ImmunityBio, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 111 Consolidated Balance Sheets as of December 31, 2020 and 2019 113 Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 114 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020, 2019 and 2018 115 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018 116 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 117 Notes to Consolidated Financial Statements 119 110 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of NantKwest, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of NantKwest, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 111 Related party transactions and disclosures Description of the Matter As discussed in Note 10 to the consolidated financial statements, the Company’s Executive Chairman of the Board of Directors and former CEO founded and has a controlling interest in NantWorks LLC, which is a collection of multiple companies in the healthcare and technology space. Affiliates of NantWorks LLC are also affiliates of the Company due to the common control by and/or common ownership interest of the Company’s Executive Chairman of the Board of Directors and former CEO. The Company has entered into multiple transactions with related parties, including shared services provided by/to NantWorks LLC, agreements with Immuno‑Oncology Clinic, Inc. to conduct various clinical trials, and multiple agreements with ImmunityBio, Inc. including a collaboration agreement with ImmunityBio, Inc. for the joint development, manufacturing, and marketing of a vaccine/treatment for COVID‑19. Assessing the sufficiency of procedures performed to identify related parties and related party transactions and determining the identified related party transactions were properly recorded, presented and disclosed was challenging due to the nature, volume and the significance of related party transactions. How We Addressed the Matter in Our Audit The audit procedures we performed included, among others, testing the completeness and accuracy of the listing of significant related parties identified and related party transactions provided by management, testing the manner in which related party transactions were recorded, presented and disclosed, and performing journal entry searches of identified related parties to verify completeness and accuracy of the Company’s related party transactions. We also inspected questionnaires received from the Company’s directors and officers, read employment and compensation contracts, proxy statements and other relevant filings with the Securities and Exchange Commission and other regulatory agencies that relate to the Company’s financial relationships and transactions with the Company’s executive officers and with other entities controlled by the Company’s Executive Chairman of the Board of Directors and former CEO. We confirmed management fees payable to NantWorks LLC and other related party affiliates and agreed such fees to subsequent payments made by the Company. We designed and executed our tests of account balances and transaction details to assess potential effects on the Company’s identified related parties and related party transactions. We inquired of management and members of the Company's audit committee regarding the completeness of the related party transactions identified. We assessed the adequacy of financial statement footnote disclosure pertaining to related party transactions. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2016. Los Angeles, California March 4, 2021 112 NantKwest, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) As of December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 11,441 $ 15,508 Prepaid expenses and other current assets (including amounts with related parties) 9,285 4,105 Marketable debt securities, available-for-sale 54,772 36,144 Total current assets 75,498 55,757 Marketable debt securities, noncurrent — 1,497 Property, plant and equipment, net (including amounts with related parties) 53,927 60,501 Operating lease right-of-use assets, net (including amounts with related parties) 13,463 11,729 Equity investment 7,849 9,253 Other assets (including amounts with related parties) 1,121 4,386 Total assets $ 151,858 $ 143,123 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 4,101 $ 1,749 Accrued expenses 8,343 5,343 Due to related parties 5,269 486 Operating lease liabilities (including amounts with related parties) 5,500 3,206 Other current liabilities (including amounts with related parties) 1,438 775 Total current liabilities 24,651 11,559 Operating lease liabilities, less current portion (including amounts with related parties) 9,814 10,885 Total liabilities 34,465 22,444 Commitments and contingencies (Note 9) Stockholders’ equity: Common stock, $ 0.0001 par value; 500,000,000 shares authorized; 108,726,551 and 98,460,404 issued and outstanding as of December 31, 2020 and December 31, 2019 11 10 Additional paid-in capital 872,078 782,965 Accumulated other comprehensive loss ( 122 ) ( 105 ) Accumulated deficit ( 754,574 ) ( 662,191 ) Total stockholders’ equity 117,393 120,679 Total liabilities and stockholders’ equity $ 151,858 $ 143,123 The accompanying notes are an integral part of these consolidated financial statements. 113 NantKwest, Inc. Consolidated Statements of Operations (in thousands, except share and per share amounts) For the Year Ended December 31, 2020 2019 2018 Revenue $ 111 $ 43 $ 47 Operating expenses: Research and development (including amounts with related parties) 64,483 49,785 55,718 Selling, general and administrative (including amounts with related parties) 27,254 18,065 42,718 Total operating expenses 91,737 67,850 98,436 Loss from operations ( 91,626 ) ( 67,807 ) ( 98,389 ) Other income (expense): Investment income, net 366 1,642 1,857 Interest expense (including amounts with related parties) ( 41 ) ( 19 ) ( 433 ) Other (expense) income, net (including amounts with related parties) ( 1,077 ) 298 236 Total other (expense) income ( 752 ) 1,921 1,660 Loss before income taxes ( 92,378 ) ( 65,886 ) ( 96,729 ) Income tax (expense) benefit ( 5 ) 97 503 Net loss $ ( 92,383 ) $ ( 65,789 ) $ ( 96,226 ) Net loss per share: Basic and diluted $ ( 0.89 ) $ ( 0.70 ) $ ( 1.22 ) Weighted-average number of shares during the period: Basic and diluted 103,550,936 94,210,087 79,132,220 The accompanying notes are an integral part of these consolidated financial statements. 114 NantKwest, Inc. Consolidated Statements of Comprehensive Loss (in thousands) For the Year Ended December 31, 2020 2019 2018 Net loss $ ( 92,383 ) $ ( 65,789 ) $ ( 96,226 ) Other comprehensive (loss) income, net of income taxes: Net unrealized (losses) gains on available-for-sale securities ( 26 ) 158 114 Reclassification of net realized losses on available-for-sale securities included in net loss 9 4 — Total other comprehensive (loss) income ( 17 ) 162 114 Comprehensive loss $ ( 92,400 ) $ ( 65,627 ) $ ( 96,112 ) The accompanying notes are an integral part of these consolidated financial statements. 115 NantKwest, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except share and per share amounts) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Shares Amount Capital Loss Deficit Total Balance as of December 31, 2017 79,021,878 $ 8 $ 717,930 $ ( 381 ) $ ( 498,713 ) $ 218,844 Stock-based compensation expense — — 23,382 — — 23,382 Exercise of warrants 93,254 — 57 — — 57 Vesting of restricted stock units (RSUs) 172,330 — — — — — Net share settlement for RSU vesting and warrant exercises ( 61,379 ) — ( 123 ) — — ( 123 ) Repurchase of common stock ( 138,349 ) — — — ( 228 ) ( 228 ) Cumulative effect of the adoption of the new revenue standard — — — — 186 186 Other comprehensive income — — — 114 — 114 Net loss — — — — ( 96,226 ) ( 96,226 ) Balance as of December 31, 2018 79,087,734 $ 8 $ 741,246 $ ( 267 ) $ ( 594,981 ) $ 146,006 Stock-based compensation expense — — 2,627 — — 2,627 Exercise of warrants 17,589,250 2 35,149 — — 35,151 Exercise of stock options 1,986,300 — 4,070 — — 4,070 Vesting of RSUs 395,051 — — — — — Net share settlement for RSU vesting and warrant exercises ( 124,345 ) — ( 127 ) — — ( 127 ) Repurchase of common stock ( 473,586 ) — — — ( 501 ) ( 501 ) Cumulative effect of the adoption of the new lease standard — — — — ( 920 ) ( 920 ) Other comprehensive income — — — 162 — 162 Net loss — — — — ( 65,789 ) ( 65,789 ) Balance as of December 31, 2019 98,460,404 $ 10 $ 782,965 $ ( 105 ) $ ( 662,191 ) $ 120,679 Issuance of common stock, net of $ 4,373 in offering costs 8,521,500 1 86,301 — — 86,302 Stock-based compensation expense — — 2,139 — — 2,139 Exercise of stock options 1,272,273 — 1,176 — — 1,176 Vesting of RSUs 648,336 — — — — — Net share settlement for RSU vesting and option exercises ( 175,962 ) — ( 503 ) — — ( 503 ) Other comprehensive loss — — — ( 17 ) — ( 17 ) Net loss — — — — ( 92,383 ) ( 92,383 ) Balance as of December 31, 2020 108,726,551 $ 11 $ 872,078 $ ( 122 ) $ ( 754,574 ) $ 117,393 The accompanying notes are an integral part of these consolidated financial statements. 116 NantKwest, Inc. Consolidated Statements of Cash Flows (in thousands) For the Year Ended December 31, 2020 2019 2018 Operating activities: Net loss $ ( 92,383 ) $ ( 65,789 ) $ ( 96,226 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 9,147 9,012 9,555 Non-cash lease expense related to operating lease right-of-use assets 3,430 2,604 — Stock-based compensation expense 2,139 2,627 23,382 Unrealized loss on equity investment 1,405 — — Amortization of net premiums and discounts on marketable debt securities 794 — 463 Losses (gains) on sales of marketable debt securities 8 4 ( 3 ) Loss on disposal of assets 4 — 209 Non-cash interest items, net ( 251 ) 246 291 Loss on impairment of assets — 869 — Deferred income tax benefit — — ( 498 ) Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 1,328 ) 9,276 ( 9,818 ) Other assets ( 339 ) ( 4,063 ) ( 1,151 ) Accounts payable 2,142 41 ( 1,100 ) Accrued expenses and other liabilities 3,686 ( 12,020 ) 12,708 Due to related parties 5,034 ( 1,093 ) ( 685 ) Operating lease liabilities ( 3,941 ) ( 3,076 ) — Deferred rent — — ( 508 ) Net cash used in operating activities ( 70,453 ) ( 61,362 ) ( 63,381 ) Investing activities: Purchases of property, plant and equipment ( 2,639 ) ( 4,182 ) ( 13,102 ) Proceeds from sales of property, plant and equipment — — 412 Purchases of debt securities, held-to-maturity — — ( 723 ) Purchases of investments in equity securities — ( 3 ) — Purchases of marketable debt securities, available-for-sale ( 91,572 ) ( 86,618 ) ( 94,770 ) Maturities of marketable debt securities 65,350 109,730 165,284 Sales of marketable debt securities 8,272 2,529 — Net cash (used in) provided by investing activities ( 20,589 ) 21,456 57,101 Financing activities: Proceeds from equity offering, net of issuance cost paid 86,302 — — Proceeds from exercises of stock options 1,176 4,070 — Proceeds from exercises of warrants — 35,151 57 Principal payments of financing obligations — — ( 477 ) Repurchases of common stock with commissions — ( 501 ) ( 228 ) Net share settlement for restricted stock unit vesting and warrant and option exercises ( 503 ) ( 127 ) ( 123 ) Net cash provided by (used in) financing activities 86,975 38,593 ( 771 ) Net decrease in cash, cash equivalents, and restricted cash ( 4,067 ) ( 1,313 ) ( 7,051 ) Cash, cash equivalents and restricted cash, beginning of period 15,687 17,000 24,051 Cash, cash equivalents and restricted cash, end of period $ 11,620 $ 15,687 $ 17,000 The accompanying notes are an integral part of these consolidated financial statements. 117 NantKwest, Inc. Consolidated Statements of Cash Flows (Continued) (in thousands) For the Year Ended December 31, 2020 2019 2018 Reconciliation of cash, cash equivalents, and restricted cash at end of period: Cash and cash equivalents $ 11,441 $ 15,508 $ 16,821 Restricted cash included in other assets 179 179 179 Cash, cash equivalents, and restricted cash, end of period $ 11,620 $ 15,687 $ 17,000 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 40 $ 19 $ 475 Income taxes $ 8 $ 3 $ 4 Supplemental disclosure of non-cash activities: Right-of-use assets obtained in exchange for operating lease liabilities $ 5,164 $ 800 $ — Cashless exercise of stock options and warrants $ 1,233 $ 29 $ 94 Property and equipment purchases included in accounts payable, accrued expenses, and other liabilities $ 289 $ 74 $ 4,664 Conversion of Viracta convertible notes and accrued interest into investment in equity securities of Viracta (Note 5) $ — $ 751 $ — Unrealized (losses) gains on marketable debt securities $ ( 17 ) $ 258 $ 123 The accompanying notes are an integral part of these consolidated financial statements. 118 NantKwest, Inc. Notes to Consolidated Financial Statements 1. Description of Business Organization NantKwest, Inc., or NantKwest, was incorporated in Illinois on October 7, 2002 under the name ZelleRx Corporation. On January 22, 2010, the company changed its name to Conkwest, Inc., and on July 10, 2015, the company changed its name to NantKwest, Inc. In March 2014, the company redomesticated from the State of Illinois to the State of Delaware and the Illinois company ceased to exist. We are a pioneering clinical-stage immunotherapy biotechnology company headquartered in San Diego, California with certain operations in Culver City and El Segundo, California and Woburn, Massachusetts. In these notes, the terms “we,” “our,” “the company” and “us” refer to NantKwest. We are 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. 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. Liquidity On June 29, 2020, the company closed an underwritten public offering of common stock as discussed further in Note 11, Stockholders Equity . 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, the company had an accumulated deficit of $ 754.6 million. We also had negative cash flow from operations of $ 70.5 million during the year ended December 31, 2020. The company will likely need additional capital to further fund development of, and seek regulatory approvals for, our product candidates, and to begin to commercialize any approved products. We are currently focused primarily on the development of immunotherapeutic treatments for cancers and debilitating viral infections using targeted cancer and viral killing cell lines, and we believe such activities will result in the company’s continued incurrence of significant research and development and other expenses related to those programs. If the clinical trials for any of the company’s product candidates fail or produce unsuccessful results and those product candidates do not gain regulatory approval, or if any of our product candidates, if approved, fail to achieve market acceptance, we may never become profitable. Even if the company achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. We intend to cover our future operating expenses through cash and cash equivalents and marketable debt securities on hand and through a combination of equity offerings, debt financings, government or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances, and licensing arrangements. Additional financing may not be available to us when needed and, if available, financing may not be obtained on terms favorable to the company or its stockholders. While we expect our existing cash, and cash equivalents and marketable debt securities, together with the ability to borrow from affiliated entities, will enable us to fund operations and capital expenditure requirements for at least the next 12 months, we may not have sufficient funds to reach commercialization. Failure to obtain adequate financing when needed may require us to delay, reduce, limit, or terminate some or all of our development programs or future commercialization efforts or grant rights to develop and market product candidates that we might otherwise prefer to develop and market ourselves, which could adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to existing stockholders may result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability to operate our business. 119 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The consolidated financial statements have been prepared assuming the company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of the uncertainty discussed in the Liquidity section of Note 1. 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 may also seek to sell additional equity, through one or more follow-on public offerings, or in separate financings, or obtain a credit facility. However, we may not be able to secure such financing in a timely manner or on favorable terms. Without additional funds, we may choose to delay or reduce our operating or investment expenditures. Further, because of the risk and uncertainties associated with the commercialization of the company’s product candidates in development, we may need additional funds to meet our needs sooner than planned. Principles of Consolidation The consolidated financial statements include the accounts of NantKwest and its wholly owned subsidiaries. All intercompany amounts have been eliminated. We apply the variable interest model under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, Consolidation , to any entity in which we hold an equity investment or to which we have the power to direct the entity's most significant economic activities and the ability to participate in the entity's economics. If the entity is within the scope of the variable interest model and meets the definition of a variable interest entity, or VIE, we consider whether we must consolidate the VIE or provide additional disclosures regarding our involvement with the VIE. If we determine that we are the primary beneficiary of the VIE, we will consolidate the VIE. This analysis is performed at the initial investment in the entity or upon any reconsideration event. For entities we hold as an equity investment that are not consolidated under the VIE model, we consider whether our investment constitutes ownership of a majority of the voting interests in the entity and therefore should be considered for consolidation under the voting interest model. Unconsolidated equity investments in the common stock or in-substance common stock of an entity under which we are able to exercise significant influence, but not control, are accounted for using the equity method. Our ability to exercise significant influence is generally indicated by ownership of 20 to 50 percent interest in the voting securities of the entity. All other unconsolidated equity investments on which we are not able to exercise significant influence will be subsequently measured at fair value with unrealized holding gains and losses included in other income and expense, net, on the consolidated statements of operations. In the instance the equity investment does not have a readily determinable fair value and does not qualify for the practical expedient to estimate fair value in accordance with ASC 820, Fair Value Measurement , or ASC 820, we will apply the measurement alternative under ASC 321, Investments—Equity Securities , or ASC 321, pursuant to which we will measure the investment at its cost, less impairment, adjusted for observable price changes in an orderly market for an identical or similar investment of the same issuer. 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’ 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. 120 Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to valuation of equity-based awards, deferred income taxes and related valuation allowances, preclinical and clinical trial accruals, impairment assessments, 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 on historical experience and on various other market-specific and relevant assumptions that we believe to be reasonable under the circumstances. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the ongoing coronavirus pandemic could have on our significant accounting estimates. Actual results could differ from those estimates. Risks and Uncertainties In March 2020, the World Health Organization declared the novel strain of coronavirus disease (SARS‑CoV‑2) outbreak a pandemic. To date, our operations have not been significantly impacted by the pandemic. However, we cannot at this time predict the specific extent, duration, or full impact that this pandemic may have on our financial condition and results of operations, including ongoing and planned clinical trials. More specifically, the pandemic may result in prolonged impacts that we cannot predict at this time and we expect that such uncertainties will continue to exist until such time a vaccine is broadly available and in use. The impact of the pandemic on the financial performance of the company will depend on future developments, including the duration and spread of the outbreak and related governmental advisories and restrictions. These developments and the impact of the ongoing pandemic on the financial markets and the overall economy are highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, our results may be adversely affected. Contingencies We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We 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 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. Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject us to concentrations of risk consist principally of cash and cash equivalents and marketable debt securities. Our cash and cash equivalents are held by one major financial institution in the U.S. and one in Korea. We minimize credit risk associated with our 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, we do not believe that we are 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. Product candidates developed by us will require approvals or clearances from the U.S. Food and Drug Administration, or FDA, or international regulatory agencies prior to commercial sales. There can be no assurance that any of our product candidates will receive any of the required approvals or clearances. If we were to be denied approval or clearance or any such approval or clearance was to be delayed, it would have a material adverse impact on us. 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. A reconciliation of cash, cash equivalents, and restricted cash is included on the consolidated statements of cash flows as of December 31, 2020, 2019 and 2018. 121 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 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 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 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 the years ended December 31, 2020, 2019 and 2018. Property, Plant and Equipment Property, plant and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditures that are directly attributable to the acquisition of the items. All repairs and maintenance are charged to net loss during the financial period in which they are incurred. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets, as follows: Buildings 39 years Software 3 years Laboratory equipment 5 years Furniture & fixtures 5 years IT equipment 3 years Leasehold improvements The lesser of the lease term or the life of the asset Upon disposal or impairment of property, plant and equipment, the cost and related accumulated depreciation is removed from the consolidated financial statements and the net amount, less any proceeds, is included in the consolidated statements of operations. Intangible Assets Intangible assets, which consisted of the cost of reacquiring a technology license during 2015, were amortized using the straight-line method over an estimated useful life of 4 years. As of December 31, 2019, our intangible assets were fully amortized. Patents Patent costs, including related legal costs, are expensed as incurred and recorded in selling, general and administrative expenses on the consolidated statements of operations. Impairments Long-lived assets include property, plant and equipment and intangible assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected undiscounted future cash flows arising from the assets using a discount rate determined by management to be commensurate with the risk inherent to our current business model. 122 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 $ 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, 20 20 and 2018 . Fair Value of Financial Instruments The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on our principal or, in absence of a principal, most advantageous market for the specific asset or liability. We use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires us to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows: • Level 1— Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Our Level 1 assets consist of bank deposits and money market funds. • Level 2— Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities. Our Level 2 assets consist of corporate debt securities including commercial paper, government sponsored securities and corporate bonds, as well as foreign municipal securities. • Level 3— Valuations based on inputs that are unobservable and significant to the overall fair value measurement. During the years ended December 31, 2020, 2019 and 2018, no transfers were made into or out of the Level 1, 2 or 3 categories. We will continue to review the fair value inputs on a quarterly basis. We utilize a third-party pricing service to assist in obtaining fair value pricing for our investments in marketable debt securities. Inputs are documented in accordance with the fair value disclosure hierarchy. Collaboration Arrangements We analyze our collaboration arrangements to assess whether they are within the scope of FASB 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 . Preclinical and Clinical Trial Accruals 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. 123 We estimate clinical trial and research agreement related expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf. In accruing clinical and research related fees, we estimate the time period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. Transactions with Related Parties As outlined in Note 10, Related Party Agreements , 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. Lease Obligations 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. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset; (2) whether we obtain the right to substantially all of the economic benefit from the use of the asset throughout the period; and (3) whether we have the right to direct the use of the asset. 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 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 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. The right-of-use asset represents the right to use the leased asset for the lease term. At lease commencement, leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the underlying asset by the end of the lease term; (2) the lease contains an option to purchase the underlying asset that is reasonably certain to be exercised; (3) the lease term is for a major part of the remaining economic life of the underlying asset; (4) the present value of the sum of the lease payments and any guaranteed residual value that is not already included in the lease payments equals or exceeds substantially all of the fair value of the underlying asset; or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any one of these criteria. We do not currently have any leases classified as finance leases. 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. Operating lease right-of-use assets also include any rent paid prior to the commencement date, less any lease incentives received, and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have elected to combine our lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) with non-lease components (e.g., common-area maintenance costs and equipment maintenance costs) and as such, we account for lease and non-lease components as a single component. Lease expense also includes amounts relating to variable lease payments. Variable lease payments include amounts relating to common area maintenance and real estate taxes. We also elected not to recognize right-of-use assets and lease liabilities for qualifying short-term leases with an initial lease term of 12 months or less at lease inception . Such leases are expensed on a straight-line basis over the lease term. The depreciable life of operating right-of-use-assets and leasehold improvements is limited by the expected lease term. Income Taxes We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record valuation allowances to reduce deferred tax assets to the amount we believe is more likely than not to be realized. 124 We recognize uncertain tax positions when the position will be more likely than not upheld on examination by the taxing authorities based solely upon the technical merits of the positions. We recognize interest and penalties, if any, related to unrecognized income tax uncertainties in income tax expense. We did no t have any accrued interest or penalties associated with uncertain tax positions as of December 31, 2020 and 2019. We are subject to U.S. federal income tax, as well as income tax in Korea, California and other states. To date, we have not been required to pay U.S. federal and state income taxes because of current and accumulated net operating losses. The federal returns for tax years 2017 through 2020 remain open to examination and the state returns remain subject to examination for tax years 2016 through 2020 . Carryforward attributes that were generated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective tax authority. All other state jurisdictions remain open to examination. No income tax returns are currently under examination by taxing authorities. Stock Repurchases In November 2015, the board of directors approved the 2015 Share Repurchase Program (Note 11) allowing the CEO or CFO, on behalf of the company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $ 50.0 million of our outstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases were and will continue to be based on market conditions and other factors, including price, regulatory requirements and other corporate considerations. The 2015 Share Repurchase Program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. We have financed, and expect to continue to finance, the purchases with existing cash balances. As it is the intent for the repurchased shares to be retired, we have elected to account for the shares repurchased under the constructive retirement method. For shares repurchased in excess of par, we allocate the purchase price in excess of par value to accumulated deficit. Revenue Recognition On January 1, 2018, we adopted the provisions of FASB ASC Topic 606, Revenue from Contracts with Customers , or ASC 606. This guidance requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASC 606 on January 1, 2018 by recording the cumulative effect of the adoption to accumulated deficit. We applied the new guidance to contracts that were not complete as of January 1, 2018. Implementation of ASC 606 did not have a material impact on our consolidated financial statements. We derive substantially all of our revenue from non-exclusive license agreements with a limited number of 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 the licensee products developed or manufactured using our intellectual property and cell lines. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied. Under the company’s license agreements with customers, the company typically promises to provide a license to use certain cell lines and related patents, the related know-how, and future research and development data that affect the license. We have concluded that these promises represent one performance obligation due to the highly interrelated nature of the promises. We provide the cell lines and know-how immediately upon entering into the contracts. The research and development data is provided throughout the term of the contract when and if available. Our license agreement with Precigen (Note 8) included a nonrefundable upfront payment of $ 0.4 million, received when we entered into the contract in 2010. In this instance, we determined that under ASC 606 it would be appropriate to recognize the initial milestone payment at a point in time, when we transferred the license. In this case, the intellectual property provided under the contract is functional intellectual property under ASC 606 and was determined to be a distinct performance obligation in the context of the arrangement. Prior to adoption, the upfront payment had been initially recorded as deferred revenue and was being recognized into revenue on a straight-line basis. As a result, upon adoption of ASC 606, we adjusted our accumulated deficit for the effects of recognizing revenue upfront for the initial milestone. The adjustment to accumulated deficit upon adoption was not material. 125 The license agreements may include nonrefundable upfront payments, event-based milestone payments, sales-based royalty payments, or some combination of these. The event-based milestone payments represent variable consideration and we use the most likely amount method to estimate this variable consideration. Given the high degree of uncertainly around achievement of these milestones, we do not recognize revenue from these milestone payments until the uncertainty associated with these payments is resolved. We currently estimate variable consideration related to milestone payments to be zero and, as such, no revenue has been recognized for milestone payments. We recognize revenue from sales-based royalty payments when or as the sales occur. On a quarterly basis, we re-evaluate our estimate of milestone variable consideration to determine whether any amount should be included in the transaction price and recorded in revenue prospectively. Upon adoption, we changed our accounting policy from accounting for milestones payments under the milestone method to accounting for variable consideration as discussed above. The change in accounting policy did not change any amounts in the financial statements because of the significant uncertainty surrounding the estimate of variable consideration for milestone payments. To date, we have generated minimal revenue related to the non-clinical use of our cell lines and intellectual property. We have no products approved for commercial sale and we have not generated any revenue from product sales. If we fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval for them, we may never be able to generate substantial future revenue. Research and Development Costs Major components of research and development costs include cash compensation and other personnel-related expenses, stock-based compensation, depreciation and amortization expense on research and development property and equipment and intangible assets, costs of preclinical studies, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on our behalf. Costs incurred in research and development are expensed as incurred. Included in research and development costs are clinical trial and research expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations and other vendors that conduct clinical trials and research on our behalf. We record accruals for estimated costs under these contracts. When evaluating the adequacy of the accrued liabilities, we analyze the progress of the studies or clinical trials, including the phase or completion of events, invoices received, contracted costs and purchase orders. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period based on the facts and circumstances known at that time. Although we do not expect the estimates to be materially different from the amounts actually incurred, if the estimates of the status and timing of services performed differs from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. Actual results could differ from our estimates. Stock-Based Compensation 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. The grant date fair values for options and warrants are estimated using the Black-Scholes-Merton option pricing model, and the grant date fair values for restricted stock units, or RSUs, are based upon the closing market price of our common stock on the date of grant. We use the straight-line method to recognize stock-based compensation expense for our outstanding share awards that do not contain a performance condition. For awards subject to performance-based vesting conditions, we assess the probability of the individual milestones under the award being achieved and stock-based compensation expense is recognized over the service period commencing once management believes the performance criteria is probable of being met. For awards with service or performance conditions, we recognize the effect of forfeitures in compensation cost in the period that the award was forfeited. Litigation Costs We expense legal fees as they are incurred. 126 Comprehensive Income (Loss) Comprehensive income or loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income or loss is composed of net income (loss) and other comprehensive income (loss). Our other comprehensive income or loss consists of unrealized gains and losses on marketable debt securities classified as available-for-sale, net of income taxes. Basic and Diluted Net Loss per Share of Common Stock Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive. The following table details those securities that have been excluded from the computation of potentially dilutive securities: As of December 31, 2020 2019 2018 Outstanding options 3,518,010 4,506,950 6,493,250 Outstanding RSUs 466,842 1,139,428 867,911 Outstanding warrants — — 17,589,250 Total 3,984,852 5,646,378 24,950,411 Amounts in the table above reflect the common stock equivalents of the noted instruments. Segment and Geographic Information Operating segments are defined as components of an enterprise (business activity from which it earns revenue and incurs expenses) for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is the company’s CEO. We view our operations and manage our business as a single operating and reporting segment. As of December 31, 2020 and 2019, the majority of our assets were held in the U.S. For the years ended December 31, 2020, 2019 and 2018, all of our revenue was derived in the U.S. Recent Accounting Pronouncements Application of New or Revised Accounting Standards – Adopted In November 2018, the FASB issued Accounting Standards Update, or ASU, No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies when certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606. It also specifically addresses when the participant should be considered a customer in the context of a unit of account; adds unit of account guidance in ASC 808 to align with guidance in ASC 606; and precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. We adopted ASU 2018-18, as required, in the quarter ended March 31, 2020. We are a party to several collaboration arrangements as further described in Note 8, Collaboration and License Agreements , however, adoption of ASU 2018-18 did not have an impact on our consolidated financial statements because the counterparties to our collaboration agreements do not meet the definition of a customer. 127 In December 2019, the FASB issued ASU 2019 ‑12, Simplifying the Accounting for Income Taxes , or ASU 2019 ‑12. The amendments in ASU 2019 ‑12 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. ASU 2019 ‑12 also amends other aspects of accounting for income taxes to help simplify and promote consistent application of U.S. GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We early adopted ASU 2019 ‑12 effective January 1, 2020, and it did not have a material impact on our consolidated financial statements. Although our adoption of ASU 2019 ‑12 did not have a material impact on our consolidated financial statements during the year ended December 31, 2020, it may have a material impact on our consolidated financial statements in future periods due to the removal of the exceptions discussed above. The amendments related to intraperiod tax allocation and the amendment related to calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year were applied prospectively. Application of New or Revised Accounting Standards – Not Yet Adopted In June 2016, the FASB issued 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. GAAP for measuring and recording of credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. 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. 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. 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 Securities and Exchange Commission during the three months ended December 31, 2020 did not, or are not expected to, have a material effect on our consolidated financial statements. 3. Financial Statement Details Prepaid expenses and other current assets As of December 31, 2020 and 2019, prepaid expenses and other current assets consist of (in thousands): As of December 31, 2020 2019 Prepaid preclinical and clinical trial services - with related party (Note 10) $ 4,626 $ 1,021 Insurance premium financing asset 1,421 757 Prepaid insurance 657 372 Prepaid services 607 440 Prepaid rent 589 392 Interest receivable - marketable debt securities 473 222 Prepaid supplies - with related party (Note 10) 281 467 Prepaid equipment maintenance 243 251 Prepaid license fees 233 78 Laboratory equipment deposit 66 — Due from related parties 45 47 Insurance claim receivables — 34 Other 44 24 $ 9,285 $ 4,105 128 Property, plant and equipment, net As of December 31, 2020 and 2019, property, plant and equipment, net, consist of (in thousands): As of December 31, 2020 2019 Leasehold improvements $ 33,680 $ 33,406 Equipment 23,069 21,434 Buildings 22,690 22,690 Software 1,190 1,195 Furniture & fixtures 415 383 81,044 79,108 Accumulated depreciation ( 27,117 ) ( 18,607 ) $ 53,927 $ 60,501 Depreciation expense related to property, plant and equipment was $ 9.1 million, $ 8.4 million and $ 7.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Intangible assets, net Our intangible assets were fully amortized as of March 31, 2019. Amortization expense was $ 0.6 million and $ 2.3 million for the years ended December 31, 2019 and 2018, respectively, and is included in research and development expense on the consolidated statements of operations. Other assets As of December 31, 2020 and 2019, other assets consist of (in thousands): As of December 31, 2020 2019 Security deposits $ 481 $ 113 Prepaid software license fees 318 — Restricted cash 179 179 Prepaid preclinical and clinical trial services - with related party (Note 10) 92 4,075 Due from related party 51 19 $ 1,121 $ 4,386 Restricted cash is comprised of a certificate of deposit that serves as collateral for a letter of credit required by our landlord as a security deposit related to our facility in San Diego, California. Accrued expenses As of December 31, 2020 and 2019, accrued expenses consist of (in thousands): As of December 31, 2020 2019 Accrued professional and service fees $ 2,920 $ 975 Accrued bonus 2,236 2,002 Accrued compensation 1,368 1,064 Accrued laboratory equipment and supplies 641 640 Accrued preclinical and clinical trial costs 638 281 Accrued capital expenditures 337 — Accrued franchise, sales/use and property taxes 103 200 Other 100 181 $ 8,343 $ 5,343 129 Other current liabilities As of December 31, 2020 and 2019, other current liabilities consist of (in thousands): As of December 31, 2020 2019 Financing obligation - current portion $ 1,421 $ 757 Other 17 18 $ 1,438 $ 775 Investment income, net Net investment income included the following for the years ended December 31, 2020, 2019 and 2018 (in thousands): For the Year Ended December 31, 2020 2019 2018 Interest income $ 1,233 $ 1,643 $ 2,317 Investment (amortization expense) accretion income, net ( 858 ) 3 ( 463 ) Net realized (losses) gains on investments ( 9 ) ( 4 ) 3 $ 366 $ 1,642 $ 1,857 Interest income includes interest from marketable debt securities, notes receivable, other assets, and interest from bank deposits. We did no t recognize an impairment loss on any investments during the years ended December 31, 2020, 2019 and 2018. 4. Agreement and Plan of Merger with ImmunityBio 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. 130 A special meeting of the stockholders of NantKwest will be held on March 8 , 2021 to consider and vot e 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 M erger. 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. 5. 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 natural killer cell therapy and possibly additional therapies. See Note 8, Collaboration and License Agreements – Royalties and In-licensing Agreements – Viracta License Agreement , for further information. 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 the 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 of $ 0.8 million. In May 2019, we exercised warrants to acquire 253,120 shares of Viracta common stock. Based on the level of equity investment at risk, Viracta is not a VIE and therefore is not consolidated under the VIE model. In addition, we do not hold a controlling financial interest in Viracta, and therefore we do not consolidate Viracta under the voting interest model. As the preferred stock is not considered in-substance common stock, the investment is not within the scope of accounting for the investment under the equity method. As the preferred stock does not have a readily determinable fair value and does not qualify for the practical expedient to estimate fair value in accordance with ASC 820, we have elected to apply the measurement alternative under ASC 321, pursuant to which we measure our investment in Viracta at cost, less impairment, adjusted for observable price changes in an orderly market for 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. At December 31, 2020, the carrying value of our investment in Viracta, which is reflected in equity investment on the consolidated balance sheets, totaled $ 7.8 million. 131 6. Financial Instruments – Investments in Marketable Debt Securities At December 31, 2020, our investments in available-for-sale debt securities consist of (in thousands): December 31, 2020 Weighted- Average Remaining Contractual Life (in years) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Current: Corporate debt securities 0.3 $ 54,789 $ 2 $ ( 19 ) $ 54,772 Current portion 0.3 54,789 2 ( 19 ) 54,772 Total 0.3 $ 54,789 $ 2 $ ( 19 ) $ 54,772 At December 31, 2019, our investments in available-for-sale debt securities consist of (in thousands): December 31, 2019 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Current: Corporate debt securities $ 32,382 $ 10 $ ( 3 ) $ 32,389 Foreign government bonds 1,007 — — 1,007 Government sponsored securities 2,752 — ( 4 ) 2,748 Current portion 36,141 10 ( 7 ) 36,144 Noncurrent: Corporate debt securities 1,501 — ( 4 ) 1,497 Noncurrent portion 1,501 — ( 4 ) 1,497 Total $ 37,642 $ 10 $ ( 11 ) $ 37,641 Accumulated unrealized losses on debt securities classified as available-for-sale that have been in a continuous loss position for less than 12 months and for more than 12 months at December 31, 2020 and 2019, were as follows (in thousands): December 31, 2020 Less than 12 months More than 12 months Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Corporate debt securities $ 42,762 $ ( 19 ) $ — $ — Total $ 42,762 $ ( 19 ) $ — $ — December 31, 2019 Less than 12 months More than 12 months Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Corporate debt securities $ 11,021 $ ( 3 ) $ 1,497 $ ( 4 ) Government sponsored securities — — 2,748 ( 4 ) Total $ 11,021 $ ( 3 ) $ 4,245 $ ( 8 ) At December 31, 2020, 34 of the securities were in an unrealized loss position. We evaluated our securities for other-than-temporary impairment and concluded that the decline in value was primarily caused by current economic and market conditions. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases. Therefore, we did not recognize any other-than-temporary impairment loss during the years ended December 31, 2020, 2019 and 2018. 132 We recognized realized gains and losses on sales of available-for-sale debt securities as follows (in thousands): Gross Realized Gains Gross Realized Losses Net Realized Gains (Losses) 2020 $ 4 $ ( 13 ) $ ( 9 ) 2019 $ 4 $ ( 8 ) $ ( 4 ) 2018 $ 3 $ — $ 3 7. Fair Value Measurements Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. Recurring Valuations Financial assets and liabilities measured at fair value on a recurring basis are summarized below at December 31, 2020 and 2019 (in thousands): Fair Value Measurements as of December 31, 2020 Total Level 1 Level 2 Level 3 Assets: Current: Cash and cash equivalents $ 11,441 $ 11,441 $ — $ — Corporate debt securities 54,772 — 54,772 — Total assets measured at fair value $ 66,213 $ 11,441 $ 54,772 $ — Fair Value Measurements as of December 31, 2019 Total Level 1 Level 2 Level 3 Assets: Current: Cash and cash equivalents $ 15,508 $ 15,508 $ — $ — Corporate debt securities 32,389 — 32,389 — Foreign government bonds 1,007 — 1,007 — Government sponsored securities 2,748 — 2,748 — Noncurrent: Corporate debt securities 1,497 — 1,497 — Total assets measured at fair value $ 53,149 $ 15,508 $ 37,641 $ — Non-recurring Valuations Non-financial assets and liabilities are recognized at fair value subsequent to initial recognition when they are deemed to be other-than-temporarily impaired. There were no material non-financial assets and liabilities deemed to be other-than-temporarily impaired and measured at fair value on a non-recurring basis for the years ended December 31, 2020, 2019 and 2018. 8. Collaboration and License Agreements Collaborative Arrangements A collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two or more parties who are (i) active participants in the activity, and (ii) exposed to significant risks and rewards dependent on the commercial success of the activity. 133 We have entered into the following collaborative arrangements with ImmunityBio , Inc., ImmunityBio , as described below. ImmunityBio is a related party, as it is controlled by our Executive Chairman and principal stockholder, Dr. Patrick Soon-Shiong ( Note 10 ) . Joint COVID‑19 Collaboration Agreement On August 21, 2020, we entered into a definitive agreement, which we refer to as the Collaboration Agreement, with ImmunityBio to pursue collaborative joint development, manufacturing and marketing of certain COVID‑19 therapeutics and vaccines. The terms of the Collaboration Agreement supersede and replace the terms of the binding term sheet executed on May 22, 2020. Through their efforts, the parties agreed to jointly develop ceNK, haNK, mesenchymal stem cells (MSC), adenovirus constructs (hAd5), and N‑803, a novel IL‑15 superagonist fusion protein, for the prevention and treatment of SARS‑CoV‑2 viral infections and associated conditions in humans, including without limitation, COVID‑19. Pursuant to the Collaboration Agreement, we have contributed our ceNK, haNK, and MSC product candidates and certain of our manufacturing capabilities, and ImmunityBio has contributed their hAd5 and N‑803 product candidates. hAd5 has been developed as a vaccine, and ceNK, haNK, MSC and N‑803 have each been developed as therapeutics for treating COVID‑19 at various stages of infection. From and after the effective date of the Collaboration Agreement, the parties will share equally in all costs relating to developing and manufacturing of the product candidates globally with the exception of certain laboratory equipment purchases that will be borne solely by us. With the exception of N‑803, we will be primarily responsible for the manufacture of each product. Each party will be responsible for the regulatory affairs and the commercialization relating to its contributed products. The global net profits from the collaboration products will be shared 60 %/ 40 % in favor of the party contributing the product on which the sales are based except if the parties mutually agree because of certain circumstances. All net profits from sales of combined collaboration products will be shared equally. This collaboration is supervised by a joint steering committee, which is comprised of an equal number of representatives from both parties. The term of the agreement will be five years and it is renewable for an additional five year period upon mutual agreement. Each party will also have a right to terminate in the event of material breach, bankruptcy, or insolvency. For the year ended December 31, 2020, 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. As of December 31, 2020, we owed ImmunityBio $ 3.3 million for net costs incurred under the Collaboration Agreement, which has been included in due to related parties on the consolidated balance sheets. Cost Sharing Agreement In January 2020, but effective on October 1, 2019, we entered into a Cost Allocation Agreement with ImmunityBio and its subsidiaries to co-sponsor and conduct certain combination clinical trials (each a Joint Study) pursuant to clinical trial protocols wherein at least one investigational agent is a proprietary therapeutic drug candidate owned or controlled by NantKwest and at least one other investigational agent is a proprietary therapeutic drug candidate owned or controlled by ImmunityBio. Prior to initiating any activities for a Joint Study the parties agreed to enter into written work orders describing, amongst other things, development and management responsibilities, allocation of Joint Study costs and expenses, regulatory responsibilities, and any other matters relating to the Joint Study. Under the Cost Allocation 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 Cost Allocation Agreement expires on June 22, 2022 with the option to renew for additional successive 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. We and ImmunityBio are splitting certain costs related to these joint studies equally in accordance with the terms of the Cost Allocation Agreement and related work orders. 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 with 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. 134 In January 2020, but effective on October 1, 2019, we executed Work Order Number One with ImmunityBio, pursuant to the Cost Allocation Agreement. Under Work Order Number One, the parties are conduct ing a clinical trial 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 th is J oint S tudy is ImmunityBio’s proprietary IL ‑ 15 superagonist known as N ‑ 803 , and our study drug is our proprietary “ off-the-shelf ” CD16-targeted natural kil ler cell therapy known as haNK. We are the sponsor of this J oint S tudy 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 part ies relating to the Joint Study . In July 2020, but effective on June 22, 2020, we executed Work Order Number Two with ImmunityBio, pursuant to the Cost Allocation Agreement. Under Work Order Number Two, the parties are conducting a clinical trial pursuant to the protocol titled QUILT 88: Open-label, randomized, comparative phase 2 study of combination immunotherapy with standard-of-care chemotherapy versus standard-of-care chemotherapy for first and second line treatment of locally or advanced metastatic pancreatic cancer . The ImmunityBio study drugs included in the joint study are ImmunityBio’s proprietary IL‑15 superagonist (N‑803) and Aldoxorubicin Hydrochloride (Aldoxorubicin), and our study drug is PD‑L1.t‑haNK. ImmunityBio is the sponsor of this Joint Study for purposes of regulatory matters, including submissions, correspondence, and communications with the FDA. Additionally, ImmunityBio is designated as the contracting party to execute agreements with third and related parties relating to this Joint Study. 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. As of December 31, 2020, we owed ImmunityBio $ 0.3 million related to the Cost Allocation Agreement. As of December 31, 2019, no balances were due between the parties with respect to the Cost Allocation Agreement. Royalties and In-licensing Agreements Viracta License Agreement In May 2017, we entered into an agreement with Viracta under which we were granted exclusive worldwide 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, at 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. Fox Chase Cancer Center License Agreement In 2004 and amended in 2008, we entered into an exclusive license agreement with Fox Chase Cancer Center, or Fox Chase, for the exclusive, worldwide right to certain patents and know-how pertaining to CD16 receptor bearing NK‑92 cell lines. In consideration for this exclusive license, we agreed to pay Fox Chase (i) low single-digit percentage royalties on net sales of licensed products for therapeutic and diagnostic use; and (ii) mid-twenties percentage royalties on any compensation we receive from sublicensees. Rush University Medical Center License Agreement In 2004, we entered into a 12 -year licensing agreement with Rush University Medical Center for the exclusive rights to license and grant sublicenses of certain intellectual property related to clinical use of NK‑92. We are required to pay low to mid-single digit percentage royalties on net sales depending upon the various fields of studies and other factors. We were required to pay a minimum annual royalty of $ 25,000 . The Rush University Medical Center License Agreement also provides for payments in the aggregate amount of $ 2.5 million upon the company achieving various milestones, including upon (i) the completion of phase II clinical trial associated with the licensed intellectual property; (ii) the approval by the FDA of a new drug application for a licensed product; and (iii) the first year that sales of the licensed product equals or exceeds $ 0.3 million. The license had a term of 12 years from 2006, the year in which royalty payments were first made, and included customary termination rights for both parties. Beginning in 2018, this license converted to a perpetual, irrevocable, fully paid, royalty-free, exclusive license. No milestones were met during the years ended December 31, 2020, 2019 and 2018. 135 Out-Licensing Agreement Precigen (formerly known as Intrexon) License Agreement In February 2010, we entered into a 17 -year license agreement with Precigen Corporation, Inc., or Precigen, pursuant to which we granted to Precigen a non-exclusive, worldwide, sublicensable license to research and sell products under certain patents relating to modified NK‑92 cells that express Precigen’s proprietary gene sequences for use as a therapeutic and prophylactic agent in humans in specified therapeutic areas. In consideration for the license agreement, Precigen paid us a one-time fee of $ 0.4 million. Prior to our adoption of ASC 606 at the beginning of 2018, this upfront payment had initially been recorded as deferred revenue and was being recognized into revenue on a straight-line basis. Upon our adoption of ASC 606, we adjusted our accumulated deficit in an amount equal to the then remaining deferred revenue after concluding that under ASC 606 the upfront payment would have been recognized when the license was transferred in 2010. Precigen will pay the following milestone payments: $ 0.1 million upon the first IND filing; $ 0.1 million upon the commencement of the first phase II clinical trial; $ 0.4 million upon the commencement of the first phase III clinical trial; and $ 0.5 million upon the first commercial sale relating to the licensed products. Precigen is obligated to pay us a low single digit percentage royalty based on net sales of the licensed products by Precigen and a mid-teen percentage royalty based on revenues received by Precigen in connection with sublicenses of the licensed products. No milestone payments were due or received in the years ended December 31, 2020, 2019 and 2018, and, therefore, we did no t record any milestone revenue for any of those years on the consolidated statements of operations. 9. Commitments and Contingencies Contingencies We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We 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. Securities Litigation In March 2016, a putative securities class action complaint captioned Sudunagunta v. NantKwest, Inc., et al. , No. 16‑cv‑01947 was filed in federal district court for the Central District of California related to the company’s restatement of certain interim financial statements for the periods ended June 30, 2015 and September 30, 2015. A number of similar putative class actions were filed in federal and state court in California. The actions originally filed in state court were removed to federal court, and the various related actions were consolidated. Plaintiffs asserted causes of action for alleged violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b‑5 promulgated thereunder. Plaintiffs sought unspecified damages, costs and attorneys’ fees, and equitable/injunctive or other relief on behalf of putative classes of persons who purchased or acquired the company’s securities during various time periods from July 28, 2015 through March 11, 2016. In September 2017, the court denied defendants' motion to dismiss the third amended consolidated complaint. On August 13, 2018, the district court granted plaintiffs’ motions for class certification and to strike plaintiffs’ claims under the Securities Exchange Act of 1934 and Rule 10b‑5. On August 24, 2018, at the district court’s direction, plaintiffs filed a fourth amended consolidated complaint. On August 27, 2018, defendants petitioned the U.S. Court of Appeals for the Ninth Circuit to authorize interlocutory appeal of the class certification order. On September 7, 2018, defendants answered the fourth amended consolidated complaint. On September 21, 2018, the parties informed the Ninth Circuit that they had reached a settlement in principle, and the parties moved to stay appellate proceedings. On September 24, 2018, the parties notified the district court that they had reached a settlement in principle. On November 9, 2018, the plaintiffs filed an unopposed motion for preliminary approval of the settlement and notice to class members. On January 9, 2019, the district court granted the motion for preliminary approval. A final approval hearing was held on April 29, 2019, and the district court granted final approval and entered judgment on May 31, 2019. Under the terms of the settlement, we paid $ 12.0 million to the plaintiffs as full and complete settlement of the litigation. We were responsible for $ 1.2 million of the settlement amount, which was recognized in selling, general and administrative expense during the year ended December 31, 2018, while the remaining $ 10.8 million was fully funded by our insurance carriers under our directors’ and officers’ insurance policy. We and the insurance carriers paid the settlement amount into a settlement fund during the year ended December 31, 2019. Subsequent to receiving final approval of the settlement on May 31, 2019, the aforementioned settlement accrual, associated insurance claim receivable and restricted cash were released and are no longer reflected on the consolidated balance sheets. 136 Stipulation of Settlement In early April 2019, following board approval, we entered into a settlement agreement, or the Stipulation of Settlement, with three stockholders of the company, each of whom had submitted a stockholder demand for the board to take action to remedy purported harm to the company resulting from certain alleged wrongful conduct concerning, among other things, disclosures about Dr. Soon-Shiong’s compensation and a related-party lease agreement. The Stipulation of Settlement called for us to adopt certain governance changes, and for the three stockholders to file a stockholder derivative action in the Superior Court of the State of California, County of San Diego, followed by an application for court approval of the Stipulation of Settlement. On May 31, 2019, the court entered an order preliminarily approving the Stipulation of Settlement and scheduling the final settlement hearing for August 9, 2019. Pursuant to the Stipulation of Settlement, we have provided stockholders with notice of the settlement and the final settlement hearing. Under the terms of the Stipulation of Settlement, which received final approval by the court on August 9, 2019, we paid an attorney’s fee of $ 0.5 million to the plaintiffs as part of the settlement. Of that amount, we were responsible for half, which was recognized in selling, general and administrative expense on the consolidated statements of operations during the year ended December 31, 2019, while the other half was funded by our insurance carrier. We and the insurance carrier paid the settlement amount into a settlement fund in June 2019. Subsequent to receiving final approval of the settlement on August 9, 2019, the aforementioned settlement accrual, associated insurance claim receivable and restricted cash were released and are no longer reflected on the consolidated balance sheets. Insurance Recoveries We have reflected our right 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 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. The amount of such receivable recorded at December 31, 2019 was $ 34,000 , which is included in prepaid expenses and other current assets on our consolidated balance sheets. There were no such receivables recorded as of December 31, 2020. Contractual Obligations - Leases On January 1, 2019, we adopted the new lease accounting guidance as discussed in further detail in Note 2. The most significant change requires us to record the present value of operating lease payments as right-of-use assets and lease liabilities on our balance sheets. We adopted the new guidance using the simplified transition approach. As a result, reporting periods beginning on January 1, 2019 are presented under the new guidance, while periods prior to January 1, 2019 continue to be reported in accordance with our historical accounting. The adoption of the new lease accounting guidance had a substantial impact on our balance sheet. The most significant impacts were (1) the recognition of $ 13.5 million of operating lease right-of-use assets, net, and $ 16.4 million of operating lease liabilities, and (2) the derecognition of assets and liabilities associated with build-to-suit leases under ASC 840, resulting in the derecognition of property, plant and equipment, net, of $ 6.6 million and net adjustments to related liabilities of $ 5.7 million). The build-to-suit leases were recorded as normal operating leases under ASC 842. The difference between the excess of build-to-suit related liabilities and assets of $ 0.9 million was recorded as an increase to our accumulated deficit. The cumulative-effect adjustment had no tax impact due to the valuation allowance against the gross deferred tax asset less reversing deferred tax liabilities. Adoption of this standard had no material impact on our results of operations and cash flows. Lease Arrangements Substantially all of our operating lease right-of-use assets and operating lease liabilities relate to facilities leases. As of December 31, 2020, we lease: (i) a research facility and office space in San Diego, California; (ii) a research and manufacturing space in Culver City, California, from a related party; (iii) research and manufacturing facilities in El Segundo, California, also from related parties; (iv) a research facility in Torrance, California, and (v) a research facility in Woburn, Massachusetts. See Note 10, Related Party Agreements , for further information. Our leases generally have initial terms ranging from two to ten years and often include one or more options to renew. These renewal terms can extend the lease term from one to three years , and are included in the lease term when it is reasonably certain that we will exercise the option. These operating leases are included in operating lease right-of-use assets, net, on the consolidated balance sheets, and represent the right to use the underlying asset for the lease term. Our obligations to make lease payments are included in current and non-current operating lease liabilities on the consolidated balance sheets. 137 Our operating right-of-use assets and lease liabilities as of December 31, 2020 and 2019, are as follows (in thousands): As of December 31, 2020 2019 Right-of-use assets: Operating lease right-of-use assets, net (including amounts with related parties) $ 13,463 $ 11,729 Short-term lease liabilities: Operating lease liabilities (including amounts with related parties) $ 5,500 $ 3,206 Long-term lease liabilities: Operating lease liabilities (including amounts with related parties) $ 9,814 $ 10,885 Total lease liabilities: Operating lease liabilities (including amounts with related parties) $ 15,314 $ 14,091 The components of lease expense for the years ended December 31, 2020 and 2019 consist of (in thousands): For the Year Ended December 31, 2020 2019 Operating lease costs $ 4,655 $ 3,898 Variable lease costs 1,566 1,215 Total lease costs $ 6,221 $ 5,113 Rental expenses for operating leases during the year ended December 31, 2018, excluding common-area maintenance, was $ 2.8 million. Cash paid during the years ended December 31, 2020 and 2019 for amounts included in the measurement of lease liabilities is as follows (in thousands): For the Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows for operating leases 5,345 4,371 The weighted-average remaining lease term as of December 31, 2020 and 2019 was 3.2 years and 4.5 years, respectively. The weighted-average discount rate used in determining the present value of operating lease liabilities as of December 31, 2020 and 2019 was 9 % . Future minimum lease payments as of December 31, 2020, including $ 3.9 million related to options to extend lease terms that are reasonably certain of being exercised, are presented in the following table (in thousands). Common area maintenance costs and taxes are not included in these payments. Years ending December 31: Operating Leases (a) 2021 $ 6,563 2022 5,607 2023 2,545 2024 1,083 2025 1,115 Thereafter 614 Total future minimum lease payments 17,527 Less: Interest 2,213 Present value of operating lease liabilities $ 15,314 138 In September 2020, we entered into a sublease agreement with Altor Bioscience Manufacturing Company, LLC, a related party (Note 10), 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. At inception of the lease we recognized an increase of $ 4.0 million in both operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheets. In August 2018, NantBio, Inc., or NantBio, a related party (Note 10), assigned an agreement to us for the use of a third-party research facility, which provides us with the exclusive right to use and access to a portion of the third party’s laboratory and vivarium premises. In conjunction with the assignment, we reimbursed NantBio for upfront payments which it had made to the third party of $ 0.9 million, and paid $ 0.5 million directly to the third party for an aggregate value of $ 1.4 million. The assigned agreement is for a term of ten years and expires in June 2027 . The agreement may be terminated by us at any time, with or without cause. 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 September 2016, we entered into a lease agreement with 605 Doug St, LLC, a related party (Note 10), for approximately 24,250 square feet in El Segundo, California, which has been converted to a research and development laboratory and a cGMP manufacturing facility. The lease runs from July 2016 through July 2023. We have the option to extend the lease for an additional three year term through July 2026. The monthly rent is $ 0.1 million with annual increases of 3 % beginning in July 2017 . In March 2016, we entered into a lease agreement for an approximately 7,893 square foot facility in Woburn, Massachusetts, for a research and development laboratory, related office and other related uses. The initial lease term ran for 48 months from April 29, 2016 through May 31, 2020. In June 2016, the lease was amended to add 260 square feet, for a total of 8,153 square feet. Base rent for the initial term of the lease was $ 19,000 per month with a $ 1 per square foot annual increase on each anniversary date. In August 2019, we exercised our right pursuant to the lease agreement to extend the term of the lease for an additional two years through May 31, 2022 . Consequently, in August 2019 we recognized an increase of $ 0.6 million in both operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheets. Base rent for the extended term of the lease is $ 25,800 per month with an annual increase of 3 % on June 1, 2021. In November 2015, we entered into a facility license agreement with NantWorks LLC, or NantWorks, a related party (Note 10), 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 manufacturing facility. The initial license was effective from May 2015 through December 2020. Base monthly rent for the initial lease term was $ 47,000 , with annual increases of 3 % beginning in January 2017 . In September 2020, we entered into an amendment to extend the term of this lease through December 31, 2021 . Commencing on January 1, 2021 , the monthly rent will increase by 3 % to $ 54,500 . Subsequent to December 31, 2021, the lease term will automatically renew on a month-to-month basis, terminable by either party with at least thirty days ’ prior written notice to the other party. In addition, we will have a one-time option to extend the lease term through December 31, 2022. If we exercise the option to extend the lease through December 31, 2022, or continue on a month-to-month basis, the monthly rent will increase by 3 % annually commencing on January 1 of each year. On the date of amendment we recognized an increase of $ 1.2 million in both operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheets, which reflects our belief that we will extend the term of this lease through December 31, 2022. In June 2015, we entered into a lease agreement for an approximately 44,700 square foot facility in San Diego, California, for a research and development laboratory, related office and other related uses. The term of the lease extends for seven years commencing on August 1, 2016. The base rent is $ 0.2 million per month with 3 % annual increases on each anniversary date. Unconditional Purchase Obligations Unconditional purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding (non-cancelable, or cancelable only in certain circumstances). We estimate our total unconditional purchase obligation commitment (for those contracts with terms in excess of one year) as of December 31, 2020, at $ 2.7 million. Payments by year are estimated as follows: 2021 ($ 1.2 million), 2022 ($ 1.2 million) and 2023 ($ 0.3 million). These commitments relate primarily to hosted software license subscription fees and related implementation costs and our pro-rata share is passed-through to us without any markup under the shared services agreement with NantWorks (as further described in Note 10 below). The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which we are contractually obligated. The majority of our goods and services are purchased as needed, with no unconditional commitment. For this reason, these amounts do not provide an indication of our expected future cash outflows related to purchases. 139 10. Related Party Agreements 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. NantWorks 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. At December 31, 2020 and 2019, we owed NantWorks a net amount of $ 1.2 million and $ 0.4 million, respectively, for all agreements between the two affiliates, which is included in due to related parties on the consolidated balance sheets. 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 . 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 (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 (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. 140 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. 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. As of December 31, 2020 and 2019, we owed the Clinic $ 0.3 million and $ 0.1 million, respectively, for services excluded from the Clinic Agreement, which are included in due to related parties on the consolidated balance sheets. As of December 31, 2020 and 2019, we had prepaid balances related to the Clinic Agreement of $ 4.7 million and $ 5.1 million, respectively, which are included in prepaid expenses and other currents assets, and other assets, on the consolidated balance sheets. We anticipate that the remaining prepayment amount as of December 31, 2020 will be utilized in future periods as the Clinic provides additional services pursuant to the Clinic Agreement. ImmunityBio 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 in Note 4, Agreement and Plan of Merger with ImmunityBio . 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. As of December 31, 2020, we owed $ 0.1 million under this agreement related to variable lease costs. On August 21, 2020, we entered into a Collaboration Agreement with ImmunityBio as further described in Note 8, Collaboration and License Agreements . 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. As of December 31, 2020, we owed ImmunityBio $ 3.3 million for net costs incurred under the Collaboration Agreement, which has been included in due to related parties on the consolidated balance sheets. 141 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 . 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. As of December 31, 2020, our balance owed to ImmunityBio related to the Cost Allocation Agreement was $ 0.3 million. As of December 31, 2019, no balances were due between the parties with respect to the Cost Allocation Agreement. 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 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. At December 31, 2020 and 2019, we had $ 0.1 million and $ 0.5 million, respectively, included in prepaid expenses and other current assets on the consolidated balance sheets related to consumables purchased from ImmunityBio. 605 Doug St, LLC 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. We have the option to extend the lease for an additional three-year term through July 2026. The monthly rent is $ 0.1 million with annual increases of 3 % beginning in July 2017 . 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. At December 31, 2020 and 2019, no balances were due between the parties. NantBio, Inc. In August 2018, NantBio assigned an agreement to us for the use of a third-party research facility, which provides us with the exclusive right to use and access to a portion of the third party’s laboratory and vivarium premises. NantBio is a related party as it is an affiliate of NantWorks. In conjunction with the assignment, we reimbursed NantBio for upfront payments which it had made to the third party of $ 0.9 million and paid $ 0.5 million directly to the third party for an aggregate value of $ 1.4 million. The assigned agreement is for a term of ten years and expires in June 2027 . The agreement may be terminated by us at any time, with or without cause. 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 March 2016, NantBio and the National Cancer Institute entered into a cooperative research and development agreement. The initial five-year agreement covers NantBio and its affiliates, including us. Under the agreement, the parties are collaborating on the preclinical and clinical development of proprietary recombinant natural killer cells and monoclonal antibodies in monotherapy and in combination immunotherapies. We benefited from the preclinical and clinical research conducted during the first four years under this agreement. 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. At December 31, 2020 and 2019, we had balances of $ 0.1 million and $ 0.1 million, respectively, included in prepaid expenses and other current assets related to this agreement on the consolidated balance sheets. 142 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. There were no expenses associated with this agreement during the year ended December 31, 2020. As of December 31, 2020 and 2019, no balances were due between the parties. 11. Stockholders’ Equity Issuance of Common Stock – 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 includes 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. Stock Repurchase – In November 2015, the board of directors approved a share repurchase program, or the 2015 Share Repurchase Program, allowing the CEO or CFO, on behalf of the company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $ 50.0 million of our outstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases were and will continue to be based on market conditions and other factors, including price, regulatory requirements and other corporate considerations. The 2015 Share Repurchase Program does not require the purchase of any minimum number of shares and may be suspended, modified, or discontinued at any time without prior notice. We have financed, and expect to continue to finance, the purchases with existing cash balances. The shares are formally retired through board approval upon repurchase. To date, we have repurchased 6,403,489 shares of our common stock under the 2015 Share Repurchase Program at a total cost of $ 31.7 million. In addition, we have paid $ 0.1 million of broker commissions on repurchases. We did no t repurchase any shares during the year ended December 31, 2020. During the years ended December 31, 2019 and 2018, we repurchased 473,586 shares for $ 0.5 million and 138,349 shares for $ 0.2 million, respectively. At December 31, 2020, $ 18.3 million remained authorized for repurchase under the 2015 Share Repurchase Program. Common Stock Reserved for Future Issuance We are authorized to issue up to 500,000,000 shares of our common stock, par value $ 0.0001 per share at December 31, 2020. As of December 31, 2020, there were 108,726,551 shares of our common stock issued and outstanding. The following table summarizes the common shares reserved for issuance on exercise or vesting of various awards at December 31, 2020: Outstanding stock options 3,518,010 Outstanding RSUs 466,842 Total shares reserved for future issuance 3,984,852 12. Stock-Based Compensation 2014 Equity Incentive Plan – In March 2014, the company’s board of directors and stockholders approved the 2014 Equity Incentive Plan, or 2014 Plan, under which 11,109,000 shares of common stock were reserved for the granting of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and performance awards to employees, directors and consultants. The maximum term of awards granted under the 2014 Plan is ten years . Recipients of stock awards are eligible to purchase shares of our common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. As of December 31, 2020, there were approximately 1.1 million vested and exercisable options outstanding under the 2014 Plan, and there were no additional shares available for future grant. 143 2015 Equity Incentive Plan – In July 2015, the company’s board of directors adopted and the company’s stockholders approved the 2015 Equity Incentive Plan, or 2015 Plan. The 2015 Plan, as amended, permits the grant of incentive stock options to the company’s employees, and for the grant of non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the company’s employees, directors and consultants. The 2015 Plan is the only equity plan of the company available for future grant of equity awards to employees, directors and consultants of the company. In April 2019, the company’s board of directors adopted, and in June 2019 the company’s stockholders approved, a first amendment to the 2015 Plan to reserve a further 3,000,000 shares of common stock for issuance pursuant to the 2015 Plan. In March 2020, the company’s board of directors adopted, and in June 2020 the company’s stockholders approved, a second amendment to the 2015 Plan to reserve a further 3,000,000 shares of common stock for issuance pursuant to the 2015 Plan. As of December 31, 2020, a total of approximately 10.2 million shares of common stock were reserved for issuance pursuant to the 2015 Plan and a total of approximately 7.2 million shares were available for future grant. In addition, the number of shares reserved for future grant under the 2015 Plan include shares subject to stock options granted under the 2014 Plan that expire or terminate without having been exercised in full and shares issued pursuant to awards granted under the 2014 Plan that are forfeited to or repurchased by us (provided that the maximum number of shares that may be added to the 2015 Plan pursuant to this provision is approximately 1.1 million shares as of December 31, 2020). Stock-Based Compensation The following table presents all stock-based compensation as included on the consolidated statements of operations (in thousands): For the Year Ended December 31, 2020 2019 2018 Stock-based compensation expense: Warrants for common stock to an officer $ — $ — $ 17,817 Employee stock options 1,388 1,309 4,057 Employee RSUs 629 938 1,193 Non-employee RSUs 122 380 315 $ 2,139 $ 2,627 $ 23,382 Stock-based compensation expense in operating expenses: Research and development $ 220 $ 499 $ 460 Selling, general and administrative 1,919 2,128 22,922 $ 2,139 $ 2,627 $ 23,382 Stock Options The following table summarizes stock option activity and related information under all equity incentive plans for the years ended December 31, 2020, 2019 and 2018: Number of Shares Weighted- Average Exercise Price Aggregate Intrinsic Value (in thousands) Weighted- Average Remaining Contractual Life (in years) Outstanding as of December 31, 2017 5,693,250 $ 7.71 $ 11,920 5.3 Options granted 800,000 $ 3.07 Outstanding at December 31, 2018 6,493,250 $ 7.14 $ 563 4.8 Options exercised ( 1,986,300 ) $ 2.06 Outstanding as of December 31, 2019 4,506,950 $ 9.37 $ 5,710 5.8 Options granted 400,000 $ 6.21 Options exercised ( 1,272,273 ) $ 1.89 Options forfeited ( 116,667 ) $ 3.07 Outstanding as of December 31, 2020 3,518,010 $ 11.93 $ 21,922 5.5 Vested and Exercisable as of December 31, 2020 2,868,008 $ 13.50 $ 16,509 4.7 As of December 31, 2020, the unrecognized compensation cost related to outstanding stock options was $ 1.3 million, which is expected to be recognized over a remaining weighted-average period of 0.9 years. 144 For the years ended December 31, 2020, 2019 and 2018, there were 166,667 , 343,810 , and 462,875 stock options vested, respectively, with weighted-average exercises prices of $ 2.09 , $ 3.51 , and $ 8.45 , respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2020, 2019 and 2018 was $ 12.7 million, $ 0.2 million and $ 0.6 million, respectively. Cash proceeds received from stock option exercises for the years ended December 31, 2020, 2019 and 2018 was $ 1.2 million, $ 4.1 million and $ 0 , respectively. As of December 31, 2019 and 2018, a total of 3,973,614 and 5,577,531 vested and exercisable shares were outstanding, respectively. The following table provides a summary of options outstanding and vested as of December 31, 2020: Exercise Prices Number Outstanding Weighted- Average Remaining Contractual Life (in years) Number Exercisable Weighted- Average Remaining Contractual Life (in years) $ 0.4213 512,036 3.9 512,036 3.9 $ 1.7554 288,404 4.0 288,404 4.0 $ 1.9984 262,120 4.1 262,120 4.1 $ 3.07 600,000 7.7 349,998 7.7 $ 6.21 400,000 9.4 — — $ 25.00 1,455,450 4.6 1,455,450 4.6 3,518,010 5.5 2,868,008 4.7 We may grant stock options to both employees and directors of the company and to employees of related parties that provide shared services to the company under the company’s shared services agreement with NantWorks (Note 10). The fair value of each stock option issued was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: For the Year Ended December 31, 2020 2019 2018 Expected term (in years) 5.5 N/A 6.0 - 6.1 Risk-free interest rate 0.4 % N/A 2.8 % Expected volatility 96.8 % N/A 75.9 % Dividend yield 0.0 % N/A 0.0 % Weighted-average grant date fair value $ 4.64 N/A $ 2.09 The expected term was estimated using the average of the contractual term and the weighted-average vesting term of the options. The risk-free interest rate was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. For grants issued during 2020, the expected volatility was estimated based on the historical volatility of our common stock. For grants issued during 2018, the expected volatility was based on a weighted-average calculation of the company’s common stock together with a peer group of comparable companies whose share prices are publicly available. The assumed dividend yield was based on the company’s expectation of not paying dividends in the foreseeable future. There were no grants issued during 2019. 145 Restricted Stock Units The following table summarizes the restricted stock units, or RSUs, activity under the 2015 Plan: Number of RSUs Outstanding Weighted- Average Grant Date Fair Value Unvested balance as of December 31, 2017 888,189 $ 8.14 Granted 487,472 $ 3.57 Vested ( 172,330 ) $ 6.16 Forfeited/canceled ( 335,420 ) $ 6.27 Unvested balance as of December 31, 2018 867,911 $ 6.69 Granted 749,793 $ 1.12 Vested ( 395,051 ) $ 8.83 Forfeited/canceled ( 83,225 ) $ 7.29 Unvested balance as of December 31, 2019 1,139,428 $ 2.23 Granted 33,500 $ 6.43 Vested ( 648,336 ) $ 2.04 Forfeited/canceled ( 57,750 ) $ 4.47 Unvested balance as of December 31, 2020 466,842 $ 2.52 We may grant RSUs to both employees and directors of the company and to employees of related parties that provide shared services to the company under the company’s shared services agreement with NantWorks (Note 10). During the year ended December 31, 2018, we granted 90,906 RSUs to employees of related companies under our shared services agreement with NantWorks (Note 10). There were no grants made to non-employees during the years ended December 31, 2020 and 2019. As of December 31, 2020, there was $ 0.6 million of unrecognized stock-based compensation expense related to RSUs that is expected to be recognized over a weighted-average period of 1.8 years. Of that amount, $ 0.6 million of unrecognized expense is related to employee grants with a remaining weighted-average period of 1.9 years and $ 6,400 of unrecognized expense is related to non-employee grants with a remaining weighted-average period of 0.2 years. Warrants The following table summarizes the company’s warrant activity: Outstanding as of December 31, 2017 17,721,088 Warrants exercised ( 93,254 ) Warrants expired ( 38,584 ) Outstanding as of December 31, 2018 17,589,250 Warrants exercised ( 17,589,250 ) Outstanding as of December 31, 2019 — Cash proceeds recognized from exercises of warrants during the years ended December 31, 2019 and 2018, were $ 35.2 million and $ 0.1 million, respectively. No warrants were issued during the years ended December 31, 2020, 2019 and 2018, and as of December 31, 2020 and 2019 there were no warrants outstanding. 13. Income Taxes The amount of loss before taxes is as follows (in thousands): For the Year Ended December 31, 2020 2019 2018 U.S. loss before taxes $ ( 92,412 ) $ ( 65,286 ) $ ( 94,423 ) Foreign income (loss) before taxes 34 ( 600 ) ( 2,306 ) Loss before income taxes $ ( 92,378 ) $ ( 65,886 ) $ ( 96,729 ) 146 Income tax (expense) benefit for the years ended December 31, 2020, 2019 and 2018 consist of the following (in thousands): For the Year Ended December 31, 2020 2019 2018 Current: Federal $ — $ — $ — State ( 5 ) ( 3 ) ( 3 ) Foreign — — — Total current ( 5 ) ( 3 ) ( 3 ) Deferred: Federal — 79 — State — 21 8 Foreign — — 498 Total deferred — 100 506 Income tax (expense) benefit $ ( 5 ) $ 97 $ 503 The components that comprise the company’s net deferred tax assets at December 31, 2020 and 2019 consist of the following (in thousands): As of December 31, 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 105,537 $ 78,377 Stock compensation 7,699 8,536 Operating lease liabilities 4,254 3,884 Depreciation and amortization 4,128 2,042 Tax credits 898 898 Accrued compensation 762 775 Leases and other accrued liabilities 451 453 Other 1,419 — Total deferred tax assets 125,148 94,965 Deferred tax liabilities: Operating lease right-of-use assets ( 3,739 ) ( 3,233 ) Total deferred tax liabilities ( 3,739 ) ( 3,233 ) Net deferred tax assets 121,409 91,732 Valuation allowance ( 121,409 ) ( 91,732 ) Net deferred tax liability $ — $ — A reconciliation of the federal statutory income tax rate to the company’s effective income tax rate for the years ended December 31, 2020, 2019 and 2018 is as follows: For the Year Ended December 31, 2020 2019 2018 Tax computed at federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 7.7 ( 19.4 ) 6.2 Tax rate adjustment ( 0.1 ) 0.1 ( 0.3 ) Research and development credits 0.1 0.2 0.1 Stock-based compensation 3.2 ( 82.5 ) ( 0.1 ) Other 0.2 ( 0.1 ) 0.3 Valuation allowance ( 32.1 ) 80.5 ( 26.7 ) Effective income tax rate — % ( 0.2 ) % 0.5 % 147 Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the company's net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 % occurs within a three-year period. We completed an Internal Revenue Code Section 382/383 analysis through March 2019 regarding the limitation of net operating loss and research and development credit carryforwards. As a result, we derecognized a portion of the deferred tax assets for net operating losses and federal and state research and development credits of $ 0.8 million from our deferred tax asset schedule as of December 31, 2020. There is no impact to tax expense for the derecognition of the net operating losses and federal and state research and development credits due to the valuation allowance recorded against the deferred tax assets. Additionally, we have not recognized the deferred tax asset for research and development credit carryforwards as of December 31, 2020 and 2019 because we are a part of a controlled group of affiliated companies with common ownership and cannot complete our calculation of the credit until the time that all members of the controlled group complete their analysis and calculation of qualified research expenditures. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical operating results and the uncertainty of the economic conditions, we have recorded a full valuation allowance of $ 121.4 million at December 31, 2020. The change in the valuation allowance for the year ended December 31, 2020 was an increase of $ 29.7 million which was mainly driven by losses for which the company cannot benefit. The portion of the valuation allowance for deferred tax assets for which subsequently recognized tax benefits will be credited directly to contributed capital is $ 0.2 million. At December 31, 2020, the company has federal net operating losses, or NOLs, of $ 389.8 million, state NOLs of $ 350.3 million, and foreign NOLs of $ 0.2 million. 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 . At December 31, 2020, the company also had federal research tax credit carryforwards of $ 11.1 million and state research tax credits of $ 7.8 million. 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. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was signed into law in response to the economic challenges facing U.S. businesses. Under the CARES Act, the Internal Revenue Code was amended to allow for federal NOL carrybacks for five years to offset previous years income, or the federal NOLs can be carried forward indefinitely to offset 100 % of taxable income for tax year 2020 and 80 % of taxable income for tax years 2021 and thereafter. On June 29, 2020, the state of California enacted Assembly Bill No. 85 (AB 85) suspending California net operating loss utilization and imposing a cap on the amount of business incentive tax credits companies can utilize, effective for tax years 2020, 2021 and 2022. There was no material impact from the provisions of AB 85 in 2020. The following table summarizes the changes to the amount of unrecognized tax benefits (in thousands): Unrecognized tax benefits as of December 31, 2018 $ 11,983 Decrease for prior year tax positions ( 7 ) Increase for current year tax positions 3,680 Unrecognized tax benefits as of December 31, 2019 15,656 Decrease for prior year tax positions ( 6 ) Increase for current year tax positions 4,763 Unrecognized tax benefits as of December 31, 2020 $ 20,413 Included in the balance of unrecognized tax benefits at December 31, 2020, is $ 18.3 million that, if recognized, would not impact our income tax benefit or effective tax rate as long as the deferred tax asset remains subject to a full valuation allowance. We do not expect that the unrecognized tax benefits will change within 12 months of this reporting date. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact the company's effective tax rate. We have not incurred any material interest or penalties as of the current reporting date with respect to income tax matters. 148 We are subject to U.S. federal income tax and various state income taxes. The federal returns for tax years 2017 through 2020 remain open to examination and the state returns remain subject to examination for tax years 2016 through 2020 . Carryforward attributes that were generated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective tax authority. All other state jurisdictions remain open to examination. Prior to the adoption of ASU 2019‑12 in the first quarter of 2020, as described in Note 2, intraperiod tax allocation rules required us to allocate the provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income. In periods in which we had a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as other comprehensive income, we had to allocate the tax provision to the other categories of earnings. We then recorded a related tax benefit in continuing operations. However, with the adoption of ASU 2019‑12, we are no longer required to allocate the tax provision to the other categories of earnings and related benefit to continuing operations under these circumstances. 14. Summarized Quarterly Data (Unaudited) The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods. The table below presents unaudited quarterly data for years ended December 31, 2020 and 2019 (in thousands, except for share and per share amounts): 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2020 Revenue $ 21 $ 1 $ 68 $ 21 Operating expenses 18,607 20,228 21,995 30,907 Operating loss ( 18,586 ) ( 20,227 ) ( 21,927 ) ( 30,886 ) Net loss ( 18,383 ) ( 20,092 ) ( 21,776 ) ( 32,132 ) Net loss per share - basic and diluted $ ( 0.19 ) $ ( 0.20 ) $ ( 0.20 ) $ ( 0.30 ) Shares used in calculating net loss per share - basic and diluted 98,472,641 98,769,687 108,246,579 108,607,715 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2019 Revenue $ 5 $ 17 $ 12 $ 9 Operating expenses 18,340 17,313 16,077 16,120 Operating loss ( 18,335 ) ( 17,296 ) ( 16,065 ) ( 16,111 ) Net loss ( 17,885 ) ( 16,682 ) ( 15,581 ) ( 15,641 ) Net loss per share - basic and diluted $ ( 0.22 ) $ ( 0.17 ) $ ( 0.16 ) $ ( 0.16 ) Shares used in calculating net loss per share - basic and diluted 81,261,302 98,594,355 98,331,695 98,419,166 15. Employee Benefits Defined Contribution Benefit Plan – In December 2015, the company adopted a 401(k) retirement and savings plan, or the 401(k) Plan, covering all employees. The 401(k) Plan allows employees to make pre- and post-tax contributions up to the maximum allowable amount set by the Internal Revenue Service. The company, at its discretion, may make certain contributions to the 401(k) Plan. We made contributions of $ 0.5 million, $ 0.6 million and $ 0.5 million during the years ended December 31, 2020, 2019 and 2018, respectively. Compensated Absences – Under our vacation policy, salaried employees are provided unlimited vacation leave. Therefore, we do not record an accrual for paid leave related to these employees since we are unable to reasonably estimate the compensated absences that these employees will take. 149 16. Subsequent Event Related Party Lease Agreement In February 2021, but effective on January 1, 2021, we entered into a lease agreement with 605 Nash, LLC, whereby we leased approximately 6,883 square feet in El Segundo, California. 605 Nash, LLC is a related party, as it is owned by our Executive Chairman and principal stockholder, Dr. Patrick Soon‑Shiong. This facility will be used primarily for pharmaceutical development and manufacturing purposes. The lease runs from January 2021 through December 2027 , and includes an option to extend the lease for an additional three year term through December 2030 . Base rent for the term of the lease is approximately $ 20,300 per month with an annual increase of 3 % on January 1 of each year during the initial term and, if applicable, during the option term. 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. 150 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.