What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-07 · 164 added, 230 removed, 342 unchanged (54% of the section changed)

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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;

any impact of the coronavirus pandemic, or responses to the pandemic, on our business, clinical trials or personnel;

our expectations regarding the potential benefits of our strategy and technology;

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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

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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.

Unlike normal natural killer c ells, 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.

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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.

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 and EGFR, which are nearing IND submission, and others that are advancing through clinical enabling studies, will enable us to potentially address an even broader range of cancers as part of a chemotherapy-free combination regimen.

Our GMP-in-a-Box Approach

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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.

Based on published literature, 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.

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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.

We have 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.

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.

Bone marrow-derived allogeneic MSCs 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 allogeneic MSCs without the risk of being rejected by the 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.

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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

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

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.

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:

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.

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.

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.

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.

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:

In-vivo tumor trafficking;

Significant elimination of both monocytic and granulocytic Myeloid Derived Suppressor Cells, immune-suppressive cells often present in the tumor microenvironment;

Robust anti-tumor activity in cancer cell lines and in mouse models;

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 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.

The following table summarizes our current development programs:

Development Update on our Product Candidate s

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.

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.

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.

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.

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:

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;

Second-line therapy;

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.

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.

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.

We also have a pipeline of IND-ready t‑haNK and ceNK projects in both solid and liquid cancers.

The following table summarizes our current development programs:

QUILT 3.063 is our 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.

This trial is actively recruiting patients at multiple centers across the U.S., and we anticipate reporting interim data next year.

As a rare disease, Merkel cell carcinoma patients often require regional referral and additional travel to a clinical trial site.

The ongoing COVID‑19 pandemic has had an impact on enrollment due in part to limitations in travel and study accessibility.

In response to this, we will continue to increase the number of study sites in new geographic locations and increase local community awareness of the trial as we add new sites.

QUILT 3.064 is our phase I first-in-human, dose escalation-single agent safety study in patients with locally advanced or metastatic solid cancers.

This study concluded in the third quarter of 2020, having enrolled ten patients across three dose cohorts, with enrollment of additional patients into the two remaining optional dose cohorts having subsequently been deemed unnecessary.

A dose level of 2 × 10 9 cells per injection twice per week was confirmed to be safe, with no dose limiting toxicities or serious adverse events related to the test article.

Final data from this trial is being collated for a final study report.

QUILT 3.067 is a phase II, open-label, single-arm trial evaluating the same novel triple combination of “off-the-shelf” haNK cell therapy with N‑803 and avelumab following a tumor conditioning regimen in subjects that have progressed on or after standard-of-care therapy for triple negative breast cancer.

Patient follow-up concluded during the third quarter of 2020 for the long-term responders in the trial and final data is being collated for a final study report.

We last reported an overall response rate by immune response RECIST criteria in 6 of 9 patients (67%), a complete response rate in 3 of 9 patients (33%) (one unconfirmed) and a median progression-free survival by immune response RECIST criteria of 13.7 months.

Based on this data, we plan to file an IND in the fourth quarter of 2020 for an open label, randomized controlled phase II trial of PD-L1.t-haNK and N-803 in combination with standard-of-care therapy versus standard-of-care therapy alone.

For the primary objective, we will compare the overall response rate between the two arms per RESIST criteria in solid tumors, Version 1.1.

Secondary objectives will include assessments of safety, event-free survival, overall survival and durability of response using the same RESIST Version 1.1 criteria.

QUILT 3.055 is a phase IIb, open - label, multi-cohort study of combination immunotherapy in patients with non-small cell lung cancer, or NSCLC, who have previously received treatment with immune checkpoint inhibitors.

Patients are eligible to enter into the cohort designated to receive third-line combination immunotherapy consisting of PD ‑L1.t ‑haNK cell therapy, N ‑803 and a checkpoint inhibitor after progressing on one of four other treatment cohorts within the study.

The p rimary efficacy endpoint of the study is overall response rate per RECIST Version 1.1.

Secondary endpoints include progression - free survival, overall survival and durability of response using RECIST Version 1.1 criteria.

The IND amendment to include this third-line study cohort has been authorized by the FDA and will be commencing at several of the study’s currently open U.S.

Observed responses in this trial will guide our plans to conduct a subsequent phase II trial in second-line NSCLC patients.

QUILT 88 is a phase II, 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.

Each of the three cohorts will be conducted as standalone studies a) as front-line maintenance therapy in patients that have achieved a clinical response after first-line standard-of-care therapy, b) in second-line therapy, and c) in third-line therapy or greater.

Cohorts A and B will have their own control arms while cohort C will be conducted as a single-arm, open-label study.

Safety and progression-free survival for cohorts A and B will be compared within the groups using RECIST Version 1.1 criteria based on blinded independent central review.

All three study cohorts of the trial are open and actively enrolling patients at multiple centers across the U.S., with 29 patients currently on study and many more actively being screened.

Additional Oncology Programs Update

We anticipate pursuing additional indications for our PD‑L1.t‑haNK product candidate, such as in the neoadjuvant setting in combination with N‑803 and a checkpoint inhibitor for newly diagnosed patients with head and neck squamous cells cancers in collaboration with the National Cancer Institute.

We also plan to initiate a phase II glioblastoma trial based on an encouraging signal observed in the clinic in our special-purpose compassionate use IND program.

We will also initiate in the near term a series of phase I first-in-human trials with our IND-ready t‑haNK products HER2.t‑haNK, EGFR.t‑haNK and the FDA authorized CD19.t‑haNK.

Likewise, we are nearing IND filings for three phase Ib ceNK studies in ovarian, myeloma and AML cancers.

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.

QUILT‑COVID‑19‑MSC is 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.

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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.

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.

This study is currently open and actively enrolling patients at regional centers in Southern California.

QUILT-COVID-19-hAd5 is a vaccine trial operated by our affiliate, ImmunityBio, under a Joint COVID‑19 Collaboration Agreement, described below.

This phase Ib, open-label study will evaluate the safety, reactogenicity and immunogeniticy of prophylactic vaccination with a second generation E1, E2b and E3 deleted human adenovirus‑5 vaccine in normal healthy volunteers.

The test article is an hAd5‑S‑Fusion+N‑ETSD vaccine which encodes for an optimized spike protein (S‑Fusion), to enhance stability and cell surface expression of the receptor binding domain of the SARS‑CoV‑2 spike protein, and a Nucleocapsid protein with an enhanced T‑cell stimulation domain (N‑ETSD) to enhance cell-mediated immunity.

Two cohorts of ten subjects will receive either 5×10 10 or 1×10 1 1 virus particles per dose on days 1 and 22 and a third cohort of fifteen patients will receive the highest safe dose administered in the two initial cohorts.

Safety and activity will be assessed for up to twelve months after the second dose.

Toxicities will be graded using the Guidance for Industry - Toxicity Grading Scale for Healthy Adult and Adolescent Volunteers Enrolled in Preventive Vaccine Clinical Trials (2007).

This study is currently open and rapidly enrolling patients at Hoag Hospital, in Newport Beach, California.

Joint COVID ‑19 Collaboration Agreement with Immunity Bio

On August 21, 2020, we entered into a definitive agreement (the “Collaboration Agreement”) with ImmunityBio to pursue collaborative joint development, manufacturing and marketing of certain COVID‑19 therapeutics and vaccines.

The terms of the Collaboration Agreement supersede and replace the terms of the binding term sheet executed on May 22, 2020, as previously disclosed.

Through their efforts, the parties agreed to jointly develop ceNK, haNK, mesenchymal stem cells (MSC), adenovirus constructs (hAd5), and N‑803, a novel IL‑15 cytokine superagonist, for the prevention and treatment of SARS‑CoV‑2 viral infections and associated conditions in humans, including without limitation, COVID‑19.

Pursuant to the Collaboration Agreement, we have contributed our ceNK, haNK, and MSC product candidates and certain of our manufacturing capabilities, and ImmunityBio has contributed their hAd5 and N‑803 product candidates.

hAd5 has been developed as a vaccine, and ceNK, haNK, MSC and N‑803 have each been developed as therapeutics for treating COVID‑19 at various stages of infection.

From and after the effective date of the Collaboration Agreement, the parties will share equally in all costs relating to developing and manufacturing of the product candidates globally with the exception of certain laboratory equipment purchases that will be borne solely by us.

With the exception of N‑803, we will be primarily responsible for the manufacture of each product.

Each party will be responsible for the regulatory affairs and the commercialization relating to its contributed products.

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 except if the parties mutually agree because of certain circumstances.

All net profits from sales of combined collaboration products will be shared equally.

This collaboration is supervised by a joint steering committee, which is comprised of an equal number of representatives from both parties.

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.

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;

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.

MSC cells (as described above) as a therapeutic candidate for patients with severe symptoms of COVID‑19 to modulate the immune system’s excessive response to COVID‑19 infection, thereby potentially reducing the debilitating and sometimes fatal effects of the disease;

ceNK and haNK cells (as described above) as a therapeutic candidate for moderate-risk, hospitalized adults with moderate to severe symptoms of COVID‑19.

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;

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.

N‑803 as a therapeutic candidate for patients with mild symptoms of COVID-19 prior to the onset of severe disease by potentially activating natural killer cells to mitigate viral replication;

Human adenovirus (hAd5) as a vaccine candidate for those individuals in an uninfected state to prevent the onset of COVID‑19.

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.

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 are in the process of readying a new, well-equipped location to manufacture and produce clinical products for our oncology trials, which resulted in additional facilities and related facility operating costs starting in the third quarter of 2020.

We have established a clinical product inventory to continue to supply clinical product for our ongoing oncology trials while this new facility is being readied.

The new facility will resume clinical product supply for our oncology trial starting in early 2021.

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.

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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.

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.

In March 2020, the World Health Organization declared the novel strain of coronavirus disease (SARS‑CoV‑2) a pandemic.

In the same month, the President of the United States declared a State of National Emergency due to the pandemic.

Many jurisdictions, particularly in North America, Europe and Asia, as well as U.S.

states in which we operate, including California, have adopted or continue to consider laws, rules, regulations or decrees intended to address the 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.

states in which we operate, including California, have adopted or continue to consider laws, rules, regulations or decrees intended to address the pandemic, including travel restrictions, closing or, more recently, re-opening of non-essential businesses or restricting daily activities.

However, due to the pandemic new restrictions might be imposed by various governmental authorities.

For example, many communities have limited, and may continue to limit, social mobility and gatherings in response to the continued rise in coronavirus cases and fatalities in the U.S.

Such restrictions and other impacts from the pandemic may have an impact on our business.

Given the unprecedented and 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.

To date, we have seen no material adverse impact to our business from the 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.

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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.

While we have not previously experienced or been notified of any anticipated impact amongst our third party vendors, it is likely that the pandemic and resulting mitigation efforts could have an impact in the future on our third-party suppliers who manufacture laboratory supplies required for our in-house manufacturing process, which in turn could have an impact on having sufficient clinical product supply available for our clinical trials.

We have addressed this in part by ensuring that we have sufficient supplies on hand to weather interruptions in our supply chain.

There is significant 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.

While the pandemic did not materially impact our results during the nine months ended September 30, 2020 outside of the Joint COVID-19 Collaboration Agreement as described above, we anticipate that it could impact our business in the short-term due to factors such as fewer patients accessing treatment for cancer.

Operating Results

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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.

As of June 30, 2020 we had 148 employees.

We have incurred net losses in each year since our inception and, as of September 30, 2020, we had an accumulated deficit of $722.4 million.

Our net losses were $60.3 million and $50.1 million for the nine months ended September 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 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 September 30, 2020 we had 160 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.

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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.

At September 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.

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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.

We did not enter into any significant new collaboration agreements during the three months ended September 30, 2020, other than those discussed in this Quarterly Report.

In addition to the collaboration and license agreements discussed in this Quarterly Report, 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.

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Soon-Shiong was to cease his affiliation with us, ImmunityBio, or with NantWorks, these entities may be unwilling to continue these relationships with us on commercially reasonable terms, or at all, and as a result may impede our ability to control the supply chain for our combination therapies.

See Note 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.

See Note 7 – Collaboration and License Agreements , of the “Notes to Unaudited Condensed Consolidated Financial Statements” 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.

Our Chairman, Dr.

Patrick 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.

Affiliates of NantWorks are also affiliates of the company due to the common control by and/or common ownership interest of our Chairman.

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.

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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 .

This is due to the numerous risks and uncertainties associated with the development of product candidates as discussed in greater detail in Part II, 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:

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

In addition, we expect our research and development expenses to 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

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Results of Operations

Comparison of the three months ended June 30, 2020 and 2019

Three Months Ended June 30,

Comparison of the three months ended September 30, 2020 and 2019

Three Months Ended

September 30,

(Unaudited, $ in thousands)

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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.

Research and development expense increased $5.2 million during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

The increase in research and development expense was primarily attributable to expenses of $3.5 million related to our Joint COVID‑19 Collaboration Agreement with ImmunityBio, including the acquisition of $3.2 million of equipment to be utilized in the manufacture of the human adenovirus, or hAd5, vaccine candidate, and other net program related costs of $0.3 million.

These equipment purchases do not have an alternative use and were therefore expensed as incurred within research and development expenses.

We also experienced increases in research and development expense of $0.8 million due to higher laboratory and supplies expenses mainly driven by our COVID‑19 programs, higher facilities expenses of $0.4 million related to our new El Segundo facility leased during the third quarter of 2020, which will be used to manufacture and produce clinical products for our oncology product candidate trials, and higher compensation and related expenses of $0.4 million including fees for shared services rendered under our shared service agreement with NantWorks.

In addition, research and development expense increased by $0.4 million for other manufacturing and facility related expenses, including higher depreciation expense, property taxes, and other facility support costs.

These increases in research and development expense were partially offset by lower cell banking costs of $0.2 million and a decrease of $0.1 million in clinical trial costs.

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 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.

Comparison of the six months ended June 30, 2020 and 2019

Six Months Ended June 30,

Selling, general and administrative expense increased $0.7 million during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

The increase in selling, general and administrative expense was mainly attributable to increases in personnel costs of $0.5 million due primarily to higher compensation and related expenses, higher stock-based compensation expense of $0.5 million driven mainly by new awards granted during the current year which have a higher average grant date fair value, higher insurance costs of $0.3 million which was driven by increases in directors’ and officers’ insurance rates, higher software license fees of $0.3 million, and higher consulting costs of $0.1 million driven mainly by services related to finalizing our Joint COVID‑19 Collaboration Agreement with ImmunityBio.

These increases in selling, general and administrative expense were partially offset by a decrease in legal expenses of $0.8 million due primarily to a settlement of a contract dispute during the third quarter of 2020, and lower travel related expenses of $0.2 million due mainly to a decline in activity as a result of the ongoing COVID‑19 pandemic.

Other income decreased by $0.3 million during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

The decrease in other income was due primarily to lower investment income, as we had higher net investment amortization expense of $0.4 million during the three months ended September 30, 2020, as compared to the year ago period.

The increase in net investment amortization expense was offset in part by increases related to foreign exchange gains and investment interest income.

Comparison of the nine months ended September 30, 2020 and 2019

Nine Months Ended

September 30,

(Unaudited, $ in thousands)

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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.

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.

Research and development expense increased $6.4 million during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.

The increase in research and development expense was primarily attributable to $3.5 million of expenses related to our Joint COVID‑19 Collaboration Agreement with ImmunityBio, including the acquisition of $3.2 million of equipment to be utilized in the manufacture of the human adenovirus, or hAd5, vaccine candidate, and other net program related costs of $0.3 million.

These equipment purchases do not have an alternative use and were therefore expensed as incurred within research and development expenses.

We also experienced increases in research and development expense of $2.5 million related to higher laboratory and supplies expense mainly driven by our COVID‑19 programs coupled with additional expenses related to readying our new El Segundo manufacturing facility leased during the third quarter of 2020, an increase of $1.4 million for other manufacturing and facility related expenses including higher depreciation expense and higher facilities and equipment maintenance costs, an increase in compensation and related expenses of $0.5 million including fees for shared services rendered under our shared service agreement with NantWorks, and increased lease expenses of $0.5 million mainly related to our new El Segundo facility leased during the third quarter of 2020 which will be used to manufacture and produce clinical products for our oncology product candidate trials.

In addition, research and development expense increased by $0.4 million due to higher cell banking costs, software license fees and other expenses.

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 $0.9 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 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.

Selling, general and administrative expense increased $2.7 million during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.

The increase in selling, general and administrative expense was primarily attributable to increases of $1.6 million due to higher corporate advisory services costs, $1.1 million due to higher compensation and related expenses, and higher insurance expense of $0.7 million which was driven by increases in directors’ and officers’ insurance rates.

In addition, selling, general and administrative expense increased by $0.3 million as a result of higher legal expenses primarily due to contracting, trademark, and patent related legal fees and other corporate matters, and an increase of $0.3 million due to higher software license fees.

These increases in selling, general and administrative expense were offset in part by a decrease of $0.5 million in stock-based compensation expense, driven primarily by the completion of executive stock-based compensation vesting in March 2019, and decreases in travel and tradeshow related expenses of $0.5 million and $0.4 million, respectively, due mainly to a decline in activity as a result of the ongoing COVID‑19 pandemic.

Other income decreased by $1.0 million during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.

The decrease in other income was due primarily to lower investment income, including a decrease in interest income, and an increase in net investment amortization expense during the nine months ended September 30, 2020, as compared to the year ago period.

Investment income decreased due mainly to a decline in the average yield on our marketable debt securities.

The decline in yield was driven in part by shorter contractual securities lives and broader economic and market conditions.

Liquidity and Capital Resources

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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.

As of September 30, 2020, we had cash and cash equivalents, and restricted cash of $27.9 million as compared to $15.7 million as of December 31, 2019.

The increase was attributable to cash flows provided by financing activities of $86.7 million, offset in part by cash used in operating and investing activities of $47.4 million and $27.2 million, respectively.

Investments in marketable debt securities were $62.1 million as of September 30, 2020, of which $61.4 million were short-term investments, as compared to $49.3 million as of September 30, 2019, of which $47.8 million were short-term investments.

The following table sets forth our primary sources and uses of cash for periods indicated:

Six Months Ended June 30,

Nine Months Ended

September 30,

(Unaudited, in thousands)

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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.

For the nine months ended September 30, 2020, our net cash used in operating activities of $47.4 million consisted of a net loss of $60.3 million, partially offset by $10.8 million in adjustments for non-cash items, and $2.1 million of cash provided by net working capital changes.

Adjustments for non-cash items primarily consisted of $6.9 million in depreciation and amortization, amortization of $2.3 million for operating lease right-of-use assets, $1.5 million in stock compensation expense, and $0.4 million related to amortization of net premiums on marketable debt securities, offset in part by a decrease of $0.3 million related to non-cash interest.

Changes in net working capital consisted primarily of increases from accounts payable of $4.3 million, accrued expenses and other liabilities of $1.6 million, due to related party of $1.1 million, and other assets of $0.1 million, partially offset by decreases in operating lease liabilities of $2.6 million, and prepaid expenses and other current assets of $2.3 million.

For the nine months ended September 30, 2019, our net cash used in operating activities of $46.5 million consisted of a net loss of $50.1 million, and $8.2 million of cash used by net working capital changes, partially offset by $11.9 million in adjustments for non-cash items.

Adjustments for non-cash items primarily consisted of $6.8 million in depreciation and amortization, $2.2 million in stock compensation expense, $1.9 million of non-cash lease expense related to operating lease right-of-use assets, $0.9 million of impairment related to laboratory equipment, and $0.2 million in non-cash interest.

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.

Changes in net working capital consisted primarily of decreases in accrued expenses of $11.6 million, operating lease liabilities of $2.3 million, and due to related party of $0.8 million, partially offset by increases in prepaid, other current assets, and other assets of $6.2 million, and accounts payable of $0.3 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.

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.

For the nine months ended September 30, 2020, net cash used in investing activities was $27.2 million, which included cash outflows of $85.6 million for purchases of marketable debt securities, and $2.2 million for purchases of property, plant and equipment, partially offset by cash inflows of $54.1 million from maturities of marketable debt securities, and $6.6 million from sales of marketable debt securities.

Our investments in property, plant and equipment during the nine months ended September 30, 2020, mainly related to the acquisition of GMP-in-a-Box equipment which will be used to manufacture our ceNK and MSC product candidates.

For the nine months ended September 30, 2019, net cash provided by investing activities was $9.3 million, which was primarily attributable to cash inflows of $87.1 million from maturities of marketable debt securities, and $2.5 million from sales of marketable debt securities, partially offset by cash outflows of $76.8 million for purchases of marketable debt securities, and $3.5 million for purchases of property, plant and equipment.

During the nine months ended September 30, 2019 our purchases of marketable debt securities included our investment of $39.2 million of cash proceeds received during 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 nine months ended September 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.

For the nine months ended September 30, 2020, net cash provided by financing activities was $86.7 million, which consisted of proceeds from the issuance of 8,521,500 shares of common stock, net of issuance cost paid, of $86.3 million, and proceeds of $0.9 million resulting from the exercise of stock options.

Net cash used in financing activities during the nine months ended September 30, 2020, consisted of $0.5 million related to net share settlement of vested RSUs for payment of employee payroll taxes.

For the nine months ended September 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 during March 2019, partially offset by $0.5 million used for stock repurchases, including commissions, and $0.1 million related to net share settlement of vested RSUs for payment of employee payroll taxes.

Future Funding Requirements

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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.

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.

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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;

continue research and development, including preclinical and clinical development of our existing product candidates including those related to our Joint CVOID-19 Collaboration agreement with a related party;

potentially seek regulatory approval for our product candidates;

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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.

Because all of our product candidates are in various stages of preclinical and clinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates or whether, or when, we may achieve profitability.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements.

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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.

During the nine months ended September 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

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The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to U.S.

Use of Estimates

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.

On an ongoing basis, we evaluate our estimates, including those related to valuation of equity-based awards, deferred income taxes and related valuation allowances, preclinical and clinical trial accruals, impairment assessments, the measurement of right-of-use assets and lease liabilities, useful lives of long-lived assets, loss contingencies, 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.

Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the ongoing coronavirus pandemic could have on our significant accounting estimates.

Actual results could differ from those estimates.

Collaboration Arrangements

We analyze our collaboration arrangements to assess whether they are within the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808.

A collaborative arrangement is a contractual arrangement that involves a joint operating activity.

These arrangements involve two or more parties who are active participants in the activity, and exposed to significant risks and rewards dependent on the commercial success of the activity.

This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.

To the extent the collaboration agreement is within the scope of ASC 808, we also assess whether the arrangement contains multiple elements that are within the scope of other accounting literature.

If we conclude that some or all aspects of the agreement are distinct and represent a transaction with a customer, we account for those aspects of the arrangement within the scope of ASC Topic 606, Revenue from Contracts with Customers , or ASC 606.

Amounts that are owed to collaboration partners that are within the scope of ASC 808 are recognized as an offset to research and development expenses as such amounts are incurred by the collaboration partner.

Where amounts owed to a collaboration partner exceed our collaboration expenses in each quarterly period, such amounts are classified as research and development expense.

Our collaboration arrangements require us to acquire certain equipment for exclusive use in the joint operating activities.

These equipment purchases do not have an alternative use and are therefore expensed as incurred within research and development expenses.

Our collaboration arrangements are further discussed within Note 7, Collaboration and License Agreements , of the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report.

Recently Adopted Accounting Policies

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What changed 10-Q

Item 2. Management’s Discussion and Analysis