Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives and expectations for our business. Our actual results and the timing of selected events could differ materially from those described in or implied by these forward-looking statements as a result of several factors, including those set forth in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. See also the section titled “Special Note Regarding Forward-Looking Statements.”
This section under Management’s Discussion and Analysis of Financi al Condition and Results of Operations generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the prospectus we filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on June 21, 2021.
Overview
We are a T-cell reprogramming company dedicated to the mastery of T cells to cure patients with solid tumors. We believe the key to effective cell therapy is the mastery of the identity, fate and function of cells to create living medicines. We take a systematic, interrogative, cell biology-driven approach to overcome what we view as the two major barriers to successful ACT – (1) T-cell exhaustion and (2) lack of durable stemness – through the application of our proprietary ex vivo genetic and epigenetic reprogramming technologies, Gen-R™ and Epi-R™. Our technologies are designed to be applied in a target and modality agnostic manner to chimeric antigen receptor (CAR), tumor-infiltrating lymphocytes (TIL) and T-cell receptor (TCR) therapies to fundamentally improve the properties of T cells needed to eradicate solid tumors. We believe our autologous T-cell therapies will generate improved, durable clinical outcomes that are potentially curative for patients with solid tumors. We are building a multi-modality product pipeline across several solid tumor indications with high unmet needs.
We are advancing a product pipeline of promising living cell product candidates across multiple ACT modalities that incorporate our Gen-R and Epi-R technology platforms. Each of our programs provide opportunities to expand into additional indications beyond the patient populations we are initially targeting.
For additional information regarding our business, see “Business” in Part I, Item 1 of this Annual Report on Form 10-K.
Pipeline Programs and Operational Updates
Pipeline Programs
Phase 1 clinical development of two product candidates (LYL797, LYL132) has commenced and additional product candidates are in preclinical development (LYL845, LYL331). LYL797 and LYL845 are wholly‑owned by Lyell, and LYL132 and LYL331 are being developed in collaboration with GSK.
LYL797 – CAR T-cell therapy targeting ROR1 + solid tumors, incorporating Gen-R and Epi-R
• Announced FDA clearance of the IND for LYL797, a chimeric antigen receptor (CAR) T-cell therapy for patients with solid tumors expressing receptor tyrosine kinase-like orphan receptor 1 (ROR1 + ).
• Screening initiated for the Phase 1 open label dose escalation and expansion trial with relapsed/refractory triple-negative breast cancer or non-small cell lung cancer who have failed at least two lines of therapy, initial data expected in 2023.
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LYL132 – TCR therapy targeting NY-ESO-1 solid tumors, incorporating Epi-R
• Announced FDA clearance of the IND for LYL132, a T-cell receptor (TCR) therapy developed in collaboration with GSK for patients with solid tumors expressing New York esophageal squamous cell carcinoma 1 (NY-ESO-1).
LYL845 - TIL therapy designed to target multiple solid tumor indications, incorporating Epi-R
• On track to submit an IND in the second half of 2022 for LYL845, a tumor infiltrating lymphocyte (TIL) therapy.
• Initially targeting melanoma, with plans to expand into additional solid tumor indications.
LYL331 - TCR therapy targeting NY-ESO-1 solid tumors, incorporating Gen-R
• GSK has communicated to us that due to updated manufacturing timing, the IND for LYL331 is likely to be submitted in late 2022/early 2023.
• LYL331 is a TCR therapy developed in collaboration with GSK for patients with solid tumors expressing New York esophageal squamous cell carcinoma 1 (NY-ESO-1).
• LYL331 incorporates Gen-R and, along with LYL132, is under investigation as a potential next-generation enhancement to lete-cel.
Operational Updates
• Announced cGMP qualification of LyFE™, Lyell’s manufacturing facility designed to produce cell products at scale for upcoming clinical trials across its CAR, TIL and TCR products.
COVID-19 Update
The global COVID-19 pandemic continues to evolve rapidly, and we will continue to monitor it closely. The extent of the impact of the COVID-19 pandemic on our business, operations and development timelines and plans remains uncertain and will depend on certain developments, including the duration and spread of the outbreak and its impact on our clinical trial plans, CROs, contract manufacturing organizations and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. While the implications of the COVID-19 pandemic on our operations remain uncertain, to date, we have not experienced delays in our discovery and development activities as a result of the COVID-19 pandemic. However, there can be no assurance that we will be able to avoid materially adverse impacts from the evolving effects of the COVID-19 pandemic. In this regard, site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic, which may delay enrollment in our current and planned clinical trials, and some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services, and we may be unable to obtain blood samples for testing. For example, limitations or modifications in surgery scheduling for oncology patients at collaborating institutions has limited and may continue to limit supply of patient tumor samples that we use in our research. We have closely monitored the COVID-19 pandemic and have strived to follow recommended containment and mitigation measures, including the guidance from the Centers for Disease Control and Prevention (CDC) as well as the states of California and Washington and applicable counties. For most of the pandemic, essential laboratory and support employees worked in our facilities to continue and progress experiments. We implemented preventative measures at our facilities in order to minimize the risk of employee exposure to the virus, including the following requirements: that each employee who entered a facility agreed to comply with social distancing, frequent hand washing and the requirement to wear masks. We also increased cleaning of high touch areas, provided hand sanitizing stations and implemented an employee questionnaire to ensure employee health status and to provide for limited on-site tracing if needed. Finally, commencing in early March 2020, we suspended all non-essential business travel and adopted a work from home policy in which work that can be done from home is encouraged and allowed to be done from home. We expect to continue such measures for the near foreseeable future, though we may allow certain designated groups of employees to return to our facilities on an as-needed basis if we determine that we may do so while continuing to maintain a safe work environment. We will continue to actively monitor the situation related to the COVID-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business.
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Collaboration, License and Success Payment Agreements
For a detailed description of our collaboration, license and success payment agreements, see the section titled “Business—Collaboration, License and Success Payment Agreements” in Part I, Item 1 of this Annual Report on Form 10‑K and Notes 2 and 3 to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Components of Results of Operations
Revenue
We have no products approved for sale and have never generated any revenue from product sales.
To date, we have generated revenue primarily from the recognition of a portion of the upfront payment under the GSK Agreement that we entered into in May 2019. As we continue to conduct research under the GSK Agreement, we will recognize revenue based upon our estimate of the progress made. In the future, we may generate additional revenue from other collaborations, strategic alliances, licensing agreements, product sales or a combination of these.
Operating Expenses (Income)
Research and Development
To date, research and development expenses consist of costs incurred by us for the discovery and development of our technology platforms and product candidates, and includes costs incurred in connection with strategic collaborations, costs to license technology, personnel-related costs, including stock-based compensation expense, facility and technology related costs, research and laboratory expenses, as well as other expenses, which include consulting fees and other costs. Upfront payments and milestones paid to third parties in connection with technology platforms that have not reached technological feasibility and do not have an alternative future use are expensed as incurred.
Research and development expenses also include non-cash expense related to the change in the esti mated fair value of the liabilities associated with our success payments granted to Fred Hutch and Stanford. See the subsection titled “Critical Accounting Policies and Estimates—Success Payments” below. Research and development expenses related to our success payment liabilities are unpredictable and may vary significantly from quarter to quarter and year to year due to changes in our assumptions used in the calculation.
We deploy our employee and infrastructure resources across multiple research and development programs for identifying and developing product candidates and establishing manufacturing capabilities. Due to the stage of development and number of ongoing programs and our ability to use resources across several programs, most of our research and development costs are not recorded on a program-specific basis. These include costs for personnel, laboratory and other indirect facility and operating costs.
Research and development activities account for a significant portion of our operating expenses. We anticipate that our research and development expenses will increase over the foreseeable future as we expand our research and development efforts including completing preclinical studies, commencing planned clinical trials, conducting and completing current and planned clinical trials, seeking regulatory approval of our product candidates, identifying new product candidates and incurring costs to acquire and license technology platforms. A change in the outcome of any of these variables could mean a significant change in the costs and timing associated with the development of our product candidates. Because we are early in our research and development efforts and just beginning clinical development of our product candidates, and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the preclinical development, clinical development and commercialization of product candidates or whether, or when, we may achieve profitability.
Our research and development expenses may vary significantly based on factors such as:
• the number and scope of preclinical and IND-enabling studies;
• per patient trial costs;
• the number of trials required for approval;
• the number of sites included in the trials;
• the countries in which the trials are conducted;
• the length of time required to enroll eligible patients;
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• the number of patients that participate in the trials;
• the drop-out or discontinuation rates of patients;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of patient participation in the trials and follow-up;
• the cost and timing of manufacturing our product candidates;
• the phase of development of our product candidates;
• the efficacy and safety profile of our product candidates;
• the extent to which we establish additional collaboration or license agreements; and
• whether we choose to partner any of our product candidates and the terms of such partnership.
A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates. We may obtain unexpected results from our preclinical studies and future clinical trials.
General and Administrative
General and administrative costs include personnel-related expenses, including stock-based compensation expense for personnel in executive, legal, finance and other administrative functions, legal costs, transaction costs related to collaboration and licensing agreements, as well as fees paid for accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expenses. Legal costs include those related to corporate and patent matters.
We anticipate that our general and administrative expenses will increase over the foreseeable future to support our continued research and development activities, operations generally, future business development opportunities, consulting fees, as well as due to the increased costs of operating as a public company such as costs related to accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs.
Other Operating Income, Net
Other operating income, net consists primarily of service and occupancy fees received associated with subleases as well as gains or losses on t he sales of property and equipment.
Interest Income, Net
Interest income, net consists primarily of interest earned on our cash, cash equivalents and marketable securities balances.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of changes in the fair value of an equity warrant investment held.
Impairment of Other Investments
Impairment of other investments consists of impairment of the PACT Series C-1 convertible preferred stock investment.
Deemed Dividends Upon Issuance or Repurchase of Convertible Preferred Stock
Deemed dividends upon issuance or repurchase of convertible preferred stock consists of the amount by which the fair value of the convertible preferred stock exceeded the cash proceeds from the sale and issuance of such convertible preferred stock or the amount by which the cash paid for the repurchase of convertible preferred stock exceeded the carrying value of such convertible preferred stock. Upon the closing of our IPO, all our convertible preferred stock was converted into our common stock.
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Results of Operations
Years Ended December 31, 2021, 2020 and 2019
The following table summarizes our results of operations for the periods presented (in thousands):
Year Ended December 31,
Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenue
$ 10,650 $ 7,756 $ 657 $ 2,894 $ 7,099
Operating expenses (income):
Research and development
138,693 182,243 63,595 (43,550) 118,648
General and administrative
89,057 46,881 39,151 42,176 7,730
Other operating income, net
(2,324) (9,431) — 7,107 (9,431)
Total operating expenses
225,426 219,693 102,746 5,733 116,947
Loss from operations
(214,776) (211,937) (102,089) (2,839) (109,848)
Interest income, net
1,165 5,939 8,121 (4,774) (2,182)
Other (expense) income, net
(161) 1,526 (35,409) (1,687) 36,935
Impairment of other investments (36,447) — — (36,447) —
Total other (loss) income, net (35,443) 7,465 (27,288) (42,908) 34,753
Net loss
(250,219) (204,472) (129,377) (45,747) (75,095)
Deemed dividends upon issuance or repurchase of convertible preferred stock
— (3,582) (1,144) 3,582 (2,438)
Net loss attributed to common stockholders
$ (250,219) $ (208,054) $ (130,521) $ (42,165) $ (77,533)
Revenue
Revenue was $10.7 million and $7.8 million for the years ended December 31, 2021 and 2020, respectively, primarily related to the recognized portion of the upfront license fee pursuant to the GSK Agreement. The increase of $2.9 million was primarily due to progress in research and development activities under the GSK Agreement.
Research and Development Expenses
The following table summarizes the components of our research and development expenses for the periods presented (in thousands):
Year Ended December 31,
Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Personnel
$ 60,499 $ 54,112 $ 31,634 $ 6,387 $ 22,478
Facilities and technology
39,092 24,560 11,378 14,532 13,182
Collaborations, research activities and outside services
35,389 98,234 20,147 (62,845) 78,087
Success payments
3,713 5,337 436 (1,624) 4,901
Total research and development expenses
$ 138,693 $ 182,243 $ 63,595 $ (43,550) $ 118,648
Research and developm ent expenses were $138.7 million and $182.2 million for the years ended December 31, 2021 and 2020, respectively. The decrease of $43.6 million was primarily due to:
• a decrease of $62.8 million in collaborations, research activities and outside services expenses due to the commitment agreement upfront payment to PACT of $63.6 million and a decrease of $7.5 million in acquired in-process research and development expense related to the asset acquisition of Immulus, Inc., both recorded in 2020. These decreases were offset by a $4.8 million increase in costs associated with collaboration agreements and a $3.5 million increase related to professional services;
• a decrease of $1.6 million in success payment expenses associated with our Fred Hutch and Stanford success payment liabilities, primarily driven by the decrease in the per share fair value of our common stock;
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• an increase of $14.5 million in facilities and technology costs, primarily related to increased infrastructure to support our expansion in research and development, manufacturing capabilities and associated headcount growth; and
• an increase of $6.4 million in personnel-related expenses, which was primarily related to an increase in headcount to expand our research, development and manufacturing capabilities.
General and Administrative Expenses
General and administrative expenses were $89.1 million and $46.9 million for the years ended December 31, 2021 and 2020, respectively. The increase of $42.2 million was primarily due to an increase of $28.6 million in stock-based compensation expense, primarily related to award modifications, accelerations and new awards granted, and $2.4 million increase in personnel-related expenses due to an increase in headcount to support our operations. A dditionally, outside services and corporate expenses increased by $7.3 million due to certain litigation costs and an increase of $3.2 million in costs associated with operating as a public company.
Other Operating Income, Net
Other operating income, net was $2.3 million and $9.4 million for the years ended December 31, 2021 and 2020, respectively. The decrease of $7.1 million was due primarily to two significant gains that occurred in 2020, a gain recorded on the sale of assets of $4.9 million and a gain recorded upon lease remeasurement of $2.9 million.
Interest Income, Net
Interest income, net was $1.2 million and $5.9 million for the years ended December 31, 2021 and 2020, respectively. The decrease of $4.8 million was due to lower interest rates earned on cash, cash equivalents and marketable securities balances.
Other (Expense) Income, Net
For the years ended December 31, 2021 and 2020, other (expense) income, net consisted primarily of the change in fair value of an equity warrant investment held.
Impairment of Other Investments
For the year ended December 31, 2021, the $36.4 million impairment of other investments consisted of the full impairment of our investment in PACT Series C-1 convertible preferred stock.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have funded our operations primarily through the sale and issuance of convertible preferred stock, the sale of common stock in connection with our IPO and business development activities. As of December 31, 2021, we had $898.3 million in cash, cash equivalents and marketable securities. Since our inception, we have incurred significant operating losses. We have not yet commercialized any product candidates and we do not expect to generate revenue from sales of any product candidates for a number of years, if ever. We had an accumulated deficit of $584.4 million as of December 31, 2021. From June 29, 2018 (inception) through December 31, 2021, we raised an aggregate of $1,405.7 million in gross proceeds from the sales of our convertible preferred stock.
Future Funding Requirements
We expect to incur additional losses in the foreseeable future as we conduct and expand our research and development efforts, including conducting preclinical studies and clinical trials, developing new product candidates, establishing internal manufacturing capabilities and funding our operations generally. Based on our current operating plan, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs into 2025. However, we anticipate that we will need to raise additional capital in the future to fund our operations, including the commercialization of any approved product candidates. We are subject to the risks typically related to the development of new products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
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Our future capital requirements will depend on many factors, including:
• the scope, timing, progress, costs and results of discovery, preclinical development and clinical trials for our current and future product candidates;
• the number of clinical trials required for regulatory approval of our current and future product candidates;
• the costs, timing and outcome of regulatory review of any of our current and future product candidates;
• the cost of manufacturing clinical and commercial supplies of our current and future product candidates;
• the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
• further investment to build additional manufacturing facilities or expand the capacity of our existing ones;
• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
• our ability to maintain existing, and establish new, collaborations, licenses, product acquisitions or other strategic transactions and the fulfillment of our financial obligations under any such agreements, including the timing and amount of any success payment, future contingent, milestone, royalty or other payments due under any such agreement;
• the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
• expenses to attract, hire and retain skilled personnel;
• the costs of operating as a public company;
• addressing any potential interruptions or delays resulting from factors related to the COVID-19 pandemic;
• addressing or responding to any potential disputes or litigation; and
• the extent to which we acquire or invest in businesses, products and technology platforms.
Until such time as we complete preclinical and clinical development and receive regulatory approval of our product candidates and can generate significant revenue from product sales, if ever, we expect to finance our operations from the sale of additional equity or debt financings, or other capital which come in the form of strategic collaborations, licensing, or other arrangements. In the event that additional capital is required, we may not be able to raise it on terms acceptable to us, or at all. If we raise additional funds through the issuance of equity or convertible debt securities, it may result in dilution to our existing stockholders. Debt financing or preferred equity financing, if available, may result in increased fixed payment obligations, and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations. If we raise funds through strategic collaboration, licensing, or other arrangements, we may relinquish significant rights or grant licenses on terms that are not favorable to us. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Material Cash Requirements
We continually evaluate our liquidity and capital resources to ensure that we can adequately and efficiently finance our operations. As of December 31, 2021 , our material cash requirements consisted primarily of paying salaries and benefits, administering clinical trials, providing the technology and facilities necessary to support our operations, operating lease obligations, potential success payments to Fred Hutch and Stanford and other payments related to our collaborative agreements. See Note 3, Collaboration, License and Success Payment Agreements , and Note 9, Leases , in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K for additional information.
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Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2021 2020 2019
Net cash provided by (used in):
Operating activities
$ (126,249) $ (160,874) $ 39,474
Investing activities
(121,573) (273,516) (422,433)
Financing activities
401,244 476,790 351,156
Net increase (decrease) in cash, cash equivalents and restricted cash
$ 153,422 $ 42,400 $ (31,803)
Operating Activities
During the year ended December 31, 2021, net cash used in operating activities was $126.2 million, consisting primarily of our net loss of $250.2 million, partially offset by certain non-cash items such as stock-based compensation expense of $62.2 million, impairment of other investments of $36.4 million, depreciat ion and amortization expense of $13.6 million and the change in fair value of success payment liabilities of $3.7 million. Additionally, net operating assets and liabilities increased $4.0 million, which included an increase in operating lease liabilities due to tenant improvement allowances received of $13.3 million offset by the recognition of $10.5 million of revenue previously recorded in deferred revenue.
Investing Activ ities
During the year ended December 31, 2021, cash used in investing activities was $121.6 million, consisting of net purchases of marketable securities of $56.1 million and capital expenditures of $65.5 million.
Financing Activities
During the year ended December 31, 2021, cash provided by financing activities was $401.2 million, consisting of $391.8 million in net proceeds from the sale of our common stock in our IPO and $9.4 million in proceeds from the exercise of stock options.
Critical Accounting Policies and Estimates
Our audited consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the audited consolidated financial statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
We recognize revenue from research services generally as services are provided while revenue from non-refundable upfront fees are recognized over time by measuring progress towards satisfaction of the relevant performance obligation using the input method (i.e., cumulative actual costs incurred relative to total estimated costs).
The estimation of measure of progress is complex, involves significant judgment and is affected by our estimates of the total costs required to complete the performance obligations including the total internal personnel costs and external costs to be incurred. Changes in these estimates can have a material effect on our revenue recognition.
For a further description of our revenue recognition, see Note 2, Basis of Presentation and Significant Accounting Policies, in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.
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Success Payments
We are required to make success payments to Fred Hutch and Stanford based on increases in the per share market value of our common stock, payable in cash or cash equivalents or, at our discretion, publicly-tradeable shares of our common stock. The success payments are accounted for under ASC 718, Compensation – Stock Compensation , and are initially recorded at fair value with a corresponding charge to research and development expense. The liabilities are marked to market at each balance sheet date with all changes in value recognized in research and development expense in the consolidated statement of operations. Once their service periods are complete, the success payments will be accounted for under ASC 815, Derivatives and Hedging , and fair value changes will be recorded in other (expense) income, net. We will continue to adjust the liabilities for changes in fair value until the earlier of the achievement or expiration of the success payment obligation. To determine the estimated fair value of the success payments, we use a Monte Carlo simulation model, which models the value of the liability based on several key variables that require judgment, including the expected fair value and volatility of our common stock, estimated term and number of valuation measurement dates.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award. Prior to the closing of our IPO, the fair value of the common stock underlying our stock-based awards was estimated on each grant date by our board of directors using significant judgment to estimate the fair value of our common stock, including considering our stage of development; progress of our research and development efforts; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; equity market conditions affecting comparable public companies; and the lack of marketability of our common stock. The fair value of stock-based awards is recognized as an expense on a straight-line basis over the requisite service period, with forfeitures recognized as they occur.
We use the Black-Scholes model to determine the fair value of our options. The Black-Scholes option pricing model requires the use of assumptions, including stock price volatility, the expected life of stock options, risk-free interest rate and the fair value of the underlying common stock on the date of grant. Our restricted stock awards are valued based on the fair market value of the award on the grant date.
Valuation of Other Investments
We have non-marketable equity investments that are accounted for using the measurement alternative. Under the measurement alternative, the carrying value is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and obligations of the securities. Recording upward and downward adjustments to the carrying value of our equity securities as a result of observable price changes requires quantitative assessments of the fair value of our securities using various valuation methodologies and involves the use of estimates.
Non-marketable equity securities are also subject to periodic impairment reviews. Our quarterly impairment analysis considers both qualitative and quantitative factors that may have a significant effect on the investment’s fair value. Qualitative factors considered include the companies’ financial and liquidity position, access to capital resources and the time since the last adjustment to fair value, among others. When indicators of impairment exist, we prepare quantitative assessments of the fair value of our equity investments using both the market and income approaches that require judgment and the use of estimates, including discount rates, investee revenues and costs, and comparable market data of private and public companies, among others. When our assessment indicates that an impairment exists, we write down the investment to its fair value.
In connection with the preparation of our financial statements for 2021, we performed a qualitative assessment of potential indicators of impairment and determined that indicators existed for our $36.4 million investment in PACT Series C-1 convertible preferred stock. While there was no single event or factor, we considered PACT’s operating cash flow requirements over the next year and liquid asset balances to fund those requirements and their inability to raise funds as indicators of impairment. Due to these indicators, we assessed the valuation of our investment in PACT as of December 31, 2021 and determined the fair value to be negligible and the impairment to be other-than-temporary in nature. As a result, we recorded a $36.4 million impairment of our PACT investment in the fourth quarter of 2021. The impairment charge was recorded within impairment of other investments on the Consolidated Statement of Operations and Comprehensive Loss and as a reduction to the investment balance within other investments on the Consolidated Balance Sheet.
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Recently Adopted and Recent Accounting Pronouncements
See Note 2, Basis of Presentation and Significant Accounting Policies, in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption and our assessment, to the extent we have made one yet, of their potential impact on our financial condition or results of operations.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statement, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We also intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of our initial public offering, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
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