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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-24 compared with 2020-03-02 · 7 added, 828 removed, 6 unchanged (99% of the section changed)

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to market risk primarily related to changes in interest rates.

3 unchanged sentences

However, because of the relatively short-term nature and low risk profile of the instruments in our portfolio, a 10% change in market interest rates would not have a material impact on our financial condition and/or results of operations.

Financial Stateme nts and Supplementary Data

R eport of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Fate Therapeutics, Inc

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Fate Therapeutics, Inc.

as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 2, 2020, expressed an unqualified opinion thereon

Adoption of ASU No.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842), and the related amendments.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

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

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

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

We conducted our audits in accordance with the standards of the PCAOB.

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

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

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

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

Critical Audit Matters

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

(1) relates to an account or disclosure that is material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of acritical 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 separate opinions on the critical audit matter or on the account or disclosure to which it relates.

Estimated total costs expected to be incurred under the Ono Collaboration

Description of the Matter

As more fully described in Note 2 of the financial statements, the Company has concluded that the grant of intellectual property licenses and the delivery of related research and development services under the Ono collaboration agreement represent a combined performance obligation for which the Company recognizes collaboration revenues as the research services are transferred over time.

Revenue is recognized over the estimated period of time to conduct the research services based on actual costs incurred compared to the estimated total costs expected to be incurred.

Collaboration revenue is significant to our audit because the revenue recognition assessment process involves inherent uncertainty, uses subjective assumptions, and the amounts involved are material to the financial statements taken as a whole.

The subjective assumption relates to the estimated total costs expected to be incurred under the agreement.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s revenue recognition review process including controls over management’s review of the significant assumptions described above.

For example, we tested controls over the development of the estimated costs to complete and the review of the estimates to complete by management.

To test revenue recognized we performed audit procedures that included, among other things, testing the assumptions and underlying data used by the Company in its computations and testing the accuracy of the computations.

We inspected evidence supporting the amount of actual costs incurred and assessed whether they were appropriate costs according to the terms of the contract.

We performed corroborative inquiries of individuals outside of the finance department to assess the reasonableness of management’s estimates of the total and remaining costs to be incurred.

In addition, we performed sensitivity analyses, including assessing the reasonableness of the estimated costs to be incurred as of the reporting date based on current factors.

/s/ Ernst & Young, LLP

We have served as the Company's auditor since 2009.

San Diego, California

March 2, 2020

Fate Therapeutics, Inc.

Consolidated Balance Sheets

(In thousands, except par value and share data)

Current assets:

Cash and cash equivalents

Accounts receivable

Short-term investments and related maturity receivables

Prepaid expenses and other current assets

Total current assets

Long-term investments

Property and equipment, net

Operating lease right-of-use assets

Restricted cash

Collaboration contract asset

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued expenses

CIRM award liability, current portion

Deferred revenue, current portion

Operating lease liabilities, current portion

Long-term debt, current portion

Total current liabilities

Deferred rent

Accrued expenses

Deferred revenue, net of current portion

CIRM award liability, net of current portion

Operating lease liabilities, net of current portion

Long-term debt, net of current portion

Commitments and contingencies

Stockholders’ equity:

Preferred stock, $0.001 par value;

authorized shares—5,000,000

at December 31, 2019 and December 31, 2018;

designated Class A Convertible

Preferred shares—2,819,549 at December 31, 2019 and December 31, 2018;

Class A Convertible Preferred shares issued and outstanding—2,794,549 at

December 31, 2019 and 2,819,549 at December 31, 2018

Common stock, $0.001 par value;

authorized shares—150,000,000 at

December 31, 2019 and December 31, 2018;

outstanding—75,730,260 at December 31, 2019 and 64,693,681 at

December 31, 2018

Additional paid-in capital

Accumulated other comprehensive gain (loss)

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes.

Fate Therapeutics, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

For the Years Ended December 31,

Collaboration revenue

Operating expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Other income (expense):

Interest income

Interest expense

Loss on extinguishment of debt

Total other income (expense), net

Other comprehensive loss:

Unrealized gain (loss) on available-for-sale securities, net

Comprehensive loss

Net loss per common share, basic and diluted

Weighted–average common shares used to compute basic and

diluted net loss per share

See accompanying notes.

Fate Therapeutics, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(In thousands, except share data)

Preferred Stock

Comprehensive

Stockholders’

Balance at December 31, 2016

Exercise of stock options, net of

issuance costs

Issuance of common stock upon

vesting of restricted stock units

Stock–based compensation

Public offering of common stock,

net of offering costs

Private placement issuances of

common stock, net of offering

Private placement issuance of

Series A convertible preferred

stock, net of offering costs

Issuance of warrants for common

Unrealized loss on investments

Balance at December 31, 2017

Exercise of stock options, net of

issuance costs

Stock–based compensation

Public offering of common stock,

net of offering costs

Issuance of common stock upon

cashless warrant exercise

Issuance of common stock for

license agreements

Unrealized gain on investments

Balance at December 31, 2018

Exercise of stock options, net of

issuance costs

Issuance of common stock upon

vesting of restricted stock units

Stock–based compensation

Public offering of common stock,

net of offering costs

Issuance of common stock upon

cashless warrant exercise

Conversion of preferred shares to

Unrealized gain on investments

Balance at December 31, 2019

See accompanying notes

Fate Therapeutics, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Years Ended December 31,

Operating activities:

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

Depreciation and amortization

Stock–based compensation

Amortization of debt discounts and debt issuance costs

Accretion and amortization of premiums and discounts on investments,

Amortization of collaboration contract asset

Noncash interest expense

Deferred rent

Deferred revenue

Issuance on common stock for license agreement

Non-cash loss on extinguishment of debt

Cash payments included in loss on extinguishment of debt

Changes in assets and liabilities:

Accounts receivable

Prepaid expenses and other assets

Accounts payable and accrued expenses

Right-of-use assets and lease liabilities, net

Net cash used in operating activities

Investing activities

Purchases of property and equipment

Purchases of investments

Maturities of investments

Net cash used in investing activities

Financing activities

Issuance of common stock from equity incentive plans, net of repurchases

and issuance costs

Proceeds from public offering of common stock, net of issuance costs

Proceeds from private placement issuances of common stock, net of

issuance costs

Proceeds from private placement issuance of preferred stock, net of

issuance costs

Proceeds from CIRM award

Proceeds from long–term debt

Payments of debt issuance costs

Payments included in loss on extinguishment of debt

Principal repayments of long–term debt

Net cash provided by financing activities

Net change in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of the period

Cash, cash equivalents and restricted cash at end of the period

Supplemental disclosure of cash flow information

Interest paid

Supplemental schedule of noncash investing and financing activities

Issuance of warrants for common stock in connection with long–term debt

Purchases of property and equipment in accounts payable

See accompanying notes.

Fate Therapeutics, Inc.

Notes to Consolidated Financial Statements

Organization and Summary of Significant Accounting Policies

Fate Therapeutics, Inc.

(the Company) was incorporated in the state of Delaware on April 27, 2007 and has its principal operations in San Diego, California.

The Company is a clinical-stage biopharmaceutical company dedicated to the development of programmed cellular immunotherapies for cancer and immune disorders.

The Company’s therapeutic pipeline is comprised of immuno-oncology programs, including off-the-shelf engineered NK- and T-cell product candidates derived from clonal master induced pluripotent stem cell (iPSC) lines, and immuno-regulatory programs, including product candidates to prevent life-threatening complications in patients undergoing hematopoietic cell transplantation.

The Company’s product candidates are based on its proprietary cell programming approach, which it applies to modulate the therapeutic function and direct the fate of immune cells .

As of December 31, 2019, the Company has devoted substantially all of its efforts to product development, raising capital and building infrastructure and has not generated any revenues from any sales of its therapeutic products.

To date, the Company’s revenues have been derived from collaboration agreements and government grants.

Public Equity Offerings

In September 2019, the Company completed a public offering of common stock in which investors, certain of which are affiliated with the directors of the Company, purchased 9,890,000 shares of its common stock at a price of $17.50 per share under a shelf registration statement.

Gross proceeds from the offering were $173.1 million, and, after giving effect to $10.7 million of costs related to the offering, net proceeds were $162.4 million.

In September 2018, the Company completed a public offering of common stock in which investors, including investors affiliated with the directors of the Company, purchased 10,648,149 shares of its common stock at a price of $13.50 per share under a shelf registration statement.

Gross proceeds from the offering were $143.8 million, and, after giving effect to $8.9 million of costs related to the offering, net proceeds were $134.9 million.

In December 2017, the Company completed a public offering of common stock in which investors purchased 10,953,750 shares of its common stock at a price of $4.20 per share under a shelf registration statement.

Gross proceeds from the offering were $46.0 million, and after giving effect to $3.0 million of costs related to the offering (of which $0.3 million was paid during the year ended December 31, 2018), net proceeds were $43.0 million.

Use of Estimates

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP).

The preparation of the Company’s consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes.

The most significant estimates in the Company’s consolidated financial statements relate to accrued expenses.

Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, Fate Therapeutics Ltd., incorporated in the United Kingdom, Fate Therapeutics, B.V., incorporated in the Netherlands and Tfinity Therapeutics, Inc., incorporated in the United States.

To date, the aggregate operations of these subsidiaries have not been significant and all intercompany transactions and balances have been eliminated in consolidation.

Segment Reporting

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

The Company views its operations and manages its business in one operating and reportable segment.

Fair Value of Financial Instruments

The carrying amounts of accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the relatively short-term nature of those instruments.

Based on the borrowing rates available to the Company for loans with similar terms, which is considered a Level 2 input as described below, the Company believes that the fair value of long-term debt approximates its carrying value.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis.

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

As a basis for considering such assumptions, the accounting guidance establishes a three- tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Observable inputs such as quoted prices in active markets;

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial assets measured at fair value on a recurring basis consist of the Company’s cash equivalents and investments.

Cash equivalents consisted of money market funds and investments consisted of U.S.

treasuries and corporate debt securities.

The following table presents the Company’s assets which were measured at fair value on a recurring basis as of December 31, 2019 and 2018 (in thousands):

Fair Value Measurements at

Reporting Date Using

Quoted Prices

As of December 31, 2019:

Cash equivalents

Money market funds

Treasury debt securities

Corporate debt securities

Total assets measured at fair value on a recurring basis

As of December 31, 2018:

Cash equivalents

Money market funds

Treasury debt securities

Total assets measured at fair value on a recurring basis

The Company obtains pricing information from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, and bid and/or offers.

None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis.

No transfers between levels have occurred during the periods presented.

As of December 31, 2019 and 2018, the Company had no material liabilities measured at fair value on a recurring basis.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash in readily available checking and savings accounts, money market accounts and money market funds.

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

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the c onsolidated b alance s heets that sum to the total of the same such amounts shown in the c onsolidated s tatement s of c ash f lows as of December 31, 201 9 , 201 8 and 201 7 (in thousands):

Years Ended December 31,

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows

Amounts included in restricted cash represent security deposits required to secure the Company’s credit card limit and its facilities lease.

Investments are accounted for as available-for-sale securities and are carried at fair value, with the unrealized gains and losses reported in other comprehensive income (loss).

The amortized cost of investments classified as available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity.

Such amortization and accretion are included in interest income.

Realized gains and losses and declines in value judged to be other-than-temporary, if any, on investments classified as available-for-sale securities are included in other income or expense.

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

Interest and dividends on securities classified as available-for-sale are included in interest income.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to a significant concentration of credit risk, consist primarily of cash and cash equivalents and investments.

The Company maintains deposits in federally insured financial institutions in excess of federally insured limits.

The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits and investments are held.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally two to five years) and generally consist of furniture and fixtures, computers, scientific and office equipment, and in-process costs related to facilities construction.

Repairs and maintenance costs are charged to expense as incurred.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets.

If the carrying amount is not recoverable, the Company measures the amount of any impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset.

While the Company’s current and historical operating losses and negative cash flows are indicators of impairment, management believes that future cash flows to be received support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses since inception.

Effective January 1, 2019, the Company determines if a contract contains a lease at the inception of the contract.

The Company currently has leases related to its facilities leased for office and laboratory space, which are classified as operating leases.

These leases result in operating right-of-use (ROU) assets, current operating lease liabilities, and non-current operating lease liabilities in the condensed consolidated balance sheets.

The Company does not have any financing leases.

Leases with a term of 12 months or less are considered short-term and a ROU asset and lease obligation are not recognized.

Payments associated with short-term leases are expensed on a straight-line basis over the lease term.

Lease liabilities represent an obligation to make lease payments arising from the lease and ROU assets represent the right to use the underlying asset identified in the lease for the lease term.

Lease liabilities are measured at the present value of the l ease payments not yet paid discounted using the discount rate for the lease established at the lease commencement date.

To determine the present value, the implicit rate is used when readily determinable.

For those leases where the implicit rate is not pro vided, the Company determines an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.

ROU assets are measured as the present value of the lease payments and also in clude any prepaid lease payments made and any other indirect costs, and exclude any lease incentives received.

Lease terms may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Lease expense for operating leases is recognized on a straight-line basis over the lease term.

The Company aggregates all lease and non-lease components for each class of underlying assets into a single lease component.

Revenue Recognition

The Company recognizes revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration the Company is entitled to receive in exchange for such product or service.

In doing so, the Company follows a five-step approach:

(i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the customer obtains control of the product or service.

The Company considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard.

The Company applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.

A customer is a party that has entered into a contract with the Company, where the purpose of the contract is to obtain a product or a service that is an output of the Company’s ordinary activities in exchange for consideration.

To be considered a contract, (i) the contract must be approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights regarding the product or the service to be transferred can be identified, (iii) the payment terms for the product or the service to be transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of future cash flows is expected to change as a result of the contract), and (v) it is probable that the Company will collect substantially all of the consideration to which it is entitled to receive in exchange for the transfer of the product or the service .

A performance obligation is defined as a promise to transfer a product or a service to a customer.

The Company identifies each promise to transfer a product or a service (or a bundle of products or services, or a series of products and services that are substantially the same and have the same pattern of transfer) that is distinct.

A product or a service is distinct if both (i) the customer can benefit from the product or the service either on its own or together with other resources that are readily available to the customer and (ii) the Company’s promise to transfer the product or the service to the customer is separately identifiable from other promises in the contract.

Each distinct promise to transfer a product or a service is a unit of accounting for revenue recognition.

If a promise to transfer a product or a service is not separately identifiable from other promises in the contract, such promises should be combined into a single performance obligation.

The transaction price is the amount of consideration the Company is entitled to receive in exchange for the transfer of control of a product or a service to a customer.

To determine the transaction price, the Company considers the existence of any significant financing component, the effects of any variable elements, noncash considerations and consideration payable to the customer.

If a significant financing component exists, the transaction price is adjusted for the time value of money.

If an element of variability exists, the Company must estimate the consideration it expects to receive and uses that amount as the basis for recognizing revenue as the product or the service is transferred to the customer.

There are two methods for determining the amount of variable consideration:

(i) the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range of possible consideration amounts.

If a contract has multiple performance obligations, the Company allocates the transaction price to each distinct performance obligation in an amount that reflects the consideration the Company is entitled to receive in exchange for satisfying each distinct performance obligation.

For each distinct performance obligation, revenue is recognized when (or as) the Company transfers control of the product or the service applicable to such performance obligation.

In those instances where the Company first receives consideration in advance of satisfying its performance obligation, the Company classifies such consideration as deferred revenue until (or as) the Company satisfies such performance obligation.

In those instances where the Company first satisfies its performance obligation prior to its receipt of consideration, the consideration is recorded as accounts receivable.

The Company expenses incremental costs of obtaining and fulfilling a contract as and when incurred if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial.

Otherwise, such costs are capitalized as contract assets if they are incremental to the contract and amortized to expense proportionate to revenue recognition of the underlying contract.

Research and Development Costs

All research and development costs are expensed as incurred.

Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of employee stock option and restricted stock unit grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis.

For stock option grants for which vesting is subject to performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable or the performance condition has been achieved.

For stock option grants for which vesting is subject to both performance-based milestones and market conditions, expense is recorded over the derived service period after the point when the achievement of the performance-based milestone is probable or the performance condition has been achieved.

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, with the exception of option grants for which vesting is subject to both performance-based milestones and market conditions, which are valued using a lattice-based model.

The fair value of restricted stock units is based on the closing price of the Company’s common stock as reported on The Nasdaq Global Market on the date of grant.

The Company recognizes forfeitures for all awards as such forfeitures occur.

Convertible Preferred Stock

The Company applies the relevant accounting standards to distinguish liabilities from equity when assessing the classification and measurement of preferred stock.

Preferred shares subject to mandatory redemptions are considered liabilities and measured at fair value.

Conditionally redeemable preferred shares are considered temporary equity.

All other preferred shares are considered as stockholders’ equity.

The Company applies the relevant accounting standards for derivatives and hedging (in addition to distinguishing liabilities from equity) when accounting for hybrid contracts that contain conversion options.

Conversion options must be bifurcated from the host instruments and accounted for as free-standing financial instruments according to certain criteria.

These criteria include circumstances when (i) the economic characteristics and risks of the embedded derivative instruments are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable accounting principles with changes in fair value reported in earnings as they occurred, and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The derivative is subsequently measured at fair value at each reporting date, with the changes in fair value reported in earnings.

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.

Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized.

In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more- likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense.

Any accrued interest and penalties are included within the related tax liability.

Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources.

Other comprehensive loss included unrealized gains and losses on investments classified as available-for-sale securities, which was the only difference between net loss and comprehensive loss for the applicable periods.

Net Loss Per Common Share

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

Dilutive common stock equivalents comprised convertible preferred stock, warrants for the purchase of common stock, and common stock options and restricted stock units outstanding under the Company’s stock option plans.

For all periods presented, there is no difference in the number of common shares used to calculate basic and diluted common shares outstanding due to the Company’s net loss position.

Potentially dilutive securities not included in the calculation of diluted net loss per common share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

As of December 31,

Warrants for common stock

Common stock options

Restricted stock units

Series A convertible preferred stock (if converted)

Going Concern Assessment

Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date.

The Company determined that there are no conditions or events that raise substantial doubt about its ability to continue as a going concern as of the date of the issuance of these financial statements.

Recently Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07.

ASU 2018-07 expands the scope of Accounting Standards Codification (ASC) 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees.

Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of ASC 718 will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered.

ASU 2018-07 is effective for fiscal years beginning after December 15, 2018.

The Company adopted the update in the first quarter of fiscal year 2019 using the modified retrospective method.

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASC 842), which requires a lessee to recognize a lease liability and a right-of-use asset for all leases with lease terms of more than 12 months.

This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted.

Companies may adopt this guidance using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.

In July 2018, the FASB issued ASU 2018-11, which provides the option of an additional transition method that allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company adopted the standard effective January 1, 2019 using the optional transition method as detailed in ASU 2018-11, which resulted in an increase in operating right-of-use assets of $16.6 million and an increase in total liabilities of $18.2 million on the consolidated balance sheet as of the effective date.

There was no material impact on the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2019 as a result of the adoption of ASU 2016-02.

There was no impact to the consolidated financial statements for the prior periods presented due to the transition method elected.

The Company elected the package of practical expedients permitted under the transition guidance, which among other things, allowed the Company to carry forward the historical lease classification.

Additionally, the Company elected the hindsight provision for determining the lease term and elected to aggregate all lease and non-lease components for each class of underlying assets into a single lease component.

Recent ly Issued Accounting Pronouncements

In November 2018, the FASB issued ASU 2018-18, which clarifies the interaction between ASC Topic 808, Collaborative Arrangements , and ASC Topic 606, Revenue from Contracts with Customers .

The guidance, among other items, clarifies that certain transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account.

ASU 2018-18 is effective for fiscal years beginning after December 15, 2019.

The Company is currently evaluating the expected impact of the guidance, but does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-13 (ASU 2018-13).

ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures.

ASU 2018-13 is effective for fiscal years beginning after December 15, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments , which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities.

The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

Collaboration and License Agreements

Ono Collaboration and Option Agreement

On September 14, 2018, the Company entered into a Collaboration and Option Agreement (the Ono Agreement) with Ono Pharmaceutical Co.

(Ono) for the joint development and commercialization of two off-the-shelf iPSC-derived chimeric antigen receptor (CAR) T-cell product candidates.

The first off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 1) targets an antigen expressed on certain lymphoblastic leukemias, and the second off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 2) targets a novel antigen identified by Ono expressed on certain solid tumors (each a Candidate and collectively the Candidates).

Pursuant to the Ono Agreement, the Company and Ono are jointly conducting research and development activities under a joint development plan, with the goal of advancing each Candidate to a pre-defined preclinical milestone.

The Company has granted to Ono, during a specified period of time, an option to obtain an exclusive license under certain intellectual property rights to develop and commercialize (a) Candidate 1 in Asia, with the Company retaining rights for development and commercialization in all other territories of the world and (b) Candidate 2 in all territories of the world, with the Company retaining the right to co-develop and co-commercialize Candidate 2 in the United States and Europe under a joint arrangement whereby it is eligible to share at least 50% of the profits and losses (each, an Option).

For each Candidate, the Option will expire upon the earliest of:

(a) the achievement of the pre-defined preclinical milestone, (b) termination by Ono of research and development activities for the Candidate and (c) the date that is the later of (i) four years after the Effective Date and (ii) completion of all applicable activities contemplated under the joint development plan (the Option Period).

The Company has maintained worldwide rights of manufacture for both Candidates.

Under the terms of the Ono Agreement, Ono paid the Company an upfront, non-refundable and non-creditable payment of $10.0 million in connection with entering into the Ono Agreement.

Additionally, as consideration for the Company’s conduct of research and preclinical development under a joint development plan, Ono pays the Company annual research and development fees set forth in the annual budget included in the joint development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan.

The Company received $5.0 million in October 2018 as a prepayment for the first year of research and development.

Further, under the terms of the Ono Agreement, Ono has agreed to pay the Company up to an additional $40.0 million, subject to the achievement of a preclinical milestone (Option Milestone) and the exercise by Ono of the Options (Option Exercise Fees) during the Option Period.

Such fees are in addition to the upfront payment and research and development fees.

Subject to Ono’s exercise of the Options and to the achievement of certain clinical, regulatory and commercial milestones (Milestones) with respect to each Candidate in specified territories, the Company is entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subject to reduction by 50% if the Company elects to co-develop and co-commercialize Candidate 2 as described above.

The Company is also eligible to receive tiered royalties (Royalties) ranging from the mid-single digits to the low-double digits based on annual net sales by Ono of each Candidate in specified territories, with such royalties subject to certain reductions.

The Ono Agreement will terminate with respect to a Candida te if Ono does not exercise its Option for a Candidate within the Option Period, or in its entirety if Ono does not exercise any of its Options for the Candidates within their respective Option Periods.

In addition, either party may terminate the Ono Agree ment in the event of breach, insolvency or patent challenges by the other party;

provided, that Ono may terminate the Ono Agreement in its sole discretion (x) on a Candidate-by-Candidate basis at any time after the second anniversary of the effective date of the Ono Agreement or (y) on a Candidate-by-Candidate or country-by-country basis at any time after the expiration of the Option Period, subject to certain limitations.

The Ono Agreement will expire on a Candidate-by-Candidate and country-by-country basi s upon the expiration of the applicable royalty term, or in its entirety upon the expiration of all applicable payment obligations under the Ono Agreement.

The Company applied ASC 808, Collaborative Arrangements and determined that the Ono Agreement is applicable to such guidance.

The Company concluded that Ono represented a customer and applied relevant guidance from ASC 606, Revenue from Contracts with Customers (ASC 606) to evaluate the appropriate accounting for the Ono Agreement.

In accordance with this guidance, the Company identified its performance obligations, including its grant of a license to Ono to certain of its intellectual property subject to certain conditions, its conduct of research services, and its participation in a joint steering committee.

The Company determined that its grant of a license to Ono to certain of its intellectual property subject to certain conditions was not distinct from other performance obligations because such grant is dependent on the conduct and results of the research services.

As a result, the license is classified as symbolic intellectual property under ASC 606.

Additionally, the Company determined that its conduct of research services was not distinct from other performance obligations since such conduct is dependent on the guidance of the joint steering committee.

Accordingly, the Company determined that all performance obligations should be accounted for as one combined performance obligation, and that the combined performance obligation is transferred over the expected term of the conduct of the research services, which is estimated to be four years .

The Company also assessed, in connection with the upfront, non-refundable and non-creditable payment of $10.0 million received in September 2018 and the $5.0 million prepayment of the first-year research and development fees in October 2018, whether a significant financing component exists under the Ono Agreement.

Such assessment evaluated whether:

(i) a substantial amount of the consideration is variable, (ii) the amount, or timing of payment, of the consideration would have varied based on the occurrence or non-occurrence of future events that are not substantially within the control of the Company or Ono, and (iii) the timing of the transfer of the performance obligations is at the discretion of Ono.

Based on its assessment, the Company concluded that there was not a significant financing component .

The Company also assessed the effects of any variable elements under the Ono Agreement.

Such assessment evaluated, among other things, the likelihood of receiving (i) preclinical milestone and option fees, (ii) various clinical, regulatory and commercial milestone payments, and (iii) royalties on net sales of either product Candidate.

Based on its assessment, the Company concluded that, based on the likelihood of these variable components occurring, there was not a significant variable element included in the transaction price.

In accordance with ASC 606, the Company determined that the initial transaction price under the Ono Agreement equals $30.0 million, consisting of the upfront, non-refundable and non-creditable payment of $10.0 million and the aggregate estimated research and development fees of $20.0 million.

The upfront payment of $10.0 million was recorded as deferred revenue and will be recognized as revenue over time in conjunction with the Company’s conduct of research services over the estimated four-year period based on actual costs incurred compared to estimated total costs expected to be incurred under the Ono Agreement, as the research and development activities are the primary component of the combined performance obligation.

The Company recorded the $5.0 million prepayment of the first-year research and development fees as deferred revenue, and such fees were recognized as revenue as the research services were delivered.

To date, the Company has received $6.5 million of research and development fees.

The Company has not assigned a transaction price to any Option Milestone, Milestones or Option Exercise Fees given the substantial uncertainty related to their achievement and has not assigned a transaction price to any Royalties.

As a direct result of the Company’s entry into the Ono Agreement, the Company incurred an aggregate of $2.0 million in sublicense consideration to existing licensors of the Company.

The $2.0 million in sublicense consideration represents an asset under ASC 340, Other Assets and Deferred Costs a nd is amortized to research and development expense in conjunction with the Company’s revenue recognition under the Ono Agreement.

During the year ended December 31, 2019, the Company recognized $0.6 million of such expense.

As of December 31, 2019, the contract asset had a balance of $1.3 million.

The Company recognized revenue of $9.3 million under the Ono Agreement during the year ended December 31, 2019.

Such revenue comprised $6.2 million associated with research services and $3.1 million associated with the upfront payment.

During the year ended December 31, 2018, the Company recognized revenue of $0.6 million under the Ono Agreement.

Such revenue comprised $0.4 million associated with research services and $0.2 million associated with the upfront payment.

As of December 31, 2019, aggregate deferred revenue related to the Ono Agreement was $6.6 million, of which $2.8 million is classified as current.

Juno Collaboration and License Agreement

On May 4, 2015, the Company entered into a strategic research collaboration and license agreement (the Juno Agreement) with Juno Therapeutics, Inc.

(Juno) to screen for and identify small molecules that enhance the therapeutic properties of Juno’s genetically-engineered T-cell immunotherapies.

The four-year initial research term under the Juno Agreement concluded as scheduled on May 4, 2019, and the overall agreement was terminated upon the receipt of the last quarterly research payment of $0.2 million, which occurred in May 2019.

No additional funding is expected from Juno.

The Company applied ASC 606 to evaluate the appropriate accounting for the Juno Agreement.

In accordance with this guidance, the Company identified its performance obligations, including its grant of an exclusive worldwide license to certain of its intellectual property subject to certain conditions, its conduct of research services and its participation in a joint research committee.

Total revenue recognized under the Juno Agreement during the year ended December 31, 2019 was $1.4 million, which comprised $0.7 million associated with the upfront fee and equity premium, and $0.7 million associated with research services.

Total revenue recognized under the Juno Agreement for the year ended December 31, 2018 was $4.1 million, which comprised $2.1 million associated with the upfront fee and the equity premium and $2.0 million associated with research services.

Total revenue recognized under the Juno Agreement for the year ended December 31, 2017 was $4.1 million, which comprised $2.1 million associated with the upfront fee and the equity premium and $2.0 million associated with research services.

No additional revenue is expected to be recognized under the Juno Agreement in future periods.

Memorial Sloan Kettering Cancer Center License Agreement

On May 15, 2018, the Company entered into an Amended and Restated Exclusive License Agreement (the Amended MSK License) with Memorial Sloan Kettering Cancer Center (MSK).

The Amended MSK License amends and restates the Exclusive License Agreement entered into between the Company and MSK on August 19, 2016 (the Original MSK License), pursuant to which the Company entered into an exclusive license agreement with MSK for rights relating to compositions and methods covering iPSC-derived cellular immunotherapy, including T-cells and NK-cells derived from iPSCs engineered with CARs.

Pursuant to the Amended MSK License, MSK granted to the Company additional licenses to certain patents and patent applications relating to new CAR constructs and off-the-shelf CAR T cells, including the use of clustered regularly interspaced short palindromic repeat (CRISPR) and other innovative technologies for their production, in each case to research, develop, and commercialize licensed products in the field of all human therapeutic uses worldwide.

The Company has the right to grant sublicenses to certain licensed rights in accordance with the terms of the Amended MSK License, in which case it is obligated to pay MSK a percentage of certain sublicense income received by the Company .

The Company issued 500,000 shares of the Company’s common stock to MSK (the MSK Shares) and, in return, MSK returned its entire interest in Tfinity Therapeutics, Inc.

(Tfinity) to the Company.

As a result, as of the effective date of the Amended MSK License, Tfinity is a wholly-owned subsidiary of the Company.

The MSK Shares were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the Securities Act), in reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a public offering.

Additionally, the Company paid an upfront fee of $0.5 million.

The Company is also obligated to pay to MSK an annual license maintenance fee during the term of the agreement, and milestone payments upon the achievement of specified clinical, regulatory and commercial milestones for licensed products as well as royalty payments on net sales of licensed products.

Furthermore , in the event a licensed product achieves a specified clinical milestone, MSK is then eligible to receive additional milestone payments, where the amount of such payments owed to MSK are contingent upon certain increases in the price of the Company’s common stock following the date of achievement of such clinical milestone.

Given the high degree of uncertainty surrounding the achievement of clinical milestones and the requisite increase in the price of the Company’s common stock, the Company has not recorded a liability for such payments.

During the year ended December 31, 2018, the Company recognized an aggregate of $5.3 million of research and development expenses, consisting of the $0.5 million upfront cash payment to MSK and the issuance of the MSK Shares, valued at $4.8 million, associated with the Amended MSK License.

Gladstone License Agreement

On September 11, 2018, the Company entered into an exclusive license agreement (the Gladstone License Agreement) with the J.

David Gladstone Institutes (Gladstone).

Pursuant to the Gladstone License Agreement, Gladstone granted to the Company exclusive licenses to certain patents and patent applications (the Patent Rights) for the research, development, manufacturing, and commercialization of human therapeutics derived from iPSCs.

The Patent Rights cover the use of the CRISPR and engineered nuclease-deactivated CRISPR-associated protein-9 (dCas9) system, known as the CRISPR activation (CRISPRa) system, for cellular reprogramming and iPSC generation.

In consideration for the rights granted under the Gladstone License Agreement, the Company issued to Gladstone 100,000 shares of the Company’s common stock (the Gladstone Shares).

The Gladstone Shares were issued pursuant to an exemption from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a public offering.

Additionally, the Company paid Gladstone an upfront fee of $0.1 million and is obligated to pay Gladstone milestone payments in an aggregate amount of up to approximately $1.9 million upon the achievement of specified clinical, regulatory and commercial milestones as well as tiered royalties in the low single digits on net sales of human therapeutic products covered by the Patent Rights.

The Company is also obligated to pay Gladstone a tiered percentage in the low- to mid-single digits of certain income received by the Company in connection with the sublicense of the Patent Rights .

During the year ended December 31, 2018, the Company recognized an aggregate of $1.4 million of research and development expenses, consisting of the $0.1 million upfront cash payment to Gladstone and the issuance of the Gladstone Shares, valued at $1.3 million, associated with the Gladstone License Agreement.

California Institute for Regenerative Medicine Award

On April 5, 2018, the Company executed an award agreement with the California Institute for Regenerative Medicine (CIRM) pursuant to which CIRM awarded the Company $4.0 million to advance the Company’s FT516 product candidate into a first-in-human clinical trial for the treatment of subjects with advanced solid tumors, including in combination with monoclonal antibody therapy (the Award).

Pursuant to the terms of the Award, the Company is eligible to receive five disbursements in varying amounts totaling $4.0 million, with one disbursement receivable upon the execution of the Award, and four disbursements receivable upon the completion of certain milestones throughout the project period.

The Award is subject to certain co-funding requirements by the Company, and the Company is required to provide CIRM progress and financial update reports under the Award.

In December 2018, the Company discussed with CIRM its intent to pursue the clinical development of FT516 in relapsed / refractory hematologic malignancies in addition to advanced solid tumors, and the Company’s preference to first submit an IND application for FT516 in relapsed / refractory hematologic malignancies rather than in advanced solid tumors.

In January 2019, the Company submitted its IND application for FT516 in relapsed / refractory hematologic malignancies, which IND submission was allowed by the FDA in February 2019.

The Company and CIRM agreed to suspend the Award until such time as the Company elected to proceed with its submission of an IND application for FT516 in advanced solid tumors.

In November 2019, the Company filed an IND application for FT516 in advanced solid tumors and the Award was taken off of suspension by CIRM in January 2020.

In February 2020, the Company received a $0.4 million disbursement based on a milestone achievement.

Pursuant to the terms of the Award, the Company, in its sole discretion, has the option to treat the Award either as a loan or as a grant.

In the event the Company elects to treat the Award as a loan, the Company will be obligated to repay i) 60%, ii) 80%, iii) 100% or iv) 100% plus interest at 7% plus LIBOR, of the total Award to CIRM, where such repayment rate is dependent upon the phase of clinical development of FT516 at the time of the Company’s election.

If the Company does not elect to treat the Award as a loan within 10 years of the date of the Award, the Award will be considered a grant and the Company will be obligated to pay to CIRM a royalty on commercial sales of FT516 until such royalty payments equal nine times the total amount awarded to the Company under the Award.

Since the Company may, at its election, repay some or all of the Award, the Company accounts for the Award as a liability until the time of election.

As of December 31, 2019, the Company has received aggregate disbursements under the Award in the amount of $3.5 million.

The aggregate amount received is recorded as a CIRM Liability on the accompanying consolidated balance sheets and classified as current or non-current based on the potential amount payable within twelve months of the current balance sheet date.

The Company invests portions of excess cash in United States treasuries and corporate debt securities with maturities ranging from three to eighteen months from the purchase date.

These securities are classified as short-term and long-term investments in the accompanying consolidated balance sheets based on each security’s contractual maturity date and are accounted for as available-for-sale securities.

The following table summarizes the Company’s investments accounted for as available-for-sale securities as of December 31, 2019 and 2018 (in thousands):

December 31, 2019

Classified as current assets:

Treasury debt securities

Corporate debt securities

Total short-term investments

Classified as non-current assets:

Treasury debt securities

Greater than 1

Corporate debt securities

Greater than 1

Total long-term investments

December 31, 2018

Classified as current assets:

Treasury debt securities

Total short-term investments

The Company reviews its investment holdings at the end of each reporting period and determines if any unrealized losses are other-than-temporary using a variety of factors including the Company’s intent to sell the underlying securities prior to maturity and whether it is more likely than not that the Company would be required to sell the securities before the recovery of their amortized basis.

During the years ended December 31, 2019, 2018 and 2017 the Company did not recognize any impairment or realized gains or losses on sales of investments and the Company does not consider any of its investments as other-than-temporarily impaired.

Property and Equipment

Property and equipment consist of the following (in thousands):

Furniture and fixtures

Computer and office equipment

Leasehold improvements—building

Scientific equipment

Construction-in-process

Total property and equipment, gross

Less accumulated depreciation and amortization

Total property and equipment, net

Depreciation expense related to property and equipment was $2.2 million, $1.2 million, and $1.0 million, for the years ended December 31, 2019, 2018, and 2017, respectively.

No material gains or losses on the disposal of property and equipment have been recorded for the years ended December 31, 2019, 2018, and 2017.

As of December 31, 2019, $0.6 million of fixed assets had not been paid.

Accrued Expenses and Long-Term Debt

Accrued Expenses

Current accrued expenses consist of the following (in thousands):

Accrued payroll and other employee benefits

Accrued clinical trial related costs

Accrued other

Total current accrued expenses

Long-term accrued expenses represented the accrual for the final payment fee associated with our long-term debt.

Long-Term Debt

Long-term debt and unamortized discount balances are as follows (in thousands):

Long-term debt

Less debt issuance costs and discount, net of current portion

Long-term debt, net of long-term portion of debt issuance costs and discount

Less current portion of long-term debt

Long-term debt, net

Current portion of long-term debt

Less current portion of debt issuance costs and discount

Current portion of long-term debt, net

Silicon Valley Bank Debt Facilities

On July 30, 2014, the Company entered into the Amended and Restated Loan and Security Agreement (the Restated LSA) with Silicon Valley Bank (the Bank), collateralized by substantially all of the Company’s assets, excluding certain intellectual property.

The Restated LSA amends and restates the Loan and Security Agreement, dated as of January 5, 2009, as amended, by and between the Company and the Bank (Loan Agreement).

Pursuant to the Restated LSA, the Bank agreed to make loans to the Company in an aggregate principal amount of up to $20.0 million, comprised of (i) a $10.0 million term loan, funded at the closing date (the Term A Loan) and (ii) subject to the achievement of a specified clinical milestone, additional term loans totaling up to $10.0 million in the aggregate, which were available until December 31, 2014 (each, a Term B Loan).

On December 24, 2014, the Company elected to draw on the full $10.0 million under a Term B Loan .

On July 14, 2017 (the First Amendment Effective Date), the Company and the Bank entered into the First Amendment (the SVB Loan Amendment) to the Restated LSA between the Company and the Bank dated July 30, 2014.

Pursuant to the SVB Loan Amendment, the Bank extended an additional term loan to the Company on July 14, 2017 in the principal amount of $15.0 million (the 2017 Term Loan), a portion of which was applied to repay in full the Company’s existing outstanding debt with the Bank under the Restated LSA, which included outstanding principal, accrued interest, and final payment fees.

Following such repayment in full of the Company’s existing outstanding debt with the Bank under the Restated LSA, cash proceeds to the Company from the remaining portion of the 2017 Term Loan were $7.5 million.

The Company determined the repayment of the Restated LSA and issuance of the 2017 Term Loan was a debt extinguishment and accounted for the 2017 Term Loan at fair value as of the First Amendment Effective Date accordingly.

On November 13, 2019, the Company repaid in full all outstanding obligations under the 2017 Term Loan.

The Company used cash on hand in the amount of $14.2 million for the repayment of such obligations associated with the 2017 Term Loan, including the repayment of $13.0 million in principal and $1.2 million associated with the final fee and outstanding interest.

The Company expensed the remaining debt issuance cost capitalized of $0.1 million to interest expense upon the repayment of the 2017 Term Loan.

The 2017 Term Loan was scheduled to mature on January 1, 2022 ( the Term L oan Maturity Date) and bear ed interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%;

provided, however, that in no event would such interest rate exceed 8.25%.

Interest wa s payable on a monthly basis on the first day of each month .

From August 1, 2017 through January 1, 2019 (the Interest-only Period), the Company was required to make monthly payments of interest only.

In January 2019, after achievement of a product development milestone, the Company elected to extend the Interest-only Period from January 1, 2019 through and including to July 31, 2019.

The Company was required to repay the principal, plus monthly payments of accrued interest, in 30 equal monthly installments based on a 30-month amortization schedule.

The Company’s final payment in November 2019 included all outstanding principal and accrued and unpaid interest under the 2017 Term Loan, plus a 7.5%, or $1.1 million, final payment fee.

This final payment fee was accrued as interest expense over the term of the 2017 Term Loan and recorded in accrued expenses.

As a result of the Company’s early repayment of the 2017 Term Loan during November 2019, the unaccrued balance of the final payment fee of $0.3 million was recorded in interest expense during the year ended December 31, 2019.

For the years ended December 31, 2019, 2018, and 2017, the Company recorded $1.8 million, $1.7 million, and $0.8 million respectively, in aggregate interest expense related to the 2017 Term Loan.

In connection with the funding of the Term B Loan under the Restated LSA, the Company issued the Bank and one of its affiliates fully-exercisable warrants to purchase an aggregate of 98,039 shares of the Company’s common stock (the 2014 Warrants) at an exercise price of $4.08 per share.

In March 2018, a portion of the 2014 Warrants were exercised in exchange for 34,149 shares of the Company’s common stock in a cashless transaction.

During July 2019, the remaining balance of the 2014 Warrants outstanding was exercised for 39,263 shares of the Company’s common stock in a cashless transaction.

As a result, none of the 2014 Warrants remain outstanding as of December 31, 2019.

In connection with the SVB Loan Amendment, the Company issued to the Bank on the First Amendment Effective Date a fully exercisable warrant (the 2017 Warrant), expiring in July 2024, to purchase up to an aggregate of 91,463 shares of the Company’s common stock, subject to adjustment, at an exercise price equal to $3.28 per share.

The aggregate fair value of the 2017 Warrant was determined to be $0.2 million using the Black-Scholes option pricing model and was recorded as a debt discount on the 2017 Term Loan.

This debt discount is amortized to interest expense over the term of the 2017 Term Loan using the effective interest method.

The Company determined the effective interest rate of the 2017 Term Loan to be 10.2% as of the First Amendment Effective Date.

During September 2018, the 2017 Warrant was fully exercised in exchange for 67,952 shares of the Company’s common stock in a cashless transaction.

In connection with a prior debt agreement between the Company and the Bank in 2009, the Company issued the Bank fully exercisable warrants to purchase an aggregate of 36,074 shares of the Company’s common stock at a weighted-average exercise price of $ 7.21 per share.

During January 2019, a portion of the warrants were exercised in exchange for 1,245 shares of the Company’s common stock in a cashless transaction.

During July 2019, the remaining balance of the warrants outstanding was exercised for 21,012 shares of the Company’s common stock in a cashless transaction.

No warrants related to the prior debt agreement remain outstanding as of December 31, 2019.

The Company leases its headquarters office and laboratory space under a non-cancelable operating lease.

In May 2018, the Company amended this lease, extending the term of the lease through the end of 2028 and agreeing to lease additional space in the same building as its existing space beginning in January 2019.

The additional space leased as a result of the amendment was considered a separate lease under ASC 842 and was recorded on the consolidated balance sheets as of the lease inception date during January 2019, resulting in an increase in operating right-of-use assets of $7.7 million and an increase in the aggregate lease liability of $9.6 million.

The Company can extend the term of each lease for five years after the end of 2028 at the then prevalent market rate, subject to the Company's delivery to the landlord of twelve months' prior written notice.

Additionally, the Company maintains the right to terminate each lease after October 2025, subject to the Company's delivery to the landlord of twelve month's prior written notice and an early termination payment of $2.5 million.

As of the date of adoption of ASC 842 and upon the lease inception date, the Company was not reasonably certain that it would exercise the extension option or the termination option, and as such, did not include these options in the determination of the total lease terms.

The leases are subject to additional variable charges for common area maintenance and other variable costs.

Given the variable nature of such costs, they are recognized as expense as incurred.

Further, the leases are subject to certain fixed amenities fees for the duration of the lease.

These costs are considered non-lease components, which have been aggregated with the lease components into a single lease component for purposes of determining the total future lease payments.

In connection with the leases, the Company has a cash-collateralized irrevocable standby letter of credit in the amount of $0.2 million.

As of D ecember 31 , 2019, future minimum payments under the Company’s operating leases were $3 8 .

2 million, which will be paid over a remaining weighted-average lease term of 9.

The weighted-average discount rate for the operating lease liabilities was 8.0% , which was the Company's incremental borrowing rate at the date of adopting ASC 842 and upon lease inception.

For the year ended December 31, 2019, total operating lease expense was $6.1 million, which consisted of $3.8 million associated with the straight-line recognition of fixed payments, and $2.3 million associated with variable costs associated with the leases.

For both the years ended December 31, 2018 and 2017, aggregate contractual rent expense was $2.3 million.

Total short-term lease expense associated with short-term leases for the year ended December 31, 2019 was $1.1 million.

Future minimum payments under the Company’s operating leases as of December 31, 2019 are as follows (in thousands):

Lease Payments

Years Ending December 31,

Total undiscounted lease payments

imputed interest

Total lease liability

The Company has an additional operating lease for office and laboratory space in New York that had not yet commenced as of December 31, 2019.

The lease commenced in January 2020 and has a lease term of two years.

Total future minimum payments under the operating lease are $0.3 million.

In January 2020, the Company entered into a lease agreement for office, laboratory, and GMP manufacturing space (the Premises).

The Premises are located in San Diego, California and the Company intends to move its corporate headquarters to the Premises in the middle of 2021.

See Note 13 of the notes to the consolidated financial statements for additional information on this lease.

Convertible Preferred Stock and Stockholders’ Equity

Convertible Preferred Stock

In November 2016, the Company completed a private placement of stock in which investors, including investors affiliated with the directors and officers of the Company, purchased convertible preferred stock and common stock of the Company (the November 2016 Placement).

The Company issued 2,819,549 shares of non-voting Class A Convertible Preferred Stock (the Class A Preferred) at $13.30 per share, each of which is convertible into five shares of common stock upon certain conditions defined in the Certificate of Designation of Preferences, Rights and Limitations of the Class A Preferred filed with the Delaware Secretary of State on November 22, 2016 (the CoD).

The Class A Preferred were purchased exclusively by entities affiliated with Redmile Group, LLC (collectively, Redmile).

The terms of the CoD prohibited Redmile from converting the Class A Preferred into shares of the Company’s common stock if, as a result of conversion, Redmile, together with its affiliates, would own more than 9.99% of the Company’s common stock then issued and outstanding (the Redmile Percentage Limitation), which percentage could change at Redmile’s election upon 61 days’ notice to the Company to (i) any other number less than or equal to 19.99% or (ii) subject to approval of the Company’s stockholders to the extent required in accordance with the NASDAQ Global Market rules, any number in excess of 19.99%.

On May 2, 2017, the Company’s stockholders approved the issuance of up to an aggregate of 14,097,745 shares of common stock upon the conversion of the outstanding shares of Class A Preferred.

As a result, Redmile has the right to increase the Redmile Percentage Limitation to any percentage in excess of 19.99% at its election.

The Company also issued 7,236,837 shares of common stock at $2.66 per share as part of the November 2016 Placement.

The Class A Preferred are non-voting shares and have a stated par value of $0.001 per share and are convertible into five shares of the Company’s common stock at a conversion price of $2.66 per share, which was the fair value of the Company’s common stock on the date of issuance.

Holders of the Class A Preferred have the same dividend rights as holders of the Company’s common stock.

Additionally, the liquidation preferences of the Class A Preferred are pari passu among holders of the Company’s common stock and holders of the Class A Preferred, pro rata based on the number of shares held by each such holder (treated for this purpose as if the Class A Preferred had been converted to common stock).

During the year ended December 31, 2019, 25,000 shares of the Company’s Class A Preferred were converted into 125,000 shares of the Company’s common stock.

Description of Securities

As of December 31, 2019, the Board of Directors of the Company has not declared any dividends.

2013 Stock Option and Incentive Plan, and Inducement Equity Plan

2013 Stock Option and Incentive Plan

On August 28, 2013, the Company’s board of directors and stockholders approved and adopted the 2013 Stock Option and Incentive Plan (the 2013 Plan).

The 2013 Plan became effective immediately prior to the Company’s IPO.

The 2013 Plan was subsequently amended in May 2017.

Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then employees, officers, directors or consultants of the Company or its subsidiaries.

A total of 1,020,000 shares of common stock were initially reserved for issuance under the 2013 Plan, and in May 2017, stockholders approved an additional 2,500,000 shares of common stock for issuance under the 2013 Plan.

The shares issuable pursuant to awards granted under the 2013 Plan will be authorized, but unissued shares.

The shares of common stock underlying any awards from the 2013 Plan and a previously existing equity plan from 2007 that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of common stock, expire or are otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2013 Plan.

In addition, the number of shares of stock available for issuance under the 2013 Plan will be automatically increased each January 1 by 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or such lesser number as determined by the compensation committee of the Company’s board of directors.

Recipients of stock options under the 2013 Plan shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair value of such stock on the date of grant.

Under the 2013 Plan, stock options generally vest 25% on the first anniversary of the original vesting date, with the balance vesting monthly over the remaining three years, or vest monthly over four years, unless they contain specific performance and/or market-based vesting provisions.

The maximum term of stock options granted under the 2013 Plan is ten years.

Under the 2013 Plan, restricted stock units generally vest annually over four years.

Inducement Plan

On May 10, 2016, the Company’s board of directors approved the Fate Therapeutics, Inc.

Inducement Equity Plan (the Inducement Plan), the purpose of which is to enable the Company to grant equity awards to induce highly-qualified prospective officers and employees who are not employed by the Company to accept employment with the Company.

Under the Inducement Plan, the Company may grant non-qualified stock options and restricted stock units.

A total of 500,000 shares of common stock were initially reserved for issuance under the Inducement Plan.

In January 2019 and January 2018, an additional 200,000 shares and 400,000 shares, respectively, of common stock were reserved for issuance under the Inducement Plan.

The shares of common stock underlying any awards from the Inducement Plan that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of common stock, expire or are otherwise terminated (other than by exercise) under the Inducement Plan will be added back to the shares of common stock available for issuance under the Inducement Plan.

Employee Stock Purchase Plan

On September 13, 2013, the Company’s board of directors approved and adopted the 2013 Employee Stock Purchase Plan (the ESPP).

A total of 729,000 shares of common stock were initially reserved for issuance under the ESPP.

In addition, the number of shares of stock available for issuance under the ESPP will be automatically increased each January 1, beginning on January 1, 2015, by the lesser of (i) 2% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31, (ii) 450,000 shares, or (iii) such lesser number as determined by the compensation committee of the Company’s board of directors.

No purchases have been made to date under the ESPP.

Stock Options and Restricted Stock Unit Awards

Stock Options.

The following table summarizes stock option activity and related information under all equity plans for the years ended December 31, 2019, 2018 and 2017:

Intrinsic Value

Outstanding at December 31, 2016

Outstanding at December 31, 2017

Outstanding at December 31, 2018

Outstanding at December 31, 2019

Options vested and expected to vest at December 31, 2019

Options exercisable at December 31, 2019

For the year ended December 31, 2019, the weighted average grant date fair value of stock options granted per share was equal to $11.52.

For the years ended December 31, 2018 and 2017, the weighted average grant date fair value of stock options granted to employees and directors was equal to $8.28 and $2.29, respectively.

As of December 31, 2019, 2018 and 2017, the unrecognized compensation cost related to outstanding options (excluding those with unachieved performance-based conditions) was $40.4 million, $15.9 million and $5.8 million, respectively, which was expected to be recognized as expense over approximately 2.9 years, 3.1 years and 2.6 years, respectively.

The total intrinsic value, which is the amount by which the exercise price was exceeded by the price of the Company’s common stock on the date of exercise, of stock options exercised during the years ended December 31, 2019, 2018, and 2017, was $10.7 million, $5.5 million, and $0.1 million, respectively.

Total cash received upon the exercise of stock options was $2.5 million for the year ended December 31, 2019.

Restricted Stock Units.

The following table summarizes r estricted s tock u nit activity and related information under all eq uity plans for the years ended December 31, 201 9 , 201 8 and 201 7 :

Fair Value Per

Intrinsic Value

Outstanding at December 31, 2016

Outstanding at December 31, 2017

Outstanding at December 31, 2018

Outstanding at December 31, 2019

Restricted stock units expected to vest at December 31, 2019

As of December 31, 2019, 2018 and 2017, the unrecognized compensation cost related to outstanding restricted stock units was $6.2 million, $0.4 million, and $0.9 million respectively, which was expected to be recognized as expense over approximately 2.7 years, 0.8 years, and 1.8 years respectively.

Stock-Based Compensation Expense

The allocation of stock-based compensation for all stock awards is as follows (in thousands):

Years Ended December 31,

Research and development

General and administrative

Total stock-based compensation expense

Stock Option Grants Valuation.

As of January 1, 2019, the Company adopted ASU 2018-07, which aligned the guidance on share-based payments to nonemployees with that for share-based payments to employees.

In accordance with ASU 2018-07, the measurement of equity-classified nonemployee awards is fixed at the grant date and entities are not required to remeasure nonemployee equity awards at each reporting date until such time that the measurement date is established.

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee and nonemployee stock option grants were as follows :

Years Ended December 31,

Risk–free interest rate

Expected volatility

Expected term (in years)

Expected dividend yield

Risk-free interest rate.

The Company bases the risk-free interest rate assumption on observed interest rates appropriate for the expected term of the stock option grants.

Expected dividend yield.

The Company bases the expected dividend yield assumption on the fact that it has n ever paid cash dividends and has no present intention to pay cash dividends.

Expected volatility.

Due to the Company’s limited operating history and limited company-specific historical or implied volatility, the expected volatility assumption is based on historical volatilities of a peer group of similar companies whose share prices are publicly available.

The peer group was developed based on companies in the biotechnology industry.

Expected term.

The expected term represents the period of time that options are expected to be outstanding.

As the Company does not have sufficient historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period.

Warrants to Purchase Common Stock in Connection with Debt Issuance

As a result of the financing of the Loan Amendment on July 14, 2017, the Company issued SVB fully-exercisable warrants to purchase an aggregate of 91,463 shares of the Company’s common stock at an exercise price of $3.28 per share.

The warrants would have expired in July 2024.

In September 2018, the 2017 Warrant was fully exercised in exchange for 67,952 shares of the Company’s common stock in a cashless transaction.

See Note 6 of the notes to the consolidated financial statements for additional information on the debt issuance.

The fair value of the warrants was determined to be $0.2 million, which was recorded to additional paid-in capital as a debt discount.

The weighted- average assumptions used in the Black-Scholes option pricing model to determine the fair value of the warrants issued were as follows:

Risk–free interest rate

Expected volatility

Expected term (in years)

Expected dividend yield

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance is as follows:

Common stock warrants

Convertible preferred stock (if converted)

Common stock options

Restricted stock units

Awards available under the 2013 Plan

Awards available under the Inducement Plan

Employee stock purchase plan

The following is a reconciliation of the Company’s expected federal income tax provision (benefit) to the actual income tax provision (in thousands):

Years Ended December 31,

Tax computed at federal statutory rate

State tax, net of federal tax benefit

Permanent differences

Stock compensation

R&D tax credits

Reserve for uncertain tax positions

Tax Cuts and Jobs Act

Valuation allowance

Income tax expense

Significant components of the Company’s deferred tax assets are summarized as follows (in thousands):

Deferred tax assets:

Section 59e amortization

Net operating losses

R&D tax credits

Depreciation and amortization

Deferred revenue

Stock compensation

Lease liability

Total deferred tax assets

Deferred tax liabilities:

Right-of-use assets

Total deferred tax liabilities

Net of deferred tax assets and liabilities

Valuation allowance

Net deferred tax assets

A valuation allowance of $94.6 million and $67.4 million at December 31, 2019 and 2018, respectively, has been established to offset the deferred tax assets, as realization of such assets is uncertain.

At December 31, 2019, the Company had federal and California net operating loss (NOL) carryforwards of $168.2 million and $168.2 million, respectively, which may be available to offset future taxable income.

The federal and California NOL carryforwards begin to expire in 2027 and 2028, respectively, unless previously utilized.

At December 31, 2019, the Company had federal and California research and development (R&D) credit carryforwards of $13.4 million and $8.5 million, respectively.

The federal R&D tax credit carryforwards will begin to expire in 2035 unless previously utilized.

The California R&D credit carryforwards will carry forward indefinitely.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that c ould be used annually in the future to offset taxable income.

The tax benefits related to future utilization of federal and state net operating loss carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative cha nges in ownership exceeds 50% within any three-year period.

The Company completed a study to assess whether an ownership change, as defined by Section 382 of the Code, had occurred from the Company’s formation through December 31, 2015.

Based upon this stu dy, the Company determined that several ownership changes had occurred.

Accordingly, the Company reduced its deferred tax assets related to the federal NOL carryforwards and the federal R&D credit carryforwards that are anticipated to expire unused as a re sult of these ownership changes.

These tax attributes were excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate.

The Company updated the study through December 31, 2019 and concluded there were no ownership changes subsequent to December 31, 2015 .

Future ownership changes may further limit the Company’s ability to utilize its remaining tax attributes .

The Company files income tax returns in the United States and California, and has historically filed income tax returns in Canada.

The Company currently has no years under examination by any jurisdiction;

however, the Company is subject to income tax examination by federal, Californian and Canadian tax authorities for years beginning in 2016, 2015, and 2015, respectively.

However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs and tax credits were generated and carried forward, and make adjustments up to the amount of the carryforwards.

The change in the Company’s unrecognized tax benefits is summarized as follows (in thousands):

Beginning unrecognized tax benefits

Increase related to current year tax positions

Increase related to prior year tax positions

Decrease related to prior year tax positions

Ending unrecognized tax benefits

The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2019 will significantly change within the next twelve months.

Due to the valuation allowance recorded against the Company’s deferred tax assets, none of the total unrecognized tax benefits as of December 31, 2019 would reduce the effective tax rate if recognized.

The Company has not recognized interest or penalties in its consolidated statements of operations and comprehensive loss since inception.

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017.

The Act reduces the US federal corporate tax rate from 34% to 21%.

The reduction in the federal corporate tax rate caused the Company to remeasure its deferred tax assets and liabilities at December 31, 2017.

The remeasurement resulted in a provisional income tax expense of $25.3 million, offset by an equal reduction in the valuation allowance during the year ended December 31, 2017.

During 2018, the Company finalized its analysis of the provisional impact associated with the remeasurement of deferred tax assets.

There was no change in the provisional remeasurement amount previously recorded during 2017.

Employee Benefits

Effective January 1, 2009, the Company adopted a defined contribution 401(k) plan for employees who are at least 21 years of age.

Employees are eligible to participate in the plan beginning on the first day of the calendar quarter following date of hire.

Under the terms of the plan, employees may make voluntary contributions as a percent of compensation.

No matching contributions have been made by the Company since the adoption of the 401(k) plan.

Commitments and Contingencies

License Agreements

The Company has entered into exclusive license agreements with certain academic institutions and universities pursuant to which the Company acquired certain intellectual property.

Pursuant to each agreement, as consideration for an exclusive license to the intellectual property, the Company paid a license fee, reimbursed the institution for historical patent costs and, in certain instances, issued the institution shares of restricted common stock.

Additionally, under each agreement, the institution is generally eligible to receive future consideration including, but not limited to, annual maintenance fees, royalties, milestone payments and sublicensing fees.

Each of the license agreements is generally cancelable by the Company, given appropriate prior written notice.

Minimum annual payments to maintain these cancelable licenses total an aggregate of $0.4 million.

Selected Quarterly Financial Data (Unaudited)

The following tables show a summary of the Company’s quarterly financial information for each quarter of 2019 and 2018 (in thousands, except per share data):

Total operating expenses

Basic and diluted net loss per common share (1)

Total operating expenses

Basic and diluted net loss per common share (1)

Basic and diluted loss per share are computed independently for each of the quarters presented.

As such, the sum of the quarterly basic and diluted loss per share information may not equal annual basic and diluted loss per share information.

Subsequent Events

In January 2020, the Company entered into a lease agreement for office, laboratory, and GMP manufacturing space (the Premises).

The Premises is located in San Diego, California and the Company intends to move its corporate headquarters to the Premises in the middle of 2021.

Lease payments shall commence, subject to certain conditions, in May 2021 (the Rent Commencement Date) and the lease has a lease term of 15 years starting from the Rent Commencement Date.

The Company has the option to extend the lease for two successive five-year terms.

The Company also has a one-time option to terminate the lease after 10 years from the Rent Commencement Date, subject to payment of a $30.0 million early termination fee.

Total future minimum payments under the lease, assuming a 15-year term from the Rent Commencement Date, are $157.6 million, which are to be paid in monthly installments beginning May 2021.

The landlord of the Premises will contribute an aggregate of up to $30.0 million toward tenant improvements of the Premises.

In connection with the lease, the Company will maintain a letter of credit for the benefit of the landlord in an initial amount of $15.0 million, which amount is subject to reduction over time.

Changes in and Disagreements with Acco untants on Accounting and Financial Disclosure

Stock Price Sensitivity

We entered into a license agreement with MSK under which we obtained rights relating to compositions and methods covering iPSC-derived cellular immunotherapy, including T cells and NK cells derived from iPSCs engineered with CARs.

MSK is eligible to receive certain milestone payments totaling up to $75.0 million in the event a licensed product achieves a specified clinical milestone, where the amount of such payments owed to MSK is contingent upon certain increases in the price of our common stock following the date of achievement of such clinical milestone.

As of December 31, 2020, the estimated fair value of the stock price appreciation milestones was $47.7 million.

Changes in the price our common stock as of each balance sheet date may cause a relatively large change in the estimated fair value of the stock price appreciation milestones and the associated liability and resulting expense or gain.

See Note 5 to our consolidated financial statements for a related sensitivity analysis.

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

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk