Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read together with the description of our business appearing in Part I, Item 1. “Business” and the consolidated financial statements and related notes thereto in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1. “Business—Forward-Looking Statements” and Item 1A. “Risk Factors,” and elsewhere in this Annual Report. These statements are based on the current expectations and assumptions of management that are subject to risks and uncertainties. Actual results could differ materially from those discussed in or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A. “Risk Factors.” Except as required by law, we do not undertake any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any document, whether as a result of new information, future events, or otherwise.
Our Business
ImmunityBio, Inc. is a clinical-stage biotechnology company developing next-generation therapies and vaccines that complement, harness, and amplify the immune system to defeat cancers and infectious diseases. We strive to be a vertically-integrated immunotherapy company designing and manufacturing our products so they are more effective, accessible, more conveniently stored, and more easily administered to patients.
Our broad immunotherapy and cell therapy platforms are designed to attack cancer and infectious pathogens by activating both the innate immune system—NK cells, dendritic cells, and macrophages—and the adaptive immune system—B cells and T cells—in an orchestrated manner. The goal of this potentially best-in-class approach is to generate immunogenic cell death thereby eliminating rogue cells from the body whether they are cancerous or virally infected and to ultimately establish an “immunological memory” that confers long-term benefit for the patient.
Our business is based on the foundation of multiple platforms that collectively act on the entire immune response with the goal of targeted, durable, coordinated, and safe immunity against disease. These platforms and their associated product candidates are designed to overcome the limitations of the current standards of care in oncology and infectious disease, such as checkpoint inhibitors and antiretroviral therapies. We have established one of the most comprehensive portfolios of immunotherapy and vaccine platforms, which include:
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We believe that our innovative approach to orchestrate and combine therapies for optimal immune system response will become a therapeutic foundation across multiple clinical indications. Although such designations may not lead to a faster development process or regulatory review and may not increase the likelihood that a product candidate will receive approval, Anktiva, our novel antibody cytokine fusion protein, has received Breakthrough Therapy and Fast Track designations in combination with BCG from the FDA for BCG -unresponsive NMIBC CIS . B ased on the reported results of the trial, we have initiated discussions with the FDA to file a BLA for Anktiva (to be branded VesAnktiva for intravesical administration) plus BCG for BCG-unresponsive NMIBC CIS. Additionally, we believe that data from multiple clinical trials indicates Anktiva has broad potential to enhance the activity of therapeutic mAbs, including checkpoint inhibitors (e.g., Keytruda ® ), across a wide range of tumor types.
Our platforms, which include 17 first-in-human therapeutic agents, are being studied in 26 actively recruiting clinical trials—17 of which are in Phase 2 or 3 development—across 13 indications in liquid and solid tumors, including bladder, pancreatic and lung cancers. These are among the most frequent and lethal cancer types for which there are high failure rates for existing standards of care or, in some cases, no available effective treatment. In infectious disease, our pipeline currently targets such pathogens as SARS-CoV-2 and HIV. We believe SARS-CoV-2 currently lacks a vaccine that provides long-term protection against the virus, particularly its variants, while HIV affects tens of millions of people globally and currently has no known cure.
We have established GMP manufacturing capacity at scale with cutting-edge cell manufacturing expertise and ready-to-scale facilities, as well as extensive and seasoned R&D, clinical trial, and regulatory operations, and development teams.
The Merger
On December 21, 2020 , we and NantCell, Inc. (formerly known as ImmunityBio, Inc., a private company) (NantCell) entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which we and NantCell agreed to combine our businesses. The Merger Agreement provided that a wholly-owned subsidiary of the company would merge with and into NantCell (the Merger), with NantCell surviving the Merger as a wholly-owned subsidiary of the company.
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On March 9, 2021 , we completed the Merger pursuant to the terms of the Merger Agreement. Under the terms of the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of NantCell common stock , par value $0.001 per share, issued and outstanding immediately prior to the Effective Time, subject to certain exceptions as set forth in the Merger Agreement, was converted automatically into a right to receive 0.8190 (the Exchange Ratio) newly issued shares of common stock, par value $0.0001 per share, of the company (Company Common Stock), with cash paid in lieu of any fractional shares. At the Effective Time, each share of the company’s common stock issued and outstanding immediately prior to the Effective Time, remained an issued and outstanding share of the combined company. At the Effective Time, each outstanding option, warrant or restricted stock unit to purchase NantCell common stock was converted using the Exchange Ratio into an option, warrant or restricted stock unit, respectively, on the same terms and conditions immediately prior to the Effective Time, to purchase shares of Company Common Stock.
Immediately following the Effective Time, the former stockholders of NantCell held approximately 71.5% of the outstanding shares of Company Common Stock and the stockholders of the company as of immediately prior to the Merger held approximately 28.5% of the outstanding shares of Company Common Stock. As a result of the Merger and immediately following the Effective Time, Dr. Patrick Soon-Shiong, our Executive Chairman and Global Chief Scientific and Medical Officer, and his affiliates beneficially owned, in the aggregate, approximately 81.8% of the outstanding shares of Company Common Stock. Following the consummation of the Merger, the symbol for shares of the company’s common stock was changed to “IBRX.”
We incurred costs totaling $23.3 million in connection with the Merger, consisting of financial advisory, legal and other professional fees, of which $13.0 million and $10.3 million were recorded for the years ended December 31, 2021 and 2020, respectively.
Accounting Treatment of the Merger
The Merger represents a business combination pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 805-50, Mergers , which is accounted for as a transaction between entities under common control as Dr. Soon‑Shiong and his affiliates were the controlling stockholders of both the company and NantCell for all of the periods presented in this report. As a result, all of the assets and liabilities of NantCell were combined with ours at their historical carrying amounts on the closing date of the Merger. We have recast our prior period financial statements to reflect the conveyance of NantCell’s common shares as if the Merger had occurred as of the earliest date of the consolidated financial statements presented in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report. All material intercompany accounts and transactions have been eliminated in consolidation.
COVID-19 Pandemic
The COVID-19 pandemic continues to present a substantial public health and economic challenge around the world. Through the date of this Annual Report, we have not seen a material adverse impact to our business from the pandemic. However, given the unprecedented and continuously evolving nature of the pandemic, we cannot at this time predict the specific extent, duration, or full impact that this pandemic may have on our financial condition and results of operations, including ongoing and planned clinical trials. More specifically, the pandemic may result in prolonged impacts that we cannot predict at this time and we expect that such uncertainties will continue to exist for the foreseeable future. The impact of the pandemic on our financial performance will depend on future developments, including the duration and spread of the outbreak, impact of potential variants and the related governmental advisories and restrictions. These developments and the impact of the ongoing pandemic on the financial markets and the overall economy are highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, our results may be adversely affected. In addition, we anticipate that enrollment of patients in certain studies will likely take longer than previously forecasted and that our clinical trials may require additional time to complete which would in turn impact the timeline of BLA submissions of our product candidates and subsequent revenue generation.
These factors have been accounted for in the company’s anticipated upcoming milestones. During any such delays in our clinical trials, we will continue to incur fixed costs such as selling, general and administrative expenses and operating expenses related to our laboratory, GMP manufacturing, and office facilities.
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Many of our office-based employees have been working from home since mid-March 2020. Essential staffing levels for our research and development operations remain in place, including maintaining key personnel in our laboratory and GMP manufacturing facilities. It is likely that the pandemic and resulting mitigation efforts could have an impact in the future on our third-party suppliers who manufacture laboratory supplies required for our in-house manufacturing process, which in turn could have an impact on having sufficient clinical product supply available for our clinical trials. We have addressed this in part by ensuring that we have sufficient supplies on hand to weather interruptions in our supply chain.
We continue to monitor the impact of the COVID-19 pandemic on our business, including our clinical trials, manufacturing facilities and capabilities, and ability to access necessary resources. For a discussion of the risks presented by the COVID-19 pandemic to our results of operations and financial condition, see Part I, Item 1A. “Risk Factors.”
Operating Results
From inception through the date of this Annual Report, we have generated minimal revenue from non-exclusive license agreements related to our cell lines, the sale of our bioreactors and related consumables, and grant programs. We have no clinical products approved for commercial sale and have not generated any revenue from therapeutic and vaccine product candidates that are under development. We have incurred net losses in each year since our inception and, as of December 31, 2021, we had an accumulated deficit of $2.0 billion. Our net losses attributable to ImmunityBio common stockholders were $346.8 million, $221.9 million, and $157.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. Substantially all of our net losses resulted principally from costs incurred in connection with our ongoing clinical trials and operations, our research and development programs, and from selling, general and administrative costs associated with our operations, including stock-based compensation expense.
As of December 31, 2021, we had 587 employees. Personnel of related companies who provide corporate, general and administrative, manufacturing strategy, research and development, regulatory and clinical trial strategy and other support services under our shared services agreement with NantWorks are not included in this number. For additional information, see Note 8 , Related-Party Agreements, of the “Notes to Consolidated Financial Statements” that appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report. In anticipation of the commercialization of select drug candidates, we expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, which may fluctuate significantly from quarter-to-quarter and year-to-year. See “— Future Funding Requirements ” below for a discussion of our anticipated expenditures and sources of capital we expect to access to fund these expenditures.
Collaboration Agreements
As we continue the development of our pipeline, we anticipate that strategic collaborations with established biopharma companies and other research-based entities will become integral to our operations and the development of novel combination therapies. These collaborations will provide ImmunityBio with a range of opportunities to leverage our partners’ expertise and capabilities to further expand the potential of our technologies and product candidates. We are currently pursuing this aspect of our business in 13 clinical trials studying our IL-15 superagonist fusion protein Anktiva in combination with complementary, approved therapies to determine if Anktiva may have broad potential to enhance the activity of those therapies, including mAbs and other standard-of-care therapeutics across a wide range of tumor types. We believe we are well positioned to become a leader in immunotherapy through the combined strength of our broad and vertically-integrated platform and complementary strategic partnerships. We may also enter into supply arrangements for various investigational agents to be used in our clinical trials. See Note 6 , Collaboration and License Agreements , of the “Notes to Consolidated Financial Statements” that appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report for a more detailed discussion regarding our collaboration and license agreements.
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Agreements with Related Parties
Our Executive Chairman, Global Chief Scientific and Medical Officer and our principal stockholder, founded and has a controlling interest in NantWorks, which is a collection of companies in the healthcare and technology space. We have entered into arrangements with NantWorks, and certain affiliates of NantWorks, to facilitate the development of new immunotherapies for our product pipeline. Affiliates of NantWorks are also affiliates of the company due to the common control by and/or common ownership interest of our Executive Chairman and Global Chief Scientific and Medical Officer.
Related-Party Promissory Notes
As of December 31, 2021, we have outstanding fixed-rate promissory notes with entities affiliated with Dr. Soon-Shiong in an aggregate amount of $306.3 million, including accrued interest. These notes bear interest at a per annum rate ranging from 3.0% to 6.0%, provide that the outstanding principal is due and payable on September 30, 2025, and accrued and unpaid interest is payable on either upon maturity or, with respect to one of the notes, on a quarterly basis beginning June 30, 2021. We may prepay the outstanding amount of any advance under such notes, together with accrued and unpaid interest, at any time, in whole or in part, without premium or penalty.
In addition, as of December 31, 2021 we have a $300.0 million variable-rate promissory note with an entity affiliated with Dr. Soon-Shiong that is due and payable on December 17, 2022. This loan bears interest at Term SOFR + 5.4%, which is compounded annually and payable quarterly commencing on March 17, 2022. As of December 31, 2021, the interest rate on this loan was 5.47%. In the event of a default on the loan (as defined in the promissory note), including if we do not repay the loan at maturity, the company has the right, at its sole option, to convert the outstanding principal amount and accrued and unpaid interest due under this note into shares of the company’s common stock at price of $5.67 per share. There can be no assurance that we can refinance this promissory note or what terms will be available in the market at the time of refinancing. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to the refinanced indebtedness would increase. These risks could materially adversely affect our financial condition, cash flows and results of operations.
I mmuno-Oncology Clinic, Inc.
We entered into multiple agreements with Immuno-Oncology Clinic, Inc. (the Clinic) to conduct clinical trials related to certain of our product candidates. The Clinic is a related party as it is owned by an officer of the company and NantWorks manages the administrative operations of the Clinic.
In the second quarter of 2021, b ased on a review of our then updated clinical trial programs post-Merger, we updated our estimates of the investigator fees for the clinical trials that were underway or planned at the Clinic. As certain programs costs are excluded from and certain services are subject to credit adjustments under the Clinic agreements, we determined the expected future fees for services to be performed were less than the carrying value of the prepaid asset on the consolidated balance sheets. As a result, we partially wrote down the value of our prepayments under the Clinic agreements and recorded approximately $1.9 million in research and development expense , on the consolidated statement of operations for the three months ended June 30,2021. In November 2021, we completed a review of alternative structures that could support our more complex clinical trial requirements and made a decision to explore a potential transition of clinical trials at the Clinic to a new structure (including contracting with a new, non-affiliated professional corporation) to be determined and agreed upon by all parties and currently planned for the first half of 2022. Based on this decision to explore a potential transition, we determined that it was more likely than not that the previously recorded prepaid asset would not result in the collection of fees for services performe d by the Clinic as contemplated in the original agreements. As a r esult, we wrote down the remaining value of our prepaid asset and recorded approximately $2.5 million in research and development expense , on the consolidated statement of operations for the three months ended December 31, 2021.
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NantWorks
Under the NantWorks shared services agreement executed in November 2015, but effective August 2015, NantWorks, a related party, provides corporate, general and administrative, manufacturing strategy, research and development, regulatory and clinical trial strategy, and other support services. We are charged for the services at cost plus reasonable allocations of employee benefits, facilities and other direct or fairly allocated indirect costs that relate to the employees providing the services.
NantBio, Inc.
In 2018, we entered into a supply agreement with NantCancerStemCell, LLC (NCSC), a 60% owned subsidiary of NantBio (with the other 40% owned by Sorrento). Under this agreement, we agreed to supply VivaBioCell’s proprietary GMP-in-a-Box bioreactors and related consumables, made according to specifications mutually agreed to with both companies.
In 2018, we entered into a shared service agreement pursuant to which we are charged for services at cost, without mark-up or profit by NantBio, but including reasonable allocations of employee benefits that relate to the employees providing the services.
Duley Road, LLC
In 2017, Altor BioScience Corporation (succeeded by our wholly-owned subsidiary Altor BioScience, LLC), through its wholly-owned subsidiary, entered into a lease agreement with Duley Road, a related party that is indirectly controlled by our Executive Chairman and Global Chief Scientific and Medical Officer, for office and cGMP manufacturing facility space in El Segundo, California. Effective in 2019, we entered into two lease agreements with Duley Road for a second building located in El Segundo, California. Both floors of the building are used for research and development and office space.
605 Nash, LLC
In February 2021, but effective on January 1, 2021, we entered into a lease agreement with 605 Nash, LLC, a related party, for a facility primarily used for pharmaceutical development and manufacturing purposes. In May 2021, but effective on April 1, 2021, we entered into an amendment to our lease agreement with 605 Nash, LLC to expand the rentable leased square feet.
557 Doug St, LLC
In September 2021, we entered into a sale transaction with Nant Capital, a related party, for a real estate property located at 557 South Douglas Street, El Segundo, California. We subsequently leased back the building for an initial seven-year lease term with an option to extend the lease for two additional seven-year periods.
Brink Biologics, Inc.
In 2015, we entered into an agreement with Brink Biologics, Inc. (Brink) whereby we granted to Brink worldwide exclusive licenses to the use of certain cell lines and intellectual property for non-clinical laboratory testing. Brink is a related party as our Executive Chairman, Global Chief Scientific and Medical Officer and our principal stockholder, and our Chief Corporate Affairs Officer and member of our board of directors, collectively own more than 50% of Brink’s outstanding shares.
420 Nash, LLC
In September 2021, we entered into a lease agreement with 420 Nash, LLC, a related party, for a facility located at 420 Nash Street, El Segundo, California, to be used primarily for the warehousing and storage of drug manufacturing supplies, products and equipment and ancillary office space. The company has options to extend the lease term for two additional consecutive periods of five years each.
See Note 8 , Related-Party Agreements , of the “Notes to Consolidated Financial Statements” that appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report for a more detailed discussion regarding our related-party agreements.
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Components of our Results of Operations
Revenue
From inception through the date of this Annual Report, we have generated minimal revenue from non-exclusive license agreements related to our cell lines, the sale of our bioreactors and related consumables, and grant programs. We have no clinical products approved for commercial sale and have not generated any revenue from therapeutic and vaccine product candidates that are under development. If we fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval for them, we may never be able to generate substantial future revenue.
Operating Expenses
We generally classify our operating expenses into research and development, and selling, general and administrative expenses. Personnel costs, including salaries, benefits, bonuses, and stock-based compensation expense comprise a significant component of our research and development, and selling, general and administrative expense categories. We allocate expenses associated with our facilities and information technology costs between these two categories, primarily based on the nature of each cost.
Research and Development
Research and development expense consists of expenses incurred while performing research and development activities to discover and develop our technology and product candidates. This includes conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expenses primarily consist of:
• clinical trial and regulatory-related costs;
• expenses incurred under agreements with investigative sites and consultants that conduct our clinical trials;
• expenses incurred under collaborative agreements;
• manufacturing and testing costs and related supplies and materials;
• employee-related expenses, including salaries, benefits, travel and stock-based compensation; and
• facility expenses dedicated to research and development.
We typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or external consultant costs to specific product candidates or development programs.
We expect our research and development expense to continue to increase significantly for the foreseeable future as we advance our product candidates through clinical development, including the conduct of our ongoing and any future clinical trials.
The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of any product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates.
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The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following:
• per patient trial costs;
• the number of sites included in the clinical trials;
• the countries in which the clinical trials are conducted;
• the length of time required to enroll eligible patients;
• the number of patients that participate in the clinical trials;
• the number of doses that patients receive;
• the cost of comparative agents used in clinical trials;
• the drop-out or discontinuation rates of patients;
• potential additional safety monitoring or other studies requested by regulatory agencies;
• the duration of patient follow-up; and
• the efficacy and safety profile of the product candidate.
We have only one product candidate, Anktiva, currently planned for a BLA submission to the FDA in the near future. However, there can be no assurance that it will be approved for commercial sale in the near term, if ever. We do not expect any of our other product candidates to be commercially available for the foreseeable future, if ever.
Selling, General and Administrative
Selling, general and administrative expense consists primarily of salaries and personnel-related costs, including employee benefits and any stock-based compensation, for employees performing functions other than research and development. This includes personnel in executive, finance, human resources, information technology, legal, and administrative support functions. Other selling, general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, professional fees for auditing, tax and legal services, advertising costs, expenses associated with strategic business transactions and business development efforts, obtaining and maintaining patents, consulting costs, royalties and licensing costs, and costs of our information systems.
We expect that our selling, general and administrative expense will increase for the foreseeable future as we expand operations, build out information systems and increase our headcount to support continued research activities and the development of our clinical programs. We have incurred and expect that we will continue to incur in the future, additional costs associated with operating as a public company, including costs to comply with stock exchange listing and SEC requirements, future funding efforts, corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public companies. Additionally, if and when we believe that a regulatory approval of a product candidate appears likely, we expect to incur significant increases in our selling, general and administrative expense relating to the sales and marketing of the approved product candidate.
Other Income and Expense
Other income and expense consists primarily of interest income, interest expense, unrealized gains and losses on investments in equity securities and equity-method investments, realized gains and losses on both debt and equity securities, and gains and losses on foreign currency transactions.
Income Taxes
We are subject to U.S. federal income tax, as well as income tax in Italy, South Korea, California and other states. From inception through December 31, 2021, we have not been required to pay U.S. federal and state income taxes because of current and accumulated net operating losses.
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Discussion of Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
For the Year Ended December 31,
2021 2020 $ Change % Change
($ in thousands)
Revenue $ 934 $ 605 $ 329 54.4 %
Operating expenses:
Research and development (including amounts
with related parties) 195,958 139,507 56,451 40.5 %
Selling, general and administrative (including amounts
with related parties) 135,256 71,318 63,938 89.7 %
Impairment of intangible assets — 10,660 (10,660) (100.0) %
Total operating expenses 331,214 221,485 109,729 49.5 %
Loss from operations (330,280) (220,880) (109,400) 49.5 %
Other expense, net:
Interest and investment (loss) income, net (4,100) 2,435 (6,535) (268.4) %
Interest expense (including amounts with related parties) (14,849) (9,074) (5,775) 63.6 %
Loss on equity method investment (803) — (803) 100.0 %
Other income, net (including amounts
with related parties) 193 1,486 (1,293) (87.0) %
Total other expense, net (19,559) (5,153) (14,406) 279.6 %
Loss before income taxes and noncontrolling interests (349,839) (226,033) (123,806) 54.8 %
Income tax (expense) benefit (9) 1,846 (1,855) (100.5) %
Net loss $ (349,848) $ (224,187) $ (125,661) 56.1 %
Revenue
Revenue increased $0.3 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase was primarily driven by royalty revenue in 2021 from a sublicense agreement.
Research and Development Expense
Research and development expense increased $56.5 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase in research and development expense was primarily driven by a $32.1 million increase in compensation expense, including an $18.6 million increase in stock-based compensation expense due to new grants issued to employees and executives and a $13.5 million increase in personnel costs due to higher headcount in support of our continued research and development efforts, a $6.9 million increase in clinical trial expenses and regulatory costs related to our Anktiva and COVID-19 programs, including a $4.4 million expense associated with the write down of a prepaid asset with the Clinic, a $6.6 million increase in facilities expense, primarily related to the expansion of one of our manufacturing facilities in El Segundo, California during 2021 and increased maintenance costs at our various facilities, a $5.5 million increase in quality control and research and development-related technology expense, a $3.5 million increase in laboratory supply expense related to our COVID-19 programs ramp up and NK-92 and M-ceNK cell therapy research, and a $2.4 million increase in shared services costs to support our growth. These increases were partially offset by a $0.5 million decrease in consulting costs.
We expect our research and development expense to increase significantly for the foreseeable future as we advance our product candidates through clinical development and conduct our ongoing and planned clinical trials.
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Selling, General and Administrative Expense
Selling, general and administrative expense increased $63.9 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase in selling, general and administrative expense was primarily attributable to a $42.2 million increase in compensation expense, including a $36.4 million increase in stock-based compensation expense driven by awards granted to employees and executives and option modifications resulting in incremental stock-based compensation expense in 2021 and a $5.8 million increase in personnel costs related to higher headcount needed to support our business activities, a $19.3 million increase in professional services fees related to Merger costs, SOX compliance, the combined company audit, our recruitment and business growth strategy, various legal matters, and new system implementations, and a $3.2 million increase in insurance costs, primarily due to higher directors’ and officers’ insurance renewal rates and increased insurance coverage. These increases were partially offset by an $0.8 million decrease in shared service costs and other general and administrative expense.
Impairment of Intangible Assets
During the year ended December 31, 2020, the company recorded an impairment charge totaling $10.7 million to write down the carrying value of indefinite-lived in-process research and development intangible assets associated with the acquisition of Receptome, LLC to zero in connection with the decision to discontinue certain programs based on results gathered from preclinical data.
Other Expense, Net
Other expense, net increased $14.4 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase was due to a $6.5 million decrease in interest and investment income, driven primarily by a $6.2 million net unrealized loss from equity securities and a $0.9 million decrease in interest income, partially offset by a $0.4 million decrease in accretion of investment premiums and $0.2 million of net realized gains on investments ; a $5.8 million increase in interest expense driven primarily by higher related-party borrowings; an $0.8 million loss on equity method investment; and a $1.3 million decrease in other income in our subsidiaries and foreign exchanges losses.
Comparison of the Years Ended December 31, 2020 to 2019
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations of ImmunityBio, Inc. filed as Exhibit 99.3 to our Current Report on Form 8-K/A filed with the SEC on April 22, 2021 for a discussion of the company’s results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019.
Financial Condition, Liquidity and Capital Resources
Sources of Liquidity
Our principal sources of liquidity are our existing cash, cash equivalents, and marketable securities. We have historically invested our cash primarily in investment grade short- to intermediate-term corporate debt securities, commercial paper, government-sponsored securities, U.S. treasury securities, and foreign government bonds and classify these investments as available-for-sale. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets.
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As of December 31, 2021, we had cash and cash equivalents, and marketable securities of $317.9 million compared to $97.0 million as of December 31, 2020. On April 30, 2021, we entered into an Open Market Sale Agreement (the Sale Agreement) with respect to an at-the-market (the ATM) offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, having an aggregate offering price of up to $500.0 million through our sales agent. For the year ended December 31, 2021, we received net proceeds totaling $164.5 million from the issuance of 13,295,817 shares under the ATM, which we expect to use for general corporate purposes, including to progress our clinical development programs, fund other research and development activities, make capital expenditures and fund working capital. We may also use a portion of the net proceeds to license intellectual property or to make acquisitions or investments. Although we made a decision to pause our ATM offering in the fourth quarter of 2021 after our $300.0 million promissory note financing with Nant Capital and do not have an active issuance notice with our sales agent, we expect to re-initiate activity at any time based on market dynamics and/or capital requirements. As of December 31, 2021, we had $330.8 million available for future stock issuances under the ATM.
In order to complete the development of our current product candidates, and implement our business plan, we will require substantial additional funding. Furthermore, changing circumstances may cause us to increase our spending significantly faster than we currently anticipate, and we may need to raise even greater amounts of funds sooner if we choose to expand more rapidly than we presently anticipate. Moreover, our fixed expenses such as rent and other contractual commitments are substantial and are expected to increase in the future.
Uses of Liquidity
In addition to the cash used to fund our operating activities discussed in “ —Future Funding Requirements ” below, we will require cash to settle the following obligations:
• As of December 31, 2021, our indebtedness totals $605.6 million (consisting of related-party promissory notes and accrued and unpaid interest, less unamortized debt issuance costs), held by entities affiliated with Dr. Soon-Shiong. Of this amount, $300.0 million is due and payable on December 17, 2022. In the event of a default on the loan (as defined in the promissory note), including if we do not repay the loan at maturity, the company has the right, at its sole option, to convert the outstanding principal amount and accrued and unpaid interest due under this note into shares of the company’s common stock at price of $5.67 per share. There can be no assurance that we can refinance this promissory note or what terms will be available in the market at the time of refinancing. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to the refinanced indebtedness would increase. These risks could materially adversely affect our financial condition, cash flows and results of operations.
The remaining $306.3 million is due and payable on September 30, 2025, including any accrued and unpaid interest. We may prepay the outstanding amount of any advance under such notes, together with accrued and unpaid interest, at any time, in whole or in part, without premium or penalty.
• In connection with our acquisition of Altor, we issued CVRs under which we have agreed to pay the prior stockholders of Altor approximately $304.0 million upon successful approval of the BLA, or foreign equivalent, for Anktiva by December 31, 2022 and approximately $304.0 million upon the first calendar year prior to December 31, 2026 in which worldwide net sales of Anktiva exceed $1.0 billion (with payments payable in cash or shares of our common stock or a combination thereof). Dr. Soon-Shiong and his related party hold approximately $279.5 million in the aggregate of CVRs, and they have both irrevocably agreed to receive shares of common stock in satisfaction of their CVRs. We may be required to pay the other prior Altor stockholders up to $164.2 million in settlement of the CVRs relating to the regulatory milestone and up to $164.2 million of the CVRs relating to the sales milestone should they choose to have the CVRs paid in cash instead of common stock. We may need to seek additional sources of capital to satisfy the CVR obligations if they are achieved.
• In connection with our acquisition of VivaBioCell, we are obligated to pay the former owners approximately $2.3 million of contingent consideration upon the achievement of a regulatory milestone relating to the GMP-in-a-Box technology.
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Discussion of Consolidated Cash Flows
The following discussion of ImmunityBio’s cash flows is based on the consolidated statements of cash flows in Part II, Item 8. “Financial Statements and Supplementary Data” and is not meant to be an all‑inclusive discussion of the changes in its cash flows for the periods presented below.
The following table sets forth our primary sources and uses of cash for periods indicated:
For the Year Ended December 31,
2021 2020
(in thousands)
Cash provided by (used in):
Operating activities $ (274,419) $ (171,724)
Investing activities (84,886) (19,812)
Financing activities 505,443 150,675
Effects of exchange rate changes on cash, cash equivalents,
and restricted cash 48 (25)
Net change in cash, cash equivalents, and restricted cash $ 146,186 $ (40,886)
Operating Activities
For the year ended December 31, 2021, net cash used in operating activities of $274.4 million consisted of a net loss of $349.8 million and $19.1 million of cash used in net working capital changes, partially offset by $94.5 million in adjustments for non-cash items. The changes in net working capital consisted primarily of decreases of $10.2 million with related parties, $4.2 million in operating lease liabilities, $4.0 million in investment and other assets, $3.7 million in accounts payable, and $2.2 million in prepaid and other current assets, partially offset by an increase of $5.2 million in accrued expenses and other liabilities. Adjustments for non-cash items primarily consisted of $57.2 million in stock-based compensation expense, $14.2 million in depreciation and amortization expense, $12.5 million in non-cash interest related primarily to related-party promissory notes, $4.9 million in non-cash lease expense related to operating lease right-of-use assets, $4.6 million in unrealized losses on equity securities driven primarily by a decrease in the value of our investments, $0.8 million loss on our equity investment in the joint venture and $0.3 million in other non-cash items.
For the year ended December 31, 2020, net cash used in operating activities of $171.7 million consisted of a net loss of $224.2 million, partially offset by $36.1 million in adjustments for non-cash items and $16.4 million of cash provided by net working capital changes. Adjustments for non-cash items primarily consisted of $12.7 million in depreciation and amortization, an impairment of intangible assets totaling $10.7 million, $8.5 million in non-cash interest items related primarily to related-party promissory notes, $5.2 million in non-cash lease expense related to operating lease right-of-use assets, $2.2 million in stock-based compensation expense, a $1.4 million unrealized loss on non-marketable equity investment, and $1.2 million in other non-cash items, partially offset by a $2.9 million change in deferred tax liability, and a $2.9 million unrealized gain on equity securities. The changes in net working capital consisted primarily of increases related to $12.5 million in accrued expenses and other liabilities, $3.4 million with related parties, and $2.6 million in accounts payable, and a decrease related to $4.2 million in prepaid expenses and other current assets, partially offset by decreases related to $5.6 million in operating lease liabilities and $0.7 million in investment and other assets.
We have historically experienced negative cash flows from operating activities, with such negative cash flows likely to continue for the foreseeable future.
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Investing Activities
For the year ended December 31, 2021, net cash used in investing activities was $84.9 million, which included $141.8 million of purchases of marketable debt securities and $33.6 million of purchases of property, plant and equipment, partially offset by cash inflows of $70.0 million from maturities and sales of marketable debt and equity securities, and $20.5 million in proceeds from the sale of 557 Doug St, LLC that were allocated to the book value of the property. Our investments in property, plant and equipment are primarily related to acquisitions of equipment that will be used for the manufacturing of our product candidates and expenditures related to the build out of our manufacturing facilities.
For the year ended December 31, 2020, net cash used in investing activities was $19.8 million, which included $91.8 million of purchases of marketable debt securities and $1.7 million of purchases of property, plant and equipment, partially offset by cash inflows of $73.7 million from maturities and sales of marketable debt securities.
We expect to accelerate our capital spending as we scale our GMP manufacturing capabilities, which will require significant capital for the foreseeable future.
Financing Activities
For the year ended December 31, 2021, net cash provided by financing activities was $505.4 million, which consisted of $338.5 million in net proceeds from issuances of related-party promissory notes, $164.5 million in net proceeds from the ATM offering, $5.5 million in proceeds from exercises of stock options and a $1.4 million capital contribution representing excess proceeds received over book value from the sale of 557 Doug St, LLC to an entity under common control. Net cash used in financing activities consisted of $4.1 million related to net share settlement of vested RSUs for payment of payroll tax withholding and a $0.4 million payment for contingent consideration.
For the year ended December 31, 2020, net cash provided by financing activities was $150.7 million, which consisted primarily of $86.3 million in net proceeds from an equity offering, $63.7 million in proceeds from issuances of related-party promissory notes and $1.2 million in proceeds from exercises of stock options, partially offset by $0.5 million related to net share settlement of vested RSUs for payment of payroll tax withholding.
Comparison of the Years Ended December 31, 2020 to 2019
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidated Cash Flows” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations of ImmunityBio, Inc. filed as Exhibit 99.3 to our Current Report on Form 8-K/A filed with the SEC on April 22, 2021 for a discussion of the company’s consolidated cash flows for the year ended December 31, 2020 compared to the year ended December 31, 2019.
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Future Funding Requirements
From inception through the date of this Annual Report, we have generated minimal revenue, and we have no clinical products approved for commercial sale and have not generated any revenue from therapeutic and vaccine product candidates that are under development. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates, and we do not know when, or if, this will occur. In addition, we expect our operating expenses to significantly increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. We have also incurred and expect that we will continue to incur in the future additional costs associated with operating as a public company as well as costs related to future fundraising efforts. In addition, subject to obtaining regulatory approval of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations. We expect that our operating expenses will increase substantially if and as we:
• continue research and development, including preclinical and clinical development of our existing product candidates;
• potentially seek regulatory approval for our product candidates;
• seek to discover and develop additional product candidates;
• establish a commercialization infrastructure and scale up our manufacturing and distribution capabilities to commercialize any of our product candidates for which we may obtain regulatory approval;
• seek to comply with regulatory standards and laws;
• maintain, leverage and expand our intellectual property portfolio;
• hire clinical, manufacturing, scientific and other personnel to support our product candidates’ development and future commercialization efforts;
• add operational, financial and management information systems and personnel; and
• incur additional legal, accounting and other expenses in operating as a public company.
As a result of continuing anticipated operating cash outflows, we believe that substantial doubt exists regarding our ability to continue as a going concern without additional funding or financial support. However, we believe our existing cash, cash equivalents, and investments in marketable securities, together with capital to be raised through equity offerings (including the ATM) and our potential ability to borrow from affiliated entities, will be sufficient to fund our operations through at least the next 12 months following the issuance date of the consolidated financial statements based primarily upon our Executive Chairman and Global Chief Scientific and Medical Officer’s intent and ability to support our operations with additional funds, including loans from affiliated entities, as required, which we believe alleviates such doubt. We may also seek to sell additional equity, through one or more follow-on public offerings, or in separate financings, or obtain a credit facility. However, we may not be able to secure such external financing in a timely manner or on favorable terms. Without additional funds, we may choose to delay or reduce our operating or investment expenditures. Further, because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we may need additional funds to meet our needs sooner than planned.
We will need to obtain additional financing to fund our future operations, including completing the development and commercialization of our product candidates. Changing circumstances may cause us to increase our spending significantly faster than we currently anticipate and we may need to raise additional funds sooner than we presently anticipate. Moreover, research and development and our operating costs and fixed expenses such as rent and other contractual commitments, including those for our research collaborations, are substantial and are expected to increase in the future.
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Our future funding requirements will depend on many factors, including, but not limited to:
• progress, timing, number, scope and costs of researching and developing our product candidates and our ongoing, planned and potential clinical trials;
• time and cost of regulatory approvals;
• our ability to successfully commercialize any product candidates, if approved and the costs of such commercialization activities;
• revenue from product candidates that we may commercialize, if any, including the selling prices for such potential products and the availability of adequate third-party coverage and reimbursement for patients;
• cost of building, staffing and validating our own manufacturing facilities in the U.S., including having a product candidate successfully manufactured consistent with FDA and European Medicines Agency regulations;
• terms, timing and costs of our current and any potential future collaborations, business or product acquisitions, CVRs, milestones, royalties, licensing or other arrangements that we have established or may establish;
• time and cost necessary to respond to technological, regulatory, political and market developments; and
• costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights.
Unless and until we can generate a sufficient amount of revenues, we may finance future cash needs through public or private equity offerings, license agreements, debt financings, collaborations, strategic alliances and marketing or distribution arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, or at all, including but not limited to the offering, issuance and sale by us of up to a maximum aggregate amount of $500.0 million of our common stock that may be issued and sold under the ATM. Although we made a decision to pause our ATM offering in the fourth quarter of 2021 after our $300.0 million promissory note financing with Nant Capital and do not have an active issuance notice with our sales agent, we expect to re-initiate activity at any time based on market dynamics and/or capital requirements. As of December 31, 2021, we had $330.8 million available for future stock issuances under the ATM. See Note 9 , Stockholders’ Deficit , of the “Notes to Consolidated Financial Statements” that appear in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report.
To the extent that we raise additional capital through the sale of equity or equity-linked securities, including convertible debt or through the ATM or other offerings, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of additional indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms unfavorable to us. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may be required to delay or reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts. Our current license and collaboration agreements may also be terminated if we are unable to meet the payment obligations under those agreements. As a result, we may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
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Contractual Obligations
We have material cash requirements to pay related party affiliates and third parties under various contractual obligations discussed below:
• We are obligated to make payments to several related party affiliates under written agreements and other informal arrangements. We are also obligated to pay interest and to repay principal under our related-party notes payable. For information regarding our financing obligations, see Note 8 , Related-Party Agreements—Related-Party Notes Payable, of the “Notes to Consolidated Financial Statements” that appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report.
• We are obligated to make payments under our operating leases, which primarily consist of facility leases. For information regarding our lease obligations, see Note 7 , Commitments and Contingencies—Lease Arrangements, and Note 8 , Related-Party Agreements, of the “Notes to Consolidated Financial Statements” that appear in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report.
• In connection with the acquisitions of Altor and VivaBioCell, we are obligated to pay contingent consideration upon the achievement of certain milestones. For information regarding our contingent consideration obligations, see Note 7 , Commitments and Contingencies—Contingent Considerations Related to Business Combinations, of the “Notes to Consolidated Financial Statements” that appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report.
• We have contractual obligations to make payments to related party affiliates and third parties under our unconditional purchase arrangements. For information on these unconditional purchase obligations, see Note 7 , Commitments and Contingencies—Contingent Consideration Related to Business Combinations, of the “Notes to Consolidated Financial Statements” that appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report.
• We have certain contractual commitments that are expected to be paid within one year, depending on the progress of build outs, completion of services, and the realization of milestones associated with third-party agreements. This amount totals $72.7 million and is primarily related to capital expenditures, open purchase orders as of December 31, 2021 for the acquisition of goods and services in the ordinary course of business, and near term up-front milestone payments to third parties.
• In addition, we have contractual commitments that are expected to be paid in fiscal year 2023 and beyond based on the achievement of various development, regulatory and commercial milestones for agreements with third parties. These payments may not be realized or may be modified and are contingent upon the occurrence of various future events, substantially all of which have a high degree of uncertainty of occurring. As of December 31, 2021, the maximum amount that may be payable related to these commitments is $570.7 million.
On February 14, 2022 , we acquired a leasehold interest in the Dunkirk Facility. In connection with this lease , w e committed to spend an aggregate of $1.52 billion on operational expenses during the initial 10 -year term, and an additional $1.50 billion on operational expenses if we elect to renew the lease for the additional 10 -year term. These amounts are not included in the discussion above. See “— Subse quent Events —Acquisition of cGMP ISO Class 5 Manufacturing Facility”.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. On an ongoing basis, we evaluate our estimates, including those related to the valuation of equity-based awards, deferred income taxes and related valuation allowances, preclinical and clinical trial accruals, impairment assessments, contingent value right measurement and assessments, the measurement of right-of-use assets and lease liabilities, useful lives of long-lived assets, loss contingencies, fair value measurements, and the assessment of our ability to fund our operations for at least the next 12 months from the date of issuance of these financial statements. Actual results could differ from those estimates. While our significant accounting policies are more fully described in the notes accompanying our consolidated financial statements that appear in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements:
Revenue Recognition
We have primarily generated revenues from non-exclusive license agreements related to our cell lines, the sale of our bioreactors and related consumables and grant programs. The nonexclusive license agreements with a limited number of pharmaceutical and biotechnology companies grant them the right to use our cell lines and intellectual property for non-clinical use. These agreements generally include upfront fees and annual research license fees for such use, as well as commercial license fees for sales of the licensee products developed or manufactured using our intellectual property and cell lines. We have generated revenues from product sales of our proprietary GMP-in-a-Box bioreactors and related consumables to related parties. Additionally, we also generated revenues from grant programs.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied.
Under our license agreements with customers, we typically promise to provide a license to use certain cell lines and related patents, the related know-how, and future research and development data that affect the license. We have concluded that these promises represent one performance obligation due to the highly interrelated nature of the promises. We provide the cell lines and know-how immediately upon entering into the contracts. Research and development data are provided throughout the term of the contract when and if available.
The license agreements may include non-refundable upfront payments, event-based milestone payments, sales-based royalty payments, or some combination of these. The event-based milestone payments represent variable consideration and we use the most likely amount method to estimate this variable consideration. Given the high degree of uncertainly around the achievement of these milestones, we do not recognize revenue from these milestone payments until the uncertainty associated with these payments is resolved. We currently estimate variable consideration related to milestone payments to be zero and, as such, no revenue has been recognized for milestone payments. We recognize revenue from sales-based royalty payments when or as the sales occur. On a quarterly basis, we re-evaluate our estimate of milestone variable consideration to determine whether any amount should be included in the transaction price and recorded in revenue prospectively.
We also have sold our proprietary GMP-in-a-Box bioreactors and related consumables to affiliated companies. The arrangements typically include delivery of bioreactors, consumables, and providing installation service and perpetual software licenses for using the equipment. We recognize revenue when customers obtain control and can benefit from the promised goods or services, generally upon installation of the bioreactors, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. Upfront payments and fees are recorded as deferred revenue upon receipt and recognized as revenue when we satisfy our performance obligations under these arrangements.
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Business Combinations
Business combinations are accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations (ASC 805). These standards require that the total cost of acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition, with the excess purchase price recorded as goodwill. The allocation of the purchase price is dependent upon certain valuations and other studies. Acquisition costs are expensed as incurred. Estimating fair value requires us to make significant judgments and assumptions.
Contingent consideration obligations incurred in connection with a business combination are recorded at their fair values on the acquisition date and re-measured at their fair values each subsequent reporting period until the related contingencies are resolved. The resulting changes in fair values are recorded as research and development expense, on the consolidated statements of operations and comprehensive loss. Changes in fair values reflect changes to our assumptions regarding probabilities of successful achievement of related milestones, the timing in which the milestones are expected to be achieved, and the discount rate used to estimate the fair value of the obligation.
Preclinical and Clinical Trial Accruals
As part of the process of preparing the consolidated financial statements, we are required to estimate expenses resulting from obligations under contracts with vendors, clinical research organizations and consultants. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.
We estimate clinical trial and research agreement-related expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf. In accruing clinical and research-related fees, we estimate the time period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.
Research and Development Costs
Major components of research and development costs include cash compensation and other personnel-related expenses, stock-based compensation, depreciation and amortization expense on research and development property and equipment and intangible assets, costs of preclinical studies, clinical trials costs, including CROs, and related clinical manufacturing, including CMOs, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on our behalf. Costs incurred in research and development are expensed as incurred.
Included in research and development costs are clinical trial and research expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf. We record accruals for estimated costs under these contracts. When evaluating the adequacy of the accrued liabilities, we analyze the progress of the preclinical studies or clinical trials, including the phase or completion of events, invoices received, contracted costs and purchase orders. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period based on the facts and circumstances known at that time. Although we do not expect the estimates to be materially different from the amounts actually incurred, if the estimates of the status and timing of services performed differ from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. Actual results could differ from our estimates. We adjust the accruals in the period when actual costs become known.
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Stock-Based Compensation
We account for stock-based compensation under the provisions of ASC Topic 718, Compensation—Stock Compensation (ASC 718). We estimate fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The Black-Scholes model requires the use of highly subjective assumptions, including, but not limited to, expected stock price volatility over the term of the awards and the expected term of the stock options. We measure the fair value of an equity-classified award at the grant date and recognize the stock-based compensation expense over the period of vesting on the straight-line basis for our outstanding share awards that do not contain a performance condition. For awards subject to performance-based vesting conditions, we assess the probability of the individual milestones under the award being achieved and stock-based compensation expense is recognized over the service period using the graded vesting method once management believes the performance criteria is probable of being met. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. For awards with service or performance conditions, we recognize the effect of forfeitures in compensation cost in the period that the award was forfeited.
Contingencies
We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We accrue for the best estimate of a loss within a range; however, if no estimate in the range is better than any other, then we accrue the minimum amount in the range. If we determine that a material loss is reasonably possible, we disclose the possible loss or range of loss, or that the amount of loss cannot be estimated at this time.
Because of the inherent uncertainty and unpredictability related to these matters, accruals are based on what we believe to be the best information available at the time of our assessment, including the legal facts and circumstances of the case, status of the proceedings, applicable law and the views of legal counsel. Upon the final resolution of such matters, it is possible that there may be a loss in excess of the amount recorded, and such amounts could have a material adverse effect on our results of operations, cash flows or financial position. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause a change in the potential amount of the liability recorded or of the range of potential losses disclosed. As of December 31, 2021, we recorded an accrual of $7.1 million contingency related to the dissenting share obligations in accrued and other current liabilities, on our consolidated balance sheets.
See further information in Note 7 , Commitments and Contingencies, of the “Notes to Consolidated Financial Statements” included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report.
Recent Accounting Pronouncements
Refer to Note 2 , Summary of Significant Accounting Policies , of the “Notes to Consolidated Financial Statements” that appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.
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Subsequent Events
Increase in Shares of Common Stock Authorized for Issuance
Effective February 1, 2022, ImmunityBio amended its Amended and Restated Certificate of Incorporation to increase the number of shares that the company is authorized to issue from 500,000,000 shares of common stock, $0.0001 par value per share, to 900,000,000 shares of common stock, $0.0001 par value per share. The number of shares of preferred stock, $0.0001 par value per share, that the company is authorized to issue remained unchanged at 20,000,000 shares.
Acquisition of cGMP ISO Class 5 Manufacturing Facility
On February 14, 2022, we acquired a leasehold interest in approximately 409,000 rentable square feet of cGMP ISO Class 5 pharmaceutical manufacturing space in western New York from Athenex. The facility provides us with a state-of-the-art biotech production center that substantially expands and diversifies our existing manufacturing capacity in the U.S.
We paid approximately $40.0 million to Athenex, and the leasehold interest in the Dunkirk Facility was transferred to us. Our annual lease payment will be $2.00 per year for an initial 10-year term, with an option to renew the lease under substantially the same terms and conditions for an additional 10-year term. As part of the transaction, we assumed obligations under various third-party agreements, and committed to spend $1.52 billion on operational expenses during the initial term, and an additional $1.50 billion on operational expenses if we elect to renew the lease for the additional 10-year term. We also committed to hiring 450 employees at the Dunkirk Facility within the first five years of operations, with 300 such employees to be hired within the first 2.5 years of operation. We are eligible for certain sales-tax exemption savings during the development of the Dunkirk Facility, and certain property tax savings over the next 20 years, subject to certain terms and conditions, including performance of certain of the obligations described above.
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