Lyell Immunopharma, Inc. 10-K

Item 8. Financial Statements and Supplementary Data LYELL IMMUNOPHARMA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2022, 2021 and 2020 CONTENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 86 Audited Consolidated Financial Statements: Consolidated Balance Sheets 88 Consolidated Statements of Operations and Comprehensive Loss 89 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 90 Consolidated Statements of Cash Flows 91 Notes to Consolidated Financial Statements 92 85 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Lyell Immunopharma, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lyell Immunopharma, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. 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 These financial statements are the responsibility of the Company's management. 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 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. We conducted our audits in accordance with the standards of the PCAOB. 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. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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. 86 Table of Contents 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. San Mateo, California February 28, 2023 87 Table of Contents Lyell Immunopharma, Inc. Consolidated Balance Sheets (in thousands, except per share amounts) As of December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 123,554 $ 293,828 Marketable securities 516,598 320,966 Prepaid expenses and other current assets 11,143 11,492 Total current assets 651,295 626,286 Restricted cash 280 466 Marketable securities, non-current 70,117 283,531 Other investments 44,924 47,001 Property and equipment, net 123,023 120,098 Operating lease right-of-use assets 43,242 46,541 Other non-current assets 4,680 3,483 Total assets $ 937,561 $ 1,127,406 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,917 $ 3,207 Accrued liabilities and other current liabilities 28,755 29,057 Success payment liabilities 4,356 9,486 Deferred revenue (1) — 4,988 Total current liabilities 37,028 46,738 Operating lease liabilities, non-current 63,168 66,650 Deferred revenue, non-current (2) — 79,665 Other non-current liabilities 4,113 4,566 Total liabilities 104,309 197,619 Commitments and contingencies (Note 16) Stockholders’ equity: Preferred stock, $ 0.0001 par value; 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 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 25 24 Additional paid-in capital 1,608,306 1,515,748 Accumulated other comprehensive loss ( 7,599 ) ( 1,623 ) Accumulated deficit ( 767,480 ) ( 584,362 ) Total stockholders’ equity 833,252 929,787 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. 88 Table of Contents Lyell Immunopharma, Inc. Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Revenue (1) $ 84,683 $ 10,650 $ 7,756 Operating expenses: Research and development 159,188 138,693 182,243 General and administrative 117,307 89,057 46,881 Other operating income, net ( 4,754 ) ( 2,324 ) ( 9,431 ) Total operating expenses 271,741 225,426 219,693 Loss from operations ( 187,058 ) ( 214,776 ) ( 211,937 ) Interest income, net 7,053 1,165 5,939 Other income (expense), net 1,887 ( 161 ) 1,526 Impairment of other investments ( 5,000 ) ( 36,447 ) — Total other income (loss), net 3,940 ( 35,443 ) 7,465 Net loss ( 183,118 ) ( 250,219 ) ( 204,472 ) Other comprehensive loss: Net unrealized loss on marketable securities ( 5,976 ) ( 1,879 ) ( 198 ) Comprehensive loss $ ( 189,094 ) $ ( 252,098 ) $ ( 204,670 ) Net loss attributed to common stockholders: Net loss $ ( 183,118 ) $ ( 250,219 ) $ ( 204,472 ) Deemed dividends upon repurchase of convertible preferred stock — — ( 3,582 ) Net loss attributed to common stockholders $ ( 183,118 ) $ ( 250,219 ) $ ( 208,054 ) Net loss per common share, basic and diluted $ ( 0.74 ) $ ( 1.84 ) $ ( 15.69 ) Weighted-average shares used to compute net loss per common share, basic and diluted 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. 89 Table of Contents Lyell Immunopharma, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands) Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ (Deficit) Equity Shares Amount Shares Amount 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 42,905 492,467 — — — — — — Issuance of common stock to strategic partners — — 275 — 1,004 — — 1,004 Issuance of common stock for asset acquisition — — 688 — 4,000 — — 4,000 Issuance of common stock upon exercise of stock options — — 113 — 373 — — 373 Stock-based compensation — — 5,345 1 33,260 — — 33,261 Repurchase of convertible preferred stock ( 547 ) ( 662 ) — — ( 3,582 ) — — ( 3,582 ) Repurchase of common stock — — ( 2,032 ) — ( 11,806 ) — — ( 11,806 ) Other comprehensive loss — — — — — ( 198 ) — ( 198 ) Net loss — — — — — — ( 204,472 ) ( 204,472 ) Balance as of December 31, 2020 194,474 $ 1,010,968 15,570 $ 2 $ 41,357 $ 256 $ ( 334,143 ) $ ( 292,528 ) Proceeds from initial public offering, net of $ 33,198 in issuance costs — — 25,000 2 391,800 — — 391,802 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 Issuance of common stock upon exercise of stock options — — 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 — — 2,600 — 81,924 — — 81,924 Other comprehensive loss — — — — — ( 5,976 ) — ( 5,976 ) Net loss — — — — — — ( 183,118 ) ( 183,118 ) Balance as of December 31, 2022 — $ — 249,567 $ 25 $ 1,608,306 $ ( 7,599 ) $ ( 767,480 ) $ 833,252 The accompanying notes are an integral part of these consolidated financial statements. 90 Table of Contents Lyell Immunopharma, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 183,118 ) $ ( 250,219 ) $ ( 204,472 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 81,924 62,201 33,261 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 Gain on other investments ( 2,923 ) — — Lease expense, net of gain on lease remeasurement ( 1,553 ) 911 3,181 Change in fair value of equity warrant 1,067 256 ( 1,323 ) 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 — — 3,529 Gain on net operating lease liability disposal — ( 308 ) — Changes in operating assets and liabilities: Prepaid expenses, other current assets and other assets ( 1,968 ) ( 6,987 ) ( 1,388 ) Accounts payable 667 91 ( 278 ) Accrued liabilities and other current liabilities ( 463 ) 4,542 6,120 Deferred revenue ( 84,653 ) ( 10,508 ) ( 7,756 ) Operating lease liabilities, non-current 4,855 13,202 2,966 Other non-current liabilities ( 453 ) 3,675 — Net cash used in operating activities ( 169,555 ) ( 126,249 ) ( 160,874 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 24,276 ) ( 65,504 ) ( 51,481 ) Purchases of marketable securities ( 406,316 ) ( 673,465 ) ( 864,909 ) Sales and maturities of marketable securities 419,052 617,396 686,322 Purchases of other investments — — ( 43,448 ) Net cash used in investing activities ( 11,540 ) ( 121,573 ) ( 273,516 ) 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 Payments for the repurchase of common stock — — ( 11,806 ) Payments for the repurchase of convertible preferred stock — — ( 4,244 ) Net cash provided by financing activities 10,635 401,244 476,790 Net (decrease) increase in cash, cash equivalents and restricted cash ( 170,460 ) 153,422 42,400 Cash, cash equivalents and restricted cash at beginning of period 294,294 140,872 98,472 Cash, cash equivalents and restricted cash at end of period $ 123,834 $ 294,294 $ 140,872 Represented by: Cash and cash equivalents $ 123,554 $ 293,828 $ 140,406 Restricted cash 280 466 466 Total $ 123,834 $ 294,294 $ 140,872 SUPPLEMENTAL CASH FLOW INFORMATION Cash received for amounts related to tenant improvement allowances $ 4,761 $ 13,295 $ 2,966 Cash paid for amounts included in the measurement of lease liabilities $ 10,870 $ 8,546 $ 5,147 Non-cash investing and financing activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 1,325 $ 4,605 $ 12,740 Remeasurement of operating lease right-of-use asset for lease modification $ 31 $ 3,873 $ ( 8,958 ) 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 Other investments received for sale of assets $ — $ — $ 6,000 The accompanying notes are an integral part of these consolidated financial statements. 91 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements 1. Organization Lyell Immunopharma, Inc. (the “Company”) was incorporated in Delaware in June 2018. 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 In June 2021, the Company successfully completed its initial public offering (“IPO”) of its common stock. In connection with its IPO, the Company issued and sold 25,000,000 shares of common stock at an IPO price of $ 17.00 per share. 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 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. 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). 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. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. Liquidity and Management’s Plan 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. Summary of Significant Accounting Policies Use of Estimates 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, 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 . 92 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) Comprehensive 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. Cash, Cash Equivalents and Restricted Cash 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 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. Marketable Securities 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 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. The Company classifies those investments that are not required for use in current operations and that mature in more than 12 months as non-current marketable securities in the accompanying consolidated balance sheets. 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 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”). If the investment or other interest is determined to be a VIE, the Company evaluates whether it is considered the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) has the obligation to absorb losses or the right to receive benefits from the VIE. For 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 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 (“measurement alternative”). This election must be made for each investment separately. The Company has made this election for all investments in this category and will continue to measure these investments using this method until they no longer qualify to be measured in accordance with this method. Changes in the carrying value of other investments are recognized through net loss. Each reporting period, the Company performs a qualitative assessment to evaluate whether the investment is impaired. The Company’s assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities and other factors that raise concerns about the investee’s ability to continue as a going concern. 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 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 93 Table of Contents 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 Property and equipment primarily consist of laboratory equipment, computer equipment and software, furniture and fixtures and leasehold improvements. Property and equipment are stated at cost less accumulated depreciation and amortization. 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. The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Valuation of Long-lived Assets Long-lived assets are reviewed each reporting period for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, which may warrant adjustments to carrying values or estimated useful lives. Recoverability is measured by comparison of the carrying amount of an asset group to the future net undiscounted cash flows that the assets are expected to generate. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. There has been no impairment of long-lived assets for any of the periods presented. Acquisitions The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the requirements of a business in which case the transaction is accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, and that the fair value of acquired intangibles be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the purchase price over the assigned fair values of the net assets acquired is recorded as goodwill. If the Company determines an acquisition does not meet the definition of a business combination under the acquisition method of accounting, the transaction is accounted for as an asset acquisition. In an asset acquisition, upfront payments allocated to in-process research and development (“IPR&D”) are recorded in research and development expense if it is determined that there is no alternative future use, and subsequent milestone payments are recorded in research and development expense when achieved for technology that has not yet met product feasibility. Leases The Company leases certain office, laboratory and manufacturing spaces. In addition to minimum rent, the leases require payment of real estate taxes, insurance, common area maintenance charges and other executory costs. At inception of a contract, the Company determines whether an arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. For all leases, the Company determines the classification of the lease as either operating or financing. As of December 31, 2022 and 2021, all of the Company’s leases were classified as operating leases . The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the lease commencement date based on the present value of future lease payments over the lease term. 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 94 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) 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 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. Lease expense is recognized on a straight-line basis over the lease term within operating expenses on the Consolidated Statements of Operations and Comprehensive Loss. The Company has elected the practical expedient to not separate lease and non-lease components for real estate leases. Additionally, the Company has elected the short-term lease recognition exemption for all short-term leases and as a result, lease liabilities and ROU assets are not included on the consolidated balance sheets for leases with an initial term of 12 months or less. Fair Value Measurements The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company’s financial instruments, in addition to those presented in Note 6, Fair Value Measurements , include cash, restricted cash, other investments, accounts payable and accrued liabilities and other current liabilities. The carrying amount of cash, restricted cash, accounts payable and accrued liabilities and other current liabilities approximate fair value because of the short-term nature of these instruments. 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 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. See Note 10, Convertible Preferred Stock . As a result, the Company recorded deemed dividends of $ 3.6 million for the year ended December 31, 2020. The transaction decreased convertible preferred stock by $ 0.7 million and reduced additional paid-in capital by $ 3.6 million. The deemed dividends increased the net loss attributed to common stockholders by $ 3.6 million. Revenue Recognition The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, Revenue from Contracts with Customers , ( “ ASC 606 ” ) the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the performance obligation is satisfied. In applying the ASC 606 framework, the Company must apply judgment to determine the nature of the promises within a revenue contract and whether those promises represent distinct performance obligations. In determining the transaction price, the Company does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of cumulative revenue when the uncertainty is resolved. 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 95 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) 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. At the end of each subsequent reporting period, the Company re-evaluates the variable consideration and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis. Under the Company’s license agreements, the Company grants the license to a customer as it exists at the point of transfer and the nature of the license is a right to use the Company’s intellectual property as transferred. If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. Research and Development Expense The Company records expense for research and development costs as incurred. 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 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, dispute and patent matters. Success Payments 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, 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. The following variables were incorporated in the estimated fair value of the success payment liability: estimated fair value of the Company’s common stock, 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. 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. 96 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) Concentrations of Credit Risk and Off-balance Sheet Risk The Company maintains its cash, cash equivalents and restricted cash with high quality, accredited financial institutions. These amounts, at times, may exceed federally insured limits. The Company also makes short-term investments in money market funds, U.S. Treasury securities, U.S. 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. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to significant risk on these funds. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Claims and Contingencies From time to time, the Company may become involved in litigation and proceedings relating to claims arising from the ordinary course of business. The Company accrues a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not determinable, the Company provides disclosure of a material claim or contingency. Stock-based Compensation 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 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. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term. 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. 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, 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. The Company also granted stock options that vest in conjunction with certain performance conditions to certain key employees. At each reporting date, the Company is required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon the Company’s assessment of accomplishing each performance provision. Income Taxes The Company determines its deferred tax assets and liabilities based on the differences between the financial reporting and tax basis of assets and liabilities. 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 97 Table of Contents 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. Segments 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. The Company views its operations and manages its business in one operating segment and one reportable segment. Recent Accounting Pronouncements None. 3. License, Collaboration and Success Payment Agreements Fred Hutch 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. Collaboration - In 2018, the Company entered into a research and collaboration agreement with Fred Hutch (“Fred Hutch Collaboration Agreement”), focused on research and development of cancer immunotherapy products. The Company funded aggregate research performed by Fred Hutch of $ 12.0 million under the Fred Hutch Collaboration Agreement and the research is conducted in accordance with a research plan and budget approved by the parties. The Fred Hutch Collaboration Agreement has a six-year term. 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 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. Each threshold is associated with a success payment, ascending from $ 10.0 million at $ 18.29 per share to $ 200.0 million at $ 91.44 per share, payable if such threshold is reached during the measurement period. Any previous success payments made are credited against the success payment owed as of any valuation date, such that Fred Hutch does not receive multiple success payments in connection with the same threshold. The term of the success payment agreement ends on the earlier to occur of (i) the nine-year anniversary of the date of the agreement and (ii) a change in control transaction. The following table summarizes the aggregate potential success payments, which are payable to Fred Hutch in cash or cash equivalents, or at the Company’s discretion, publicly-tradeable shares of the Company’s common stock: Multiple of initial equity value at issuance 10 x 20 x 30 x 40 x 50 x Per share common stock price required for payment $ 18.29 $ 36.58 $ 54.86 $ 73.15 $ 91.44 Aggregate success payment(s) (in millions) $ 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 98 Table of Contents 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 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 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. Stanford License Agreement - In 2019, the Company entered into a license agreement with Stanford to license specified patent rights. The Company is also required to pay Stanford 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 date of the first commercial sale of a licensed product. Milestone payments to Stanford of up to a maximum of $ 3.7 million per target are payable upon achievement of certain specified clinical and regulatory milestones. The Company is also obligated to pay Stanford $ 2.5 million collectively for all licensed products upon the achievement of a certain commercial milestone. Additionally, low single‑digit tiered royalties based on annual net sales of the licensed products are payable to Stanford. 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. The Stanford Collaboration Agreement has a four-year term. 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, $ 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 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. Each threshold is associated with a success payment, ascending from $ 10.0 million at $ 18.29 per share to $ 200.0 million at $ 91.44 per share, payable if such threshold is reached during the measurement period. Any previous success payments made are credited against the success payment owed as of any valuation date, so that Stanford does not receive multiple success payments in connection with the same threshold. The term of each success payment agreement ends on the earlier to occur of (i) the nine year anniversary of the date of the agreement and (ii) a change in control transaction. The following table summarizes the aggregate potential success payments, which are payable to Stanford in cash or cash equivalents, or at the Company’s discretion, publicly-tradeable shares of the Company’s common stock: Multiple of initial equity value at issuance 10 x 20 x 30 x 40 x 50 x Per share common stock price required for payment $ 18.29 $ 36.58 $ 54.86 $ 73.15 $ 91.44 Aggregate success payment(s) (in millions) $ 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. 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 99 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) 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. GSK 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 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. 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 . 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. No license revenue was recognized for the year ended December 31, 2022. 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. PACT 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. 100 Table of Contents 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. In the fourth quarter of 2021, the Company fully impaired the remaining balance of $ 36.4 million. 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 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. 4. Cash Equivalents and Marketable Securities The fair value and amortized cost of cash equivalents and marketable securities by major security type are as follows (in thousands): December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market funds $ 67,970 $ — $ — $ 67,970 U.S. Treasury securities 277,056 — ( 5,257 ) 271,799 U.S. government agency securities 135,460 1 ( 1,416 ) 134,045 Corporate debt securities 221,608 3 ( 930 ) 220,681 Total cash equivalents and marketable securities $ 702,094 $ 4 $ ( 7,603 ) $ 694,495 Classified as: Fair Value Cash equivalents $ 107,780 Marketable securities 516,598 Marketable securities, non-current 70,117 Total cash equivalents and marketable securities $ 694,495 101 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market funds $ 206,245 $ — $ — $ 206,245 U.S. Treasury securities 290,909 2 ( 1,205 ) 289,706 U.S. government agency securities 93,864 2 ( 240 ) 93,626 Corporate debt securities 285,338 — ( 182 ) 285,156 Total cash equivalents and marketable securities $ 876,356 $ 4 $ ( 1,627 ) $ 874,733 Classified as: Fair Value Cash equivalents $ 270,236 Marketable securities 320,966 Marketable securities, non-current 283,531 Total cash equivalents and marketable securities $ 874,733 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. 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. 5. Other Investments From time to time, the Company makes minority ownership strategic investments. As of December 31, 2022 and 2021, the aggregate carrying amounts of the Company’s strategic investments in non-publicly traded companies were $ 44.9 million and $ 47.0 million , respectively. 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 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. The 102 Table of Contents 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, 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. In November 2020, the Company made a strategic equity investment of $ 13.0 million in Outpace Bio, Inc. (“Outpace”), a privately-held company, which represented a minority ownership interest at the time of the strategic investment. Outpace is engaged in the research and development of protein and cell technology platforms and has financed its activities via issuances of preferred stock. The Company determined that Outpace is a VIE and the at-risk equity holders, as a group, lack the characteristics of a controlling financial interest. The Company does not have majority voting rights, representation on Outpace’s board of directors or the power to direct the activities of this entity, and therefore it is not the primary benefic iary. 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. 6. Fair Value Measurements The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands): December 31, 2022 Level 1 Level 2 Level 3 Total Financial assets: Money market funds $ 67,970 $ — $ — $ 67,970 U.S. Treasury securities — 271,799 — 271,799 U.S. government agency securities — 134,045 — 134,045 Corporate debt securities — 220,681 — 220,681 Total financial assets $ 67,970 $ 626,525 $ — $ 694,495 Financial liabilities: Success payment liabilities $ — $ — $ 4,356 $ 4,356 Total financial liabilities $ — $ — $ 4,356 $ 4,356 103 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) December 31, 2021 Level 1 Level 2 Level 3 Total Financial assets: Money market funds $ 206,245 $ — $ — $ 206,245 U.S. Treasury securities — 289,706 — 289,706 U.S. government agency securities — 93,626 — 93,626 Corporate debt securities — 285,156 — 285,156 Equity warrant investment — — 1,067 1,067 Total financial assets $ 206,245 $ 668,488 $ 1,067 $ 875,800 Financial liabilities: Success payment liabilities $ — $ — $ 9,486 $ 9,486 Total financial liabilities $ — $ — $ 9,486 $ 9,486 The Company measures the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. The Level 2 marketable securities include U.S. 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 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. To determine the estimated fair value of the success payment liabilities, the Company uses a Monte Carlo simulation methodology that 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. The following variables were incorporated in the estimated fair value of the success payment liabilities: 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. 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. The following assumptions were incorporated into the calculation of the estimated fair value of the Fred Hutch success payment liability: December 31, 2022 2021 Fair value of common stock $ 3.47 $ 7.74 Risk-free interest rate 3.58 % - 4.65 % 0.19 % - 1.88 % Expected volatility 80.0 % 75.0 % Expected term (in years) 0.46 - 4.97 0.46 - 5.97 The following assumptions were incorporated into the calculation of the estimated fair value of the Stanford success payment liability: December 31, 2022 2021 Fair value of common stock $ 3.47 $ 7.74 Risk-free interest rate 3.58 % - 4.65 % 0.19 % - 1.88 % Expected volatility 80.0 % 75.0 % Expected term (in years) 0.46 - 6.75 0.46 - 7.75 104 Table of Contents 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. A small change in the valuation of the Company’s common stock may have a relatively large change in the estimated fair value of the success payment liability and associated expense. The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets and liabilities (in thousands): Equity Warrant Investment Success Payment Liabilities Balance at December 31, 2020 $ 1,323 $ 5,773 Change in fair value (1) ( 256 ) 3,713 Balance at December 31, 2021 1,067 9,486 Change in fair value (1) ( 1,067 ) ( 5,130 ) Balance at December 31, 2022 $ — $ 4,356 __________ (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. 7. Property and Equipment, Net Property and equipment, net, consisted of the following (in thousands): December 31, 2022 2021 Leasehold improvements $ 116,930 $ 95,001 Laboratory equipment 31,982 27,039 Computer equipment and software 1,630 1,610 Furniture and fixtures 717 384 Construction in progress 4,148 10,577 Property and equipment, at cost 155,407 134,611 Less: Accumulated depreciation and amortization ( 32,384 ) ( 14,513 ) Total property and equipment, net $ 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. 105 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) 8. Accrued Liabilities and Other Current Liabilities Accrued liabilities and other current liabilities consisted of the following (in thousands): December 31, 2022 2021 Accrued compensation and related benefits $ 15,447 $ 17,296 Accrued property and equipment 732 4,055 Accrued legal 930 2,619 Accrued research and development expenses 4,760 2,449 Current lease liabilities 4,534 1,169 Other 2,352 1,469 Total accrued liabilities and other current liabilities $ 28,755 $ 29,057 9. Leases The Company’s lease portfolio is comprised of operating leases for laboratory, office and manufacturing facilities located in South San Francisco, California, and Seattle and Bothell, Washington with contractual periods expiring between December 2028 and March 2031. 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 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. The Company has two five-year options to extend the lease, which are not reasonably assured. In 2019, the Company entered into an operating lease for approximately 34,000 square feet of office and laboratory space in South San Francisco, California. 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 for the year ended December 31, 2021. 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 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. The Company has two 90 -month options to extend the leases, which are not reasonably assured. In 2019, the Company entered into an operating lease agreement for approximately 108,000 square feet of office and laboratory space located in South San Francisco, California. The initial lease term expires in January 2031 with the option to extend the term for another 10 years, which is not reasonably assured. In January 2021, the Company amended the lease term to extend the lease expiration to March 2031, which resulted in an increase to the right-of-use asset and lease liability of $ 4.2 million. 106 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) The following table summarizes the Company’s future minimum operating lease commitments, including expected lease incentives to be received, as of December 31, 2022 (in thousands): Year Ending December 31: 2023 $ 10,101 2024 11,347 2025 11,859 2026 12,209 2027 12,569 Thereafter 35,525 Total undiscounted lease payments 93,610 Less: imputed interest ( 25,908 ) Total operating lease liabilities $ 67,702 Reported as of December 31, 2022: Short-term portion of lease liabilities (included in accrued liabilities and other current liabilities) $ 4,534 Operating lease liabilities, non-current 63,168 Total $ 67,702 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 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. The weighted-average remaining lease terms for operating leases were 7.8 and 8.8 years as of December 31, 2022 and 2021, respectively. The weighted-average discount rates for operating leases were 8.5 % and 8.4 % as of December 31, 2022 and 2021, respectively. In May 2021, the Company entered into a sublease, whereby the Company agreed to sublease approximately 11,000 square feet of its space in South San Francisco, California currently leased by the Company. The sublease is classified as an operating lease and will expire in March 2031. 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. (“Sonoma”), a related party, whereby the Company agreed to sublease approximately 18,000 square feet of space in South San Francisco, California currently leased by the Company. See Note 17, Related-Party Transactions . As a part of the sublease, in September 2021, the Company received a $ 4.6 million tenant improvement contribution payment, which will be recognized over the term of the sublease. The sublease is classified as an operating lease and will expire in March 2031. 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. 10. Convertible Preferred Stock In March 2020, the Company sold 42,905,042 shares of its Series C convertible preferred stock at a price of $ 11.49 per share for proceeds of $ 492.5 million, net of issuance costs of $ 0.5 million. In March 2020, the Company repurchased 546,806 shares of its Series A convertible preferred stock from a related party for a purchase price of $ 4.2 million. 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. As of December 31, 2022, no shares of convertible preferred stock were outstanding. 107 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) 11. Stockholders’ Equity Preferred Stock 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. Common Stock 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. 12. Stock-based Compensation 2021 Equity Incentive Plan 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 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. The term of any stock option granted under the 2021 Plan cannot exceed ten years . Generally, awards granted by the Company vest over four years , but may be granted with different vesting terms. In conjunction with adopting the 2021 Plan, the Company discontinued the 2018 Plan with respect to new equity awards. As of December 31, 2022 , 20,264,523 shares were available for future issuance pursuant to the 2021 Plan. 108 Table of Contents Lyell Immunopharma, Inc. Notes to Consolidated Financial Statements—(Continued) 2021 Employee Stock Purchase Plan In June 2021, the Company adopted the 2021 Employee Stock Purchase Plan (“2021 ESPP”), which became effective immediately prior to the execution of the underwriting agreement related to the Company’s IPO with an initial reserve of 2,470,000 shares. The 2021 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15 % of their earnings, subject to plan limitations. 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 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. 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 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 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. Stock-based Compensation Expense Stock-based compensation expense by classification included within the Consolidated Statements of Operations and Comprehensive Loss was as follows (in thousands): Year Ended December 31, 2022 2021 2020 Research and development $ 16,721 $ 15,328 $ 14,977 General and administrative 65,203 46,873 18,284 Total stock-based compensation expense $ 81,924 $ 62,201 $ 33,261 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 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, 109 Table of Contents 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): December 31, 2022 2021 2020 Previous CEO - Options (1) $ 3,741 $ — $ — Previous CEO - Options (2) — 21,948 15,052 Other - Options (3) — 1,019 4,717 Previous CEO - RSA (4) — 10,908 20,799 Other - RSA (5) — — 9,029 Total $ 3,741 $ 33,875 $ 49,597 __________ (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 RSA activity was as follows: Number of Shares Weighted-Average Value at Grant Date Per Share Unvested shares as of December 31, 2021 2,600,002 $ 0.0001 Vested ( 2,600,002 ) $ 0.0001 Unvested shares as of December 31, 2022 — $ — 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. 110 Table of Contents 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 Per Share Unvested RSUs as of December 31, 2021 0 $ — 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 was as follows: Number of Stock Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Options outstanding as of December 31, 2021 41,775,179 $ 5.05 7.84 $ 142,076 Granted 18,399,530 $ 4.89 Exercised ( 3,600,478 ) $ 2.66 Canceled or forfeited ( 2,725,186 ) $ 6.28 Options outstanding as of December 31, 2022 53,849,045 $ 5.09 7.84 $ 24,887 Options exercisable as of December 31, 2022 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 weighted-average assumptions: Year Ended December 31, 2022 2021 2020 Risk-free interest rate 2.93 % 0.80 % 0.79 % Expected volatility 87.3 % 78.7 % 75.0 % Expected term (in years) 6.03 6.10 6.11 Expected dividend yield 0 % 0 % 0 % 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, 2022, 2021 and 2020 was $ 13.9 million, $ 16.1 million and $ 0.3 million, respectively. 13. Income Taxes The Company has reported pre-tax operating losses for all periods presented. The Company’s net losses are derived solely from within the U.S. The Company has not reflected any benefit for corresponding tax net operating loss carryforwards in the accompanying consolidated financial statements. The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. As of December 31, 2022 and 2021, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $ 383.3 million and $ 271.0 million, respectively, which were available to reduce future taxable income and do not expire. The Company also had U.S. state NOL carryforwards of $ 372.5 million that begin to expire in 2038. The Company had gross U.S. federal and state tax credits of $ 15.8 million and $ 9.8 million as of December 31, 2022 and 2021, 111 Table of Contents 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 . The attributed carryforwards may become subject to annual limitations in the event of certain cumulative changes in the ownership interest of significant stockholders. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows: Year Ended December 31, 2022 2021 2020 Federal statutory tax 21.00 % 21.00 % 21.00 % State tax, net of federal benefit 5.10 6.39 4.71 Valuation allowance ( 28.89 ) ( 22.43 ) ( 24.60 ) Collaboration revenue 6.72 — — Stock-based compensation ( 6.11 ) ( 5.92 ) ( 1.77 ) Tax credits 2.33 0.99 0.95 Other ( 0.15 ) ( 0.03 ) ( 0.29 ) Effective income tax rate 0.00 % 0.00 % 0.00 % The principal components of the Company’s net deferred tax assets were as follows (in thousands): Year Ended December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 106,530 $ 70,855 Tax credit carryforwards 14,317 8,338 Accrued liabilities and allowances 3,692 3,879 Deferred revenue 904 8,224 Amortization 4,585 15,961 Capitalized research and development 26,199 — Investment basis difference 14,235 13,587 Lease liability 17,656 18,429 Stock-based compensation 7,471 2,872 Other 1,171 2,613 Gross deferred tax assets 196,760 144,758 Valuation allowance ( 180,132 ) ( 127,226 ) Deferred tax assets, net of valuation allowance 16,628 17,532 Deferred tax liabilities: Operating lease right-of-use assets ( 11,277 ) ( 12,647 ) Property and equipment ( 5,351 ) ( 4,885 ) Deferred tax liabilities ( 16,628 ) ( 17,532 ) Net deferred tax assets $ — $ — 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 112 Table of Contents 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. In its evaluation, the Company considered its cumulative loss in recent years and its forecasted losses in the near-term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, Accounting for Income Taxes (“ASC 740”), the Company determined that the negative evidence outweighed the positive evidence and a full valuation allowance on its U.S. net deferred tax assets will be maintained. The valuation allowance relates primarily to net U.S. deferred tax assets from net operating loss carryforwards, research and development tax credit carryforwards, research and development expenses capitalized and amortized for tax but deducted for GAAP and stock-based compensation. The Company will continue to assess the realizability of its deferred tax assets and adjust the valuation allowance as required by ASC 740. The increase in the valuation allowance was $ 52.9 million and $ 56.1 million for the years ended December 31, 2022 and 2021, respectively. The Company evaluates its uncertain tax positions based on a determination of whether it is more likely than not such position will be sustained based upon its technical merits and upon examination by the relevant income tax authorities with all facts known. The Company applies judgment in its measurement of an uncertain tax position recorded in its consolidated financial statements and tax return. As of December 31, 2022 and 2021, there are no penalties or accrued interest recorded in the consolidated financial statements. The Company is generally subject to examination by the U.S. federal and local income tax authorities for all tax years in which a loss carryforward is available. The Company is currently not under examination by the Internal Revenue Service or other jurisdictions for any tax years. The following tab le summarized changes to the Company’s unrecognized tax benefits (in thousands): Year Ended December 31, 2022 2021 Beginning balance $ 796 $ — Additions based on tax position related to the current year — 396 Adjustments based on prior year tax positions ( 396 ) 400 Ending balance $ 400 $ 796 14. Net Loss Per Share 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, 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. 15. Employee Benefit Plan In January 2019, the Company adopted a 401(k) retirement and savings plan (the “401(k) Plan”) covering all of its employees. The 401(k) Plan allows employees to make pre- and post-tax contributions up to the maximum allowable amount set by the IRS. 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. 16. Commitments and Contingencies Collaboration and License Agreements 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 113 Table of Contents 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. 17. Related-Party Transactions 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. Dr. 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 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 . 18. Asset Acquisition In May 2020, the Company completed the acquisition of 100 % of the outstanding equity of Immulus, Inc. (“Immulus”), a company focused on developing technology platforms that enable the development and production of cell therapeutics. As consideration for the acquisition, the Company paid $ 3.5 million in cash and issued an aggregate of 688,463 shares of its common stock, with an estimated fair value of $ 4.0 million. The Company also incurred $ 0.5 million of direct expenses, for total consideration of $ 8.0 million. The Company concluded the acquisition did not meet the accounting definition of a business as inputs were acquired, but no processes or outputs were acquired. Consequently, the Company accounted for the transaction as an asset acquisition with the value concentrated in IPR&D. The following table summarizes the fair value of assets acquired (in thousands): Other assets $ 487 In-process research and development (IPR&D) 7,528 Total assets acquired $ 8,015 The amount allocated to the IPR&D asset was charged to research and development expenses for the year ended December 31, 2020 as this asset had no alternative future use at the time of the acquisition transaction. In addition, the Company is also required to make milestone payments of up to $ 37.0 million to the former stockholders of Immulus upon successful completion of specified development milestones. Triggering of these milestones payments was not considered probable as of the date of the acquisition, and no expense has been recorded for these milestones for the years ended December 31, 2022, 2021 and 2020. 114 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.