Werewolf Therapeutics, Inc.HOWL
Werewolf Therapeutics, Inc. Fair Value Disclosure
4. Financial Instruments and Fair Value Measurements
Our assets that are required to be measured at fair value on a recurring basis consist of money market funds, classified as cash, cash equivalents and restricted cash and cash equivalents on our consolidated balance sheets as of December 31, 2024 and 2023 .
Our liabilities that are required to be measured at fair value on a recurring basis consist of a derivative liability pursuant to a loan and security agreement (the “K2HV Loan Agreement”) with K2 HealthVentures LLC (“K2HV”) (see Note 7, Term Loan) as of December 31, 2024. We did not have any liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2023.
The carrying amounts reflected in the consolidated balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2024 were as follows:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Money market funds | $ | 105,526 | $ | — | $ | — | $ | 105,526 | |||||||||||||||
Total assets | $ | 105,526 | $ | — | $ | — | $ | 105,526 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||
Derivative liability | $ | — | $ | — | $ | 2,829 | $ | 2,829 | |||||||||||||||
Total liabilities | $ | — | $ | — | $ | 2,829 | $ | 2,829 | |||||||||||||||
Assets measured at fair value on a recurring basis as of December 31, 2023 were as follows:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Money market funds | $ | 149,294 | $ | — | $ | — | $ | 149,294 | |||||||||||||||
Total assets | $ | 149,294 | $ | — | $ | — | $ | 149,294 | |||||||||||||||
There were no changes in valuation techniques during the year ended December 31, 2024.
Derivative Liability
In May 2024, we entered into the K2HV Loan Agreement, as further described in Note 7, which provides up to $60.0 million principal in term loans. Pursuant to the terms of K2HV Loan Agreement, the lenders thereto may elect, prior to the full repayment of the term loans, to convert up to $5.0 million of the outstanding principal of the term loans into shares of our common stock at a conversion price of the lesser of $6.3182 per share (the “Fixed Price Conversion”) and the lowest effective price per share of our first equity financing following the closing of the K2HV Loan Agreement (the “Variable Price Conversion”), subject to customary adjustments and 9.99% and 19.99% beneficial ownership limitations. The Fixed Price Conversion and Variable Price Conversion within the K2HV Loan Agreement are required to be bifurcated as a single compound embedded derivative carried at fair value, with subsequent changes in fair value recognized in the consolidated statement of operations.
The following table reconciles the change in fair value of the derivative liability during the year ended December 31, 2024 based on Level 3 inputs (in thousands):
| Balance at December 31, 2023 | $ | — | |||
Fair value of derivative liability at issuance of term loan | 4,450 | ||||
| Change in fair value | (1,621) | ||||
| Balance at December 31, 2024 | $ | 2,829 | |||
The change in fair value of the derivative liability is included in other income (expense), net in the accompanying consolidated statements of operations. We recognized a gain on the change in fair value of the derivative liability of $1.6 million during the year ended December 31, 2024.
The fair value of the conversion option derivative liability in the term loan was estimated using the Monte Carlo model. A summary of the weighted-average significant unobservable inputs (Level 3 inputs) used in measuring the conversion option derivative liability in the term loan as of December 31, 2024 and May 2, 2024 (inception) is as follows:
| December 31, 2024 | May 2, 2024 | ||||||||||
| Stock Price | $1.48 | $6.08 | |||||||||
| Volatility | 103.0% | 101.0% | |||||||||
| Risk-free rate (continuous) | 4.2% | 4.7% | |||||||||
| Expected term (in years) | 0.58 | 0.91 | |||||||||
| Dividend yield (continuous) | —% | —% | |||||||||
Success Payment Liability
In April 2022, we entered into an amended and restated loan and security agreement (the “PWB Loan Agreement”) with PWB, as described below in Note 7. In conjunction with the PWB Loan Agreement, we became obligated to pay to PWB a one-time success payment of up to $1.6 million (the “Success Fee”) upon achieving certain conditions defined in the PWB Loan Agreement (the “Success Fee Event”). The Success Fee Event occurred during the second quarter of 2023, resulting in the immediate payment in full of the required Success Fee.
Prior to the occurrence of the Success Fee Event, we recognized a success payment liability that was stated at fair value and was considered Level 3 because its fair value measurement was based, in part, on significant inputs not observed in the market. Upon completion of the Success Fee Event, we paid the total $1.6 million success payment and removed the corresponding success payment liability. We remeasured the success payment liability at each reporting date and immediately prior to the Success Fee Event. During the year ended December 31, 2023, we recognized expense of $1.0 million associated with the change in the fair value of the success payment liability which is included in other income (expense), net in the accompanying consolidated statement of operations. We had no outstanding obligation associated with the Success Fee as of December 31, 2024 or December 31, 2023.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.