ImmunityBio, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10‑Q, or Quarterly Report. This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the section entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include, but are not limited to: • our ability to pioneer immunotherapy, harness the power of the innate immune system, implement precision cancer medicine and change the current paradigm of cancer care; • our ability to implement and support the Joint COVID‑19 Collaboration; • any impact of the COVID‑19 pandemic, or responses to the pandemic, on our business, clinical trials or personnel; • our expectations regarding the potential benefits of our strategy and technology; • our expectations regarding the operation of our product candidates and related benefits; • our ability to utilize multiple modes to induce cell death; • our beliefs regarding the benefits and perceived limitations of competing approaches, and the future of competing technologies and our industry; • details regarding our strategic vision and planned product candidate pipeline, including that we eventually plan to advance therapies for virally induced infectious diseases; • our beliefs regarding the success, cost and timing of our product candidate development activities and current and future clinical trials and studies, including study design; • our expectations regarding our ability to utilize the phase I and II aNK and haNK clinical trials data to support the development of all of our product candidates, including our haNK, taNK, t‑haNK, MSC and ceNK product candidates; • the timing or likelihood of regulatory filings or other actions and related regulatory authority responses, including any planned investigational new drug, or IND, filings or pursuit of accelerated regulatory approval pathways or orphan drug status and breakthrough therapy designations; • our ability to implement an integrated discovery ecosystem and the operation of that planned ecosystem, including being able to regularly add neoepitopes and subsequently formulate new product candidates; • the ability and willingness of strategic collaborators, including certain affiliates of NantWorks, LLC, or NantWorks, to share our vision and effectively work with us to achieve our goals; • the ability and willingness of various third parties to engage in research and development activities involving our product candidates, and our ability to leverage those activities; • our ability to attract additional third party collaborators; • our expectations regarding the ease of administration associated with our product candidates; • our expectations regarding the patient compatibility associated with our product candidates; • our beliefs regarding the potential markets for our product candidates and our ability to serve those markets; • our ability to produce an “off-the-shelf” therapy; • our beliefs regarding the potential manufacturing and distribution benefits associated with our product candidates, and our ability to scale up the production of our product candidates; • our plans regarding our manufacturing facility and our belief that our manufacturing is capable of being conducted in‑house; • our belief in the potential of our aNK cells as a technology platform, and the fact that our business is based upon the success of our aNK cells as a technology platform; 29 • our aNK platform and other product candidate families, including genetically modified haNK , taNK, t ‑haNK , MSC and ceNK product candidates, will require significant additional clinical testing; • even if we successfully develop and commercialize our haNK and t‑haNK product candidates, we may not be successful in developing and commercializing our other product candidates either alone or in combination with other therapeutic agents; • the ability to obtain and maintain regulatory approval of any of our product candidates, and any related restrictions, limitations and/or warnings in the label of any approved product candidate; • our ability to commercialize any approved products; • the rate and degree of market acceptance of any approved products; • our ability to attract and retain key personnel; • the accuracy of our estimates regarding our future revenue, as well as our future operating expenses, capital requirements and needs for additional financing; • our ability to obtain funding for our operations, including funding necessary to complete further development and any commercialization of our product candidates; • our ability to obtain and maintain intellectual property protection for our product candidates and not infringe upon the intellectual property of others; • our expected use of the net proceeds from our June 2020 equity offering; • regulatory developments in the United States, or U.S., and foreign countries; and • our expectations regarding the period during which we qualify as an “emerging growth company” under the JOBS Act, and a “smaller reporting company,” as defined in Rule 12b‑2 of the Securities Exchange Act of 1934. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, “Risk Factors,” elsewhere in this Quarterly Report filed with the Securities and Exchange Commission, or SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. This Quarterly Report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. In this Quarterly Report, “NantKwest,” “the company,” “we,” “us” and “our” refer to NantKwest, Inc. and its subsidiaries. 30 Overview We are a pioneering clinical-stage immunotherapy company focused on harnessing the power of the innate immune system by using our natural killer cells, or NK cells, to treat cancer and viral infectious diseases. NK cells are the body’s first line of defense due to their innate ability to rapidly seek and destroy abnormal cells, such as cancer or virally infected cells, without prior exposure or co-activation by other support molecules that are typically required to train and activate adaptive immune cells such as T‑cells. A critical aspect of our strategy is to invest significantly in innovating new therapeutic candidates, based upon our proprietary activated NK, or aNK, cell platform, and conducting clinical testing and scale manufacturing of our most promising biologic product candidates. We believe our aNK cell is capable of being manufactured as a cell-based “off-the-shelf” therapy that can be molecularly engineered in a variety of ways to boost its killing capabilities against cancers and virally infected cells. We retain worldwide commercial rights to clinical and research data, intellectual property and know-how developed with our aNK cells, as well as what we believe is the only clinical grade master cell bank of aNK cells in existence. Equity Offering On June 29, 2020, the company closed an underwritten public offering of an aggregate of 8,521,500 shares of common stock, which included 4,811,500 shares issued to the public at a price of $9.50 per share (which included 1,111,500 shares sold to the public upon full exercise of the underwriters’ option to purchase additional shares at a public offering price of $9.50 per share), less underwriting discounts and commissions, and 3,710,000 shares issued to our Chairman, CEO and principal stockholder, Dr. Patrick Soon-Shiong, at a price of $12.12 per share, less underwriting discounts and commissions. All of the shares were offered by the company. Including the underwriters’ option exercise, the aggregate gross proceeds from the offering were approximately $90.7 million, before deducting underwriting discounts, commissions and other offering expenses payable by the company of approximately $4.4 million. Our Off-the-Shelf Approach Our NK platforms have demonstrated the ability to induce cell death in cancers and virally infected cells through a variety of concurrent mechanisms including innate killing, antibody-mediated killing, chimeric antigen receptor (CAR)-directed killing and a combination of both antibody mediated and CAR-directed killing. Innate Killing—the aNK Platform. We have developed a unique NK cell platform, which we believe is capable of being manufactured as a cell-based “off-the-shelf” therapy that can be molecularly engineered in a variety of ways to boost its killing capabilities against cancers and virally infected cells. Unlike normal natural killer cells, our NK cells do not express the key inhibitory receptors that diseased cells often exploit to turn off the killing function of natural killer cells and escape elimination. We have developed a unique aNK cell, which omits key inhibitory receptors, while preserving critical activation receptors that enable selective innate targeting and killing of distressed and diseased cells. They do so through the recognition and binding of stress-proteins that are overexpressed on the surfaces of i. rapidly growing cancer cells due to oxidative and metabolic stress, nutrient deprivation and waste accumulation that typically occurs when cell growth outpaces the capacity of local circulation; and ii. virally infected cells where the cellular machinery is hijacked to produce an abundance of viral proteins and virions. Our aNK cells are also designed to deliver a more lethal blow to their target by delivering a larger payload of lytic enzymes and cytokines responsible for both direct and indirect killing when compared to other natural killer cells isolated from healthy donors. This is due to the higher density of lytic granules and larger cell volume possessed by aNK cells when compared to that of donor derived natural killer cells. We believe that our aNK cells can be produced at commercial scale as a ‘living drug’ using our proprietary manufacturing and distribution processes to adequately address select global cancer markets. Several phase I safety studies with unmodified aNK cells have been conducted in a variety of bulky hematological cancers and solid tumors, enrolling 46 patients in a range of dose levels and schedules with encouraging evidence of single-agent activity and a durable remission, including some complete responses in liquid tumors. Based on these earlier clinical trials, we have further modified our aNK platform through virus-free molecular engineering designed to leverage additional modes of killing available to aNKs, including antibody-mediated killing, the haNK platform, and both antibody-mediated and CAR-directed antigen targeted killing, the t‑haNK platform. 31 Antibody - Mediated Killing — the haNK Platform. We have genetically engineered our aNK cell platform to overexpress high - affinity CD16 receptors, which bind to antibodies. These antibody - targeted haNK cells are designed to directly bind to IgG1 - type antibodies, such as avelumab, trastuzumab, cetuximab and rituximab with the intention of enhancing the cancer killing efficacy of these antibodies by boosting the population of competent natural killer cells that can kill cancer cells through Antibody Dependent Cellular Cytotoxicity , or ADCC. Antibody products are abundantly utilized to treat cancer and it is estimated that they generate over $100 billion in reported annual sales. A growing number of studies suggest that clinically meaningful responses to these antibody therapies correlate directly with the overall health of a patient’s natural killer cell population and whether they express the high-affinity variant of the CD16 receptor. Currently available literature estimates that only approximately 10% to 15% of the addressable patient population eligible for antibody therapies carry high-affinity CD16 receptors. This implies that our haNK product candidate may have significant market potential as a combination therapy to potentially address a large number of patients who do not carry high-affinity CD16 receptors and, as a result, exhibit a poorer response to antibody therapies. We therefore intend to develop our haNK product candidate as a combination therapy with widely-used U.S. Food and Drug Administration, or FDA, approved antibody products such as avelumab, trastuzumab, cetuximab and rituximab. Current Good Manufacturing Practice, or cGMP, master and working cell banks of our haNK product candidate have been successfully established and will serve as our source for product for our clinical trials and , if approved, commercialization going forward. We have optimized our manufacturing process partly by designing our haNK product candidate to not require IL ‑ 2 cytokine supplementation to the growth media every few days, thereby enabling us to overcome a technically challenging and costly limitation that many other natural killer cell-based therapies face. We have also successfully established processes for large-scale production, cryopreservation and long-term storage of final dose forms, thereby optimizing production efficiencies and allowing for on-demand availability with minimal handling at the infusion sites. Our cryopreserved haNK product candidate has been cleared for clinical testing in several phase Ib/II clinical trials , including our phase II Merkel cell cancer study . CAR-Directed Killing—the taNK Platform. We have genetically engineered our aNK platform to express CARs that target tumor-specific antigens found on the surfaces of cancers and virally infected cells. Our taNK cells are designed to bind directly to these surface antigens and induce cell death through the release of toxic granules directly into the tumor cells and release of cytokines and chemokines to recruit additional innate and adaptive immune responses, including the recruitment of cytotoxic T‑cells. These tumor antigens encompass four categories of proteins, all of which can be targeted individually by our engineered taNK products: i. Checkpoint ligands, such as PD‑L1; ii. Well-established tumor proteins such as CD19, HER2 and EGFR; iii. Novel surface antigens associated with cancer stem cells, such as CD123 and IGF‑R1; and iv. Newly discovered proteins, or neoepitopes, from individual patient tumor samples. Preclinical evidence has been mounting which indicates that taNK cell activation through the binding of its CAR receptors to these cancer specific proteins may be potent enough to override many of the pre-existing inhibitory signals and immunosuppressive factors present in the tumor microenvironment that may be responsible for tumor resistance. CAR-Directed and Antibody-Mediated Killing—the t‑haNK Platform. Our newest and most promising platform for the development of therapeutic product candidates is an innovative, bioengineered combination of our haNK and taNK platforms that incorporates all the features of our haNK platform together with a CAR. The resulting line of product candidates under this platform avails itself to all three modes of killing: innate , antibody-mediated and CAR-directed killing . These product candidates also include one or more additional expression elements such as functional cytokines, chemokines and trafficking factors, making them amongst the most versatile in our portfolio. These product candidates are intended to be combined with commercially available therapeutic antibodies to effectively target either two different epitopes of the same cancer specific protein or two entirely different cancer specific proteins. In addition to our two t‑haNK product candidates, PD‑L1.t‑haNK, recently cleared to commence phase II testing, and CD19.t‑haNK, cleared to commence phase I testing, we believe a pipeline of prominent CARs for t‑haNK, including HER2, which is nearing IND submission, and EGFR, which is advancing through clinical enabling studies, among others, will enable us to potentially address an even broader range of cancers as part of a chemotherapy-free combination regimen. 32 Our GMP-in-a-Box Approach NantKwest is a leading company in the efforts to generate allogeneic and autologous-sourced cell based products, the most advanced of which are our cytokine enriched memory-like NK, or ceNK, and mesenchymal stem cell, or MSC, therapeutics. We utilize a scalable GMP production process that combines the use of ImmunityBio’s (a related party) semi-automated manufacturing equipment and software, cytokine expansion and activation reagents, including ImmunityBio’s N‑803, and unique user-friendly processing methods, all of which are proprietary. We have optimized processes for generating both fresh and cryopreserved clinical dose forms of ceNK cells with 100% purity (in the allogeneic setting) from a variety of sources, including cord blood and allogeneic and autologous peripheral blood. We have also optimized processes for generating fresh and cryopreserved clinical dose forms of MSCs from cord blood, cord tissue and allogeneic bone marrow sources. We avoid the use of both feeder-layers and feeder-layer derived substances for activation as well as other commonly applied additives that frequently create downstream issues in achieving a high-quality, operator-friendly reproducible final dose form and have been able to generate multiple dose forms from each donor product, both of which are critical features in achieving scalability. Cytokine Enriched Natural Killer (ceNK) Cell Platform. Cytokine-induced memory-like NK cells are a unique set of lymphocytes that differentiate after a brief pre-activation with interleukin‑12 (IL‑12), IL‑15, and IL‑18 and exhibit enhanced responses to cytokine re-stimulation that include enhanced interferon‑g production and cytotoxicity against leukemic cell lines. These cells have been isolated and characterized by their unique cell-surface marker profile and their highly desirable feature of immune-memory, marked by their pronounced anti-cancer activity for weeks to months in duration, which has made these cells a research focus for more than a decade. Based on published literature, to date we believe the ability to generate these memory-like cells at clinically meaningful quantities has been limited to the work performed at Washington University by T.A. Fehniger, et al. Published data so far has been limited to the acute myeloid leukemia patient population in the post-allogeneic, haploidentical stem cell transplantation setting, for which the Fehniger group has generated enough cells to provide a one-time dose of these cytokine-activated, memory-like natural killer cells. Our cytokine enriched natural killer cell program is based on the ability to enrich and expand donor-sourced natural killer cells in a GMP facility to a clinically relevant scale, which allows for the production of a pure cytokine activated and expanded NK cell population that possesses the unique phenotype we call ceNK cells. NantKwest has developed a unique ability to generate a portfolio of distinct ceNK cell products through the application of ImmunityBio’s proprietary GMP-in-a-Box bioreactors and cytokines and our proprietary methods and overall expertise in scale manufacturing of NK cell based products. 33 Mesenchymal Stem Cell (MSC) Platform. Bone marrow-derived allogen e ic MSC s are considered to be a prominent cell type to treat degenerative diseases and autoimmune disorders. MSCs are reported to be immunoprivileged, allowing for transplantation of allogen e ic MSCs without the risk of being rejected by host immune system. MSCs have been found to be capable of modulating immune responses, thereby reducing inflammation as well as immunopathology and protecting alveolar epithelial cells during acute respiratory distress syndrome, or ARDS, including that triggered by cytokine storm. More importantly, MSCs demonstrated promising activity in reducing the non-productive inflammation and in promoting lung generation in a phase II clinical trial, as well as in patients with ARDS in clinical practice. As a result, we believe MSCs have the potential to alleviate the SARS ‑CoV ‑2-derived cytokine storm and ARDS, and thereby have an effect on the treatment of subsequent chronic respiratory dysfunction and lung fibrosis. We have developed and optimized procedures and proprietary protocols to generate multiple dose forms of MSC products from a single bone marrow or cord sample, in a scalable format using ImmunityBio’s GMP-in-a-Box system. Research Update on our Product Candidates Our haNK cell therapeutic candidate is a molecularly engineered variant of our aNK cell platform, which incorporates both the expression of i. A natural, high-affinity antibody engager, FcγRIIIa/CD16 receptor, which is designed to bind to therapeutically administered cancer-targeting antibodies and result in destruction of the cancer targets through a mechanism widely referred to as ADCC, and ii. The IL‑2 support cytokine, whose expression is retained within the cell where it can exert its maximum effects of supporting growth and killing function while limiting expression into the extracellular surroundings, where it could result in cytokine-related symptoms. 34 Recently published preclinical research by our collaborators at the National Cancer Institute under a Nant K west funded clinical research and development agreement confirms and expands upon earlier research which demonstrate d that irradiated and cryopreserved haNK cells showed increased resistance to hypoxic conditions as seen in suppressive tumor microenvironments . This is in marked distinction to healthy donor-derived natural killer cells, which exhibit significant impairment in both innate killing and antibody-mediated killing as well as in serial killing capabilities when exposed to the same hypoxic conditions . We believe NK p erformance under hypoxemic conditions is indicative of how natural killer cell therapies will fare within the tumor microenvironment . Key points include: i. Of the healthy donor natural killer cells tested, 92% exhibited a significant loss of innate lytic capability against cancer cell lines after exposure to 0% oxygen. In contrast, haNK cells maintained killing ability under the same hypoxic conditions. ii. Hypoxia led to decreases in antibody-mediated, or ADCC, killing by as much as 90% in healthy donor natural killer cells, whereas our haNK cells did not show diminished ADCC capacity under hypoxic conditions. iii. When combined with a human monoclonal antibody to mediate ADCC, killing by haNK cells was superior to that of healthy donor natural killer cells from all examined donors. iv. Healthy donor natural killer cell serial killing was significantly decreased under 0% oxygen. The addition of cetuximab increased serial killing by six-fold at 20% oxygen and 0% oxygen brought serial killing down to levels similar to those without cetuximab. Our haNK cells displayed a 24.6-fold increase in serial killing compared with healthy donor natural killer cells under 20% oxygen and this was not significantly decreased under 0% oxygen. The addition of cetuximab increased haNK cell serial killing 99-fold over healthy donor natural killer cells at 20% oxygen and likewise, was not significantly decreased under 0% oxygen. v. All findings were corroborated by corresponding RNAseq and proteomic analysis. Our haNK platform is itself being evaluated as a product candidate in a phase II clinical trial in patients with Merkel cell carcinoma who have progressed on or after checkpoint inhibitor therapy. Additionally, the haNK platform forms the basis of all our t‑haNK product candidates, including PD‑L1.t‑haNK, CD19.t‑haNK and Her2.t‑haNK, adding an additional mode of cancer targeting via CARs. A second recent publication of preclinical results by our collaborators at the National Cancer Institute on our PD‑L1.t‑haNK cells, haNK cells engineered to express PD‑L1 checkpoint-directed chimeric antigen receptors, demonstrated: i. In-vivo tumor trafficking; ii. Significant elimination of both monocytic and granulocytic Myeloid Derived Suppressor Cells, immune-suppressive cells often present in the tumor microenvironment; iii. Robust anti-tumor activity in cancer cell lines and in mouse models; and iv. The ability to kill 20 out of 20 human cancer cell lines tested, including triple negative breast cancer, or TNBC, and lung, urogenital, and gastric cancer cells. Our PD‑L1.t‑haNK product candidate is being evaluated in a phase II clinical trial in patients with pancreatic cancers in each of front-line maintenance, second-line and third-line therapies. Additional studies in other cancers are at various stages of advanced planning. Our primary target therapeutic area is cancer, with a heavy emphasis on solid tumors. According to the National Cancer Institute, there will be an estimated 1.8 million newly diagnosed cases of cancer in the U.S. in 2020. In 2019 there were an estimated 16.9 million people already living with cancer in the U.S. In addition, we plan to advance therapies for hematologic malignancies and virally induced infectious diseases. 35 The following table summarizes our current development programs: Our leading programs reside in two core disease areas: Oncology, which includes our haNK and PD‑L1.t‑haNK programs, and COVID‑19, which includes our BM‑Allo‑MSC and ceNK programs. We also have a pipeline of earlier stage t‑haNK projects in both Oncology and COVID‑19. 36 haNK Program Initial clinical experience with aNK and haNK in Merkel cell carcinoma Based on these encouraging data, we have proceeded with a phase II Merkel cell carcinoma trial. Phase II Trial of haNK in Second Line or Greater Merkel cell carcinoma QUILT 3.063 is a phase II, open label, single-arm trial evaluating the novel triple combination of “off-the-shelf” haNK cell therapy with N‑803 and avelumab, without chemotherapy in subjects that have progressed after treatment with a checkpoint inhibitor for Merkel cell carcinoma. Avelumab was the first approved checkpoint inhibitor therapy for front-line treatment of patients with Merkel cell carcinomas. This trial, which is currently enrolling patients, will be evaluating the objective response rate using Response Evaluation Criteria in Solid Tumors (RECIST) version 1.1 based on blinded independent central review. Additional measures of efficacy by progression-free survival, overall survival, disease-specific survival, duration of response, disease control rate, and quality of life by patient-reported outcomes and measures of safety will also be assessed. Exploratory objectives include the assessment of the pharmacokinetic and immunogenicity profiles, assessment of tumor molecular profiles and therapy-induced changes in immune responses, and molecular changes in cell-free circulating DNA and RNA, and their correlations with subject outcomes. This triple combination of immunotherapies has been safely studied in our prior trials for other solid cancer indications. The goal of combining these therapies is to synergistically maximize the killing of cancer cells while attempting to spare patients from chemotherapy and its associated adverse side effects. In both in vitro and in vivo studies we conducted, the combination of haNK cells with a number of different therapeutic antibodies, including avelumab, led to enhanced tumor cell killing when compared to the use of the antibody alone. Avelumab is a checkpoint inhibitor which targets the programmed death-ligand 1 protein, or PD‑L1, commonly expressed on a wide range of cancers. N‑803 has been shown to synergistically activate natural killer and T‑cells and enhance cancer cell killing in both single agent and combination therapy. When N‑803 is combined with haNK cells, a synergistic response was likewise observed in both in vivo and in vitro models. Merkel Cell Carcinoma. Merkel cell carcinoma, or MCC, is a rare and aggressive skin cancer that arises from uncontrolled growth of cells in the skin. Increasing in incidence, approximately 2,500 new cases are reported in the U.S. each year. Patients with metastatic or locally advanced MCC have an extremely poor prognosis, with less than 20% of patients surviving longer than five years. Typically, these patients are treated with a range of drugs, including chemotherapy, which can result in significant side effects. Although new immune therapies have the potential to improve survival, MCC is still fatal for a majority of patients who have progressed on or after treatment with a checkpoint inhibitor and represents an area of serious unmet medical need. 37 Initial clinical experience with haNK in Triple Negative Breast Cancer (TNBC) Based on these encouraging phase Ib data, we plan to request an end of phase I meeting with the FDA to discuss the potential for a registration path in TNBC with our PD‑L1.t‑haNK product candidate. PD‑L1.t‑haNK Program Our novel GMP-grade, cryopreserved, “off-the-shelf” bi-specific PD‑L1.t‑haNK NK cell therapy candidate received authorization from the FDA in June 2019 to proceed with a first-in-human, dose escalation-single agent safety study. To date, we completed treatment for the first ten patients across the first three dose cohorts of this phase I study in patients with locally advanced or metastatic solid cancers. In this study, five of the patients had a significant adverse event, or SAE, only one of which was suspected to have been drug related. This patient experienced shortness of breath and after recovery continued in the study at the same dosage as before with no subsequent adverse events. The remainder of the SAEs were judged to be possibly related to drug in patients with very advanced disease. One patient at the highest dose level experienced a dose-limiting toxicity involving neutropenia and we subsequently determined to reduce the dosing frequency from twice per week to once per week. We expect to enroll an additional four to six patients at this dosing schedule and to be ready for full study readout in the fourth quarter of 2020. While efficacy assessment was not part of this monotherapy trial, we did observe that several patients achieved a stable disease response early on but note that all patients went on to develop progressive disease. Since PD‑L1.t‑haNK is not intended for use as a monotherapy, it will be applied as the backbone of a combination regimen that includes a therapeutic monoclonal antibody in addition to the IL‑15 superagonist, N‑803, through our exclusive co-development agreement with Altor, a related party. We believe that the addition of this selective IL‑15 cytokine therapy will complement the activity of our bi-specific NK cell therapy through its stimulation of the patient’s own resident population of natural killer and cytotoxic CD8 T‑cells. A similar approach will be used for our CD19.t‑haNK NK cell therapy in CD19 positive B‑cell malignancies. As we conclude the evaluation of safety and initial activity, we plan to conduct a wide range of additional immunotherapy studies with this agent in simple combinations to address the PD‑L1 molecular marker across select tumor types beyond pancreatic cancer, including non-small cell lung cancers, and do not intend to pursue development of PD‑L1.t‑haNK as a monotherapy. By the conclusion of the phase I study, we believe we will have characterized the pharmacologic profile for PD‑L1.t‑haNK, obtained preliminary estimates of efficacy as a monotherapy in terms of objective response rate, progression-free survival and overall survival, assessed tumor molecular profiles, as well as therapy-induced changes in immune responses and their correlations with subject outcomes. 38 On a related note, a patient with late stage pancreatic cancer was enrolled to a special IND , or spIND , to receive PD ‑ L1.t ‑ haNK cells in combination with N ‑ 803 and aldoxorubicin. This protocol design was a streamlined version of the design that evolved across three phase Ib haNK combination protocols for patients with pancreatic cancers who have progressed on or after standard-of-care therapy. All patients tolerated the combination therapy with haNK cells and while survival was not formally assessed, it was noted that ten of the 13 patients on study experienced a stable disease at their first scheduled assessment and five continued to experience stable disease on subsequent scheduled assessments, which ranged from four to seven months. These observations were encouraging, given that at the time of enrollment, all patients were experiencing progressive disease. The patient who enrolled into the spIND protocol was confirmed to have a complete response by Positron Emission Tomography CT at eight months. While this single data point is not statistically significant or indicative of the likelihood to secure approval, it serves as a proof of concept for us that PD‑L1.t‑haNK in combination with N‑803 and a tumor conditioning regimen that includes aldoxorubicin may have encouraging clinical activity that warrants further study. QUILT 88, a phase II/III protocol that was recently authorized by the FDA, will investigate this combination of agents further. The results of this spIND were very positive; however, it has no statistical significance and will not be included in any application we may make to the FDA regarding the use of PD‑L1.t‑haNK. Phase II/III Front-Line Maintenance, Second Line and Third Line Treatment of Locally Advanced or Metastatic Pancreatic Cancer. QUILT 88 is a phase II/III open-label, randomized, three-cohort comparative study of PD‑L1.t‑haNK, N‑803 and aldoxorubicin in combination with standard-of-care therapy versus standard-of-care therapy alone for front-line maintenance, second-line and third-line or greater treatment of subjects with locally advanced or metastatic pancreatic cancer. The three cohorts include: A. Front-line maintenance therapy in patients that have achieved either a partial response, complete response, or stable disease after first-line standard-of-care therapy; B. Second-line therapy; and C. Third-line therapy or greater as a single arm. Within Cohorts A and B, enrolled subjects will be randomly assigned to receive a combination of PD‑L1.t‑haNK, N‑803 and aldoxorubicin with standard-of-care in an experimental arm or standard-of-care only in the control arm. 39 Safety and progression-free survival will be compared between the groups using RECIST version 1.1 based on blinded independent central review. The IND application for QUILT 88 has recently been authorized by the FDA and the IND amendment for the addition of Cohort C for third-line or greater treatment and other study updates has been filed with the FDA. Multiple clinical sites are in the process of being opened, and five patients have been enrolled to date with three additional patients actively being screened. 40 Pancreatic Cancer. Pancreatic cancer is one of the deadliest cancers for patients in the U.S. Pancreatic cancer is the third leading cause of cancer-related death in the U.S., behind only lung cancer and colorectal cancer, and is expected to become the second-leading cause after lung cancer around 2020. The overall five-year survival rate is just 9%. In 2019, an estimated 56,770 people were diagnosed with pancreatic cancer in the U.S., and it is estimated that approximately 45,750 of those newly diagnosed will die from the disease. Pancreatic cancer is the ninth-most commonly diagnosed cancer in women and the tenth-most commonly diagnosed cancer in men. Only about 20% to 30% of cases are found early enough to treat surgically, before the cancer has spread, and surgery gives the only chance that this cancer can be eradicated. Treatment options for pancreatic cancer patients include surgery, chemotherapy, radiation therapy, targeted therapy, immunotherapy, and clinical trials. Pancreatic cancer is uniformly accepted as an area of serious unmet medical need, with five-year relative survival rates by SEER (The Surveillance, Epidemiology, and End Results program of the N ational Cancer Institute ) stage at diagnosis of 37% for localized, 12% for regional, 3% for distant, and 9% for all SEER stages combined. COVID‑19 Programs Update QUILT‑COVID‑19‑MSC. COVID‑19 infection causes progressive severe lung infection that can lead to death in a significant number of infected patients. Prior work using allogeneic MSCs in severely infected individuals has shown promise in reversing the severe consequences of infection in critically ill patients such as the consequences of cytokine release syndrome. Thus, the potential exists for allogeneic MSCs to slow or halt disease progression and reduce time on ventilators in critically ill patients infected with COVID‑19, and thus improve disease outcomes. We are conducting a randomized, double-blind placebo-controlled phase Ib study to assess the safety of therapeutic treatment with immunomodulatory bone marrow-derived mesenchymal stem cells, or BM‑Allo‑MSC, in adults with severe COVID‑19 infection. This clinical trial will evaluate the safety and efficacy of BM‑Allo‑MSC versus best supporting care in treating patients with severe disease requiring ventilator support during COVID‑19 infection. A total of 45 subjects receiving care in the critical care or ICU setting for COVID‑19 will be enrolled in this study. Subjects will be randomized in a 2:1 fashion to the experimental and control arms, respectively. Primary endpoints include incidence of adverse events, mortality and number of ventilator-free days within 60 days of randomization. All subjects will also be assessed using the standard National Early Warning Score, or NEWS score (Royal College of Physicians 2012). The NEWS score has demonstrated an ability to identify patients at risk of poor outcomes and will be used as a measure of efficacy. This score is based on 7 clinical parameters (respiration rate, oxygen saturation, any supplemental oxygen, temperature, systolic blood pressure, heart rate, level of consciousness). We will be evaluating any changes in NEWS scores from baseline assessments. We recently announced FDA authorization of our IND for BM‑Allo‑MSC and have initiated the Phase Ib trial at regional hospitals in Southern California, with our first patient anticipated to be dosed in August 2020. To expedite our in-house clinical production and supply, we engaged a national marrow donor service to provide us with cryopreserved donor stem cells to supplement our sourcing of starting material. We believe the accelerated access to material, combined with our scalable manufacturing processes, will allow for rapid enrollment in the trial. QUILT‑ceNK‑COVID‑19. We plan to file an IND for an open-label, phase Ib study of the safety of ceNK cells for treatment of high-risk, hospitalized adults with COVID‑19. This clinical trial will assess the safety and the immune enhancement activity of ceNK monotherapy in hospitalized subjects who have tested positive for SARS‑CoV‑2 and have confirmed COVID‑19 lung disease that require supplemental oxygen, but not ventilator assistance, will be enrolled. Subjects may be receiving other supportive care in the hospitalized setting. We anticipate completing the regulatory authorization process, filing an IND and preparing clinical sites for study enrollment in the second half of 2020. Additional Programs Update We anticipate pursuing additional indications for our PD‑L1.t‑haNK product candidate, starting with non-small cell lung cancer (NSCLC). In July 2020 an amendment to incorporate a PD‑L1.t‑haNK containing cohort to an ongoing multi-center NSCLC trial, QUILT 3.055, sponsored by Immunity Bio, a related party, had been filed on our behalf. This single arm cohort will enroll twenty-five patients with third-line or greater NSCLC, using a combination of PD‑L1.t‑haNK together with N‑803 and a checkpoint inhibitor. Observed responses in this trial will guide our plans to conduct a subsequent phase II trial in first and second-line NSCLC patients. Earlier stage t‑haNK programs, including CD19.t‑haNK, which has IND authorization for a phase I B‑cell lymphoma trial, and Her2.t‑haNK, which is IND ready for a phase I Her2+ breast cancer trial, are both anticipated to initiate in the first half of 2021. 41 Additionally, we anticipate filing IND applications for first-in-human phase I safety testing of ceNK cells in advanced, metastatic ovarian cancer and multiple myeloma in the fourth quarter of 2020. Ovarian cancer. Pre-clinical data demonstrate encouraging cytotoxic activity of ceNK cells against ovarian cancer cell lines in both in vitro and in vivo models. Given the large unmet medical need with few available treatment options for patients who fail second-line therapy, such an approach potentially holds great promise. Separately, N‑803 has likewise demonstrated promising activity in the same setting, holding promise for a potential combination regimen after establishing safety in phase I testing. Multiple Myeloma. The importance of natural killer cells in multiple myeloma and its potential utility in patients who failed stem cell transplantation is well supported in the literature. Likewise, memory-like natural killer cells have demonstrated the potential for clinical utility in this setting. In vitro testing of our own ceNK cells against highly resistant myeloma cell lines have consistently demonstrated potent killing in laboratory assays. Given the industry’s focus on the use of BCMA directed CAR‑T therapies despite the risk often associated with CAR‑T products of life-threatening cytokine release syndrome in addition to expensive in-patient hospital stays, we believe that ceNK cells, either in their native form or modified with a BCMA CAR being developed in-house, could be an attractive product candidate to evaluate in phase I and II clinical studies. Joint Development Agreement with ImmunityBio for COVID ‑ 19 In May 2020, we entered into a binding term sheet with one of our affiliate companies, ImmunityBio, Inc., or ImmunityBio, for the joint development, manufacturing and marketing of a vaccine and various therapeutics for COVID‑19, or the Joint COVID-19 Collaboration. We are negotiating and finalizing a definitive agreement related to this term sheet and expect to complete this definitive agreement by late August 2020, and our current plans and operations assume that this definitive agreement will be executed to continue the Joint COVID‑19 Collaboration. Until the definitive agreement is finalized, any investments made by each entity are the responsibility of the contributing party. As of June 30, 2020, we have incurred operating expenses of $5.4 million, which includes allocated personnel costs, laboratory supplies, and other expenses related to readying and operating our GMP laboratory manufacturing facilities in El Segundo and Culver City, California, which has been included in research and development expense on the condensed consolidated statements of operations. These facilities and related laboratory equipment have been repurposed for the manufacture of two of the collaboration product candidates. In addition, we also incurred capital expenditures of $2.3 million related to laboratory equipment in connection with the Joint COVID-19 Collaboration, which has been included in property, plant and equipment on the condensed consolidated balance sheets. As of June 30, 2020, we have committed operating and capital expenditures of $4.5 million that we will incur in future periods. The incurred and committed expenditures are primarily associated with the company’s previously ongoing QUILT-COVID-19-MSC product candidate and ImmunityBio’s human adenovirus, or hAd5, vaccine candidate. In this Joint COVID‑19 Collaboration, we contributed the following programs: • QUILT‑COVID‑19‑MSC (as described above) as a therapeutic candidate for patients with severe symptoms of COVID‑19, or what we refer to as a “red” status, to modulate the immune system’s excessive response to COVID‑19 infection, thereby potentially reducing the debilitating and sometimes fatal effects of the disease; and • QUILT‑ceNK‑COVID‑19 (as described above) as a therapeutic candidate for moderate-risk, hospitalized adults with moderate to severe symptoms of COVID‑19, or what we refer to as “yellow” status. ImmunityBio contributed the following programs: • IL‑15 as a therapeutic candidate for patients with mild symptoms of COVID-19, or “yellow” status, prior to the onset of severe disease by potentially activating natural killer cells to mitigate viral replication; and • Human adenovirus (hAd5) as a vaccine candidate for those individuals in an uninfected state, or what we refer to as “green” status, to prevent the onset of COVID‑19. 42 In addition to the above programs contributed by each party, we will contribute our manufacturing capabilities in the form of facilities, equipment, personnel and related know-how, including our GMP manufacturing facility in El Segundo, California, and ImmunityBio will contribute certain manufacturing equipment and related technology and know-how. To date, NantKwest and ImmunityBio have each prepared a GMP-ready manufacturing plant for COVID‑19 vaccine production, which we and ImmunityBio expect will have a combined estimated capacity to produce sufficient clinical supply for our phase I and II studies by year-end 2020. We have prepared one of our GMP manufacturing facilities previously used to manufacture product for our oncology trials to manufacture and produce the vaccine candidate and we have identified a new, well-equipped location to manufacture and produce clinical products for our oncology trials, which will result in additional facilities and related facility operating costs in future periods. We have established a clinical product inventory to continue to supply clinical product for our ongoing oncology trials. In addition, we have repurposed some of our manufacturing facility in Culver City, California, and personnel to support our QUILT‑COVID‑19‑MSC program and have repurposed some of our personnel overseeing quality of our oncology programs to support the Joint COVID‑19 Collaboration. We also expect to hire additional staff to support the Joint COVID‑19 Collaboration. We believe the Joint COVID‑19 Collaboration will have no material impact on our current oncology efforts and trials and we expect that we will be able to continue to manufacture adequate product to continue our ongoing oncology trials. Additionally, with the sole exception of IL‑15 manufacturing, we will have primary responsibility for manufacturing and supplying the COVID‑19 collaboration products for clinical and commercial purposes. We will also have the primary responsibility in the U.S. for sales and marketing of the COVID‑19 collaboration products and the parties will share responsibility in the rest of the world for sales and marketing for the COVID‑19 collaboration products. 43 The Joint COVID ‑19 Collaboration binding term sheet outlines how development costs will be shared, how profits will be apportioned for any successfully marketed products, and the structure of shared governance of the joint effort s . Under the terms of the collaboration, we and ImmunityBio will share equally in all costs relating to developing, manufacturing, and marketing of the product candidates globally, starting from and after the effective date of the definitive agreement, and the global net profits from the collaboration products will be shared 60%/40% in favor of the party contributing the product on which the sales are based. All net profits from sales of any combined collaboration products will be shared equally. The Joint COVID ‑19 Collaboration will be supervised by joint committees, comprised of an equal number of representatives from both companies. The term of the agreement will be five years and it is renewable for an additional five year period upon mutual agreement. Each party will also have a right to terminate in the event of material breach, bankruptcy, or insolvency. If the definit i ve agreement is not entered into by both parties on or prior to August 21, 2020, then either party may thereafter terminate the term sheet upon five business days’ notice. Coronavirus Pandemic In March 2020, the World Health Organization declared the novel coronavirus (SARS‑CoV‑2) a pandemic. In the same month, the President of the United States declared a State of National Emergency due to the COVID‑19 outbreak. Many jurisdictions, particularly in North America, Europe and Asia, as well as U.S. states in which we operate, including California, have adopted or continue to consider laws, rules, regulations or decrees intended to address the COVID‑19 outbreak, including travel restrictions, closing or, more recently, re-opening of non-essential businesses or restricting daily activities. However, due to the very recent uptick of COVID‑19 worldwide and across the U.S. new restrictions might be imposed by government authorities. In addition, many communities have limited, and may consider continuing to limit, social mobility and gathering, in particular also in response to the recent rise in COVID‑19 cases and fatalities in certain U.S. states including California. Such restrictions and other impacts from COVID‑19 may have an impact on our business. Given the unprecedented and evolving nature of the pandemic, the future impact of these changes and potential changes on our company are unknown at this time. To date, we have seen no material adverse impact to our business from the COVID‑19 pandemic. We anticipate, however, that enrollment of patients in our studies will likely take longer than forecasted in prior SEC filings and that our clinical trials may require additional time to complete which would in turn impact the timeline in which we were previously forecasting BLA submissions of our product candidates and subsequent revenue generation. These factors have been accounted for in the anticipated upcoming milestones table, above. During any such delays in our clinical trials, we will continue to incur fixed costs such as selling, general and administrative expenses and operating expenses related to our laboratory, GMP manufacturing, and office facilities. Our office-based employees have been working from home since mid-March 2020, while ensuring essential staffing levels for our research and development operations remain in place, including maintaining key personnel in our laboratory and GMP manufacturing facilities. While we have not previously experienced or been notified of any anticipated impact amongst our third party vendors, it is likely that the COVID‑19 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 ample supplies on hand to weather interruptions in our supply chain. There is significant uncertainly about the progression and ultimate impact of the pandemic on our business and operations. While COVID‑19 did not materially impact our results during the six months ended June 30, 2020, we anticipate that COVID‑19 could impact our business in the short-term due to factors such as fewer patients accessing treatment for cancer. Operating Results To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property. We have not generated any revenue from product sales. We have incurred net losses in each year since our inception and, as of June 30, 2020, we had an accumulated deficit of $700.7 million. Our net losses were $38.5 million and $34.6 million for the six months ended June 30, 2020 and 2019, respectively, and $65.8 million and $96.2 million for the years ended December 31, 2019 and 2018, respectively. Substantially all of our net losses resulted principally from stock-based compensation expense and 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. 44 As of June 30, 2020 we had 148 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 9 – Related Party Agreements of the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item I of this Quarterly Report. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, which may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our expenses will increase substantially as we: • 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. We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we do not expect to happen for at least the next several years, if ever. Until such time that we can generate substantial revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our research and development programs or commercialization efforts. Failure to receive additional funding could cause us to cease operations, in part or in full. Viracta Investment In March 2017, we participated in a Series B convertible preferred stock financing and invested $8.5 million in Viracta Therapeutics, Inc., or Viracta, a clinical stage drug development company. In May 2017, we executed an exclusive worldwide license with Viracta to develop and commercialize Viracta’s proprietary histone deacetylase inhibitor drug candidate for use in combination with NK cell therapy and possibly additional therapies. At June 30, 2020, our investment in Viracta totaled $9.3 million. See Note 4 – Viracta Investment, of the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report for a more detailed discussion regarding our investment in Viracta. Collaboration Agreements We anticipate that strategic collaborations will become an integral part of our operations, providing opportunities to leverage our partners’ expertise and capabilities to further expand the potential of our technologies and product candidates. We believe we are well positioned to become a leader in cell-based immunotherapy due to our broad and vertically integrated platform and through complementary strategic partnerships. We did not enter into any significant new collaboration agreements during the three months ended June 30, 2020, other than those discussed in this Quarterly Report. In addition to the collaboration and license agreements discussed below, we may enter into a commercial agreement relating to an IL‑15 superagonist product developed by an affiliate, and we may also pursue supply arrangements for various investigational agents controlled by affiliates and third parties to be used in our clinical trials. These collaboration and supply agreements do not typically specify how sales will be apportioned between the parties upon successful commercialization of the product. As a result, we cannot guarantee that we will receive a percentage of the revenue that is at least proportional to the costs that we will incur in commercializing the product candidate. Furthermore, if Dr. Soon-Shiong was to cease his affiliation with us, ImmunityBio, or with NantWorks, these entities may be unwilling to continue these relationships with us on commercially reasonable terms, or at all, and as a result may impede our ability to control the supply chain for our combination therapies. 45 See Note 7 – Collaboration and License Agreements, of the “N otes to U naudited C ondensed C onsolidated F inancial S tatements ” included in Part I, Item I of this Quarterly Report for a more detailed discussion regarding our collaboration and license agreements. Agreements with Related Parties Our Chairman and CEO, Dr. Soon-Shiong, founded and has a controlling interest in NantWorks, which is a collection of multiple companies in the healthcare and technology space. We have entered into arrangements with NantWorks, and certain affiliates of NantWorks that, taken together, we expect will facilitate the development of new genetically modified NK cells for our product pipeline. Affiliates of NantWorks are also affiliates of the company due to the common control by and/or common ownership interest of our Chairman and CEO. See Note 9 – Related Party Agreements , of the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report for a more detailed discussion regarding our related party agreements. Components of our Results of Operations Revenue To date, we have derived substantially all of our revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companies granting them the right to use our cell lines and intellectual property for non-clinical use. These agreements generally include upfront fees and annual research license fees for such use, as well as commercial license fees for sales of our licensee’s products developed or manufactured using our intellectual property and cell lines. Our license agreements may also include milestone payments, although to date, we have not generated any revenue from milestone payments. To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property. We have no products approved for commercial sale and have not generated any revenue from product sales. If we fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval for them, we may never be able to generate substantial future revenue. Operating Expenses We classify our operating expenses into research and development and selling, general and administrative expenses. Personnel costs, including salaries, benefits, bonuses, and stock-based compensation expense comprise a significant component of our research and development and selling, general and administrative expense categories. We allocate expenses associated with our facilities and information technology costs between these two categories based on the nature of each cost. Research and Development Research and development expense consists of expenses incurred while performing research and development activities to discover and develop our product candidates, including collaborative arrangements. This includes conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expense primarily consists of: • clinical trial and regulatory-related costs; • expenses incurred under 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. 46 Substantially all of our research and development expenses to date have been incurred in connection with our product candidates. We expect our research and development expenses to 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 as discussed in greater detail in Part I I , Item 1A, “ Risk Factors ” of this Quarterly Report . The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following: • per patient trial costs; • the number of sites included in the clinical trials; • the countries in which the clinical trials are conducted; • the length of time required to enroll eligible patients; • the number of patients that participate in the clinical trials; • the number of doses that patients receive; • 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 do not expect any of our product candidates to be commercially available for at least the next several years, 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 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 obtaining and maintaining patents, consulting costs, royalties and licensing costs, and costs of our information systems. We expect that our selling, general and administrative expenses during the year ended December 31, 2020 will increase as compared to the year ended December 31, 2019. We have incurred and expect that we will continue to incur in the future, additional costs associated with operating as a public company, including costs to comply with stock exchange listing and SEC requirements, future funding efforts, corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public companies. Additionally, if and when we believe that a regulatory approval of a product candidate appears likely, we expect to incur significant increases in our selling, general and administrative expenses relating to the sales and marketing of the approved product candidate. Other Income (Expense) Other income (expense) consists primarily of income from our investments in marketable debt securities, sublease rental income and foreign currency income (expense). Income Tax Income tax expense consists of U.S. federal and state income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. Our income tax expense to date primarily relates to minimum income taxes in the State of California. Our income tax benefit to date relates primarily to the amortization of deferred tax liabilities at our Korean subsidiary. 47 Results of Operations Comparison of the three months ended June 30, 2020 and 2019 Three Months Ended June 30, 2020 2019 $ Change % Change (Unaudited, $ in thousands) Revenue $ 1 $ 17 $ (16 ) (94 %) Operating expenses: Research and development (including amounts with related parties) 13,709 13,131 578 4 % Selling, general and administrative (including amounts with related parties) 6,519 4,182 2,337 56 % Total operating expenses 20,228 17,313 2,915 17 % Loss from operations (20,227 ) (17,296 ) (2,931 ) 17 % Other income (expense): Investment income, net 75 533 (458 ) (86 %) Interest expense (3 ) — (3 ) n/a Other income, net (including amounts with related parties) 67 83 (16 ) (19 %) Total other income 139 616 (477 ) (77 %) Loss before income taxes (20,088 ) (16,680 ) (3,408 ) 20 % Income tax expense (4 ) (2 ) (2 ) 100 % Net loss $ (20,092 ) $ (16,682 ) $ (3,410 ) 20 % Research and Development Research and development expense increased $0.6 million during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The increase in research and development expense was primarily attributable to increases of $1.7 million related to higher laboratory supplies, mainly driven by increases associated with additional supply purchases to guard against potential supply chain disruptions associated with the COVID‑19 pandemic coupled with purchases related to our COVID-19 collaboration product candidates. We also experienced an increase of $0.4 million for laboratory and manufacturing facility related expenses, including increases related to depreciation expense, supply chain costs and property taxes. These increases in research and development expense were offset in part by a decrease of $0.9 million related to impairment of laboratory equipment during the second quarter of 2019 and a decrease of $0.6 million in pre-clinical and clinical trial costs driven by decreased activity and research agreements. Selling, General and Administrative Selling, general and administrative expense increased $2.3 million during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The increase in selling, general and administrative expense was primarily attributable to consulting costs of $1.3 million driven mainly by corporate advisory services, legal and professional services expenses of $0.8 million driven by higher contracting, trademark and patent related legal fees and public company related expenses, higher compensation expense of $0.5 million, and $0.2 million due to higher insurance costs which was driven by increases in directors and officers insurance rates. These increases in selling, general and administrative expense were offset in part by a $0.5 million decrease resulting from lower tradeshow and travel related expenses due primarily to less activity and due to the cancellation of attendance of certain conventions as a result of the ongoing COVID‑19 pandemic. Other Income Other income decreased by $0.5 million during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decrease in other income was due primarily to lower investment income, as we had lower average marketable-debt securities balances held during the three months ended June 30, 2020, as compared to the year ago period. 48 Comparison of the six months ended June 30, 2020 and 2019 Six Months Ended June 30, 2020 2019 $ Change % Change (Unaudited, $ in thousands) Revenue $ 22 $ 22 $ — 0 % Operating expenses: Research and development (including amounts with related parties) 26,943 25,729 1,214 5 % Selling, general and administrative (including amounts with related parties) 11,892 9,924 1,968 20 % Total operating expenses 38,835 35,653 3,182 9 % Loss from operations (38,813 ) (35,631 ) (3,182 ) 9 % Other income (expense): Investment income, net 253 903 (650 ) (72 %) Interest expense (10 ) (3 ) (7 ) 233 % Other income, net (including amounts with related parties) 99 130 (31 ) (24 %) Total other income 342 1,030 (688 ) (67 %) Loss before income taxes (38,471 ) (34,601 ) (3,870 ) 11 % Income tax (expense) benefit (4 ) 34 (38 ) (112 %) Net loss $ (38,475 ) $ (34,567 ) $ (3,908 ) 11 % Research and Development Research and development expense increased $1.2 million during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The increase in research and development expense was primarily attributable to increases of $1.7 million related to higher laboratory supplies, mainly driven by increases associated with additional supply purchases to guard against potential supply chain disruptions associated with the COVID‑19 pandemic coupled with purchases related to our COVID-19 collaboration product candidates. We also experienced increases of $1.4 million for laboratory and manufacturing facility related expenses, including increases related to facility and equipment validation and qualification costs, depreciation expense, and testing services, mainly related to our El Segundo cGMP facility, an increase of $0.3 million due to higher cell banking costs, and an increase of $0.1 million related to compensation and related expense including fees for shared services rendered under our shared services agreement with NantWorks. These increases in research and development expense were offset in part by a decrease of $0.9 million related to impairment of laboratory equipment during the second quarter of 2019, a decrease of $0.8 million in clinical trial costs driven by decreased activity, and a decrease of $0.6 million in amortization expense due to the underlying asset being fully amortized as of March 2019. We expect our research and development expenses to increase significantly for the foreseeable future as we advance our product candidates through clinical development and conduct our ongoing and planned clinical trials. Selling, General and Administrative Selling, general and administrative expense increased $2.0 million during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The increase in selling, general and administrative expense was primarily attributable to increases of $1.5 million in legal expenses primarily due to contracting, trademark, and patent related legal fees and other corporate matters, increases of $1.0 million mainly due to corporate advisory services, $0.6 million due to higher headcount related costs, and higher insurance expense of $0.4 million which was driven by increases in directors and officers insurance rates. These increases in selling, general and administrative expense were offset in part by a decrease of $0.9 million in stock-based compensation expense, driven primarily by the completion of executive stock-based compensation vesting in March 2019, and lower tradeshow and travel related expenses of $0.7 million driven by less activity and the cancellation of the attendance of certain conventions as an impact of the ongoing COVID‑19 pandemic. Other Income Other income decreased by $0.7 million during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The decrease in other income was due primarily to lower investment income, as we had lower average marketable-debt securities balances held during the six months ended June 30, 2020, as compared to the year ago period. 49 Liquidity and Capital Resources Sources of Liquidity Our principal sources of liquidity are our existing cash, cash equivalents, and marketable debt securities. We have historically invested our cash primarily in investment grade short- to intermediate-term corporate debt securities, commercial paper, government sponsored securities, U.S. treasury securities, and foreign government bonds and classify these investments as available-for-sale. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets. As of June 30, 2020, we had cash and cash equivalents, and restricted cash of $102.9 million as compared to $15.7 million as of December 31, 2019. The increase was attributable to cash flows provided by financing and investing activities of $87.2 million and $29.1 million, respectively, offset in part by cash used in operating activities of $29.1 million. Investments in marketable debt securities were $7.9 million as of June 30, 2020, all of which were short-term investments, as compared to $68.3 million as of June 30, 2019, of which $66.8 million were short-term investments. Cash Flows The following table sets forth our primary sources and uses of cash for periods indicated: Six Months Ended June 30, 2020 2019 (Unaudited, in thousands) Cash provided by (used in): Operating activities $ (29,117 ) $ (29,905 ) Investing activities 29,090 (8,081 ) Financing activities 87,217 38,694 Net increase in cash, cash equivalents, and restricted cash $ 87,190 $ 708 Operating Activities For the six months ended June 30, 2020, our net cash used in operating activities of $29.1 million consisted of a net loss of $38.5 million, partially offset by $6.8 million in adjustments for non-cash items, and $2.6 million of cash provided by net working capital changes. Adjustments for non-cash items primarily consisted of $4.5 million in depreciation and amortization, $1.3 million of amortization of operating lease right-of-use assets, $0.8 million in stock compensation expense, and $0.2 million related to other non-cash items. Changes in net working capital consisted primarily of increases from accrued expenses and other liabilities of $1.5 million, accounts payable of $1.2 million, prepaid expenses and other current assets of $0.9 million, due to related party of $0.4 million, and other assets of $0.2 million, partially offset by a decrease in operating lease liabilities of $1.5 million. For the six months ended June 30, 2019, our net cash used in operating activities of $29.9 million consisted of a net loss of $34.6 million, and $4.0 million of cash used by net working capital changes, partially offset by $8.7 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of $4.6 million in depreciation and amortization, $1.9 million in stock compensation expense, $1.3 million of non-cash lease expense related to operating lease right-of-use assets, $0.9 million of impairment related to laboratory equipment, and $0.1 million in non-cash interest. Changes in net working capital consisted primarily of decreases in accrued expenses of $12.5 million, operating lease liabilities of $1.4 million, due to related party of $0.7 million, operating lease right-of-use assets of $0.2 million, and accounts payable of $0.1 million, partially offset by an increase in prepaid, other current assets, and other assets of $10.9 million. Investing Activities For the six months ended June 30, 2020, net cash provided by investing activities was $29.1 million, which was primarily attributable to $44.4 million in sales and maturities of marketable debt securities, partially offset by $14.8 million in purchases of marketable debt securities, and $0.5 million in purchases of property, plant and equipment. 50 For the six months ended June 30, 2019, net cash used in investing activities was $8.1 million, which was primarily attributable to $66.8 million in purchases of marketable debt securities, and $3.1 million in purchases of property, plant and equipment, partially offset by $61.8 million in sales and/or maturities of marketable debt securities. During the six months ended June 30, 2019 our purchases of marketable debt securities was driven by $39.2 million of cash proceeds received in March 2019 from the exercise of stock options and warrants, together with reinvestment of excess cash related to maturing securities. Our investments in property, plant and equipment during the six months ended June 30, 2019 mainly related to our El Segundo, California, facilities. Financing Activities For the six months ended June 30, 2020, net cash provided by financing activities was $87.2 million, which consisted of proceeds from the issuance of 8,521,500 shares of common stock, net of issuance cost paid, of $86.8 million, and proceeds of $0.6 million resulting from the exercise of stock options. Net cash used in financing activities during the six months ended June 30, 2020, consisted of $0.2 million related to net share settlement of vested RSUs for payment of employee payroll taxes. For the six months ended June 30, 2019, net cash provided by financing activities was $38.7 million, which primarily consisted of cash proceeds of $35.2 million and $4.1 million resulting from the exercise of warrants and stock options, respectively, by our Chairman and Chief Executive Officer during March 2019, partially offset by $0.5 million used for stock repurchases, including commissions. Future Funding Requirements To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property, and we have no products approved for commercial sale and have not generated any revenue from product sales. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates and we do not know when, or if, this will occur. In addition, we expect our expenses to significantly increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. Moreover, since the completion of our IPO in July 2015, we have 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 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. Based upon our current operating plan, we expect that our existing cash, cash equivalents, and marketable debt securities will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months following the issuance date of the financial statements. We have based this estimate on assumptions that may prove to be incorrect, and we may use our available capital resources sooner than we currently expect. The successful development of any product candidate is highly uncertain. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, if approved, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates. 51 Our future capital requirements will depend on many factors, including: • the timing of, and the costs involved in, preclinical and clinical development and obtaining any regulatory approvals for our product candidates; • the impacts of COVID‑19 on our operations; • the costs of manufacturing, distributing and processing our product candidates; • the number and characteristics of any other product candidates we develop or acquire; • our ability to establish and maintain strategic collaborations, licensing or other commercialization arrangements and the terms and timing of such arrangements including our arrangements with ImmunityBio and its subsidiaries and Viracta; • the degree and rate of market acceptance of any approved products; • the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments; • the expenses needed to attract and retain skilled personnel; • the costs associated with being a public company; • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing intellectual property claims, including litigation costs and the outcome of such litigation; • the timing, receipt and amount of sales of, or royalties on, any approved products; and • any product liability or other lawsuits related to our product candidates or the company. Because all of our product candidates are in the early stages of preclinical and clinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves. Contractual Obligations and Commitments During the six months ended June 30, 2020, there have been no material changes outside the ordinary course of business in our contractual obligations from those disclosed in the section entitled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Item 7 of our Annual Report on Form 10‑K for the year ended December 31, 2019. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under Security and Exchange Commission rules. Critical Accounting Policies and Significant Judgments and Estimates In the notes to our audited consolidated financial statements and in “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included in our 2019 Annual Report on Form 10‑K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. Except as noted below, there have been no other material changes to those policies that we consider to be significant since the filing of our 2019 Annual Report on Form 10‑K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to U.S. GAAP. 52 The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to valuation of equity-based awards, deferred income taxes and related valuation allowances, preclinical and clinical trial accruals, impairment assessments, useful lives of long-lived assets, loss contingencies, and fair value measurements. We base our estimates on historical experience and on various other market-specific and relevant assumptions that we believe to be reasonable under the circumstances. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the recent coronavirus disease (COVID ‑ 19) could have on our significant accounting estimates. Actual results could differ from those estimates. Recently Adopted Accounting Policies Refer to Note 2 – Summary of Significant Accounting Policies , of the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.