Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives and expectations for our business. Our actual results and the timing of selected events could differ materially from those described in or implied by these forward-looking statements as a result of several factors, including those set forth in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. See also the section titled “Special Note Regarding Forward-Looking Statements.”
This section under Management’s Discussion and Analysis of Financi al Condition and Results of Operations generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Overview
We are a clinical-stage cell therapy company advancing a pipeline of product candidates for patients with solid tumors utilizing our proprietary ex vivo genetic and epigenetic T‑cell reprogramming technologies. Our investigational therapies use the patient’s own cells as the starting point to generate highly tumor-reactive, longer-lasting functional T cells with enhanced ability to defeat solid tumors. Our innovative reprogramming technologies address what we believe are the primary barriers that limit consistent and long-lasting responses to T‑cell therapy in solid tumors: T‑cell exhaustion and lack of durable stemness. Our technologies are designed to generate T cells with the ability to persist and self‑renew while driving durable tumor cytotoxicity, even in the setting of an immunosuppressive tumor microenvironment. We apply our technologies with the aim of developing T‑cell therapies with improved and durable antitumor responses for patients with solid tumors. Our technologies can be applied in a target agnostic manner to multiple T‑cell modalities, including chimeric antigen receptor (CAR), tumor-infiltrating lymphocytes (TIL) and T‑cell receptor (TCR) therapies.
Our growing pipeline of promising cell product candidates targets solid tumor indications with large unmet needs that are collectively responsible for approximately 180,000 deaths in the United States annually. Each of our programs provide opportunities to expand into additional indications beyond the patient populations we are initially targeting.
For additional information regarding our business, see “Business” in Part I, Item 1 of this Annual Report on Form 10-K.
Pipeline Programs and Operational Updates
Pipeline Programs
We are advancing four wholly-owned product candidates. Two product candidates, LYL797 and LYL845 are in Phase 1 clinical development. Two additional product candidates, LYL119 and a second-generation tumor infiltrating lymphocyte (TIL) product candidate, are in preclinical development and our T-cell rejuvenation technology is in research.
LYL797 – A ROR1-targeted Chimeric Antigen Receptor (CAR) T-cell product candidate genetically reprogrammed to overexpress c-Jun and epigenetically reprogrammed using Lyell’s proprietary Epi-R TM manufacturing protocol, designed for differentiated potency and durability
• Enrollment in the Phase 1 clinical trial of LYL797 is ongoing. The study includes patients with relapsed or refractory triple-negative breast cancer (TNBC) or non-small cell lung cancer (NSCLC).
• Initial clinical and translational data from at least 20 patients in the Phase 1 trial of LYL797 are expected in the first half of 2024.
• Initiated a CAR T-cell manufacturing proof-of-concept collaboration with Cellares as part of an overall manufacturing strategy to build scale and reduce cost. Under the collaboration, the companies have agreed on a proof-of-concept technology transfer process for the manufacture of Lyell’s LYL797 CAR T-cell therapy, using Cellares’ Cell Shuttle™.
76
Table of Contents
• Announced initial results from Lyell’s ROR1 screening program indicating that expression of ROR1 in TNBC and NSCLC, 53% (N=77) and 33% (N=18), respectively, is consistent with what has been reported in the literature. The screening program is designed to support Lyell’s current and future clinical trials.
• Presented a LYL797 Trial in Progress poster at the 38th Annual Meeting of the Society for Immunotherapy of Cancer (SITC).
LYL845 – A novel epigenetically reprogrammed TIL product candidate using Lyell’s proprietary Epi-R TM manufacturing protocol, designed for differentiated potency and durability
• Enrollment in the Phase 1 clinical trial for LYL845 is ongoing. The study includes patients with relapsed and/or refractory metastatic or locally advanced melanoma, NSCLC and colorectal cancer.
• Initial clinical and translational data from the Phase 1 trial of LYL845 are expected in the second half of 2024.
• Received FDA Orphan Drug designation (ODD) for LYL845 for the treatment of stage IIB-IV melanoma.
• Presented nonclinical data at SITC highlighting the Epi-R P2 manufacturing process, which is designed to shorten TIL manufacturing time to less than three weeks without impacting cell number and phenotype. Epi-R P2 is expected to be incorporated into the Phase 1 trial of LYL845 in 2024.
• Presented a LYL845 Trial in Progress poster at SITC.
LYL119 – A ROR1-targeted CAR T-cell product candidate incorporating Lyell’s four stackable and complementary reprogramming technologies for enhanced cytotoxicity
• LYL119 is a ROR1-targeted CAR T-cell product enhanced with Lyell’s four novel genetic and epigenetic reprogramming technologies: c-Jun overexpression, NR4A3 knockout, Epi-R manufacturing protocol and Stim‑R TM T-cell activation technology.
• An IND application for LYL119 is expected to be submitted in the first half of 2024.
• Presented posters highlighting preclinical development of LYL119 at the American Society for Gene and Cell Therapy and at SITC. In preclinical studies, LYL119 demonstrated superior cytotoxicity and sustained cytokine production upon repeated antigen stimulation compared to various controls lacking one or more of the reprogramming technologies and showed robust in vivo antitumor efficacy and prolonged survival in a mouse xenograft tumor model at very low cell doses.
Rejuvenation – Novel partial reprogramming technology designed to maintain T-cell identity while reducing cells’ epigenetic age
• Presented nonclinical data at the International Society for Stem Cell Research (ISSCR) 2023 Annual Meeting demonstrating that Lyell’s T‑cell Rejuvenation technology generates cells with improved expansion capacity and increased expression of biomarkers associated with T-cell stemness, that also exhibit improved antitumor properties compared with non-rejuvenated T-cell controls in sequential cell-killing assays.
• Presented nonclinical data at SITC demonstrating that TIL generated with Lyell’s Rejuvenation technology retain a broad TCR repertoire and demonstrate improved T-cell function and antitumor properties.
Corporate Updates
• Appointed Matt Lang, J.D., Chief Business Officer. Mr. Lang, who also serves as Lyell’s Chief Legal Officer and Corporate Secretary, is an experienced company builder who has successfully led growth in complex organizations.
Macroeconomic Environment
Our business and operations may be affected by worldwide economic conditions, which may continue to be impacted by global macroeconomic challenges such as the effects of the ongoing geopolitical conflicts in Ukraine, escalating armed conflicts and turmoil in the Middle East, tensions in U.S.-China relations, inflationary pressures, interest rate environment, instability in the banking industry and overall market volatility. The first half of 2023 was marked by significant market uncertainty, inflationary pressures, banking upheaval and supply constraints. Although these negative impacts improved throughout the fiscal year, economic uncertainty persists and could continue in 2024, and these market dynamics and similar adverse market conditions may negatively impact our business.
For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
77
Table of Contents
Reduction in Workforce
In the fourth quarter of 2023, we implemented a reduction in our workforce of approximately 25% to reduce operating costs and improve operating efficiency. The restructuring prioritized investment in our clinical stage programs and core research platforms and streamlined operations. In connection with this reduction in workforce, we incurred approximately $5.5 million in expenses for one-time severance payments and other employee-related costs for the year ended December 31, 2023.
License, Collaboration and Success Payment Agreements
For a detailed description of our license, collaboration and success payment agreements, see the section titled “ Business—License, Collaboration and Success Payment Agreements ” in Part I, Item 1 of this Annual Report on Form 10‑K and Notes 2 and 3 to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Components of Results of Operations
Revenue
We have no products approved for sale and have never generated any revenue from product sales.
We have generated revenue primarily from the recognition of the upfront payment under 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). GSK terminated the GSK Agreement effective December 2022 and we do not expect further revenue from the collaboration. See Note 3, License, Collaboration and Success Payment Agreements , in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional details regarding termination of the GSK Agreement.
In the future, we may generate additional revenue from other collaborations, strategic alliances, licensing agreements, product sales, or a combination of these.
Operating Expenses
Research and Development
To date, research and development expenses consist of costs incurred by us for the discovery and development of our technology platforms and product candidates, and include costs incurred in connection with strategic collaborations, costs to license technology, personnel-related costs, including stock-based compensation expense, facility and technology related costs, research and laboratory expenses, as well as other expenses, which include consulting fees and other costs. Upfront payments and milestones paid to third parties in connection with technology platforms that have not reached technological feasibility and do not have an alternative future use are expensed as incurred. Research and development costs also include expenses related to the reduction in workforce, which was substantially completed in 2023.
Research and development expenses also include non-cash expenses related to the change in the estimated fair value of the success payment obligations over their respective requisite service terms granted to Fred Hutchinson Cancer Center (Fred Hutch) and The Board of Trustees of the Leland Stanford Junior University (Stanford). See the subsection titled “Critical Accounting Policies and Estimates— Success Payments ” below. As of December 31, 2022, Fred Hutch had provided the requisite service obligation to earn the potential success payment consideration under the continued collaboration. For the year ended December 31, 2023 and future periods, the change in the Fred Hutch success payment liability fair value is recognized in other income (expense), net, as the requisite service obligation had been met. Research and development expenses related to our success payment liabilities are unpredictable and may vary significantly from year‑to‑year due to changes in our assumptions used in the calculation.
We deploy our employee and infrastructure resources across multiple research and development programs for identifying and developing product candidates and establishing manufacturing capabilities. Due to the stage of development and number of ongoing programs and our ability to use resources across several programs, most of our research and development costs are not recorded on a program-specific basis. These include costs for personnel, laboratory and other indirect facility and operating costs.
Research and development activities account for a significant portion of our operating expenses. We anticipate that our research and development expenses will increase over the foreseeable future as we expand our research and
78
Table of Contents
development efforts including completing nonclinical studies, commencing planned clinical trials, conducting and completing current and planned clinical trials, seeking regulatory approvals of our product candidates, identifying new product candidates and incurring costs to acquire and license technology platforms. A change in the outcome of any of these variables could mean a significant change in the costs and timing associated with the development of our product candidates. Because we are early in our research and clinical development efforts of our product candidates, and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the nonclinical development, clinical development and commercialization of product candidates or whether, or when, we may achieve profitability.
Our research and development expenses may vary significantly based on factors such as:
• the number and scope of nonclinical and IND-enabling studies;
• per patient trial costs;
• the number of trials required for approval;
• the number of sites included in the trials;
• the countries in which the trials are conducted;
• the length of time required to enroll eligible patients;
• the number of patients that participate in the trials;
• the drop-out or discontinuation rates of patients;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of patient participation in the trials and follow-up;
• the cost and timing of manufacturing our product candidates;
• the phase of development of our product candidates;
• the efficacy and safety profile of our product candidates;
• the extent to which we establish additional collaboration or license agreements; and
• whether we choose to partner any of our product candidates and the terms of such partnership.
A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates. We may obtain unexpected results from our nonclinical studies and clinical trials.
General and Administrative
General and administrative costs include personnel-related expenses, including stock-based compensation expense for personnel in executive, legal, finance and other administrative functions, legal costs, transaction costs related to collaboration and licensing agreements, as well as fees paid for accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expenses. Legal costs include those related to corporate, dispute and patent matters. General and administrative costs also include expenses related to the reduction in workforce, which was substantially completed in 2023.
We anticipate that our general and administrative expenses will increase over the foreseeable future to support our continued research and development activities, operations generally, future business development opportunities, consulting fees, as well as the costs of operating as a public company such as costs related to accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission (SEC) requirements, director and officer insurance costs and investor and public relations costs.
Other Operating Income, Net
Other operating income, net consists primarily of service and occupancy fees received associated with subleases as well as losses on t he retirement of property and equipment.
Interest Income, Net
Interest income, net consists primarily of interest earned on our cash, cash equivalents and marketable securities balances.
79
Table of Contents
Other Income (Expense), Net
Other income (expense), net consists primarily of the change in fair value associated with our success payment liabilities to Fred Hutch for the year ended December 31, 2023 and primarily of a gain to record the PACT Series D convertible preferred shares for the year ended December 31, 2022 and changes in the fair value of an equity warrant investment held for the years ended December 31, 2022 and 2021.
Impairment of Other Investments
Impairment of other investments consists of reductions in the value of certain other investments.
Results of Operations
Years Ended December 31, 2023, 2022 and 2021
The following table summarizes our results of operations for the periods presented (in thousands):
Year Ended December 31,
Change
2023 2022 2021 2023 vs 2022
2022 vs 2021
Revenue
$ 130 $ 84,683 $ 10,650 $ (84,553) $ 74,033
Operating expenses:
Research and development
182,945 159,188 138,693 23,757 20,495
General and administrative
66,983 117,307 89,057 (50,324) 28,250
Other operating income, net
(2,790) (4,754) (2,324) 1,964 (2,430)
Total operating expenses
247,138 271,741 225,426 (24,603) 46,315
Loss from operations
(247,008) (187,058) (214,776) (59,950) 27,718
Interest income, net
23,453 7,053 1,165 16,400 5,888
Other income (expense), net
1,846 1,887 (161) (41) 2,048
Impairment of other investments (12,923) (5,000) (36,447) (7,923) 31,447
Total other income (loss), net 12,376 3,940 (35,443) 8,436 39,383
Net loss
$ (234,632) $ (183,118) $ (250,219) $ (51,514) $ 67,101
Revenue
Reven ue was $0.1 million a nd $84.7 million for the years ended December 31, 2023 and 2022, respectively. The GSK Agreement was terminated in December 2022 and, therefore, no further research and development pursuant to the GSK Agreement was performed in 2023, which drove the decrease in revenue of $84.6 million for the year ended December 31, 2023. The revenue for the year ended December 31, 2022 was primarily due to $83.6 million in revenue adjustments driven by the mutual agreement with GSK to conclude certain research activities in June 2022 and GSK’s subsequent termination of the GSK Agreement, both of which resulted in changes to the measure of proportional cumulative performance. See Note 3, License, Collaboration and Success Payment Agreements – GSK , in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information about the termination of the GSK Agreement.
80
Table of Contents
Research and Development Expenses
The following table summarizes the components of our research and development expenses for the periods presented (in thousands):
Year Ended December 31,
Change
2023 2022 2021 2023 vs 2022
2022 vs 2021
Personnel
$ 81,717 $ 70,483 $ 60,499 $ 11,234 $ 9,984
Facilities and technology
51,688 52,153 39,092 (465) 13,061
Research activities, collaborations and outside services
50,470 41,682 35,389 8,788 6,293
Success payments
(930) (5,130) 3,713 4,200 (8,843)
Total research and development expenses
$ 182,945 $ 159,188 $ 138,693 $ 23,757 $ 20,495
Research and developm ent expenses were $182.9 million and $159.2 million for the years ended December 31, 2023 and 2022, respectively. The increase of $23.8 million was primarily due to an increase o f $17.5 million in research and laboratory costs principally due to clinical trials as part of the $8.8 million increase in research activities, collaborations and outside services, partially offset by a reduction of $5.2 million in collaboration and license fees primarily related to the completion of certain sponsored research agreements and a reduction of $3.6 million in professional services; an increase of $11.2 million i n personnel‑related expenses to support our growth, including $4.6 million for one-time severance payments and other employee-related costs in connection with the reduction in workforce that occurred during the fourth quarter of 2023; a change of $4.2 million in success payments associated with the decrease in fair value of our Fred Hutch and Stanford success payment liabilities, including a $3.9 million change due to recognizing the Fred Hutch success payment liability fair value change in other income (expense), net for the year ended December 31, 2023; partially offset by a decrease of $0.5 million in facilities and technology costs, primarily related to lower software implementation costs.
General and Administrative Expenses
General and administrative expenses were $67.0 million and $117.3 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $50.3 million was primarily due to a decrease of $36.3 million in stock-based compensation expense, primarily related to significant awards being fully expensed, a decrease of $9.7 million in outside services primarily due to a decrease in legal and consulting expenses and a decrease of $2.8 million in other administrative expenses. Included in general and administrative expenses for the year ended December 31, 2023 is $0.9 million for one‑time severance payments and other employee-related costs in connection with the reduction in workforce that occurred during the fourth quarter of 2023.
Other Operating Income, Net
Other operating income, net was $2.8 million and $4.8 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $2.0 million was due primarily to increased losses on property and equipment disposals offsetting sublease income and operating fees related to our subleases.
Interest Income, Net
Interest income, net was $23.5 million and $7.1 million for the years ended December 31, 2023 and 2022, respectively. The increase of $16.4 million was primarily driven by higher interest rates in 2023.
Other Income (Expense), Net
Other income (expense), net was $1.8 million and $1.9 million for the years ended December 31, 2023 and 2022, respectively. Other income (expense), net of $1.8 million consisted primarily of a gain associated with the change in fair value associated with our Fred Hutch success payment liabilities. For fiscal 2023, changes in the Fred Hutch success payment liability were recognized in other income (expense) net as Fred Hutch had provided the requisite service obligation to earn the potential success payment consideration under the continued collaboration as of December 2022. Other income (expense), net of $1.9 million for the year ended December 31, 2022 consisted primarily of a gain of $2.9 million for the year ended December 31, 2022 to record the estimated fair value of PACT Pharma Inc. (PACT) Series D convertible preferred shares acquired, offset by a decrease of $1.1 million in the fair value of an equity warrant investment held for the year ended December 31, 2022.
81
Table of Contents
Impairment of Other Investments
For the year ended December 31, 2023, the $12.9 million impairment consisted of the full impairment of two of our other investments. For the year ended December 31, 2022, the $5.0 million impairment consisted of the full impairment of one of our other investments. See Note 5, Other Investments , in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K for additional information.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have funded our operations primarily through the sale and issuance of convertible preferred stock, the sale of common stock in connection with our IPO and business development activities. As of December 31, 2023, we ha d $562.7 million in cas h, cash equivalents and marketable securities. Since our inception, we have incurred significant operating losses. We have not yet commercialized any product candidates and we do not expect to generate revenue from sales of any product candidates for a number of years, if ever. We had an accumulated deficit of $1.0 billion as of December 31, 2023. From June 29, 2018 (inception) through December 31, 2023, we raised an aggregate of $1.4 billion in gross proceeds from the sales of our convertible preferred stock and the IPO.
On February 28, 2024, we entered into a sales agreement (the Sales Agreement) with Cowen and Company, LLC as the Company’s sales agent (Agent) with respect to an at-the-market offering program. In accordance with the terms of the Sales Agreement, we may offer and sell from time to time through the Agent shares of our common stock having an aggregate offering amount of up to $150.0 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 Agent, by any method permitted by law deemed to be an “at-the-market offering” as defined in Rule 415 of the Securities Act. We will pay commissions to the Agent of up to 3% of the gross proceeds of the sale of the Placement Shares sold under the Sales Agreement and reimburse the Agent for certain expenses. Neither us nor the Agent is obligated to sell any shares and, to date, we have not made any sales under the Sales Agreement.
Future Funding Requirements
We expect to incur additional losses in the foreseeable future as we conduct and expand our research and development efforts, including conducting nonclinical studies and clinical trials, developing new product candidates, establishing internal manufacturing capabilities and funding our operations generally. Based on our current operating plan, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs into 2027. However, we anticipate that we will need to raise additional capital in the future to fund our operations, including further development of our product candidates and the commercialization of any approved product candidates. In addition, we regularly consider fund-raising opportunities and may decide, from time to time, to raise additional capital, including pursuant to the Sales Agreement, based on various factors, including market conditions and our plans of operation. We are subject to the risks typically related to the development of new products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
Our future capital requirements will depend on many factors, including:
• the scope, timing, progress, costs and results of discovery, nonclinical development and clinical trials for our current and future product candidates and any additional nonclinical studies;
• the number of clinical trials required for regulatory approval of our current and future product candidates;
• the costs, timing and outcome of regulatory review of any of our current and future product candidates;
• the cost of manufacturing clinical and commercial supplies of our current and future product candidates;
• the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
• further investment to build additional manufacturing facilities or expand the capacity of our existing ones;
• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
• our ability to maintain existing, and establish new, collaborations, licenses, product acquisitions or other strategic transactions and the fulfillment of our financial obligations under any such agreements, including the
82
Table of Contents
timing and amount of any success payment, future contingent payments, milestone, royalty or other payments due under any such agreement;
• the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
• expenses to attract, hire and retain skilled personnel;
• the costs and estimated financial impact of our reduction in workforce in the fourth quarter of 2023;
• the costs of operating as a public company, including legal, accounting and other related expenses as well as costs relating to maintaining or expanding our operational, financial and management systems;
• addressing or responding to any potential disputes or litigation; and
• the extent to which we acquire or invest in businesses, products and technology platforms.
Until such time as we complete nonclinical and clinical development and receive regulatory approval of our product candidates and can generate significant revenue from product sales, if ever, we expect to finance our operations from the sale of additional equity or debt financings, or other capital which come in the form of strategic collaborations, licensing, or other arrangements. In the event that additional capital is required, we may not be able to raise it on terms acceptable to us, or at all. If we raise additional funds through the issuance of equity or convertible debt securities, including pursuant to the Sales Agreement, it may result in dilution to our existing stockholders. Debt financing or preferred equity financing, if available, may result in increased fixed payment obligations, and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that may restrict our operations. If we raise funds through strategic collaboration, licensing, or other arrangements, we may relinquish significant rights or grant licenses on terms that are not favorable to us. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from actual or perceived changes in interest rates and economic inflation, and otherwise. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Material Cash Requirements
We continually evaluate our liquidity and capital resources to ensure that we can adequately and efficiently finance our operations. As of December 31, 2023 , our material cash requirements consisted primarily of paying salaries and benefits, administering clinical trials, conducting research, improving our manufacturing capabilities, providing the technology and facilities necessary to support our operations, funding operating lease obligations and other payments related to our collaborative agreements. See Note 3, License, Collaboration and Success Payment Agreements , and Note 9, Leases , in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K for additional information.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2023 2022 2021
Net cash (used in) provided by:
Operating activities
$ (163,694) $ (169,555) $ (126,249)
Investing activities
184,048 (11,540) (121,573)
Financing activities
1,743 10,635 401,244
Net increase (decrease) in cash, cash equivalents and restricted cash
$ 22,097 $ (170,460) $ 153,422
Operating Activities
During the year ended December 31, 2023, net cash used in operating activities was $163.7 million, primarily reflecting our net loss of $234.6 million, partially offset by non-cash items primarily related to stock-based compensation expense o f $47.1 million , depreciation and amortization expense of $20.3 million and impairment of other investments of $12.9 million. Non-cash net amortization and accretion on marketable securitie s of $9.6 million also contributed to net cash used in operating activities.
83
Table of Contents
During the ye ar ended December 31, 2022, net cash used in operating activities was $169.6 million , primarily reflecting our net loss of $183.1 million , partially offset by non-cash items mainly related to stock-based compensation expense of $81.9 million , depreciation and amortization expense of $18.0 million and impairment of other investments of $5.0 million. Non-cash deferred revenue of $84.7 million also contributed to net cash used in operating activities.
Investing Activ ities
During the year ended December 31, 2023, cas h provided by investing activities was $184.0 million, consisting of net maturities, sales and purchases of marketable securities of $186.7 million, partially offset by purchases of property and equipment of $2.7 million. During the year ended December 31, 2022, cash used in investing activities was $11.5 million , consisting of purchases of property and equipment of $24.3 million offset by net maturities, sales and purchases of marketable securities of $12.7 million .
Financing Activities
During the year ended December 31, 2023, cash provided by financing activities was $1.7 million, consisting of $1.9 million in proceeds from our employee stock purchase plan and $0.3 million in proceeds from the exercise of stock options, partially offset by $0.5 million in taxes paid related to the net share settlement of equity awards. During the year ended December 31, 2022, cash provided by financing activities was $10.6 million, consisting of $9.6 million in proceeds from the exercise of stock options and $1.5 million in proceeds from our employee stock purchase plan, partially offset by $0.5 million in taxes paid related to the net share settlement of equity awards.
Critical Accounting Policies and Significant Judgments and Estimates
Our audited consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the audited consolidated financial statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
We recognize revenue from research services generally as services are provided while revenue from non‑refundable upfront fees are recognized over time by measuring progress towards satisfaction of the relevant performance obligation using the input method ( i.e. , cumulative actual costs incurred relative to total estimated costs).
The estimation of measure of progress is complex, involves significant judgment and is affected by our estimates of the total costs required to complete the performance obligations including the total internal personnel costs and external costs to be incurred. Changes in these estimates can have a material effect on our revenue recognition.
For a further description of our revenue recognition, see Note 2, Basis of Presentation and Significant Accounting Policies, in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.
Success Payments
We are required to make success payments to Fred Hutch and Stanford based on increases in the per share market value of our common stock, payable in cash or cash equivalents or, at our discretion, publicly tradeable shares of our common stock. The success payments are accounted for under Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation , and are initially recorded at fair value with a corresponding charge to research and development expense. The liabilities are marked to market at each balance sheet date with all changes in value recognized in research and development expense in the Consolidated Statements of Operations and Comprehensive Loss. Once their service periods are complete , the success payment fair value changes are recorded in other income (expense), net. We will continue to adjust the liabilities for changes in fair value until the earlier of the achievement or expiration of the success payment obligation. To determine the estimated fair value of the success payments, we use a Monte Carlo simulation
84
Table of Contents
model, which models the value of the liability based on several key variables that require judgment, including the expected fair value and volatility of our common stock, estimated term and number of valuation measurement dates.
Stock-based Compensation
Stock-based compensation cost is recognized for restricted stock awards (RSAs), restricted stock units (RSUs), employee stock purchases related to the Employee Stock Purchase Plan and stock options. Stock-based compensation cost is measured at the grant date based on the fair value of the award. The fair value of stock-based awards is recognized as an expense on a straight-line basis over the requisite service period, with forfeitures recognized as they occur.
We use the Black-Scholes model to determine the fair value of our options. The Black-Scholes option pricing model requires the use of assumptions, including stock price volatility, the expected life of stock options, risk-free interest rate and the fair value of the underlying common stock on the date of grant. Our restricted stock awards and restricted stock units are valued based on the fair market value of the award on the grant date.
Valuation of Other Investments
We have non-marketable equity investments that are accounted for using the measurement alternative. Under the measurement alternative, the carrying value is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and obligations of the investments. Recording upward and downward adjustments to the carrying value of our equity investments as a result of observable price changes requires quantitative assessments of the fair value of our investments using various valuation methodologies and involves the use of estimates.
We determine 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, we evaluate whether we are 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 we are considered the primary beneficiary, the assets, liabilities and results of operations of the VIE would be included in our consolidated financial statements. As of December 31, 2023 and 2022, there were no VIEs for which we were the primary beneficiary.
Non-marketable equity investments are also subject to periodic impairment reviews. Our quarterly impairment analysis considers both qualitative and quantitative factors that may have a significant effect on the investment’s fair value. Qualitative factors considered include the companies’ financial and liquidity position, access to capital resources and the time since the last adjustment to fair value, among others. When indicators of impairment exist, we prepare quantitative assessments of the fair value of our equity investments using both the market and income approaches that require judgment and the use of estimates, including discount rates, investee revenues and costs, and comparable market data of private and public companies reasonably available, among others. When our assessment indicates that an impairment exists, we write down the investment to its fair value.
We perform quarterly qualitative assessments of potential indicators of impairment and determined that indicators existed for certain of our other investments during the years ended December 31, 2023, 2022 and 2021 . While there was no single event or factor in each instance, we considered the underlying companies’ operating cash flow requirements over the next year, liquid asset balances to fund those requirements and the uncertainty regarding the underlying companies’ ability to raise funds as indicators of impairment. Due to these indicators, we assessed the valuation of these investments and determined the fair values to be negligible and the impairments to be other-than-temporary in nature. As a result, we recorded impairment expense of $12.9 million for our PACT Series D convertible preferred stock and another investment for the year ended December 31, 2023 , $5.0 million for one investment for the year ended December 31, 2022 and $36.4 million for our PACT Series C-1 convertible preferred stock investment for the year ended December 31, 2021. The impairment expenses were recorded within impairment of other investments on the Consolidated Statements of Operations and Comprehensive Loss and as a reduction of the other investments on the Consolidated Balance Sheets.
Recently Adopted and Recent Accounting Pronouncements
See Note 2, Basis of Presentation and Significant Accounting Policies, in the accompanying notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption and our assessment, to the extent we have made one yet, of their potential impact on our financial condition or results of operations.
85
Table of Contents