IBRX US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with Item 6, “Selected Financial Data,” the description of the business appearing in Item 1, “Business,” of this report, and the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10‐K and the related notes included elsewhere in this report. This discussion contains forward-looking statements as a result of many factors, including those set forth under Item 1, “Business – Forward-Looking Statements” and Item 1A, "Risk Factors", and elsewhere in this Annual Report on Form 10‐K. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in Item 1A, “Risk Factors”.

Overview

We are a pioneering clinical-stage immunotherapy company focused on harnessing the power of the innate immune system by using our natural killer cells, or NK cells, to treat cancer and viral infectious diseases. NK cells are the body’s first line of defense due to their innate ability to rapidly seek and destroy abnormal cells, such as cancer or virally infected cells, without prior exposure or co-activation by other support molecules that are typically required to train and activate adaptive immune cells such as T‐cells.

A critical aspect of our strategy is to invest significantly in innovating new therapeutic candidates, based upon our proprietary activated NK, or aNK, cell platform, and conducting clinical testing and scale manufacturing of our most promising biologic product candidates. We believe our aNK cell is capable of being manufactured as a cell-based “off-the-shelf” therapy that can be molecularly engineered in a variety of ways to boost its killing capabilities against cancers and virally infected cells.

We retain worldwide commercial rights to clinical and research data, intellectual property and know-how developed with our aNK cells, as well as clinical grade master and working cell banks of aNK, haNK and t‐haNK cell lines.

Agreement and Plan of Merger with ImmunityBio, Inc.

On December 21, 2020, NantKwest and ImmunityBio, Inc. (ImmunityBio) entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which NantKwest and ImmunityBio agreed to combine their businesses. The Merger Agreement provides that a wholly owned subsidiary of NantKwest will merge with and into ImmunityBio (the Merger), with ImmunityBio continuing as the surviving company and being renamed NantCell, Inc., upon the terms and subject to the conditions therein. At the effective time of the Merger (the Effective Time), NantKwest’s name, as the parent of NantCell, Inc., will be changed to “ImmunityBio, Inc.”

At the Effective Time, each share of ImmunityBio common stock issued and outstanding immediately prior to the Effective Time, subject to certain exceptions as set forth in the Merger Agreement, will be converted automatically into a right to receive 0.8190 shares of NantKwest common stock. At the Effective Time, each share of NantKwest common stock issued and outstanding immediately prior to the Effective Time, will remain an issued and outstanding share of the combined company. At the Effective Time, each outstanding option, warrant or restricted stock unit to purchase ImmunityBio common stock will be converted (using the merger exchange ratio of 0.8190) into an option, warrant or restricted stock unit, respectively, on the same terms and conditions immediately prior to the Effective Time, to purchase shares of common stock of the combined company.

Upon consummation of the Merger, on a fully-diluted basis, ImmunityBio stockholders and NantKwest stockholders will own approximately 72% and 28%, respectively, of the outstanding shares of common stock of the combined company. It is estimated that, immediately following the closing date, Dr. Patrick Soon‐Shiong, our Executive Chairman and principal stockholder, and his affiliates will beneficially own, in the aggregate, approximately 82% of the common stock of the combined company.

Following consummation of the Merger, shares of common stock of the combined company are expected to be listed on the Nasdaq Global Select Market under the symbol “IBRX”.

Under the terms and subject to the conditions set forth in the Merger Agreement, the closing of the Merger depends on a number of conditions being satisfied, including approval of the Merger by holders of a majority of the outstanding shares of NantKwest common stock as of the NantKwest record date (excluding all shares of NantKwest common stock beneficially owned by Dr. Patrick Soon‐Shiong and his affiliates Cambridge Equities, LP and Chan Soon‐Shiong Family Foundation or any of their respective controlled affiliates or any of the directors or executive officers of NantKwest or ImmunityBio).

On February 1, 2021, our Registration Statement on Form S-4, which was filed with the Securities and Exchange Commission (SEC) in connection with the Merger, was declared effective by the SEC.

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A special meeting of the stockholders of NantKwest will be held on March 8, 2021 to consider and vote on a proposal to approve the issuance of shares of common stock of NantKwest to security holders of ImmunityBio, and to consider and vote on a proposal to approve the Merger. Only holders of record of NantKwest common stock at the close of January 29, 2021, will be entitled to notice of and to vote at the special meeting.

We expect the Merger to close in the first quarter of 2021, subject to receipt of the requisite stockholder approvals and satisfaction of other customary closing conditions.

The Merger is expected to be accounted for as a transaction between entities under common control as Dr. Patrick Soon‐Shiong is the controlling stockholder of each of NantKwest and ImmunityBio. Upon the closing of the Merger, the net assets of ImmunityBio will be combined with those of NantKwest at their historical carrying amounts and the companies will be presented on a combined basis for all historical periods presented.

For the year ended December 31, 2020, we incurred costs of $6.2 million in connection with our proposed merger with ImmunityBio, consisting of financial advisory, legal and other professional fees.

Our Off-the-Shelf Approach

Multiple Modes of aNK Directed Tumor Cell Killing. Our NK platform has demonstrated the ability to induce cell death in cancers and virally infected cells through a variety of concurrent mechanisms including:

All three modes of killing; Innate Killing, Antibody-Mediated Killing, and CAR-Directed Killing, are employed by our proprietary t‐haNK platform, which combines all the enhanced NK killing functions of aNK, haNK and taNK into a single product platform.

Our primary target therapeutic area is cancer, with a heavy emphasis on solid tumors. According to the National Cancer Institute, almost 1.9 million new cancer cases are expected to be diagnosed in the U.S. during 2021, adding to the 16.9 million already living with cancer. In addition, we plan to advance therapies for hematologic malignancies and virally induced infectious diseases.

Innate Killing—the aNK Platform. We have developed a unique NK cell platform, which we believe is capable of being manufactured as a cell-based “off-the-shelf” therapy that can be molecularly engineered in a variety of ways to boost its killing capabilities against cancers and virally infected cells. Unlike normal natural killer cells, our NK cells do not express the key inhibitory receptors that diseased cells often exploit to turn off the killing function of natural killer cells and escape elimination. We have developed a unique aNK cell, which omits key inhibitory receptors, while preserving critical activation receptors that enable selective innate targeting and killing of distressed and diseased cells. They do so through the recognition and binding of stress-proteins that are overexpressed on the surfaces of

Our aNK cells are also designed to deliver a more lethal blow to their target by delivering a larger payload of lytic enzymes and cytokines responsible for both direct and indirect killing when compared to other natural killer cells isolated from healthy donors. This is due to the higher density of lytic granules and larger cell volume possessed by aNK cells when compared to that of donor-derived natural killer cells. We believe that our aNK cells can be produced at commercial scale as a ‘living drug’ using our proprietary manufacturing and distribution processes to adequately address select global cancer markets.

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Several phase I safety studies with unmodified aNK cells have been conducted in a variety of bulky hematological cancers and solid tumors, enrolling 46 patients in a range of dose levels and schedules with encouraging evidence of single-agent activity and a durable remission, including some complete responses in liquid tumors. Based on these earlier clinical trials, we have further modified our aNK platform through virus-free molecular engineering designed to leverage additional modes of killing available to aNKs, including antibody-mediated killing, the haNK platform, and both antibody-mediated and CAR-directed antigen targeted killing, the t‐haNK platform.

Antibody-Mediated Killing—the haNK Platform. We have genetically engineered our aNK cell platform using a virus-free method to overexpress high-affinity CD16 receptors, which bind to antibodies. These antibody-targeted haNK cells are designed to directly bind to IgG1-type antibodies, such as avelumab, trastuzumab, cetuximab and rituximab with the intention of enhancing the cancer-killing efficacy of these antibodies by boosting the population of competent natural killer cells that can kill cancer cells through ADCC. Antibody products are abundantly utilized to treat cancer and it is estimated that they generate over $100 billion in reported annual sales. A growing number of studies suggest that clinically meaningful responses to these antibody therapies correlate directly with the overall health of a patient’s natural killer cell population and whether they express the high-affinity variant of the CD16 receptor. Currently available literature estimates that only approximately 10% to 15% of the addressable patient population eligible for antibody therapies carry high-affinity CD16 receptors. This implies that our haNK product candidate may have significant market potential as a combination therapy to potentially address a large number of patients who do not carry high-affinity CD16 receptors and, as a result, exhibit a poorer response to antibody therapies. We therefore intend to develop our haNK product candidate as a combination therapy with widely-used U.S. Food and Drug Administration, or FDA, approved antibody products such as avelumab, trastuzumab, cetuximab and rituximab. Current Good Manufacturing Practice, or cGMP, master and working cell banks of our haNK product candidate have been successfully established and will serve as our source for product for our clinical trials and, if approved, commercialization going forward. We have optimized our manufacturing process partly by designing our haNK product candidate to not require IL‐2 cytokine supplementation to the growth media every few days, thereby enabling us to overcome a technically challenging and costly limitation that many other natural killer cell-based therapies face. We have also successfully established processes for large-scale production, cryopreservation and long-term storage of final dose forms, thereby optimizing production efficiencies and allowing for on-demand availability with minimal handling at the infusion sites. Our cryopreserved haNK product candidate has been cleared for clinical testing in several phase Ib/II clinical trials, including our phase II Merkel cell cancer study.

CAR-Directed Killing—the taNK Platform. We have genetically engineered our aNK platform to express CARs that target tumor-specific antigens found on the surfaces of cancers and virally infected cells. Our taNK cells are designed to bind directly to these surface antigens and induce cell death through the release of toxic granules directly into the tumor cells and release of cytokines and chemokines to recruit additional innate and adaptive immune responses, including the recruitment of cytotoxic T‐cells. These tumor antigens include checkpoint ligands, such as PD‐L1 and B7‐H4 as well as well-established tumor proteins such as CD19, HER2 and EGFR, all of which can be targeted individually by our engineered taNK products.

Preclinical evidence has been mounting which indicates that taNK cell activation through the binding of its CAR receptors to these cancer specific proteins may be potent enough to override many of the pre-existing inhibitory signals and immunosuppressive factors present in the tumor microenvironment that may be responsible for tumor resistance.

CAR-Directed and Antibody-Mediated Killing—the t‐haNK Platform. Our newest and most promising platform for the development of therapeutic product candidates is an innovative, bioengineered combination of our haNK and taNK platforms that incorporates all the features of our haNK platform together with a CAR. The resulting line of product candidates under this platform avails itself to all three modes of killing: innate, antibody-mediated and CAR-directed killing. These product candidates also include one or more additional expression elements such as functional cytokines, chemokines and trafficking factors, making them amongst the most versatile in our portfolio. These product candidates are intended to be combined with commercially available therapeutic antibodies to effectively target either two different epitopes of the same cancer specific protein or two entirely different cancer specific proteins. In addition to our two t‐haNK product candidates, PD‐L1.t‐haNK, currently in phase II testing, and CD19.t‐haNK, cleared to commence phase I testing, we believe a pipeline of prominent CARs for t‐haNK, including HER2 and EGFR, which are nearing IND submission, and others that are advancing through clinical enabling studies, will enable us to potentially address an even broader range of cancers as part of a chemotherapy-free combination regimen.

The Nant Cancer Vaccine. The Nant Cancer Vaccine, or NCV, program is a personalized therapy regimen, which utilizes our “off-the-shelf” NK cell platform as the backbone of the regimen. NCV consists of an initial tumor-conditioning regimen followed by a molecularly-informed immunologic conditioning therapy. More specifically, NCV combines the novel delivery of metronomic, albumin-linked low-dose chemotherapy in conjunction with certain other agents, followed by a sequenced administration of tumor-associated antigen vaccines and an IL‐15 superagonist fusion protein, all of which potentiate our NK cell therapy to potentially drive immunogenic cell death while avoiding the ravages of toxic high-dose chemotherapy. By inducing immunogenic cell death and enhancing a patient’s innate and adaptive immune system, NCV is designed to attain a long-term, durable response in multiple cancer types with a potential for lower toxicity and improved efficacy and quality of life in comparison with current standards of care. We believe ultimately that employing our NK cell therapy in the context of NCV will be a highly effective combination for long term clinical success over available standards of care that employ maximum tolerated dose, tolerogenic cell death and immune system compromise.

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Coronavirus Pandemic

In March 2020, the World Health Organization declared the novel strain of coronavirus disease (SARS‐CoV‐2) a pandemic. In the same month, the President of the United States declared a State of National Emergency due to the pandemic. Many jurisdictions, particularly in North America, Europe and Asia, as well as U.S. states in which we operate, including California, have adopted or continue to consider laws, rules, regulations or decrees intended to address the pandemic, including travel restrictions, closing or re-opening of non-essential businesses or restricting daily activities. However, due to the pandemic new restrictions might be imposed by various governmental authorities. For example, many communities have limited, and may continue to limit, social mobility and gatherings in response to the continued rise in coronavirus cases and fatalities in the U.S. Such restrictions and other impacts from the pandemic may have an impact on our business.

Given the unprecedented and continuously evolving nature of the pandemic, the future impact of these changes and potential changes on our company are unknown at this time. To date, we have seen no material adverse impact to our business from the pandemic. We anticipate, however, that enrollment of patients in certain studies will likely take longer than forecasted in prior SEC filings and that our clinical trials may require additional time to complete which would in turn impact the timeline in which we were previously forecasting BLA submissions of our product candidates and subsequent revenue generation. These factors have been accounted for in the company’s anticipated upcoming milestones. During any such delays in our clinical trials, we will continue to incur fixed costs such as selling, general and administrative expenses and operating expenses related to our laboratory, GMP manufacturing, and office facilities.

Our office-based employees have been working from home since mid-March 2020, while ensuring essential staffing levels for our research and development operations remain in place, including maintaining key personnel in our laboratory and GMP manufacturing facilities. While we have not previously experienced or been notified of any anticipated impact amongst our third party vendors, it is likely that the pandemic and resulting mitigation efforts could have an impact in the future on our third-party suppliers who manufacture laboratory supplies required for our in-house manufacturing process, which in turn could have an impact on having sufficient clinical product supply available for our clinical trials. We have addressed this in part by ensuring that we have sufficient supplies on hand to weather interruptions in our supply chain.

There is significant uncertainty about the progression and ultimate impact of the pandemic on our business and operations. While the pandemic did not materially impact our results during the year ended December 31, 2020 outside of the Joint COVID-19 Collaboration Agreement as described above, we anticipate that it could impact our business in the short-term due to factors such as fewer patients accessing treatment for cancer.

Operating Results

To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property. We have not generated any revenue from product sales. We have incurred net losses in each year since our inception and, as of December 31, 2020, we had an accumulated deficit of $754.6 million. Our net losses were $92.4 million, $65.8 million and $96.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Substantially all of our net losses resulted principally from costs incurred in connection with our ongoing clinical trials and operations, our research and development programs, and from selling, general and administrative costs associated with our operations including stock-based compensation expense.

As of December 31, 2020, we had 171 employees. Personnel of related companies who provide corporate, general and administrative, manufacturing strategy, research and development, regulatory and clinical trial strategy and other support services under our shared services agreement with NantWorks are not included in this number. For additional information, see Note 10, Related Party Agreements, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, which may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our expenses will increase substantially as we:

• potentially seek regulatory approval for our product candidates;

• seek to discover and develop additional product candidates;

• seek to comply with regulatory standards and laws;

• maintain, leverage and expand our intellectual property portfolio;

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• add operational, financial and management information systems and personnel;

We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we do not expect to happen for at least the next several years, if ever. Until such time that we can generate substantial revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our research and development programs or commercialization efforts. Failure to receive additional funding could cause us to cease operations, in part or in full.

Viracta Investment

In March 2017, we participated in a Series B convertible preferred stock financing and invested $8.5 million in Viracta Therapeutics, Inc., or Viracta, a clinical stage drug development company, which was initially recorded at cost. In May 2017, we executed an exclusive worldwide license with Viracta to develop and commercialize Viracta’s proprietary histone deacetylase inhibitor drug candidate for use in combination with NK cell therapy and possibly additional therapies.

We measure our equity securities without readily determinable fair values at cost, less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with such changes recognized in the consolidated statements of operations. Some factors we may consider in the impairment analysis include the extent to which the security has been in an unrealized loss position, the change in the financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions. At December 31, 2020, our fair value assessment indicated that the recent offering of Viracta’s Series E preferred shares, at a lower offering price per share than the per share carrying amount of our investment in Viracta, is a directional indicator representing an observable price change in an orderly transaction for a similar investment. On December 31, 2020, we reduced the carrying value by $1.4 million due to the observable price change, which has been included in other income and expense, net, on the consolidated statements of operations. On a cumulative basis, we have recognized a reduction in carrying value of $1.4 million. As of December 31, 2020, the carrying value of our investment in Viracta totaled $7.8 million.

For additional information, see Note 5, Viracta Investment, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Collaboration Agreements

We anticipate that strategic collaborations will become an integral part of our operations, providing opportunities to leverage our partners’ expertise and capabilities to further expand the potential of our technologies and product candidates. We believe we are well positioned to become a leader in cell-based immunotherapy due to our broad and vertically integrated platform and through complementary strategic partnerships.

In addition to the collaboration and license agreements discussed below, we may enter into a commercial agreement relating to an IL‐15 superagonist product developed by an affiliate, and we are also pursuing supply arrangements for various investigational agents controlled by affiliates and third parties to be used in our clinical trials. These collaboration and supply agreements do not typically specify how sales will be apportioned between the parties upon successful commercialization of the product. As a result, we cannot guarantee that we will receive a percentage of the revenue that is at least proportional to the costs that we will incur in commercializing the product candidate. Furthermore, if Dr. Soon-Shiong was to cease his affiliation with us, ImmunityBio, or with NantWorks, these entities may be unwilling to continue these relationships with us on commercially reasonable terms, or at all, and as a result may impede our ability to control the supply chain for our combination therapies.

See Note 8, Collaboration and License Agreements, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report for a more detailed discussion regarding our collaboration and license agreements.

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Agreements with Related Parties

Our Executive Chairman, and principal stockholder, founded and has a controlling interest in NantWorks, which is a collection of multiple companies in the healthcare and technology space. As described below, we have entered into arrangements with NantWorks, and certain affiliates of NantWorks, to facilitate the development of new genetically modified NK cells for our product pipeline. Affiliates of NantWorks are also affiliates of the company due to the common control by and/or common ownership interest of our Executive Chairman.

NantWorks

Under the NantWorks shared services agreement executed in November 2015, but effective August 2015, NantWorks provides corporate, general and administrative, manufacturing strategy, research and development, regulatory and clinical trial strategy, and other support services. We are charged for the services at cost plus reasonable allocations for indirect costs that relate to the employees providing the services. For the years ended December 31, 2020, 2019 and 2018, we recorded $2.5 million, $2.1 million and $2.8 million, respectively, in selling, general and administrative expense, and $1.5 million, $1.5 million and $3.3 million, respectively, in research and development expense under this arrangement on the consolidated statements of operations. These amounts exclude certain general and administrative expenses provided by third party vendors directly for our benefit, which have been reimbursed to NantWorks based on those vendors’ invoiced amounts without markup by NantWorks.

In June 2016, we amended the existing shared services agreement with NantWorks whereby we can provide support services to NantWorks and/or any of its affiliates. For the years ended December 31, 2020, 2019 and 2018, we recorded expense reimbursements of $1.4 million, $1.2 million and $0.6 million, respectively, in selling, general and administrative expense and $1.6 million, $2.3 million and $2.6 million, respectively, in research and development expense.

In November 2015, we entered into a facility license agreement with NantWorks, which became effective in May 2015, for approximately 9,500 square feet in Culver City, California, which has been converted to a research and development laboratory and a cGMP manufacturing facility. In September 2020, we amended this agreement to extend the term of this lease through December 31, 2021, as further described in Note 9, Commitments and Contingencies, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report. Lease expense for this facility for the years ended December 31, 2020, 2019 and 2018, is recorded in research and development expense on the consolidated statements of operations and was $0.6 million, $0.6 million, and $0.2 million, respectively.

Immuno-Oncology Clinic, Inc.

Beginning in 2017, we entered into multiple agreements with Immuno-Oncology Clinic, Inc., or the Clinic (dba Chan Soon-Shiong Institutes for Medicine, in El Segundo, California), to conduct clinical trials related to certain of our product candidates. The Clinic is a related party as it is owned by one officer of NantKwest and NantWorks manages the administrative operations of the Clinic. Prior to June 30, 2019, one of the company’s officers was an investigator or sub-investigator for all of the company’s trials conducted at the Clinic.

In July 2019, we entered into a new agreement with the Clinic (the Clinic Agreement), which became effective on July 1, 2019. The Clinic Agreement, as amended on March 31, 2020, covers clinical trial and research related activities on a non-exclusive basis relating to our existing clinical trials, commenced prior to July 1, 2019, and prospective clinical trials and research projects. The Clinic Agreement also specifies certain services and related costs that are excluded from the Clinic Agreement. Prior to commencing any work under the Clinic Agreement, the parties have agreed to execute written work orders setting forth the terms and conditions related to specific services to be performed, including financial terms. For clinical trials that commenced prior to July 1, 2019, fees incurred for services performed after July 1, 2019 are covered under the Clinic Agreement and applied towards the below-mentioned prepayments. The Clinic Agreement allows for an automatic renewal and additional extensions beyond the initial one year term.

In consideration of the services to be performed under the Clinic Agreement, as amended on March 31, 2020, we agreed to make payments of up to $7.5 million to the Clinic, of which $3.75 million and $1.875 million were paid in July 2019 and October 2019, respectively. As amended, a conditional payment of $1.875 million shall be due and payable at such time, if any, that the payments made in July 2019 and October 2019 have been earned by the Clinic through performance of services. On a quarterly basis, our prepayment is increased by an interest credit computed in accordance with terms specified in the Clinic Agreement.

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To the extent any portion of the prepayments remain unearned by the Clinic on the third anniversary of the Clinic Agreement, we may elect at our sole discretion either to(i)not extend the term of the Clinic Agreement and have the Clinic reimburse us for the total amount of any remaining unused portion of the prepayments, or (ii)extend the term of the Clinic Agreement for up to three additional oneyear periods, at which time the Clinic will reimburse us for the total amount of any remaining unused portion of the prepayments plus interest if reimbursement is not made within 60 days of expiration. The Clinic may terminate this agreement upon each anniversary date upon sixty (60) days prior written notice and reimbursement in full to us of any outstanding unearned balance of the prepayments, provided that any such termination by the Clinic will not apply with respect to any work orders still in effect at the time of such termination.

In July 2019, we executed a clinical trial work order under the Clinic Agreement for an open-label, phase I study of PD‐L1.t‐haNK for infusion in subjects with locally advanced or metastatic solid cancers. In July 2020, but effective on June 22, 2020, we and ImmunityBio executed a clinical trial work order under our existing master agreement with the Clinic for an open-label, randomized, comparative phase II study of ImmunityBio’s proprietary IL‐15 superagonist (N‐803) and Aldoxorubicin Hydrochloride (Aldoxorubicin) and our PD‐L1.t‐haNK with standard-of-care chemotherapy versus standard-of-care chemotherapy for first and second line treatment of locally or advanced metastatic pancreatic cancer.

During the years ended December 31, 2020, 2019 and 2018, $0.6 million, $1.1 million, and $2.7 million, respectively, was recognized in research and development expense on the consolidated statements of operations related to clinical trial and research related activities conducted for us by the Clinic.

ImmunityBio

ImmunityBio, Inc., or ImmunityBio, is a related party, as it is controlled by our Executive Chairman and principal stockholder, Dr. Patrick Soon-Shiong.

On December 21, 2020, we entered into a merger agreement with ImmunityBio pursuant to which NantKwest and ImmunityBio agreed to combine their businesses. The proposed merger is discussed in additional detail above under Agreement and Plan of Merger with ImmunityBio, Inc.

In September 2020, we entered into a sublease agreement with Altor Bioscience Manufacturing Company, LLC, a subsidiary of ImmunityBio, whereby we leased approximately 6,901 square feet in El Segundo, California, including laboratory space and related furniture, fixtures and equipment. The agreement also includes certain non-lease components related primarily to the right to use certain common areas within the building and the related furniture and fixtures. This facility will be used to manufacture and produce clinical products for our oncology product candidate trials. The lease runs from August 2020 through July 2022, and includes an option to extend the lease for an additional one-year term through July 2023. The monthly fixed charge related to the agreement is $0.2 million, a portion of which is subject to annual increases of 3% which began in November 2020. In addition, under the agreement, we are required to pay our share of estimated property taxes and operating expenses, both of which are variable lease expenses. Lease expense for this facility is recorded in research and development expense on the consolidated statements of operations and was $0.9 million during the year ended December 31, 2020.

On August 21, 2020, we entered into a Collaboration Agreement with ImmunityBio as further described in Note 8, Collaboration and License Agreements, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report. As of December 31, 2020, the joint research activity under the Collaboration Agreement totaled $8.4 million, which has been included in research and development expense on the consolidated statements of operations. Expenses incurred during the year ended December 31, 2020 were primarily related to purchases of equipment of $5.0 million, to be utilized in the manufacture of the hAd5 COVID‐19 vaccine candidate, and net program related costs of $3.4 million, after applying the eligible cost sharing under the Collaboration Agreement. Certain equipment purchases made by us during the year ended December 31, 2020, which are necessary for us to fulfil our manufacturing obligations related to the COVID‐19 program, were borne solely by us. The equipment purchases do not have an alternative use and were therefore expensed as incurred within research and development expenses. Prior to the effective date of the Collaboration Agreement, COVID‐19 related program costs incurred by us and ImmunityBio, including expenditures related to property, plant and equipment, were the responsibility of each party and not subject to the equal cost sharing.

In January 2020, but effective on October 1, 2019, we entered into a Cost Allocation Agreement with ImmunityBio, which (together with related work orders) is described further in Note 8, Collaboration and License Agreements, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report. During the years ended December 31, 2020 and 2019, we incurred net costs of $1.1 million and $35,700, respectively, after applying the eligible costs sharing under the Cost Allocation Agreement, which have been recognized in research and development expense on the consolidated statements of operations.

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In November 2018, we entered into an agreement with Etubics Corporation, or Etubics, a subsidiary of ImmunityBio. Pursuant to this agreement we sold used laboratory equipment to Etubics for $0.3 million. In conjunction with this sale, we recognized a loss on disposal of related laboratory equipment of $0.1 million, which was included in other income, net on the consolidated statements of operations.

In June 2015, we entered into a supply agreement with ImmunityBio pursuant to which we have the right to purchase ImmunityBio’s proprietary bioreactors, made according to specifications mutually agreed to with ImmunityBio. We also have the right to purchase reagents and consumables associated with such equipment from ImmunityBio. When an upfront payment is made, it is included in prepaid expenses on the consolidated balance sheets until the product is received. The agreement had an initial term of five years and renews automatically for successive one-year periods unless terminated earlier.

At December 31, 2020 and 2019, we had $3.2 million and $1.8 million, respectively, in equipment purchased from ImmunityBio pursuant to our supply agreement, which has been included in property, plant and equipment, net, on the consolidated balance sheets. During the years ended December 31, 2020, 2019 and 2018, we recorded research and development expense associated with reagents and consumables purchased from ImmunityBio pursuant to our supply agreement of $0.3 million, $0.1 million and $0.1 million, respectively, on the consolidated statements of operations.

605 Doug St, LLC

In September 2016, we entered into a lease agreement with 605 Doug St, LLC, an entity owned by our Executive Chairman and principal stockholder, for approximately 24,250 square feet in El Segundo, California, which has been converted to a research and development laboratory and a cGMP laboratory manufacturing facility. The lease runs from July 2016 through July 2023. We have the option to extend the lease for an additional three-year term through July 2026. The monthly rent is $0.1 million with annual increases of 3% beginning in July 2017. Lease expense for this facility for the years ended December 31, 2020, 2019 and 2018, is recorded in research and development expense on the consolidated statements of operations and was $0.9 million, $0.9 million and $0.2 million, respectively.

NantBio, Inc.

In August 2018, NantBio, Inc., or NantBio, assigned an agreement to us for the use of a third-party research facility, which provides us with the exclusive right to use and access to a portion of the third party’s laboratory and vivarium premises. NantBio is a related party as it is an affiliate of NantWorks. In conjunction with the assignment, we reimbursed NantBio for upfront payments which it had made to the third party of $0.9 million, and paid $0.5 million directly to the third party for an aggregate value of $1.4 million. The assigned agreement is for a term of ten years and expires in June 2027. The agreement may be terminated by us at any time, with or without cause. In case of termination of the agreement, the third party will reimburse us for a pro-rata amount based upon the passage of time.

In March 2016, NantBio and the National Cancer Institute entered into a cooperative research and development agreement. The initial five-year agreement covers NantBio and its affiliates, including us. Under the agreement, the parties are collaborating on the preclinical and clinical development of proprietary recombinant natural killer cells and monoclonal antibodies in monotherapy and in combination immunotherapies. We benefited from the preclinical and clinical research conducted during the first four years under this agreement. In each of the contractual years under the agreement we paid $0.6 million to the National Cancer Institute as a prepayment for services under the agreement. We recognize research and development expense related to this agreement ratably over a 12-month period for each funding year and recorded $0.6 million of expense related to this agreement in each of the years ended December 31, 2020, 2019 and 2018.

NantHealth Labs, Inc.

In March 2018, we entered into an agreement with NantHealth Labs, Inc., or NantHealth Labs, to obtain blood-based tumor profiling services. NantHealth Labs is a related party, as it is a wholly owned subsidiary of NantHealth, Inc., a majority owned subsidiary of NantWorks. We are obligated to pay NantHealth Labs fixed, per-patient fees. The agreement has an initial term of five years and renews automatically for successive one-year periods, unless terminated earlier. During the years ended December 31, 2019 and 2018, $10,000 and $0.3 million, respectively, has been recognized in research and development expense on the consolidated statements of operations. There were no expenses associated with this agreement during the year ended December 31, 2020.

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Components of our Results of Operations

Revenue

To date, we have derived substantially all of our revenue from non-exclusive license agreements with several pharmaceutical and biotechnology companies granting them the right to use our cell lines and intellectual property for non-clinical use. These agreements generally include upfront fees and annual research license fees for such use, as well as commercial license fees for sales of our licensee’s products developed or manufactured using our intellectual property and cell lines. Our license agreements may also include milestone payments, although to date, we have not generated any revenue from milestone payments. To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property. We have no products approved for commercial sale and have not generated any revenue from product sales. If we fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval for them, we may never be able to generate substantial future revenue.

Operating Expenses

We classify our operating expenses into research and development and selling, general and administrative expenses. Personnel costs, including salaries, benefits, bonuses, and stock-based compensation expense comprise a significant component of our research and development and selling, general and administrative expense categories. We allocate expenses associated with our facilities and information technology costs between these two categories based on the nature of each cost.

Research and Development

Research and development expense consists of expenses incurred while performing research and development activities to discover and develop our product candidates, including collaborative arrangements. This includes conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expense primarily consists of:

• clinical trial and regulatory-related costs;

• expenses incurred under collaborative agreements;

• manufacturing and testing costs and related supplies and materials;

• facility expenses dedicated to research and development.

We typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or external consultant costs to specific product candidates or development programs.

Substantially all of our research and development expenses to date have been incurred in connection with our product candidates. We expect our research and development expenses to continue to increase significantly for the foreseeable future as we advance our product candidates through clinical development, including the conduct of our ongoing and any future clinical trials as well as product candidates pursued as part of our collaboration efforts. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of any product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates as discussed in greater detail in Part I, Item 1A, “Risk Factors” of this Annual Report.

The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following:

• per patient trial costs;

• the number of sites included in the clinical trials;

• the countries in which the clinical trials are conducted;

• the length of time required to enroll eligible patients;

• the number of patients that participate in the clinical trials;

• the number of doses that patients receive;

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• the cost of comparative agents used in clinical trials;

• the drop-out or discontinuation rates of patients;

• the duration of patient follow-up; and

• the efficacy and safety profile of the product candidate.

We do not expect any of our product candidates to be commercially available for at least the next several years, if ever.

In addition, we expect our research and development expenses to continue to increase significantly for the foreseeable future as we advance our product candidates through clinical development and conduct our ongoing and planned clinical trials.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of salaries and personnel-related costs, including employee benefits and any stock-based compensation, for employees performing functions other than research and development. This includes personnel in executive, finance, human resources, information technology, legal, and administrative support functions. Other selling, general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, professional fees for auditing, tax and legal services, advertising costs, expenses associated with strategic business transactions and business development efforts, obtaining and maintaining patents, consulting costs, royalties and licensing costs, and costs of our information systems.

We expect that our selling, general and administrative expenses for the year ended December 31, 2021 will increase as compared to the year ended December 31, 2020. We have incurred and expect that we will continue to incur in the future, additional costs associated with operating as a public company, including costs to comply with stock exchange listing and SEC requirements, future funding efforts, corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public companies. Additionally, if and when we believe that a regulatory approval of a product candidate appears likely, we expect to incur significant increases in our selling, general and administrative expenses relating to the sales and marketing of the approved product candidate. Furthermore, we expect to continue to incur additional costs associated with our proposed merger with ImmunityBio and the operations of the combined company after closing.

Other Income and Expense

Other income and expense consists primarily of income from our investments in marketable debt securities, sublease rental income, unrealized losses related to observable price changes associated with our equity investment in Viracta, and foreign currency gains and losses.

Income Taxes

Income taxes consists of U.S. federal and state income taxes and foreign income taxes associated with our Korean subsidiary. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. Our income tax expense to date primarily relates to minimum income taxes in the State of California. Our income tax benefit to date relates primarily to the amortization of deferred tax liabilities at our Korean subsidiary.

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Results of Operations

Comparison of the years ended December 31, 2020, 2019 and 2018 (in thousands):

For the Year Ended December 31, Change

Operating expenses:

Other income (expense):

Revenue

The change in revenue was minimal during the comparative periods and consisted of license fees and royalties.

Research and Development

Research and development expense increased $14.7 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase in research and development expense was primarily attributable to $8.4 million of expenses related to our Joint COVID‐19 Collaboration Agreement with ImmunityBio, including the acquisition of $5.0 million of equipment to be utilized in the manufacture of the hAd5 COVID‐19 vaccine candidate, and net program related costs of $3.4 million, after applying the eligible cost sharing under the Collaboration Agreement. The equipment purchases do not have an alternative use and were therefore expensed as incurred within research and development expenses. In addition, research and development expenses increased by $4.0 million due to higher laboratory and supplies expense mainly driven by our COVID‐19 programs, including additional expenses related to readying our new El Segundo manufacturing facility leased during the third quarter of 2020. We also experienced a $3.2 million increase related to higher lease and facility operating costs, including an increase of $1.6 million related to our new El Segundo facility, and an increase of $1.6 million for other manufacturing and facility related expenses including higher depreciation expense and higher facilities and equipment maintenance costs. Our new El Segundo facility is used to manufacture and produce clinical products for our oncology product candidate trials. In addition, we incurred higher shared services costs of $0.6 million driven mainly by manufacturing services, and higher third party research agreement costs of $0.5 million. These increases in research and development expenses were partially offset by a decrease of $0.9 million related to impairment of laboratory equipment during the year ended December 31, 2019, a decrease of $0.6 million in amortization expense due to the underlying asset being fully amortized as of March 2019, and a decrease of $0.5 million in clinical trial costs mainly driven by decreased activity.

We expect our research and development expense to increase significantly for the foreseeable future as we advance our product candidates, including collaboration product candidates, through clinical development and conduct our ongoing and planned clinical trials and those of ImmunityBio if the proposed merger closes.

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Research and development expense decreased $5.9 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The decrease in research and development expense was primarily attributable to decreases of $4.7 million in compensation and related expenses due to decreased staff and to fees for shared services rendered under our shared services agreement with NantWorks as a result of less clinical trial support activities, $2.0 million for pre-clinical and clinical trial costs mainly driven by decreased activity related to investigator sponsored trials and research agreements, and $1.7 million of intangible asset amortization expense due to the underlying asset being fully amortized as of March 2019. These decreases were partially offset by a net increase of $1.6 million for laboratory and manufacturing facility related expenses, including increases related to third-party facility and manufacturing process validation and qualification costs, depreciation expense, and lease expense, mainly driven and associated with our El Segundo cGMP facility, and decreases related to third party testing services and laboratory supplies. In addition, we recorded $0.9 million of expense related to impairment of laboratory equipment.

Selling, General and Administrative

Selling, general and administrative expense increased $9.2 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase in selling, general and administrative expense was primarily attributable to higher financial advisory, legal and other professional fees of $7.1 million driven primarily by strategic initiatives, including our proposed merger with ImmunityBio, as well as by higher costs associated with contracting, trademark, and patent related legal fees and other matters. Selling, general and administrative expense also increased by $1.0 million due to higher compensation and related expenses, and higher insurance expense of $1.0 million which was driven by increases in directors’ and officers’ insurance rates. In addition, we incurred higher shared services costs of $0.5 million driven mainly by legal and information technology related activities, an increase of $0.4 million due to higher software license fees, and higher corporate relations costs of $0.2 million driven by an increase in corporate communications, including press releases. These increases in selling, general and administrative expense were offset in part by decreases in travel and tradeshow related expenses of $0.6 million and $0.4 million, respectively, due mainly to a decline in activity as a result of the ongoing COVID‐19 pandemic.

Selling, general and administrative expense decreased $24.7 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018. The decrease in selling, general and administrative expense was primarily attributable to a decrease of $20.8 million in stock-based compensation expense, which was primarily driven by a decrease due to vesting completed in July 2018 and March 2019 related to service-based equity awards issued to our Executive Chairman in 2015. In addition, selling, general and administrative expense decreased by $2.3 million due to lower costs associated with litigation, $1.1 million due to decreased activity in shared services provided by NantWorks, and $0.6 million due to lower headcount related expenses. These decreases in selling, general and administrative expense were partially offset by a $0.2 million increase in other administrative costs.

Other Income and Expense

Other income decreased by $2.7 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019. The decrease in other income resulted primarily from a $1.4 million unrealized loss attributable to an observable price change associated with our equity investment in Viracta, and a decrease of $1.3 million in investment income associated with our investments in marketable debt securities. Investment income from our marketable debt securities decreased due primarily to a decline in the average yield on our marketable debt securities which was driven in part by shorter contractual securities lives and broader economic and market conditions.

Other income increased by $0.3 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018. The increase in other income resulted primarily from lower interest expense of $0.4 million, offset in part by a decrease in investment income related to use of our investments for operations of $0.2 million.

Income Taxes

The change in income taxes was immaterial during the year ended December 31, 2020, as compared to the year ended December 31, 2019.

Income tax benefit decreased by $0.4 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The decrease was due primarily to lower income tax benefits related to losses at our Korean subsidiary.

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Liquidity and Capital Resources

Sources of Liquidity

Our principal sources of liquidity are our existing cash, cash equivalents, and marketable debt securities. We have historically invested our cash primarily in investment grade short- to intermediate-term corporate debt securities, commercial paper, government sponsored securities, U.S. treasury securities, and foreign government bonds and classify these investments as available-for-sale. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets.

On June 29, 2020, the company closed an underwritten public offering of an aggregate of 8,521,500 shares of common stock, which included 4,811,500 shares issued to the public at a price of $9.50 per share (which included 1,111,500 shares sold to the public upon full exercise of the underwriters’ option to purchase additional shares at a public offering price of $9.50 per share), less underwriting discounts and commissions, and 3,710,000 shares issued to our Executive Chairman and principal stockholder, Dr. Patrick Soon-Shiong, at a price of $12.12 per share, less underwriting discounts and commissions. All of the shares were offered by the company. Including the underwriters’ option exercise, the aggregate gross proceeds from the offering were $90.7 million, before deducting underwriting discounts, commissions and other offering expenses of $4.4 million.

As of December 31, 2020, we had cash and cash equivalents, and restricted cash of $11.6 million compared to $15.7 million as of December 31, 2019. The decrease was attributable to cash used in operating and investing activities of $70.5 million and $20.6 million, respectively, partially offset cash flows provided by financing activities of $87.0 million.

Investments in marketable debt securities were $54.8 million as of December 31, 2020, all of which were short-term investments, as compared to $37.6 million as of December 31, 2019, of which $36.1 million were short-term investments.

Cash Flows

The following table sets forth our primary sources and uses of cash for the years ended December 31, 2020, 2019 and 2018 (in thousands):

For the Year Ended December 31,

Cash provided by (used in):

Operating Activities

For the year ended December 31, 2020, our net cash used in operating activities of $70.5 million consisted of a net loss of $92.4 million, partially offset by $16.7 million in adjustments for non-cash items, and $5.3 million of cash provided by net working capital changes. Adjustments for non-cash items primarily consisted of $9.1 million in depreciation and amortization, $3.4 million of non-cash lease expense related to operating lease right-of-use assets, $2.1 million in stock compensation expense, $1.4 million of unrealized losses attributable to an observable price change associated with our equity investment in Viracta, and $0.8 million in amortization of premiums on marketable debt securities, reduced by $0.3 million in non-cash interest. The change in net working capital consisted primarily of increases in amounts due to related parties of $5.0 million, accrued expenses of $3.7 million, and accounts payable of $2.1 million, partially offset by decreases related to operating lease liabilities of $3.9 million, other current assets of $1.3 million, and other long-term assets of $0.3 million. The $9.1 million increase in cash used in operating activities, as compared to the year ended December 31, 2019, was primarily due to costs incurred in ongoing clinical trials, ramp-up of manufacturing, and Joint COVID‐19 Collaboration Agreement related activities as well as costs associated with our proposed merger with ImmunityBio.

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For the year ended December 31, 2019, our net cash used in operating activities of $61.4 million consisted of a net loss of $65.8 million, and $10.9 million of cash used by net working capital changes, partially offset by $15.4 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of $9.0 million in depreciation and amortization, $2.6 million in stock compensation expense, $2.6 million of non-cash lease expense related to operating lease right-of-use assets, $0.9 million of impairment related to laboratory equipment, and $0.2 million in non-cash interest. The decrease in net working capital consisted primarily of decreases related to accrued expenses of $12.0 million, other long-term assets of $4.0 million, operating lease liabilities of $3.1 million, and due to related parties of $1.1 million, partially offset by an increase related to prepaid expenses and other current assets of $9.3 million. The $2.0 million decrease in cash used in operating activities, as compared to the year ended December 31, 2018, was primarily due to lower laboratory and manufacturing related costs and lower headcount and compensation costs including shared services, partially offset by higher clinical trial and related operational costs.

For the year ended December 31, 2018, our net cash used in operating activities of $63.4 million consisted of a net loss of $96.2 million, offset by $33.4 million in adjustments for non-cash items, primarily attributable to $23.4 million in stock-based compensation expense, as well as research and development and selling, general and administrative expenses, and a $0.6 million decrease of cash related to changes in working capital. Adjustments for non-cash items primarily consisted of the $23.4 million in stock-based compensation expense, $9.6 million in depreciation and amortization, $0.5 million in amortization of premiums on marketable debt securities, $0.3 million in non-cash interest related to our marketable debt securities, and $0.2 million related to loss on disposal of assets, reduced by $0.5 million of deferred income tax benefit. Changes in net working capital consisted primarily of increases related to prepaid and other current assets of $9.8 million, other assets of $1.2 million, accounts payable of $1.1 million, due to related parties of $0.7 million, and deferred rent of $0.5 million, partially offset by an increase in accrued expenses of $12.7 million.

Investing Activities

For the year ended December 31, 2020, net cash used in investing activities was $20.6 million, which included cash outflows of $91.6 million for purchases of marketable debt securities, and $2.6 million for purchases of property, plant and equipment, partially offset by cash inflows of $65.4 million and $8.3 million from maturities and sales of marketable debt securities, respectively. Our investments in property, plant and equipment for the year ended December 31, 2020, related primarily to acquisitions of equipment which will be used to manufacture our ceNK and MSC product candidates.

For the year ended December 31, 2019, net cash provided by investing activities was $21.5 million, which was primarily attributable to cash inflows of $109.7 million and $2.5 million from maturities and sales of marketable debt securities, respectively, partially offset by cash outflows of $86.6 million for purchases of marketable debt securities, and $4.2 million for purchases of property, plant and equipment. During the year ended December 31, 2019, our purchases of marketable debt securities included our investment of $39.2 million of cash proceeds received in March 2019 from the exercise of stock options and warrants, together with reinvestment of excess cash related to maturing securities. Our investments in property, plant and equipment during the year ended December 31, 2019 mainly related to our El Segundo, California, facilities.

For the year ended December 31, 2018, net cash provided by investing activities was $57.1 million, which was primarily attributable to cash inflows of $165.3 million from maturities of marketable debt securities and $0.4 million from sales of laboratory equipment, partially offset by cash outflows of $94.8 million for purchases of marketable debt securities, driven by the reinvestment of excess cash resources, $13.1 million for purchases of property, plant and equipment, mainly related to our laboratory and cGMP build out in El Segundo, California, and $0.7 million for purchases of Viracta convertible notes.

Financing Activities

For the year ended December 31, 2020, net cash provided by financing activities was $87.0 million, which consisted of proceeds from the issuance of 8,521,500 shares of common stock, net of issuance cost paid, of $86.3 million, and proceeds of $1.2 million resulting from exercises of stock options. Net cash used in financing activities for the year ended December 31, 2020, consisted of $0.5 million related to net share settlement of vested RSUs for payment of employee payroll taxes.

For the year ended December 31, 2019, net cash provided by financing activities was $38.6 million, which primarily consisted of cash proceeds of $35.2 million and $4.1 million resulting from the exercise of warrants and stock options, respectively, by our Executive Chairman during March 2019, partially offset by $0.5 million used for stock repurchases, including commissions, and $0.1 million related to net share settlement of vested RSUs and option exercises for payment of employee payroll taxes.

For the year ended December 31, 2018, net cash used in financing activities was $0.8 million, which primarily related to $0.5 million of principal payments on our financing obligations, $0.2 million used for stock repurchases, and $0.1 million in net share settlement of exercised warrants and vesting of RSUs for payment of employee payroll taxes, partially offset by $0.1 million in proceeds from the exercise of warrants.

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Future Funding Requirements

To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property, and we have no products approved for commercial sale and have not generated any revenue from product sales. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates, and we do not know when, or if, this will occur. In addition, we expect our expenses to significantly increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. We have also incurred and expect that we will continue to incur in the future additional costs associated with operating as a public company as well as costs related to future fundraising efforts and our proposed merger with ImmunityBio. In addition, subject to obtaining regulatory approval of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations. We expect that our expenses will increase substantially if and as we:

• potentially seek regulatory approval for our product candidates;

• seek to discover and develop additional product candidates;

• seek to comply with regulatory standards and laws;

• maintain, leverage and expand our intellectual property portfolio;

• add operational, financial and management information systems and personnel;

• complete our proposed merger with ImmunityBio.

As a result of continuing anticipated operating cash outflows, we believe that substantial doubt exists regarding our ability to continue as a going concern without additional funding or financial support. However, we believe our existing cash, cash equivalents, and investments in marketable debt securities, and our ability to borrow from affiliated entities, will be sufficient to fund operations through at least the next 12 months following the issuance date of the financial statements based primarily upon our Executive Chairman’s intent and ability to support our operations with additional funds, including loans from affiliated entities, as required, which we believe alleviates such doubt. We have based this estimate on assumptions that may prove to be incorrect, and we may use our available capital resources sooner than we currently expect. The successful development of any product candidate is highly uncertain. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, if approved, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates.

Our future capital requirements will depend on many factors, including:

• the impacts of COVID‐19 on our operations;

• the degree and rate of market acceptance of any approved products;

• the expenses needed to attract and retain skilled personnel;

• the costs associated with being a public company;

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Because all of our product candidates are in various stages of preclinical and clinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations, Commitments and Contingencies

Contractual Obligations and Commitments

See Note 9, Commitments and Contingencies, Contractual Obligations – Leases, and Note 10, Related Party Agreements, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Contingencies

From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.

Critical Accounting Policies, Significant Judgements and Use of Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to valuation of equity-based awards, deferred income taxes and related valuation allowances, preclinical and clinical trial accruals, impairment assessments, the measurement of right-of-use assets and lease liabilities, useful lives of long-lived assets, loss contingencies, fair value measurements, and the assessment of the company’s ability to fund its operations for at least the next twelve months from the date of issuance of these financial statements. We base our estimates and judgments on historical experience and on various other market-specific and relevant assumptions that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, such as the economic considerations related to the impact that the ongoing coronavirus pandemic could have on our significant accounting estimates.

The following is not intended to be a comprehensive discussion of all of our significant accounting policies. See the notes accompanying our financial statements appearing in this Annual Report for a summary of all of our significant accounting policies and other disclosures required by U.S. GAAP.

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Transactions with Related Parties

As discussed in additional detail above, we have various agreements with related parties. Some are billed and settled in cash monthly. Others are billed quarterly and settled in cash the following month. Monthly accruals are made for all quarterly billing arrangements.

Collaboration Arrangements

We analyze our collaboration arrangements to assess whether they are within the scope of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 808, Collaborative Arrangements, or ASC 808. A collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two or more parties who are active participants in the activity, and exposed to significant risks and rewards dependent on the commercial success of the activity. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. To the extent the collaboration agreement is within the scope of ASC 808, we also assess whether the arrangement contains multiple elements that are within the scope of other accounting literature. If we conclude that some or all aspects of the agreement are distinct and represent a transaction with a customer, we account for those aspects of the arrangement within the scope of FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. Amounts that are owed to collaboration partners that are within the scope of ASC 808 are recognized as an offset to research and development expenses as such amounts are incurred by the collaboration partner. Where amounts owed to a collaboration partner exceed our collaboration expenses in each quarterly period, such amounts are classified as research and development expense.

Our collaboration arrangements require us to acquire certain equipment for exclusive use in the joint operating activities. These equipment purchases do not have an alternative use and are therefore expensed as incurred within research and development expenses.

Our collaboration arrangements are further discussed within Note 8, Collaboration and License Agreements, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Preclinical and Clinical Trial Accruals

As part of the process of preparing the financial statements, we are required to estimate expenses resulting from obligations under contracts with vendors, clinical research organizations and consultants. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

We estimate clinical trial and research agreement related expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf. In accruing clinical and research related fees, we estimate the time period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Research and Development Costs

Major components of research and development costs include cash compensation and other personnel-related expenses, stock-based compensation, depreciation and amortization expense on research and development property and equipment and intangible assets, costs of preclinical studies, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on our behalf. Costs incurred in research and development are expensed as incurred.

Included in research and development costs are clinical trial and research expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf. We record accruals for estimated costs under these contracts. When evaluating the adequacy of the accrued liabilities, we analyze the progress of the studies or clinical trials, including the phase or completion of events, invoices received, contracted costs and purchase orders. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period based on the facts and circumstances known at that time. Although we do not expect the estimates to be materially different from the amounts actually incurred, if the estimates of the status and timing of services performed differs from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. Actual results could differ from our estimates.

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Cash, Cash Equivalents and Restricted Cash

Cash equivalents include highly liquid investments with an original maturity of three months or less from the date of purchase.

Restricted cash includes a certificate of deposit held as a substitute letter of credit for one of our leased properties. This certificate of deposit is included in other assets on the consolidated balance sheets as the landlord is the beneficiary of the account and we are not able to access the funds during the term of the lease.

We minimize the credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of our primary financial institutions. While we maintain cash deposits in FDIC insured financial institutions in excess of federally insured limits, management believes we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. We have not experienced any losses on such accounts.

Marketable Debt Securities

We invest our excess funds in investment grade short- to intermediate-term corporate debt securities, government sponsored securities, and foreign government bonds and classify these investments as available-for-sale. Marketable debt securities with remaining maturities of 12 months or less are classified as short-term and marketable debt securities with remaining maturities greater than 12 months are classified as long-term. All marketable debt securities are reported at fair value and any unrealized gains and losses are reported as a component of accumulated other comprehensive loss on the consolidated statements of stockholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, which are recorded in investment income, net, on the consolidated statements of operations. Realized gains and losses are included in investment income, net, on the consolidated statements of operations. Realized gains and losses from sales of securities and the amounts, net of tax, reclassified out of accumulated other comprehensive loss, if any, are determined on a specific identification basis.

We periodically evaluate whether declines in fair values of our investments below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recovery occurs. Additionally, we assess whether or not we have plans to sell the security or whether or not it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis. Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of our investments, duration and severity of the decline in value, and our strategy and intentions for holding the investment. There were no other-than-temporary impairments recorded in the years ended December 31, 2020, 2019 and 2018.

Contingencies

We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause a change in the potential amount of the liability recorded or of the range of potential losses disclosed. Moreover, we record gain contingencies only when they are realizable, and the amount is known. Additionally, we record our rights to insurance recoveries, limited to the extent of incurred or probable losses, as a receivable when such recoveries have been agreed to with our third-party insurers and when receipt is deemed probable. This includes instances when our third-party insurers have agreed to pay, on our behalf, certain legal defense costs and settlement amounts directly to applicable law firms and a settlement fund.

Investment in Equity Securities

We own non-marketable equity securities that are accounted for using the measurement alternative under ASC 321 because the preferred stock held by us is not considered in-substance common stock and such preferred stock does not have a readily determinable fair value. All investments are reviewed for possible impairment on a regular basis. If an investment's fair value is determined to be less than its net carrying value, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an impairment indicator is present include: the investees’ earnings performance and clinical trial performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost of the investment, issues that raise concerns about the investee's ability to continue as a going concern, and any other information that we may be aware of related to the investment. Factors considered in determining whether an observable price change has occurred include the price at which the investee issues equity instruments similar to those of our investment and the rights and preferences of those equity instruments compared to ours.

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Fair Value of Financial Instruments

We record our available-for-sale investments at fair value. At December 31, 2020, our cash equivalents and investments in marketable debt securities totaled $54.8 million. FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, establishes three levels of inputs that may be used to measure fair value. Each level of input represents varying degrees of subjectivity and difficulty involved in determining fair value. Valuations using Level 1 and 2 inputs are generally based on price quotations and other observable inputs in active markets and do not require significant management judgment or estimation. We utilize a third-party pricing service to assist us in obtaining fair value pricing for these investments. While pricing for these securities is based on proprietary models, the inputs used are based on observable market information; therefore, we have classified our inputs as Level 1 and Level 2. For additional information, see Note 7, Fair Value Measurements, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Impairments

Long-lived assets include property, plant and equipment and intangible assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows that the assets are expected to generate. 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 undiscounted future cash flows arising from the assets using a discount rate determined by management to be commensurate with the risk inherent to our current business model.

During the year ended December 31, 2019, we determined that certain bioreactor laboratory equipment could no longer be utilized in the production process. As a result, we recorded an impairment charge totaling $0.9 million, which is included in research and development expense on the consolidated statements of operations. There were no impairment losses recognized during the years ended December 31, 2020 and 2018.

Lease Obligations

On January 1, 2019, we adopted FASB ASC Topic 842, Leases, or ASC 842. For contracts entered into on or after the effective date, we determine if an arrangement is, or contains, a lease at lease inception. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset; (2) whether we obtain the right to substantially all of the economic benefit from the use of the asset throughout the period; and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered into prior to January 1, 2019, which were accounted for under ASC 840, Leases, were not reassessed as we elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allowed us to carry forward the historical lease classification. We determine the lease term by assuming the exercise of renewal options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. Several of our leases have renewal options, however, exercise of renewal is only assured for two of our current Good Manufacturing Practices, or cGMP, facilities, where we have made significant improvements or extended the lease.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. At lease commencement, leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the underlying asset by the end of the lease term; (2) the lease contains an option to purchase the underlying asset that is reasonably certain to be exercised; (3) the lease term is for a major part of the remaining economic life of the underlying asset; (4) the present value of the sum of the lease payments and any guaranteed residual value that is not already included in the lease payments equals or exceeds substantially all of the fair value of the underlying asset; or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any one of these criteria.

We do not currently have any leases classified as finance leases. Our operating lease assets and liabilities are included in operating lease right-of-use assets, net, and current and long-term operating lease liabilities, respectively, on the consolidated balance sheets. At the commencement date, operating lease right-of-use assets and operating lease liabilities are determined based on the present value of lease payments to be made over the lease term. Operating lease right-of-use assets also include any rent paid prior to the commencement date, less any lease incentives received, and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have elected to combine our lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) with non-lease components (e.g., common-area maintenance costs and equipment maintenance costs) and as such, we account for lease and non-lease components as a single component. Lease expense also includes amounts relating to variable lease payments. Variable lease payments include amounts relating to common area maintenance and real estate taxes.

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We also elected not to recognize right-of-use assets and lease liabilities for qualifying short-term leases with an initial lease term of 12 months or less at lease inception. Such leases are expensed on a straight-line basis over the lease term.

The depreciable life of operating right-of-use-assets and leasehold improvements is limited by the expected lease term.

Stock-Based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or ASC 718, which applies to share-based payments issued to employees and nonemployees in exchange for goods or services. Under ASC 718, the fair value of an equity-classified award is estimated on the grant date without regard to service or performance conditions. The grant date fair values for options and warrants are estimated using the Black-Scholes-Merton option pricing model, and the grant date fair values for restricted stock units, or RSUs, are based upon the closing market price of our common stock on the date of grant.

We use the straight-line method to recognize stock-based compensation expense for our outstanding share awards that do not contain a performance condition. For awards subject to performance-based vesting conditions, we assess the probability of the individual milestones under the award being achieved and stock-based compensation expense is recognized over the service period commencing once management believes the performance criteria is probable of being met. For awards with service or performance conditions, we recognize the effect of forfeitures in compensation cost in the period that the award was forfeited.

Stock Repurchases

In November 2015, the board of directors approved a share repurchase program, or the 2015 Share Repurchase Program, allowing the CEO or CFO, on behalf of the company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50.0 million of our outstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases were and will continue to be based on market conditions and other factors, including price, regulatory requirements and other corporate considerations. The 2015 Share Repurchase Program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. We have financed, and expect to continue to finance, the purchases with existing cash balances. As it is the intent for the repurchased shares to be retired, we have elected to account for the shares repurchased under the constructive retirement method. For shares repurchased in excess of par, we allocate the purchase price in excess of par value to accumulated deficit.

Utilization of Net Operating Loss Carryforwards, or NOLs, and Research and Development Credits

As of December 31, 2020, we had federal, state and foreign income tax NOLs of $389.8 million, $350.3 million and $0.2 million, respectively. Of the $389.8 million in federal NOLs, $226.4 million will not expire and will be able to offset 80% of taxable income in future years. Of the $350.3 million in state NOLs, $4.4 million will not expire and will be able to offset 80% of taxable income in future years. The remaining federal NOL carryforwards begin to expire in 2024, the remaining state NOL carryforwards begin to expire in 2030 and the foreign NOL carryforwards begin to expire in 2022. As of December 31, 2020, we also had federal and state research and development tax credit carryforwards of $11.1 million and state research tax credits of $7.8 million, respectively. The federal research tax credit carryforwards begin to expire in 2034 and certain state research tax credit carryforwards begin to expire in 2031. The California research tax credits can be carried forward indefinitely. These net operating loss and research and development tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. We have completed a study through March 2019 to determine the impact of ownership changes on our NOLs and we have undergone significant ownership changes in previous years. Accordingly, some of our NOLs and research and development credits have been derecognized.

Recent Accounting Pronouncements

Application of New or Revised Accounting Standards – Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update, or ASU, 2016‐13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016‐13, which have the same effective date and transition dates as described below. The new guidance supersedes existing U.S. GAAP for measuring and recording of credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than

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reducing the carrying amount under the current, other-than-temporary-impairment model. For public business entities that meet the definition of a Securities and Exchange Commission, or SEC, filer, except entities that are eligible to be a smaller reporting company as defined by the SEC, the standard is effective for annual periods beginning after December 15, 2019, and interim periods therein. For all other entities, the standard is effective for annual periods beginning after December 15, 2022, and interim periods therein. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings as of the beginning of the fiscal year of adoption. We continue to evaluate the impact that this new standard and its related amendments will have on our consolidated financial statements and we do not intend to early adopt this new standard.

Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the SEC during the three months ended December 31, 2020 did not, or are not expected to, have a material effect on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk for changes in interest rates relates primarily to interest earned on our cash equivalents and investments. The primary objective of our investment activities is to preserve our capital to fund operations. A secondary objective is to maximize income from our investments without assuming significant risk. Our investment policy provides for investments in low-risk, investment-grade debt instruments. As of December 31, 2020, we had $11.4 million in cash and cash equivalents and $54.8 million in our investment portfolio. Our cash equivalents are short-term investments with maturities of 90 days or less at the time of purchase. We maintain cash deposits in FDIC insured financial institutions in excess of federally insured limits. However, we believe that we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. As of December 31, 2020, we did not hold or issue financial instruments for trading purposes. To date, we have not realized any significant loss of principal on our investments.

Interest rate risk – cash

With the cash discussed above, our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S interest rates. However, we do not believe a sudden change in the interest rates would have a material impact on our financial condition or results of operations due to the short-term maturities on our cash equivalents. A hypothetical 100 basis point change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Interest rate risk – cash equivalents and investment portfolio

We invest a portion of our cash in a number of diversified fixed and floating rate securities, consisting of marketable debt securities and debt funds that are subject to interest rate risk. Changes in the general level of interest rates can affect the fair value of our investment portfolio. If interest rates in the general economy were to rise, our holdings could lose value. At December 31, 2020, a hypothetical increase in interest rates of 100 basis points across the entire yield curve on our holdings would not have resulted in a material impact on the fair value of our portfolio.

Foreign currency exchange risk

We contract with clinical research organizations, investigational sites and suppliers in foreign countries and we have a bank account in Korea. We are, therefore, subject to fluctuations in foreign currency rates in connection with these agreements. We have not entered into any material foreign currency hedging contracts although we may do so in the future. To date we have not incurred any material effects from foreign currency changes on these contracts. The effect of a 10% adverse change in exchange rates on foreign currency denominated cash and payables as of December 31, 2020 would not have been material. However, fluctuations in currency exchange rates could harm our business in the future.

Inflation risk

Inflation may affect us by increasing our cost of labor, clinical trial, and other costs. We do not believe that inflation has had a material effect on our business, financial condition or results of operations for any period presented herein.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 111

Notes to Consolidated Financial Statements 119

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of NantKwest, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of NantKwest, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

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 Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

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

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 account or disclosure to which it relates.

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Related party transactionsand disclosures

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2016.

Los Angeles, California

March 4, 2021

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NantKwest, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

As of December 31,

ASSETS

Current assets:

Marketable debt securities, available-for-sale 54,772 36,144

Marketable debt securities, noncurrent — 1,497

Other assets (including amounts with related parties) 1,121 4,386

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Operating lease liabilities (including amounts with related parties) 5,500 3,206

Other current liabilities (including amounts with related parties) 1,438 775

Commitments and contingencies (Note 9)

Stockholders’ equity:

Accumulated other comprehensive loss (122 ) (105 )

Total liabilities and stockholders’ equity $ 151,858 $ 143,123

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

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NantKwest, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

For the Year Ended December 31,

Operating expenses:

Other income (expense):

Interest expense (including amounts with related parties) (41 ) (19 ) (433 )

Income tax (expense) benefit (5 ) 97 503

Net loss per share:

Basic and diluted $ (0.89 ) $ (0.70 ) $ (1.22 )

Weighted-average number of shares during the period:

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

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NantKwest, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

For the Year Ended December 31,

Other comprehensive (loss) income, net of income taxes:

Net unrealized (losses) gains on available-for-sale securities (26 ) 158 114

Total other comprehensive (loss) income (17 ) 162 114

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

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NantKwest, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated

Shares Amount Capital Loss Deficit Total

Stock-based compensation expense — — 23,382 — — 23,382

Vesting of restricted stock units (RSUs) 172,330 — — — — —

Cumulative effect of the adoption of the new revenue standard — — — — 186 186

Other comprehensive income — — — 114 — 114

Stock-based compensation expense — — 2,627 — — 2,627

Vesting of RSUs 395,051 — — — — —

Other comprehensive income — — — 162 — 162

Stock-based compensation expense — — 2,139 — — 2,139

Vesting of RSUs 648,336 — — — — —

Other comprehensive loss — — — (17 ) — (17 )

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

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NantKwest, Inc.

Consolidated Statements of Cash Flows

(in thousands)

For the Year Ended December 31,

Operating activities:

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

Unrealized loss on equity investment 1,405 — —

Losses (gains) on sales of marketable debt securities 8 4 (3 )

Loss on disposal of assets 4 — 209

Loss on impairment of assets — 869 —

Deferred income tax benefit — — (498 )

Changes in operating assets and liabilities:

Prepaid expenses and other current assets (1,328 ) 9,276 (9,818 )

Operating lease liabilities (3,941 ) (3,076 ) —

Deferred rent — — (508 )

Investing activities:

Purchases of property, plant and equipment (2,639 ) (4,182 ) (13,102 )

Proceeds from sales of property, plant and equipment — — 412

Purchases of debt securities, held-to-maturity — — (723 )

Purchases of investments in equity securities — (3 ) —

Sales of marketable debt securities 8,272 2,529 —

Financing activities:

Proceeds from equity offering, net of issuance cost paid 86,302 — —

Proceeds from exercises of stock options 1,176 4,070 —

Proceeds from exercises of warrants — 35,151 57

Principal payments of financing obligations — — (477 )

Repurchases of common stock with commissions — (501 ) (228 )

Net cash provided by (used in) financing activities 86,975 38,593 (771 )

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

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NantKwest, Inc.

Consolidated Statements of Cash Flows (Continued)

(in thousands)

For the Year Ended December 31,

Reconciliation of cash, cash equivalents, and restricted cash at end of period:

Restricted cash included in other assets 179 179 179

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Income taxes $ 8 $ 3 $ 4

Supplemental disclosure of non-cash activities:

Cashless exercise of stock options and warrants $ 1,233 $ 29 $ 94

Unrealized (losses) gains on marketable debt securities $ (17 ) $ 258 $ 123

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

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NantKwest, Inc.

Notes to Consolidated Financial Statements

1. Description of Business

Organization

NantKwest, Inc., or NantKwest, was incorporated in Illinois on October 7, 2002 under the name ZelleRx Corporation. On January 22, 2010, the company changed its name to Conkwest, Inc., and on July 10, 2015, the company changed its name to NantKwest, Inc. In March 2014, the company redomesticated from the State of Illinois to the State of Delaware and the Illinois company ceased to exist. We are a pioneering clinical-stage immunotherapy biotechnology company headquartered in San Diego, California with certain operations in Culver City and El Segundo, California and Woburn, Massachusetts. In these notes, the terms “we,” “our,” “the company” and “us” refer to NantKwest.

We are focused on harnessing the power of the innate immune system by using our natural killer cells, or NK cells, to treat cancer and viral infectious diseases. A critical aspect of our strategy is to invest significantly in innovating new therapeutic candidates, based upon our proprietary activated NK, or aNK, cell platform, and conducting clinical testing and scale manufacturing of our most promising biologic product candidates.

We hold the exclusive right to commercialize aNK cells, a commercially viable NK cell line, and a wide range of genetically modified derivatives capable of killing cancer and virally infected cells. We own corresponding United States, or U.S., and foreign composition and methods-of-use patents and applications covering the cells, improvements, methods of expansion and manufacture and use of aNK cells and their improvements as therapeutics to treat a spectrum of clinical conditions.

Liquidity

On June 29, 2020, the company closed an underwritten public offering of common stock as discussed further in Note 11, Stockholders Equity. Gross proceeds from the offering were $90.7 million, before deducting underwriting discounts, commissions and other offering expenses of $4.4 million.

As of December 31, 2020, the company had an accumulated deficit of $754.6 million. We also had negative cash flow from operations of $70.5 million during the year ended December 31, 2020. The company will likely need additional capital to further fund development of, and seek regulatory approvals for, our product candidates, and to begin to commercialize any approved products.

We are currently focused primarily on the development of immunotherapeutic treatments for cancers and debilitating viral infections using targeted cancer and viral killing cell lines, and we believe such activities will result in the company’s continued incurrence of significant research and development and other expenses related to those programs. If the clinical trials for any of the company’s product candidates fail or produce unsuccessful results and those product candidates do not gain regulatory approval, or if any of our product candidates, if approved, fail to achieve market acceptance, we may never become profitable. Even if the company achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. We intend to cover our future operating expenses through cash and cash equivalents and marketable debt securities on hand and through a combination of equity offerings, debt financings, government or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances, and licensing arrangements. Additional financing may not be available to us when needed and, if available, financing may not be obtained on terms favorable to the company or its stockholders.

While we expect our existing cash, and cash equivalents and marketable debt securities, together with the ability to borrow from affiliated entities, will enable us to fund operations and capital expenditure requirements for at least the next 12 months, we may not have sufficient funds to reach commercialization. Failure to obtain adequate financing when needed may require us to delay, reduce, limit, or terminate some or all of our development programs or future commercialization efforts or grant rights to develop and market product candidates that we might otherwise prefer to develop and market ourselves, which could adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to existing stockholders may result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability to operate our business.

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2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.

The consolidated financial statements have been prepared assuming the company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of the uncertainty discussed in the Liquidity section of Note 1. As a result of continuing anticipated operating cash outflows, we believe that substantial doubt exists regarding our ability to continue as a going concern without additional funding or financial support. However, we believe our existing cash, cash equivalents, and investments in marketable debt securities, and our ability to borrow from affiliated entities, will be sufficient to fund operations through at least the next 12 months following the issuance date of the financial statements based primarily upon our Executive Chairman’s intent and ability to support our operations with additional funds, including loans from affiliated entities, as required, which we believe alleviates such doubt. We may also seek to sell additional equity, through one or more follow-on public offerings, or in separate financings, or obtain a credit facility. However, we may not be able to secure such financing in a timely manner or on favorable terms. Without additional funds, we may choose to delay or reduce our operating or investment expenditures. Further, because of the risk and uncertainties associated with the commercialization of the company’s product candidates in development, we may need additional funds to meet our needs sooner than planned.

Principles of Consolidation

The consolidated financial statements include the accounts of NantKwest and its wholly owned subsidiaries. All intercompany amounts have been eliminated.

We apply the variable interest model under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, Consolidation, to any entity in which we hold an equity investment or to which we have the power to direct the entity's most significant economic activities and the ability to participate in the entity's economics. If the entity is within the scope of the variable interest model and meets the definition of a variable interest entity, or VIE, we consider whether we must consolidate the VIE or provide additional disclosures regarding our involvement with the VIE. If we determine that we are the primary beneficiary of the VIE, we will consolidate the VIE. This analysis is performed at the initial investment in the entity or upon any reconsideration event.

For entities we hold as an equity investment that are not consolidated under the VIE model, we consider whether our investment constitutes ownership of a majority of the voting interests in the entity and therefore should be considered for consolidation under the voting interest model.

Unconsolidated equity investments in the common stock or in-substance common stock of an entity under which we are able to exercise significant influence, but not control, are accounted for using the equity method. Our ability to exercise significant influence is generally indicated by ownership of 20 to 50 percent interest in the voting securities of the entity.

All other unconsolidated equity investments on which we are not able to exercise significant influence will be subsequently measured at fair value with unrealized holding gains and losses included in other income and expense, net, on the consolidated statements of operations. In the instance the equity investment does not have a readily determinable fair value and does not qualify for the practical expedient to estimate fair value in accordance with ASC 820, Fair Value Measurement, or ASC 820, we will apply the measurement alternative under ASC 321, Investments—Equity Securities, or ASC 321, pursuant to which we will measure the investment at its cost, less impairment, adjusted for observable price changes in an orderly market for an identical or similar investment of the same issuer.

We own non-marketable equity securities that are accounted for using the measurement alternative under ASC 321 because the preferred stock held by us is not considered in-substance common stock and such preferred stock does not have a readily determinable fair value. All investments are reviewed for possible impairment on a regular basis. If an investment's fair value is determined to be less than its net carrying value, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an impairment indicator is present include: the investees’ earnings performance and clinical trial performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost of the investment, issues that raise concerns about the investee's ability to continue as a going concern, and any other information that we may be aware of related to the investment. Factors considered in determining whether an observable price change has occurred include: the price at which the investee issues equity instruments similar to those of our investment and the rights and preferences of those equity instruments compared to ours.

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Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to valuation of equity-based awards, deferred income taxes and related valuation allowances, preclinical and clinical trial accruals, impairment assessments, the measurement of right-of-use assets and lease liabilities, useful lives of long-lived assets, loss contingencies, fair value measurements, and the assessment of the company’s ability to fund its operations for at least the next twelve months from the date of issuance of these financial statements. We base our estimates on historical experience and on various other market-specific and relevant assumptions that we believe to be reasonable under the circumstances. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the ongoing coronavirus pandemic could have on our significant accounting estimates. Actual results could differ from those estimates.

Risks and Uncertainties

In March 2020, the World Health Organization declared the novel strain of coronavirus disease (SARS‐CoV‐2) outbreak a pandemic. To date, our operations have not been significantly impacted by the pandemic. However, we cannot at this time predict the specific extent, duration, or full impact that this pandemic may have on our financial condition and results of operations, including ongoing and planned clinical trials. More specifically, the pandemic may result in prolonged impacts that we cannot predict at this time and we expect that such uncertainties will continue to exist until such time a vaccine is broadly available and in use. The impact of the pandemic on the financial performance of the company will depend on future developments, including the duration and spread of the outbreak and related governmental advisories and restrictions. These developments and the impact of the ongoing pandemic on the financial markets and the overall economy are highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, our results may be adversely affected.

Contingencies

We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause a change in the potential amount of the liability recorded or of the range of potential losses disclosed. Moreover, we record gain contingencies only when they are realizable, and the amount is known. Additionally, we record our rights to insurance recoveries, limited to the extent of incurred or probable losses, as a receivable when such recoveries have been agreed to with our third-party insurers and when receipt is deemed probable. This includes instances when our third-party insurers have agreed to pay, on our behalf, certain legal defense costs and settlement amounts directly to applicable law firms and a settlement fund.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject us to concentrations of risk consist principally of cash and cash equivalents and marketable debt securities.

Our cash and cash equivalents are held by one major financial institution in the U.S. and one in Korea. We minimize credit risk associated with our cash and cash equivalents by periodically evaluating the credit quality of our primary financial institutions. While we maintain cash deposits in FDIC insured financial institutions in excess of federally insured limits, we do not believe that we are exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. We have not experienced any losses on such accounts.

Product candidates developed by us will require approvals or clearances from the U.S. Food and Drug Administration, or FDA, or international regulatory agencies prior to commercial sales. There can be no assurance that any of our product candidates will receive any of the required approvals or clearances. If we were to be denied approval or clearance or any such approval or clearance was to be delayed, it would have a material adverse impact on us.

Cash, Cash Equivalents and Restricted Cash

Cash equivalents include highly liquid investments with an original maturity of three months or less from the date of purchase.

Restricted cash includes a certificate of deposit held as a substitute letter of credit for one of our leased properties. This certificate of deposit is included in other assets on the consolidated balance sheets as the landlord is the beneficiary of the account and we are not able to access the funds during the term of the lease.

A reconciliation of cash, cash equivalents, and restricted cash is included on the consolidated statements of cash flows as of December 31, 2020, 2019 and 2018.

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Marketable Debt Securities

We invest our excess funds in investment grade short- to intermediate-term corporate debt securities, government sponsored securities, and foreign government bonds and classify these investments as available-for-sale. Marketable debt securities with remaining maturities of 12 months or less are classified as short-term and marketable debt securities with remaining maturities greater than 12 months are classified as long-term. All marketable debt securities are reported at fair value and any unrealized gains and losses are reported as a component of accumulated other comprehensive loss on the consolidated statements of stockholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, which are recorded in investment income, net, on the consolidated statements of operations. Realized gains and losses are included in investment income, net, on the consolidated statements of operations. Realized gains and losses from sales of securities and the amounts, net of tax, reclassified out of accumulated other comprehensive loss, if any, are determined on a specific identification basis.

We periodically evaluate whether declines in fair values of our investments below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recovery occurs. Additionally, we assess whether or not we have plans to sell the security or whether or not it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis. Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of our investments, duration and severity of the decline in value, and our strategy and intentions for holding the investment. There were no other-than-temporary impairments recorded in the years ended December 31, 2020, 2019 and 2018.

Property, Plant and Equipment

Property, plant and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditures that are directly attributable to the acquisition of the items. All repairs and maintenance are charged to net loss during the financial period in which they are incurred. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets, as follows:

Buildings 39 years

Software 3 years

Laboratory equipment 5 years

Furniture & fixtures 5 years

IT equipment 3 years

Leasehold improvements The lesser of the lease term or the life of the asset

Upon disposal or impairment of property, plant and equipment, the cost and related accumulated depreciation is removed from the consolidated financial statements and the net amount, less any proceeds, is included in the consolidated statements of operations.

Intangible Assets

Intangible assets, which consisted of the cost of reacquiring a technology license during 2015, were amortized using the straight-line method over an estimated useful life of 4 years. As of December 31, 2019, our intangible assets were fully amortized.

Patents

Patent costs, including related legal costs, are expensed as incurred and recorded in selling, general and administrative expenses on the consolidated statements of operations.

Impairments

Long-lived assets include property, plant and equipment and intangible assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows that the assets are expected to generate. 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 undiscounted future cash flows arising from the assets using a discount rate determined by management to be commensurate with the risk inherent to our current business model.

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During the year ended December 31, 2019, we determined that certain bioreactor laboratory equipment could no longer be utilized in the production process. As a result, we recorded an impairment charge totaling $0.9million, which is included in research and development expense on the consolidated statements of operations. There were no impairment losses recognized during theyears ended December 31, 2020 and 2018.

Fair Value of Financial Instruments

The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on our principal or, in absence of a principal, most advantageous market for the specific asset or liability.

We use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires us to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.

The three tiers are defined as follows:

During the years ended December 31, 2020, 2019 and 2018, no transfers were made into or out of the Level 1, 2 or 3 categories. We will continue to review the fair value inputs on a quarterly basis.

We utilize a third-party pricing service to assist in obtaining fair value pricing for our investments in marketable debt securities. Inputs are documented in accordance with the fair value disclosure hierarchy.

Collaboration Arrangements

We analyze our collaboration arrangements to assess whether they are within the scope of FASB ASC Topic 808, Collaborative Arrangements, or ASC 808. A collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two or more parties who are active participants in the activity, and exposed to significant risks and rewards dependent on the commercial success of the activity. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. To the extent the collaboration agreement is within the scope of ASC 808, we also assess whether the arrangement contains multiple elements that are within the scope of other accounting literature. If we conclude that some or all aspects of the agreement are distinct and represent a transaction with a customer, we account for those aspects of the arrangement within the scope of FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. Amounts that are owed to collaboration partners that are within the scope of ASC 808 are recognized as an offset to research and development expenses as such amounts are incurred by the collaboration partner. Where amounts owed to a collaboration partner exceed our collaboration expenses in each quarterly period, such amounts are classified as research and development expense.

Our collaboration arrangements require us to acquire certain equipment for exclusive use in the joint operating activities. These equipment purchases do not have an alternative use and are therefore expensed as incurred within research and development expenses.

Our collaboration arrangements are further discussed within Note 8, Collaboration and License Agreements.

Preclinical and Clinical Trial Accruals

As part of the process of preparing the financial statements, we are required to estimate expenses resulting from obligations under contracts with vendors, clinical research organizations and consultants. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

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We estimate clinical trial and research agreement related expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf.In accruing clinical and research related fees, we estimate the time period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Transactions with Related Parties

As outlined in Note 10, Related Party Agreements, we have various agreements with related parties. Some are billed and settled in cash monthly. Others are billed quarterly and settled in cash the following month. Monthly accruals are made for all quarterly billing arrangements.

Lease Obligations

On January 1, 2019, we adopted FASB ASC Topic 842, Leases, or ASC 842. For contracts entered into on or after the effective date, we determine if an arrangement is, or contains, a lease at lease inception. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset; (2) whether we obtain the right to substantially all of the economic benefit from the use of the asset throughout the period; and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered into prior to January 1, 2019, which were accounted for under ASC 840, Leases, were not reassessed as we elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allowed us to carry forward the historical lease classification. We determine the lease term by assuming the exercise of renewal options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. Several of our leases have renewal options, however, exercise of renewal is only assured for two of our current Good Manufacturing Practices, or cGMP, facilities, where we have made significant improvements or extended the lease.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. At lease commencement, leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the underlying asset by the end of the lease term; (2) the lease contains an option to purchase the underlying asset that is reasonably certain to be exercised; (3) the lease term is for a major part of the remaining economic life of the underlying asset; (4) the present value of the sum of the lease payments and any guaranteed residual value that is not already included in the lease payments equals or exceeds substantially all of the fair value of the underlying asset; or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any one of these criteria.

We do not currently have any leases classified as finance leases. Our operating lease assets and liabilities are included in operating lease right-of-use assets, net, and current and long-term operating lease liabilities, respectively, on the consolidated balance sheets. At the commencement date, operating lease right-of-use assets and operating lease liabilities are determined based on the present value of lease payments to be made over the lease term. Operating lease right-of-use assets also include any rent paid prior to the commencement date, less any lease incentives received, and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have elected to combine our lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) with non-lease components (e.g., common-area maintenance costs and equipment maintenance costs) and as such, we account for lease and non-lease components as a single component. Lease expense also includes amounts relating to variable lease payments. Variable lease payments include amounts relating to common area maintenance and real estate taxes.

We also elected not to recognize right-of-use assets and lease liabilities for qualifying short-term leases with an initial lease term of 12 months or less at lease inception. Such leases are expensed on a straight-line basis over the lease term.

The depreciable life of operating right-of-use-assets and leasehold improvements is limited by the expected lease term.

Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record valuation allowances to reduce deferred tax assets to the amount we believe is more likely than not to be realized.

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We recognize uncertain tax positions when the position will be more likely than not upheld on examination by the taxing authorities based solely upon the technical merits of the positions. We recognize interest and penalties, if any, related to unrecognized income tax uncertainties in income tax expense. We did not have any accrued interest or penalties associated with uncertain tax positions as of December 31, 2020 and 2019.

We are subject to U.S. federal income tax, as well as income tax in Korea, California and other states. To date, we have not been required to pay U.S. federal and state income taxes because of current and accumulated net operating losses. The federal returns for tax years 2017 through 2020 remain open to examination and the state returns remain subject to examination for tax years 2016 through 2020. Carryforward attributes that were generated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective tax authority. All other state jurisdictions remain open to examination. No income tax returns are currently under examination by taxing authorities.

Stock Repurchases

In November 2015, the board of directors approved the 2015 Share Repurchase Program (Note 11) allowing the CEO or CFO, on behalf of the company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50.0 million of our outstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases were and will continue to be based on market conditions and other factors, including price, regulatory requirements and other corporate considerations. The 2015 Share Repurchase Program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. We have financed, and expect to continue to finance, the purchases with existing cash balances. As it is the intent for the repurchased shares to be retired, we have elected to account for the shares repurchased under the constructive retirement method. For shares repurchased in excess of par, we allocate the purchase price in excess of par value to accumulated deficit.

Revenue Recognition

On January 1, 2018, we adopted the provisions of FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. This guidance requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASC 606 on January 1, 2018 by recording the cumulative effect of the adoption to accumulated deficit. We applied the new guidance to contracts that were not complete as of January 1, 2018. Implementation of ASC 606 did not have a material impact on our consolidated financial statements.

We derive substantially all of our revenue from non-exclusive license agreements with a limited number of pharmaceutical and biotechnology companies granting them the right to use our cell lines and intellectual property for non-clinical use. These agreements generally include upfront fees and annual research license fees for such use, as well as commercial license fees for sales of the licensee products developed or manufactured using our intellectual property and cell lines.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied.

Under the company’s license agreements with customers, the company typically promises to provide a license to use certain cell lines and related patents, the related know-how, and future research and development data that affect the license. We have concluded that these promises represent one performance obligation due to the highly interrelated nature of the promises. We provide the cell lines and know-how immediately upon entering into the contracts. The research and development data is provided throughout the term of the contract when and if available.

Our license agreement with Precigen (Note 8) included a nonrefundable upfront payment of $0.4 million, received when we entered into the contract in 2010. In this instance, we determined that under ASC 606 it would be appropriate to recognize the initial milestone payment at a point in time, when we transferred the license. In this case, the intellectual property provided under the contract is functional intellectual property under ASC 606 and was determined to be a distinct performance obligation in the context of the arrangement. Prior to adoption, the upfront payment had been initially recorded as deferred revenue and was being recognized into revenue on a straight-line basis. As a result, upon adoption of ASC 606, we adjusted our accumulated deficit for the effects of recognizing revenue upfront for the initial milestone. The adjustment to accumulated deficit upon adoption was not material.

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The license agreements may include nonrefundable upfront payments, event-based milestone payments, sales-based royalty payments, or some combination of these. The event-based milestone payments represent variable consideration and we use the most likely amount method to estimate this variable consideration. Given the high degree of uncertainly around achievement of these milestones, we do not recognize revenue from these milestone payments until the uncertainty associated with these payments is resolved. We currently estimate variable consideration related to milestone payments to be zero and, as such, no revenue has been recognized for milestone payments. We recognize revenue from sales-based royalty payments when or as the sales occur. On a quarterly basis, we re-evaluate our estimate of milestone variable consideration to determine whether any amount should be included in the transaction price and recorded in revenue prospectively.

Upon adoption, we changed our accounting policy from accounting for milestones payments under the milestone method to accounting for variable consideration as discussed above. The change in accounting policy did not change any amounts in the financial statements because of the significant uncertainty surrounding the estimate of variable consideration for milestone payments.

To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property. We have no products approved for commercial sale and we have not generated any revenue from product sales. If we fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval for them, we may never be able to generate substantial future revenue.

Research and Development Costs

Major components of research and development costs include cash compensation and other personnel-related expenses, stock-based compensation, depreciation and amortization expense on research and development property and equipment and intangible assets, costs of preclinical studies, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on our behalf. Costs incurred in research and development are expensed as incurred.

Included in research and development costs are clinical trial and research expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf. We record accruals for estimated costs under these contracts. When evaluating the adequacy of the accrued liabilities, we analyze the progress of the studies or clinical trials, including the phase or completion of events, invoices received, contracted costs and purchase orders. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period based on the facts and circumstances known at that time. Although we do not expect the estimates to be materially different from the amounts actually incurred, if the estimates of the status and timing of services performed differs from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. Actual results could differ from our estimates.

Stock-Based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or ASC 718, which applies to share-based payments issued to employees and nonemployees in exchange for goods or services. Under ASC 718, the fair value of an equity-classified award is estimated on the grant date without regard to service or performance conditions. The grant date fair values for options and warrants are estimated using the Black-Scholes-Merton option pricing model, and the grant date fair values for restricted stock units, or RSUs, are based upon the closing market price of our common stock on the date of grant.

We use the straight-line method to recognize stock-based compensation expense for our outstanding share awards that do not contain a performance condition. For awards subject to performance-based vesting conditions, we assess the probability of the individual milestones under the award being achieved and stock-based compensation expense is recognized over the service period commencing once management believes the performance criteria is probable of being met. For awards with service or performance conditions, we recognize the effect of forfeitures in compensation cost in the period that the award was forfeited.

Litigation Costs

We expense legal fees as they are incurred.

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Comprehensive Income (Loss)

Comprehensive income or loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income or loss is composed of net income (loss) and other comprehensive income (loss). Our other comprehensive income or loss consists of unrealized gains and losses on marketable debt securities classified as available-for-sale, net of income taxes.

Basic and Diluted Net Loss per Share of Common Stock

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.