assumptions used in the valuation model included an expected holding period of two years, a risk free interest rate of 4.87%, a dividend yield of 0.0% and an estimated volatility of 83.00%. The estimated volatility was calculated based on the historical volatility of a selected peer group of public companies comparable to Affini-T. The estimated fair value of the Company’s investment in Affini-T was $8.5 million and $5.7 million as of December 31, 2023 and 2022, respectively.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets (in thousands):

There were no transfers within the fair value hierarchy during the years ended December 31, 2023 and 2022.

AVAILABLE-FOR-SALE MARKETABLE SECURITIES

The following tables summarize the amortized cost, unrealized gains (losses) and estimated fair value of the available-for-sale marketable securities (in thousands):

As of December 31, 2023 and 2022, no significant facts or circumstances were present to indicate a deterioration in the creditworthiness of the issuers of the available-for-sale securities, and the Company has no requirement or intention to sell these securities before maturity or recovery of their amortized cost basis. The Company considered the current and expected future economic and market conditions and determined that its investments were not significantly impacted. For all securities with a fair value less than its amortized cost basis, the Company determined the decline in fair value below amortized cost basis to be immaterial and non-credit related, and therefore no allowance for losses has been recorded. During the years ended December 31, 2023 and 2022, the Company did not recognize any impairment losses on its investments.

The Company’s policy is to exclude the applicable accrued interest from both the fair value and the amortized cost basis of its available-for-sale securities for purposes of identifying and measuring an impairment. The Company presents accrued interest receivable related to the available-for-sale securities in prepaid expenses and other current assets, separate from available-for-sale marketable securities in the consolidated balance sheets. As of December 31, 2023 and 2022, accrued interest receivable was $1.0 million and $0.3 million, respectively. The Company’s accounting policy is to not measure an allowance for credit losses for accrued interest receivable and to write-off any uncollectible accrued interest receivable as a reversal of interest income in a timely manner, which it considers to be in the period in which the Company determines the accrued interest will not be collected. The company has not written off any accrued interest receivable for the years ended December 31, 2023 and 2022.

The amortized cost and fair value of available-for-sale marketable securities by contractual maturity were as follows as of December 31, 2023 (in thousands):

The amortized cost and fair value of available-for-sale marketable securities by contractual maturity were as follows as of December 31, 2022 (in thousands):

LONG-TERM INVESTMENTS

Affini-T investment

As of December 31, 2023 and 2022, the Company had investments in shares of preferred stock and common stock of Affini-T. The Company performed a VIE analysis and concluded that it was not a primary beneficiary of Affini-T as of December 31, 2023 and 2022. The Company is using the fair value method to account for its investments in Affini-T with changes in fair value recorded to other income (expense) in the consolidated statements of operations and other comprehensive loss.

As of December 31, 2021, the Company owned 213,730 shares of Affini-T common stock and a convertible promissory note with the principle amount of $1.5 million and 6% annual interest rate. In March 2022, Affini-T closed a qualifying round of financing, and the Company’s investment in the Affini-T convertible promissory note and accrued interest were converted into 527,035 Series A convertible preferred stock shares of Affini-T.

In June 2022, the Company entered into a Development, Option and License Agreement with Affini-T to perform research and development activities (see Note 7). The Company received an upfront equity consideration of 719,920 shares of Affini-T’s common stock with an estimated fair value of $1.3 million in June 2022. The fair value of common shares was estimated by the Company’s management, considering the most recent third-party valuation.

The fair values of common stock and preferred stock shares were estimated by management using an option-pricing valuation model and recent financing transactions at Affini-T. The Company estimated fair value of its investments in Affini-T as $8.5 million and $5.7 million as of December 31, 2023 and 2022, respectively (see Note 3). The Company recognized changes in fair value of $2.9 million and of $0.1 million for the years ended December 31, 2023 and 2022, respectively.

No impairment loss was recognized on the Company’s investment in Affini-T as of December 31, 2023 or 2022.

ViTToria investment

As of December 31, 2023 and 2022, the Company had investment in shares of preferred stock of ViTToria Biotherapeutics, Inc. (“Vittoria”), a private biotechnology company. During the years ended December 31, 2023 and 2022, the Company did not have a board seat and owned less than 20% of outstanding voting shares of Vittoria. The investment in Vittoria does not provide the Company the ability to control or have significant influence over Vittoria’s operations. The Company accounts for its investment in Vittoria using the measurement alternative method. As of December 31, 2023 and 2022, the carrying value of Vittoria’s investment was $2.2 million and no impairment was recognized.

CONSOLIDATED BALANCE SHEETS COMPONENTS

Property and equipment, net consists of the following (in thousands):

Depreciation expense was $4.2 million and $1.7 million for the years ended December 31, 2023 and 2022, respectively.

Other assets consist of the following (in thousands):

Accrued expenses and other current liabilities consist of the following (in thousands):

SIGNIFICANT AGREEMENTS

Moderna strategic collaboration and license agreement

On October 29, 2021, the effective date, the Company entered into a Strategic Collaboration and License Agreement (the “Moderna Agreement”) with Moderna. The parties will collaborate on the research and development of in-vivo genome editing therapies directed at certain targets and the commercialization of such genome editing therapies. The collaboration provides Moderna with exclusive access to the Company’s technology platform during the research period in (1) the field of in vivo gene editing technology for a therapeutic, ameliorative or prophylactic application by way of knock-out through InDel formation or base editing or insertion of an exogenous DNA template (such field, “DT Field”) and (2) the field of in vivo gene editing technology for a therapeutic, ameliorative or prophylactic application outside the use of (a) DNA donor templates and (b) no exogenous template at all but including (c) correction by base editing (such field, “RT Field”). The use of RNA-mediated integration systems (“RIGS”) with messenger RNA (“mRNA”) and base editing correction with mRNA is within the RT Field exclusive to Moderna within the Term. The parties formed a joint steering committee, a joint research subcommittee and a joint patent subcommittee to oversee the collaboration activities.

Under the terms of the Moderna Agreement, the parties will collaborate on one or more programs in the RT Field (the “Moderna RT program”) and two programs in the DT Field (the “Moderna DT program” and the “DT Co-Co program”).

With respect to the Moderna RT and Moderna DT programs, the parties will collaborate on the research and development of product candidates under the approved research plans. The initial research term of the Moderna RT program is four years, which may be extended by Moderna for an additional three years upon written notice and a payment of extension fees. The initial research term of the Moderna DT program is four years. The Company granted to Moderna an option to obtain an exclusive license to develop, manufacture and commercialize up to ten Moderna RT program candidates and up to two Moderna DT program candidates at any time during the research term and prior to filing of an investigational new drug (“IND”) application with the Food and Drug Administration (“FDA”) or any similar application filed with a regulatory authority in a country other than the United States (“U.S.”), subject to Moderna’s payment of an option exercise fee of $10.0 million per target.

With respect to the DT Co-Co program, the parties will work together on the co-development and commercialization of products and share costs and profits equally. The Company maintains commercialization rights in the U.S. (subject to Moderna’s right to appoint up to 50% of the U.S. sales force for the DT Co-Co program), while Moderna maintains these rights in countries other than the U.S. The initial research term for the DT Co-Co program is four years, and each party has a right to opt-out of the DT Co-Co program at any time, at which point the other party has the right to solely continue the development and commercialization activities. If there is no development candidate nomination by the end of the initial research term, the DT Co-Co program will expire, unless the parties have mutually agreed to continue the program.

During the year ended December 31, 2021, the Company received a non-refundable upfront payment of $40.0 million and a $5.0 million payment for the first year of research costs. Concurrent with the Moderna Collaboration Agreement, Moderna also provided $30.0 million in cash in the form of a convertible promissory note pursuant to a convertible promissory note agreement dated October 29, 2021 (the “Moderna Convertible Promissory Note Agreement”). The convertible promissory note was converted into shares of Series B redeemable convertible preferred units in January 2022 (see Note 9). Moderna will reimburse the Company up to $5.0 million in annual research and development costs related to the Moderna DT and Moderna RT programs, or up to the agreed amount of expenses per the budget. As of December 31, 2023, the Company has received a total of $49.6 million under the Moderna Agreement, not including cost-sharing payments under the DT Co-Co program.

For the Moderna RT and Moderna DT programs, the Company is eligible to receive (i) technology milestone fees related to the achievement of certain preclinical research objectives, of up to $75.0 million, (ii) development and regulatory milestones of up to $100.0 million per target, (iii) sales milestones of up to $200.0 million per target and (iv) royalties ranging from a mid-single digit to a low-teens percentage of annual net sales of a licensed product. Any profits and losses from the co-development and commercialization of the DT Co-Co program are shared equally between the Company and Moderna. With respect to the DT Co-Co program for which the opt-out party has exercised its opt-out right, the continuing party will pay to the opt-out party, certain development, regulatory and sales milestone payments that will not exceed an aggregate $239.0 million per DT Co-Co target, and opt-out royalties ranging from a high-single digit to a low-teens percentage of annual net sales of a licensed product.

The term of the Moderna Agreement will continue on a licensed product-by-licensed product and country-by-country basis, until the expiration of the applicable royalty term. The royalty term commences on the first commercial sale of a licensed product and terminates on the latest of: (a) the expiration or abandonment of the last valid claim of a patent within the licensed Moderna DT or RT technology; (b) 10 years after the first commercial sale of a licensed product; and (c) expiration of the regulatory exclusivity. Upon the expiration of the term of a licensed product in the Moderna DT or Moderna RT program, the licenses granted to Moderna will survive and become perpetual, fully paid and royalty-free. Each party may terminate the Moderna Agreement on a program-by-program basis upon written notice to the other party for an uncured material breach or insolvency. The Company may terminate the Moderna Agreement upon written notice to Moderna for a patent challenge. Additionally, Moderna may terminate the agreement at its convenience with respect to Moderna DT or Moderna RT programs for any reason upon at least: (a) 60 days’ prior written notice if a first commercial sale has not occurred for the products in such program, or (b) 180 days’ prior written notice if a first commercial sale of a product in such program has occurred.

The Company concluded that the Moderna DT and Moderna RT programs are in the scope of ASC 606. The Company determined that the licenses granted to Moderna, and its participation in the joint steering committee are not capable of being distinct from the preclinical research and development services and therefore concluded that there are two performance obligations: (1) the Moderna RT program and (2) the Moderna DT program. The Company also concluded that the option to obtain an exclusive license and options to extend Moderna RT program term do not include significant incremental discounts, and as such, the options do not provide material rights.

The Company concluded the DT Co-Co program research activities are within the scope of ASC 808, as the Company and Moderna are both active participants in the research, development and commercialization activities, are exposed to significant risks and rewards that are dependent on the success of the DT Co-Co program activities and share costs and profits equally. The Company determined that the guidance in ASC 730, Research and Development, was appropriate to apply to the DT Co-Co program research activities by analogy, based on the nature of the cost sharing provisions of the agreement. The Company concluded that DT Co-Co program is one unit of accounting, as the co-exclusive license is not distinct from the research and development and the participation in joint steering committee activities. The Company recognizes payments to or from Moderna related to the DT Co-Co program cost sharing research activities as an increase to or reduction of research and development expenses, respectively.

The Company concluded that the Moderna Collaboration Agreement and the Moderna Convertible Promissory Note Agreement should be combined and treated as a single arrangement for accounting purposes as the agreements were entered into contemporaneously and in contemplation of one another. The Company estimated the contract consideration to be $90.0 million, which consisted of: 1) the non-refundable upfront collaboration payment of $40.0 million received in 2021, 2) $30.0 million in cash received in 2021 in exchange for the convertible promissory note and 3) the estimated cost reimbursements for Moderna DT and Moderna RT programs of $20.0 million. The Company constrained future milestones, as it assessed that it is probable that the inclusion of such variable consideration could result in a significant reversal of cumulative revenue in future periods. During the year ended December 31, 2021, the Company recorded $30.0 million of the contract consideration for the convertible promissory note based on the fair value and allocated the transaction price of $60.0 million to each of the following programs on a relative standalone selling price basis: 1) $49.5 million to the Moderna RT program, 2) $5.5 million to the Moderna DT program and 3) $5.0 million to the DT Co-Co program.

The variable consideration is reevaluated at each reporting period and as changes in circumstances occur. The Company recognizes revenue for each of the Moderna DT and Moderna RT programs as collaboration revenue based on the measure of progress using an estimated cost-based input method each reporting period. The Company also amortizes the allocation consideration for the DT Co-Co program of $5.0 million as a credit to research and development expenses during the discovery and lead optimization phases for the DT Co-Co program.

The Company recognized collaboration revenue of $18.1 million and $14.5 million in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, the Company recorded $0.5 million in accounts receivable on the consolidated balance sheet, related to services performed. As of December 31, 2023 and 2022, deferred revenue related to the Moderna Agreement was $18.7 million and $30.2 million, respectively. Collaboration revenue recognized during the years ended December 31, 2023 and 2022 included $18.1 million and $14.5 million that was included in deferred revenue as of December 31, 2022 and 2021, respectively. The value of the transaction price allocated to the remaining unsatisfied portion of the performance obligations was approximately $23.7 million as of December 31, 2023, which the Company expects to recognize as revenue over the next two-to-three years.

The Company recognized $0.3 million and $0.4 million in credits to research and development expenses related to cost sharing allocation and amortization of the collaboration advance, respectively, within research and development expenses in the consolidated statement of operations and comprehensive loss during the year ended December 31, 2023. The Company recognized $0.9 million and $3.5 million in credits to research and development expenses related to cost sharing allocation and amortization of the collaboration advance during the year ended December 31, 2022, respectively. As of December 31, 2023, the collaboration advance balance was $0.7 million and the cost-sharing payable balance was $0.1 million, which were presented as a collaboration advance on the Company’s consolidated balance sheet. As of December 31, 2022, the collaboration advance balance was $1.1 million, partially offset by the cost-sharing receivable balance of $0.4 million, which was presented as a collaboration advance on the Company’s consolidated balance sheet.

Affini-T development, option and license agreement

On June 14, 2022, the effective date, the Company entered into a Development, Option and License Agreement (the “Affini-T Agreement”) with Affini-T. Pursuant to the Affini-T Agreement, the parties have agreed to identify, develop or optimize certain reagents using the Company’s proprietary technology for Affini-T to use such reagents to develop and commercialize gene edited T-cell receptor (“TCR”)-based therapeutic products exclusively in the field of treatment, prevention or diagnosis of any human cancer using products with any engineered primary TCR alpha/beta T cells and non-exclusively in the field of treatment, prevention or diagnosis of any human cancer using products with certain other engineered immune cells worldwide. A joint steering committee was established by both parties to assign alliance managers and project leaders to oversee the collaboration activities.

Pursuant to the Affini-T Agreement, the Company granted Affini-T options to receive, on a pre-specified target-by-pre-specified target basis, for up to six pre-specified targets, either (i) an exclusive, royalty-bearing, sublicensable worldwide license under all of the Company’s applicable intellectual property to research, develop, manufacture, use, commercialize and otherwise exploit any TCR-based therapy, preventative treatment, or diagnostic for humans that is directed to such pre-specified target, contains or comprises Primary TCR alpha/beta T Cells and is derived from ex vivo application of a Company reagent (the “Exclusive Option”) or a non-exclusive, royalty-bearing, sublicensable worldwide license under all of the Company’s applicable intellectual property to research, develop, manufacture, use commercialize and otherwise exploit any TCR-based therapy, preventative treatment, or diagnostic for humans that is directed to such pre-specified target, contains or comprises TCR natural killer (“NK”) cells derived from iPSC immune cells or TCR T cells derived from donor-derived or iPSC immune cells. Affini-T can exercise its options for either an exclusive license or a non-exclusive license, or both, for each pre-specified target by providing written notice prior to the earlier of (x) the end of the Affini-T Agreement term or (y) 90 days following the filing of an IND for a licensed product directed to a pre-specified target, subject to the payment of certain fees per each option exercised. After the option exercise, Affini-T has agreed to use commercially reasonable efforts to conduct all development and commercialization activities for a licensed product, and development and commercialization of all licensed products will be at Affini-T’s sole cost and expense.

In connection with the Affini-T Agreement, the Company received upfront equity consideration of 719,920 shares of Affini-T’s common stock with an estimated fair value of $1.3 million in June 2022. The fair value of Affini-T’s shares of common stock was estimated by management, considering the most recent third-party valuation. Affini-T has also agreed to reimburse the Company for expenses incurred while performing research activities under the research plans. As of December 31, 2023, the Company received a total of $4.3 million from Affini-T related to reimbursable expenses. Additionally, the Company is eligible to receive (i) 933,650 shares of Affini-T’s common stock upon the achievement of a regulatory milestone, which is the earlier of a submission of a drug master file to the FDA or an acceptance of an IND filing for a licensed product by the FDA, (ii) up to $18.8 million in future developmental milestone payments depending on the completion of or the number of patients dosed in, the relevant human clinical trial, or the initiation of a pivotal trial, and $40.6 million in future regulatory approval milestone payments, which include regulatory approvals in the U.S. and other markets for licensed products directed to a pre-specified target if options for both exclusive and non-exclusive licenses are exercised with respect to such target, (iii) up to $250.0 million in sales-based milestones for aggregate sales of all licensed products directed to a given pre-specified target and (iv) royalties ranging from a low-single digit to high-single digit percentage of worldwide annual net sales of licensed products.

The initial term of the Affini-T Agreement is five years from the effective date. If Affini-T exercises an Exclusive Option with respect to any pre-specified target during the initial term, the initial term will be extended by an additional five years. Following the expiration of the extended term, if any, the agreement will continue on a target-by-target basis and expire with respect to such target upon the expiration of the royalty term for all licensed products directed to such target. The Affini-T Agreement may be terminated during the term by either party for an uncured material breach by, or bankruptcy of, the other party. Additionally, Affini-T may terminate the Affini-T Agreement for convenience, in its entirety, on a research plan-by-research plan basis, on a target-by-target basis or on a licensed product-by-licensed product basis, by providing prior written notice.

The Company concluded that the Affini-T Agreement is in the scope of ASC 606 and that there is one performance obligation to perform research activities under the Affini-T Agreement. Exclusive and non-exclusive licenses are optional contingent purchases that do not include significant incremental discounts, and therefore do not provide a material right.

At the effective date, the transaction price consisted of the upfront equity consideration with an estimated fair value of $1.3 million and estimated research reimbursement costs. Research reimbursement costs represent variable consideration, and the Company’s management estimates what portion to include in total consideration at the end of each reporting period. Other payments under the Affini-T Agreement, including additional equity consideration and development and regulatory milestones, also represent variable consideration, and are constrained to the extent that the inclusion of such variable consideration could result in a significant reversal of cumulative revenue in future periods. As of December 31, 2023 and 2022, additional equity consideration and future development and regulatory milestone payments were excluded from the estimated total transaction price as they were considered constrained. The transaction price is reevaluated in each reporting period and as changes in circumstances occur. The Company recognizes revenue each reporting period based on the measure of progress using an estimated cost-based input method.

The Company recognized collaboration revenue of $4.7 million and $2.6 million in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022, respectively. In June 2023, the joint steering committee approved the budget for estimated research reimbursement costs for the Affini-T Agreement, which resulted in a $2.4 million reduction to variable consideration. As of December 31, 2023, the Company recorded $2.0 million in accounts receivable on the consolidated balance sheet, related to services performed. There was no contract asset related to services performed as of December 31, 2023. As of December 31, 2022, the Company recorded $1.3 million in contract assets on the consolidated balance sheet, related to services performed but not invoiced. As of December 31, 2023 and 2022, deferred revenue related to the Affini-T Agreement was $0.2 million and zero, respectively. The value of the transaction price allocated to the remaining unsatisfied portion of the performance obligation was approximately $1.7 million as of December 31, 2023, which the Company expects to recognize as revenue over the next four-to-five years.

Ionis collaboration and license agreement

On November 10, 2022, the effective date, the Company entered into a Collaboration and License Agreement (the “Ionis Agreement”) with Ionis to collaborate on drug discovery and exploratory research activities to advance new medicines using gene editing strategies, with the goal of discovering novel medicines. Pursuant to the terms of the Ionis Agreement, the Company granted Ionis and its affiliates a worldwide exclusive, royalty-bearing license, with the right to grant sublicenses, to use all licensed systems and licensed products in the field of in vivo gene editing for all therapeutic, prophylactic, palliative, and analgesic uses in humans. In connection with the Ionis Agreement, the Company also has the right to exercise an exclusive option to co-develop and co-commercialize certain products under a drug discovery program. A joint steering committee was established by both parties to coordinate, oversee and monitor the research and drug discovery activities under the Ionis Agreement.

The parties will collaborate to discover therapeutic products under a drug discovery program and develop a drug discovery plan for each target, selected by Ionis. The target selection is divided into two waves: up to four targets in Wave 1 and up to four targets in Wave 2. For each drug discovery program, once the parties identify a development candidate that is suitable for further development, Ionis will be responsible for the development and commercialization of products resulting from such program. Per the terms of the Ionis Agreement, at any time prior to the designation of a development candidate for a drug discovery program and for any reason, Ionis may replace the collaboration target, provided such target has not previously been substituted out. Ionis may substitute (i) up to two Wave 1 targets and (ii) up to two Wave 2 targets.

The drug discovery activities for a program commence on the selection of a target and expire upon the earlier of (a) completion of all drug discovery activities for such program, (b) the fifth anniversary of the effective date and (c) selection of a development candidate for such drug discovery program. If one or more Wave 2 targets become collaboration targets as a result of the parties achieving enabled delivery and less than two years are remaining in the drug discovery term, then the term will be extended to the earlier of (i) the time that the Company completes all of its activities under the applicable drug discovery plan and (ii) the seventh anniversary of the effective date, subject to the Company’s consent.

The parties will also conduct an exploratory research program, and will jointly optimize gRNA and select delivery technologies and other activities. The exploratory research activities commence on the effective date and expire upon the earlier of (a) completion of all exploratory research activities established in the exploratory research plan, and (b) the fifth anniversary of the effective date.

The Company has the exclusive option to co-develop and co-commercialize the licensed products under a drug discovery program (the “Co-Co Option”) with Ionis. The Co-Co Option may be exercised for (a) the initial Wave 1 target (“Target 1”), (b) no more than one of the other three discovery programs for the Wave 1 targets, and (c) no more than two drug discovery programs for the Wave 2 targets that become collaboration targets. If the Company exercises the Co-Co Option for a particular drug discovery program, that drug discovery program will automatically be deemed a “Co-Co Program”, all corresponding licensed products be deemed “Co-Co Products,” the Company will be obligated to pay Ionis an option exercise fee, and the parties will enter into a separate co-development and co-commercialization agreement. The Co-Co Option exercise fee will equal 50% of Ionis’ internal costs and out-of-pocket costs incurred in the conduct of the drug discovery activities prior to the exercise of the Co-Co Option and be reduced by 50% of the Company’s corresponding costs incurred. Future development and commercialization costs will be shared equally. The Company may elect to reduce its cost- share percentage anywhere between 50% and 25% on a go-forward basis, provided the Company will continue to bear 50% of the costs of any clinical trials ongoing at the time of the election through the completion of the clinical trials.

The Company will manufacture all licensed systems and certain components of the applicable licensed products that are needed by Ionis for use in its development activities and all of the Company’s manufactured components needed by Ionis for use in its commercialization activities. The Company will provide the manufactured components at a price that represents the cost of goods plus 15%.

Pursuant to the terms of the Ionis Agreement, the Company has also been granted an option to obtain a non-exclusive, royalty-bearing license, with the right to grant sublicenses, for certain Ionis’ background technology to use in up to eight therapeutic products discovered by the Company in the field of in vivo gene editing and directed to a Collaboration Target (each such product, a “Metagenomi Product” and each such option an “Ionis IP Option”), but subject to encumbrance checks with respect to particular targets. A Collaboration Target is a target that is selected by Ionis, and, with respect to the Company is not the subject of discussions with a third party, is not the subject of a contractual grant of rights to a third party nor the subject to an internal research and development program. If the Company exercises its Ionis IP Option, the Company will pay to Ionis up to several million dollars per Metagenomi Product upon achievement of certain clinical and regulatory milestones. The Company is also obligated to pay Ionis royalties in an amount equal to a low single- digit royalty on the net sales of the applicable Metagenomi Product on product-by-product and country-by-country basis.

In November 2022, the Company received an $80.0 million upfront payment from Ionis for the Wave 1 drug discovery research collaboration and selected Target 1. Ionis selected its second target (“Target 2”) in Wave 1 in December 2022, its third target (“Target 3”) in Wave 1 in November 2023, and its fourth target (“Target 4”) in Wave 1 in February 2024. Ionis has an option to select up to four Wave 2 targets at any time during the drug discovery term, if (a) an IND for any licensed product directed to a Wave 1 target is filed with the applicable regulatory authority or (b) the parties achieve enabled delivery for a non-liver target under the exploratory research activities, by providing written notice and by paying a Wave 2 target selection fee of $15.0 million or $30.0 million, depending on and per the selected target.

Ionis is obligated to reimburse the Company for all internal costs and out-of-pocket costs incurred in the performance of the exploratory research activities, up to an aggregate of $10.0 million, which is payable in quarterly installments of $0.5 million during the exploratory research term. As of December 31, 2023, the Company received a total of $2.0 million related to the reimbursable expenses. The Company is also eligible to receive (a) up to $29.0 million in future development milestone payments for each licensed product; (b) up to $60.0 million in future regulatory milestone payments for each licensed product; (c) up to $250.0 million in sales-based milestones for each licensed product; and (d) royalties on annual net sales of licensed products from a mid-single-digit to low-teens percentage, subject to customary reductions.

The term of the Ionis Agreement will continue (i) with respect to the drug discovery programs, until the expiration of all applicable royalty terms for a licensed product, (ii) with respect to the Co-Co Programs, until the parties cease all exploitation for the Co-Co Products that are the subject to such Co-Co Program, and with respect to the Metagenomi Products, until the expiration of the royalty term for a Metagenomi Product. The royalty term ends on the latest of the following two dates: (i) the expiration of (A) the last claim of any issued and unexpired patent, or (B) a claim within a patent application that has not been pending for more than seven years from the earliest date to which the claim or applicable patent application is entitled to claim priority and which claim has not been revoked, canceled, withdrawn, held invalid, or abandoned, or (ii) 12 years following the first commercial sale of a licensed product.

The Ionis Agreement may be terminated during the term by either party for an uncured material breach or bankruptcy by the other party. Additionally, Ionis may terminate the Ionis Agreement for convenience and without penalty, in its entirety or on a licensed product-by-licensed product basis, by providing 90 days’ written notice.

The Company concluded that the Ionis Agreement is in the scope of ASC 606 at the effective date and until the Company exercises its Co-Co Option for any drug discovery program, which was determined to not be probable at the effective date and as of December 31, 2023 and 2022. The Company also concluded that exclusive licenses and participation in a joint steering committee are not distinct from discovery research services and should thus be combined into one performance obligation (the “discovery program”). The Company also concluded that exploratory research services are a separate and distinct performance obligation (the “exploratory program”). As the Ionis options for Wave 2 targets are optional purchases and do not have significant incremental discounts, as such, the options do not provide material rights.

The Company allocated the total estimated transaction price of $90.0 million, which consisted of an $80.0 million upfront payment received in November 2022 and a $10.0 million reimbursement for research costs, into two performance obligations, and was determined based on their estimated standalone selling prices. The Company concluded that future development and commercial supply agreements are at market terms, as the terms were consistent with industry standards as of the effective date. The Company constrains future milestone payments under the arrangement to the extent that the inclusion of such variable consideration could result in a significant reversal of cumulative revenue in future periods. The Company constrained all development and regulatory milestone payments at the effective date and as of December 31, 2023 and 2022. The Company is recognizing revenue of $80.0 million related to the discovery program and of $10.0 million related to exploratory program over the research terms using an estimated cost- based input method as a measure of progress for each obligation.

The Company recognized collaboration revenue of $21.9 million and $0.1 million in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, deferred revenue related to the Ionis Agreement was $60.0 million and $79.9 million, respectively. Collaboration revenue recognized during the year ended December 31, 2023 included $21.9 million that was included in deferred revenue as of December 31, 2022. The value of the transaction price allocated to the remaining performance obligations was approximately $68.0 million as of December 31, 2023, which the Company expects to recognize as revenue over the next four-to-five years.

COMMITMENTS AND CONTINGENCIES

Operating leases

In January 2021, the Company entered into a ten-year operating lease for laboratory and office space in Emeryville, California. The lease commencement date was in February 2021. In conjunction with signing this lease, the Company secured a letter of credit for $3.3 million, which is recorded as noncurrent restricted cash in the consolidated balance sheets. As of December 31, 2023 and 2022, the balance of this letter of credit was $2.5 million and $3.3 million, respectively. The lease agreement includes a renewal provision allowing the Company to extend this lease for an additional five years, which the Company is not reasonably certain to exercise. In addition to base rent, the Company pays variable costs related to its share of operating expenses and taxes, which are recognized as incurred.

In September 2021, the Company entered into a 9.25-year operating lease for office space in Emeryville, California, with a lease commencement date in November 2021. In conjunction with signing the lease, the Company secured a letter of credit for $0.8 million, which is recorded as noncurrent restricted cash in the consolidated balance sheets as of December 31, 2023 and 2022. In addition to base rent, the Company will pay variable costs related to its share of operating expenses and taxes, which are recognized as incurred.

In November 2022, the Company entered into an 8.25-year sublease for office, research and laboratory space in Emeryville, California, with a lease commencement date in January 2023. In conjunction with signing the lease, the Company secured a letter of credit for $2.0 million, which is recorded as noncurrent restricted cash in the consolidated balance sheet as of December 31, 2023 and 2022. Monthly base rent under the lease is approximately $0.5 million and is subject to annual escalation. During the initial 18 months from the lease commencement date, 50% of the monthly base rent is abated. In addition to base rent, the Company pays variable costs related to its share of operating expenses and taxes, which are recognized as incurred.

Operating lease costs for the years ended December 31, 2023 and 2022 totaled $9.6 million and $3.5 million, respectively, including $2.8 million and $0.4 million of variable lease cost, respectively. Supplemental information related to the Company’s operating leases is as follows (in thousands):

The following table summarizes future minimum lease payments as of December 31, 2023 (in thousands):

Legal contingencies

From time to time, the Company may become involved in legal proceedings arising from the ordinary course of business. The Company records a liability for such matters when it is probable that future losses will be incurred and that such losses can be reasonably estimated. Significant judgment by the Company is required to determine both probability and the estimated amount. Management is currently not aware of any legal matters that could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Guarantees and indemnifications

In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. Its exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To the extent permitted under Delaware law, the Company has agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was serving, at a request in such capacity. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. As of December 31, 2023 and 2022, the Company did not have any material indemnification claims that were probable or reasonably possible and consequently has not recorded related liabilities.

REDEEMABLE CONVERTIBLE PREFERRED UNITS

On January 21, 2022, the Company closed the Series B financing and issued 12,446,876 shares of the Series B redeemable convertible preferred units for gross cash proceeds of $145.0 million. The Company incurred $0.7 million in issuance costs. Concurrently with the closing of the Series B financing, the outstanding Moderna convertible promissory note and accrued interest of $30.4 million was converted into 2,607,387 Series B Preferred Units, at a conversion price equal to the price per unit paid by the Series B investors.

On December 20, 2022, the Company entered into Series B-1 redeemable convertible preferred unit purchase agreement to sell up to 7,108,480 Series B redeemable convertible preferred units at the purchase price of $14.06770. In December 2022, the Company sold and issued 6,773,726 shares of the Series B-1 redeemable convertible preferred units for gross cash proceeds of $95.3 million in the initial closing. The Company incurred $0.4 million issuance costs. Additional shares may be sold within 90 days of the initial closing.

In January 2023, the Company sold an additional 334,754 Series B-1 redeemable convertible preferred units in accordance with the Series B-1 purchase agreement and received gross cash proceeds of $4.7 million. The Company incurred $0.1 million in issuance costs.

As of December 31, 2022, the Company operated under the LLC Agreement. As of December 31, 2023, the Company operated under the LLC Agreement, as amended on July 31, 2023 (see Note 11 for details around the amendment). The LLC Agreement provides for eight classes of units: common units, Series A-1 redeemable convertible preferred units (Series A-1), Series A-2 redeemable convertible preferred units (Series A-2), Series A-3 redeemable convertible preferred units (Series A-3), Series A-4 redeemable convertible preferred units (Series A-4), Series A-5 redeemable convertible preferred units (Series A-5), Series B redeemable convertible preferred units (Series B) and Series B-1 redeemable convertible preferred units (Series B-1).

The redeemable convertible preferred units as of December 31, 2023, consisted of the following (in thousands, except unit data):

The redeemable convertible preferred units as of December 31, 2022, consisted of the following (in thousands, except unit data):

The holders of the redeemable convertible preferred units have various rights and preference as follows:

Voting rights

Each redeemable convertible preferred unit is entitled to one vote for each common unit into which such redeemable convertible preferred unit is then convertible. The redeemable convertible preferred unitholders and the common unitholders vote together on all matters as a single class, except as otherwise provided by law or the provisions of the LLC Agreement.

The Board of Managers consists of up to seven individuals. As long as at least 618,716 Series A-1 redeemable convertible preferred units, Series A-2 redeemable convertible preferred units and/or Series A-3 redeemable convertible preferred units remain outstanding, the members holding a majority of the outstanding Series A-1 redeemable convertible preferred units, Series A-2 redeemable convertible preferred units and Series A-3 redeemable convertible preferred units, voting together as a single class on an as-converted basis, are entitled to elect one manager. As long as at least 1,654,555 Series A-4 redeemable convertible preferred units remain outstanding, the members holding a majority of the Series A-4 redeemable convertible preferred units, voting as a single class, are entitled to elect one manager. As long as at least 316,187 Series A-5 redeemable convertible preferred units remain outstanding, the members holding a majority of the Series A-5 redeemable convertible preferred units, voting as a single class, are entitled to elect one manager. As long as at least 3,010,852 Series B redeemable convertible preferred units remain outstanding, the members holding a majority of the Series B redeemable convertible preferred units, voting as a single class, are entitled to elect one manager. The members holding a majority of the common units, voting as a single class are entitled to elect one manager. The members holding a majority of the units then outstanding, voting together as a single class on an as-converted to common units basis are entitled to elect any remaining managers. As of each December 31, 2023 and 2022 the Company’s Board of Managers consisted of six individuals, respectively.

Conversion

Each redeemable convertible preferred unit is convertible into common units at the option of a holder at the then applicable conversion price, which is equal the original purchase price, subject to adjustments for recapitalization and others. The original purchase price is equal to $3.2325 per Series A-1 Preferred Unit, $0.6456 per Series A-2 Preferred Unit, $1.1713 per Series A-3 Preferred Unit, $4.84875 per Series A-4 Preferred Unit, $6.32536 per Series A-5 Preferred Unit, $11.64951 per Series B Preferred Unit, and $14.06770 per Series B-1 Preferred Unit. As of December 31, 2023 and 2022, the redeemable convertible preferred units were convertible into common units at a one-for-one conversion ratio.

Each redeemable convertible preferred unit is automatically convertible into common units (or shares of common stock, if the Company is converted into a corporation), based on the then-effective applicable conversion rate (A) at any time upon the affirmative vote or written consent of (i) the members holding a majority of the redeemable convertible preferred units then outstanding, (ii) the members holding a majority of the Series B redeemable convertible preferred units then outstanding, and (iii) the members holding a majority of the Series B-1 redeemable convertible preferred units then outstanding, or (B) immediately upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of common units (or other common securities) with the gross cash proceeds to the Company, before underwriting discounts, commissions and offering expenses, are at least $100.0 million, or (C) the closing of a merger, acquisition or other business combination involving the Company and a publicly traded special purpose acquisition company (“SPAC”) or its subsidiary or affiliate in which the surviving public company has available immediately cash of at least $100.0 million in the aggregate greater than the cash on the Company’s consolidated balance sheets as of immediately prior to such merger, acquisition or other business combination (including proceeds of a private investment in public equity transaction that is substantially contemporaneous with or conditioned on such merger, acquisition or other business combination, and any redemptions from the SPAC’s trust account).

Anti-dilution and other protective provisions

The holders of the redeemable convertible preferred units have proportional anti-dilution protection right for unit splits, unit dividends and similar recapitalizations, subject to certain exclusions, anti-dilution price protection for additional sales of securities by the Company for consideration per unit less than the applicable conversion price per unit of any series of the redeemable convertible preferred units, on a broad-based weighted average basis.

The holders of the redeemable convertible preferred units have certain protective rights. The Company shall not, either directly or by amendment, merger, consolidation or otherwise, without the prior written approval of members holding a majority of the redeemable convertible preferred units then outstanding to alter or change the rights, preferences or privileges of the redeemable convertible preferred units; consummate a liquidation or a deemed liquidation event; change the Company’s LLC Agreement; authorize or create any new class or series of units or other equity security; increase or decrease the authorized number of the common units or the redeemable convertible preferred units or any series; redeem, acquire or repurchase any, or make any distribution on, any common units or redeemable convertible preferred units; change the compensation or equity awards granted to executive officers of the Company, unless such transaction is approved by the Board of Managers; increase or decrease the authorized number of managers constituting the Board of Managers and amend other rights or enter into certain transactions.

Liquidation preference

In the event of a liquidation, a deemed liquidation event (including a consolidation, merger or reorganization or a sale, lease, transfer, exclusive irrevocable license or other disposition of all or substantially all of the assets of the Company), dissolution or winding-up of the Company, the funds are distributed first to the members holding the redeemable convertible preferred units in proportion to and to the extent of their unreturned original purchase price per redeemable convertible preferred unit, until each member holding the redeemable convertible preferred units has received cumulative distributions in an amount equal to the unreturned original purchase price for each of such member’s redeemable convertible preferred unit. Second, to the members holding common units and the redeemable convertible preferred units pro rata based on the number of units held by each such holder, assuming for this purpose that all the redeemable convertible preferred units have been converted into common units as of the date of such operating distribution or distribution of net proceeds or assets available for distribution, whether in cash or in other property. Third, the amounts that would otherwise be distributed to any redeemable convertible preferred unit holder pursuant to the liquidation preference on as-converted to common units basis will be reduced by an amount equal to the remaining preferred participation threshold amount for such redeemable convertible preferred unit. The preferred participation threshold amount for a redeemable convertible preferred unit is equal to the original purchase price, reduced by distributions paid.

Distributions preference

Distributions, when determined by the Board of Managers, are payable to the members holding the redeemable convertible preferred units, pro rata in proportion to the liquidation preference amounts in respect of the redeemable convertible preferred units held by such members; thereafter, to the members in proportion to the number of shares held by such members, on as converted basis. No distributions were declared or made from inception and during the years ended December 31, 2023 and 2022.

Redemption

The redeemable convertible preferred units are not redeemable except in the event of certain effected deemed liquidation events, that are not in the Company’s control.

COMMON UNITS

As of December 31, 2023 and 2022, the Company was authorized to issue 66,000,000 common units. Each common unit is entitled to cast one vote. The holders of common units are also entitled to receive distributions whenever funds are legally available and when declared by the Company’s Board of Managers, subject to prior rights of the holders of the redeemable convertible preferred units. No distributions have been declared from inception to date.

As of December 31, 2023 and 2022, the Company reserved common units for future issuance as follows:

PROFITS INTERESTS PLAN

The Company grants profits interests under the 2019 Equity Incentive Plan, adopted on March 13, 2019 (the “2019 Plan”). The Company may grant profits interests with a threshold amount, which may be zero, established by the Board of Managers on the date of issuance. Accordingly, such profits interests do not give a holder a share of the proceeds if the Company’s assets were sold at fair market value and the proceeds of such disposition were distributed in complete liquidation of the Company immediately after the date of grant but give a holder a right to share in the appreciation in the value of a common unit from the date of receipt to the future, as specifically provided in the LLC Agreement. The 2019 Plan allows for grants of profits interests to the Company’s officers, employees, directors and consultants. Profits interests generally vest monthly over four years, with or without one- year cliff vesting in the first year. In the event of a profits interest holder’s termination, the unvested portion of such profits interest is automatically forfeited and canceled without any additional consideration. Additionally, the Company has the right to repurchase the vested portion of such profits interest at its fair market value, which is based on the fair market value of a common unit (as determined by the Board of Managers), less the applicable profits interest threshold amount, at any time during the 12-month period after termination of a profits interest holder’s service to the Company.

The Company’s LLC Agreement was amended on July 31, 2023 to provide for “catch-up” distributions for profits interests once the applicable catch-up threshold amount for such profits interests was met (the “Amendment to the LLC Agreement”).

The LLC Agreement provides each profits interest with a distribution threshold amount, which is determined on the date of issuance and represents the amount that would be distributed if, immediately after issuance, the Company sold all of its assets at fair market value and distributed the net proceeds in liquidation. A profits interest does not participate in Company distributions until an amount equal to its distribution threshold amount has been distributed to other members of the Company with units that either have a lower threshold amount or no threshold amount.

In accordance with the Amendment to the LLC Agreement, once the applicable distribution threshold amount has been met for a particular profits interest, such profits interest will participate in Company distributions on a pro rata basis until the catch-up threshold amount has been met. Once the catch-up threshold amount has been met, subsequent “catch-up” distributions will be made solely to holders of profits interests until such holders have received an amount equal to the amount such holders would have received had the distribution threshold not existed. Once the profits interest holders have received distributions in an amount equal to what they would have received had the distribution threshold not existed, all subsequent distributions are made on a pro rata basis with common unitholders.

As a result of the amendment, the Board approved an $11.84 catch-up threshold amount, which was based on the estimated fair value of the Company’s common unit as of July 31, 2023.

Refer below for discussion around the accounting treatment and financial statement impact of the catch-up.

The number of common units reserved for issuance under the 2019 Plan was 14,604,165 as of December 31, 2023.

The table below presents a summary of activities and a reconciliation of common units authorized and remaining for grant under the 2019 Plan during the year ended December 31, 2023:

The aggregate intrinsic value is calculated as the positive difference between the threshold amount of the profits interests and the fair value of the Company’s common unit as of December 31, 2023.

During the years ended December 31, 2023 and 2022, the Company granted 2,267,813 and 2,763,356 profits interests with a weighted average grant date fair value of $6.73 and $1.9, respectively. The total fair value of the profits interests vested during the years ended December 31, 2023 and 2022 was $2.8 million and $1.1 million, respectively.

Unit-based compensation expense

The grant date fair value of common units issued prior to July 31, 2023 utilized in the Black-Scholes model is determined by the Company’s Board of Managers with the assistance of management. The grant date fair value of common units is determined using valuation methodologies which utilizes certain assumptions including probability weighting of expected exit events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability.

After giving the effect to the Amendment to the LLC Agreement, the grant date fair value of profits interests issued after July 31, 2023 and profits interests at the modification date was estimated using the valuation model based on the Probability Weighted Expected Return Method (“PWERM”). The estimated equity fair value was allocated via the distribution waterfall in accordance with the Amendment to the LLC Agreement to all outstanding redeemable convertible preferred units, common units and profits interests.

The value of profits interests calculated using the Black-Scholes model and the option-pricing model within the PWERM model was based on the following assumptions for the years ended December 31, 2023 and 2022:

Expected volatility—The Company is a private company and lacks company-specific historical and implied volatility information. Therefore, the Company estimates its expected unit’s volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until the Company has adequate historical data regarding the volatility of the Company’s traded unit or stock price.

Expected term—The expected term of profits interests has been determined based on the expected time to liquidity and expected vesting term.

Risk-free interest rate—The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.

Dividends—Expected dividend yield is zero because the Company does not pay cash dividends on common units and does not expect to pay any cash dividends in the foreseeable future.

The PWERM is the hybrid method, where the equity value in one or more scenarios is calculated using an option pricing model. The PWERM is a scenario based methodology that estimates the fair value of common unit based upon an analysis of future values for the company, assuming various outcomes. The common unit value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of members’ units. The future value of the common unit under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common unit. A discount for lack of marketability of the common unit is then applied to arrive at an indication of value for the common unit.

In determining the fair value of the common units, the methodologies used to estimate the enterprise value were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

The following table presents the classification of unit-based compensation expense for the years ended December 31, 2023 and 2022 (in thousands):

The above unit-based compensation expense related to the following unit-based awards for the years ended December 31, 2023 and 2022 (in thousands):

As part of the catch-up and Amendment to the LLC Agreement, the Company modified the terms and conditions of the profits interest, which resulted in a change in the fair value of the awards. The change was treated as a modification under ASC 718, Stock Compensation, in which the fair value of the profits interests was remeasured at the modification date and compared to the fair value of the modified award immediately prior to the modification, with the difference resulting in incremental compensation expense. The Company estimated total modification expense of $10.3 million. The company recognized $1.1 million of this expense related to vested profits interests as of the modification date and $1.2 million through December 31, 2023, the remaining $7.8 million is expected to be recognized over the next 2.8 years as profits interests continue to vest.

There was $15.5 million unrecognized unit-based compensation expense related to the profits interests as of December 31, 2023 that is expected to be recognized over a weighted-average period of 3.00 years.

RELATED PARTY TRANSACTIONS

In connection with Series B and Series B-1 financing, the Company reimbursed certain investors for finance issuance costs that they incurred totaling $0.4 million during the year ended December 31, 2022. As of December 31, 2022, $0.1 million of Series B-1 financing costs reimbursable to investors was recorded in accrued expenses and other current liabilities in the consolidated balance sheets. The reimbursable Series B-1 financing costs were fully paid during the year ended December 31, 2023.

INCOME TAXES

Metagenomi is treated as a partnership for tax purposes, and thus, is not subject to income taxes. It is the responsibility of the LLC members to report their proportionate share of any taxable income or loss generated by Metagenomi to the appropriate taxing authorities and pay the associated taxes, if any. With respect to the Company’s subsidiary, Metagenomi Inc. is a corporation for tax purposes and is subject to income taxes which have been included in the consolidated financial statements. All pre-tax losses have been incurred in the United States.

During the year ended December 31, 2023 and 2022, income tax expense consisted of the following (in thousands):

The Company recognized an income tax provision of $8.0 million for the year ended December 31, 2023 as a result of their taxable income related to an upfront payment received under the Ionis Agreement and capitalization of their research and development expenses under the Internal Revenue Code Section 174 (“Section 174”), which became effective on January 1, 2022. Section 174 changed the tax treatment of research and experimentation (R&E) expenditures, which requires the capitalization of R&E expenditures over a period of five years for R&E paid or incurred in the United States and 15 years for R&E paid or incurred outside of the United States.

The effective tax rate of the Company’s provision for income taxes differs from the federal statutory rate of 21% for the years ended December 31, 2023 and 2022, is as follows:

Significant components of the deferred tax assets for federal and state income taxes as of December 31, 2023 and 2022, are as follows (in thousands):

A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Metagenomi Inc. believes that, based on a number of factors such as the history of operating losses, it is more likely than not that the deferred tax assets will not be fully realized, such that a full valuation allowance has been recorded. The valuation allowance increased by $28.9 million and $16.8 million for the years ended December 31, 2023 and 2022, respectively, primarily due to the increase in deferred revenue and capitalization of research and development expenses under Section 174.

As of December 31, 2023, Metagenomi Inc. had less than $0.1 million and $17.5 million of net operating loss carryforwards for federal and state income tax purposes, respectively. Federal net operating loss carryforwards do not expire. State net operating loss carryforwards begin expiring in 2037.

As of December 31, 2023, Metagenomi Inc. had $0 and $4.7 million of research credit carryforwards for federal and state income tax purposes, respectively. State research credit carryforwards do not expire and can be carried forward indefinitely.

Utilization of some of the federal and state net operating losses and credit carryforwards may be subject to annual limitations due to the change in ownership provisions of the Internal Revenue Code of 1986 (“Internal Revenue Code”) and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. As of December 31, 2023, the Company has completed an IRC Section 382 analysis from inception through the year ended December 31, 2023. The Company experienced two ownership changes in August 2019 and January 2022. Net operating losses generated prior to December 31, 2017, of $0.3 million are permanently limited for federal tax purposes. Net federal operating losses generated after December 31, 2017 are not limited as they can be carried forward indefinitely, subject to an 80% income limitation. Net operating losses of $0.1 million are permanently limited for California tax purposes.

Metagenomi Inc. uses the “more likely than not” criterion for recognizing the income tax benefit of uncertain income tax positions and establishing measurement criteria for income tax benefits. Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, Metagenomi Inc. does not anticipate significant changes to unrecognized tax benefits over the next 12 months. The Company recognizes interest related to income tax matters as a component of income tax expense. As of December 31, 2023, the amount of accrued interest related to uncertain tax positions was less than $0.1 million thousand. During the years ended December 31, 2023 and 2022, no penalties were recognized relating to unrecognized tax benefits. In the event Metagenomi Inc. should need to recognize penalties related to unrecognized income tax liabilities, this amount will be recorded as an accrued liability and an increase to income tax expense.

The changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for the years ended December 31, 2023 and 2022, are as follows (in thousands):

Metagenomi Inc. files tax returns in the U.S. and California. Metagenomi Inc. is not currently under examination in any of these jurisdictions and all its tax years remain effectively open to examination due to net operating losses from inception. As of December 31, 2023, the balance of unrecognized tax benefits was $5.9 million of which $5.0 million, if recognized, would affect the effective tax rate.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which includes an Alternative Minimum Tax based on the Adjusted Financial Statement Income of Applicable Corporations. Based on an initial evaluation, the Company does not believe the Inflation Reduction Act will have a material impact on the income tax provision and cash taxes. The Company will continue to monitor the changes in tax laws and regulations to evaluate their potential impact on the business.

NET LOSS PER SHARE

Basic and diluted net loss per share attributable to common stockholders is calculated as follows (in thousands except share and per share amounts):

The following outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per unit, as their effect is anti-dilutive*:

• The table presents the number of units without giving effect of the Reorganization and reverse stock split of Metagenomi, Inc.

EMPLOYEE RETIREMENT PLAN

The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”), covering its employees. Employees may contribute a percentage of their annual compensation to this plan, subject to the maximum allowable amount set by the Internal Revenue Service. The 401(k) Plan provides that the Company matches each participant’s contribution at 100% up to the first 5% of the employee’s eligible compensation. The Company’s contributions to the 401(k) Plan were $1.4 million and $0.6 million for the years ended December 31, 2023 and 2022, respectively.

SUBSEQUENT EVENTS

Adoption of 2024 Stock Option and Incentive Plan and 2024 Employee Stock Purchase Plan at the IPO effectiveness date

In January 2024, the board of directors of Metagenomi, Inc. adopted and stockholders approved the amendment and restatement to the Metagenomi, Inc. certificate of incorporation that became effective immediately prior to the closing of the IPO, and the 2024 Stock Option and Incentive Plan (“2024 Plan”) and 2024 Employee Stock Purchase Plan (“ESPP”), which become effective upon the date immediately preceding the date on which Metagenomi Inc.’s registration statement was declared effective by the SEC. In connection with the closing of the IPO, Metagenomi Inc. increased the authorized number of shares of common stock to 500,000,000 shares and was authorized to issue up to 10,000,000 shares of preferred stock. Metagenomi, Inc. initially reserved 6,690,000 and 375,000 shares of common stock under the 2024 Plan and ESPP, respectively, which will increase as defined in the plans.