What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-28 compared with 2022-03-29 · 351 added, 358 removed, 778 unchanged (48% of the section changed)

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

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Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

VIE Accounting Considerations for the PACT Transaction

Description of the Matter

As described in notes 2, 3, 5 and 6 to the consolidated financial statements, in October 2022, the Company entered into a settlement agreement with PACT Pharma, Inc.

(PACT) to resolve their outstanding legal dispute.

In connection with the settlement agreement, the parties entered into a stock purchase agreement, pursuant to which PACT issued shares of PACT’s Series D convertible preferred stock, representing approximately 80% of PACT’s fully diluted shares, to the Company in exchange for the Company’s tender of its PACT Series C-1 convertible preferred stock and resolution of the arbitration.

The Company consolidates a variable interest entity (VIE) if it has a variable interest, and it is the primary beneficiary.

The primary beneficiary of a VIE has both:

(i) the power to direct activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

If the Company is not the primary beneficiary of a VIE, it accounts for its interest under other applicable GAAP, according to the nature of the investment.

We identified the initial accounting for the PACT Series D convertible preferred shares as a critical audit matter as there was significant complexity and judgment by management in assessing whether the Company was the primary beneficiary.

This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating the audit evidence obtained related to this assessment.

How We Addressed the Matter in Our Audit

To test the Company’s accounting for its interest in PACT, we engaged in discussions with management regarding the governance of PACT and inspected transaction documents, including the settlement agreement, preferred stock purchase agreement, amended and restated voting rights agreement and PACT’s amended and restated certificate of incorporation, assessed management’s judgments and conclusions regarding the primary beneficiary determination, and evaluated the effectiveness of controls related to management’s assessment.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2019.

Redwood City, California

March 29, 2022

San Mateo, California

February 28, 2023

Lyell Immunopharma, Inc.

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Prepaid expenses and other current assets

11,143 11,492

Total current assets

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$ 937,561 $ 1,127,406

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

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Deferred revenue, non-current (2)

79,665 89,066

Other non-current liabilities

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Commitments and contingencies (Note 16)

Convertible preferred stock, $ 0.0001 par value;

zero and 195,021 shares authorized at December 31, 2021 and 2020, respectively;

zero and 194,474 shares issued and outstanding at December 31, 2021 and 2020, respectively

Stockholders’ equity (deficit):

Stockholders’ equity:

Preferred stock, $ 0.0001 par value;

10,000 and zero shares authorized at December 31, 2021 and 2020, respectively;

10,000 shares authorized at December 31, 2022 and 2021, respectively;

zero shares issued and outstanding at December 31, 2022 and 2021

Common stock, $ 0.0001 par value;

500,000 and 264,905 shares authorized at December 31, 2021 and 2020, respectively;

500,000 shares authorized at December 31, 2022 and 2021, respectively;

249,567 and 242,738 shares issued and outstanding at December 31, 2022 and 2021, respectively

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1,608,306 1,515,748

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss

( 7,599 ) ( 1,623 )

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( 767,480 ) ( 584,362 )

Total stockholders’ equity (deficit)

Total stockholders’ equity

833,252 929,787

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

Total liabilities and stockholders’ equity

$ 937,561 $ 1,127,406

(1) Includes amounts from a related-party of zero and $ 4,988 as of December 31, 2022 and December 31, 2021, respectively.

(2) Includes amounts from a related-party of zero and $ 79,665 as of December 31, 2022 and December 31, 2021, respectively.

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

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$ 84,683 $ 10,650 $ 7,756

Operating expenses (income):

Operating expenses:

Research and development

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7,053 1,165 5,939

Other (expense) income, net

Other income (expense), net

1,887 ( 161 ) 1,526

Impairment of other investments ( 5,000 ) ( 36,447 ) —

Total other (loss) income, net ( 35,443 ) 7,465 ( 27,288 )

Total other income (loss), net 3,940 ( 35,443 ) 7,465

( 183,118 ) ( 250,219 ) ( 204,472 )

Other comprehensive (loss) gain:

Net unrealized (loss) gain on marketable securities

Other comprehensive loss:

Net unrealized loss on marketable securities

( 5,976 ) ( 1,879 ) ( 198 )

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$ ( 183,118 ) $ ( 250,219 ) $ ( 204,472 )

Deemed dividends upon issuance or repurchase of convertible preferred stock

Deemed dividends upon repurchase of convertible preferred stock

— — ( 3,582 )

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247,080 135,918 13,258

(1) Includes related-party revenue of $ 84,653 , $ 10,509 and $ 7,756 for the years ended December 31, 2022, 2021 and 2020, respectively.

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

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Comprehensive

(Loss) Income

Retained Earnings (Accumulated

Income (Loss)

Total Stockholders’

Equity (Deficit)

(Deficit) Equity

Shares Amount Shares Amount

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152,116 $ 519,163 11,181 $ 1 $ 18,108 $ 454 $ ( 129,671 ) $ ( 111,108 )

Issuance of Series A convertible preferred stock, net of $ 29 in issuance costs

23,527 89,380 — — — — — —

Issuance of Series B convertible preferred stock, net of $ 133 in issuance costs

23,930 162,018 — — — — — —

Issuance of Series AA convertible preferred stock, net of $ 101 in issuance costs

30,253 146,325 — — — — — —

Deemed dividends on issuance of Series A convertible preferred stock — 1,144 — — ( 826 ) — ( 318 ) ( 1,144 )

Issuance of common stock to strategic partners — — 910 — 2,562 — — 2,562

Repurchase of common stock — — — — ( 185 ) — — ( 185 )

Stock-based compensation — — 9,179 1 15,731 — — 15,732

Other comprehensive income — — — — — 454 — 454

Net loss — — — — — — ( 129,377 ) ( 129,377 )

Balance as of December 31, 2019

152,116 $ 519,163 11,181 $ 1 $ 18,108 $ 454 $ ( 129,671 ) $ ( 111,108 )

Issuance of Series C convertible preferred stock, net of $ 533 in issuance costs

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Issuance of common stock to strategic partners — — 275 — 1,004 — — 1,004

— — 275 — 1,004 — — 1,004

Issuance of common stock for asset acquisition — — 688 — 4,000 — — 4,000

— — 688 — 4,000 — — 4,000

Issuance of common stock upon exercise of stock options — — 113 — 373 — — 373

— — 113 — 373 — — 373

Stock-based compensation — — 5,345 1 33,260 — — 33,261

— — 5,345 1 33,260 — — 33,261

Repurchase of convertible preferred stock ( 547 ) ( 662 ) — — ( 3,582 ) — — ( 3,582 )

( 547 ) ( 662 ) — — ( 3,582 ) — — ( 3,582 )

Repurchase of common stock — — ( 2,032 ) — ( 11,806 ) — — ( 11,806 )

— — ( 2,032 ) — ( 11,806 ) — — ( 11,806 )

Other comprehensive loss — — — — — ( 198 ) — ( 198 )

— — — — — ( 198 ) — ( 198 )

— — — — — — ( 204,472 ) ( 204,472 )

Net loss — — — — — — ( 204,472 ) ( 204,472 )

Balance as of December 31, 2020

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Conversion of convertible preferred stock to common stock ( 194,474 ) ( 1,010,968 ) 194,474 20 1,010,948 — — 1,010,968

Issuance of common stock upon exercise of stock options — — 2,750 — 9,442 — — 9,442

Stock-based compensation — — 4,944 — 62,201 — — 62,201

Other comprehensive loss — — — — — ( 1,879 ) — ( 1,879 )

Net loss — — — — — — ( 250,219 ) ( 250,219 )

Balance as of December 31, 2021

— $ — 242,738 $ 24 $ 1,515,748 $ ( 1,623 ) $ ( 584,362 ) $ 929,787

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— — 3,601 1 9,576 — — 9,577

Issuance of common stock under employee stock purchase plan — — 475 — 1,519 — — 1,519

Issuance of common stock in connection with restricted stock units, net of tax — — — 153 — ( 461 ) — — ( 461 )

Stock-based compensation

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$ ( 183,118 ) $ ( 250,219 ) $ ( 204,472 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation expense

81,924 62,201 33,261

Impairment of other investments 36,447 — —

Depreciation and amortization

Depreciation and amortization expense

18,020 13,624 4,294

Impairment of other investments 5,000 36,447 —

Change in fair value of success payment liabilities

( 5,130 ) 3,713 5,337

Change in fair value of warrants

256 ( 1,323 ) —

Gain on other investments ( 2,923 ) — —

Lease expense, net of gain on lease remeasurement

( 1,553 ) 911 3,181

Non-cash expense in connection with asset acquisition

Net amortization or accretion on marketable securities

Change in fair value of equity warrant

1,067 256 ( 1,323 )

Loss on remeasurement of convertible preferred stock tranche liabilities — — 35,444

Expense in connection with equity issuances — — 3,566

Loss (gain) on property and equipment disposals 1,210 ( 4,884 ) —

Net amortization and accretion on marketable securities

( 930 ) 1,901 539

Loss (gain) on property and equipment disposals, net 103 1,210 ( 4,884 )

Expense in connection with asset acquisition

Gain on net operating lease liability disposal — ( 308 ) —

Changes in operating assets and liabilities:

Prepaid expenses and other assets

Prepaid expenses, other current assets and other assets

( 1,968 ) ( 6,987 ) ( 1,388 )

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Other non-current liabilities ( 453 ) 3,675 —

Net cash (used in) provided by operating activities

Net cash used in operating activities

( 169,555 ) ( 126,249 ) ( 160,874 )

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CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of stock options

9,577 9,442 373

Proceeds from employee stock purchase plan 1,519 — —

Taxes paid related to net share settlement of equity awards ( 461 ) — —

Proceeds from initial public offering, net of issuance costs — 391,802 —

Proceeds from issuance of convertible preferred stock, net of issuance costs

— 492,467 351,341

Proceeds from exercise of stock options

Payments for the repurchase of common stock

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10,635 401,244 476,790

Net increase (decrease) in cash, cash equivalents and restricted cash

Net (decrease) increase in cash, cash equivalents and restricted cash

( 170,460 ) 153,422 42,400

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Non-cash investing and financing activities:

Conversion of convertible preferred stock to common stock upon closing of initial public offering $ 1,010,968 $ — $ —

Purchases of property and equipment included in accounts payable and accrued liabilities

$ 1,325 $ 4,605 $ 12,740

Operating lease right-of-use assets obtained in exchange for lease obligations

$ — $ 30,475 $ 23,656

Remeasurement of operating lease right-of-use asset for lease modification

$ 31 $ 3,873 $ ( 8,958 )

Other investments received for sale of assets

Acquisition of PACT Series D convertible preferred shares $ 2,923 $ — $ —

Conversion of convertible preferred stock to common stock upon closing of initial public offering $ — $ 1,010,968 $ —

Operating lease right-of-use assets obtained in exchange for lease obligations

$ — $ — $ 30,475

Non-cash deemed dividends on convertible preferred stock

Other investments received for sale of assets

$ — $ — $ 6,000

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(the “Company”) was incorporated in Delaware in June 2018.

The Company is a T‑cell reprogramming company dedicated to the mastery of T cells to cure patients with solid tumors.

The Company is building a multi-modality product pipeline.

The Company’s primary activities since incorporation have been to develop T‑cell therapies, perform research and development, enter into strategic collaboration and license arrangements, enable manufacturing activities in support of its product candidate development efforts, acquire technology, organize and staff the Company, conduct business planning, establish its intellectual property portfolio, raise capital and provide general and administrative support for these activities.

The Company is a clinical-stage cell therapy company advancing a pipeline of therapies for patients with solid tumors utilizing our proprietary ex vivo genetic and epigenetic T‑cell reprogramming technologies.

The Company’s primary activities since incorporation have been to develop T‑cell therapies, perform research and development, enter into strategic collaboration and license arrangements, build manufacturing capabilities, enable manufacturing activities in support of its product candidate development efforts, acquire technology, organize and staff the Company, conduct business planning, establish its intellectual property portfolio, raise capital and provide general and administrative support for these activities.

Initial Public Offering

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The Company received $ 391.8 million in net proceeds, after deducting underwriting discounts and commissions of $ 29.8 million and offering expenses of $ 3.4 million.

Upon the closing of the IPO, 194,474,431 shares of convertible preferred stock then outstanding converted into an equivalent number of shares of common stock.

Upon the closing of the IPO, 194,474,431 shares of convertible preferred stock then outstanding converted into an equal number of shares of common stock.

The related carrying value of the converted preferred stock of $ 1.0 billion was reclassified to common stock and additional paid in-capital.

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generally accepted accounting principles (“GAAP”).

The consolidated financial statements include the accounts of Lyell Immunopharma, Inc.

and its wholly-owned subsidiary.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.

All significant intercompany transactions and balances are eliminated in consolidation.

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Liquidity and Management’s Plan

The Company is currently working on a number of long-term development projects that involve experimental technologies.

The projects may require several years and substantial expenditures to complete and ultimately may be unsuccessful.

The Company is currently working on long-term product candidates that involve experimental technologies.

The product candidates may require several years and substantial expenditures to complete and ultimately may be unsuccessful.

The Company plans to finance operations with available cash resources or from the issuance of equity or debt securities.

The Company believes that its available cash, cash equivalents and marketable securities as of December 31, 2022 will be adequate to fund its operations at least through the next 12 months from the date these consolidated financial statements are issued.

The Company will require substantial additional financial resources to complete the development and commercialization of its product candidates.

Additional capital may not be available on terms acceptable to the Company, or at all.

If adequate funds are not available, or if the terms of potential funding sources are unfavorable, the Company’s business and ability to develop its technology and therapeutic products would be harmed.

Furthermore, any sales of additional equity securities may result in dilution to the Company’s stockholders, and any debt financing may include covenants that restrict the Company’s business.

Summary of Significant Accounting Policies

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The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect reported amounts and related disclosures.

Specific accounts that require management estimates include, but are not limited to, stock-based compensation, valuation of success payments, revenue recognition and accrued expenses.

Specific accounts that require management estimates include, but are not limited to, stock-based compensation, valuation of success payments, valuation of other investments, revenue recognition and accrued expenses.

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 value of assets and liabilities that are not readily apparent from other sources.

Actual results could differ materially from those estimates.

In June 2022, the Company recorded adjustments to revenue related to changes in estimates in connection with the Collaboration and License Agreement, entered into in 2019 and amended in June 2020 and December 2021 (“GSK Agreement”) with GlaxoSmithKline Intellectual Property (No.

5) Limited and Glaxo Group Limited (together, “GSK”).

These changes in estimates were driven by the mutual agreement to conclude certain research activities in June 2022 and GSK’s termination of the GSK Agreement, effective December 24, 2022, both of which resulted in changes to the measure of proportional cumulative performance.

These adjustments increased revenue by $ 83.6 million, decreased net loss by $ 83.6 million and resulted in a $ 0.34 reduction in the Company’s basic and diluted net loss per common share for the year ended December 31, 2022 .

Lyell Immunopharma, Inc.

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Comprehensive Loss

Comprehensive loss includes net loss and certain changes in stockholders’ equity (deficit) that are excluded from net loss.

Comprehensive loss includes net loss and certain changes in stockholders’ equity that are excluded from net loss.

For the years ended December 31, 2022, 2021 and 2020 this was comprised of net unrealized gains and losses on the Company’s marketable securities.

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The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents.

Cash equivalents consist primarily of amounts invested in money market accounts.

Cash equivalents consist primarily of amounts invested in commercial paper and money market accounts.

Restricted cash is cash held in bank accounts and is used as collateral for letters of credits issued in conjunction with the Company’s lease agreements and collateral associated with the Company’s corporate credit card program.

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The Company generally invests its excess cash in investment grade short- to intermediate-term fixed income securities.

Such investments are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses reported as a component of comprehensive loss.

Realized gains and losses on available-for-sale securities are included in other (expense) income, net.

Such investments are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses repo rted as a component of comprehensive loss.

Realized gains and losses on available-for-sale securities are included in other income (expense), net.

The cost of investments sold is based on the specific-identification method.

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Each reporting period, the Company evaluates whether declines in fair value below carrying value are due to expected credit losses, as well as the Company’s ability and intent to hold the investment until a forecasted recovery occurs.

Expected credit losses are recorded as an allowance through other (expense) income, net.

Other Investments

Expected credit losses are recor ded as an allowance through other income (expense), net.

Valuation of Other Investments

The Company determines at the inception of each arrangement whether an investment or other interest is considered a variable interest entity (“VIE”).

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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 its consolidated financial statements.

For any investments in VIEs in which the Company is considered the primary beneficiary, the assets, liabilities and results of operations of the VIE would be included in its consolidated financial statements.

As of December 31, 2022 and 2021, there were no VIEs for which the Company was the primary beneficiary.

The Company accounts for its strategic equity interests in non-publicly traded companies for which it does not have the ability to exercise significant influence in accordance with Accounting Standards Codification (“ASC”) 321, Investments – Equity Securities (“ASC 321”).

The Company accounts for its strategic equity interests in common stock and in- su bstance common stock in non‑publicly traded companies for which it does not have the ability to exercise significant influence in accordance with Accounting Standards Codification (“ASC”) 321, Investments – Equity Securities (“ASC 321”).

Upon acquisition, these investments are measured at cost, which represents the then fair value.

Under ASC 321, the Company can elect to subsequently measure the investments at initial cost, minus impairment and any changes, plus or minus, resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

This election must be made for each investment separately.

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If the investment is impaired, an impairment charge is recognized in the amount by which the carrying amount of the investment exceeds the estimated fair value of the investment, with the impairment charge recognized through net loss.

See Note 5, Other Investments , for details related to an investment impairment recognized during the year ended December 31, 2021.

Additionally, the Company holds an investment in equity warrants giving it the right to acquire stock of a non‑publicly traded company.

Equity warrant investments are recorded within other assets at the estimated fair value, with gains and losses recognized in other (expense) income, net.

See Note 5, Other Investments , for details related to investment impairments recognized during the years ended December 31, 2022 and 2021.

Additionally, the Company holds an equity warrant investment giving it the right to acquire stock of a non‑publicly traded company.

Equity warrant investments are recorded within other assets at the estimated fair value, with gains and losses recognized in other income (expense), net.

For the year ended December 31, 2022, in conjunction with the impairment of one of the Company’s other investments, the associated equity warrant investment’s fair value was

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

determined to be negligible.

The Company reduced the equity warrant investment’s fair value to zero for the year ended December 31, 2022.

See Note 6, Fair Value Measurements , for additional details regarding the equity warrant investment.

Property and Equipment, Net

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Property and equipment are stated at cost less accumulated depreciation and amortization.

Depreciation is calculated using the straight-line method based on the estimated useful lives of the related assets, which are generally three to five years .

For leasehold improvements, amortization is calculated using the straight‑line method based on the shorter of the useful life or the lease term.

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recorded in other (expense) income, net in the period realized.

Depreci ation is calculated using the straight-line method based on the estimated useful lives of the related assets, which are generally three to five years .

F or leasehold improvements, amortization is calculated using the straight‑line method based on the shorter of the useful life or the lease term.

When assets are retired or otherwise disposed of, the cost and related a ccumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recorded in other income (expense), net in t he period realized.

Maintenance and repairs are expensed as incurred.

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As the Company’s leases do not provide an implicit rate, an incremental borrowing rate at each lease commencement date is used to determine the present value of future lease payments.

The incremental borrowing rate is the rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis at the lease commencement date.

To estimate the incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating.

The ROU asset includes any lease payments made prior to the lease commencement date

The incremental borrowing rate is the rate of interest that the Company would pay to borrow equivalent funds

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

and is reduced by any lease incentives received or deemed payable to the Company.

on a collateralized basis at the lease commencement date.

The ROU asset includes any lease payments made prior to the lease commencement date and is reduced by any lease incentives received or deemed payable to the Company.

The lease term may include options to extend or terminate the lease when it is reasonably certain that a lease option will be exercised.

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As described in Note 5, Other Investments , other investments are carried at cost, minus impairment and any changes, plus or minus, resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Deemed Dividends Upon Issuance or Repurchase of Convertible Preferred Stock

Deemed Dividends Upon Repurchase of Convertible Preferred Stock

In March 2020, 546,806 shares of the Company’s Series A convertible preferred stock were repurchased by the Company at the then estimated fair value of $ 7.76 per share, which was higher than the carrying value of those shares.

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Milestone and other forms of variable consideration that the Company may earn are subject to significant uncertainties of research and development related achievements, which generally are deemed not probable until such milestones are actually achieved.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Additionally, the Company develops assumptions that require judgment to determine the standalone

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

selling price of each performance obligation identified in the contract.

predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Additionally, the Company develops assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract.

The Company then allocates the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation, for which it recognizes revenue as or when the performance obligations are satisfied.

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Research and development expenses consist of costs incurred by the Company for the discovery and development of its 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, which have not reached technological feasibility and do not have an alternative future use are expensed as incurred.

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.

General and Administrative Expense

General and administrative costs are expensed as incurred and 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.

Legal costs include those related to corporate, dispute and patent matters.

Success Payments

The Company granted rights to success payments to Fred Hutchinson Cancer Research Center (“Fred Hutch”) and The Board of Trustees of the Leland Stanford Junior University (“Stanford”) pursuant to the terms of its research and collaboration agreements with each of those entities.

The Company granted rights to success payments to Fred Hutchinson Cancer Center (“Fred Hutch”) and The Board of Trustees of the Leland Stanford Junior University (“Stanford”) pursuant to the terms of its research and collaboration agreements with each of those entities.

Pursuant to the terms of these agreements, on each contractually prescribed measurement date, the Company may be required to make success payments based on increases in the estimated per share fair value of the Company’s common stock.

See Note 3, Collaboration, License and Success Payment Agreements .

The success payments are accounted for under ASC 718, Compensation – Stock Compensation , with the expense being recorded in research and development expenses.

Once the service period is complete, the instrument will be accounted for under ASC 815, Derivatives and Hedging , and continue to be remeasured each reporting period with all changes in value recognized immediately in other (expense) income, net.

The success payment liability is estimated at fair value at inception and at each reporting period, and the expense is accreted over the service period of the research and collaboration agreement.

See Note 3, License, Collaboration and Success Payment Agreements .

The success payments are accounted for under A SC 718, Compensation – Stock Compensation , with the expense being recorded in research and development expenses.

Once the service period is complete, the instrument is accounted for under ASC 815, Derivatives and Hedging , and continues to be remeasured each reporting period with all changes in value recognized immediately in other income (expense), net.

The success payment liability is estimated at fair value at inception and at each subsequent reporting period, and the expense is accreted over the service period of the research and collaboration agreement.

To determine the estimated fair value of the success payments, the Company uses a Monte Carlo simulation methodology which models the future movement of stock prices based on several key variables combined with empirical knowledge of the process governing the behavior of the stock price.

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The computation of expected volatility was estimated based on available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

Concentrations of Credit Risk and Off-balance Sheet Risk

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Treasury securities, U.S.

government agency securities and corporate debt

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

securities, which can be subject to certain credit risk.

government agency securities and corporate debt securities, which can be subject to certain credit risk.

However, the Company mitigates the risks by investing in high-grade instruments, limiting exposure to any one issuer or type of investment and monitoring the ongoing creditworthiness of the financial institutions and issuers.

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Stock-based Compensation

Under ASC 718, the Company measures and recognizes expense for restricted stock awards (“RSAs”) and stock options granted to employees, directors and consultants based on the fair value of the awards on the date of grant.

The fair value of stock options is estimated using the Black-Scholes option pricing model, which requires the use of subjective assumptions and for management to apply judgment and make estimates including:

stock price volatility, the expected life of stock options, the risk-free interest rate, expected dividend, and the fair value of the underlying common stock on the date of grant.

Under ASC 718, the Company measures and recognizes expense for restricted stock awards (“RSAs”), restricted stock units (“RSUs”), employee stock purchases related to the Employee Stock Purchase Plan and stock options granted to employees, directors and consultants based on the fair value of the awards on the date of grant.

The fair value of stock options is estimated using the Black-Scholes option pricing model.

The Black-Scholes option pricing model requires inputs based on certain subjective assumptions including:

stock price volatility, the expected term of stock options, the risk-free interest rate, expected dividends, and the fair value of the underlying common stock on the date of grant.

The expected volatility is based on the historical volatility of the stock of similar entities within the Company’s industry over periods commensurate with the Company’s expected term assumption.

The expected term of stock option grants represents the weighted-average period the options are expected to remain outstanding and is based on the “simplified” method where the expected term is the midpoint between the vesting date and the end of the contractual term for each option.

The expected term of stock option grants represents the period the options are expected to remain outstanding and is based on the “simplified” method where the expected term is the midpoint between the vesting date and the end of the contractual term for each option.

The Company used the simplified method as provided for under the applicable guidance for entities with a limited history of relevant stock option exercise activity.

The Company bases the risk-free interest rate on the interest rate payable on U.S.

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In reference to the expected dividend yield assumption, the Company has not historically paid, and does not expect for the foreseeable future to pay, a dividend.

The Company utilizes significant estimates and assumptions in determining the fair value of its common stock for financial reporting purposes.

Prior to the closing of the IPO, the Company recorded expense for RSAs and stock options at prices not less than the fair market value of its common stock as determined by the board of directors, taking into consideration input from management and an independent third-party valuation analysis, and in accordance with the American Institute of Certified Public Accountants (“AICPA”) Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation .

Prior to the closing of the IPO, the Company utilized significant estimates and assumptions in determining the fair value of its common stock for financial reporting purposes.

The Company recorded expense for RSAs and stock options at prices not less than the estimated fair market value of its common stock as determined by the board of directors, taking into consideration input from management and an independent third-party valuation analysis, and in accordance with the American Institute of Certified Public Accountants (“AICPA”) Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation .

Following the closing of the IPO, the fair value of the Company’s common stock is based on its closing price as reported on the NASDAQ Global Select Market on the date of grant.

Stock-based compensation expense for RSAs and stock options is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award.

Stock-based compensation expense for RSAs, RSUs and stock options is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award.

The Company accounts for forfeitures as they occur.

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The deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse.

A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be recovered.

The Company applies judgment in the determination of the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The Company recognizes any material interest and penalties related to unrecognized tax benefits in income tax expense.

A valuation allowance is recorded when it is more

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

likely than not that the deferred tax asset will not be recovered.

The Company applies judgment in the determination of the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The Company recognizes any material interest and penalties related to unrecognized tax benefits in income tax expense.

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance.

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Recent Accounting Pronouncements

Recently Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2019-12, Income Taxes – Simplifying the Accounting for Income Taxes (“ASU 2019-12”).

The guidance removes exceptions to the general principles in Income Taxes (Topic 740) for allocating tax expense between financial statement components, accounting basis differences stemming from an ownership change in foreign investments and interim period income tax accounting for year-to-date losses that exceed projected losses.

The guidance became effective for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted.

Effective January 1, 2019, the Company early adopted ASU 2019-12.

The adoption of this standard did not have a material impact on the Company ’ s consolidated financial statements.

Credit Losses

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”).

ASU 2016-13 implements an impairment model, known as the current expected credit loss model, that is based on expected losses rather than incurred losses.

Under the new guidance, an entity will recognize as an allowance its estimate of expected credit losses.

On January 1, 2020, the Company early adopted this standard by using a modified retrospective approach.

The adoption did not have a material impact on the Company’s consolidated financial statements.

Collaborative Arrangements

In November 2018, the FASB issued ASU No.

2018-18, Collaborative Arrangements (Topic 808):

Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer.

In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction.

On January 1, 2020, the Company early adopted this standard on a retrospective basis to the date of initial application of ASC 606.

The adoption did not have a material impact on the Company’s consolidated financial statements.

Cloud Computing Arrangements

In August 2018, the FASB issued ASU No.

2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.

On January 1, 2020, the Company early adopted this standard using the prospective method.

The adoption did not have a material impact on the Company’s consolidated financial statements.

Collaboration, License and Success Payment Agreements

License Agreement – In 2018, the Company entered into a license agreement with Fred Hutch that grants the Company an exclusive, worldwide, sublicensable license under certain patent rights, and a non-exclusive, worldwide, sublicensable license for certain technology, to research, develop, manufacture, improve and commercialize products and processes covered by such patent rights or incorporating such technology for all therapeutic uses for the treatment of human cancer.

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Notes to Consolidated Financial Statements—(Continued)

License, Collaboration and Success Payment Agreements

License Agreement - In 2018, the Company entered into a license agreement with Fred Hutch that grants the Company a worldwide, sublicensable license under certain patent rights (exclusive) and certain technology (non-exclusive), to research, develop and commercialize products and processes for all therapeutic uses for the treatment of human cancer.

The Company is also required to pay Fred Hutch annual license maintenance payments of $ 50,000 on the second anniversary of the effective date, and each anniversary of the effective date thereafter until the first commercial sale of a licensed product.

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The Fred Hutch Collaboration Agreement has a six-year term.

During the year-ended December 31, 2021, one of the research plans on which the success payment service term is based, was extended from January 31, 2022 to December 31, 2022.

During 2021, one of the research plans on which the success payment service term is based, was extended from January 31, 2022 to December 31, 2022.

The Company incurred $ 1.7 million, $ 4.2 million and $ 4.1 million in expense in connection with the Fred Hutch Collaboration Agreement for the years ended December 31, 2022, 2021 and 2020, respectively.

Success Payments - In 2018, the Company granted Fred Hutch rights to certain success payments, pursuant to the terms of the Fred Hutch Collaboration Agreement.

The potential payments for the Fred Hutch success payments are based on multiples of increased value ranging from 10 x to 50 x based on a comparison of the estimated per share fair value of the Series A convertible preferred stock, or any security into which such stock has been converted or for which it has been exchanged, relative to its original $ 1.83 per share issuance price.

Upon the closing of the IPO, all shares of Series A convertible preferred stock then outstanding converted into an equivalent number of shares of common stock.

The potential payments for the Fred Hutch success payments are based on multiples of increased value ranging from 10 x to 50 x based on a comparison of the per share fair market value of the Company’s common stock (as all shares of Series A convertible preferred stock were converted into an equivalent number of shares of common stock upon the closing of the IPO) relative to its original $ 1.83 per share issuance price.

The aggregate success payments to Fred Hutch are not to exceed $ 200.0 million, which would only occur upon a 50 times increase in value.

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$ 10 $ 40 $ 90 $ 140 $ 200

The success payments will be owed if the per share fair value of the Company’s common stock on the contractually specified valuation measurement dates during the term of the success payment agreement equals or exceeds the above outlined multiples.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

the above outlined multiples.

The valuation measurement dates are triggered by the following events:

the one-year anniversary of the Company ’ s IPO and each two-year anniversary of the Company ’ s IPO thereafter, the closing of a change in control transaction and the last day of the term of the success payment agreement, unless the term has ended due to the closing of a change of control transaction.

As of December 31, 2022, no success payments have been incurred as the per share fair value of the Company’s common stock was below the price required for payment.

The estimated fair values of the success payments to Fred Hutch as of December 31, 2022 and 2021 were $ 2.5 million a nd $ 8.5 million, respectively.

The success payment liability is estimated at fair value at inception and at each subsequent reporting period and the expense is accreted over the service period of the Fred Hutch Collabor ation Agreement.

The success payment liability is estimated at the fair value at inception and at each subsequent reporting period and the expense is accreted over the service period of the Fred Hutch Collabor ation Agreement.

The success payment liability was $ 2.5 million and $ 6.4 million as of December 31, 2022 and 2021, respectively.

With respect to Fred Hutch success payment obligations, the Company recognized expense of $ 1.2 million, $ 4.8 million, and $ 0.4 million for the years ended December 31, 2021, 2020, and 2019 respectively.

With respect to the Fred Hutch Collaboration Agreement success payment obligations, the Company recognized a gain of $ 3.9 million for the year ended December 31, 2022 , and success payment expense of $ 1.2 million and $ 4.8 million for the years ended December 31, 2021 and 2020, respectively.

License Agreement - In 2019, the Company entered into a license agreement with Stanford to license specified patent rights.

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Additionally, low single‑digit tiered royalties based on annual net sales of the licensed products are payable to Stanford.

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Notes to Consolidated Financial Statements—(Continued)

Collaboration Agreement - In October 2020, the Company entered into a research and collaboration agreement with Stanford (“Stanford Collaboration Agreement”), focused on research and development of cellular immunotherapy products.

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The Company is committed to fund aggregate research performed by Stanford of $ 12.0 million under the Stanford Collaboration Agreement, and the research will be conducted in accordance with a research plan and budget approved by the parties.

The Company incurred $ 3.0 million and $ 0.8 million in expense in connection with the Stanford Collaboration Agreement for the years ended December 31, 2021 and 2020, respectively.

The Company incurred $ 3.0 million, $ 3.0 million and $ 0.8 million in expense in connection with the Stanford Collaboration Agreement for the years ended December 31, 2022, 2021, and 2020, respectively.

Success Payments - In October 2020, the Company granted Stanford rights to certain success payments, pursuant to the terms of the Stanford Collaboration Agreement.

The potential payments for the Stanford success payments are based on multiples of increased value ranging from 10 x to 50 x based on a comparison of the estimated per share fair value of the Series A convertible preferred stock, or any security into which such stock has been converted or for which it has been exchanged, relative to its original $ 1.83 per share issuance price.

At the closing of the IPO, all shares of Series A convertible preferred stock then outstanding converted into an equivalent number of shares of common stock.

The potential payments for the Stanford Collaboration Agreement success payments are based on multiples of increased value ranging from 10 x to 50 x based on a comparison of the per share fair market value of the Company’s common stock (as all shares of Series A convertible preferred stock were converted into an equivalent number of shares of common stock upon the closing of the IPO) relative to its original $ 1.83 per share issuance price.

The aggregate success payments to Stanford are not to exceed $ 200.0 million, which would only occur upon a 50 times increase in value.

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The valuation measurement dates are triggered by the following events:

The estimated fair value of the success payments to Stanford as of December 31, 2021 and 2020 was $ 9.9 million and $ 8.9 million, respectively.

The success payment liability is estimated at fair value at inception and at each subsequent reporting period and the expense is accreted over the service period of the Stanford Collaboration Agreement.

The success payment liability was $ 3.1 million and $ 0.6 million as of December 31, 2021 and 2020, respectively.

With respect to Stanford success payment obligations, the Company recognized expe nse of $ 2.5 million and $ 0.6 million for the years ended December 31, 2021 and 2020, respectively.

In 2019, the Company entered into a Collaboration and License Agreement, amended in June 2020 and December 2021 (“GSK Agreement”) with GlaxoSmithKline Intellectual Property (No.

5) Limited and Glaxo Group Limited (together, “GSK”) for potential T-cell therapies that apply the Company’s platform technologies and cell therapy innovations with T-cell receptors (“TCRs”) or chimeric antigen receptors (“CARs”) under distinct collaboration programs.

The GSK Agreement has defined two initial collaboration targets and allows GSK to nominate seven additional targets through July 2024.

The Company is expected to perform research and development services for each selected target up until a defined point (the “GSK Option Point”), at which time GSK will decide whether or not to exercise an option to obtain a license from the Company (“License Option”) and take over the future development and commercialization.

For each selected target, both parties will determine whether it will be developed under a Proof of Concept (“PoC”) Development Program or Component Development Program.

For a PoC Development Program, the Company is expected to conduct both preclinical and clinical development for the target and present clinical trial data to GSK in connection with their evaluation of whether to exercise the License Option.

For a Component Development Program, the Company is obligated to perform preclinical studies only.

Along with the research activities, the Company appoints three

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

representatives to the joint steering committee (“JSC”) and is responsible for the manufacture of all compounds and products necessary for its research and development activities.

closing of a change of control transaction.

As of December 31, 2022, no success payments have been incurred as the per share fair value of the Company’s common stock was below the price required for payment.

The estimated fair values of the success payments to Stanford as of December 31, 2022 and 2021 were $ 3.3 million and $ 9.9 million, respectively.

The success payment liability is estimated at the fair value at inception and at each subsequent reporting period and the expense is accreted over the service period of the Stanford Collaboration Agreement.

The success payment liability was $ 1.9 million and $ 3.1 million as of December 31, 2022 and 2021, respectively.

With respect to the Stanford Collaboration Agreement success payment obligations, the Company recognized a gain of $ 1.2 million for the year ended December 31, 2022 , and success payment expense of $ 2.5 million and $ 0.6 million for the years ended December 31, 2021 and 2020, respectively.

In 2019, the Company entered into the GSK Agreement with GSK for potential T‑cell therapies that apply the Company’s platform technologies and cell therapy innovations with T‑cell receptors (“TCRs”) or chimeric antigen receptors (“CARs”) under distinct collaboration programs.

The GSK Agreement defined two initial collaboration targets, LYL331 and LYL132, and allowed GSK to nominate seven additional targets through July 2024, noting no additional targets were nominated over the life of the GSK Agreement.

The Company was expected to perform research and development services for each selected target up until a defined point (the “GSK Option Point”), at which time GSK would decide whether or not to exercise an option to obtain a license from the Company (“License Option”) and take over the future development and commercialization.

In April 2021, GSK exercised the License Option on LYL331 (NY-ESO-1 TCR with c-Jun) and assumed sole responsibility for future development and commercialization of the program at its own cost and expense.

The IND application for LYL132 was cleared in January 2022, though no patients were treated, and the IND for LYL331 was not submitted to the U.S.

Food and Drug Administration.

GSK terminated the GSK Agreement effective December 24, 2022 and Lyell has discontinued any further work on these programs.

There are no future performance obligations associated with the GSK Agreement.

The Company received a non-refundable upfront payment of $ 45.0 million under the GSK Agreement.

In addition to the upfront payment, the Company is eligible to receive up to two one-time payments, totaling up to approximately $ 200.0 million in aggregate for technology validation of the Company’s cell therapy innovations.

For each cell therapy target for which there has been a joint collaboration program, the Company also could receive up to approximately $ 400.0 million in aggregate in development and sales milestones if the target is already within GSK’s pipeline and meets certain criteria, up to approximately $ 900.0 million in aggregate in development and sales milestones for all other targets, and tiered royalties on a per-product basis ranging from low to high single digits for targets that are already within GSK’s pipeline and meet certain criteria, or from high single digit to low teens for all other targets.

Milestones are paid once per target, even if there is more than one of the Company’s innovations applied to a T-cell therapy directed to that target.

Any amounts received from GSK are generally non-refundable unless the Company terminates a collaboration target for safety or feasibility reasons and the funding received from GSK exceeds the costs incurred for the terminated target.

In connection with the GSK Agreement, in May 2019, the Company also entered into a Stock Purchase Agreement with GSK (the “GSK Stock Purchase Agreement”), pursuant to which the Company agreed to sell 30,253,189 shares of Series AA convertible preferred stock at a price of $ 6.78 per share, which was above the issuance date estimated fair value of $ 4.84 per share.

The difference between the per share values resulted in $ 58.6 million additional deemed consideration, bringing the total upfront payment of the GSK Agreement to $ 103.6 million.

Research and Development Services

The GSK Agreement was deemed to be within the scope of ASC 606 because GSK engaged the Company to initially provide research and development services, which are outputs of its ongoing activities, in exchange for consideration.

The Company identified the following two distinct performance obligations:

(i) research and development services related to the two initial collaboration targets, inclusive of the JSC participation and the manufacture of compounds necessary for providing the research and development services and (ii) a material right for GSK to nominate seven additional collaboration targets for which the Company will perform research and development services until the GSK Option Point.

To allocate revenue among the performance obligations, the Company determined standalone selling prices (“SSP”) of each obligation.

For the research and development services, the SSP was calculated using a cost-plus margin approach.

For the material right, SSP was calculated by reference to the underlying research and development services expected to be provided and the corresponding expected consideration.

All amounts included in the transaction price are allocated to performance obligations proportionate to their SSPs.

As of December 31, 2020, the transaction price was deemed to be $ 103.6 million, consisting of the upfront payment of $ 45.0 million under the GSK Agreement and the $ 58.6 million allocated from the GSK Stock Purchase Agreement.

Other than the upfront payment and the amounts allocated from the GSK Stock Purchase Agreement, all other contingent consideration that may be earned under the GSK Agreement is subject to uncertainties including but not limited to target addition, research and investigational new drug enabling studies, initiation of clinical trials, and other related achievements.

Consequently, the transaction price currently does not include any such contingent consideration that, if included, could result in a probable significant reversal of cumulative revenue when related uncertainties become resolved.

The Company will re-evaluate the transaction price at each reporting period.

If and when contingent consideration is included in the transaction price, it will be allocated to the two performance obligations proportionate to their SSPs and a cumulative catch up in revenue will be recorded for the portion of the services already completed.

The remaining amounts will be deferred and recognized as the services are rendered.

The research and development services are transferred as the services are performed, with cost used as the measure of progress compared to total estimated cost to complete.

Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.

The determination of the percentage of completion requires the Company to estimate the costs to complete the project.

The Company makes a detailed estimate of the costs to complete, which is reassessed every reporting period based on the latest project plan and discussions with project teams.

If a change in facts or circumstances occurs, the estimate will be adjusted, and the revenue will be recognized based on the revised estimate.

The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate would be recognized as an adjustment to revenue in the period in which the change in estimate occurs.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

In connection with the GSK Agreement, in May 2019, the Company also entered into a stock purchase agreement with GSK (“GSK Stock Purchase Agreement”), pursuant to which the Company agreed to sell 30,253,189 shares of Series AA convertible preferred stock at a price of $ 6.78 per share, which was above the issuance date estimated fair value of $ 4.84 per share.

The difference between the per share values resulted in $ 58.6 million additional deemed consideration, bringing the total upfront consideration of the GSK Agreement to $ 103.6 million.

The GSK Agreement was deemed to be within the scope of ASC 606 because GSK engaged the Company to initially provide research and development services, which were outputs of its ongoing activities, in exchange for consideration.

During the year ended December 31, 2022 , the Company recorded adjustments to revenue related to changes in estimates to complete its performance obligations under the GSK Agreement.

These changes in estimates were driven by the mutual agreement to conclude certain research activities in June 2022 and the termination of the GSK Agreement, effective December 24, 2022, both of which resulted in changes to the measure of proportional cumulative performance.

The Company recognized revenue related to the research and development services related to the two initial targets of $ 84.7 million , $ 10.5 million and $ 7.8 million for the years ended December 31, 2022, 2021 and 2020 respectively.

Changes in deferred revenue during the year ended December 31, 2021 were as follows:

Deferred revenue balance at December 31, 2020

Revenue recognized during the period previously recorded in deferred revenue

Deferred revenue balance at December 31, 2021 $ 84,653

Exercise of the License Option

In April 2021, GSK exercised the License Option on NY-ESO-1 TCR with Gen-R, a Component Development Program, and will assume sole responsibility for future development and commercialization of the program at its own cost and expense.

The Company is entitled to the remaining development and sales milestones up to an aggregate of approximately $ 400.0 million as well as the tiered royalties on future sales of all such products covered by the license granted pursuant to the License Option.

The exercise of the License Option was accounted for as a separate license contract for revenue recognition purposes.

The Company identified one performance obligation, which was the license delivered to GSK upon the exercise of the License Option and transfer of information and data associated with the license.

The Company concluded that the development milestone payments are solely dependent on GSK’s performance and achievement of the specified events and are deemed to be not probable until such development milestones are actually achieved.

Therefore, the remaining development milestones are fully constrained and excluded from the transaction price until the respective milestone is achieved.

The Company also concluded that sales milestones and royalties relate predominantly to the license granted to GSK.

Therefore, they also have been excluded from the transaction price and will be recognized when the related sales occur.

At the end of each reporting period, the Company will update its assessment of whether an estimate of variable consideration is constrained and update the estimated transaction price accordingly.

As of December 31, 2021, there were no contract assets or contract liabilities related to the license contract.

None of the costs to obtain or fulfill the contract were capitalized.

No license revenue was recognized for the year ended December 31, 2022.

In June 2020, the Company entered into an agreement (“PACT Agreement”) with PACT Pharma, Inc.

(“PACT”) to jointly develop and test a next generation personalized anti-cancer T-cell therapy against solid tumors.

The Company paid PACT an upfront non-refundable payment of $ 50.0 million upon execution of the PACT Agreement.

In November 2020, the parties agreed to suspend research and development activity under the PACT Agreement, and neither party would be required to conduct any further work under the development plan (including manufacturing development) nor incur any financial obligations (including milestone payments) that might otherwise arise, for as long as the parties continued to negotiate in good faith to resolve the issues that have arisen between them relating to the PACT Agreement.

In June 2020 in connection with the entry into the PACT Agreement, the Company also entered into a stock purchase agreement with PACT (“PACT SPA”), pursuant to which the Company purchased 17,806,901 shares of PACT Series C-1 convertible preferred stock at a purchase price of $ 2.81 per share.

As of the purchase date, the estimated fair value of the Series C-1 convertible preferred stock was $ 2.05 per share, and the difference between the estimated fair value of the preferred stock as of the purchase date and the purchase price of $ 13.6 million was deemed to be additional consideration for the PACT Agreement and recognized as research and development expense.

As a result, the total upfront payment paid in connection with the PACT Agreement was $ 63.6 million and was included in research and development expense.

As of December 31, 2022 and 2021, the Company had deferred revenue of zero and $ 84.7 million, respectively, related to the GSK Agreement.

As of December 31, 2022, there were no contract assets or contract liabilities related to the license contract.

In June 2020, the Company entered into a commitment agreement (“PACT Commitment Agreement”) with PACT to jointly develop and test a next generation personalized anti-cancer T‑cell therapy against solid tumors.

The Company paid PACT an upfront non-refundable payment of $ 50.0 million upon execution of the PACT Commitment Agreement.

In November 2020, the parties agreed to suspend research and development activity under the PACT Commitment Agreement, and neither party would be required to conduct any further work under the development plan (including manufacturing development) nor incur any financial obligations (including milestone payments) that might otherwise arise, for as long as the parties continued to negotiate in good faith to resolve the issues that have arisen between them relating to the PACT Commitment Agreement.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

In June 2020 in connection with the entry into the PACT Commitment Agreement, the Company also entered into a stock purchase agreement with PACT (“PACT SPA”), pursuant to which the Company purchased 17,806,901 shares of PACT Series C-1 convertible preferred stock at a purchase price of $ 2.81 per share.

As of the purchase date, the estimated fair value of the Series C-1 convertible preferred stock was $ 2.05 per share, and the difference between the estimated fair value of the preferred stock as of the purchase date and the purchase price of $ 13.6 million was deemed to be additional consideration for the PACT Commitment Agreement and recognized as research and development expense.

As a result, the total upfront consideration paid in connection with the PACT Commitment Agreement was $ 63.6 million and was included in research and development expenses.

The remaining $ 36.4 million associated with the PACT Series C-1 convertible preferred stock was recorded in other investments.

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See Note 5, Other Investments , for additional details regarding the PACT investment impairment.

In February 2021, the Company filed a demand for arbitration seeking, among other things, rescission of the PACT Agreement and the PACT SPA and recovery of the consideration paid thereunder.

An arbitration hearing occurred in March 2022.

The Company expects to receive the outcome of the arbitration panel in June 2022.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

In December 2020, the Company entered into a license agreement with the National Cancer Institute (“NCI”) to access certain intellectual property for the development of treatment of human cancers.

In connection with this agreement, the Company paid $ 100,000 upfront, which was recorded as research and development expense for the year ended December 31, 2020.

The Company is also required to pay NCI annual maintenance payments which may be credited against earned royaltie s.

The Company incurred $ 75,000 and $ 3,100 in maintenance fees for the years ended December 31, 2021 and 2020, respectively.

Under the agreement, the Company may also be required to make certain prespecified development milestone payments up to an aggregate of $ 3.1 million, and prespecified commercial milestone payments up to a maximum aggregate of $ 12.0 million for all licensed products.

In June 2021, the Company entered into an amendment to the license agreement with NCI to include additional intellectual property and one additional inventor.

In connection with this amendment, the Company paid $ 25,000 upfront, which was recorded in research and development expense.

Under the amendment, the Company may also be required to pay prespecified additional development milestone payments that total $ 75,000 .

In February 2021, the Company filed a demand for arbitration seeking, among other things, rescission of the PACT Commitment Agreement and the PACT SPA and recovery of the consideration paid thereunder.

Arbitration hearings occurred in March and April 2022.

On October 1, 2022, the Company entered into a settlement agreement with PACT, pursuant to which the parties agreed to resolve their outstanding legal dispute.

In connection with the settlement agreement, the parties also entered into a stock purchase agreement, pursuant to which PACT issued shares of PACT’s Series D convertible preferred stock to the Company in exchange for the Company’s tender of its PACT Series C-1 convertible preferred stock and resolution of the arbitration.

The issuance of PACT’s Series D convertible preferred stock, which are non-voting, have limited conversion rights and carry no right to appoint directors, resulted in the Company’s ownership increasing to approximately 80 % of PACT’s fully diluted shares outstanding.

The settlement agreement also included the termination of the PACT Commitment Agreement to jointly develop a next generation anti-cancer T‑cell therapy against solid tumors.

The Company recorded a gain of $ 2.9 million on October 1, 2022 for the estimated fair value of the PACT Series D convertible preferred stock received as part of the settlement agreement.

The PACT Series D convertible preferred stock was recorded at its estimated fair value as of the settlement date and is included in other investments in the Company’s Consolidated Balance Sheets.

Cash Equivalents and Marketable Securities

The fair value and amortized cost of cash equivalents and marketable securities by major security type as of December 31, 2021 and 2020 are presented in the following tables (in thousands):

The fair value and amortized cost of cash equivalents and marketable securities by major security type are as follows (in thousands):

December 31, 2022

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Total cash equivalents and marketable securities

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2021

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Total cash equivalents and marketable securities

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

As of December 31, 2021 and 2020, the fair value of securities held by the Company in an unrealized loss position was $ 602.9 million and $ 132.6 million, respectively, and as of December 31, 2021 and 2020, securities held by the Company in an unrealized loss position have been in the continuous loss position for less than 12 months.

The fair value of securities held by the Company in an unrealized loss position for less than 12 months were $ 287.8 million and $ 602.9 million, as of December 31, 2022 and 2021, respectively.

The fair value of securities held by the Company in an unrealized continuous loss position for greater than 12 months were $ 278.7 million and zero as of December 31, 2022 and 2021, respectively.

As of December 31, 2022 and 2021, all of the Company’s marketable securities had a maturity date of two years or less, were available for use and were classified as available-for-sale.

The Company does not intend to sell these securities nor does the Company believe that it will be required to sell these securities before recovery of their amortized cost basis.

The Company determined that there was no material change in the credit risk of the above investments during the years ended December 31, 2022 and 2021.

As such, an allowance for credit losses has not been recognized.

The Company does not intend to sell these securities nor does the Company believe that it will be required to sell these securities before recovery of their amortized cost basis.

Gross realized gains and losses were de minimis for the years ended December 31, 2021 and 2020 and as a result, amounts reclassified out of accumulated other comprehensive (loss) income for the years ended December 31, 2021 and 2020 were also de minimis .

As of December 31, 2021 and 2020, all of the Company’s marketable securities had a maturity date of two years or less, were available for use, and were classified as available-for-sale.

Gross realized gains and losses were de minimis for the years ended December 31, 2022 and 2021 and as a result, amounts reclassified out of accumulated other comprehensi ve loss for the years ended December 31, 2022 and 2021 were also de minimis .

See Note 6, Fair Value Measurements , for additional information regarding cash equivalents and marketable securities.

3 unchanged sentences

These investments are measured at initial cost, minus impairment, if any, and plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

In connection with the preparation of the financial statements for 2021, the Company performed a qualitative assessment of potential indicators of impairment and determined that indicators exist for its $ 36.4 million investment in PACT Series C-1 convertible preferred stock .

In connection with the preparation of the financial statements for 2022, the Company performed a qualitative assessment of potential indicators of impairment and determined that indicators existed for one of the Company’s other investments with a carrying amount of $ 5.0 million.

While there was no single event or factor, the Company considered the underlying company’s operating cash flow requirements over the next year and liquid asset balances to fund those requirements and the underlying company’s inability to raise funds as indicators of impairment.

Due to these indicators, the Company assessed the valuation of the investment and determined the fair value to be negligible and the impairment to be other-than-temporary in nature.

As a result, the Company recorded a $ 5.0 million impairment expense for the investment for the year ended December 31, 2022 , which 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.

No other investments were impaired for the year ended December 31, 2022 .

In October 2022, the Company received non-voting preferred stock pursuant to the settlement agreement with PACT (See Note 3, License, Collaboration and Success Payment Agreements ).

The Company determined that PACT is a VIE as PACT does not have sufficient equity at risk.

The Company evaluated whether it was the primary beneficiary of PACT, including the Company’s ongoing rights and responsibilities, to assess whether the Company has the power to direct the activities of PACT.

The Company’s only involvement in PACT is its PACT Series D convertible preferred stock investment, which are non-voting, have limited conversion rights and carry no right to appoint directors.

Based on the above noted factors, the Company determined that it is not the primary beneficiary and does not consolidate PACT since it does not have the power to direct the activities that most significantly impact PACT’s economic performance.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

Company does not have the ability to exercise significant influence over PACT and accounts for its investment in PACT preferred stock under the measurement alternative.

The Company recognized its investment in PACT preferred stock at its estimated fair value of $ 2.9 million on October 1, 2022, which is included in the Company’s Consolidated Balance Sheets within other investments.

The Company’s maximum exposure to loss from PACT is limited to the carrying value of its investment in PACT preferred stock.

In connection with the preparation of the financial statements for 2021, the Company performed a qualitative assessment of potential indicators of impairment and determined that indicators existed for its $ 36.4 million investment in PACT Series C-1 convertible preferred stock .

While there was no single event or factor, the Company considered PACT’s operating cash flow requirements over the next year and liquid asset balances to fund those requirements and PACT’s inability to raise funds as indicators of impairment.

Due to these indicators, the Company assessed the valuation of the 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, the Company recorded a $ 36.4 million impairment expense for the 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.

As a result, the Company recorded a $ 36.4 million impairment expense for the PACT investment in the fourth quarter of 2021, which 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.

Aside from the investment in PACT, no other investments were impaired for the year ended December 31, 2021.

5 unchanged sentences

As of both December 31, 2022 and 2021, the carrying value of the Company’s investment in Outpace was $ 13.0 million, which is recorded in other investments.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

Fair Value Measurements

11 unchanged sentences

— 220,681 — 220,681

Equity warrant investment — — 1,067 1,067

Total financial assets

5 unchanged sentences

$ — $ — $ 4,356 $ 4,356

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2021

19 unchanged sentences

The Level 2 marketable securities include U.S.

Treasury securities, government agency securities and corporate debt securities.

Treasury securities, U.S.

government agency securities and corporate debt securities.

The Company’s Level 2 securities are valued using third-party pricing sources.

The pricing services utilize industry standard valuation models.

The pricing services applied industry standard valuation models.

Inputs utilized include market pricing based on real-time trade data for the same or similar securities and other significant inputs derived from or corroborated by observable market data.

The Level 3 financial instruments include an equity warrant investment and the success payment liabilities.

For the year ended December 31, 2022, in conjunction with the impairment of one of the Company’s other investments, the associated equity warrant investment’s fair value was determined to be negligible as of December 31, 2022.

The Company reduced the equity warrant investment’s fair value from $ 1.1 million as of December 31, 2021 to zero as of December 31, 2022.

See Note 5, Other Investments , for additional details regarding the impairment of the other investment.

The Company’s Level 3 financial instruments are valued using valuation models which include the Black-Scholes model for valuing the equity warrant investment and a Monte Carlo simulation for the success payment liabilities.

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The following variables were incorporated in the estimated fair value of the success payment liabilities:

fair value of the Company ’ s common stock (Series A convertible preferred stock, prior to IPO), expected volatility, risk-free interest rate and the estimated number and timing of valuation measurement dates on the basis of which payments may be triggered.

fair value of the Company ’ s common stock, expected volatility, the risk-free interest rate and the estimated number and timing of valuation measurement dates on the basis of which payments may be triggered.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

The following assumptions were incorporated into the calculation of the estimated fair value of the Fred Hutch success payment liability:

Fair value of common stock (Series A convertible preferred stock)

Fair value of common stock

$ 3.47 $ 7.74

3 unchanged sentences

Expected volatility

80.0 % 75.0 %

Expected term (in years)

The following assumptions were incorporated into the calculation of the estimated fair value of the Stanford success payment liability:

Fair value of common stock (Series A convertible preferred stock)

Fair value of common stock

$ 3.47 $ 7.74

3 unchanged sentences

Expected volatility

80.0 % 75.0 %

Expected term (in years)

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

The Company utilizes estimates and assumptions in determining the estimated success payment liabilities and associated expense.

4 unchanged sentences

Balance at December 31, 2020

$ 1,323 $ 5,773

Change in fair value (1)

( 256 ) 3,713

Balance at December 31, 2021

2 unchanged sentences

Balance at December 31, 2022

$ 1,067 $ 9,486

(1) The change in fair value associated with the equity warrant investment held is recorded in other (expense) income, net and the change in fair value associated with success payments liabilities is recorded in research and development expense.

(1) The changes in fair value associated with the equity warrant investment held are recorded in other income (expense) , net and the changes in fair value associated with success payment liabilities are recorded in research and development expense .

In October 2022, the Company received non-voting series D preferred stock pursuant to the settlement agreement with PACT (See Note 3, License, Collaboration and Success Payment Agreements ).

The Company determined the fair value of PACT was a fraction of the aggregate liquidation preference of the Company’s PACT Series D preferred stock.

The Company determined that the fair value of its investment in PACT preferred stock is approximated by the fair value of the PACT business since the Company is the only party invested in PACT preferred stock series D as of October 1, 2022, the most senior class of stock issued by PACT.

The fair value of PACT was estimated at $ 2.9 million as of October 1, 2022 using the cost approach.

Under this approach, the fair value of an asset is measured by the cost to reconstruct or replace such asset with another one of like utility.

The fair value of PACT was estimated by using significant unobservable inputs, including an estimate of insignificant fair value associated with PACT intangible assets.

Accordingly, the Company classified the fair value measurement of PACT preferred stock on October 1, 2022 as Level 3 under the fair value hierarchy.

Property and Equipment, Net

7 unchanged sentences

Construction in progress

10,577 55,712

Property and equipment, at cost

4 unchanged sentences

$ 123,023 $ 120,098

Depreciation and amortization expense was $ 18.0 million , $ 13.5 million and $ 4.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

Depreciation and amortization expense was $ 13.5 million, $ 4.2 million and $ 1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Accrued Liabilities and Other Current Liabilities

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In addition to minimum rent, the leases require payment of real estate taxes, insurance, common area maintenance charges and other executory costs.

These additional charges are considered variable costs and are recognized in the period in which the costs are incurred.

These additional charges are considered variable lease costs and are recognized in the period in which the costs are incurred.

In 2018, the Company entered into an operating lease for approximately 34,000 square feet of office and laboratory space in Seattle, Washington, with an initial lease term expiring in December 2028.

2 unchanged sentences

In December 2020, the Company exercised its early termination right and remeasured the remaining consideration in the contract, resulting in a gain of $ 2.9 million, which was recognized in other operating income, net.

The lease termination was effective October 2021, resulting in a gain of $ 0.3 million, which was recognized in other operating income, net.

Additionally, the Company recognized a loss of $ 0.6 million at lease termination on leasehold improvements unable to be moved to its new corporate headquarters in South San Francisco, California, which was recognized in other operating income, net.

The lease termination was effective October 2021, resulting in a gain of $ 0.3 million, which was recognized in other operating income, net for the year ended December 31, 2021.

In 2019, the Company entered into two operating lease agreements for a combined approximately 73,000 square feet of space to develop a cell therapy manufacturing facility located in Bothell, Washington, with initial terms expiring in May 2030.

7 unchanged sentences

Year Ending December 31:

2023 $ 10,101

Total undiscounted lease payments

imputed interest

tenant improvement allowances

Total operating lease liabilities

4 unchanged sentences

The operating lease costs for all operating leases were $ 9.3 million, $ 9.4 million and $ 11.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The operating lease costs and total commitments for short-term leases were de minimis f or the years ended December 31, 2021, 2020 and 2019.

The operating lease costs and total commitments for short-term leases were de minimis for the years ended December 31, 2022, 2021 and 2020.

Variable lease costs for operating leases were $ 5.1 million, $ 4.1 million and $ 2.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

3 unchanged sentences

The sublease is classified as an operating lease and will expire in March 2031.

The monthly fixed payment due to the Company is $ 0.1 million, subject to annual rent increases in accordance with the contract.

The Company recognized sublease income for this sublease of $ 0.8 million and $ 0.4 million for the years ended December 31, 2022 and 2021, respectively.

In September 2021, the Company entered into a sublease with Sonoma Biotherapeutics, Inc.

3 unchanged sentences

The sublease is classified as an operating lease and will expire in March 2031.

The monthly fixed payment due to the Company is $ 0.1 million , subject to annual rent increases in accordance with the contract.

The Company recognized Sonoma sublease income of $ 1.9 million and $ 0.6 million for the years ended December 31, 2022 and 2021, respectively.

The Company’s sublease income is recognized within other operating income, net in the Consolidated Statements of Operations and Comprehensive Loss.

Convertible Preferred Stock

5 unchanged sentences

Notes to Consolidated Financial Statements—(Continued)

Stockholders’ Equity (Deficit)

The Company amended and restated its certificate of incorporation effective June 2021, increasing the number of shares the Company has the authority to issue to 510.0 million shares, of which 500.0 million are common shares and 10.0 million shares are preferred stock.

Stockholders’ Equity

Preferred Stock

The Company is authorized to issue 10.0 million shares of preferred stock, par value $ 0.0001 per share.

As of December 31, 2021, no shares of preferred stock were outstanding.

As of December 31, 2021 and 2020, there wer e 242,738,350 shares and 15,569,788 shares of the Company’s common stock outstanding, respectively, excluding 2,600,002 s hares and 7,562,503 shares, respectively, of RSAs outstanding that are subject to vesting requirements.

The Company is authorized to issue 10.0 million shares of preferred stock with a par value $ 0.0001 per share.

As of December 31, 2022 and 2021, no shares of preferred stock were outstanding.

The Company is authorized to issue 500.0 million shares of common stock with a par value of $ 0.0001 per share.

As of December 31, 2022 and 2021, there wer e 249,567,343 shares and 242,738,350 shares of the Company’s common stock outstanding, respectively, excluding zero and 2,600,002 shares, respectively, of RSAs outstanding that are subject to vesting requirements.

Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of the Company’s common stock are entitled to receive dividends out of funds legally available if the Company’s board of directors, in its discretion, determines to issue dividends and then only at the times and in the amounts that the Company’s board of directors may determine.

In March 2020, the Company repurchased 2,032,166 shares of its common stock from a related party for a purchase price of $ 11.8 million .

On August 4, 2022, the Company entered into an Equity Distribution Agreement with Goldman Sachs & Co.

LLC (“Goldman Sachs”) and BofA Securities, Inc.

(“BofA”, and together with Goldman Sachs, “the Agents”) with respect to an at-the-market offering program (the “Equity Distribution Agreement”).

In accordance with the terms of the Equity Distribution Agreement, the Company may offer and sell from time to time through the Agents shares of the Company’s common stock having an aggregate offering amount of up to $ 200.0 million (“the Placement Shares”).

Sales of the Placement Shares, if any, will be made at prevailing market prices on Nasdaq at the time of sale, or as otherwise agreed with the Agents, by any method permitted by law deemed to be an “at-the-market offering” as defined in Rule 415 of the Securities Act of 1933, as amended.

The Company will pay commissions to the Agents of up to 3.0 % of the gross proceeds of the sale of the Placement Shares sold under the Equity Distribution Agreement and reimburse the Agents for certain expenses.

Neither the Company nor the Agents are obligated to sell any shares and, to date, the Company has not made any sales under the Equity Distribution Agreement.

Stock-based Compensation

1 unchanged sentence

In June 2021, the Company adopted the 2021 Equity Incentive Plan (“2021 Plan”), which on the date of the underwriting agreement related to the Company’s IPO became effective with an initial reserve of 26,662,087 shares, plus any shares subject to outstanding awards granted under the 2018 Equity Incentive Plan (“2018 Plan”) that, on or after the effectiveness of the 2021 Plan, terminate or expire before exercise or settlement, are not issued because the award is settled in cash, are forfeited because of the failure to vest or are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price.

In addition, the number of shares reserved for issuance under the 2021 Plan will automatically increase on January 1 of each year for a period of ten years , beginning on January 1, 2022 and continuing through January 1, 2031, in an amount equal to (1) 5 % of the total number of shares of the Company’s common stock outstanding on December 31 of the immediately preceding year, or (2) a lesser number of shares determined by the Company's board of directors no later than December 31 of the immediately preceding year.

Under the 2021 Plan, the Company may grant incentive stock options, non-statutory stock options, RSAs, restricted stock units, stock appreciation rights, performance awards and other stock-based awards.

In addition, the number of shares reserved for issuance under the 2021 Plan automatically increases on January 1 of each year for a period of ten years , beginning on January 1, 2022 and continuing through January 1, 2031, in an amount equal to (1) 5 % of the total number of shares of the Company’s common stock outstanding on December 31 of the immediately preceding year, or (2) a lesser number of shares determined by the Company’s board of directors no later than December 31 of the immediately preceding year.

On January 1, 2022, the Company reserved an additional 12,266,917 shares of common stock for issuance under the 2021 Plan representing 5 % of the total common shares outstanding as of December 31, 2021.

Under the 2021 Plan, the Company may grant incentive stock options, non-statutory stock options, RSAs, RSUs, stock appreciation rights, performance awards and other stock-based awards.

Terms of stock awards, including vesting requirements, are determined by the Company’s board of directors or by a committee authorized by the Company’s board of directors, subject to provisions of the 2021 Plan.

2 unchanged sentences

In conjunction with adopting the 2021 Plan, the Company discontinued the 2018 Plan with respect to new equity awards.

As of December 31, 2021 , 24.7 million shares were available for future issuance pursuant to the 2021 Plan.

As of December 31, 2022 , 20,264,523 shares were available for future issuance pursuant to the 2021 Plan.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

2021 Employee Stock Purchase Plan

2 unchanged sentences

Unless otherwise determined by the Company’s board of directors, employees are able to purchase shares at 85 % of the lower of the fair market value of the Company’s common stock on the first date of an offering or on the purchase date.

The number of shares of the Company’s common stock reserved for issuance under the 2021 ESPP will automatically increase on January 1 of each year for a period of ten years , beginning on January 1, 2022 and continuing through January 1, 2031, by the lesser of (1) 1 % of the total number of shares of the Company’s common stock outstanding on December 31 of the immediately preceding year, and (2) 4,940,000 shares;

The number of shares of the Company’s common stock reserved for issuance under the 2021 ESPP automatically increases on January 1 of each year for a period of ten years , beginning on January 1, 2022 and continuing through January 1, 2031, by the lesser of (1) 1 % of the total number of shares of the Company’s common stock outstanding on December 31 of the immediately preceding year, and (2) 4,940,000 shares;

provided, however, that the Company’s board of directors may act to provide a lesser increase in number of shares.

On January 1, 2022, the Company reserved an additional 2,453,383 common shares for issuance under the 2021 ESPP representing 1 % of the total common shares outstanding as of December 31, 2021.

The Company may specify offerings with durations not more than 27 months and may specify shorter purchase periods within each offering.

No shares have been issued under the 2021 ESPP as of December 31, 2021.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

Under the 2021 ESPP, 475,363 and zero shares have been issued for the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2022 , 4,448,020 shares were available for future issuance pursuant to the 2021 ESPP.

2018 Equity Incentive Plan

In 2018, the Company established the 2018 Plan under which it may grant incentive stock options, non-statutory stock options, RSAs, restricted stock units, stock appreciation rights, and other stock-based awards.

Terms of stock awards, including vesting requirements, are determined by the board of directors or by a committee authorized by the Company’s board of directors, subject to provisions of the 2018 Plan.

In 2018, the Company established the 2018 Plan that provided for the grant of incentive stock options, non-statutory stock options, RSAs, RSUs, stock appreciation rights and other stock-based awards.

Terms of stock awards, including vesting requirements, were determined by the board of directors or by a committee authorized by the Company’s board of directors, subject to provisions of the 2018 Plan.

The term of any stock option granted under the 2018 Plan cannot exceed ten years .

Generally, awards granted by the Company vest over four years , but may be granted with different vesting terms.

Pursuant to the terms of the 2021 Plan, any shares subject to outstanding options originally granted under the 2018 Plan that terminate, expire or lapse for any reason without the delivery of shares to the holder thereof shall become available for issuance pursuant to awards granted under the 2021 Plan.

Generally, awards granted by the Company vest over four years , but could have been granted with different vesting terms.

Pursuant to the terms of the 2021 Plan, any shares subject to outstanding options originally granted under the 2018 Plan that terminate, expire or lapse for any reason without the delivery of shares to the holder thereof become available for issuance pursuant to awards granted under the 2021 Plan.

While no shares are available for future issuance under the 2018 Plan, it continues to govern outstanding equity awards granted thereunder.

9 unchanged sentences

$ 81,924 $ 62,201 $ 33,261

Stock-based compensation expense for the year ended December 31, 2021 includes the impact of awards accelerated in connection with the Company’s IPO of $ 2.6 million.

Stock-based compensation expense for the year ended December 31, 2021 included the impact of an award accelerated in connection with the Company’s IPO of $ 2.6 million.

Stock Options and RSA Modifications

Stock-based compensation expense includes costs related to stock option and RSA modifications in the years ended December 31, 2021 and 2020.

The modifications were due to the reduction in the service level for certain employees, including the former chief executive officer (“CEO”), changes in vesting schedules and an increase to certain awards’ post-termination exercise periods.

The modifications impacted both vested and unvested awards.

Expense associated with vested awards was recognized in the period of the modification and expense associated with unvested awards is recognized over the remaining service life of the options or RSAs.

The following is a summary of the incremental stock-based compensation expense recognized during the years ended December 31, 2021 and 2020, as well as expense to be recognized in future periods as a result of the modifications (in thousands):

Year Ended December 31,

Total 2021 2020 Expense

2021 Equity Modifications:

Former CEO - Options $ 21,948 $ 4,105 $ — $ 17,843

Other - Options 1,019 1,019 — —

Former CEO - RSA

In December 2022, the Company’s former chief executive officer (“CEO”) resigned.

Under the terms of the separation agreement, the former CEO will be available to provide consulting services to the Company through June 15, 2024, with vested options continuing to be exercisable and unvested options continuing to vest through that date.

The Company concluded that the obligation to provide consulting services is nonsubstantive, and therefore resulted in a modification of their options due to the reduction of their service level.

As their remaining service period was determined to be nonsubstantive, the entire incremental expense of $ 3.7 million associated with the modification was recognized in the fourth quarter of 2022.

In 2021, the Company had modifications due to the reduction in the service level for a previous CEO, who resigned as Executive Chairman in the fourth quarter of 2021, as well as an increase to certain awards’ post-termination exercise periods.

In 2020, the Company had modifications due to the reduction in the service level for a previous CEO,

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

changes in vesting schedules for certain individuals and increases to certain awards’ post-termination exercise periods.

The 2021 and 2020 modifications impacted both vested and unvested awards.

Expense associated with vested awards is recognized in the period of the modification and expense associated with unvested awards is recognized over the remaining service life of the options or RSAs.

The following table shows the total incremental stock-based compensation expense associated with modifications by the year in which the modification occurred in the years December 31, 2022, 2021 and 2020 (in thousands):

2022 2021 2020

2020 Equity Modifications:

Former CEO - Options 15,052 6,044 2,755 6,253

Previous CEO - Options (1)

$ 3,741 $ — $ —

Previous CEO - Options (2)

— 21,948 15,052

Other - Options (3)

Former CEO - RSA

— 1,019 4,717

Previous CEO - RSA (4)

— 10,908 20,799

Other - RSA (5)

$ 3,741 $ 33,875 $ 49,597

Stock-based compensation expense includes the impact of the Company repricing certain stock options in December 2019 by canceling all existing outstanding option grants with a per share exercise price at, and higher than, $ 4.78 in exchange for new option grants at an exercise price of $ 3.65 per share.

Except for the change in exercise price, the new options had the same terms and conditions as the original options, including the contractual term, vesting schedule and vesting start date.

The total amount of incremental stock-based compensation expense associated with the repricing was

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

$ 3.3 million, of which $ 0.3 million, $ 0.7 million and $ 0.6 million were recognized for the years ended December 31, 2021, 2020 and 2019, respectively.

Amounts relating to options that were already vested were recorded on the date of the modification and amounts relating to options that were unvested are expensed over the remaining vesting term of the new options.

Stock-based compensation expense also includes the impact of the accelerated vesting of certain RSAs in 2019, resulting in an incremental expense of $ 8.6 million, which was recorded for the year ended December 31, 2019.

(1) The modification for Previous CEO - Options for 2022 is for Ms.

Elizabeth Homans, who resigned in December 2022.

(2) The modifications for Previous CEO - Options for 2021 and 2020 is for Dr.

Richard Klausner, who resigned as Executive Chairman in October 2021 and is now the Chair of Lyell’s Board.

(3) The modifications for Other - Options are represented by one individual in 2021 and four individuals in 2020.

(4) The modifications for Previous CEO - RSAs for 2021 and 2020 are for Dr.

Richard Klausner, who resigned as Executive Chairman in October 2021 and is now the Chair of Lyell’s Board.

(5) The modifications for Other - RSAs are represented by three individuals in 2020.

At December 31, 2022, total stock-based compensation cost related to unvested awards not yet recognized was $ 98.5 million, which is expected to be recognized over a remaining weighted-average period of 2.86 years.

Restricted Stock Awards

A summary of the Company’s RSAs activity were as follows:

A summary of the Company’s RSA activity was as follows:

Number of Shares Weighted-Average

3 unchanged sentences

( 2,600,002 ) $ 0.0001

( 18,750 ) $ 0.0001

Unvested shares as of December 31, 2022

2,600,002 $ 0.0001

The fair value of RSAs vested during the years ended December 31, 2022, 2021 and 2020 was $ 15.2 million, $ 57.1 million and $ 29.4 million, respectively.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

Restricted Stock Units

A summary of the Company’s RSU activity was as follows:

Number of Shares Weighted-Average

Value at Grant Date

Unvested RSUs as of December 31, 2021

RSUs granted 1,330,962 $ 5.98

RSUs vested ( 223,200 ) $ 5.98

RSUs forfeited or canceled ( 235,685 ) $ 5.98

Unvested RSUs as of December 31, 2022

872,077 $ 5.98

The fair value of RSUs vested during the year ended December 31, 2022 w as $ 1.5 million .

No RSUs vested during the years ended December 31, 2021 and 2020.

Stock Options

A summary of the Company’s stock option activity were as follows:

A summary of the Company’s stock option activity was as follows:

Options Weighted-

years) Aggregate

(in years) Aggregate

Value (in thousands)

Options outstanding as of December 31, 2021

8 unchanged sentences

28,115,416 $ 4.43 6.78 $ 23,462

The fair value of stock options granted to employees, directors and consultants was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:

The fair value of stock options granted to employees, directors and consultants was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions:

Year Ended December 31,

5 unchanged sentences

The weighted-average grant date fair value of options granted for the years ended December 31, 2022, 2021 and 2020 was $ 3.60 per share, $ 6.59 per share and $ 3.36 per share, respectively.

The intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was $ 16.1 million a nd $ 0.3 million, respectively.

No options were exercised for the year ended December 31, 2019 .

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

The intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 13.9 million, $ 16.1 million and $ 0.3 million, respectively.

The Company has reported pre-tax operating losses for all periods presented.

7 unchanged sentences

The Company had gross U.S.

federal and state tax credits of $ 9.8 million and $ 5.7 million as of December 31, 2021 and 2020, respectively, which may be used to offset future tax liabilities.

federal and state tax credits of $ 15.8 million and $ 9.8 million as of December 31, 2022 and 2021,

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

respectively, which may be used to offset future tax liabilities.

The federal NOL carryforward period is indefinite, while the tax credits will begin to expire in 2039 .

11 unchanged sentences

( 28.89 ) ( 22.43 ) ( 24.60 )

Convertible preferred stock tranche liabilities

Collaboration revenue

Stock-based compensation

10 unchanged sentences

Tax credit carryforwards

Accrued liabilities & allowances

Accrued liabilities and allowances

Deferred revenue

15,961 14,375

Capitalized research and development 26,199 —

Investment basis difference

14,235 13,587

Lease liability

15 unchanged sentences

Net deferred tax assets

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

The Tax Cuts and Jobs Act contained a provision that requires the capitalization of Section 174 costs incurred in years beginning on or after January 1, 2022.

Section 174 costs are expenditures that represent research and development costs that are incident to the development or improvement of a product, process, formula, invention, computer software or technique.

This provision changes the treatment of Section 174 costs such that the expenditures are no longer allowed as an immediate deduction but rather must be capitalized and amortized over five years for domestic research and development and fifteen years for foreign research and development.

The Company has included the impact of this provision, which results in a deferred tax asset of approximately $ 26.2 million as of December 31, 2022.

The Company maintains a full valuation allowance on its net U.S.

deferred tax assets.

The assessment regarding whether a valuation allowance is required considers the evaluation of both positive and negative evidence when concluding whether it is more likely than not that deferred tax assets are realizable.

The assessment regarding whether a valuation allowance is required considers the evaluation of both positive and negative evidence when concluding

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

whether it is more likely than not that deferred tax assets are realizable.

In making this assessment, significant weight is given to evidence that can be objectively verified.

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Additions based on tax position related to the current year — 396

Additions based on prior year tax positions 400 —

Adjustments based on prior year tax positions ( 396 ) 400

Ending balance $ 400 $ 796

1 unchanged sentence

Basic and diluted net loss per share attributed to common stockholders is calculated by dividing net loss attributed to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents.

The Company’s potentially dilutive shares, which include preferred stock, unvested RSAs and options to purchase common stock, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The amounts in the table below were excluded from the calculation of diluted net loss per share attributed to common stockholders for the periods indicated due to their anti-dilutive effect:

Year Ended December 31,

2021 2020 2019

Convertible preferred stock

— 194,474,431 152,116,195

Unvested RSAs

2,600,002 7,562,503 13,663,338

Options to purchase common stock

41,775,179 34,413,889 27,028,217

44,375,181 236,450,823 192,807,750

The Company’s potentially dilutive shares, which include preferred stock, unvested RSAs, unvested RSUs and options to purchase common stock, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

Shares subject to options to purchase common stock, preferred stock, unvested RSAs and unvested RSUs were all excluded from consideration in the calculation of diluted net loss per share in all periods presented due to their anti-dilutive effects.

Employee Benefit Plan

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The 401(k) Plan allows employees to make pre- and post-tax contributions up to the maximum allowable amount set by the IRS.

As of December 31, 2021, the Company had not made any matching contributions to the 401(k) Plan on behalf of participants.

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

Beginning in 2022, the Company sponsors a defined-contribution savings plan with matching 401(k) contributions based upon the amount of the employees’ contributions subject to certain limitations.

The Company made matching contributions to the 401(k) Plan on behalf of participants of $ 1.0 million for the year ended December 31, 2022 and none for the years ended December 31, 2021 and 2020.

Commitments and Contingencies

Collaboration and License Agreements

The Company has entered into certain collaboration and license agreements, including those identified in Note 3, Collaboration, License and Success Payment Agreements above, with third parties that include the funding of certain development, manufacturing and commercialization efforts with the potential for future milestone and royalty payments upon the achievement of pre-established developmental, regulatory and/or commercial milestones.

The Company’s obligation to fund these efforts is contingent upon continued involvement in the programs and/or the lack of any adverse events that could cause the discontinuance of the programs.

The Company has entered into certain collaboration and license agreements, including those identified in Note 3, License, Collaboration and Success Payment Agreements above, with third parties that include the funding of certain development, manufacturing and commercialization efforts with the potential for future milestone and royalty payments

Lyell Immunopharma, Inc.

Notes to Consolidated Financial Statements—(Continued)

upon the achievement of pre-established developmental, regulatory and/or commercial milestones.

The Company’s obligation to fund these efforts is contingent upon continued involvement in the programs and/or the lack of any adverse events that could cause the discontinuance of the programs, including termination of such agreements.

Due to the nature of these agreements, the future potential payments are inherently uncertain, and accordingly no amounts had been recorded for the potential future achievement of these targets as of December 31, 2022 and 2021.

Related-Party Transactions

In September 2021, the Company entered into a sublease with Sonoma, with whom the Company has common stockholders with board seats.

As a part of the sublease, a $ 4.6 million tenant improvement contribution payment was made by Sonoma, which will be recognized over the term of the sublease.

As of December 31, 2021, accrued liabilities and other current liabilities of $ 0.5 million a nd other non-current lia bilities of $ 4.0 million we re in connection with the sublease with Sonoma.

Incom e of $ 1.8 million w as recognized in other operating income, net for the year ended December 31, 2021.

In September 2021, the Company entered into a sublease with Sonoma, with whom the Company has common stockholders with board seats, whereby the Company agreed to sublease approximately 18,000 square feet of space in South San Francisco, California currently leased by the Company.

Klausner, the Chair of the Company’s board of directors, also serves as a member of the board of directors of Sonoma.

As a part of the sublease, a $ 4.6 million tenant improvement contribution payment was made by Sonoma, which is recognized over the term of the sublease.

As of December 31, 2022 and 2021, there were accrued liabilities and other current liabilities of $ 0.5 million and $ 0.5 million, respectively, a nd other non-current lia bilities of $ 3.5 million and $ 4.0 million, respectively, in connection with the sublease with Sonoma.

Incom e of $ 2.6 million and $ 1.8 million w as recognized in other operating income, net for the years ended December 31, 2022 and 2021, respectively, of which $ 1.9 million and $ 0.6 million was attributed to sublease income f or the years ended December 31, 2022 and 2021, respectively .

See Note 9, Leases , for more detail on the Sonoma sublease.

The Company is party to the GSK Agreement, who is a holder of more than 10 % of the Company’s equity.

See Note 3, Collaboration, License and Success Payment Agreements .

Deferred revenue of $ 5.0 million and $ 6.1 million as of December 31, 2021 and 2020, respectively, and deferred revenue, net of current portion of $ 79.7 million and $ 89.1 million as of December 31, 2021 and 2020, respectively, were in connection with the GSK Agreement.

The Company was party to the GSK Agreement, who is a holder of more than 10 % of the Company’s outstanding common stock.

See Note 3, License, Collaboration, and Success Payment Agreements .

Deferred revenue of zero and $ 5.0 million as of December 31, 2022 and 2021, respectively, and deferred revenue, non-current of zero and $ 79.7 million as of December 31, 2022 and 2021, respectively, were in connection with the GSK Agreement.

Revenue recognized in connection with the GSK agreement was $ 84.7 million, $ 10.5 million and $ 7.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.

GSK terminated the GSK Agreement effective December 24, 2022.

See Note 3, License, Collaboration, and Success Payment Agreements, for additional details regarding the termination of the GSK Agreement.

In March 2020, the Company repurchased 546,806 shares of its Series A convertible preferred stock and 2,032,166 shares of its common stock from a related party.

See Note 10, Convertible Preferred Stock and Note 11, Stockholders’ Equity (Deficit) .

See Note 10, Convertible Preferred Stock and Note 11, Stockholders’ Equity .

Asset Acquisition

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data