FATE THERAPEUTICS INC 10-K

ITEM 8. Financial Statements and Supplementary Data Report 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, 2020 and 2019, 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, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. 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, 2020, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2021, expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 85 Table of Contents Determination of appropriate accounting of the collaboration and option agreement with Janssen Biotech, Inc. Description of the matter As described in Note 2 to the consolidated financial statements, the Company entered into a Collaboration and Option Agreement (the Janssen Agreement) and Stock Purchase Agreement with Janssen Biotech, Inc. during the year ended December 31, 2020. Under the Janssen agreement the Company concluded that Janssen represented a customer as defined by Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. The Company identified its potential performance obligations, including its grant of a license to Janssen to certain intellectual property, its conduct of research and development services (R&D services) and its participation in various joint oversight committees. In determining the appropriate accounting treatment, the Company concluded the Janssen Agreement represented a single distinct performance obligation due to the highly interdependent and interrelated nature of the licensed technology and the conduct and results of the R&D services. Fulfillment of the performance obligation was determined to occur throughout the term of the contract. After considering the impact of both variable elements and potential milestones, the Company determined that the initial transaction price under the Janssen Agreement equals $66.0 million, which consists of an upfront payment of $50.0 million and a $16 million premium received on the sale of the Company’s common stock. Given the subjective nature of this judgement and the potential impact on the revenue to be recognized, we identified the evaluation as to whether any promises or services described in the collaboration agreement should be considered as distinct performance obligations in the context of the contract to be a critical audit matter. How we addressed the matter in our audit We tested the controls over the appropriateness for the accounting of the collaboration and option agreement, including management review controls over the identification of and accounting for the performance obligations identified in the contract. To test the conclusion that the various promises under the contract collectively constituted one performance obligation , we read the collaboration and option agreement, discussed the potential performance obligations with management including those performing the research services, and evaluated whether management’s accounting position considered all relevant facts and terms included in the agreement. We further evaluated management’s technical analysis and evaluated management’s conclusions to determine whether they had appropriately considered and applied the guidance and interpretations associated with performance obligations within ASC 606. Revenue recognition – Revenue recognized over time 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 certain of its existing collaboration agreements 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 an appropriate measure of progress towards satisfaction of the identified performance obligation. 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 assumptions relate to the estimated total costs expected to be incurred and the estimated total full-time employees (FTEs) expected to be utilized under each 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 and estimated full-time employees to complete and the review of the estimates 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 actual FTEs utilized and 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 total estimated costs and total FTEs to understand the progress to date and the estimate of total inputs. In addition, we performed sensitivity analyses, including assessing the reasonableness of the estimated costs to be incurred and estimated FTEs to be utilized as of the reporting date based on current factors. 86 Table of Contents Fair value of stock price appreciation milestones Description of the matter As more fully described in Note 2 to the financial statements, under the terms of the Memorial Sloan Kettering (MSK) Cancer Center License Agreement (the Agreement), MSK is eligible to receive certain milestone payments totaling up to $75.0 million based on the price of the Company’s common stock (the “stock price appreciation milestones”) contingent on a licensed product achieving a specified clinical milestone (the “clinical milestone”). The Company uses a Monte Carlo simulation methodology to estimate the fair value of the milestone payments at the end of each reporting period which models future Company common stock prices based on the current stock price and several key variables. As the stock price appreciation milestones are first contingent upon the achievement of the clinical milestone, the Company also estimates the fair value of the stock price appreciation milestones based on the probability of achieving the clinical milestone. The assessment of the probability of achieving the clinical milestone in turn considers several factors including the successful achievement of technological, manufacturing, and regulatory requirements. Auditing the Company’s valuation of the stock price appreciation milestones is significant to our audit as the Company uses a complex valuation methodology that incorporates significant assumptions which include the estimated term, estimated volatility of the Company’s common stock price as well as the estimated probability of achieving the clinical milestone. The fair value measurement is highly sensitive to changes in these inputs. How we addressed the matter in our audit We tested controls over the risks of material misstatement relating to the valuation of the stock price appreciation milestones. For example, we tested controls over management’s review of the valuation model, the underlying assumptions used in the model and the probability of achieving the clinical milestone. To test the valuation of the stock price appreciation milestones, our audit procedures included, among others, evaluating the methodology used in the valuation model and testing the significant assumptions. For example, we assessed the estimated license end date, and we compared the forecasted volatility of the Company’s common stock price to its historical volatility. Further, we evaluated the reasonableness of management’s assumptions over the probability of achieving the clinical milestone by comparing the assumptions within the model to internal communications to management and the Board of Directors and conducting inquiries with those responsible for clinical affairs regarding the progress of the ongoing trial. We also assessed the completeness and accuracy of the underlying data. In addition, we involved our internal valuation specialists to assist in our evaluation of the significant assumptions and methodology used by the Company. We have also evaluated the Company’s financial statement disclosures related to these matters included in Note 2 to the Consolidated Financial Statements. /s/ Ernst & Young, LLP We have served as the Company's auditor since 2009. San Diego, California February 24, 2021 87 Table of Contents Fate Therapeutics, Inc. Consolidated Balance Sheets (In thousands, except par value and share data) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 167,347 $ 99,814 Accounts receivable 5,515 — Short-term investments and related maturity receivables 315,569 121,613 Prepaid expenses and other current assets 5,892 5,662 Total current assets 494,323 227,089 Long-term investments — 39,440 Property and equipment, net 32,308 11,419 Operating lease right-of-use assets 67,084 22,752 Restricted cash 15,227 227 Collaboration contract assets 13,506 1,338 Other assets 9 9 Total assets $ 622,457 $ 302,274 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 6,283 $ 5,822 Accrued expenses 15,564 14,697 CIRM award liability, current portion 3,200 2,808 Deferred revenue, current portion 21,144 2,787 Operating lease liabilities, current portion 3,355 1,692 Stock price appreciation milestones, current portion 36,018 — Total current liabilities 85,564 27,806 Deferred revenue, net of current portion 46,021 3,775 CIRM award liability, net of current portion 800 702 Operating lease liabilities, net of current portion 93,943 25,235 Stock price appreciation milestones, net of current portion 11,684 — Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.001 par value; authorized shares— 5,000,000 at December 31, 2020 and December 31, 2019; Class A Convertible Preferred shares issued and outstanding— 2,794,549 at December 31, 2020 and December 31, 2019 3 3 Common stock, $ 0.001 par value; authorized shares— 150,000,000 at December 31, 2020 and December 31, 2019; issued and outstanding— 87,722,237 at December 31, 2020 and 75,730,260 at December 31, 2019 88 76 Additional paid-in capital 941,216 628,200 Accumulated other comprehensive gain 70 22 Accumulated deficit ( 556,932 ) ( 383,545 ) Total stockholders’ equity 384,445 244,756 Total liabilities and stockholders’ equity $ 622,457 $ 302,274 See accompanying notes. 88 Table of Contents Fate Therapeutics, Inc. Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) For the Years Ended December 31, 2020 2019 2018 Collaboration revenue $ 31,434 $ 10,680 $ 4,740 Operating expenses: Research and development 125,623 87,770 56,024 General and administrative 33,896 23,637 15,808 Total operating expenses 159,519 111,407 71,832 Loss from operations ( 128,085 ) ( 100,727 ) ( 67,092 ) Other income (expense): Interest income 2,400 4,330 2,190 Interest expense — ( 1,752 ) ( 1,696 ) Change in fair value of stock price appreciation milestones ( 47,702 ) — — Total other income (expense), net ( 45,302 ) 2,578 494 Net loss $ ( 173,387 ) $ ( 98,149 ) $ ( 66,598 ) Other comprehensive loss: Unrealized gain on available-for-sale securities, net 48 24 1 Comprehensive loss $ ( 173,339 ) $ ( 98,125 ) $ ( 66,597 ) Net loss per common share, basic and diluted $ ( 2.10 ) $ ( 1.44 ) $ ( 1.19 ) Weighted–average common shares used to compute basic and diluted net loss per share 82,385,319 68,190,741 56,195,650 See accompanying notes. 89 Table of Contents Fate Therapeutics, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (In thousands, except share data) Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Gain (Loss) Deficit Equity Balance at December 31, 2017 2,819,549 $ 3 52,648,601 $ 53 $ 295,934 $ ( 3 ) $ ( 218,798 ) $ 77,189 Exercise of stock options, net of issuance costs — — 694,830 1 2,692 — — 2,693 Stock–based compensation — — — — 6,293 — — 6,293 Public offering of common stock, net of offering costs — — 10,648,149 11 134,780 — — 134,791 Issuance of common stock upon cashless warrant exercise — — 102,101 — — — — — Issuance of common stock for license agreements — — 600,000 — 6,100 — — 6,100 Unrealized gain on investments — — — — — 1 — 1 Net loss — — — — — — ( 66,598 ) ( 66,598 ) Balance at December 31, 2018 2,819,549 $ 3 64,693,681 $ 65 $ 445,799 $ ( 2 ) $ ( 285,396 ) $ 160,469 Exercise of stock options, net of issuance costs — — 787,434 1 2,595 — — 2,596 Issuance of common stock upon vesting of restricted stock units — — 172,625 — — — — — Stock–based compensation — — — — 17,410 — — 17,410 Public offering of common stock, net of offering costs — — 9,890,000 10 162,396 — — 162,406 Issuance of common stock upon cashless warrant exercise — — 61,520 — — — — — Conversion of preferred shares to common stock ( 25,000 ) — 125,000 — — — — — Unrealized gain on investments — — — — — 24 — 24 Net loss — — — — — — ( 98,149 ) ( 98,149 ) Balance at December 31, 2019 2,794,549 $ 3 75,730,260 $ 76 $ 628,200 $ 22 $ ( 383,545 ) $ 244,756 Exercise of stock options, net of issuance costs — — 1,419,117 1 9,581 — — 9,582 Issuance of common stock upon vesting of restricted stock units — — 85,000 — — — — — Stock–based compensation — — — — 30,753 — — 30,753 Public offering of common stock, net of offering costs — — 7,108,796 7 188,777 — — 188,784 Private placement of common stock, net of issuance costs 1,766,160 2 49,973 — — 49,975 Issuance of stock to collaboration partner, net of issuance costs — — 1,612,904 2 33,932 — — 33,934 Unrealized gain on investments — — — — — 48 — 48 Net loss — — — — — — ( 173,387 ) ( 173,387 ) Balance at December 31, 2020 2,794,549 $ 3 87,722,237 $ 88 $ 941,216 $ 70 $ ( 556,932 ) $ 384,445 See accompanying notes 90 Table of Contents Fate Therapeutics, Inc. Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2020 2019 2018 Operating activities: Net loss $ ( 173,387 ) $ ( 98,149 ) $ ( 66,598 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 3,087 2,193 1,204 Stock–based compensation 30,753 17,410 6,293 Amortization of debt discounts and debt issuance costs — 115 76 Accretion and amortization of premiums and discounts on investments, net 1,676 ( 478 ) ( 335 ) Amortization of collaboration contract asset 3,110 620 42 Noncash interest expense — — 373 Deferred rent — — 192 Deferred revenue 60,603 ( 8,526 ) 12,259 Issuance of common stock for license agreement — — 6,100 Change in fair value of stock price appreciation milestones 47,702 — — Changes in assets and liabilities: Accounts receivable ( 5,515 ) 500 ( 500 ) Prepaid expenses and other assets ( 13,582 ) ( 1,911 ) ( 2,010 ) Accounts payable and accrued expenses ( 1,554 ) 4,277 4,254 Right-of-use assets and lease liabilities, net 7,878 774 — Net cash used in operating activities ( 39,229 ) ( 83,175 ) ( 38,650 ) Investing activities Purchases of property and equipment ( 4,932 ) ( 7,395 ) ( 2,303 ) Purchases of investments ( 277,344 ) ( 248,858 ) ( 55,660 ) Maturities of investments 121,200 98,800 57,500 Net cash used in investing activities ( 161,076 ) ( 157,453 ) ( 463 ) Financing activities Issuance of common stock from equity incentive plans, net of issuance costs 9,655 2,522 2,693 Proceeds from public offering of common stock, net of issuance costs 188,784 162,406 134,577 Proceeds from private placement of common stock, net of issuance costs 49,975 — — Proceeds from sale of common stock to collaboration partner, net of issuance costs 33,934 — — Proceeds from CIRM award 490 — 3,510 Principal repayments of long–term debt — ( 15,000 ) — Net cash provided by financing activities 282,838 149,928 140,780 Net change in cash, cash equivalents and restricted cash 82,533 ( 90,700 ) 101,667 Cash, cash equivalents and restricted cash at beginning of the period 100,041 190,741 89,074 Cash, cash equivalents and restricted cash at end of the period $ 182,574 $ 100,041 $ 190,741 Supplemental disclosure of cash flow information Interest paid $ — $ 2,291 $ 1,242 Supplemental schedule of noncash investing and financing activities Purchases of property and equipment in accounts payable $ 1,486 $ 602 $ 37 Right-of-use assets obtained in exchange for lease obligations $ 49,287 $ 13 $ — See accompanying notes. 91 Table of Contents Fate Therapeutics, Inc. Notes to Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies Organization 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 patients with cancer, including off-the-shelf natural killer (NK) and T-cell product candidates derived from clonal master engineered induced pluripotent stem cell (iPSC) lines. As of December 31, 2020, 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 June 2020, the Company completed a public offering of common stock in which investors, certain of which are affiliated with a director of the Company, purchased 7.1 million shares of its common stock at a price of $ 28.31 per share under a shelf registration statement. Gross proceeds from the offering were $ 201.3 million, and after giving effect to $ 12.5 million of costs related to the offering, net proceeds were $ 188.8 million. In September 2019, the Company completed a public offering of common stock in which investors, certain of which are affiliated with a director of the Company, purchased 9.9 million 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, certain of which are affiliated with a director of the Company, purchased 10.6 million 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. Private Placements of Common Stock In June 2020, in connection with the June 2020 public offering of common stock, the Company exercised its right to cause an existing shareholder, Johnson & Johnson Innovation-JJDC, Inc (JJDC), to purchase $ 50.0 million of the Company’s common stock, and JJDC purchased in a private placement 1.8 million shares of the Company’s common stock at a price of $ 28.31 per share, for aggregate proceeds of $ 50.0 million. In April 2020, in connection with the Janssen Agreement described in Note 2, JJDC purchased in a private placement 1.6 million shares of the Company’s common stock at a price of $ 31.00 per share, for aggregate proceeds of $ 50.0 million. The shares of common stock purchased in the private placements were not subject to any underwriting discounts or commissions. Use of Estimates The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (U.S. 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 its stock appreciation milestone obligations, contracts containing leases, accrued expenses and the estimated total costs expected to be incurred under the Company’s collaboration agreements. 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. 92 Table of Contents Risks and Uncertainties Due to the global outbreak of SARS-CoV-2, the novel strain of coronavirus that causes Coronavirus disease 19 (COVID-19), the Company experienced impacts on certain aspects of its business, including its clinical trial and research and development activities, during the year ended December 31, 2020. For example, certain of the Company’s research and development activities have been delayed or disrupted as a result of measures the Company implemented in response to governmental “stay at home” orders and in the interests of public health and safety, and the Company has experienced delays or disruptions in the initiation and conduct of its clinical trials as a result of prioritization of hospital and other medical resources toward pandemic efforts, policies and procedures implemented at clinical sites with respect to the conduct of clinical trials, and other precautionary measures taken in treating patients or in practicing medicine in response to the COVID-19 pandemic. The scope and duration of these delays and disruptions, and the ultimate impacts of COVID-19 on the Company’s operations, are currently unknown. The Company is continuing to actively monitor the situation and may take further precautionary and preemptive actions as may be required by federal, state or local authorities or that it determines are in the best interests of public health and safety and that of the Company’s patient community, employees, partners, and stockholders. The Company cannot predict the effects that such actions, or the impact of COVID-19 on global business operations and economic conditions, may have on its business, strategy, collaborations, or financial and operating results. 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 Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, stock price appreciation milestones, accounts payable, and accrued liabilities. The carrying amounts of accounts receivable, 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 as described below, the Company believes that the fair value of long-term debt approximates its carrying value during the periods when debt was outstanding. 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: Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly 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. 93 Table of Contents The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows as of December 31, 2020, 2019 and 2018 (in thousands): Years Ended December 31, 2020 2019 2018 Cash and cash equivalents $ 167,347 $ 99,814 $ 190,514 Restricted cash 15,227 227 227 Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows $ 182,574 $ 100,041 $ 190,741 In January 2020, the Company entered into a lease for a facility in San Diego that it intends to use as its new corporate headquarters. In lieu of a security deposit, Silicon Valley Bank issued a $ 15.0 million letter of credit on the Company’s behalf, which letter of credit is secured by a deposit of equal amount . For the years ended December 31, 2020, 2019 and 2018, the restricted cash balance includes cash-collateralized irrevocable standby letters of credit in the amounts of $ 15.2 million, $ 0.2 million, and $ 0.2 million, respectively, associated with the Company’s facilities leases . Investments Investments are accounted for as available-for-sale securities and are carried at fair value on the consolidated balance sheets. Upon initial recognition of the investment and at each reporting period, the Company evaluates whether any unrealized losses on investments are attributable to a credit loss or other factors. Any unrealized losses attributable to credit loss are recorded through an allowance for credit losses, limited to the amount by which the fair value is below amortized cost, with the offsetting amount recorded in other income or expense in the consolidated statement of operations and comprehensive loss. Unrealized losses not attributable to an expected credit loss and unrealized gains on investments are recorded in other comprehensive income (loss) on the consolidated statements of operations and comprehensive loss. Realized gains and losses, if any, on investments classified as available-for-sale securities are included in other income or expense. 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. 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. 94 Table of Contents Leases 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 Company’s 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 ROU assets and lease obligations 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 lease 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 provided, 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 include any prepaid lease payments made and any other indirect costs incurred, 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. 95 Table of Contents 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 . Stock Price Appreciation Milestones The Company estimates the fair value of the stock price appreciation milestones associated with the Amended and Restated Exclusive License Agreement with Memorial Sloan Kettering Cancer Center, using a Monte Carlo simulation model, which relies on the Company’s current stock price as well as significant estimates and assumptions to determine the estimated liability associated with the contingent milestone payments. The Company accounts for the fair value of the stock price appreciation milestones in accordance with ASC 815, Derivatives and Hedging , with fair value marked to market at each reporting date. The assumptions used to calculate the fair value of the stock price appreciation milestones are subject to a significant amount of judgment including the probability of achieving a specified clinical milestone, the expected volatility of the Company’s common stock, the risk-free interest rate, and the estimated term, which is based in part on the last valid patent claim date. The Company remeasures the fair value of the stock price appreciation milestones at each balance sheet date, with changes in fair value recorded in earnings as non-operating income or expense on the consolidated statements of operations and comprehensive loss. Research and Development Costs All research and development costs are expensed as incurred. Patent Costs 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. 96 Table of Contents 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. Income Taxes 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 includes unrealized gains and losses, other than losses attributable to a credit loss which are included in other income and expense, 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 comprise 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 are 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, 2020 2019 2018 Warrants for common stock — — 85,094 Common stock options 10,432,822 9,327,742 6,980,581 Restricted stock units 1,401,732 520,000 188,625 Series A convertible preferred stock (if converted) 13,972,745 13,972,745 14,097,745 Total 25,807,299 23,820,487 21,352,045 97 Table of Contents 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 for a period of at least twelve months from the date of issuance of these financial statements . Recently Adopted Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (ASC) Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The only exception addressed in ASU 2019-12 applicable to the Company is the elimination of the intra-period exception to allocating income taxes when there are losses from continuing operations. The guidance is to be applied prospectively at the beginning in the year of adoption. The Company elected to early adopt the standard as of January 1, 2020 using the prospective method, and such adoption did not have a material impact on the Company’s consolidated financial statements. 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 adopted the standard effective January 1, 2020, and such adoption did not have a material impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which 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. The Company adopted the standard effective January 1, 2020, and such adoption did not have a material impact on the Company’s consolidated financial statements. 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. The Company adopted the standard effective January 1, 2020 using the modified retrospective approach. Due to the nature of the Company’s investment portfolio, the adoption of the guidance did not have a material effect on the Company’s consolidated financial statements and no allowance was recorded for expected credit losses. Recently Issues Accounting Pronouncements In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40): Accounting 74 for Convertible Instruments and Contracts in an Entity's Own Equity , which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments, and amends existing earnings-per-share, or EPS, guidance by requiring that an entity use the if-converted method when calculating diluted EPS for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company plans to adopt ASU 2020-06 effective January 1, 2022 and is currently evaluating the effect ASU 2020-06 will have on its consolidated financial statements and related disclosures. 2. Collaboration and License Agreements Janssen Collaboration and Option Agreement On April 2, 2020 (the Effective Date), the Company entered into a Collaboration and Option Agreement (the Janssen Agreement) with Janssen Biotech, Inc. (Janssen), part of the Janssen Pharmaceutical Companies of Johnson & Johnson. Additionally, on the Effective Date, the Company entered into a Stock Purchase Agreement (the Stock Purchase Agreement) with Johnson & Johnson Innovation – JJDC, Inc. (JJDC). 98 Table of Contents Upon entering the Janssen Agreement, the Company received an upfront, non-refundable and non-creditable payment of $ 50.0 million. Under the Janssen Agreement, Janssen and the Company will collaborate to develop iPSC-derived CAR NK and CAR T-cell product candidates for the treatment of cancer. Janssen will contribute proprietary antigen binding domains directed to up to four tumor-associated antigen targets (the Janssen Cancer Targets). The Company will research and construct iPSC-derived CAR NK and CAR T-cell product candidates directed to each of the Janssen Cancer Targets (the Collaboration Candidates) and perform preclinical development of Collaboration Candidates. Upon the Company’s completion of activities sufficient to allow the filing of an Investigational New Drug (IND) application for a Collaboration Candidate, Janssen will have the right to exercise an exclusive option and obtain an exclusive license to the Company’s intellectual property rights for the development and commercialization of such Collaboration Candidate. Upon the exercise of such exclusive option, Janssen will be solely responsible for the worldwide clinical development and commercialization of such Collaboration Candidate, and the Company will be primarily responsible for the manufacture, at Janssen’s cost, of such Collaboration Candidate. For each Collaboration Candidate, upon attaining clinical proof-of-concept, the Company shall have the right to elect to co-commercialize and share equally in the profits and losses in the United States, subject to the Company sharing in certain development costs. Under the terms of the Janssen Agreement, the Company is entitled to receive full funding for all research, preclinical development and IND-enabling activities performed by the Company for Collaboration Candidates, and is eligible to receive (i) with respect to the first Janssen Cancer Target, payments of up to $ 898.0 million upon the achievement of specified development, regulatory and sales milestones (the Janssen Milestone Payments) for the first Collaboration Candidate, and up to $ 460.0 million in Janssen Milestone Payments for each additional Collaboration Candidate, directed to the first Janssen Cancer Target; and (ii) with respect to each of the second, third and fourth Janssen Cancer Targets, up to $ 706.0 million in Janssen Milestone Payments for each of the first Collaboration Candidates, and up to $ 340.0 million in Janssen Milestone Payments for each additional Collaboration Candidate, directed to the applicable Janssen Cancer Target, where certain Janssen Milestone Payments under (i) and (ii) are subject to reduction in the event the Company elects to co-commercialize and share equally in the profits and losses in the United States of a respective Collaboration Candidate. The Company is further eligible to receive double-digit tiered royalties ranging up to the mid-teens on net sales of Collaboration Candidates that are commercialized by Janssen under the Janssen Agreement, subject to reduction under certain circumstances. Under the Stock Purchase Agreement, the Company sold 1.6 million shares of common stock to JJDC at $ 31.00 per share, for an aggregate purchase price of approximately $ 50.0 million, on April 7, 2020. The Company determined that this common stock purchase represented a premium of $ 9.93 per share, or $ 16.0 million in aggregate (the Equity Premium), and the remaining $ 34.0 million was recorded as an issuance of common stock in shareholders’ equity. In addition, under the Stock Purchase Agreement, the Company had the right to require JJDC purchase an aggregate of $ 50.0 million in shares of the Company’s common stock in a private placement at the same price per share as that paid by investors in a public offering. In June 2020, in connection with the Company’s June 2020 public offering, the Company exercised this right and JJDC purchased in a private placement 1.8 million shares of the Company’s common stock at a price of $ 28.31 per share, for aggregate proceeds of $ 50.0 million. Janssen may terminate the Janssen Agreement with respect to one or more Janssen Cancer Targets, or in its entirety, at any time on or after the second anniversary of the Effective Date, and the Company may terminate the Janssen Agreement with respect to a particular Janssen Cancer Target if a Collaboration Candidate has not been selected for IND-enabling studies for such Janssen Cancer Target within specified time periods under certain conditions. The Janssen Agreement contains customary provisions for termination by either party in the event of a material breach of the Janssen Agreement, subject to cure, by the other party and in the event of any bankruptcy, insolvency or similar events with respect to the other party. The Company applied ASC 808, Collaborative Arrangements (ASC 808) and determined the Janssen Agreement is applicable to such guidance. The Company concluded that Janssen represented a customer and applied relevant guidance from ASC 606, Revenue from Contracts with Customers (ASC 606) to evaluate the appropriate accounting for the Janssen Agreement. In accordance with this guidance, the Company identified its potential performance obligations, including its grant of a license to Janssen to certain of its intellectual property subject to certain conditions, its conduct of research and development services, and its participation in various joint oversight committees. The Company determined that its grant of a license to Janssen 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 and development services. Accordingly, the Company determined that its grant of a license to Janssen and its conduct of research and development services 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 and development services, which is estimated to be four years. Additionally, the Company determined that participation in the various joint oversight committees did not constitute a performance obligation as the Company’s participation in the various joint oversight committees does not transfer a service. 99 Table of Contents The Company also assessed the effects of any variable elements under the Janssen Agreement. Such assessment evaluated, among other things, the funding to be received by the Company for its conduct of research and development services. Based on its assessment, the Company concluded that the total amount to be received by the Company for its conduct of research and development services is variable and cannot be readily estimated and, therefore, no amounts associated with such services were included in the initial transaction price. In addition, the Company also assessed its likelihood of receiving (i) preclinical milestones, (ii) various clinical, regulatory and commercial milestone payments, and (iii) royalties on net sales of the Collaboration Candidates . Based on the likelihood of receiving such milestone payments and royalties, no amounts associated with milestones or royalties were included in the initial transaction price. In accordance with ASC 606, the Company determined that the initial transaction price under the Janssen Agreement equals $ 66.0 million, consisting of the upfront, non-refundable and non-creditable payment of $ 50.0 million and the Equity Premium of $ 16.0 million. The Company concluded that there was not a significant financing component under the Janssen Agreement. The upfront payment of $ 66.0 million was recorded as deferred revenue and is being recognized as revenue consistent with the Company’s efforts related to the conduct of research and development services, as the research and development services are the primary component of the combined performance obligation. Since the total amount to be received by the Company for its research and development services under the Janssen Agreement could not be readily estimated, revenue associated with the upfront payment will be recognized based on actual headcount utilized as a percentage of total headcount expected to be utilized over the expected term of the conduct of the research and development services . Revenue associated with the research and development services will be recognized in an amount equal to the actual costs incurred during the period in which the research and development services are performed by the Company. As a direct result of the Company’s entry into the Janssen Agreement, the Company incurred $ 13.3 million in sublicense fees to certain of its existing licensors. The $13.3 million in sublicense consideration represents an asset under ASC 340, Other Assets and Deferred Costs (ASC 340) and is amortized to research and development expense ratably with the Company’s revenue recognition under the Janssen Agreement. During the year ended December 31, 2020, the Company recognized $ 1.3 million of such expense. As of December 31, 2020, the Janssen Agreement contract asset balance was $ 12.0 million. The Company recognized revenue of $ 16.8 million under the Janssen Agreement for the year ended December 31, 2020. Such revenue comprised $ 10.3 million associated with research and development services and $ 6.5 million associated with the upfront fee and Equity Premium for the year ended December 31, 2020. As of December 31, 2020, aggregate deferred revenue related to the Janssen Agreement was $ 59.5 million, of which $ 16.3 million is classified as current. As of December 31, 2020, the Company has received $ 4.8 million in cash in aggregate research and development fees from Janssen. As of December 31, 2020, the Company’s entire accounts receivable balance comprised amounts owed from Janssen. 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. Ltd. (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 ). On December 4, 2020, the Company and Ono entered into a letter agreement (the Ono Letter Agreement) in connection with the Ono Agreement. Pursuant to the Ono Letter Agreement, Ono delivered to the Company proprietary antigen binding domains targeting an antigen expressed on certain solid tumors and nominated such antigen binding domains as the Ono Antigen Binding Domain for incorporation into Collaboration Candidate 2. In connection with such nomination and pursuant to the original agreement, in December 2020, Ono paid the Company a milestone fee of $ 10.0 million for further research and development of Collaboration Candidate 2 and Ono maintains its option to this candidate. In addition, in connection with the Ono Letter Agreement, Fate and Ono agreed to the termination of the Ono Agreement with respect to Collaboration Candidate 1. Fate retains all rights, in its sole discretion, to research, develop and commercialize Collaboration Candidate 1 throughout the world without any obligation to Ono. 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 Candidate 2 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 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 (the Option). 100 Table of Contents 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 Candidate 2. 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 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. Further, under the terms of the Ono Agreement, Ono has agreed to pay the Company up to an additional $ 20.0 million, subject to the exercise by Ono of the Option (Option Exercise Fees) during the Option Period for Candidate 2. Such fees are in addition to the upfront payment research and development fees, and the previously paid $10.0 milestone associated with the Ono Letter Agreement. Subject to Ono’s exercise of the Option and to the achievement of certain clinical, regulatory and commercial milestones (Milestones) with respect to the Candidate in specified territories, the Company is entitled to receive an aggregate of up to $ 885.0 million in additional 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 for Candidate 2 in specified territories, with such royalties subject to certain reductions. No milestone payments specific to Candidate 1 are payable under the Ono Agreement, given the termination of such candidate under the agreement. The Ono Agreement will terminate with respect to a Candidate 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 Agreement 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 basis 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 to the Ono Agreement and Ono Letter Agreement and determined that the agreements are applicable to such guidance. The Company concluded that Ono represented a customer and applied relevant guidance from ASC 606 to evaluate the appropriate accounting for the Ono Agreement and the Ono Letter 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. 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 termination of Candidate 1 under the Ono Agreement did not impact this assessment. 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 and concluded that there was not a significant financing component to the Ono Agreement. 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. Accordingly, the Company has not assigned a transaction price to any Ono Option Milestone, Ono Milestones or Ono Option Exercise Fees, other than the $10.0 million milestone triggered as part of the Ono Letter Agreement in December 2020, given the substantial uncertainty related to their achievement and has not assigned a transaction price to any Ono Royalties. 101 Table of Contents 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 is being recognized as revenue over time in conjunction with the Company’s conduct of research services as the research services are the primary component of the combined performance obligations. Revenue associated with the upfront payment will be recognized based on actual costs incurred as a percentage of the estimated total costs expected to be incurred over the expected term of conduct of the research services. 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. In accordance with ASC 606, the Company concluded that the $10.0 million milestone payment associated with the Ono Letter Agreement represented an increase in the initial transaction price under the Ono Agreement in the form of the receipt of variable consideration that was previously constrained. The milestone payment of $ 10.0 million was recorded to deferred revenue for the proportional percentage of remaining costs to be incurred under the Ono Agreement as a percentage of the estimated total costs expected to be incurred over the expected term of conduct of the research services and is being recognized as revenue over the expected term in conjunction with the Company’s conduct of research services as the research services are the primary component of the combined performance obligations. The Company recognized revenue associated with the milestone payment for the proportional percentage of actual costs incurred under the Ono Agreement as a percentage of the estimated total costs expected to be incurred over the expected term of conduct of the research services. As a direct result of the Company’s entry into the Ono Agreement and the Ono Letter Agreement, the Company incurred an aggregate of $ 4.0 million in sublicense consideration to existing licensors of the Company. The $ 4.0 million in sublicense consideration represents an asset under ASC 340 a nd is being amortized to research and development expense ratably with the Company’s revenue recognition under the Ono Agreement. During the years ended December 31, 2020 and 2019, the Company recognized $ 1.8 million and $ 0.6 million, respectively, of such expense. As of December 31, 2020, the Ono Agreement contract asset had a balance of $ 1.5 million. The Company recognized revenue of $ 14.6 million, $ 9.3 million, and $ 0.6 million under the Ono Agreement and Ono Letter Agreement during the years ended December 31, 2020, 2019 and 2018, respectively. Such revenue comprised $ 6.1 million associated with the Ono Letter Agreement milestone earned in December 2020, $ 5.7 million associated with research services and $ 2.8 million associated with the upfront payment during the year ended December 31, 2020. 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, 2019, and $ 0.4 million associated with research services and $ 0.2 million associated with the upfront payment during the year ended December 31, 2018. As of December 31, 2020, aggregate deferred revenue related to the Ono Agreement and Ono Letter Agreement was $ 7.7 million, of which $ 4.8 million is classified as current. As of December 31, 2020, the Company has received $ 12.3 million in cash of aggregate research and development fees from Ono. 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. 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. No revenue was recognized under the Juno Agreement during the year ended December 31. 2020. 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. 102 Table of Contents 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. 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. The Company is 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 In the event a licensed product achieves a specified clinical milestone, MSK is then eligible to receive certain milestone payments totaling up to $ 75.0 million based on the price of the Company’s common stock, where the amount of such payments owed to MSK is contingent upon certain increases in the price of the Company’s common stock following the date of achievement of such clinical milestone. These payments are based on common stock price multiples, with the numerator being the fair value of the ten-trading day trailing average closing price of the Company’s common stock and the denominator being the ten-trading day trailing average closing price of the Company’s common stock as of the effective date of the Amended MSK License, adjusted for any stock splits, cash dividends, stock dividends, other distributions, combinations, recapitalizations, or similar events. Under the terms of the Amended MSK License, upon a change of control of the Company, in certain circumstances, the Company may be required to pay a portion of these payments to MSK based on the price of the Company’s common stock in connection with such change of control. The following table summarizes the common stock multiples and the stock price appreciation milestone payments, none of which have been triggered as of December 31, 2020: Common stock multiple 5.0x 10.0x 15.0x Ten-trading day trailing average common stock price $ 50.18 $ 100.36 $ 150.54 Stock price appreciation milestone payment (in millions) $ 20.0 $ 30.0 $ 25.0 To determine the estimated fair value of the stock price appreciation milestones, the Company uses a Monte Carlo simulation methodology which models future Company common stock prices based on the current stock price and several key variables. The following variables were incorporated in the calculation of the estimated fair value of the stock price appreciation milestones as of December 31, 2020: Year Ended December 31, 2020 Risk-free interest rate 1.5 % Expected volatility 78.1 % Estimated term (in years) 18.0 Closing stock price as of measurement date $ 90.93 103 Table of Contents The key inputs to the Monte Carlo simulation to determine the fair value of the stock price appreciation milestones include the Company’s stock price as of the measurement date; the estimated term which is based in part on the last valid patent claim date; the expected volatility of the Company’s common stock, estimated using the Company’s historical common stock volatility as of the remeasurement date; and the risk-free rate based on the U.S. Treasury yield for the estimated term determined. Fair value measurements are highly sensitive to changes in these inputs and significant changes could result in a significantly higher or lower fair value and resulting expense or gain. As the stock price appreciation milestones are first contingent upon the achievement of a specified clinical milestone, the Company estimates the fair value of the stock price appreciation milestones based on the probability of achieving the clinical milestone. This assessment is based on several factors including the successful achievement of technological, manufacturing, and regulatory requirements. At each balance sheet date, the Company remeasures the fair value of the stock price appreciation milestones, with changes in fair value recognized as a component of other income (expense) in the consolidated statements of operations and comprehensive loss . Amounts are included in current or non-current liabilities based on the estimated timeline associated with the individual potential payments. During the year ended December 31, 2020, the Company recorded $ 47.7 million of expense associated with the change in fair value of the stock price appreciation milestones. As of December 31, 2020, the Company recorded a liability of $ 47.7 million associated with the stock price appreciation milestones for the Amended MSK License. To date, no licensed products have achieved the specified clinical milestone, and no stock price appreciation milestone payments are currently owed to MSK. 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. 3. 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. 104 Table of Contents 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, 2020, the Company has received all disbursements available under the Award in the amount of $ 4.0 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. 4. Investments The Company invests portions of excess cash in United States treasuries, commercial paper, non-U.S. government securities, municipal securities, and corporate debt securities with maturities ranging from three to eighteen months from the purchase date. These investments are accounted for as available-for-sale securities and are classified as short-term and long-term investments in the accompanying consolidated balance sheets based on each security’s contractual maturity date. The following table summarizes the Company’s investments accounted for as available-for-sale securities as of December 31, 2020 and 2019 (in thousands): Maturity (in years) Amortized Cost Unrealized Losses Unrealized Gains Estimated Fair Value December 31, 2020 Classified as current assets: U.S. Treasury debt securities 1 or less $ 39,736 $ — $ 31 $ 39,767 Non-U.S. government securities 1 or less 5,054 — 2 $ 5,056 Municipal securities 1 or less 3,082 ( 1 ) — $ 3,081 Corporate debt securities 1 or less 159,947 ( 68 ) 124 $ 160,003 Commercial paper 1 or less 107,680 ( 18 ) — $ 107,662 Total short-term investments $ 315,499 $ ( 87 ) $ 157 $ 315,569 December 31, 2019 Classified as current assets: U.S. Treasury debt securities 1 or less $ 50,445 $ ( 4 ) $ 16 $ 50,457 Corporate debt securities 1 or less 71,171 ( 24 ) 9 71,156 Total short-term investments $ 121,616 $ ( 28 ) $ 25 $ 121,613 Classified as non-current assets: U.S. Treasury debt securities Greater than 1 $ 9,841 $ — $ 5 $ 9,846 Corporate debt securities Greater than 1 29,572 ( 1 ) 23 29,594 Total long-term investments $ 39,413 $ ( 1 ) $ 28 $ 39,440 As of December 31, 2020 and 2019, the Company had $ 1.5 million and $ 1.0 million, respectively, of accrued interest on investments recorded in prepaid expenses and other assets on the consolidated balance sheets. The Company reviews its investment holdings at the end of each reporting period and evaluates any unrealized losses using the expected credit loss model to determine if the unrealized loss is a result of a credit loss or other factors. The Company also evaluates its investment holdings for impairment 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, 2020, 2019 and 2018, the Company did no t recognize any impairment or realized gains or losses on sales of investments, and the Company did no t record an allowance for, or recognize, any expected credit losses. 105 Table of Contents 5. Fair Value Measurements The following tables presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands): Fair Value Measurements at Reporting Date Using Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) As of December 31, 2020: Financial assets: Money market funds $ 167,347 $ 167,347 $ — $ — U.S. Treasury debt securities 39,767 39,767 — — Non-U.S. government securities 5,056 — 5,056 — Municipal securities 3,081 — 3,081 — Corporate debt securities 160,003 — 160,003 — Commercial paper 107,662 — 107,662 — Total assets measured at fair value on a recurring basis $ 482,916 $ 207,114 $ 275,802 $ — Financial liabilities: Stock price appreciation milestones $ 47,702 $ — $ — $ 47,702 Total financial liabilities measured at fair value on a recurring basis $ 47,702 $ — $ — $ 47,702 As of December 31, 2019: Financial assets: Money market funds $ 84,814 $ 84,814 $ — $ — U.S. Treasury debt securities 60,303 60,303 — — Corporate debt securities 100,750 — 100,750 — Total financial assets measured at fair value on a recurring basis $ 245,867 $ 145,117 $ 100,750 $ — Level 1 assets consisted of money market funds and U.S. Treasury securities measured at fair value based on quoted prices in active markets as provided by the Company’s investment managers. Level 2 assets consisted of corporate debt securities, commercial paper, municipal securities, and non-U.S. government securities measured at fair value using standard observable inputs, including reported trades, broker/dealer quotes, and bids and/or offers. The Company validates the quoted market prices provided by its investment managers by comparing the investment managers’ assessment of the fair values of the Company's investment portfolio balance against the fair values of the Company's investment portfolio balance obtained from an independent source. There were no Level 3 assets held by the Company as of December 31, 2020. Level 3 liabilities consisted of stock price appreciation milestones associated with the Amended MSK License as described in detail in Note 2. To determine the estimated fair value of the stock price appreciation milestones, the Company uses a Monte Carlo simulation methodology which models future Company common stock prices based on several key variables. The assumptions used to calculate the fair value of the stock price appreciation milestones are subject to a significant amount of judgment including the expected volatility of the Company’s common stock and estimated term, which is based in part on the last valid patent claim date. Fair value measurements are highly sensitive to changes in these inputs and significant changes could result in a significantly higher or lower fair value and resulting expense or gain. Further, as the stock price appreciation milestones are first contingent upon the achievement of a specified clinical milestone, the Company also estimates the fair value of the stock price appreciation milestones based on the probability of achieving the clinical milestone. This assessment is based on several factors including the successful achievement of technological, manufacturing, and regulatory requirements. 106 Table of Contents A small change in the assumptions and other inputs, such as the price of the Company’s common stock, may have a relatively large change in the estimated fair value of the stock price appreciation milestones and associated liability and expense. For example, keeping all other variables constant, a hypothetical 10 % increase in the stock price at December 31, 2020 from $ 90.93 to $ 100.02 per share would have increased the expense recorded during 2020 by $ 2.4 million related to the stock price appreciation milestones. Keeping all other variables constant, a hypothetical 10 % decrease in the stock price at December 31, 2020 from $ 90.93 to $ 81.84 per share would have decreased the expense recorded during 2020 by $ 2.6 million related to the stock price appreciation milestones. The following table presents the changes in fair value of the Company’s Level 3 stock price appreciation milestones liability (in thousands): Balance at December 31, 2019 $ — Changes in fair value of stock price appreciation milestones liability 47,702 Balance at December 31, 2020 $ 47,702 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. 6. Property and Equipment Property and equipment consist of the following (in thousands): December 31, 2020 2019 Furniture and fixtures $ 803 $ 899 Computer and office equipment 656 917 Software 257 103 Leasehold improvements—building 2,701 2,465 Scientific equipment 20,794 15,355 Construction-in-process 18,192 198 Total property and equipment, gross 43,403 19,937 Less accumulated depreciation and amortization ( 11,095 ) ( 8,518 ) Total property and equipment, net $ 32,308 $ 11,419 Depreciation expense related to property and equipment was $ 3.1 million, $ 2.2 million, and $ 1.2 million, for the years ended December 31, 2020, 2019, and 2018, respectively. No material gains or losses on the disposal of property and equipment have been recorded for the years ended December 31, 2020, 2019, and 2018. 7. Accrued Expenses and Long-Term Debt Accrued Expenses Current accrued expenses consist of the following (in thousands): December 31, 2020 2019 Accrued payroll and other employee benefits $ 4,815 $ 5,329 Accrued clinical trial related costs 5,244 5,976 Accrued other 5,505 3,392 Total current accrued expenses $ 15,564 $ 14,697 107 Table of Contents Long-Term Debt Silicon Valley Bank Debt Facilities In 2009, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which was collateralized by substantially all of the Company’s assets excluding certain intellectual property. This Loan and Security Agreement was subsequently amended in 2014 and 2017. In November 2019, the Company repaid in full all outstanding obligations under the Loan and Security Agreement, as amended. The Company used cash on hand in the amount of $ 14.2 million for the repayment of such obligations, including the repayment of $ 13.0 million in principal and $ 1.2 million associated with the final fee and outstanding interest. For the years ended December 31, 2019 and 2018, the Company recorded $ 1.8 million and $ 1.7 million respectively, in aggregate interest expense related to the Loan and Security Agreement. 8. Leases The Company has lease agreements for office, laboratory and manufacturing spaces that are classified as operating leases on the consolidated balance sheets. These leases have terms varying from one to approximately sixteen years , with renewal options of up to ten years , as well as early termination options. Extension and termination options are included in the total lease term when the Company is reasonably certain to exercise them. The leases are subject to additional variable charges, including common area maintenance, property taxes, property insurance and other variable costs. Given the variable nature of such costs, they are recognized as expense as incurred. Additionally, some of the Company’s leases are subject to certain fixed fees which the Company has determined to be non-lease components. The Company has elected to combine and account for lease and non-lease components as a single lease component for purposes of determining the total future lease payments. In January 2020, the Company entered into a lease agreement for certain office, laboratory and manufacturing spaces (the Premises), and such lease is accounted for as an operating lease. 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. 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 periods. 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. The landlord of the Premises is obligated to contribute an aggregate of up to $ 29.8 million toward tenant improvements of the Premises. As of December 31, 2020, the Company had utilized $ 18.2 million associated with the tenant improvements allowance and expects the remainder of the tenant improvements to be utilized within the next six months. In connection with the lease, the Company maintains a letter of credit for the benefit of the landlord in an amount equal to $ 15.0 million, which amount is subject to reduction over time. As of December 31, 2020, future undiscounted minimum contractual payments under the Company’s operating leases were $ 194.0 million, which will be paid over a remaining weighted-average lease term of 13.3 years. The weighted-average discount rate for the operating lease liabilities was 8.4 %, which was the Company's incremental borrowing rate at lease commencement, as the discount rates implicit in the leases could not be readily determined. The components of lease expense for the years ended December 31, 2020 and 2019 were as follows (in thousands): Years Ended December 31, 2020 2019 Straight-line lease expense $ 12,076 $ 3,781 Variable lease expense 2,245 2,330 Total operating lease expense $ 14,321 $ 6,111 Total short-term lease expense associated with short-term leases for the years ended December 31, 2020 and 2019 was $ 1.2 million and $ 1.1 million, respectively. For the year ended December 31, 2018, aggregate contractual rent expense was $ 2.3 million. 108 Table of Contents Future undiscounted minimum payments under the Company’s operating leases as of December 31, 2020 are as follows (in thousands): Operating Lease Payments Years Ending December 31, 2021 $ 10,824 2022 12,610 2023 12,988 2024 13,378 2025 13,779 Thereafter 130,447 Total undiscounted lease payments $ 194,026 Less: imputed interest ( 85,247 ) Less: amounts associated with tenant improvement allowance not yet utilized ( 11,481 ) Total lease liability $ 97,298 9. 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 Dividends As of December 31, 2020, the Board of Directors of the Company has not declared any dividends. 109 Table of Contents 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 March 2020, January 2019 and January 2018, an additional 470,822 shares, 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. 110 Table of Contents 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 year ended December 31, 2020: Options Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (in 000s) Outstanding at December 31, 2019 9,327,742 $ 9.67 7.73 $ 92,567 Granted 2,756,108 29.29 Exercised ( 1,419,117 ) 6.76 Cancelled ( 231,911 ) 15.73 Outstanding at December 31, 2020 10,432,822 $ 15.11 7.48 $ 791,000 Options vested and expected to vest at December 31, 2020 10,432,822 $ 15.11 7.48 $ 791,000 Options exercisable at December 31, 2020 5,540,840 $ 9.07 6.51 $ 453,593 For the year ended December 31, 2020 and 2019, the weighted average grant date fair value of stock options granted per share was equal to $ 18.87 and $ 11.52 , respectively. For the year ended December 31, 2018, the weighted average grant date fair value of stock options granted to employees and directors was equal to $ 8.28 . During the years ended December 31, 2020, 2019 and 2018, the total fair value of stock options vested was $ 21.0 million, $ 12.4 million and $ 5.4 million, respectively. As of December 31, 2020, 2019 and 2018, the unrecognized compensation cost related to outstanding options was $ 66.1 million, $ 40.4 million and $ 15.9 million, respectively, which was expected to be recognized as expense over approximately 2.9 years, 2.9 years and 3.1 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, 2020, 2019 and 2018, was $ 59.7 million, $ 10.7 million, and $ 5.5 million, respectively. Total cash received upon the exercise of stock options was $ 9.7 million for the year ended December 31, 2020. Restricted Stock Units. The following table summarizes restricted stock unit activity and related information under all equity plans for the year ended December 31, 2020: Number of Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Vesting Period Aggregate Intrinsic Value (in 000s) Outstanding at December 31, 2019 520,000 $ 16.41 2.64 $ 10,176 Granted 1,033,323 22.86 Vested ( 85,000 ) 16.34 Cancelled ( 66,591 ) 21.94 Outstanding at December 31, 2020 1,401,732 $ 20.91 2.64 $ 127,459 Restricted stock units expected to vest at December 31, 2020 1,401,732 $ 20.91 2.64 $ 127,459 During years ended December 31, 2020, 2019 and 2018, the total fair value of restricted stock units vested was $ 1.9 million, $ 2.4 million and $ 0.3 million, respectively. As of December 31, 2020, 2019 and 2018, the unrecognized compensation cost related to outstanding restricted stock units was $ 20.8 million, $ 6.2 million, and $ 0.4 million respectively, which was expected to be recognized as expense over approximately 2.9 years, 2.7 years, and 0.8 years respectively. 111 Table of Contents Stock-Based Compensation Expense The allocation of stock-based compensation for all stock awards is as follows (in thousands): Years Ended December 31, 2020 2019 2018 Research and development $ 18,636 $ 9,804 $ 3,654 General and administrative 12,117 7,606 2,639 Total stock-based compensation expense $ 30,753 $ 17,410 $ 6,293 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, 2020 2019 2018 Risk–free interest rate 1.0 % 2.4 % 2.5 % Expected volatility 77.5 % 80.1 % 79.3 % Expected term (in years) 5.5 6.1 6.0 Expected dividend yield 0.0 % 0.0 % 0.0 % 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 never paid cash dividends and has no present intention to pay cash dividends. Expected volatility. During the year ended December 31, 2020, the Company based t he expected volatility on the historical volatility of its common stock over the most recent period commensurate with the estimated expected term of the Company’s stock options , as the Company determined there was sufficient operating history and company-specific historical volatility to estimate the expected volatility. During the years ended December 31, 2019 and 2018, the expected volatility assumption was based on historical volatilities of a peer group of similar companies whose share prices were 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. During the year ended December 31, 2020, the Company estimated the expected term using historical experience and anticipated future exercise behavior. During the years ended December 31, 2019 and 2018, due to limited historical exercise behavior, the Company determined the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period. Common Stock Reserved for Future Issuance Common stock reserved for future issuance is as follows: December 31, 2020 2019 Convertible preferred stock (if converted) 13,972,745 13,972,745 Common stock options 10,432,822 9,327,742 Restricted stock units 1,401,732 520,000 Awards available under the 2013 Plan 2,618,516 2,880,235 Awards available under the Inducement Plan 550,000 279,178 Employee stock purchase plan 729,000 729,000 Total 29,704,815 27,708,900 112 Table of Contents 10. Income Taxes 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, 2020 2019 2018 Tax computed at federal statutory rate $ ( 36,411 ) $ ( 20,611 ) $ ( 13,985 ) State tax, net of federal tax benefit ( 1,296 ) ( 2,088 ) ( 1,620 ) Permanent differences ( 165 ) 175 22 Stock compensation ( 6,073 ) 359 ( 307 ) R&D tax credits ( 7,177 ) ( 7,285 ) ( 3,301 ) Reserve for uncertain tax positions 1,555 2,163 1,160 Other 70 77 304 Valuation allowance 49,497 27,210 17,727 Income tax expense $ — $ — $ — Significant components of the Company’s deferred tax assets are summarized as follows (in thousands): December 31, 2020 2019 Deferred tax assets: Section 59e amortization $ 48,195 $ 32,781 Net operating losses 41,213 37,563 R&D tax credits 23,488 16,391 Intangible asset amortization 2,615 1,650 Deferred revenue 11,915 2,115 Stock compensation 4,307 2,346 Lease liability 20,433 5,655 Other 10,208 846 Total deferred tax assets 162,374 99,347 Deferred tax liabilities: Depreciation ( 4,220 ) — Right-of-use assets ( 14,088 ) ( 4,778 ) Total deferred tax liabilities ( 18,308 ) ( 4,778 ) Net of deferred tax assets and liabilities 144,066 94,569 Valuation allowance ( 144,066 ) ( 94,569 ) Net deferred tax assets $ — $ — A valuation allowance of $ 144.1 million and $ 94.6 million at December 31, 2020 and 2019, respectively, has been established to offset the deferred tax assets, as realization of such assets is uncertain. At December 31, 2020, the Company had federal and California net operating loss (NOL) carryforwards of $ 186.4 million and $ 188.0 million, respectively, which may be available to offset future taxable income. Of the federal NOLs, $ 67.0 million are indefinite lived and are limited to offsetting eighty-percent of taxable income within a fiscal year. The remaining federal and California NOL carryforwards begin to expire in 2027 and 2028 , respectively, unless previously utilized. At December 31, 2020, the Company had federal and California research and development (R&D) credit carryforwards of $ 18.0 million and $ 12.9 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. 113 Table of Contents 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 could 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 changes in ownership exceeds 50 % within any three-year period. The Company had previously 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 study, 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 result 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, 2020 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 and California tax authorities for years beginning in 2017 and 2016 , 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): December 31, 2020 2019 2018 Beginning unrecognized tax benefits $ 16,822 $ 13,547 $ 11,800 Increase related to current year tax positions 1,837 3,196 1,798 Increase related to prior year tax positions 1,120 79 148 Decrease related to prior year tax positions — — ( 199 ) Ending unrecognized tax benefits $ 19,779 $ 16,822 $ 13,547 The Company does no t anticipate that the amount of unrecognized tax benefits as of December 31, 2020 will significantly change within the next twelve months. Due to the valuation allowance recorded against the Company’s deferred tax assets, no ne of the total unrecognized tax benefits as of December 31, 2020 would reduce the effective tax rate if recognized. The Company has not recognized interest or penalties related to income tax matters in its consolidated statements of operations and comprehensive loss since inception. 11. 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 as of December 31, 2020 since the adoption of the 401(k) plan. 12. Commitments and Contingencies License Agreements 114 Table of Contents 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. See Note 2 of the notes to the consolidated financial statements for additional information on certain licenses. 13. Subsequent Events In January 2021, the Company completed a public offering of common stock in which investors, certain of which are affiliated with a director of the Company, purchased an aggregate of 5.1 million shares of the Company’s common stock at a price of $ 85.50 per share under a shelf registration statement. In addition, the Company issued pre-funded warrants, in lieu of common stock to certain investors, to purchase 257,310 shares of the Company’s common stock (Pre-Funded Warrants). The purchase price for the Pre-Funded Warrants was $ 85.499 per Pre-Funded Warrant, which equals the per share public offering price for the shares of common stock less the $ 0.001 exercise price for each such Pre-Funded Warrant. The Pre-Funded Warrants are exercisable at any time after the date of issuance. A holder of Pre-Funded Warrants may not exercise the Pre-Funded Warrant if the holder, together with its affiliates, would beneficially own more than 9.99 % of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise. A holder of Pre-Funded Warrants may increase or decrease this percentage not in excess of 19.99 % by providing at least 61 days’ prior notice to the Company. Gross proceeds from the offering were $ 460.0 million. Net proceeds from the offering, after giving effect to underwriting discounts and commissions and estimated expenses related to the offering, are estimated to be approximately $ 432.1 million. 115 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.