What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-04 compared with 2020-03-25 · 282 added, 310 removed, 329 unchanged (64% of the section changed)

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Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in Item 1A, “Risk Factors”.

As a pioneering clinical-stage immunotherapy company, we are focused on harnessing the power of the innate immune system by using its 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, typically required to train and activate adaptive immune cells such as T‑cells.

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 hold the exclusive right to commercialize aNK cells, a commercially viable NK cell line, and a wide range of genetically modified derivatives capable of killing cancer and virally infected cells.

We own corresponding United States, or U.S., and foreign composition and methods-of-use patents and applications covering the cells, improvements, methods of expansion and manufacture and use of aNK cells and their improvements as therapeutics to treat a spectrum of clinical conditions.

We also license exclusive commercial rights to a high-affinity CD16 receptor expressing enhancement of our aNK cell platform, covered in a portfolio of U.S.

and foreign composition and methods-of-use patents and applications covering both the clinical use as a therapeutic to treat cancers in combination with antibody products, as well as the non-clinical use in laboratory testing of monoclonal antibodies.

We believe our proprietary NK cell platform, coupled with our integrated discovery ecosystem, positions us to implement precision cancer medicine by taking advantage of the advances that have evolved during the past decade and addressing newly discovered challenges of cancer.

Cancer is only recently understood to be a complex of rare diseases, with hundreds of cancer specific proteins.

We believe proteins, selectively expressed on the cancer cells and not on the essential normal tissue, represent large untapped targeting opportunities for immune effector cell products derived from our aNK cell platform.

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 clinical grade master and working cell banks of aNK, haNK and t‑haNK cell lines.

Agreement and Plan of Merger with ImmunityBio, Inc.

On December 21, 2020, NantKwest and ImmunityBio, Inc.

(ImmunityBio) entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which NantKwest and ImmunityBio agreed to combine their businesses.

The Merger Agreement provides that a wholly owned subsidiary of NantKwest will merge with and into ImmunityBio (the Merger), with ImmunityBio continuing as the surviving company and being renamed NantCell, Inc., upon the terms and subject to the conditions therein.

At the effective time of the Merger (the Effective Time), NantKwest’s name, as the parent of NantCell, Inc., will be changed to “ImmunityBio, Inc.”

At the Effective Time, each share of ImmunityBio common stock issued and outstanding immediately prior to the Effective Time, subject to certain exceptions as set forth in the Merger Agreement, will be converted automatically into a right to receive 0.8190 shares of NantKwest common stock.

At the Effective Time, each share of NantKwest common stock issued and outstanding immediately prior to the Effective Time, will remain an issued and outstanding share of the combined company.

At the Effective Time, each outstanding option, warrant or restricted stock unit to purchase ImmunityBio common stock will be converted (using the merger exchange ratio of 0.8190) into an option, warrant or restricted stock unit, respectively, on the same terms and conditions immediately prior to the Effective Time, to purchase shares of common stock of the combined company.

Upon consummation of the Merger, on a fully-diluted basis, ImmunityBio stockholders and NantKwest stockholders will own approximately 72% and 28%, respectively, of the outstanding shares of common stock of the combined company.

It is estimated that, immediately following the closing date, Dr.

Patrick Soon‑Shiong, our Executive Chairman and principal stockholder, and his affiliates will beneficially own, in the aggregate, approximately 82% of the common stock of the combined company.

Following consummation of the Merger, shares of common stock of the combined company are expected to be listed on the Nasdaq Global Select Market under the symbol “IBRX”.

Under the terms and subject to the conditions set forth in the Merger Agreement, the closing of the Merger depends on a number of conditions being satisfied, including approval of the Merger by holders of a majority of the outstanding shares of NantKwest common stock as of the NantKwest record date (excluding all shares of NantKwest common stock beneficially owned by Dr.

Patrick Soon‑Shiong and his affiliates Cambridge Equities, LP and Chan Soon‑Shiong Family Foundation or any of their respective controlled affiliates or any of the directors or executive officers of NantKwest or ImmunityBio).

On February 1, 2021, our Registration Statement on Form S-4, which was filed with the Securities and Exchange Commission (SEC) in connection with the Merger, was declared effective by the SEC.

A special meeting of the stockholders of NantKwest will be held on March 8 , 2021 to consider and vote on a proposal to approve the issuance of shares of common stock of NantKwest to security holders of ImmunityBio, and to consider and vote on a proposal to approve the Merger.

Only holders of record of NantKwest common stock at the close of January 29, 2021, will be entitled to notice of and to vote at the special meeting.

We expect the Merger to close in the first quarter of 2021, subject to receipt of the requisite stockholder approvals and satisfaction of other customary closing conditions.

The Merger is expected to be accounted for as a transaction between entities under common control as Dr.

Patrick Soon‑Shiong is the controlling stockholder of each of NantKwest and ImmunityBio.

Upon the closing of the Merger, the net assets of ImmunityBio will be combined with those of NantKwest at their historical carrying amounts and the companies will be presented on a combined basis for all historical periods presented.

For the year ended December 31, 2020, we incurred costs of $6.2 million in connection with our proposed merger with ImmunityBio, consisting of financial advisory, legal and other professional fees.

Our Off-the-Shelf Approach

Multiple Modes of aNK Directed Tumor Cell Killing.

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Our primary target therapeutic area is cancer, with a heavy emphasis on solid tumors.

According to the National Cancer Institute, there was an estimated 1.7 million newly diagnosed cases of cancer in the U.S.

in 2019, adding to the 16.9 million already living with cancer.

According to the National Cancer Institute, almost 1.9 million new cancer cases are expected to be diagnosed in the U.S.

during 2021, adding to the 16.9 million already living with cancer.

In addition, we plan to advance therapies for hematologic malignancies and virally induced infectious diseases.

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They do so through the recognition and binding of stress-proteins that are overexpressed on the surfaces of

rapidly growing cancer cells due to oxidative and metabolic stress, nutrient deprivation and waste accumulation typical when cell growth outpaces the capacity of local circulation;

virally infected cells where the cellular machinery is hijacked to produce an abundance of viral proteins and virons.

Our aNK cells can also 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.

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;

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 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 complete responses in liquid tumors.

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.

Antibody-Mediated Killing—the haNK Platform.

We have genetically engineered our aNK cell platform to overexpress high-affinity CD16 receptors, which bind to antibodies.

We have genetically engineered our aNK cell platform using a virus-free method 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 ADCC.

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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 commercialization going forward.

We have optimized our haNK product manufacturing process partly through the successful development of a product that does 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 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 has been approved for clinical testing in several phase Ib/II clinical trials, including our phase II Merkel cell cancer study.

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 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:

Checkpoint ligands, such as PD‑L1 and B7‑H4;

Well-established tumor proteins such as HER2 and CD19;

Novel surface antigens associated with cancer stem cells, such as CD123 and IGF‑R1;

Newly discovered proteins, or neoepitopes, from individual patient tumor samples.

Preclinical evidence has been mounting which demonstrates that taNK cell activation through the binding of its CAR receptors to these cancer specific proteins is 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.

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 include checkpoint ligands, such as PD‑L1 and B7‑H4 as well as well-established tumor proteins such as CD19, HER2 and EGFR, all of which can be targeted individually by our engineered taNK products.

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 products under this platform avails itself to all three modes of killing:

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 products 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 products 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, authorized to commence phase I testing, a pipeline of prominent CARs for t‑haNK, including HER2, which is nearing IND submission, and EGFR, which is advancing through human enabling studies, among others will enable us to address an even broader range of cancers as part of a chemotherapy-free combination regimen.

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, currently in 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.

The Nant Cancer Vaccine.

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NCV consists of an initial tumor-conditioning regimen followed by a molecularly-informed immunologic conditioning therapy.

More specifically, NCV combines tumor and peripheral blood genomic and transcriptomic data derived from our affiliates NantOmics’ and NantHealth Labs’ sequencing and analytical services with the novel delivery of metronomic, albumin-bound low-dose chemotherapy in conjunction with certain other agents, followed by a sequenced administration of tumor-associated antigen vaccines and a unique IL‑15 cytokine, all of which potentiate our NK cell therapy to potentially drive immunogenic cell death while avoiding the ravages of toxic high-dose chemotherapy.

More specifically, NCV combines the novel delivery of metronomic, albumin-linked low-dose chemotherapy in conjunction with certain other agents, followed by a sequenced administration of tumor-associated antigen vaccines and an IL‑15 superagonist fusion protein, all of which potentiate our NK cell therapy to potentially drive immunogenic cell death while avoiding the ravages of toxic high-dose chemotherapy.

By inducing immunogenic cell death and enhancing a patient’s innate and adaptive immune system, NCV is designed to attain a long-term, durable response in multiple cancer types with a potential for lower toxicity and improved efficacy and quality of life in comparison with current standards of care.

We believe ultimately that employing our NK cell therapy in the context of NCV will be a highly effective combination for long term clinical success over available standards of care that employ maximum tolerated dose, tolerogenic cell death and immune system compromise.

Our Integrated Discovery Ecosystem for Precision Medicine.

In order to effectively target newly discovered neoepitopes, we plan to eventually integrate the following ecosystem to help drive the utility of our NK cell therapies against these unique cancer markers, including the use of our haNK platform in conjunction with cancer vaccines that induce in vivo antibody formation directed against these mutated proteins, as well as the development of t‑haNK cells that directly target these mutated proteins:

a high-speed supercomputing infrastructure to help identify both known antigens on the surface of tumor cells and neoepitopes in clinical patients suffering from cancer, in a timely manner and at large scale;

a next-generation genomic and transcriptomic sequencing infrastructure to verify the expression of the neoepitopes in the tumor cell, developed by our affiliate entity NantOmics;

delivering the neoepitope via an adenoviral or yeast platform developed by an affiliate entity to induce production of IgG1-type antibodies in the body, which would in turn combine with our haNK cells to accelerate ADCC tumor killing;

a diverse library of human antibodies from which to interrogate and extract an antibody to construct a CAR for genetic incorporation into our t‑haNK platform;

CAR‑targeted t‑haNK cells potentially capable of being produced as a scalable cell-based “off-the-shelf” therapy, without the need for patient compatibility matching.

We expect to regularly add newly discovered neoepitopes and novel antibody/CAR targets from our discovery engine and we believe the thousands of newly discovered antigens selectively expressed on the cancer cells and not on the essential normal tissue will provide us with the ability to create new libraries of cancer-specific antibodies and their corresponding CARs to be potentially delivered as living drugs for selective targeting of metastatic cancer cells and cancer stem cells.

We retain exclusive worldwide 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.

Coronavirus Pandemic

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 pandemic, including travel restrictions, closing or 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 continuously 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 pandemic.

We anticipate, however, that enrollment of patients in certain 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 company’s anticipated upcoming milestones.

During any such delays in our clinical trials, we will continue to incur fixed costs such as selling, general and administrative expenses and operating expenses related to our laboratory, GMP manufacturing, and office facilities.

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 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 uncertainty about the progression and ultimate impact of the pandemic on our business and operations.

While the pandemic did not materially impact our results during the year ended December 31, 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

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 December 31, 2019, we had an accumulated deficit of approximately $662.2 million.

Our net losses were approximately $65.8 million, $96.2 million and $96.4 million for the years ended December 31, 2019, 2018 and 2017, 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.

We have incurred net losses in each year since our inception and, as of December 31, 2020, we had an accumulated deficit of $754.6 million.

Our net losses were $92.4 million, $65.8 million and $96.2 million for the years ended December 31, 2020, 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 December 31, 2020, we had 171 employees.

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incur additional legal, accounting and other expenses in operating as a public company;

incur additional costs associated with our proposed merger with ImmunityBio, including a higher expense rate for the operations of the combined company if the merger closes.

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.

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Failure to receive additional funding could cause us to cease operations, in part or in full.

PD‑L1.t‑haNK Program

Our novel GMP‑grade, cryopreserved, “off-the-shelf” bi-specific PD‑L1.t‑haNK NK cell therapy, which received authorization from the FDA in June 2019 to proceed with a first-in-human trial, has completed enrollment in the second dose cohort of a phase I study in patients with locally advanced or metastatic solid cancers.

We anticipate that this will prove to be safe to administer, based on past favorable safety profiles for other aNK cell products, and subsequently progress towards multiple phase II studies in patients with PD‑L1 positive cancer indications.

PD‑L1.t‑haNK is expected to serve 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 (see Note 7 – Collaboration and License Agreements , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report).

We believe that the addition of this selective IL‑15 cytokine therapy will complement the efficacy of our bispecific NK cell therapy through its stimulation of the patient’s own resident population of NK 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.

Viracta Investment and Convertible Notes

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.

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, which was initially recorded at cost.

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.

In June 2018, Viracta executed a 2018 Note and Warrant Purchase Agreement with existing and new investors, including us.

The initial closing under the Purchase Agreement occurred in June 2018, at which point we purchased a convertible note, for $0.4 million, which under certain circumstances was convertible into preferred stock of Viracta, and a warrant to purchase Viracta’s common shares.

The convertible note accrued interest at 8% and had a one-year maturity date.

In September 2018, a milestone closing under the Purchase Agreement occurred, at which point we purchased an additional convertible note for $0.4 million, which under certain circumstances was convertible into preferred stock of Viracta, and a warrant to purchase Viracta’s common shares.

The convertible note accrued interest at 8% and had a one-year maturity date.

We classified these convertible notes as held-to-maturity notes receivable on the consolidated balance sheets.

Effective January 31, 2019, the notes, together with accrued interest then outstanding, were converted to Series B preferred stock resulting in an increase to our investment in Viracta’s Series B convertible preferred stock totaling $0.8 million.

In May 2019, we exercised warrants to acquire 253,120 shares of Viracta common stock.

At December 31, 2019, our investment in Viracta totaled $9.3 million.

For additional information, see Note 4 – Viracta Investment and Convertible Notes of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

We measure our equity securities without readily determinable fair values at cost, less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with such changes recognized in the consolidated statements of operations.

Some factors we may consider in the impairment analysis include the extent to which the security has been in an unrealized loss position, the change in the financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

At December 31, 2020, our fair value assessment indicated that the recent offering of Viracta’s Series E preferred shares, at a lower offering price per share than the per share carrying amount of our investment in Viracta, is a directional indicator representing an observable price change in an orderly transaction for a similar investment.

On December 31, 2020, we reduced the carrying value by $1.4 million due to the observable price change, which has been included in other income and expense, net, on the consolidated statements of operations.

On a cumulative basis, we have recognized a reduction in carrying value of $1.4 million.

As of December 31, 2020, the carrying value of our investment in Viracta totaled $7.8 million.

For additional information, see Note 5, Viracta Investment , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Collaboration Agreements

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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.

ImmunityBio, Inc.

In January 2020, we entered into a Cost Allocation Agreement, or the Agreement, with ImmunityBio, Inc.

and its subsidiaries, or ImmunityBio.

The Agreement is effective as of October 1, 2019.

ImmunityBio is a related party, as it is an affiliate of NantWorks.

Simultaneously, we and ImmunityBio entered into Work Order Number One under the Agreement.

Under the Agreement and Work Order Number One, the parties agreed to conduct a joint study, the clinical research trial being conducted pursuant to the protocol titled QUILT 3.063:

A phase 2 study of combination therapy with an IL-15 superagonist (N‑803), off-the-shelf CD16‑targeted natural killer cells (haNK), and avelumab without cytotoxic chemotherapy in subjects with Merkel Cell Carcinoma (MCC) that has progressed on or after treatment with a checkpoint inhibitor .

The ImmunityBio study drug included in the joint study is ImmunityBio’s proprietary IL-15 superagonist known as N‑803 and our study drug is our proprietary “off-the-shelf” CD16-targeted natural killer cell therapy known as haNK.

We will act as the sponsor of this joint study for purposes of regulatory matters, including submissions, correspondence, and communications.

Additionally, we are designated as the contracting party to execute agreements with third and related parties relating to the joint study under Work Order Number One.

We and ImmunityBio will split certain joint study costs equally related to Work Order Number One, in accordance with the terms of the Agreement.

Shared joint study costs include cost related to conducting the joint study development activities, such as personnel related costs, as well as all costs associated to regulatory matters.

Costs and expenses incurred in connection with the development, manufacturing, supply, delivery, and pre-patient administration dosing mechanism of each party’s study drug, are excluded from the shared joint study costs.

As of December 31, 2019, there was minimal joint research activity under the Agreement and we incurred approximately $0.1 million in costs related to the joint study that are subject to joint cost sharing under the Agreement.

Under the agreement, each of ImmunityBio and the company will receive exclusive rights to any new intellectual property developed that relates solely to its respective study drug, and the parties will have joint co-equal rights in any other intellectual property .

The Agreement expires upon the second anniversary of the effective date with the option to renew for additional successiv e one-year terms, but work orders for any joint studies still in process at the time of termination will continue until the applicable study is completed.

Altor BioScience, LLC.

In August 2016, we entered into an exclusive Co-Development Agreement, or the Co-Development Agreement, with Altor BioScience, LLC, or Altor.

Altor is a related party, as it is a wholly owned subsidiary of ImmunityBio.

ImmunityBio is an affiliate of NantWorks.

Under the Co-Development Agreement, the parties agreed to exclusively collaborate on the development of certain therapeutic applications combining our proprietary NK cells with Altor's N‑801 and/or N‑803 products with respect to certain technologies and intellectual property rights as may be agreed between the parties for the purpose of jointly developing therapeutic applications of certain effector cell lines.

We are the lead developer for each product developed by the parties pursuant to the Co-Development Agreement unless otherwise agreed to under a given project plan.

Under the terms of the Co-Development Agreement, both parties granted a co-exclusive, royalty free, fully paid-up, worldwide license, with the right to sublicense (only to a third-party contractor assisting with research and development activities under this Co-Development Agreement and subject to prior consent, not to be unreasonably withheld), under the intellectual property, or IP, including the parties interest in the joint IP, solely to conduct any development activities agreed to by the steering committee as set forth in any development plan.

Unless otherwise mutually agreed by the parties in the development plan for a project, we are responsible for all costs and expenses incurred by either party related to conducting clinical trials and other activities under each development program, including costs associated with patient enrollment, materials and supplies, third party staffing, and regulatory filings.

Altor supplies free of charge, sufficient amounts of Altor products for all pre-clinical requirements and certain clinical requirements for up to 400 patients in phase I and/or phase II clinical trials, as required under the development plan for a project per the Co-Development Agreement.

Each company owns an undivided interest in and to all rights, title and interest in and to the joint product rights.

The Co-Development Agreement expires upon the fifth anniversary of the effective date.

We have dosed patients with N‑803, an IL‑15 superagonist, in several phase Ib/II trials during the years ended December 31, 2019, 2018 and 2017.

No charges for supplies by Altor were incurred in association with the above trials during the years ended December 31, 2019, 2018 and 2017.

Licensing Agreements

Viracta Therapeutics, Inc.

In May 2017, we entered into an agreement with Viracta to grant us exclusive world-wide rights to Viracta’s phase II drug candidate, VRx‑3996, for use in combination with our platform of NK cell therapies.

In consideration for the license, we are obligated to pay to Viracta (i) mid-single digit percentage royalties of net sales of licensed products for therapeutic use;

and (ii) milestone payments ranging from $10.0 million to $25.0 million for various regulatory approvals and cumulative net sales levels.

We may terminate the agreement, in our sole discretion, in whole or on a product-by-product and/or country by country basis, at any time upon 90 days’ prior written notice.

In addition, either party may terminate the agreement in the event of a material breach or for bankruptcy of the other party.

See Note 8, Collaboration and License Agreements , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual 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.

Share Repurchase

In November 2018, we entered into a share repurchase agreement with an immediate family member of a director of the company, pursuant to which we repurchased 138,349 of our common shares for a total of $0.2 million under our existing share repurchase program.

NantHealth Labs, Inc.

In March 2018, we entered into an agreement with NantHealth Labs, Inc., or NantHealth Labs, to obtain blood-based tumor profiling services.

NantHealth Labs is a related party, as it is a wholly owned subsidiary of NantHealth, Inc., a majority owned subsidiary of NantWorks.

We are obligated to pay NantHealth Labs fixed, per-patient fees.

The agreement has an initial term of five years and renews automatically for successive one-year periods, unless terminated earlier.

During the years ended December 31, 2019 and 2018, $10,000 and $0.3 million, respectively, has been recognized in research and development expense on the consolidated statements of operations.

Our Executive Chairman, and principal stockholder, founded and has a controlling interest in NantWorks, which is a collection of multiple companies in the healthcare and technology space.

As described below, we have entered into arrangements with NantWorks, and certain affiliates of NantWorks, to 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 Executive Chairman.

Under the NantWorks shared services agreement executed in November 2015, but effective August 2015, NantWorks provides corporate, general and administrative, manufacturing strategy, research and development, regulatory and clinical trial strategy, and other support services.

We are charged for the services at cost plus reasonable allocations for indirect costs that relate to the employees providing the services.

For the years ended December 31, 2020, 2019 and 2018, we recorded $2.5 million, $2.1 million and $2.8 million, respectively, in selling, general and administrative expense, and $1.5 million, $1.5 million and $3.3 million, respectively, in research and development expense under this arrangement on the consolidated statements of operations.

These amounts exclude certain general and administrative expenses provided by third party vendors directly for our benefit, which have been reimbursed to NantWorks based on those vendors’ invoiced amounts without markup by NantWorks.

In June 2016, we amended the existing shared services agreement with NantWorks whereby we can provide support services to NantWorks and/or any of its affiliates.

For the years ended December 31, 2020, 2019 and 2018, we recorded expense reimbursements of $1.4 million, $1.2 million and $0.6 million, respectively, in selling, general and administrative expense and $1.6 million, $2.3 million and $2.6 million, respectively, in research and development expense.

In November 2015, we entered into a facility license agreement with NantWorks, which became effective in May 2015, for approximately 9,500 square feet in Culver City, California, which has been converted to a research and development laboratory and a cGMP manufacturing facility.

In September 2020, we amended this agreement to extend the term of this lease through December 31, 2021, as further described in Note 9, Commitments and Contingencies , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Lease expense for this facility for the years ended December 31, 2020, 2019 and 2018, is recorded in research and development expense on the consolidated statements of operations and was $0.6 million, $0.6 million, and $0.2 million, respectively.

Immuno-Oncology Clinic, Inc.

Beginning in 2017, we entered into multiple agreements with Immuno-Oncology Clinic, Inc., or the Clinic, to conduct various clinical trials.

The Clinic was formerly known as John Lee, M.D.

and Leonard Sender, M.D., Inc., a professional medical corporation, dba Chan Soon-Shiong Institutes for Medicine, El Segundo, California.

Beginning in 2017, we entered into multiple agreements with Immuno-Oncology Clinic, Inc., or the Clinic (dba Chan Soon-Shiong Institutes for Medicine, in El Segundo, California), to conduct clinical trials related to certain of our product candidates.

The Clinic is a related party as it is owned by one officer of NantKwest and NantWorks manages the administrative operations of the Clinic.

Prior to June 30, 2019, one of the company’s officers was an investigator or sub-investigator for all of the company’s trials conducted at the Clinic.

In July 2019, we entered into a new agreement with the Clinic which superseded our existing agreements with the Clinic, effective as of July 1, 2019.

The new agreement covers clinical trial and research related activities on a non-exclusive basis relating to our existing clinical trials, commenced prior to July 1, 2019, and prospective clinical trials and research projects.

The new agreement also specifies certain services and related costs that are excluded from the new agreement.

Prior to commencing any work under the new agreement, the parties have agreed to execute written work orders setting forth the terms and conditions related to specific services to be performed, including financial terms.

For existing clinical trials, commenced prior to July 1, 2019, fees incurred for services performed after July 1, 2019 are covered under the new agreement and applied towards the below-mentioned prepayments.

The initial term of the new agreement is for one year, but the agreement allows for an automatic renewal and additional extensions beyond the initial term.

In July 2019, we executed a clinical trial work order under the new agreement with the Clinic for an open-label, phase I study of PD‑L1.t‑haNK for infusion in subjects with locally advanced or metastatic solid cancers.

In consideration of the services to be performed under the new agreement, we agreed to make payments of $7.5 million to the Clinic, of which $3.75 million and $1.875 million were paid in July 2019 and October 2019, respectively.

The prepayments constitute a prepayment by us for services to be performed by the Clinic.

We anticipate that the prepayment amount will be utilized in future periods as the Clinic provides additional services pursuant to the new agreement.

Under the term of the new agreement, the outstanding balance of our prepayment shall be increased on a quarterly basis by an interest credit computed in accordance with terms specified in the new agreement.

To the extent any portion of the prepayments remain unearned by the Clinic on the third anniversary of the new agreement, we may elect at our sole discretion either to (i) not extend the term of the new agreement and have the Clinic reimburse us for the total amount of any remaining unused portion of the prepayments, or (ii) extend the term of the new agreement for up to three additional one year periods, at which time the Clinic will reimburse us for the total amount of any remaining unused portion of the prepayments plus interest if reimbursement is not made within 60 days of expiration.

In July 2019, we entered into a new agreement with the Clinic (the Clinic Agreement), which became effective on July 1, 2019.

The Clinic Agreement, as amended on March 31, 2020, covers clinical trial and research related activities on a non-exclusive basis relating to our existing clinical trials, commenced prior to July 1, 2019, and prospective clinical trials and research projects.

The Clinic Agreement also specifies certain services and related costs that are excluded from the Clinic Agreement.

Prior to commencing any work under the Clinic Agreement, the parties have agreed to execute written work orders setting forth the terms and conditions related to specific services to be performed, including financial terms.

For clinical trials that commenced prior to July 1, 2019, fees incurred for services performed after July 1, 2019 are covered under the Clinic Agreement and applied towards the below-mentioned prepayments.

The Clinic Agreement allows for an automatic renewal and additional extensions beyond the initial one year term.

In consideration of the services to be performed under the Clinic Agreement, as amended on March 31, 2020, we agreed to make payments of up to $7.5 million to the Clinic, of which $3.75 million and $1.875 million were paid in July 2019 and October 2019, respectively.

As amended, a conditional payment of $1.875 million shall be due and payable at such time, if any, that the payments made in July 2019 and October 2019 have been earned by the Clinic through performance of services.

On a quarterly basis, our prepayment is increased by an interest credit computed in accordance with terms specified in the Clinic Agreement.

To the extent any portion of the prepayments remain unearned by the Clinic on the third anniversary of the Clinic Agreement, we may elect at our sole discretion either to (i) not extend the term of the Clinic Agreement and have the Clinic reimburse us for the total amount of any remaining unused portion of the prepayments, or (ii) extend the term of the Clinic Agreement for up to three additional one year periods, at which time the Clinic will reimburse us for the total amount of any remaining unused portion of the prepayments plus interest if reimbursement is not made within 60 days of expiration.

The Clinic may terminate this agreement upon each anniversary date upon sixty (60) days prior written notice and reimbursement in full to us of any outstanding unearned balance of the prepayments, provided that any such termination by the Clinic will not apply with respect to any work orders still in effect at the time of such termination.

During the years ended December 31, 2019, 2018 and 2017, expense of $1.1 million, $2.7 million and $0.8 million, respectively, has been recognized in research and development expense on the consolidated statements of operations for services performed by the Clinic.

In July 2019, we executed a clinical trial work order under the Clinic Agreement for an open-label, phase I study of PD‑L1.t‑haNK for infusion in subjects with locally advanced or metastatic solid cancers.

In July 2020, but effective on June 22, 2020, we and ImmunityBio executed a clinical trial work order under our existing master agreement with the Clinic for an open-label, randomized, comparative phase II study of ImmunityBio’s proprietary IL‑15 superagonist (N‑803) and Aldoxorubicin Hydrochloride (Aldoxorubicin) and our PD‑L1.t‑haNK with standard-of-care chemotherapy versus standard-of-care chemotherapy for first and second line treatment of locally or advanced metastatic pancreatic cancer.

During the years ended December 31, 2020, 2019 and 2018, $0.6 million, $1.1 million, and $2.7 million, respectively, was recognized in research and development expense on the consolidated statements of operations related to clinical trial and research related activities conducted for us by the Clinic.

ImmunityBio, Inc., or ImmunityBio, is a related party, as it is controlled by our Executive Chairman and principal stockholder, Dr.

Patrick Soon-Shiong.

On December 21, 2020, we entered into a merger agreement with ImmunityBio pursuant to which NantKwest and ImmunityBio agreed to combine their businesses.

The proposed merger is discussed in additional detail above under Agreement and Plan of Merger with ImmunityBio, Inc.

In September 2020, we entered into a sublease agreement with Altor Bioscience Manufacturing Company, LLC, a subsidiary of ImmunityBio, whereby we leased approximately 6,901 square feet in El Segundo, California, including laboratory space and related furniture, fixtures and equipment.

The agreement also includes certain non-lease components related primarily to the right to use certain common areas within the building and the related furniture and fixtures.

This facility will be used to manufacture and produce clinical products for our oncology product candidate trials.

The lease runs from August 2020 through July 2022, and includes an option to extend the lease for an additional one-year term through July 2023.

The monthly fixed charge related to the agreement is $0.2 million, a portion of which is subject to annual increases of 3% which began in November 2020.

In addition, under the agreement, we are required to pay our share of estimated property taxes and operating expenses, both of which are variable lease expenses.

Lease expense for this facility is recorded in research and development expense on the consolidated statements of operations and was $0.9 million during the year ended December 31, 2020.

On August 21, 2020, we entered into a Collaboration Agreement with ImmunityBio as further described in Note 8, Collaboration and License Agreements , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

As of December 31, 2020, the joint research activity under the Collaboration Agreement totaled $8.4 million, which has been included in research and development expense on the consolidated statements of operations.

Expenses incurred during the year ended December 31, 2020 were primarily related to purchases of equipment of $5.0 million, to be utilized in the manufacture of the hAd5 COVID‑19 vaccine candidate, and net program related costs of $3.4 million, after applying the eligible cost sharing under the Collaboration Agreement.

Certain equipment purchases made by us during the year ended December 31, 2020, which are necessary for us to fulfil our manufacturing obligations related to the COVID‑19 program, were borne solely by us.

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

Prior to the effective date of the Collaboration Agreement, COVID‑19 related program costs incurred by us and ImmunityBio, including expenditures related to property, plant and equipment, were the responsibility of each party and not subject to the equal cost sharing.

In January 2020, but effective on October 1, 2019, we entered into a Cost Allocation Agreement with ImmunityBio, which (together with related work orders) is described further in Note 8, Collaboration and License Agreements , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

During the years ended December 31, 2020 and 2019, we incurred net costs of $1.1 million and $35,700, respectively, after applying the eligible costs sharing under the Cost Allocation Agreement, which have been recognized in research and development expense on the consolidated statements of operations.

In November 2018, we entered into an agreement with Etubics Corporation, or Etubics, a subsidiary of ImmunityBio.

Pursuant to this agreement we sold used laboratory equipment to Etubics for $ 0.3 million.

In conjunction with this sale, we recognized a loss on disposal of related laboratory equipment of $ 0.1 million, which was included in other income, net on the consoli dated statements of operations.

In June 2015, we entered into a supply agreement with ImmunityBio pursuant to which we have the right to purchase ImmunityBio’s proprietary bioreactors, made according to specifications mutually agreed to with ImmunityBio.

We also have the right to purchase reagents and consumables associated with such equipment from ImmunityBio.

When an upfront payment is made, it is included in prepaid expenses on the consolidated balance sheets until the product is received.

The agreement had an initial term of five years and renews automatically for successive one-year periods unless terminated earlier.

At December 31, 2020 and 2019, we had $3.2 million and $1.8 million, respectively, in equipment purchased from ImmunityBio pursuant to our supply agreement, which has been included in property, plant and equipment, net, on the consolidated balance sheets.

During the years ended December 31, 2020, 2019 and 2018, we recorded research and development expense associated with reagents and consumables purchased from ImmunityBio pursuant to our supply agreement of $0.3 million, $0.1 million and $0.1 million, respectively, on the consolidated statements of operations.

605 Doug St, LLC

In September 2016, we entered into a lease agreement with 605 Doug St, LLC, an entity owned by our Chairman and CEO, for approximately 24,250 square feet in El Segundo, California, which we converted to a research and development laboratory and a current Good Manufacturing Practices, or cGMP, manufacturing facility.

In September 2016, we entered into a lease agreement with 605 Doug St, LLC, an entity owned by our Executive Chairman and principal stockholder, for approximately 24,250 square feet in El Segundo, California, which has been converted to a research and development laboratory and a cGMP laboratory manufacturing facility.

The lease runs from July 2016 through July 2023.

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The monthly rent is $0.1 million with annual increases of 3% beginning in July 2017.

For the years ended December 31, 2019, 2018 and 2017, we recorded rent expense of $0.9 million, $0.2 million and $0.2 million, respectively, which is reflected in research and development expense on the consolidated statements of operations.

Lease expense for this facility for the years ended December 31, 2020, 2019 and 2018, is recorded in research and development expense on the consolidated statements of operations and was $0.9 million, $0.9 million and $0.2 million, respectively.

NantBio, Inc.

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In case of termination of the agreement, the third party will reimburse us for a pro-rata amount based upon the passage of time.

In January 2018, we entered into a laboratory services agreement with NantBio.

The agreement, effective December 2017, included a sublease of approximately 1,965 square feet of laboratory and office space at our San Diego, California, research facility.

This sublease was terminated effective December 31, 2019, pursuant to the terms of the agreement.

For the years ended December 31, 2019, 2018 and 2017, we recognized $0.1 million, $0.1 million and $10,000, respectively, in other income on the consolidated statements of operations.

In March 2016, NantBio and the National Cancer Institute entered into a cooperative research and development agreement.

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We benefited from the preclinical and clinical research conducted during the first four years under this agreement.

In each of April 2016, April 2017, August 2018, and May 2019, we paid $0.6 million to the National Cancer Institute as a prepayment for services under the agreement.

We recognize expense associated with this agreement ratably over a 12-month period and recorded $0.6 million of research and development expense in each of the years ended December 31, 2019, 2018 and 2017.

In November 2015, we entered into a shared services agreement with NantWorks, which became effective in August 2015, under which NantWorks provides corporate, general and administrative, manufacturing strategy, research and development, regulatory and clinical trial strategy, and other support services to us.

We are charged for the services at cost plus reasonable allocations for indirect costs that relate to the employees providing the services.

For the years ended December 31, 2019, 2018 and 2017, we recorded $2.1 million, $2.8 million and $3.6 million, respectively, to selling, general and administrative expense, and $1.5 million, $3.3 million and $3.2 million, respectively, in research and development expense under this arrangement on the consolidated statements of operations.

In June 2016, we entered into an amended shared services agreement with NantWorks to allow for the provision of such support services by us to NantWorks and/or any of its affiliates.

For the years ended December 31, 2019, 2018 and 2017, we recorded expense reimbursements of $1.2 million, $0.6 million and $0.4 million, respectively, to selling, general and administrative expense, and $2.3 million, $2.6 million and $1.0 million, respectively, to research and development expense.

In November 2015, we entered into a facility license agreement with NantWorks, which became effective in May 2015, for approximately 9,500 square feet of office space in Culver City, California, which has been converted to a research and development laboratory and a cGMP laboratory.

The term of the license extends through December 2020.

The monthly rent is $47,000 with annual increases of 3% beginning in January 2017.

For each of the years ended December 31, 2019, 2018 and 2017, we recorded rent expense of $0.6 million, $0.2 million and $0.2 million, respectively, which is included in research and development expense on the consolidated statements of operations.

NantOmics, LLC

In June 2015, we entered into an agreement, as amended in May 2018, with NantOmics, LLC, or NantOmics, which is a related party, as it is an affiliate of NantWorks.

Pursuant to the agreement we obtain genomic sequencing and proteomic analysis services, as well as related data management and bioinformatics services, exclusively from NantOmics.

We have rights to use the data and results generated from NantOmics’ services in connection with the performance of the particular oncology trial with respect to which the services were performed, but NantOmics owns the data and results, as well as any other intellectual property it creates in performing these services on our behalf.

We are obligated to pay NantOmics a fixed, per sample fee, determined based on the type of services being provided.

The agreement has an initial term of five years and renews automatically for successive one-year periods, unless terminated.

We have the right to terminate the agreement for convenience on 90 days prior written notice, and both parties may terminate if there is a material, uncured breach of the agreement by the other party.

For the years ended December 31, 2019, 2018 and 2017, under this arrangement we recorded operating expense of $0.1 million, $0.1 million and $0.1 million, respectively, to research and development on the consolidated statements of operations.

ImmunityBio, Inc., or ImmunityBio, is a related party, as it is an affiliate of NantWorks.

ImmunityBio was formerly known as NantCell, Inc.

In January 2020, we entered into a cost sharing agreement with ImmunityBio as further described above and in Note 15 ‑ Subsequent Events of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

In November 2018, we entered into an agreement with Etubics Corporation, or Etubics, a subsidiary of ImmunityBio.

Pursuant to this agreement we sold used laboratory equipment to Etubics for $0.3 million.

In conjunction with this sale, we recognized a loss on disposal of related laboratory equipment of $0.1 million, which was included in other income, net on the consolidated statements of operations.

In August 2016, we entered into a Co-Development Agreement with Altor as further described above and under Collaborative Arrangements – Exclusive Co-Development Agreement in Note 7 of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Altor is a related party, as it is a wholly owned subsidiary of ImmunityBio.

No charges for supplies by Altor were incurred in association with the trials during the years ended December 31, 2019, 2018 and 2017.

We also have the right to purchase reagents and consumables associated with such equipment from ImmunityBio.

When an upfront payment is made, it is included in prepaid expenses on the consolidated balance sheets until the product is received.

In each of the contractual years under the agreement we paid $0.6 million to the National Cancer Institute as a prepayment for services under the agreement.

We recognize research and development expense related to this agreement ratably over a 12-month period for each funding year and recorded $0.6 million of expense related to this agreement in each of the years ended December 31, 2020, 2019 and 2018.

NantHealth Labs, Inc.

In March 2018, we entered into an agreement with NantHealth Labs, Inc., or NantHealth Labs, to obtain blood-based tumor profiling services.

NantHealth Labs is a related party, as it is a wholly owned subsidiary of NantHealth, Inc., a majority owned subsidiary of NantWorks.

We are obligated to pay NantHealth Labs fixed, per-patient fees.

The agreement has an initial term of five years and renews automatically for successive one-year periods, unless terminated earlier.

As of December 31, 2019 and 2018, we had $1.8 million and $1.1 million, respectively, in capitalized equipment purchased from ImmunityBio, which is included in property, plant and equipment, net, on the consolidated balance sheets.

During the years ended December 31, 2019, 2018 and 2017, we recorded research and development expense associated with reagents and consumables purchased from ImmunityBio of $0.1 million, $0.1 million and $0.3 million, respectively, on the consolidated statements of operations.

During the years ended December 31, 2019 and 2018, $10,000 and $0.3 million, respectively, has been recognized in research and development expense on the consolidated statements of operations.

There were no expenses associated with this agreement during the year ended December 31, 2020.

Components of our Results of Operations

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.

To date, we have derived substantially all of our revenue from non-exclusive license agreements with several 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.

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Research and Development

Research and development expense consists of expenses incurred while performing research and development activities to discover and develop our product candidates.

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.

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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;

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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.

We expect our research and development expenses to continue to increase significantly for the foreseeable future as we advance our product candidates through clinical development, including the conduct of our ongoing and any future clinical trials as well as product candidates pursued as part of our collaboration efforts.

The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming.

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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, Item 1A, “ Risk Factors ”.

This is due to the numerous risks and uncertainties associated with the development of product candidates as discussed in greater detail in Part I, Item 1A, “ Risk Factors ” of this Annual 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 continue 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 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 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.

Although our selling, general and administrative costs declined during the year ended December 31, 2019 as compared to the year ended December 31, 2018, we expect that our selling, general and administrative expenses during the year ended December 31, 2020 will increase.

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, corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public companies.

This includes personnel in executive, finance, human resources, information technology, legal, and administrative support functions.

Other selling, general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, professional fees for auditing, tax and legal services, advertising costs, expenses associated with strategic business transactions and business development efforts, obtaining and maintaining patents, consulting costs, royalties and licensing costs, and costs of our information systems.

We expect that our selling, general and administrative expenses for the year ended December 31, 2021 will increase as compared to the year ended December 31, 2020.

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, interest expense from the accretion of our capital lease and financing obligations, foreign currency income (expense), and gains and losses on disposition of assets.

Income tax expense consists of U.S.

federal and state income taxes.

Furthermore, we expect to continue to incur additional costs associated with our proposed merger with ImmunityBio and the operations of the combined company after closing.

Other Income and Expense

Other income and expense consists primarily of income from our investments in marketable debt securities, sublease rental income, unrealized losses related to observable price changes associated with our equity investment in Viracta, and foreign currency gains and losses.

Income taxes consists of U.S.

federal and state income taxes and foreign income taxes associated with our Korean subsidiary.

To date, we have not been required to pay U.S.

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Our income tax expense to date primarily relates to minimum income taxes in the State of California.

Our tax benefit relates to the amortization of deferred tax liabilities at our Korean subsidiary.

Our income tax benefit to date relates primarily to the amortization of deferred tax liabilities at our Korean subsidiary.

Results of Operations

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with related parties)

Other income, net (including amounts

with related parties)

Total other income

Other (expense) income, net (including

amounts with related parties)

Total other (expense) income

Loss before income taxes

Income tax benefit

Income tax (expense) benefit

The change in revenue was minimal during the comparative periods and consisted of license fees and royalties.

Research and Development

Research and development expense decreased $5.9 million during the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Research and development expense increased $14.7 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The increase in research and development expense was primarily attributable to $8.4 million of expenses related to our Joint COVID‑19 Collaboration Agreement with ImmunityBio, including the acquisition of $5.0 million of equipment to be utilized in the manufacture of the hAd5 COVID‑19 vaccine candidate, and net program related costs of $3.4 million, after applying the eligible cost sharing under the Collaboration Agreement.

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

In addition, research and development expenses increased by $4.0 million due to higher laboratory and supplies expense mainly driven by our COVID‑19 programs, including additional expenses related to readying our new El Segundo manufacturing facility leased during the third quarter of 2020.

We also experienced a $3.2 million increase related to higher lease and facility operating costs, including an increase of $1.6 million related to our new El Segundo facility, and an increase of $1.6 million for other manufacturing and facility related expenses including higher depreciation expense and higher facilities and equipment maintenance costs.

Our new El Segundo facility is used to manufacture and produce clinical products for our oncology product candidate trials.

In addition, we incurred higher shared services costs of $0.6 million driven mainly by manufacturing services, and higher third party research agreement costs of $0.5 million.

These increases in research and development expenses were partially offset by a decrease of $0.9 million related to impairment of laboratory equipment during the year ended December 31, 2019, a decrease of $0.6 million in amortization expense due to the underlying asset being fully amortized as of March 2019, and a decrease of $0.5 million in clinical trial costs mainly driven by decreased activity.

We expect our research and development expense to increase significantly for the foreseeable future as we advance our product candidates, including collaboration product candidates, through clinical development and conduct our ongoing and planned clinical trials and those of ImmunityBio if the proposed merger closes.

Research and development expense decreased $5.9 million for the year ended December 31, 2019 , as compared to the year ended December 31, 2018.

The decrease in research and development expense was primarily attributable to decreases of $4.7 million in compensation and related expenses due to decreased staff and to fees for shared services rendered under our shared services agreement with NantWorks as a result of less clinical trial support activities, $2.0 million for pre-clinical and clinical trial costs mainly driven by decreased activity related to investigator sponsored trials and research agreements, and $1.7 million of intangible asset amortization expense due to the underlying asset being fully amortized as of March 2019.

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In addition, we recorded $0.9 million of expense related to impairment of laboratory equipment.

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.

Research and development expense increased $13.7 million during the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The increase in research and development expense was attributable to increases of $7.8 million primarily due to the ramp-up of laboratory and GMP manufacturing activities driven in part by our El Segundo, California, facility where we completed construction in May 2018, $6.1 million in compensation and related expenses due to increased personnel and fees for services rendered under our shared services agreement with NantWorks, and $0.4 million in stock compensation expense primarily related to increased staff.

The increase was partially offset by decreases of $0.7 million for clinical and regulatory consultant costs due to bringing these functions in-house.

Selling, General and Administrative

Selling, general and administrative expense increased $9.2 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The increase in selling, general and administrative expense was primarily attributable to higher financial advisory, legal and other professional fees of $7.1 million driven primarily by strategic initiatives, including our proposed merger with ImmunityBio, as well as by higher costs associated with contracting, trademark, and patent related legal fees and other matters.

Selling, general and administrative expense also increased by $1.0 million due to higher compensation and related expenses, and higher insurance expense of $1.0 million which was driven by increases in directors’ and officers’ insurance rates.

In addition, we incurred higher shared services costs of $0.5 million driven mainly by legal and information technology related activities, an increase of $0.4 million due to higher software license fees, and higher corporate relations costs of $0.2 million driven by an increase in corporate communications, including press releases.

These increases in selling, general and administrative expense were offset in part by decreases in travel and tradeshow related expenses of $0.6 million and $0.4 million, respectively, due mainly to a decline in activity as a result of the ongoing COVID‑19 pandemic.

Selling, general and administrative expense decreased $24.7 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018.

The decrease in selling, general and administrative expense was primarily attributable to a decrease of $20.8 million in stock-based compensation expense, which was primarily driven by a decrease due to vesting completed in July 2018 and March 2019 related to service-based equity awards issued to our Chairman and CEO in 2015.

In addition, selling, general and administrative expense decreased by $2.3 million due to lower costs associated with litigation, $1.1 million due to decreased activity in shared services provided by NantWorks, and $0.6 million due to lower headcount related expenses.

These decreases in selling, general and administrative expense were partially offset by a $0.2 million increase in other administrative costs.

We expect our selling, general and administrative expenses to increase in the foreseeable future to support our ongoing operations, including accounting, audit, legal, and regulatory compliance, director and officer insurance costs, and other expenses associated with operating as a public company.

Selling, general and administrative expense decreased $14.4 million during the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The decrease in selling, general and administrative expense was primarily attributable to a decrease of $14.0 million in stock-based compensation expense mainly driven by a decrease of $13.8 million due to the completion of vesting in July 2018 related to service-based equity awards issued to our Chairman and CEO in 2015.

In addition, selling, general and administrative expense decreased by $0.6 million due to decreased activity in shared services provided by NantWorks, $0.5 million for professional and consulting fees for accounting and compliance related services, and $0.4 million, primarily due to lower travel related expenses.

These decreases in selling, general and administrative expense were partially offset by a $1.0 million increase mainly driven by litigation related expenses and other professional fees.

Other Income (Expense)

Other Income and Expense

Other income decreased by $2.7 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The decrease in other income resulted primarily from a $1.4 million unrealized loss attributable to an observable price change associated with our equity investment in Viracta, and a decrease of $1.3 million in investment income associated with our investments in marketable debt securities.

Investment income from our marketable debt securities decreased due primarily to a decline in the average yield on our marketable debt securities which was driven in part by shorter contractual securities lives and broader economic and market conditions.

Other income increased by $0.3 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018.

The increase in other income resulted primarily from lower interest expense of $0.4 million, offset in part by a decrease in investment income related to use of our investments for operations of $0.2 million.

Other income decreased by $0.5 million during the year ended December 31, 2018 as compared to the year ended December 31, 2017 due to a $0.8 million decrease in investment income related to use of our investments for operations, partially offset by a $0.2 million increase in interest expense related to our financing obligations.

Income Tax Benefit

The $0.4 million decrease in the income tax benefit during the year ended December 31, 2019 as compared to the year ended December 31, 2018, was due primarily to lower income tax benefits related to losses at our Korean subsidiary.

The change in income tax benefit was minimal during the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The change in income taxes was immaterial during the year ended December 31, 2020, as compared to the year ended December 31, 2019.

Income tax benefit decreased by $0.4 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018.

The decrease was due primarily to lower income tax benefits related to losses at our Korean subsidiary.

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.

During the year ended December 31, 2019, our Chairman and CEO exercised warrants and options resulting in proceeds to us of $35.2 million and $4.1 million, respectively.

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 Executive Chairman 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 $90.7 million, before deducting underwriting discounts, commissions and other offering expenses of $4.4 million.

As of December 31, 2020, we had cash and cash equivalents, and restricted cash of $11.6 million compared to $15.7 million as of December 31, 2019.

The decrease was attributable to cash used in operating activities of $61.4 million, offset in part by cash flows provided by financing and investing activities of $38.6 million and $21.5 million, respectively.

Investments in marketable debt securities were $37.6 million as of December 31, 2019, of which $36.1 million were short-term investments, as compared to $63.0 million as of December 31, 2018, of which $57.3 million were short-term investments.

The decrease was attributable to cash used in operating and investing activities of $70.5 million and $20.6 million, respectively, partially offset cash flows provided by financing activities of $87.0 million.

Investments in marketable debt securities were $54.8 million as of December 31, 2020, all of which were short-term investments, as compared to $37.6 million as of December 31, 2019, of which $36.1 million were short-term investments.

The following table sets forth our primary sources and uses of cash for the years ended December 31, 2020, 2019 and 2018 (in thousands):

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Financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

Operating Activities

For the year ended December 31, 2020, our net cash used in operating activities of $70.5 million consisted of a net loss of $92.4 million, partially offset by $16.7 million in adjustments for non-cash items, and $5.3 million of cash provided by net working capital changes.

Adjustments for non-cash items primarily consisted of $9.1 million in depreciation and amortization, $3.4 million of non-cash lease expense related to operating lease right-of-use assets, $2.1 million in stock compensation expense, $1.4 million of unrealized losses attributable to an observable price change associated with our equity investment in Viracta, and $0.8 million in amortization of premiums on marketable debt securities, reduced by $0.3 million in non-cash interest.

The change in net working capital consisted primarily of increases in amounts due to related parties of $5.0 million, accrued expenses of $3.7 million, and accounts payable of $2.1 million, partially offset by decreases related to operating lease liabilities of $3.9 million, other current assets of $1.3 million, and other long-term assets of $0.3 million.

The $9.1 million increase in cash used in operating activities, as compared to the year ended December 31, 2019, was primarily due to costs incurred in ongoing clinical trials, ramp-up of manufacturing, and Joint COVID‑19 Collaboration Agreement related activities as well as costs associated with our proposed merger with ImmunityBio.

For the year ended December 31, 2019, our net cash used in operating activities of $61.4 million consisted of a net loss of $65.8 million, and $10.9 million of cash used by net working capital changes, partially offset by $15.4 million in adjustments for non-cash items.

Adjustments for non-cash items primarily consisted of $9.0 million in depreciation and amortization, $2.6 million in stock compensation expense, $2.6 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.

The decrease in net working capital consisted primarily of decreases related to accrued expenses of $12.0 million, other long-term assets of $4.0 million, operating lease liabilities of $2.3 million, due to related parties of $1.1 million, and operating lease right-of-use assets of $0.8 million, partially offset by an increase related to prepaid expenses and other current assets of $9.3 million.

The decrease in cash used in operating activities is primarily due to lower laboratory and manufacturing related costs and lower headcount and compensation costs including shared services, partially offset by higher clinical trial and related operational costs.

The decrease in net working capital consisted primarily of decreases related to accrued expenses of $12.0 million, other long-term assets of $4.0 million, operating lease liabilities of $3.1 million, and due to related parties of $1.1 million, partially offset by an increase related to prepaid expenses and other current assets of $9.3 million.

The $2.0 million decrease in cash used in operating activities, as compared to the year ended December 31, 2018, was primarily due to lower laboratory and manufacturing related costs and lower headcount and compensation costs including shared services, partially offset by higher clinical trial and related operational costs.

For the year ended December 31, 2018, our net cash used in operating activities of $63.4 million consisted of a net loss of $96.2 million, offset by $33.4 million in adjustments for non-cash items, primarily attributable to $23.4 million in stock-based compensation expense, as well as research and development and selling, general and administrative expenses, and a $0.6 million decrease of cash related to changes in working capital.

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Changes in net working capital consisted primarily of increases related to prepaid and other current assets of $9.8 million, other assets of $1.2 million, accounts payable of $1.1 million, due to related parties of $0.7 million, and deferred rent of $0.5 million, partially offset by an increase in accrued expenses of $12.7 million.

The increase in cash used in operating activities is primarily due to costs incurred in ongoing preclinical and clinical trials, the ramp-up of manufacturing activities, increased personnel, and research and development activities.

For the year ended December 31, 2017, our net cash used in operating activities of $48.8 million consisted of a net loss of $96.4 million, partially offset by $44.4 million in adjustments for non-cash items, primarily attributable to $37.0 million in stock compensation expense, as well as research and development and selling, general and administrative expenses, and $3.2 million of cash provided by net working capital changes.

Adjustments for non-cash items primarily consisted of the $37.0 million in stock-based compensation expense, $5.6 million in depreciation and amortization, $1.6 million in amortization of premiums on marketable debt securities, $0.7 million in non-cash interest related to our marketable debt securities, and $0.1 million in loss on asset disposals, reduced by $0.5 million of deferred income tax benefit.

Changes in net working capital consisted primarily of increases in due to related parties of $1.6 million, deferred rent of $1.2 million, other assets of $0.5 million, accounts payable of $0.2 million, and prepaid and other current assets of $0.2 million, partially offset by a decrease in accrued expenses of $0.3 million.

Investing Activities

For the year ended December 31, 2019, net cash provided by investing activities was $21.5 million, which was primarily attributable to $112.3 million in sales and/or maturities of marketable debt securities, partially offset by $86.6 million in purchases of marketable debt securities, and $4.2 million in purchases of property, plant and equipment.

For the year ended December 31, 2020, net cash used in investing activities was $20.6 million, which included cash outflows of $91.6 million for purchases of marketable debt securities, and $2.6 million for purchases of property, plant and equipment, partially offset by cash inflows of $65.4 million and $8.3 million from maturities and sales of marketable debt securities, respectively.

Our investments in property, plant and equipment for the year ended December 31, 2020, related primarily to acquisitions of equipment which will be used to manufacture our ceNK and MSC product candidates.

For the year ended December 31, 2019, net cash provided by investing activities was $21.5 million, which was primarily attributable to cash inflows of $109.7 million and $2.5 million from maturities and sales of marketable debt securities, respectively, partially offset by cash outflows of $86.6 million for purchases of marketable debt securities, and $4.2 million for purchases of property, plant and equipment.

During the year ended December 31, 2019, our purchases of marketable debt securities included our investment of $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 year ended December 31, 2019 mainly related to our El Segundo, California, facilities.

For the year ended December 31, 2018, net cash provided by investing activities was $57.1 million, which was primarily attributable to $165.3 million in sales and/or maturities of marketable debt securities and $0.4 million in proceeds from sales of laboratory equipment, partially offset by $94.8 million in purchases of marketable debt securities, driven by the reinvestment of excess cash resources, $13.1 million in purchases of property, plant and equipment, mainly related to our laboratory and cGMP build out in El Segundo, California, and $0.7 million in purchases of Viracta convertible notes.

For the year ended December 31, 2017, net cash provided by investing activities was $99.6 million, which was primarily attributable to $254.2 million in sales and maturities of marketable debt securities partially offset by $111.4 million in purchases of marketable debt securities driven by the reinvestment of excess cash resources, $34.8 million in purchases of property and equipment mainly related to our laboratory and cGMP build out in El Segundo, California, and equipment purchases for the El Segundo, California, research and cGMP facility, and $8.5 million in the purchase of an investment in equity securities.

For the year ended December 31, 2018, net cash provided by investing activities was $57.1 million, which was primarily attributable to cash inflows of $165.3 million from maturities of marketable debt securities and $0.4 million from sales of laboratory equipment, partially offset by cash outflows of $94.8 million for purchases of marketable debt securities, driven by the reinvestment of excess cash resources, $13.1 million for purchases of property, plant and equipment, mainly related to our laboratory and cGMP build out in El Segundo, California, and $0.7 million for purchases of Viracta convertible notes.

Financing Activities

For the year ended December 31, 2019, net cash provided by financing activities was $38.6 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 CEO 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 and option exercises for payment of employee payroll taxes.

For the year ended December 31, 2020, net cash provided by financing activities was $87.0 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 $1.2 million resulting from exercises of stock options.

Net cash used in financing activities for the year ended December 31, 2020, consisted of $0.5 million related to net share settlement of vested RSUs for payment of employee payroll taxes.

For the year ended December 31, 2019, net cash provided by financing activities was $38.6 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 Executive 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 and option exercises for payment of employee payroll taxes.

For the year ended December 31, 2018, net cash used in financing activities was $0.8 million, which primarily related to $0.5 million of principal payments on our financing obligations, $0.2 million used for stock repurchases, and $0.1 million in net share settlement of exercised warrants and vesting of RSUs for payment of employee payroll taxes, partially offset by $0.1 million in proceeds from the exercise of warrants.

For the year ended December 31, 2017, net cash used in financing activities was $35.0 million , which consisted of $19.9 million in principal payments primarily related to our capital lease obligation, $15.2 million used for stock repurchases, and $1.0 million in net share settlement of exercised stock options and vesting of RSUs for payment of employee payroll taxes, partially offset by $1.2 million in proceeds from the exercise of stock options and warrants.

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.

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 and our proposed merger with ImmunityBio.

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 ImmunityBio;

potentially seek regulatory approval for our product candidates;

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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, and our ability to borrow from affiliated entities, 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 based on our Chairman and CEO’s intent and ability to support our operations with additional funds, including loans from affiliated entities, as required.

complete our proposed merger with ImmunityBio.

As a result of continuing anticipated operating cash outflows, we believe that substantial doubt exists regarding our ability to continue as a going concern without additional funding or financial support.

However, we believe our existing cash, cash equivalents, and investments in marketable debt securities, and our ability to borrow from affiliated entities, will be sufficient to fund operations through at least the next 12 months following the issuance date of the financial statements based primarily upon our Executive Chairman’s intent and ability to support our operations with additional funds, including loans from affiliated entities, as required, which we believe alleviates such doubt.

We 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.

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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;

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the costs associated with being a public company;

the costs associated with our proposed merger with ImmunityBio and costs of operations for the combined company if the merger closes;

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing intellectual property claims, including litigation costs and the outcome of such litigation;

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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

Our contractual obligations as of December 31, 2019 were as follows (in thousands):

Payments Due by Period

Contractual Obligations

Operating lease liabilities (1)

Total contractual obligations

Represents future minimum lease payments under all our leases as of December 31, 2019.

The operating lease liability payments above do not include any related common area maintenance charges or real estate taxes.

For additional information, see Note 8 – Commitments and Contingencies, Contractual Obligations – Leases and Note 9 – Related Party Agreements of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

See Note 9, Commitments and Contingencies, Contractual Obligations – Leases , and Note 10, Related Party Agreements , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Contingencies

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The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances.

Materially different results can occur as circumstances change and additional information becomes known.

We continually evaluate our estimates and judgments, the most critical of which are 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, fair value measurements, and the assessment of the company’s ability to fund its operations for at least the next twelve months from the date of issuance of these financial statements.

We base our estimates and judgments on historical experience and on various other market-specific and relevant assumptions that we believe to be reasonable under the circumstances.

Materially different results can occur as circumstances change and additional information becomes known, such as the economic considerations related to the impact that the ongoing coronavirus pandemic could have on our significant accounting estimates.

The following is not intended to be a comprehensive discussion of all of our significant accounting policies.

See the notes accompanying our financial statements appearing in this Annual Report for a summary of all of our significant accounting policies and other disclosures required by U.S.

Transactions with Related Parties

As discussed in additional detail above, we have various agreements with related parties.

Some are billed and settled in cash monthly.

Others are billed quarterly and settled in cash the following month.

Monthly accruals are made for all quarterly billing arrangements.

Collaboration Arrangements

We analyze our collaboration arrangements to assess whether they are within the scope of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or 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 FASB 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 8, Collaboration and License Agreements , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Preclinical and Clinical Trial Accruals

As part of the process of preparing the financial statements, we are required to estimate expenses resulting from our obligations under contracts with vendors, clinical research organizations and consultants.

As part of the process of preparing the financial statements, we are required to estimate expenses resulting from obligations under contracts with vendors, clinical research organizations and consultants.

The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

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If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly.

Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Payments made under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Research and Development Costs

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Actual results could differ from our estimates.

Cash, Cash Equivalents and Marketable Debt Securities

We invest our excess funds in investment grade short- to intermediate-term corporate debt securities, commercial paper, government sponsored securities, and foreign government bonds and classify these investments as available-for-sale.

We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents and all investments purchased with original maturities of greater than three months as marketable debt securities.

Cash, Cash Equivalents and Restricted Cash

Cash equivalents include highly liquid investments with an original maturity of three months or less from the date of purchase.

Restricted cash includes a certificate of deposit held as a substitute letter of credit for one of our leased properties.

This certificate of deposit is included in other assets on the consolidated balance sheets as the landlord is the beneficiary of the account and we are not able to access the funds during the term of the lease.

We minimize the credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of our primary financial institutions.

While we maintain cash deposits in FDIC insured financial institutions in excess of federally insured limits, management believes we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

We have not experienced any losses on such accounts.

Marketable Debt Securities

We invest our excess funds in investment grade short- to intermediate-term corporate debt securities, government sponsored securities, and foreign government bonds and classify these investments as available-for-sale.

Marketable debt securities with remaining maturities of 12 months or less are classified as short-term and marketable debt securities with remaining maturities greater than 12 months are classified as long-term.

All marketable debt securities are reported at fair value and any unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss), net of tax, on the consolidated statements of stockholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, which are recorded in investment income, net, on the consolidated statements of operations.

All marketable debt securities are reported at fair value and any unrealized gains and losses are reported as a component of accumulated other comprehensive loss on the consolidated statements of stockholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, which are recorded in investment income, net, on the consolidated statements of operations.

Realized gains and losses are included in investment income, net, on the consolidated statements of operations.

Realized gains and losses from sale of the securities and the amounts, net of tax, reclassified out of accumulated other comprehensive loss, if any, are determined on a specific identification basis.

Realized gains and losses from sales of securities and the amounts, net of tax, reclassified out of accumulated other comprehensive loss, if any, are determined on a specific identification basis.

We periodically evaluate whether declines in fair values of our investments below their book value are other-than-temporary.

This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recovery occurs.

Additionally, we assess whether we plan to sell the security or it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis.

Additionally, we assess whether or not we have plans to sell the security or whether or not it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis.

Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of our investments, duration and severity of the decline in value, and our strategy and intentions for holding the investment.

There were no other-than-temporary impairments recorded in years ended December 31, 2019, 2018 and 2017.

We minimize the credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of our primary financial institutions.

We have not experienced any losses on such accounts.

We have funded a certificate of deposit, or CD, as a substitute letter of credit for one of the leased properties.

This CD is reported as long-term restricted cash and is included in other assets on the consolidated balance sheets as the landlord is the beneficiary of the account and we are not able to access the funds during the term of the lease.

There were no other-than-temporary impairments recorded in the years ended December 31, 2020, 2019 and 2018.

Contingencies

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We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause a change in the potential amount of the liability recorded or of the range of potential losses disclosed.

Moreover, we record gain contingencies only when they are realizable, and the amount is known.

Additionally, we record our rights to insurance recoveries, limited to the extent of incurred or probable losses, as a receivable when such recoveries have been agreed to with our third-party insurers and when receipt is deemed probable.

This includes instances where our third-party insurers have agreed to pay, on our behalf, certain legal defense costs and settlement amounts directly to applicable law firms and a settlement fund.

This includes instances when our third-party insurers have agreed to pay, on our behalf, certain legal defense costs and settlement amounts directly to applicable law firms and a settlement fund.

Investment in Equity Securities

We own non-marketable equity securities that are measured at cost, less impairment, adjusted for observable price changes in an orderly market for an identical or similar investment of the same issuer, because the preferred stock we hold is not considered in-substance common stock and such preferred stock does not have a readily determinable fair value.

This investment is reviewed on a regular basis for possible impairment.

If the fair value of the investment is determined to be less than its net carrying value, the investment will be written down to its fair value.

We own non-marketable equity securities that are accounted for using the measurement alternative under ASC 321 because the preferred stock held by us is not considered in-substance common stock and such preferred stock does not have a readily determinable fair value.

All investments are reviewed for possible impairment on a regular basis.

If an investment's fair value is determined to be less than its net carrying value, the investment is written down to its fair value.

Such an evaluation is judgmental and dependent on specific facts and circumstances.

Factors considered in determining whether an impairment indicator is present include:

the investees’ earning performance and clinical trial performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost of the investment, issues that raise concerns about the investee's ability to continue as a going concern, and any other information that we may be aware of related to the investment.

Factors considered in determining whether an observable price change has occurred include:

the price at which the investee issues equity instruments similar to those of our investment and the rights and preferences of those equity instruments compared ours.

To date, we have not recorded any adjustments to the cost basis of this investment.

the investees’ earnings performance and clinical trial performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost of the investment, issues that raise concerns about the investee's ability to continue as a going concern, and any other information that we may be aware of related to the investment.

Factors considered in determining whether an observable price change has occurred include the price at which the investee issues equity instruments similar to those of our investment and the rights and preferences of those equity instruments compared to ours.

Fair Value of Financial Instruments

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At December 31, 2020, our cash equivalents and investments in marketable debt securities totaled $54.8 million.

Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures , or ASC 820, establishes three levels of inputs that may be used to measure fair value.

FASB ASC Topic 820, Fair Value Measurements and Disclosures , or ASC 820, establishes three levels of inputs that may be used to measure fair value.

Each level of input represents varying degrees of subjectivity and difficulty involved in determining fair value.

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For additional information, see Note 7, Fair Value Measurements , of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

Long-Lived Assets

Long-lived assets include property, plant and equipment and intangible assets.

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During the year ended December 31, 2019, we determined that certain bioreactor laboratory equipment could no longer be utilized in the production process.

As a result, we recorded an impairment charge totaling approximately $0.9 million, which is included in research and development expense on the condensed consolidated statements of operations of the “Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.

As a result, we recorded an impairment charge totaling $0.9 million, which is included in research and development expense on the consolidated statements of operations.

There were no impairment losses recognized during the years ended December 31, 2020 and 2018.

Lease Obligations

We adopted FASB ASC Topic 842, Leases , or ASC 842, effective January 1, 2019.

On January 1, 2019, we adopted FASB ASC Topic 842, Leases , or ASC 842.

For contracts entered into on or after the effective date, we determine if an arrangement is, or contains, a lease at lease inception.

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At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Leases entered into prior to January 1, 2019, which were accounted for under ASC 840, Leases , were not reassessed as we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.

Leases entered into prior to January 1, 2019, which were accounted for under ASC 840, Leases , were not reassessed as we elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allowed us to carry forward the historical lease classification.

We determine the lease term by assuming the exercise of renewal options that are reasonably assured.

The exercise of lease renewal options is at our sole discretion.

Several of our leases have renewal options, however, exercise of renewal is only assured for the El Segundo current Good Manufacturing Practices, or cGMP, facility, where we have made significant improvements.

Several of our leases have renewal options, however, exercise of renewal is only assured for two of our current Good Manufacturing Practices, or cGMP, facilities, where we have made significant improvements or extended the lease.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized.

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We do not currently have any leases classified as finance leases.

Our operating leases are included in operating lease right-of-use assets, net, other current liabilities, and operating lease liabilities on the consolidated balance sheets.

Our operating lease assets and liabilities are included in operating lease right-of-use assets, net, and current and long-term operating lease liabilities, respectively, on the consolidated balance sheets.

At the commencement date, operating lease right-of-use assets and operating lease liabilities are determined based on the present value of lease payments to be made over the lease term.

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Stock-Based Compensation

We account for stock-based compensation under the provisions of ASC Topic 718, Compensation—Stock Compensation , or ASC 718, which applies to share-based payments issued to employees and nonemployees in exchange for goods or services.

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation , or ASC 718, which applies to share-based payments issued to employees and nonemployees in exchange for goods or services.

Under ASC 718, the fair value of an equity-classified award is estimated on the grant date without regard to service or performance conditions.

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Utilization of Net Operating Loss Carryforwards, or NOLs, and Research and Development Credits

As of December 31, 2019, we had federal, state and foreign income tax NOLs of approximately $291.8 million, $255.7 million and $0.2 million, respectively, which will begin to expire at various dates starting with 2022.

As of December 31, 2019 we also had federal and state research and development tax credit carryforwards of $8.5 million and $5.7 million, respectively, to offset future income taxes.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited.

We have completed a study to determine the impact of ownership changes on our NOLs and we have undergone significant ownership changes in previous years.

As of December 31, 2020, we had federal, state and foreign income tax NOLs of $389.8 million, $350.3 million and $0.2 million, respectively.

Of the $389.8 million in federal NOLs, $226.4 million will not expire and will be able to offset 80% of taxable income in future years.

Of the $350.3 million in state NOLs, $4.4 million will not expire and will be able to offset 80% of taxable income in future years.

The remaining federal NOL carryforwards begin to expire in 2024, the remaining state NOL carryforwards begin to expire in 2030 and the foreign NOL carryforwards begin to expire in 2022.

As of December 31, 2020, we also had federal and state research and development tax credit carryforwards of $11.1 million and state research tax credits of $7.8 million, respectively.

The federal research tax credit carryforwards begin to expire in 2034 and certain state research tax credit carryforwards begin to expire in 2031.

The California research tax credits can be carried forward indefinitely.

These net operating loss and research and development tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited.

We have completed a study through March 2019 to determine the impact of ownership changes on our NOLs and we have undergone significant ownership changes in previous years.

Accordingly, some of our NOLs and research and development credits have been derecognized.

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Application of New or Revised Accounting Standards – Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes .

The amendments in this update include removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income, or a gain, from other items (e.g., discontinued operations or other comprehensive income), and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

We are currently evaluating the impact that these amendments will have on our consolidated financial statements and we intend to early adopt these amendments on January 1, 2020.

We do not expect that the adoption of these amendments will have a significant impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016‑13, Financial Instruments—Credit Losses (Topic 326):

In June 2016, the FASB issued Accounting Standards Update, or ASU, 2016‑13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

The FASB subsequently issued amendments to ASU 2016‑13, which have the same effective date and transition dates as described below.

The new guidance supersedes existing U.S.

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Accordingly, these financial assets will be presented at the net amount expected to be collected.

This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model.

The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, but may be adopted earlier.

This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than

reducing the carrying amount under the current, other-than-temporary-impairment model.

For public business entities that meet the definition of a Securities and Exchange Commission, or SEC, filer, except entities that are eligible to be a smaller reporting company as defined by the SEC, the standard is effective for annual periods beginning after December 15, 2019, and interim periods therein.

For all other entities, the standard is effective for annual periods beginning after December 15, 2022, and interim periods therein.

Early adoption is permitted for all entities for annual periods beginning after December 15, 2018.

With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings as of the beginning of the fiscal year of adoption.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326):

Targeted Transition Relief , which provides companies with an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis upon adoption of Topic 326.

We are currently evaluating the impact that this new standard and its related amendments will have on our consolidated financial statements and we intend to adopt the standard on January 1, 2021.

However, as the impact is dependent upon the investments held as of the adoption date, it is not possible for us to quantify the impact until the date of adoption.

We continue to evaluate the impact that this new standard and its related amendments will have on our consolidated financial statements and we do not intend to early adopt this new standard .

Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the SEC during the three months ended December 31, 2020 did not, or are not expected to, have a material effect on our consolidated financial statements.

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted.

Section 107 of the JOBS Act provides that an “ emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards.

In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain exemptions and reduced reporting requirements provided by the JOBS Act, including those relating to (i) providing an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis.

We will remain an “emerging growth company” until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700 million of outstanding equity securities held by non-affiliates, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the previous three years, or (iv) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO, or December 31, 2020.

Quantitative and Qualitat ive Disclosures About Market Risk.

Our exposure to market risk for changes in interest rates relates primarily to interest earned on our cash equivalents and investments.

The primary objective of our investment activities is to preserve our capital to fund operations.

A secondary objective is to maximize income from our investments without assuming significant risk.

Our investment policy provides for investments in low-risk, investment-grade debt instruments.

As of December 31, 2019, we had $15.5 million in cash and cash equivalents and $37.6 million in our investment portfolio.

Our cash equivalents are short-term investments with maturities of 90 days or less at the time of purchase.

We maintain cash deposits in FDIC insured financial institutions in excess of federally insured limits.

However, we believe that we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

As of December 31, 2019, we did not hold or issue financial instruments for trading purposes.

To date, we have not realized any significant loss of principal on our investments.

Interest rate risk – cash

With the cash discussed above, our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S interest rates.

However, we do not believe a sudden change in the interest rates would have a material impact on our financial condition or results of operations due to the short-term maturities on our cash equivalents.

A hypothetical 100 basis point change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Interest rate risk – cash equivalents and investment portfolio

We invest a portion of our cash in a number of diversified fixed and floating rate securities, consisting of marketable debt securities and debt funds that are subject to interest rate risk.

Changes in the general level of interest rates can affect the fair value of our investment portfolio.

If interest rates in the general economy were to rise, our holdings could lose value.

At December 31, 2019, a hypothetical increase in interest rates of 100 basis points across the entire yield curve on our holdings would not have resulted in a material impact on the fair value of our portfolio.

Foreign currency exchange risk

We contract with clinical research organizations, investigational sites and suppliers in foreign countries and we have a bank account in Korea .

We are, therefore, subject to fluctuations in foreign currency rates in connection with these agreements.

We have not entered into any material foreign currency hedging contracts although we may do so in the future.

To date we have not incurred any material effects from foreign currency changes on these contracts.

The effect of a 10% adverse change in exchange rates on foreign currency denominated cash and payables as of December 31, 2019 would not have been material.

However, fluctuations in currency exchange rates could harm our business in the future.

Inflation risk

Inflation may affect us by increasing our cost of labor, clinical trial, and other costs.

We do not believe that inflation has had a material effect on our business, financial condition or results of operations for any period presented herein.

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What changed 10-K

Item 7. Management’s Discussion and Analysis