10-Q 1 nk-10q_20180630.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission file number: 001-37507

NANTKWEST, INC.

(Exact name of registrant as specified in its charter)

Delaware |  | 43-1979754
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

3530 John Hopkins Court San Diego, California |  | 92121
(Address of principal executive offices) |  | (Zip Code)

(858) 633-0300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☒
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐
Emerging growth company | ☒ |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 2, 2018 the registrant had 79,207,876 shares of common stock, par value $0.0001 per share, outstanding.

TABLE OF CONTENTS

|  |  |  | Page
| Part I – Financial Information |  |  |
Item 1. |  | Financial Statements |  | 1 |
Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 24 |
Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk |  | 35 |
Item 4. |  | Controls and Procedures |  | 35 |
| Part II – Other Information |  |  |
Item 1. |  | Legal Proceedings |  | 36 |
Item 1A. |  | Risk Factors |  | 37 |
Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 73 |
Item 3. |  | Defaults Upon Senior Securities |  | 73 |
Item 4. |  | Mine Safety Disclosures |  | 73 |
Item 5. |  | Other Information |  | 74 |
Item 6. |  | Exhibits |  | 74 |

-i-

NANTKWEST, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

NantKwest, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share amounts)

|  | June 30, 2018 |  |  | December 31, 2017 |
|  | (Unaudited) |  |  |  |  |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 16,122 |  |  | $ | 23,872 |
Due from related parties |  |  | 54 |  |  |  | 154 |
Prepaid expenses and other current assets |  |  | 4,734 |  |  |  | 4,152 |
Marketable debt securities, available-for-sale |  |  | 88,822 |  |  |  | 104,280 |
Note receivable, held-to-maturity |  |  | 361 |  |  |  | — |
Total current assets |  |  | 110,093 |  |  |  | 132,458 |
Marketable debt securities, noncurrent |  |  | 12,580 |  |  |  | 29,600 |
Property, plant and equipment, net |  |  | 78,211 |  |  |  | 76,726 |
Equity investment |  |  | 8,500 |  |  |  | 8,500 |
Intangible assets, net |  |  | 1,695 |  |  |  | 2,826 |
Other assets |  |  | 354 |  |  |  | 330 |
Total assets |  | $ | 211,433 |  |  | $ | 250,440 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 5,502 |  |  | $ | 5,865 |
Accrued expenses |  |  | 11,517 |  |  |  | 11,267 |
Due to related parties |  |  | 1,806 |  |  |  | 2,363 |
Other current liabilities |  |  | 1,367 |  |  |  | 1,373 |
Total current liabilities |  |  | 20,192 |  |  |  | 20,868 |
Build-to-suit liability, less current portion |  |  | — |  |  |  | 4,909 |
Financing obligation, less current portion |  |  | 6,267 |  |  |  | 1,741 |
Deferred rent |  |  | 3,049 |  |  |  | 3,325 |
Deferred tax liability |  |  | 250 |  |  |  | 498 |
Other liabilities |  |  | 44 |  |  |  | 255 |
Total liabilities |  |  | 29,802 |  |  |  | 31,596 |
Commitments and contingencies (Note 8) |  |  |  |  |  |  |  |
Stockholders’ equity |  |  |  |  |  |  |  |
Common stock, $0.0001 par value; 500,000,000 shares authorized; 79,165,819 and 79,021,878 issued and outstanding as of June 30, 2018 and December 31, 2017 |  |  | 8 |  |  |  | 8 |
Additional paid-in capital |  |  | 735,849 |  |  |  | 717,930 |
Accumulated other comprehensive loss |  |  | (448 | ) |  |  | (381 | )
Accumulated deficit |  |  | (553,778 | ) |  |  | (498,713 | )
Total stockholders’ equity |  |  | 181,631 |  |  |  | 218,844 |
Total liabilities and stockholders’ equity |  | $ | 211,433 |  |  | $ | 250,440 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

NantKwest, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except for share and per share amounts)

(Unaudited)

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |  |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |  |
Revenue |  | $ | 4 |  |  | $ | 14 |  |  | $ | 9 |  |  | $ | 25 |  |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development (including amounts to related parties) |  |  | 14,688 |  |  |  | 9,706 |  |  |  | 28,679 |  |  |  | 18,954 |  |
Selling, general and administrative (including amounts to related parties) |  |  | 13,594 |  |  |  | 14,128 |  |  |  | 27,892 |  |  |  | 30,355 |  |
Total operating expenses |  |  | 28,282 |  |  |  | 23,834 |  |  |  | 56,571 |  |  |  | 49,309 |  |
Loss from operations |  |  | (28,278 | ) |  |  | (23,820 | ) |  |  | (56,562 | ) |  |  | (49,284 | ) |
Other income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment income, net |  |  | 490 |  |  |  | 681 |  |  |  | 995 |  |  |  | 1,460 |  |
Interest expense (including amounts to related parties) |  |  | (106 | ) |  |  | (154 | ) |  |  | (139 | ) |  |  | (191 | ) |
Other income (expense), net (including amounts to related parties) |  |  | 39 |  |  |  | (283 | ) |  |  | 208 |  |  |  | (174 | ) |
Total other income |  |  | 423 |  |  |  | 244 |  |  |  | 1,064 |  |  |  | 1,095 |  |
Loss before income taxes |  |  | (27,855 | ) |  |  | (23,576 | ) |  |  | (55,498 | ) |  |  | (48,189 | ) |
Income tax benefit |  |  | 123 |  |  |  | 124 |  |  |  | 247 |  |  |  | 222 |  |
Net loss |  | $ | (27,732 | ) |  | $ | (23,452 | ) |  | $ | (55,251 | ) |  | $ | (47,967 | ) |
Net loss per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  | $ | (0.35 | ) |  | $ | (0.29 | ) |  | $ | (0.70 | ) |  | $ | (0.60 | ) |
Weighted-average number of shares during the period: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  |  | 79,107,208 |  |  |  | 81,440,816 |  |  |  | 79,071,824 |  |  |  | 79,426,402 |  |

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

NantKwest, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |  |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |  |
Net loss |  | $ | (27,732 | ) |  | $ | (23,452 | ) |  | $ | (55,251 | ) |  | $ | (47,967 | ) |
Other comprehensive income, net of income taxes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized gain (loss) on available-for-sale securities |  |  | 107 |  |  |  | (280 | ) |  |  | (67 | ) |  |  | (236 | ) |
Reclassification of net realized gains on available-for-sale securities included in net loss |  |  | — |  |  |  | (1 | ) |  |  | — |  |  |  | (1 | ) |
Total other comprehensive income (loss) |  |  | 107 |  |  |  | (281 | ) |  |  | (67 | ) |  |  | (237 | ) |
Comprehensive loss |  | $ | (27,625 | ) |  | $ | (23,733 | ) |  | $ | (55,318 | ) |  | $ | (48,204 | ) |

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

NantKwest, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands, except for share amounts)

(Unaudited)

|  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  | Other |  |  |  |  |  |  |  |  |
|  | Common |  |  | Paid-in |  |  | Comprehensive |  |  | Accumulated |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Income (Loss) |  |  | Deficit |  |  | Total |
Balance at December 31, 2017 |  |  | 79,021,878 |  |  | $ | 8 |  |  | $ | 717,930 |  |  | $ | (381 | ) |  | $ | (498,713 | ) |  | $ | 218,844 |
Stock-based compensation expense |  |  | — |  |  |  | — |  |  |  | 18,007 |  |  |  | — |  |  |  | — |  |  |  | 18,007 |
Vesting of restricted stock units |  |  | 154,123 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Exercise of warrants |  |  | 21,675 |  |  |  | — |  |  |  | 35 |  |  |  | — |  |  |  | — |  |  |  | 35 |
Employee payroll taxes withheld related to vesting of restricted stock units |  |  | (31,857 | ) |  |  | — |  |  |  | (123 | ) |  |  | — |  |  |  | — |  |  |  | (123 | )
Cumulative effect of the adoption of the new revenue standard |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 186 |  |  |  | 186 |
Other comprehensive loss, net |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (67 | ) |  |  | — |  |  |  | (67 | )
Net loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (55,251 | ) |  |  | (55,251 | )
Balance at June 30, 2018 |  |  | 79,165,819 |  |  | $ | 8 |  |  | $ | 735,849 |  |  | $ | (448 | ) |  | $ | (553,778 | ) |  | $ | 181,631 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

NantKwest, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

|  | Six Months Ended June 30, |
|  | 2018 |  |  | 2017 |
Operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (55,251 | ) |  | $ | (47,967 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 3,992 |  |  |  | 2,536 |
Stock-based compensation expense |  |  | 18,007 |  |  |  | 19,399 |
Deferred income tax benefit |  |  | (248 | ) |  |  | (217 | )
Loss on disposal of assets |  |  | 90 |  |  |  | — |
Non-cash interest items, net |  |  | 91 |  |  |  | 470 |
Amortization of net premiums on marketable debt securities |  |  | 343 |  |  |  | 940 |
Loss on sales of marketable debt securities |  |  | — |  |  | 1 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Prepaid expenses and other current assets |  |  | (544 | ) |  |  | (1,306 | )
Other assets |  |  | 12 |  |  |  | 452 |
Accounts payable |  |  | 1,875 |  |  |  | (1,067 | )
Accrued expenses and other liabilities |  |  | 603 |  |  |  | (1,104 | )
Due to related parties |  |  | (508 | ) |  |  | 1,429 |
Deferred rent and revenue |  |  | (239 | ) |  |  | 1,427 |
Net cash used in operating activities |  |  | (31,777 | ) |  |  | (25,007 | )
Investing activities: |  |  |  |  |  |  |  |
Purchases of property, plant and equipment |  |  | (7,394 | ) |  |  | (12,665 | )
Purchase of equity investment |  |  | — |  |  |  | (8,500 | )
Purchase of debt securities, held-to-maturity |  |  | (361 | ) |  |  | — |
Purchases of marketable debt securities, available-for-sale |  |  | (53,503 | ) |  |  | (46,518 | )
Sales/maturities of marketable debt securities |  |  | 85,571 |  |  |  | 140,540 |
Net cash provided by investing activities |  |  | 24,313 |  |  |  | 72,857 |
Financing activities: |  |  |  |  |  |  |  |
Principal payments of financing/capital lease obligations |  |  | (198 | ) |  |  | (4,920 | )
Proceeds from exercise of stock options and warrants |  |  | 35 |  |  |  | 1,191 |
Repurchase of common stock with commissions |  |  | — |  |  |  | (12,456 | )
Net share settlement for RSU vesting and option exercises |  |  | (123 | ) |  |  | (709 | )
Net cash used in financing activities |  |  | (286 | ) |  |  | (16,894 | )
Net increase (decrease) in cash, cash equivalents, and restricted cash |  |  | (7,750 | ) |  |  | 30,956 |
Cash, cash equivalents and restricted cash, beginning of period |  |  | 24,051 |  |  |  | 8,262 |
Cash, cash equivalents, and restricted cash, end of period |  | $ | 16,301 |  |  | $ | 39,218 |
Reconciliation of cash, cash equivalents, and restricted cash at end of period: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 16,122 |  |  | $ | 39,039 |
Restricted cash included in other assets |  |  | 179 |  |  |  | 179 |
Cash, cash equivalents, and restricted cash at end of period |  | $ | 16,301 |  |  | $ | 39,218 |
Supplemental disclosure of cash flow information: |  |  |  |  |  |  |  |
Cash paid during the period for: |  |  |  |  |  |  |  |
Interest |  | $ | 179 |  |  | $ | 238 |
Income taxes |  | $ | 4 |  |  | $ | 3 |
Supplemental disclosure of non-cash investing and financing activities: |  |  |  |  |  |  |  |
Property and equipment purchases acquired under capital lease expenses |  | $ | — |  |  | $ | 19,448 |
Property and equipment purchases included in accounts payable, accrued expenses, and other liabilities |  | $ | 6,704 |  |  | $ | 13,402 |
Unrealized gain (loss) on marketable debt securities |  | $ | (67 | ) |  | $ | 74 |
Cashless exercise of warrants |  | $ | 1 |  |  | $ | 16 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

NantKwest, Inc.

Notes to Condensed Consolidated Financial Statements

1. Description of Business

Organization

NantKwest, Inc. (the Company) 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. The Company is 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.

The Company is focused on harnessing the power of the innate immune system by using the natural killer cell to treat cancer, infectious diseases, and inflammatory diseases. A critical aspect of the Company’s strategy is to invest significantly in expanding the activated natural killer (aNK) platform and the development of the Company’s product candidates.

The Company holds the exclusive right to commercialize aNK cells, a commercially viable natural killer cell-line, and a variety of genetically modified derivatives capable of killing cancer and virally infected cells. The Company owns corresponding U.S. and foreign composition and methods-of-use patents and applications covering the clinical use of aNK cells as a therapeutic to treat a spectrum of clinical conditions.

The Company also licensed exclusive commercial rights to a portfolio of CD16 bearing aNK cells along with the corresponding U.S. and foreign composition and methods-of-use patents and applications covering the non-clinical use in laboratory testing of monoclonal antibodies, as well as clinical use as a therapeutic to treat cancers in combination with antibody products. The Company has licensed or sub-licensed its CD16 bearing aNK cell lines and intellectual property to numerous pharmaceutical and biotechnology companies for such non-clinical uses. The Company also licensed exclusive commercial rights to a unique HER2-specific receptor bearing aNK cell line along with the corresponding U.S. and foreign composition and methods-of-use patents and applications covering clinical use as a therapeutic to treat cancers.

The Company retains exclusive worldwide rights to clinical and research data, intellectual property, and know-how developed with the Company’s aNK cells, as well as the only clinical grade master cell bank.

Liquidity

As of June 30, 2018, the Company had an accumulated deficit of approximately $553.8 million. The Company also had negative cash flow from operations of approximately $31.8 million during the six months ended June 30, 2018. The Company expects that it will likely need additional capital to further fund development of, and seek regulatory approvals for, its product candidates, and begin to commercialize any approved products. The Company is currently focused primarily on the development of immunotherapeutic treatments for cancers and debilitating viral infections using targeted cancer killing cell lines, and believes 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 the Company’s product candidates, if approved, fail to achieve market acceptance, the Company may never become profitable. Even if the Company achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. The Company intends to cover its 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 the Company when needed and, if available, financing may not be obtained on terms favorable to the Company or its stockholders.

While the Company expects its existing cash and cash equivalents and marketable debt securities will enable it to fund operations and capital expenditure requirements for at least the next twelve months, it may not have sufficient funds to reach commercialization. Failure to obtain adequate financing when needed may require the Company to delay, reduce, limit, or terminate some or all of its development programs or future commercialization efforts or grant rights to develop and market product candidates that the Company might otherwise prefer to develop and market itself, which could adversely affect the Company’s ability to operate as a going concern. If the Company raises additional funds from the issuance of equity securities, substantial dilution to existing stockholders may result. If the Company raises 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 the Company’s ability to operate its business.

2. Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies other than the adoption of accounting pronouncements below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

6

Basis of Presentation

The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results for the interim periods presented and have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended December 31, 2017.

The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position, and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K. Interim operating results are not necessarily indicative of operating results for the full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to stock-based compensation, the valuation allowance for deferred tax assets, preclinical and clinical trial accruals, impairment assessments, and the valuation of build-to-suit lease assets. The Company bases its estimates on historical experience and on various other market-specific and relevant assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Principles of Consolidation and Equity Investments

The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Inex Bio, Inc. and 557 Doug St, LLC, and have been prepared in accordance with GAAP. All intercompany amounts have been eliminated.

The Company applies the variable interest model under Accounting Standards Codification (ASC) Topic 810, Consolidation, to any entity in which the Company holds an equity investment in or to which the Company has 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 (VIE), the Company considers whether it must consolidate the VIE or provide additional disclosures regarding the Company's involvement with the VIE. If the Company determines that it is the primary beneficiary of the VIE, the Company will consolidate the VIE. This analysis is performed at the initial investment in the entity or upon any reconsideration event.

For entities the Company holds an equity investment in and are not consolidated under the VIE Model, the Company considers whether its 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 the Company is able to exercise significant influence, but not control, are accounted for using the equity method. The Company’s 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 the Company is not able to exercise significant influence will be subsequently measured at fair value with unrealized holding gains and losses included in other income, net on the consolidated statements of operations. In the instance the equity investment does not have a readily determinable fair value, the Company will apply the practicability exception and estimate the fair value at its cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

7

The Company owns non-marketable equity securities that are accounted for as an equity investment at cost minus impairment and plus or minus changes resu lting from observable price changes because the preferred stock held by the Company is not considered in-substance common stock and such preferred stock does not have a readily determinable fair value. All investments are reviewed on a regular basis for po ssible impairment. If an investment's fair value is determined to be less than its net carrying value, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an impairment indicator is present include: the investees’ earning performance and clinical trial performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost of the investment, issues that raise concerns about the investee's ability to continue as a going concern, and any other information that the Company may be aware of related to the investment. Factors considered in determining whet her an observable price change has occurred include: the price at which the investee issues equity instruments similar to those of the Company’s investment and the rights and preferences of those equity instruments compared to the Company’s.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash and cash equivalents and marketable debt securities.

The Company’s cash and cash equivalents are with one major financial institution in the United States and one in Korea.

Drug candidates developed by the Company will require approvals or clearances from the U.S. Food and Drug Administration (“FDA”) or international regulatory agencies prior to commercial sales. There can be no assurance that the Company’s drug candidates will receive any of the required approvals or clearances. If the Company were to be denied approval or clearance or any such approval or clearance were to be delayed, it would have a material adverse impact on the Company.

Basic and Diluted Net Loss per Share of Common Stock

Basic net loss per share is calculated by dividing 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 June 30, |  |
|  | 2018 |  |  | 2017 |
Outstanding options |  |  | 5,693,250 |  |  |  | 5,693,250 |  |
Outstanding restricted stock units |  |  | 890,512 |  |  |  | 979,825 |  |
Outstanding warrants |  |  | 17,699,413 |  |  |  | 17,735,527 |  |
Total |  |  | 24,283,175 |  |  |  | 24,408,602 |  |

Amounts in the table above reflect the common stock equivalents of the noted instruments.

Recently Adopted Accounting Policies

Financial Assets and Financial Liabilities

Effective January 1, 2018, the Company adopted Accounting Standard Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, associated with the recognition and measurement of financial assets and liabilities. During the first quarter of 2018, the Financial Accounting Standards Board (FASB) issued further clarifications with the issuance of ASU 2018-03, effective for fiscal years beginning after December 15, 2017 and interim periods beginning after June 15, 2018, and ASU 2018-04, effective upon issuance. The Company has early adopted ASU 2018-03 and adopted ASU 2018-04 effective January 1, 2018 concurrently with ASU 2016-01. ASU 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. Effective January 1, 2018, the Company elected to record its preferred stock equity investment in Viracta Therapeutics, Inc., which does not have a readily determinable fair value, using the alternative method. Adoption of the updates did not have a material effect on the Company’s accounting for equity investments, fair value disclosures, and other disclosure requirements.

8

Revenue Recognition

Beginning January 1, 2018, the Company follows the provisions of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized. The Company has applied the guidance to all contracts as of the date of initial application. The Intrexon, Brink, and Coneksis Agreements are contracts with customers that are within the scope of ASC Topic 606.

The Company derives substantially all of its revenue from non-exclusive license agreements with a limited number of pharmaceutical and biotechnology companies granting them the right to use the Company’s 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 Company’s licensee’s products developed or manufactured using the Company’s 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 Topic 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 affects the license. The Company concluded that these promises represent one performance obligation due to the highly interrelated nature of the promises. The Company provides 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.

The Company’s license agreement with Intrexon included a nonrefundable upfront payment of $0.4 million, received when the Company entered into the contract in 2010. In this instance, the Company determined that under ASC 606 it would be appropriate to recognize the initial milestone payment at a point in time, when it 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, the Company adjusted its opening retained deficit for the effects of recognizing revenue upfront for the initial milestone. The adjustment to opening retained deficit upon adoption was not material.

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 the Company uses the most likely amount method to estimate this variable consideration. Given the high degree of uncertainly around achievement of these milestones, the Company does not recognize revenue from these milestone payments until the uncertainty associated with these payments is resolved. The Company currently estimates variable consideration related to milestone payments to be zero and, as such, no revenue has been recognized for milestone payments. The Company will recognize revenue from sales-based royalty payments when or as the sales occur. On a quarterly basis, the Company will re-evaluate its estimate of milestone variable consideration to determine whether any amount should be included in the transaction price and recorded in revenue prospectively.

Upon adoption, the Company changed its 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.

The Company’s revenue from non-clinical license agreements is nominal. In the future, the Company may generate revenue from license agreements entered into for therapeutic uses. To date, the Company has not generated any revenue from product sales. If the Company fails to complete the development of its product candidates in a timely manner or fails to obtain regulatory approval for them, the Company may never be able to generate substantial future revenue.

Statement of Cash Flows

Effective January 1, 2018, the Company adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. Also, effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB’s Emerging Issues Task Force. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities are also required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. Prior periods were retrospectively adjusted to conform to the current period’s presentation. There was no material impact on the Company’s statement of cash flows on adoption of either Update.

9

Recently Issued Accounting Pronouncements – Not Yet Adopted

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The existing guidance on nonemployee share-based payments is significantly different from current guidance for employee share-based payments. This ASU expands the scope of the employee share-based payments guidance to include share-based payments issued to nonemployees, including measuring equity awards to nonemployees at grant-date fair value, aligning the accounting for share-based awards with performance conditions, and eliminating the requirement to reassess the classification of nonemployee share-based awards upon vesting. ASU 2018-07 will be effective for the Company beginning January 1, 2019, with early adoption permitted. Adoption of ASU 2018-07 is not expected to have a significant impact on the Company’s consolidated financial statements and disclosures.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This new standard provides financial statement preparers with an option to reclassify stranded tax effects within Accumulated Other Comprehensive Income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. ASU 2018-02 will be effective for the Company beginning January 1, 2019, with early adoption permitted. Adoption of ASU 2018-02 is not expected to have a significant impact in the Company’s consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This new guidance is intended to present credit losses on available for sale debt securities as an allowance rather than as a write-down. ASU 2016-13 will be effective for the Company beginning January 1, 2020, with early adoption permitted beginning in 2019. Adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for operating leases with lease terms greater than twelve months in the balance sheet. The update also requires improved disclosures to help users of financial statements better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016‑02 will be effective for the Company beginning January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and disclosures. The adoption is expected to result in a significant increase in the total assets and liabilities reported in the Company’s consolidated balance sheet.

3. Financial Statement Details

Prepaid Expenses and Other Current Assets

As of June 30, 2018 and December 31, 2017, prepaid expenses and other current assets consisted of (in thousands):

|  | June 30, 2018 |  |  | December 31, 2017 |
|  | (Unaudited) |  |  |  |  |
Insurance claim receivable |  | $ | 1,932 |  |  | $ | 340 |
Interest receivable - marketable debt securities |  |  | 674 |  |  |  | 764 |
Prepaid license fees |  |  | 598 |  |  |  | 597 |
Prepaid services |  |  | 460 |  |  |  | 416 |
Prepaid rent |  |  | 375 |  |  |  | 373 |
Prepaid supplies |  |  | 309 |  |  |  | 210 |
Prepaid insurance |  |  | 123 |  |  |  | 572 |
Equipment deposits |  | — |  |  |  | 482 |
Other |  |  | 263 |  |  |  | 398 |
|  | $ | 4,734 |  |  | $ | 4,152 |

10

Property, Plant and Equipment, Net

As of June 30, 2018 and December 31, 2017, property, plant and equipment, net consisted of (in thousands):

|  | June 30, 2018 |  |  | December 31, 2017 |
|  | (Unaudited) |  |  |  |  |
Construction in progress |  | $ | 700 |  |  | $ | 42,281 |
Buildings |  |  | 59,356 |  |  |  | 23,811 |
Equipment |  |  | 19,619 |  |  |  | 9,625 |
Leasehold improvements |  |  | 4,019 |  |  |  | 3,918 |
Software |  |  | 1,224 |  |  |  | 1,092 |
Furniture & fixtures |  |  | 479 |  |  |  | 302 |
|  |  | 85,397 |  |  |  | 81,029 |
Accumulated depreciation |  |  | (7,186 | ) |  |  | (4,303 | )
|  | $ | 78,211 |  |  | $ | 76,726 |

Depreciation expense related to property, plant and equipment was $1.8 million and $0.8 million for the three months ended June 30, 2018 and 2017, respectively, and $2.9 million and $1.4 million for the six months ended June 30, 2018 and 2017, respectively.

Buildings of $59.4 million include buildings under build-to-suit leases of $39.9 million and $19.5 million related to the Company’s purchased warehouse and distribution facility. Building value under build-to-suit leases represents the estimated fair market value of the buildings and capitalized construction costs where the Company is the “deemed owner” of the assets, for accounting purposes only. See Note 8 – Financing Lease Obligation for further discussion on the Company’s build-to-suit leases.

Intangible Assets, Net

As of June 30, 2018 and December 31, 2017, intangible assets consisted of (in thousands):

|  | June 30, 2018 |  |  | December 31, 2017 |
|  | (Unaudited) |  |  |  |  |
Technology license |  | $ | 9,042 |  |  | $ | 9,042 |
Less accumulated amortization |  |  | (7,347 | ) |  |  | (6,216 | )
|  | $ | 1,695 |  |  | $ | 2,826 |

Amortization expense related to intangible assets was $0.6 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively, and $1.1 million and $1.1 million for the six months ended June 30, 2018 and 2017, respectively. Amortization for the Company’s technology license is included in research and development expense on the condensed consolidated statements of operations.

Other Assets

As of June 30, 2018 and December 31, 2017, other assets consisted of (in thousands):

|  | June 30, 2018 |  |  | December 31, 2017 |
|  | (Unaudited) |  |  |  |  |
Restricted cash |  | $ | 179 |  |  | $ | 179 |
Security deposits |  |  | 113 |  |  |  | 127 |
Other |  |  | 62 |  |  |  | 24 |
|  | $ | 354 |  |  | $ | 330 |

Restricted cash is a certificate of deposit that is collateral for the letter of credit required as a security deposit for the Company’s San Diego, California, facility by the Company’s landlord.

11

Accrued Expenses

As of June 30, 2018 and December 31, 2017, accrued expenses consisted of (in thousands):

|  | June 30, 2018 |  |  | December 31, 2017 |
|  | (Unaudited) |  |  |  |  |
Accrued construction costs |  | $ | 5,214 |  |  | $ | 6,212 |
Accrued bonus |  |  | 1,600 |  |  |  | 1,930 |
Accrued professional and service fees |  |  | 1,387 |  |  |  | 1,048 |
Accrued preclinical and clinical trial costs |  |  | 1,264 |  |  |  | 521 |
Accrued compensation |  |  | 1,021 |  |  |  | 944 |
Accrued laboratory equipment and supplies |  |  | 839 |  |  |  | — |
Other |  |  | 192 |  |  |  | 612 |
|  | $ | 11,517 |  |  | $ | 11,267 |

Other Current Liabilities

As of June 30, 2018 and December 31, 2017, other current liabilities were made up of (in thousands):

|  | June 30, 2018 |  |  | December 31, 2017 |
|  | (Unaudited) |  |  |  |  |
Financing obligation - current portion |  | $ | 585 |  |  | $ | 284 |
Deferred rent - current portion |  |  | 558 |  |  |  | 520 |
Build-to-suit lease liability - current portion |  | — |  |  |  | 334 |
Other |  |  | 224 |  |  |  | 235 |
|  | $ | 1,367 |  |  | $ | 1,373 |

Investment Income, Net

Net investment income includes interest income from all bank accounts as well as marketable debt securities, net realized gains or losses on sales of investments, and the amortization of the premiums and discounts of the investments and is as follows for the three and six months ended June 30, 2018 and 2017 (in thousands):

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |  |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |  |
|  | (Unaudited) |  |  | (Unaudited) |  |
Interest income |  | $ | 632 |  |  | $ | 1,049 |  |  | $ | 1,336 |  |  | $ | 2,403 |  |
Investment amortization accretion expense, net |  |  | (142 | ) |  |  | (367 | ) |  |  | (343 | ) |  |  | (939 | ) |
Net realized gains (losses) on investments |  | — |  |  |  | (1 | ) |  |  | 2 |  |  |  | (4 | ) |
|  | $ | 490 |  |  | $ | 681 |  |  | $ | 995 |  |  | $ | 1,460 |  |

Interest income includes interest from the Company’s bank deposits. The Company did not recognize an impairment loss on any investments for the three and six months ended June 30, 2018 and 2017.

4. Equity Investment

In March 2017, the Company participated in a Series B convertible preferred stock financing and invested $8.5 million in Viracta Therapeutics, Inc. (Viracta), a clinical stage drug development company. The Company did not exercise its option to purchase up to an additional $8.5 million worth of shares of the Series B convertible preferred stock by the expiration date of September 30, 2017. In May 2017, the Company executed an exclusive worldwide license with Viracta to develop and commercialize Viracta’s proprietary histone deacetylase inhibitor drug candidate for use in combination with NK cell therapy and possibly additional therapies.

Based on the level of equity investment at risk, Viracta is not a Variable Interest Entity (VIE) and therefore is not consolidated under the VIE Model. Also, the Company does not hold a controlling financial interest in Viracta and therefore is not consolidating 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, the Company has elected to apply the practicability exception noted under ASC 825 and estimates the fair value at its $8.5 million cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

12

As of June 30, 2018, the Company’s qualitative impairment assessment did not indicate there were events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment. The Company has not recorded any impairments as of June 30, 2018 or on a cumulative basis. Further, the Company has not identified any downward or upward adjustments due to observable price changes in the investment as of June 30, 2018 or on a cumulative basis. The $8.5 milli on cost of the investment is recorded in equity investment on the condensed consolidated balance sheet as of June 30, 2018.

In addition, in June 2018, Viracta executed a 2018 Note and Warrant Purchase Agreement with existing and new investors, including the Company. The initial closing under the Purchase Agreement occurred in June 2018, at which point the Company purchased a convertible note, for $0.4 million, which under certain circumstances is convertible into Series B Preferred Stock, and a warrant to purchase Viracta’s common shares. The convertible note accrues interest at 8% and has a one year maturity date. The Company classified the convertible note as a held-to-maturity marketable security on the condensed consolidated balance sheets.

5. Cash Equivalents and Marketable Debt Securities

As of June 30, 2018, all of the Company’s marketable debt securities are classified as available-for-sale or held-to-maturity and are scheduled to mature within 3.2 years. At June 30, 2018, the detail of the Company’s cash equivalents and marketable debt securities is as follows (in thousands):

|  | June 30, 2018 |
|  | (unaudited) |
|  | Amortized Cost |  |  | Unrealized Gains |  |  | Unrealized Losses |  |  | Fair Value |
Current: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities |  | $ | 74,516 |  |  | $ | — |  |  | $ | (154 | ) |  | $ | 74,362 |
Government sponsored securities |  |  | 5,991 |  |  |  | 1 |  |  |  | (3 | ) |  |  | 5,989 |
Foreign government bonds |  |  | 2,997 |  |  |  | — |  |  |  | — |  |  |  | 2,997 |
Commercial paper |  |  | 5,473 |  |  |  | 1 |  |  |  | — |  |  |  | 5,474 |
Total available-for-sale |  |  | 88,977 |  |  |  | 2 |  |  |  | (157 | ) |  |  | 88,822 |
Held-to-maturity, note receivable |  |  | 361 |  |  |  | — |  |  |  | — |  |  |  | 361 |
Current portion |  |  | 89,338 |  |  |  | 2 |  |  |  | (157 | ) |  |  | 89,183 |
Noncurrent: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities |  |  | 10,114 |  |  |  | — |  |  |  | (228 | ) |  |  | 9,886 |
Government sponsored securities |  |  | 2,758 |  |  |  | — |  |  |  | (64 | ) |  |  | 2,694 |
Noncurrent portion |  |  | 12,872 |  |  |  | - |  |  |  | (292 | ) |  |  | 12,580 |
Total |  | $ | 102,210 |  |  | $ | 2 |  |  | $ | (449 | ) |  | $ | 101,763 |

At December 31, 2017, the detail of the Company’s cash equivalents and marketable debt securities is as follows (in thousands):

|  | December 31, 2017 |
|  | Amortized Cost |  |  | Unrealized Gains |  |  | Unrealized Losses |  |  | Fair Value |
Current: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities |  | $ | 82,188 |  |  | $ | 5 |  |  | $ | (84 | ) |  | $ | 82,109 |
Government sponsored securities |  |  | 19,261 |  |  |  | — |  |  |  | (28 | ) |  |  | 19,233 |
Foreign government bonds |  |  | 6,441 |  |  |  | — |  |  |  | (5 | ) |  |  | 6,436 |
Current portion |  |  | 107,890 |  |  |  | 5 |  |  |  | (117 | ) |  |  | 107,778 |
Noncurrent: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities |  |  | 27,109 |  |  |  | — |  |  |  | (226 | ) |  |  | 26,883 |
Government sponsored securities |  |  | 2,760 |  |  |  | — |  |  |  | (43 | ) |  |  | 2,717 |
Noncurrent portion |  |  | 29,869 |  |  |  | — |  |  |  | (269 | ) |  |  | 29,600 |
Total |  | $ | 137,759 |  |  | $ | 5 |  |  | $ | (386 | ) |  | $ | 137,378 |

Included in foreign government bonds is $3.5 million of cash equivalents at December 31, 2017.

13

Available-for-sale investments that had been in an unrealized loss p osition for more and less than 12 months at June 30, 2018 and December 31, 2017 are as follows (in thousands):

|  | June 30, 2018 |
|  | (unaudited) |
|  | Less than 12 months |  |  | More than 12 months |
|  | Estimated Fair Value |  |  | Gross Unrealized Losses |  |  | Estimated Fair Value |  |  | Gross Unrealized Losses |
Corporate debt securities |  | $ | 62,011 |  |  | $ | (213 | ) |  | $ | 17,733 |  |  | $ | (169 | )
Government sponsored securities |  |  | 2,694 |  |  |  | (64 | ) |  |  | 2,000 |  |  |  | (3 | )
Foreign government bonds |  |  | 2,997 |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 67,702 |  |  | $ | (277 | ) |  | $ | 19,733 |  |  | $ | (172 | )

|  | December 31, 2017 |
|  | Less than 12 months |  |  | More than 12 months |
|  | Estimated Fair Value |  |  | Gross Unrealized Losses |  |  | Estimated Fair Value |  |  | Gross Unrealized Losses |
Corporate debt securities |  | $ | 67,522 |  |  | $ | (104 | ) |  | $ | 35,918 |  |  | $ | (206 | )
Government sponsored securities |  |  | 9,744 |  |  |  | (20 | ) |  |  | 12,205 |  |  |  | (51 | )
Foreign government bonds |  |  | 1,542 |  |  |  | — |  |  |  | 1,396 |  |  |  | (5 | )
Total |  | $ | 78,808 |  |  | $ | (124 | ) |  | $ | 49,519 |  |  | $ | (262 | )

The Company evaluated its securities for other-than-temporary impairment and concluded that the decline in value was primarily caused by current economic and market conditions. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. Therefore, the Company did not have any other-than-temporary impairment loss during the six months ended June 30, 2018. At June 30, 2018, 48 of the securities and bonds are in an unrealized loss position.

The Company recorded realized gains and losses on sales or maturities of available-for-sale securities as follows (in thousands):

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |  |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |  |
|  | (Unaudited) |  |  | (Unaudited) |  |
Gross realized gains |  | $ | — |  |  | $ | — |  |  | $ | 2 |  |  | $ | 2 |  |
Gross realized losses |  |  | — |  |  |  | (1 | ) |  |  | — |  |  |  | (6 | ) |
Net realized gains |  | $ | — |  |  | $ | (1 | ) |  | $ | 2 |  |  | $ | (4 | ) |

6. 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.

Recurring Valuations

In accordance with the authoritative guidance for financial assets and liabilities measured at fair value on a recurring basis (ASC Topic 820), the Company prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions as follows:

| • | Level 1—Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

| • | Level 2—Observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

| • | Level 3—Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation.

14

The following tables present the Company’s hierarchy for its assets measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 (in thousands):

|  | Fair Value Measurements at June 30, 2018 |
|  | (unaudited) |
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 16,122 |  |  | $ | 16,122 |  |  | $ | — |  |  | $ | — |
Corporate debt securities |  |  | 74,362 |  |  |  | — |  |  |  | 74,362 |  |  |  | — |
Government sponsored securities |  |  | 5,989 |  |  |  | — |  |  |  | 5,989 |  |  |  | — |
Foreign government bonds |  |  | 2,997 |  |  |  | — |  |  |  | 2,997 |  |  |  | — |
Commercial paper |  |  | 5,474 |  |  |  | — |  |  |  | 5,474 |  |  |  | — |
Noncurrent: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities |  |  | 9,886 |  |  |  | — |  |  |  | 9,886 |  |  |  | — |
Government sponsored securities |  |  | 2,694 |  |  |  | — |  |  |  | 2,694 |  |  |  | — |
Total assets measured at fair value |  | $ | 117,524 |  |  | $ | 16,122 |  |  | $ | 101,402 |  |  | $ | — |

|  | Fair Value Measurements at December 31, 2017 |
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 23,872 |  |  | $ | 20,374 |  |  | $ | 3,498 |  |  | $ | — |
Corporate debt securities |  |  | 82,109 |  |  |  | — |  |  |  | 82,109 |  |  |  | — |
Government sponsored securities |  |  | 19,233 |  |  |  | — |  |  |  | 19,233 |  |  |  | — |
Foreign government bonds |  |  | 2,938 |  |  |  | — |  |  |  | 2,938 |  |  |  | — |
Noncurrent: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities |  |  | 26,883 |  |  |  | — |  |  |  | 26,883 |  |  |  | — |
Government sponsored securities |  |  | 2,717 |  |  |  | — |  |  |  | 2,717 |  |  |  |  |
Total assets measured at fair value |  | $ | 157,752 |  |  | $ | 20,374 |  |  | $ | 137,378 |  |  | $ | — |

Non-recurring Valuation

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 three months ended June 30, 2018.

7. Collaboration and License Agreements

Collaborative Arrangement

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. There were no new collaborative agreements during the three months ended June 30, 2018 .

15

License Agreement

Chemotherapeutisches Forschungsinstitut Georg-Speyer-Haus (GSH) and DRK-Blutspendedienst Baden-Wurttenberg-Hessen gGmbH (BSD) License Agreement

In August 2015, the Company entered into a license agreement with GSH and BSD under which the Company was granted an exclusive license to certain GSH-BSD patents, materials, and know-how that specifically targets ErbB2 expressing cancers. In addition, GSH granted the Company an exclusive license to certain GSH only technology and materials. In consideration for the licenses, the Company agreed to pay initial and annual licensing fees, regulatory and commercial milestones, and low single-digit percentage royalties on net sales of licensed products. The royalty term shall continue in a particular country until the later of (i) the expiration of the valid patent claims in such country or (ii) a specified period of time after the first commercial sale of licensed product in such country. The license agreement shall continue until no further payments are due at which time the licenses and rights will continue on a non-exclusive, royalty-free basis. The license agreement can be terminated earlier: (i) for material breach by either party after 60 days cure period, (ii) if the Company declares bankruptcy or insolvency or (iii) by the Company in its sole discretion upon 60 days prior written notice. In January 2018, the Company began expensing the first annual license fee of $0.5 million. The license fee is currently in prepaid expenses and other current assets on the condensed consolidated balance sheet. The Company is amortizing the license over the twelve month period and recorded $0.1 million and $0.2 million of expense in research and development on the condensed consolidated statements of operations for the three and six months ended June 30, 2018.

8. Commitments and Contingencies

Contingencies

The Company records accruals for loss contingencies to the extent that the Company concludes it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company evaluates, 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. Additionally, the Company records receivables from third-party insurers when recovery has been determined to be probable. This includes instances when the Company’s third-party insurers have agreed to reimburse certain legal defense costs incurred with the applicable law firms by the Company.

Appeal of USPTO Decision

In March 2009, the Company received a final rejection in one of the Company’s original patent applications pertaining to certain limited methods of use claims for NK-92 from the U.S. Patent and Trademark Office (the USPTO), but the USPTO allowed claims on all of the other proposed claims, including other methods of use. The Company appealed this decision with the USPTO Board of Appeals and, in the fall of 2013, the Board of Appeals reversed the Examiner’s rejection of the claim to certain limited methods of use with NK-92, but affirmed the Examiner’s rejection of the remaining patent claims. In December 2013, the Company brought an action in the U.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as the Company disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment. On September 24, 2015, the Company filed a notice of appeal to the United States Court of Appeals for the Federal Circuit. In September 2015, the USPTO filed a Motion for Expenses seeking $0.1 million for attorney’s fees and the USPTO’s expert witness fees. In February 2016, the U.S. District Court denied the USPTO’s Motion for Expenses for attorney’s fees and granted Director’s Motion for Expenses for the USPTO’s expert witness fees. The USPTO filed a notice of appeal on April 5, 2016. In May 2017, the Federal Circuit affirmed the U.S. District Court’s summary judgment ruling. The formal mandate was issued on June 26, 2017. In June 2017, the Federal Circuit reversed the U.S. District Court’s fees ruling and remanded the case for the U.S. District Court to enter an award of $0.1 million in favor of the USPTO. On August 31, 2017, a majority of active Federal Circuit judges voted to vacate the June 2017 decision and hear the case en banc sua sponte. On July 27, 2018, the Federal Circuit sitting en banc affirmed the U.S. District Court. The USPTO may seek rehearing or Supreme Court review. Based on the information available at present, the Company cannot reasonably estimate a range of loss for this action beyond the attorney and expert witness fees. The Company is expensing legal costs associated with defending this litigation as the costs are incurred.

16

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 have been consolidated. Plaintiffs assert 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 seek 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. A trial date has been set for August 2019. Management intends to vigorously defend these proceedings. At this time, the Company cannot predict how the Court will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Therefore, based on the information available at present, the Company cannot reasonably estimate a range of loss for this action. Should the Company ultimately be found liable, the liability could have a material adverse effect on the Company’s results of operations for the period or periods in which it is incurred.

On September 6, 2016, a putative shareholder derivative complaint captioned Bushansky v. Soon-Shiong, et al., No. 37-2016-00030867-CU-SL-CTL was filed in California Superior Court, San Diego County also related to the Company’s restatement of certain interim financial statements. The complaint named as defendants the Company’s directors and outside auditor at the time of the IPO. The Company is named solely as a nominal defendant. The complaint alleges the directors breached their fiduciary duties to the Company and wasted corporate assets, and that the outside auditors committed malpractice. The complaint seeks, on behalf of the Company, unspecified damages, the return of directors’ salaries for unspecified periods, and injunctive relief. In April 2017, the court entered a written order of dismissal after granting the Company’s motion to dismiss the California complaint based on a corporate charter provision specifying a Delaware forum. Plaintiffs have appealed. On May 25, 2018, the California court of appeal affirmed the dismissal. On July 3, 2018, plaintiffs filed a petition for review with the California Supreme Court. On July 26, 2018, the Company filed an answer to the petition for review with the California Supreme Court. Should the Company ultimately be found liable, the liability could have a material adverse effect on the Company’s results of operations for the period or periods in which it is incurred.

In October 2017, the first of two putative stockholder derivative complaints was filed in the Delaware Court of Chancery. The Delaware actions have been consolidated as In re NantKwest, Inc. Derivative Litigation, Cons. C.A. No. 2017-0774-VCL. A consolidated complaint was filed asserting that various of the Company's current and former directors and officers breached their fiduciary duties to the Company based on factual allegations similar to those in the Sudunagunta and Bushansky actions. The complaint seeks damages and other relief on behalf of the Company, which is named solely as a nominal defendant. On February 5, 2018, the defendants filed a motion to dismiss the consolidated complaint. On May 18, 2018, the Court granted the motion and dismissed the action. No appeal has been filed, and the deadline for appeal has passed.

Insurance Recoveries

The Company has reflected its right to insurance recoveries, limited to the extent of incurred or probable losses, as a receivable when such recoveries have been agreed to with its third-party insurers and receipt is deemed probable. This includes instances where the Company’s third-party insurers have agreed to reimburse certain legal defense costs incurred with applicable law firms by the Company. The amount of such receivable recorded at June 30, 2018 was $1.9 million and is included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets.

Contractual Obligations - Leases

The Company leases: (i) office space in Cardiff-by-the-Sea, California; (ii) a research facility in Woburn, Massachusetts; (iii) a research facility and office space in San Diego, California; (iv) research and manufacturing space in Culver City, California, from a related party; and (v) a research and manufacturing facility in El Segundo, California, also from a related party. See Note 9 – Related Party Agreements for additional details.

The Company recognizes rent expense under its operating leases on a straight-line basis. Rent expense for the three months ended June 30, 2018 and 2017 was $0.7 million and $0.7 million, respectively, and $1.4 million and $1.4 million for the six months ended June 30, 2018 and 2017, respectively.

17

Financing Lease Obligation – El Segundo

In September 2016, the Company entered into a lease agreement with 605 Doug St, LLC, a related party (Note 9), for approximately 24,250 square feet in El Segundo, California, which has been converted to a research and development laboratory and a current Good Manufacturing Practices (cGMP) manufacturing facility. The lease runs from July 2016 through July 2023. The Company has 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. The Company records the rent payments as (1) a reduction of the financing obligation; (2) imputed interest expense; and (3) rent expense on the imputed cost to lease the underlying land of the facility, which is considered an operating lease. Rent expense for this facility is recorded in research and development expense in the condensed consolidated statements of operations and was $0.1 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively, and was $0.1 million and $0.1 million, for the six months ended June 30, 2018 and 2017, respectively.

The Company was responsible for costs to build out the facility and has incurred costs of approximately $30.4 million. Additionally, in order for the facility to meet the Company's research and development laboratory and cGMP specifications, the Company made certain structural changes to the facility as part of the conversion. As a result of these changes, the Company concluded that it is the “deemed owner” of the building (for accounting purposes only) during the construction period. The Company recorded the build out costs as an asset with a corresponding build-to-suit liability, which was recorded as a component of other current and non-current liabilities in the condensed consolidated balance sheet while the building was under construction.

Upon completion of construction of this building in May 2018, the Company evaluated the derecognition of the asset and liability under the provisions of ASC 840-40, Leases – Sale-Leaseback Transactions. The Company determined that the lease does not meet the criteria for sale-leaseback accounting treatment, due to the continuing involvement in the project resulting from the significant collateral the Company provided to the landlord in the form of building improvements. As a result, the building is being accounted for as a financing obligation. The underlying assets amount to approximately $35.6 million. The Company determined its incremental borrowing rate for the purpose of calculating the interest and principal components of each lease payment. However, as the use of any reasonable incremental borrowing rate resulted in a built-in-loss at the end of the lease (i.e., net book value exceeding the financing obligation), depreciation is being accelerated to eliminate such result. At the conclusion of the lease term, the Company will derecognize both the remaining net book values of the assets and financing obligation.

Financing Lease Obligation – Culver City

In November 2015, the Company entered into a facility license agreement with NantWorks LLC (NantWorks) (Note 9) 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 license was effective in May 2015 and extends through December 2020. The Company has the option to extend the license through December 2023. The monthly license fee is $47,000, with annual increases of 3% beginning in January 2017. The Company records the rent payments as (1) a reduction of the financing obligation; (2) imputed interest expense; and (3) rent expense on the imputed cost to lease the underlying land of the facility, which is considered an operating lease. Rent expense for this facility is recorded in research and development expense in the consolidated statements of operations and was $47,000 and $47,000 for the three months ended June 30, 2018 and 2017, respectively, and was $0.1 million and $0.1 million, for the six months ended June 30, 2018 and 2017, respectively.

Under the facility license agreement, the Company was responsible for costs to build out the laboratory and manufacturing facility space and incurred costs of approximately $3.5 million. The Company concluded that it was the “deemed owner” of the building (for accounting purposes only) during the construction period. The Company recorded the build out costs as an asset with a corresponding build-to-suit liability, which was recorded as a component of other current and non-current liabilities in the condensed consolidated balance sheet while the building was under construction.

Upon completion of construction of this building in August 2016, the Company evaluated the derecognition of the asset and liability under the provisions of ASC 840-40, Leases – Sale-Leaseback Transactions. The Company determined that the lease does not meet the criteria for sale-leaseback accounting treatment, due to the continuing involvement in the project resulting from the significant collateral the Company provided to the landlord in the form of building improvements. As a result, the building is being accounted for as a financing obligation. The underlying assets amount to approximately $4.3 million. The Company determined its incremental borrowing rate for the purpose of calculating the interest and principal components of each lease payment. However, as the use of any reasonable incremental borrowing rate resulted in a built-in-loss at the end of the lease (i.e., net book value exceeding the financing obligation), depreciation is being accelerated to eliminate such result. At the conclusion of the lease term, the Company will derecognize both the remaining net book values of the assets and financing obligation.

Commitments

The Company did not enter into any significant contracts during the six months ended June 30, 2018 other than those disclosed in this document.

18

9. Related Party Agreements

The Company’s Chairman and CEO founded and has a controlling interest in NantWorks, which is a collection of multiple companies in the healthcare and technology space. As described below, the Company has entered into arrangements with NantWorks and certain affiliates of NantWorks to facilitate the development of new genetically modified NK cells for the Company’s product pipeline.

Liquid Genomics, Inc.

In March 2018, the Company entered into an agreement with Liquid Genomics, Inc. (Liquid Genomics) to obtain blood-based tumor profiling services. Liquid Genomics is a related party of the Company as it is a wholly owned subsidiary of NantHealth, Inc., a majority owned subsidiary of NantWorks. The Company is obligated to pay Liquid Genomics 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 three and six months ended June 30, 2018, $0.1 million has been recognized in research and development expense on the condensed consolidated statements of operations. As of June 30, 2018, the Company owes Liquid Genomics $0.1 million, which is included in due to related parties on the condensed consolidated balance sheets.

John Lee, M.D. and Leonard Sender, M.D., Inc., a professional medical corporation, dba Chan Soon-Shiong Institutes for Medicine (CSSIM)

In 2017 and 2018, the Company entered into multiple agreements with John Lee, M.D. and Leonard Sender, M.D., Inc., a professional medical corporation, dba Chan Soon-Shiong Institutes for Medicine (CSSIM), in El Segundo, California, to conduct various clinical trials. CSSIM is a related party as it is owned by two officers of the Company and NantWorks provides administrative services to CSSIM. One of the Company’s officers is an investigator for the trials on behalf of CSSIM. During the three and six months ended June 30, 2018, $0.7 million and $1.4 million, respectively, has been recognized in research and development expense on the condensed consolidated statements of operations. As of June 30, 2018, the Company owes CSSIM $0.7 million, which is included in due to related parties on the condensed consolidated balance sheet.

Tensorcom, Inc.

In April 2017, the Company entered into a sublease agreement with Tensorcom, Inc. (Tensorcom) for a portion of its San Diego, California, research and development laboratory and office space, with a lease from May 1, 2017 through its expiration in April 30, 2018. The Company’s Chairman and CEO indirectly owns all of the outstanding equity of Tensorcom. Rent income from this sublease is recorded in other income on the condensed consolidated statements of operations and was $32,000 and $15,000 for the three months ended June 30, 2018 and 2017, respectively, and was $0.1 million and $15,000, for the six months ended June 30, 2018 and 2017, respectively. At June 30, 2018, the Company owed Tensorcom $33,000, which is included in due to related parties on the condensed consolidated balance sheet.

VivaBioCell S.p.A.

In February 2017, the Company entered into a research grant agreement with VivaBioCell S.p.A. (VBC), a subsidiary of NantCell, Inc. NantCell is an affiliate of NantWorks. Pursuant to this research grant agreement, VBC conducted research and development activities related to the Company’s NK cell lines using VBC’s proprietary technology. The Company paid $0.6 million to VBC, which was recorded in prepaid expenses and other current assets on the condensed consolidated balance sheet and benefited from the research and development activities over a one year timeframe. The Company recognized research and development expense of $0 and $0.1 million in the condensed consolidated statements of operations for the three months ended June 30, 2018 and 2017 and $0.1 million and $0.2 million for the six months ended June 30, 2018 and 2017. Prepaid expenses and other current assets on the condensed consolidated balance sheet has been reduced by the expense recognized.

605 Doug St. LLC

In September 2016, the Company entered into a lease agreement with 605 Doug St. LLC, an entity owned by the Company’s Chairman and CEO, 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. The Company has 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. See Note 8 – Financing Lease Obligation – El Segundo for further details on this lease. Rent expense for this facility is recorded in research and development expense in the condensed consolidated statements of operations and was $0.1 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively, and was $0.1 million and $0.1 million, for the six months ended June 30, 2018 and 2017, respectively. At June 30, 2018, there is no balance due between the parties.

19

Altor Bio Science, LLC

In August 2016, the Company entered into an exclusive Co-Development Agreement (the Co-Development Agreement) with Altor BioScience, LLC, formerly known as Altor BioScience Corporation (Altor). Altor is a related party of the Company as it is a wholly owned subsidiary of NantCell, Inc. (NantCell). NantCell is an affiliate of NantWorks. Under the Co-Development Agreement, the Company and Altor agreed to exclusively collaborate on the development of therapeutic applications combining the Company’s proprietary natural killer cells with Altor's ALT-801 and/or ALT-803 products with respect to certain technologies and intellectual property rights as may be agreed between the parties for the purpose of jointly developing therapeutic applications of certain effector cell lines.

The Company will be the lead developer for each product developed by the parties pursuant to the Co-Development Agreement unless otherwise agreed to under a given project plan. Under the terms of the Co-Development Agreement, both parties granted a co-exclusive, royalty free, fully paid-up, worldwide license, with the right to sublicense (only to a third-party contractor assisting with research and development activities under this Co-Development Agreement and subject to prior consent, not to be unreasonably withheld), under the intellectual property (IP), including the parties interest in the joint IP, solely to conduct any development activities agreed to by the steering committee as set forth in any development plan. Unless otherwise mutually agreed by the parties in the development plan for a project, the Company is responsible for all costs and expenses incurred by either party related to conducting clinical trials and other activities under each development program, including costs associated with patient enrollment, materials and supplies, third-party staffing, and regulatory filings. Altor is required to supply, free of charge, sufficient amounts of Altor products for all pre-clinical requirements and all clinical requirements for up to 400 patients in phase I and/or phase II clinical trials, as required under the development plan for a project per the Co-Development Agreement.

Altor and the Company each will own an undivided interest in and to all rights, title and interest in and to the joint product rights. The Co-Development Agreement expires upon the fifth anniversary of the effective date. The Company has dosed several patients with ALT-803 in several phase Ib/II and II trials. No charges for supplies or milestones by Altor have been incurred in association with the above trial during the three and six months ended June 30, 2018 and 2017.

NantBio, Inc.

In January 2018, the Company entered into a laboratory services agreement with NantBio, Inc. (NantBio) a NantWorks company. The agreement, effective December 2017, includes a sublease of approximately 1,965 square feet of laboratory and office space at the Company’s San Diego, California, research facility. The term of the sublease is 24 months, but can be terminated by either party with 30 days prior written notice. The sublease agreement converts to a month-to-month lease after the initial term, not to exceed the expiration of the lease agreement between the Company and the landlord. The monthly sublease and service fee of $10,000 is subject to an annual 3% increase on the agreement anniversary date. Rent income from this sublease is recorded in other income on the condensed consolidated statements of operations and was $31,000 and $0.1 million for the three and six months ended June 30, 2018, respectively. At June 30, 2018, NantBio owes the Company $17,000, which is included in due from related parties on the condensed consolidated balance sheet.

In March 2016, NantBio and the National Cancer Institute entered into a cooperative research and development agreement. The agreement covers NantBio and its affiliates, including the Company. Under the agreement, the parties are collaborating on the preclinical and clinical development of proprietary recombinant NK cells and monoclonal antibodies in monotherapy and in combination immunotherapies. The Company benefited from the preclinical and clinical research conducted during the first and second year under this agreement and provided the first and second year funding under the five year agreement. In both April 2016 and April 2017, the Company paid $0.6 million to the National Cancer Institute as a prepayment for the first and second year of funding. The Company recognized research and development expense relating to this agreement ratably over a 12 month period for each funding year and recorded $0.2 million and $0.2 million of expense for the three months ended June 30, 2018 and 2017, respectively, and $0.3 million and $0.3 million of expense for the six months ended June 30, 2018 and 2017, respectively. The Company has accrued $0.2 million in anticipation of funding in 2018.

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. The Company is charged for the services at cost plus reasonable allocations for indirect costs that relate to the employees providing the services.

For the three months ended June 30, 2018 and 2017, the Company recorded selling, general and administrative expense of $0.8 million and $0.9 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded selling, general and administrative expense of $1.5 million and $2.0 million, respectively. For the three months ended June 30, 2018 and 2017, the Company recorded research and development expense of $0.9 million and $0.7 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded research and development expense of $1.8 million and $1.5 million, respectively. These amounts exclude certain general and administrative expenses provided by third party vendors directly for the Company’s benefit, which have been reimbursed to NantWorks based on those vendors’ invoiced amounts without markup by NantWorks.

20

In June 2016, the Company amended the existing shared services agreement with NantWorks whereby the Company can provide such support services to NantWorks and/or any of its affiliates. For the three months ended June 30, 2018 and 2017, the Company recorded selling, general and administrative expense reimbursements of $0.2 million and $0.1 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded selling, general and administrative expense reimbursements of $0.3 million and $0.2 million, respectively. For the three months ended June 30, 2018 and 2017, the Company recorded research and development expens e reimbursements of $0.7 million and $0.1 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded research and development expense reimbursements of $1.3 million and $0.3 million, respectively.

In November 2015, the Company entered into a facility license agreement with NantWorks, which became effective 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. See Note 8 – Financing Lease Obligation – Culver City for further details on this lease. For the three months ended June 30, 2018 and 2017, the Company recorded rent expense of $47,000 and $47,000, respectively, and for the six months ended June 30, 2018 and 2017 recorded rent expense of $0.1 million and $0.1 million, respectively, which is reflected in research and development expense on the condensed consolidated statements of operations.

In May 2018, the Company entered into an assignment agreement with NantWorks and a third-party construction firm. In conjunction with the agreement, the Company assigned its deposit of $0.4 million with the third-party firm to NantWorks, for which NantWorks will reimburse the Company. This assignment represents unutilized deposits that NantKwest had previously made with the construction company, for which NantWorks can now utilize in applying such funds to future planned construction projects.

The Company owed NantWorks a net amount of $0.9 million for all agreements between the two affiliates at June 30, 2018, which is included in due to related parties on the condensed consolidated balance sheet.

NantOmics, LLC

In June 2015, the Company entered into an agreement, as amended in May 2018, with NantOmics, LLC (NantOmics), an affiliate of NantWorks, to obtain genomic sequencing and proteomic analysis services, as well as related data management and bioinformatics services, exclusively from NantOmics. The Company will have rights to use the data and results generated from NantOmics’ services in connection with the performance of the particular oncology trial with respect to which the services were performed, but NantOmics will own the data and results, as well as any other intellectual property it creates in performing these services on the Company’s behalf. The Company is obligated to pay NantOmics a fixed, per sample fee, determined based on the type of services being provided. The agreement has an initial term of five years and renews automatically for successive one year periods, unless terminated earlier. For the three months ended June 30, 2018 and 2017, the Company recorded operating expense of $0.1 million and $13,000, respectively, and for the six months ended June 30, 2018 and 2017, the Company recorded operating expense of $0.1 million and $13,000, respectively, under the agreement to research and development expense on the condensed consolidated statements of operations. At June 30, 2018, the Company owes NantOmics $0.1 million, which is included in due to related parties on the condensed consolidated balance sheet.

NantCell

In June 2015, the Company also entered into a supply agreement with NantCell, an affiliate of NantWorks, pursuant to which the Company has the right to purchase NantCell’s proprietary bioreactors, made according to specifications mutually agreed to with NantCell. The Company also has the right to purchase reagents and consumables associated with such equipment from NantCell. The agreement has an initial term of five years and renews automatically for successive one year periods unless terminated earlier. During the three months ended June 30, 2018 and 2017, the Company recorded operating expense of $0 and $33,000, respectively, and during the six months ended June 30, 2018 and 2017, the Company recorded operating expense of $0 and $0.3 million, respectively, in research and development expense on the condensed consolidated statement of operations. At June 30, 2018, the Company has balances of $0.7 million and $0.2 million included in property, plant, and equipment, net, and prepaid expenses and other current assets, respectively, related to purchases from NantCell, on the condensed consolidated balance sheet.

10. Stockholders’ Equity

Stock Repurchase—In November 2015, the board of directors approved a share repurchase program (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 the Company’s outstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases will 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. The Company expects to finance the purchases with existing cash balances. At June 30, 2018, $19.1 million remained authorized for repurchase under the Company’s 2015 Share Repurchase Program and no shares were repurchased during the three months ended June 30, 2018.

21

11. Stock-Based Compensation

The following table presents stock-based compensation expense included on the Company’s condensed consolidated statements of operations (in thousands):

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |  |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |  |
|  | (Unaudited) |  |  | (Unaudited) |  |
Stock-based compensation expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants for common stock to an officer |  | $ | 7,636 |  |  | $ | 7,827 |  |  | $ | 15,272 |  |  | $ | 16,313 |  |
Employee stock options |  |  | 970 |  |  |  | 952 |  |  |  | 1,948 |  |  |  | 2,303 |  |
Employee restricted stock units |  |  | 294 |  |  |  | (93 | ) |  |  | 686 |  |  |  | 225 |  |
Non-employee restricted stock units |  |  | 34 |  |  |  | 695 |  |  |  | 101 |  |  |  | 558 |  |
|  | $ | 8,934 |  |  | $ | 9,381 |  |  | $ | 18,007 |  |  | $ | 19,399 |  |
Stock-based compensation expense in operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  | $ | 142 |  |  | $ | (49 | ) |  | $ | 281 |  |  | $ | 43 |  |
Selling, general and administrative |  |  | 8,792 |  |  |  | 9,430 |  |  |  | 17,726 |  |  |  | 19,356 |  |
|  | $ | 8,934 |  |  | $ | 9,381 |  |  | $ | 18,007 |  |  | $ | 19,399 |  |

Stock Options

The following table summarizes stock option activity for the six months ended June 30, 2018 (in thousands, except for share and year amounts):

|  | Number of Shares |  |  | Weighted- Average Exercise Price |  |  | Aggregate Intrinsic Value |  |  | Weighted- Average Remaining Contractual Life (in years) |
Outstanding at December 31, 2017 |  |  | 5,693,250 |  |  | $ | 7.71 |  |  |  |  |  |  |  |  |
Options granted/exercised/forfeited |  |  | — |  |  | $ | — |  |  |  |  |  |  |  |  |
Outstanding at June 30, 2018 |  |  | 5,693,250 |  |  | $ | 7.71 |  |  | $ | 5,466 |  |  |  | 4.8 |
Vested and Exercisable at June 30, 2018 |  |  | 5,346,093 |  |  | $ | 8.07 |  |  | $ | 5,167 |  |  |  | 5.0 |

The total unrecognized stock-based compensation expense related to non-vested stock options as of June 30, 2018 is $2.9 million, which is expected to be recognized over a weighted-average remaining amortization period of 0.7 years.

Restricted Stock Units

The following table summarizes the activity for restricted stock units:

|  | Number of Shares |  |  | Weighted-Average Grant Date Fair Value |
Unvested balance at December 31, 2017 |  |  | 888,189 |  |  | $ | 8.14 |
Granted |  |  | 302,466 |  |  | $ | 3.74 |
Vested |  |  | (154,123 | ) |  | $ | 6.19 |
Forfeited |  |  | (146,020 | ) |  | $ | 7.35 |
Unvested balance at June 30, 2018 |  |  | 890,512 |  |  | $ | 7.11 |

The Company may grant shares of restricted stock units 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 9). During the six months ended June 30, 2018, the Company granted 302,466 shares of restricted stock units to employees and directors, with no grants to shared services employees. As of June 30, 2018, there was $3.5 million of unrecognized stock-based compensation expense related to restricted stock units that is expected to be recognized over a weighted-average remaining amortization period of 2.3 years. Of that amount, $3.1 million of unrecognized expense is related to employee grants with a weighted-average remaining amortization period of 2.7 years and $0.4 million of unrecognized expense, which is impacted by periodic mark-to-market adjustments, and is related to non-employee grants with a weighted-average remaining amortization period of 0.7 years.

22

Warran ts

The following table summarizes the warrant activity for the six months ended June 30, 2018:

|  | Number of Shares |
Outstanding at December 31, 2017 |  |  | 17,721,088 |
Warrants exercised |  |  | (21,675 | )
Outstanding at June 30, 2018 |  |  | 17,699,413 |
Vested and exercisable at June 30, 2018 |  |  | 17,514,263 |

The total unrecognized stock-based compensation expense related to non-vested warrants as of June 30, 2018 is $2.5 million, which is expected to be recognized over a weighted-average remaining amortization period of 0.1 years.

12. Income Taxes

The difference between the federal statutory tax rate of 21% and the Company’s 0% tax rate is due to losses in jurisdictions from which the Company cannot benefit.

Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as other comprehensive income, the Company must allocate the tax provision to the other categories of earnings. The Company then records a related tax benefit in continuing operations.

The Company did not record any unrealized gains in other comprehensive income during the three and six months ended June 30, 2018. The Company did record unrealized gains on its marketable debt securities in other comprehensive income, net of taxes, during the three and six months ended June 30, 2017. As a result, the Company recorded a tax benefit of $0 and $4,000 for the three months ended June 30, 2018 and 2017, respectively, and $0 and $10,000 for the six months ended June 30, 2018 and 2017 on the condensed consolidated statements of operations. The Company also recorded other comprehensive income of $0 and $2,000, for the three months ended June 30, 2018 and 2017, respectively, and $0 and $28,000, for the six months ended June 30, 2018 and 2017, respectively, in the condensed consolidated balance sheet.

The Company is operating in Korea. During the three months ended June 30, 2018 and 2017, the tax benefit related to Korea was $0.1 million for each period . During the six months ended June 30, 2018 and 2017, the tax benefit related to Korea was $0.3 million and $0.2 million, respectively.

The Company currently files federal and state income tax returns in the United States and in Korea. Income tax expense consists of U.S. federal, state, and Korean income taxes. To date, the Company has not been required to pay U.S. federal income taxes because of current and accumulated net operating losses.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, modifies the rules with respect to the deductibility of certain executive compensation, and creates new taxes on certain foreign sourced earnings.

In March 2018, the FASB issued ASU 2018-05, Income Taxes – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The guidance provides for a provisional one year measurement period for entities to finalize their accounting for certain tax effects related to the Act. The Company’s estimates may also be affected as it gains a more thorough understanding of the tax law. These changes would likely not be material to income tax expense given the Company’s valuation allowance against the U.S. net deferred tax assets. As of June 30, 2018, the Company had not completed its accounting for the tax effects of the Act.

13. Subsequent Events

Related Party Agreement

In July 2018, the Company entered into a clinical trial agreement with John Lee, M.D. and Leonard Sender, M.D., Inc., a professional medical corporation, dba Chan Soon-Shiong Institutes for Medicine (CSSIM), in El Segundo, California. CSSIM is a related party as it is owned by two officers of the Company and NantWorks provides administrative services to CSSIM. The clinical trial is a phase Ib study that is part of the Company’s Nant Cancer Vaccine, or NCV, program for treatment of subjects with pancreatic cancer who have progressed on or after standard-of-care therapy. The cost under this agreement is estimated at $2.2 million.

23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, or Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the section entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include, but are not limited to:

| • | our ability to pioneer immunotherapy, implement precision cancer medicine and change the current paradigm of cancer care;

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

| • | our expectations regarding the operation of our product candidates and related benefits;

| • | our ability to utilize multiple modes to induce cell death;

| • | our beliefs regarding the benefits and perceived limitations of competing approaches, and the future of competing technologies and our industry;

| • | details regarding our strategic vision and planned product candidate pipeline;

| • | our beliefs regarding the success, cost and timing of our product candidate development activities and clinical trials;

| • | our expectations regarding our ability to utilize the phase I aNK clinical trial data to support the development of all of our product candidates;

| • | the timing or likelihood of regulatory filings or other actions and related regulatory authority responses, including any planned investigational new drug, or IND, filings or pursuit of accelerated regulatory approval pathways or orphan drug status and breakthrough therapy designations;

| • | our ability to implement an integrated discovery ecosystem and the operation of that planned ecosystem, including being able to regularly add neoepitopes and subsequently formulate new product candidates;

| • | the ability and willingness of strategic collaborators, including certain affiliates of NantWorks, LLC, or NantWorks, to share our vision and effectively work with us to achieve our goals;

| • | the ability and willingness of various third parties to engage in research and development activities involving our product candidates, and our ability to leverage those activities;

| • | our ability to attract additional third party collaborators;

| • | our expectations regarding the ease of administration associated with our product candidates;

| • | our expectations regarding the patient compatibility associated with our product candidates;

| • | our beliefs regarding the potential markets for our product candidates and our ability to serve those markets;

| • | our ability to produce an “off-the-shelf” therapy;

| • | our beliefs regarding the potential manufacturing and distribution benefits associated with our product candidates, and our ability to scale up the production of our product candidates;

| • | our plans regarding our planned manufacturing facility;

| • | the ability to obtain and maintain regulatory approval of any of our product candidates, and any related restrictions, limitations and/or warnings in the label of any approved product candidate;

| • | our ability to commercialize any approved products;

| • | the rate and degree of market acceptance of any approved products;

| • | our ability to attract and retain key personnel;

24

| • | the accuracy of our estima tes regarding our future revenue as well as our future operating expenses, future revenue, capital requirements and needs for additional financing;

| • | our ability to obtain funding for our operations, including funding necessary to complete further development and any commercialization of our product candidates;

| • | our ability to obtain and maintain intellectual property protection for our product candidate and not infringe upon the intellectual property of others;

| • | regulatory developments in the United States and foreign countries;

| • | our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act; and

| • | our use of proceeds from our initial public offering.

Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, “Risk Factors,” elsewhere in this Form 10-Q filed with the Securities and Exchange Commission, or SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q.

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

This Form 10-Q contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Form 10-Q, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

In this Form 10-Q, “the Company,” “we,” “us” and “our” refer to NantKwest, Inc. and its subsidiaries.

Overview

We are a pioneering clinical-stage immunotherapy company focused on harnessing the power of the innate immune system by using the natural killer cell to treat cancer, infectious diseases and inflammatory diseases. Natural killer, or NK, cells are the body’s first line of defense due to their innate ability to rapidly seek and destroy abnormal cells, such as cancer or virally-infected cells, without prior exposure or activation by other support molecules required to activate adaptive immune cells such as T-cells.

We believe that our proprietary NK cell line, coupled with our planned integrated discovery ecosystem, positions us to implement precision cancer medicine by leveraging the advances that have evolved during the past decade and addressing newly discovered challenges of cancer. Cancer is only recently understood to be a complex of rare diseases, with hundreds of patient-specific, cancer-promoting mutated proteins, some known and many more unknown called neoepitopes. Identifying and targeting these mutated proteins is our strategy to overcome the challenges of cancer in the era of genomics, transcriptomics and immuno-oncology. We believe neoepitopes, which are newly discovered antigens, selectively expressed on the cancer cells and not on the essential normal tissue, represent large untapped targeting opportunities for immune effector cells such as our activated NK cells.

25

Multiple Modes of Tumor Cell Killing. Our immuno-oncology NK platform has multiple modes to potentially induce cell death against the tumor or infected cell by: (1) direct killing by binding to stress ligands expressed by the diseased cell with the release of toxic granules directly into the tumor cell; (2) antibody mediated killing by binding to antibodies that are either produced in the body or in response to vaccination or administered as monoclonal antibody products in combination, and enhancing the cancer killing effect of the administered antibody, enabling targeted cell killing through antibody dependent cellular cytotoxicity, or ADCC; and (3) direct target killing by binding to known or newly discovered tumor-specific antigens expressed on the surface of tumor cells and inducing cell death by the release of toxic granules directly into the tumor cell and by the release of cytokines and chemokines that recruit addition al innate and adaptive immune responses, including the recruitment of cytotoxic T-cells.

Our targeted therapeutic areas include: (1) cancer, focusing on solid tumors and hematological malignancies as well as residual disease such as cancer stem cells, and (2) infectious diseases, including viral and other opportunistic pathogens.

The NANT Cancer Vaccine. The NANT Cancer Vaccine, or NCV, program is a personalized therapy that utilizes our off-the-shelf natural killer cells as the backbone of the therapy. NCV consists of an initial tumor conditioning regimen followed by a molecularly-informed immunologic conditioning therapy. More specifically, NCV combines tumor and peripheral blood genomic and transcriptomic data as well as tumor proteomic data derived from our affiliates NantOmics’ and Liquid Genomics’ sequencing and analysis services with the novel delivery of metronomic, albumin bound low-dose chemotherapy in conjunction with certain other agents, followed by a sequenced administration of tumor-associated antigen vaccines and IL-15, all of which potentiate our NK cell therapy to drive immunogenic cell death while avoiding the ravages of toxic high dose chemotherapy. By inducing immunogenic cell death and enhancing a patient’s innate and adaptive immune system, NCV is designed to attain a long-term, durable response in multiple cancer types with a potential for lower toxicity and improved efficacy in comparison with current standards of care. We believe that employing our NK cell therapy in the context of NCV would biologically be a more effective combination for long term success over available standards of care that employ maximum tolerated dose, tolerogenic cell death and immune system compromise.

Our Integrated Discovery Ecosystem for Precision Medicine. In order to effectively target newly discovered neoepitopes, we plan to integrate the following ecosystem to help drive the utility of our NK cell therapies against these cancer-promoting mutated proteins, including the use of our genetically modified NK cells that express the high-affinity CD16 receptor, or haNK, in conjunction with cancer vaccines that induce in vivo antibody formation directed against these mutated proteins as well as the development of NK cells modified to directly target these mutated proteins: (1) a high-speed supercomputing infrastructure to help identify both known antigens on the surface of tumor cells and neoepitopes in clinical patients suffering from cancer, in a timely manner and at large scale; (2) a next-generation genomic and transcriptomic sequencing infrastructure to identify the expression of the neoepitopes on the surface of the tumor cell, developed by our affiliate entity NantOmics; (3) delivering the neoepitope via an adenoviral or yeast platform developed by an affiliate entity to induce IgG1 in-vivo production and ADCC activity by our High Affinity NK Cell, or haNK, therapy; (4) a diverse library of human antibodies from which to interrogate and extract an antibody matching the neoepitope; and (5) haNK and chimeric antigen receptor, or CAR, targeted haNK, or t-haNK, cells potentially capable of being produced as a scalable cell-based “off-the-shelf” therapy without the need for patient compatibility matching. We expect to regularly add newly discovered neoepitopes from our discovery engine, and we believe the thousands of newly discovered antigens selectively expressed on the cancer cells and not on the essential normal tissue will provide us with the ability to create new and targeted libraries of antibodies to be potentially delivered as living drugs for metastatic cancer cells and cancer stem cells.

Innate Killing: aNK Platform. We have developed a unique NK cell which we believe is capable of being produced as a cell-based “off-the-shelf” therapy that can be molecularly engineered in a variety of ways to impart enhanced killing potential for cancer and virally-infected cells. Unlike normal NK cells, our NK cells do not express inhibitory receptors, which diseased cells often utilize to turn off the killing function of NK cells. We have developed a unique activated NK, or aNK, cell which lacks these inhibitory receptors but retains activation receptors that enable selective innate targeting and killing of stressed diseased cells. They do so through an array of naturally occurring activation receptors that bind to stress proteins that are overexpressed on the surfaces of cells under stress, such as cancerous and virally infected cells. These killing mechanisms are preserved in our aNK cells and are increased compared to normal NK cells by virtue of delivering a larger payload of lytic enzymes and cytokines responsible for the direct and indirect killing of diseased cells. We believe our aNK cells can be grown at commercial scale as a living drug using our proprietary manufacturing and distribution processes.

Several phase I safety studies with aNK cells have concluded in a variety of bulky hematological cancers and solid tumors, enrolling 46 patients to a range of dose levels and schedules with encouraging evidence of single-agent activity and a durable remission, including complete responses in liquid tumors. Based on these clinical trials, we are developing the therapeutic applications of this aNK platform through molecular engineering designed to leverage additional modes of killing available to aNKs, including antibody mediated killing- the haNK platform, and both antibody mediated and antigen targeted killing- the t-haNK platform.

We retain exclusive worldwide rights to clinical and research data, intellectual property and know-how developed with our aNK cells, as well as what we believe is the only clinical grade master cell bank of aNK cells in existence.

26

Since our inception in 2002, we have devoted substantially all of our resources to the discovery and development of our product candidates, including the conduct of clinical trials, and funding general and administrativ e support for these operations. We progressed our versatile, cryopreserved off-the-shelf haNK product, having safely dosed patients with advanced pancreatic cancer in the first phase Ib/II NCV study and are now advancing with several additional IND studies. These include randomized phase II trials in pancreatic, colorectal, triple-negative breast, chordoma, and hepatocellular cancers and non-randomized phase Ib/II trials in non-small cell lung, head & neck squamous cell, melanoma, and ovarian cancers. Our s tudies are all based on a master treatment protocol that is designed to more fully harness the power of the immune system and improve cancer patient outcomes.

To date, we have generated minimal revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companies granting the right to use our cell lines and intellectual property for non-clinical use. We have not generated any revenue from product sales. We have incurred net losses in each year since our inception and, as of June 30, 2018, we had an accumulated deficit of approximately $553.8 million. Our net losses were $55.3 million and $48.0 million for the six months ended June 30, 2018 and 2017, respectively, and $96.4 million and $120.8 million for the years ended December 31, 2017 and 2016, respectively. Substantially all of our net losses resulted from stock-based compensation expense and costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations.

As of June 30, 2018 we had 184 employees. Personnel of related companies who provide corporate, general and administrative, manufacturing strategy, research and development, regulatory and clinical trial strategy and other support services under our shared services agreement with NantWorks are not included in this number. See Note 9 – Related Party Agreements within the notes to the unaudited condensed consolidated financial statements for further information. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, which may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our expenses will increase substantially as we:

| • | continue research and development, including preclinical and clinical development of our existing product candidates;

| • | potentially seek regulatory approval for our product candidates;

| • | seek to discover and develop additional product candidates;

| • | establish a commercialization infrastructure and scale up our manufacturing and distribution capabilities to commercialize any of our product candidates for which we may obtain regulatory approval;

| • | seek to comply with regulatory standards and laws;

| • | maintain, leverage and expand our intellectual property portfolio;

| • | hire clinical, manufacturing, scientific and other personnel to support our product candidates’ development and future commercialization efforts;

| • | add operational, financial and management information systems and personnel; and

| • | incur additional legal, accounting and other expenses in operating as a public company.

We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we do not expect to happen for at least the next several years, if ever. Until such time that we can generate substantial revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our research and development programs or commercialization efforts. Failure to receive additional funding could cause us to cease operations, in part or in full.

IND Approval

A phase Ib/II Investigational New Drug, or IND, application for advanced cancers, that incorporates a novel cryopreserved haNK product as the backbone of a multi-agent tumor and immune conditioning regimen known as the NCV regimen, received approval from the U.S. Food and Drug Administration in October 2017 to proceed. Since then, nine additional INDs in various cancer indications using cryopreserved haNK product as the backbone of the NCV regimen received approval from the FDA.

27

Equity Investment

We have an equity investment in Viracta Therapeutics, Inc., or Viracta, a clinical stage drug development company. In May 2017, we executed an exclusive worldwide license with Viracta to develop and commercialize Viracta’s proprietary histone deacetylase inhibitor drug candidate for use in combination with NK cell therapy and possibly additional therapies. As of June 30, 2018, the fair value of our investment was $8.5 million, which is recorded as an equity investment on the condensed consolidated balance sheets. See Note 4 – Equity Investment within the notes to the unaudited condensed consolidated financial statements for a detailed discussion of the accounting for this investment.

In addition, in June 2018, Viracta executed a 2018 Note and Warrant Purchase Agreement with existing and new investors. 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 is convertible into Series B Preferred Stock, and a warrant to purchase Viracta’s common shares. The convertible note accrues interest at 8% and has a one year maturity date. We classified the convertible note as a held-to-maturity marketable security on the condensed consolidated balance sheets.

Collaboration and License Agreements

We anticipate that strategic collaborations will become an integral part of our operations, providing opportunities to leverage our partners’ expertise and capabilities to further expand the potential of our technologies and product candidates. We believe we are well positioned to become a leader in cell-based immunotherapy due to our broad and vertically integrated platform and through complementary strategic partnerships. We did not enter any new collaboration agreements during the three months ended June 30, 2018.

In addition to the collaboration and license agreements discussed in Note 7 – Collaboration and License Agreements, we may enter into an agreement relating to an IL-15 superagonist product developed by an affiliate and we are also pursuing supply arrangements for various investigational agents controlled by affiliates and third parties to be used in our clinical trials. These collaboration agreements do not typically specify how sales will be apportioned between the parties upon successful commercialization of the product. As a result, we cannot guarantee that we will receive a percentage of the revenue that is at least proportional to the costs that we will incur in commercializing the product candidate. Furthermore, if Dr. Soon-Shiong was to cease his affiliation with us or with NantWorks, these entities may be unwilling to continue these relationships with us on commercially reasonable terms, or at all, and as a result may impede our ability to control the supply chain for our combination therapies.

See Note 7 – Collaboration and License Agreements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our collaboration and license agreements.

Related Party Agreements

Our Chairman and Chief Executive Officer, or CEO, Dr. Soon-Shiong, founded and has a controlling interest in NantWorks, which is a collection of multiple companies in the healthcare and technology space. We have entered into arrangements with certain affiliates of NantWorks that, taken together, we expect will facilitate the development of new genetically modified NK cells for our product pipeline.

See Note 9 – Related Party Agreements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our related party agreements.

Components of our Results of Operations

Revenue

To date, we have derived substantially all of our revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companies granting them the right to use our cell lines and intellectual property for non-clinical use. These agreements generally include upfront fees and annual research license fees for such use, as well as commercial license fees for sales of our licensee’s products developed or manufactured using our intellectual property and cell lines. Our license agreements may also include milestone payments, although to date, we have not generated any revenue from milestone payments. Our revenue from non-clinical license agreements is nominal. In the future, we may generate revenue from license agreements entered into for therapeutic uses. To date, 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.

Operating Expenses

We classify our operating expenses into two primary areas: (1) research and development and (2) selling, general and administrative expenses. Personnel costs including salaries, benefits, bonuses, and stock-based compensation expense comprise a significant component of each of those two expense categories. We allocate expenses associated with our facilities and information technology costs between these two categories based on the nature of each cost.

28

Research and Development

Research and development expense consists of expenses incurred while performing research and development activities to discover and develop our product candidates. This includes conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expense primarily consists of:

| • | clinical trial and regulatory-related costs;

| • | expenses incurred under agreements with investigative sites and consultants that conduct our clinical trials;

| • | manufacturing and testing costs and related supplies and materials;

| • | employee-related expenses, including salaries, benefits, travel and stock-based compensation; and

| • | facility expenses dedicated to research and development.

We typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or external consultant costs to specific product candidates or development programs.

Substantially all of our research and development expenses to date have been incurred in connection with our product candidates. We expect our research and development expenses to increase significantly for the foreseeable future as we advance an increased number of our product candidates through clinical development, including the conduct of our planned clinical trials. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of any product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates.

The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following:

| • | per patient trial costs;

| • | the number of sites included in the clinical trials;

| • | the countries in which the clinical trials are conducted;

| • | the length of time required to enroll eligible patients;

| • | the number of patients that participate in the clinical trials;

| • | the number of doses that patients receive;

| • | the cost of comparative agents used in clinical trials;

| • | the drop-out or discontinuation rates of patients;

| • | potential additional safety monitoring or other studies requested by regulatory agencies;

| • | the duration of patient follow-up; and

| • | the efficacy and safety profile of the product candidate.

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

Selling, General and Administrative

Selling, general and administrative expense consists primarily of salaries and personnel-related costs, including employee benefits and any stock-based compensation, for employees performing functions other than research and development. This includes personnel in executive, finance, human resources and administrative support functions. Other selling, general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, professional fees for auditing, tax and legal services, advertising costs, expenses associated with obtaining and maintaining patents, consulting costs, royalties and licensing costs, and costs of our information systems.

29

Although our selling, general and administrative costs declined during the three and six months ended June 30, 2018 as compared to the three and six months ended June 30, 2017, we expect that our selling, general and administrative expenses will increase in the foreseeable future as we expand operations, internalize the manufacturing of our product candidates (including costs relat ed to building out state-of-the-art manufacturing facilities, as well as hiring additional employees to support our manufacturing and processing department), and operate as a public reporting company (including increased fees for outside consultants, lawye rs and accountants, as well as increased directors’ and officers’ liability insurance premiums). We have incurred and expect that we will continue to incur in the future, additional costs associated with operating as a public company, including costs to co mply with stock exchange listing and Securities and Exchange Commission, or SEC, requirements, corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public companies. Additionally, if and when we bel ieve that a regulatory approval of a product candidate appears likely, we expect to incur significant increases in our selling, general and administrative expenses relating to the sales and marketing of the approved product candidate.

Other Income

Other income consists primarily of income from our investments in marketable debt securities, sublease rental income and foreign currency income, partially offset by interest expense from the accretion of our financing obligations.

Income Tax

Income tax expense consists of United States, or U.S., federal and state income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. Our income tax expense to date primarily relates to minimum income taxes in the State of California. Our tax benefit primarily relates to the amortization of deferred tax liabilities at our Korean subsidiary.

Results of Operations

Comparison of the three months ended June 30, 2018 and 2017

|  | Three Months Ended June 30, |  |  |  |  |  |  |  |  |
|  | 2018 |  |  | 2017 |  |  | $ Change |  |  | % Change |
|  | (unaudited, in thousands) |  |  |  |  |  |  |  |  |
Revenue |  | $ | 4 |  |  | $ | 14 |  |  | $ | (10 | ) |  | (71%) |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development (including amounts to related parties) |  |  | 14,688 |  |  |  | 9,706 |  |  |  | 4,982 |  |  | 51% |
Selling, general and administrative (including amounts to related parties) |  |  | 13,594 |  |  |  | 14,128 |  |  |  | (534 | ) |  | (4%) |
Total operating expenses |  |  | 28,282 |  |  |  | 23,834 |  |  |  | 4,448 |  |  | 19% |
Loss from operations |  |  | (28,278 | ) |  |  | (23,820 | ) |  |  | (4,458 | ) |  | 19% |
Other income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment income, net |  |  | 490 |  |  |  | 681 |  |  |  | (191 | ) |  | (28%) |
Interest expense (including amounts to related parties) |  |  | (106 | ) |  |  | (154 | ) |  |  | 48 |  |  | (31%) |
Other income (expense), net (including amounts to related parties) |  |  | 39 |  |  |  | (283 | ) |  |  | 322 |  |  | (114%) |
Total other income |  |  | 423 |  |  |  | 244 |  |  |  | 179 |  |  | 73% |
Loss before income taxes |  |  | (27,855 | ) |  |  | (23,576 | ) |  |  | (4,279 | ) |  | 18% |
Income tax benefit |  |  | 123 |  |  |  | 124 |  |  |  | (1 | ) |  | (1%) |
Net loss |  | $ | (27,732 | ) |  | $ | (23,452 | ) |  | $ | (4,280 | ) |  | 18% |

Revenue

Revenue is derived from our non-exclusive license arrangements and changes period over period continued to be minimal.

Research and Development

The increase was primarily attributable to increases of $2.5 million in compensation and related expenses due to increased staff and fees for services rendered under our shared services agreement with NantWorks, $1.2 million for laboratory and manufacturing facility related expenses, $1.1 million for laboratory, pre-clinical, and clinical trial costs driven by increased research and cGMP manufacturing activities, and $0.2 million in stock compensation expense due to increased staff. We expect our research and development expenses to increase significantly for the foreseeable future as we advance an increased number of our product candidates through clinical development and conduct our planned clinical trials.

30

Selling, General, and Administrative

The decrease in selling, general, and administrative expense was primarily attributable to a decrease of $0.6 million in stock compensation expense, driven by decreases of $0.5 million in restricted stock unit (RSU) expense related to lower stock prices in 2018 that reduced the non-employee stock compensation expense, as it is revalued each quarter, and $0.2 million of decreased warrant expense due to the timing of performance milestones being achieved in 2017, partially offset by new RSU grants in the second quarter of 2018.

In addition, selling, general and administrative expense decreased $ 0.1 million related to legal expenses, partially offset by increased compensation related expenses of $0.2 million.

Other Income

The increase in other income was mainly due to a write-off of obsolete equipment in 2017, partially offset by lower investment income in 2018 driven by the use of our investments for operations.

Income Tax Benefit

The change in the income tax benefit period over period continued to be minimal.

Comparison of the six months ended June 30, 2018 and 2017

|  | Six Months Ended June 30, |  |  |  |  |  |  |  |  |
|  | 2018 |  |  | 2017 |  |  | $ Change |  |  | % Change
|  | (unaudited, in thousands) |  |  |  |  |  |  |  |  |
Revenue |  | $ | 9 |  |  | $ | 25 |  |  | $ | (16 | ) |  |  | (64 | %)
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development (including amounts to related parties) |  |  | 28,679 |  |  |  | 18,954 |  |  |  | 9,725 |  |  |  | 51 | %
Selling, general and administrative (including amounts to related parties) |  |  | 27,892 |  |  |  | 30,355 |  |  |  | (2,463 | ) |  |  | (8 | %)
Total operating expenses |  |  | 56,571 |  |  |  | 49,309 |  |  |  | 7,262 |  |  |  | 15 | %
Loss from operations |  |  | (56,562 | ) |  |  | (49,284 | ) |  |  | (7,278 | ) |  |  | 15 | %
Other income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment income, net |  |  | 995 |  |  |  | 1,460 |  |  |  | (465 | ) |  |  | (32 | %)
Interest expense (including amounts to related parties) |  |  | (139 | ) |  |  | (191 | ) |  |  | 52 |  |  |  | (27 | %)
Other income (expense), net (including amounts to related parties) |  |  | 208 |  |  |  | (174 | ) |  |  | 382 |  |  |  | (220 | %)
Total other income |  |  | 1,064 |  |  |  | 1,095 |  |  |  | (31 | ) |  |  | (3 | %)
Loss before income taxes |  |  | (55,498 | ) |  |  | (48,189 | ) |  |  | (7,309 | ) |  |  | 15 | %
Income tax benefit |  |  | 247 |  |  |  | 222 |  |  |  | 25 |  |  |  | 11 | %
Net loss |  | $ | (55,251 | ) |  | $ | (47,967 | ) |  | $ | (7,284 | ) |  |  | 15 | %

Revenue

Revenue is derived from our non-exclusive license arrangements and changes period over period continued to be minimal.

Research and Development

The increase in research and development expense was primarily attributable to increases of $4.3 million in compensation and related expenses due to increased staff and fees for services rendered under our shared services agreement with NantWorks, $4.2 million for laboratory, pre-clinical and clinical trial costs driven by increased research and cGMP manufacturing activities, and $2.0 million for laboratory and manufacturing facility related expenses, partially offset by decreases of $1.0 million for clinical and regulatory consultants due to bringing these functions in-house. We expect our research and development expenses to increase significantly for the foreseeable future as we advance an increased number of our product candidates through clinical development and conduct our planned clinical trials.

Selling, General and Administrative

The decrease in selling, general, and administrative was primarily attributable to decreases of $1.6 million in stock compensation expense mainly driven by decreases due to vesting completed in 2017 related to warrant and option awards, a $0.4 million decrease in travel related expenses, a $0.4 million decrease in professional fees for accounting and compliance related services in connection with operating as a public company, and a $0.3 million decrease related to charges under our shared services agreement with NantWorks.

31

Other Income

The slight decrease in other income was mainly due to lower investment income driven by the use of our investments for operations, partially offset by higher sublease rental income driven by additional agreements entered into subsequent to June 30, 2017.

Income Tax Benefit

The change in the income tax benefit period over period continued to be minimal.

Liquidity and Capital Resources

Sources of Liquidity

Our principal sources of liquidity are our existing cash, cash equivalents, and marketable debt securities. We have historically invested our cash primarily in the U.S. treasuries and government agencies, corporate debt, and money market funds. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets.

As of June 30, 2018, we had cash, cash equivalents, and restricted cash of $16.3 million as compared to $24.1 million as of December 31, 2017. This change was attributable to cash used in operating and financing activities of $31.8 million and $0.3 million, respectively, partially offset by net cash provided by investing activities of $24.3 million that was primarily driven by maturities of marketable debt securities.

Investments in marketable debt securities were $101.4 million as of June 30, 2018, of which $88.8 million were short-term investments, as compared to $183.5 million as of June 30, 2017, of which $136.5 million were short-term investments.

Cash Flows

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

|  | Six Months Ended June 30, |
|  | 2018 |  |  | 2017 |
|  | (unaudited, in thousands) |
Cash used in (provided by): |  |  |  |  |  |  |  |
Operating activities |  | $ | (31,777 | ) |  | $ | (25,007 | )
Investing activities |  |  | 24,313 |  |  |  | 72,857 |
Financing activities |  |  | (286 | ) |  |  | (16,894 | )
Net increase (decrease) in cash, cash equivalents, and restricted cash |  | $ | (7,750 | ) |  | $ | 30,956 |

Operating Activities

For the six months ended June 30, 2018, our net cash used in operating activities of $31.8 million consisted of a net loss of $55.3 million, partially offset by $22.3 million in adjustments for non-cash items, primarily attributable to $18.0 million in stock compensation expense as well as research and development and selling, general and administrative expenses, and $1.2 million of cash provided by net working capital changes. Adjustments for non-cash items primarily consisted of the $18.0 million in stock-based compensation expense, $4.0 million in depreciation and amortization, $0.3 million in amortization of premiums on marketable debt securities, and $0.1 million in non-cash interest, reduced by $0.2 million of deferred income tax benefit. Changes in net working capital consisted primarily of increases in accounts payable of $1.9 million and accrued expenses of $0.6 million, partially offset by decreases in prepaid and other current assets of $0.6 million, due to related party of $0.5 million, and deferred rent of $0.2 million.

For the six months ended June 30, 2017, our net cash used in operating activities of $25.0 million consisted of a net loss of $48.0 million, primarily attributable to $19.4 million in stock compensation expense as well as research and development and selling, general and administrative expenses and $0.2 million of cash used in net working capital changes, partially offset by $23.1 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of the $19.4 million in stock-based compensation expense, $2.5 million in depreciation and amortization, $0.9 million in amortization of premiums on marketable debt securities, and $0.5 million in non-cash interest, reduced by $0.2 million of deferred income tax benefit. Changes in net working capital consisted primarily of decreases in prepaid and other current assets of $1.3 million, accounts payable of $1.1 million, and accrued expenses of $1.1 million, partially offset by increases in due to related parties of $1.4 million, deferred rent of $1.4 million, and $0.5 million in other assets.

32

Investing Activities

For the six months ended June 30, 2018, net cash provided by investing activities was $24.3 million, which was primarily attributable to $85.6 million in sales and/or maturities of marketable debt securities, partially offset by $53.5 million in purchases of marketable debt securities driven by the reinvestment of excess cash resources, $7.4 million in purchases of property, plant and equipment mainly related to our laboratory and cGMP build out in El Segundo, California, and $0.4 million in a purchase of a convertible note.

For the six months ended June 30, 2017, net cash provided by investing activities was $72.9 million, which was primarily attributable to $140.5 million in sales and/or maturities of marketable debt securities, partially offset by $46.5 million in purchases of marketable debt securities driven by the reinvestment of excess cash resources, $12.7 million in purchases of property, plant and equipment mainly related to our laboratory and cGMP build out in El Segundo, California, and equipment purchases for the Culver City, California, facility, and $8.5 million in the purchase of an equity investment.

Financing Activities

For the six months ended June 30, 2018, net cash used in financing activities was $0.3 million, which primarily related to $0.2 million of principal payments on our financing obligations and $0.1 million related to net share settlement of RSUs.

For the six months ended June 30, 2017, net cash used in financing activities was $16.9 million, which consisted of $12.5 million used for stock repurchases including commissions, $4.9 million in principal payments primarily related to our capital lease obligation, and $0.7 million in net share settlement of exercised stock options and vested RSUs for payment of employee payroll taxes, partially offset by $1.2 million in proceeds from the exercise of stock options and warrants.

Future Funding Requirements

To date, we have generated minimal revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companies granting the right to use our cell lines and intellectual property for non-clinical use for laboratory testing that were spun out to Brink Biologics on June 9, 2015. We have not generated any revenue from product sales. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates and we do not know when, or if, this will occur. In addition, we expect our expenses to significantly increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. Moreover, since the completion of our IPO in July 2015, we have incurred and expect that we will continue to incur in the future additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations. We expect that our expenses will increase substantially if and as we:

| • | continue research and development, including preclinical and clinical development of our existing product candidates;

| • | potentially seek regulatory approval for our product candidates;

| • | seek to discover and develop additional product candidates;

| • | establish a commercialization infrastructure and scale up our manufacturing and distribution capabilities to commercialize any of our product candidates for which we may obtain regulatory approval;

| • | seek to comply with regulatory standards and laws;

| • | maintain, leverage and expand our intellectual property portfolio;

| • | hire clinical, manufacturing, scientific and other personnel to support our product candidates’ development and future commercialization efforts;

| • | add operational, financial and management information systems and personnel; and

| • | incur additional legal, accounting and other expenses in operating as a public company.

Based upon our current operating plan, we expect that the net proceeds from our IPO and the concurrent private placement, together with our existing cash and cash equivalents and marketable debt securities, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be incorrect and we may use our available capital resources sooner than we currently expect. The successful development of any product candidate is highly uncertain. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, if approved, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates.

33

Our future capital requirements will depend on many factors, including:

| • | the timing of, and the costs involved in, preclinical and clinical development and obtaining any regulatory approvals for our product candidates;

| • | the costs of manufacturing, distributing and processing our product candidates;

| • | the number and characteristics of any other product candidates we develop or acquire;

| • | our ability to establish and maintain strategic collaborations, licensing or other commercialization arrangements and the terms and timing of such arrangements including our arrangements with Viracta and Altor;

| • | the degree and rate of market acceptance of any approved products;

| • | the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments;

| • | the expenses needed to attract and retain skilled personnel;

| • | the costs associated with being a public company;

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

| • | the timing, receipt and amount of sales of, or royalties on, any approved products; and

| • | any product liability or other lawsuits related to our product candidates.

Because all of our product candidates are in the early stages of preclinical and clinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

During the six months ended June 30, 2018, there have been no material changes outside the ordinary course of business in our contractual obligations from those disclosed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under Security and Exchange Commission, or SEC, rules.

Critical Accounting Policies and Significant Judgments and Estimates

In the notes to our consolidated financial statements and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2017 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. Except as noted below, there have been no other material changes to those policies that we consider to be significant since the filing of our 2017 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.

34

Recently Adopted Accounting Policies

Revenue Recognition

Beginning January 1, 2018, we follow the provisions of Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized. We have applied the guidance to all contracts as of the date of initial application. The Intrexon, Brink and Coneksis Agreements are contracts with customers that are within the scope of ASC Topic 606.

Refer to Note 2 – Summary of Significant Accounting Policies, within the notes to the unaudited condensed consolidated financial statements for a discussion of other recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Financial market risks related to interest rates, foreign currency exchange rates and inflation are described in our 2017 Annual Report on Form 10-K. At June 30, 2018, there have been no material changes to the financial market risks described at December 31, 2017. We do not currently anticipate any other near-term changes in the nature of our financial market risk exposures or in management’s objectives and strategies with respect to managing such exposures.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There is no assurance that our disclosure controls and procedures will operate effectively under all circumstances.

Management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018, our CEO and CFO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

35

PART II – OTHE R INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may be involved in various other claims and legal proceedings relating to claims arising out of our operations. Except as noted below, we are not currently a party to any other legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

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 our 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 have been consolidated. Plaintiffs assert 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 seek unspecified damages, costs and attorneys’ fees, and equitable/injunctive or other relief on behalf of putative classes of persons who purchased or acquired our 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. A trial date has been set for August 2019. Management intends to vigorously defend these proceedings. At this time, we cannot predict how the Court will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Therefore, based on the information available at present, we cannot reasonably estimate a range of loss for this action. Should we ultimately be found liable, the liability could have a material adverse effect on our results of operations for the period or periods in which it is incurred.

On September 6, 2016, a putative shareholder derivative complaint captioned Bushansky v. Soon-Shiong, et al., No. 37-2016-00030867-CU-SL-CTL was filed in California Superior Court, San Diego County also related to our restatement of certain interim financial statements. The complaint named as defendants our directors and outside auditor at the time of the IPO. The Company is named solely as a nominal defendant. The complaint alleges the directors breached their fiduciary duties to the Company and wasted corporate assets, and that the outside auditors committed malpractice. The complaint seeks, on behalf of the Company, unspecified damages, the return of directors’ salaries for unspecified periods, and injunctive relief. In April 2017, the court entered a written order of dismissal after granting our motion to dismiss the California complaint based on a corporate charter provision specifying a Delaware forum. Plaintiffs appealed. On May 25, 2018, the California court of appeal affirmed the dismissal. On July 3, 2018, plaintiffs filed a petition for review with the California Supreme Court. On July 26, 2018, we filed an answer to the petition for review with the California Supreme Court. Should we ultimately be found liable, the liability could have a material adverse effect on our results of operations for the period or periods in which it is incurred.

In October 2017, the first of two putative stockholder derivative complaints was filed in the Delaware Court of Chancery. The Delaware actions have been consolidated as In re NantKwest, Inc. Derivative Litigation, Cons. C.A. No. 2017-0774- VCL. A consolidated complaint was filed asserting that various of our current and former directors and officers breached their fiduciary duties to the Company based on factual allegations similar to those in the Sudunagunta and Bushansky actions. The complaint seeks damages and other relief on behalf of the Company, which is named solely as a nominal defendant. On February 5, 2018, the defendants filed a motion to dismiss the consolidated complaint. On May 18, 2018, the Court granted the motion and dismissed the action. No appeal has been filed, and the deadline for appeal has passed.

36

Appeal of USPTO Decision

In March 2009, we received a final rejection in one of our original patent applications pertaining to certain limited methods of use claims for NK-92 from the U.S. Patent and Trademark Office (the USPTO), but the USPTO allowed claims on all of the other proposed claims, including other methods of use. We appealed this decision with the USPTO Board of Appeals and, in the fall of 2013, the Board of Appeals reversed the Examiner’s rejection of the claim to certain limited methods of use with NK-92, but affirmed the Examiner’s rejection of the remaining patent claims. In December 2013, we brought an action in the U.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as we disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment. On September 24, 2015, we filed a notice of appeal to the United States Court of Appeals for the Federal Circuit. In September 2015, the USPTO filed a Motion for Expenses seeking $0.1 million for attorney’s fees and the USPTO’s expert witness fees. In February 2016, the U.S. District Court denied the USPTO’s Motion for Expenses for attorney’s fees and granted Director’s Motion for Expenses for the USPTO’s expert witness fees. The USPTO filed a notice of appeal on April 5, 2016. In May 2017, the Federal Circuit affirmed the U.S. District Court’s summary judgment ruling. The formal mandate was issued on June 26, 2017. In June 2017, the Federal Circuit reversed the U.S. District Court’s fees ruling and remanded the case for the U.S. District Court to enter an award of $0.1 million in favor of the USPTO. On August 31, 2017, a majority of active Federal Circuit judges voted to vacate the June 2017 decision and hear the case en banc sua sponte. On July 27, 2018, the Federal Circuit sitting en banc affirmed the U.S. District Court. The USPTO may seek rehearing or Supreme Court review. Based on the information available at present, we cannot reasonably estimate a range of loss for this action beyond the attorney and expert witness fees. We are expensing legal costs associated with defending this litigation as the costs are incurred.

ITEM 1A. RISK FACTORS.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as other information included in our 2017 Annual Report on Form 10-K, including our financial statements and the related notes, and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” any of which may be relevant to decisions regarding an investment in or ownership of our stock. The occurrence of any of these risks could have a significant adverse effect on our reputation, business, financial condition, results of operations, growth and ability to accomplish our strategic objectives. We have organized the description of these risks into groupings in an effort to enhance readability, but many of the risks interrelate or could be grouped or ordered in other ways, so no special significance should be attributed to the groupings or order below.

Any risk factors that have changed since our Annual Report on Form 10-K will be noted with an asterisk (*).

Risks Related to Our Financial Condition and Capital Requirements

*We are a clinical-stage biopharmaceutical company with a limited operating history and have incurred significant losses since our inception, and we anticipate that we will continue to incur losses for the foreseeable future, which makes it difficult to assess our future viability.

We are a clinical-stage biopharmaceutical company with a limited operating history upon which our business can be evaluated. To date, we have generated minimal revenue from non-exclusive license agreements with biopharmaceutical companies to which we have granted the right to use our cell lines and intellectual property for non-clinical laboratory testing, and we have no products approved for commercial sale and have not generated any revenue from product sales. We have incurred operating losses on an annual basis since our formation and we may never become profitable. As of June 30, 2018, we had an accumulated deficit of approximately $553.8 million. We incurred net losses of $55.3 million and $48.0 million for the six months ended June 30, 2018 and 2017, respectively. Our losses have resulted principally from costs incurred in ongoing preclinical studies, clinical trials and operations, research and development expenses, as well as general and administrative expenses.

37

A critical aspect of our strategy is to invest significantly in expanding our haNK and taNK plat forms and the development of our product candidates. We expect to incur significant expenses as we continue to expand our business, including in connection with conducting research and development across multiple therapeutic areas, participating in clinica l trial activities, continuing to acquire or in-license technologies, maintaining, protecting and expanding our intellectual property, seeking regulatory approvals and, upon successful receipt of the Federal Drug Administration, or FDA, approval, commercia lizing our products. We will also incur costs as we hire additional personnel and increase our manufacturing capabilities, including potentially pursuant to the lease or purchase of a facility, for the manufacturing of our product candidates for our planne d clinical trials and, upon potential receipt of FDA approval, for our initial commercialization activities. Moreover, we do not expect to have any significant product sales or revenue for a number of years. These losses have had and, as our operating loss es continue to increase significantly in the future due to these expenditures, will continue to have an adverse effect on our stockholders’ equity and working capital. Because of the numerous risks and uncertainties associated with our product development efforts, we are unable to predict when we may become profitable, if at all. Additionally, our net losses may fluctuate significantly from quarter to quarter, and as a result a period to period comparison of our results of operations may not be meaningful. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

We do not have any therapeutic products that are approved for commercial sale. Our ability to generate revenue from product sales and achieve and maintain profitability depends significantly on our success in a number of factors.

We currently do not have any therapeutic products that are approved for commercial sale. We have not received, and do not expect to receive for at least the next several years, if at all, any revenues from the commercialization of our product candidates if approved. To obtain revenue from sales of our product candidates that are significant or large enough to achieve profitability, we must succeed, either alone or with third parties, in developing, obtaining regulatory approval for, manufacturing and marketing therapies with commercial potential. Our ability to generate revenue and achieve and maintain profitability depends significantly on our success in many areas, including:

| • | our research and development efforts, including preclinical studies and clinical trials of our haNK and taNK platforms and our product candidates;

| • | developing sustainable, scalable, reliable and cost-effective manufacturing and distribution processes for our product candidates, including establishing and maintaining commercially viable supply relationships with third parties and establishing our own current Good Manufacturing Practices, or cGMP, manufacturing facilities and processes;

| • | addressing any competing technological and industry developments;

| • | identifying, assessing, acquiring and/or developing new technology platforms and product candidates across numerous therapeutic areas;

| • | obtaining regulatory approvals and marketing authorizations for product candidates;

| • | launching and commercializing any approved products, either directly or with a collaborator or distributor;

| • | obtaining market acceptance of and acceptable reimbursement for any approved products;

| • | completing collaborations, licenses and other strategic transactions on favorable terms, if at all;

| • | maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and

| • | attracting, hiring and retaining qualified personnel.

Even if one or more of our product candidates is eventually approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate and we may not generate significant revenue from sales of such products, resulting in limited or no profitability in the future. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital for the foreseeable future. Any failure to become and remain profitable may adversely affect the market price of our common stock, our ability to raise additional capital and our future viability.

*We will need to obtain substantial additional financing to complete the development and any commercialization of our product candidates, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our commercialization efforts, product development or other operations.

Since our inception, we have used substantial amounts of cash to fund our operations and expect our expenses to increase substantially in the foreseeable future. Developing our product candidates and conducting clinical trials for the treatment of cancer and other diseases requires substantial amounts of capital. We will also require a significant additional amount of capital to commercialize any approved products.

38

As of June 30, 2018, we had cash and cash equivalents of $16.1 million and marketable debt securiti es of $101.4 million. We are using and expect to continue to use the net proceeds from our initial public offering, or IPO, and the concurrent private placement to fund expenses in connection with our planned clinical trials, our planned manufacturing faci lity and processes and the hiring of additional personnel, and for other research and development activities, working capital and general corporate purposes, including our share repurchase program. We believe that such proceeds, together with our existing cash and cash equivalents, will be sufficient to fund our operations for at least the next 12 months. Our estimate as to how long we expect our existing cash and cash equivalents to be available to fund our operations is based on assumptions that may be pr oved inaccurate, and we could deplete our available capital resources sooner than we currently expect. In addition, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more mone y than currently expected because of circumstances beyond our control. We may require additional capital for the further development and any commercialization of our product candidates and may need to raise additional funds sooner than we anticipate if we choose to expand more rapidly than we presently anticipate.

Our future capital requirements may depend on, and could increase significantly as a result of, many factors, including:

| • | the timing of, and the costs involved in, preclinical and clinical development and obtaining any regulatory approvals for our product candidates;

| • | the costs of manufacturing, distributing and processing our product candidates;

| • | the number and characteristics of any other product candidates we develop or acquire;

| • | our ability to establish and maintain strategic collaborations, licensing or other commercialization arrangements and the terms and timing of such arrangements, including our arrangements with Viracta and Altor;

| • | the degree and rate of market acceptance of any approved products;

| • | the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments;

| • | the expenses needed to attract and retain skilled personnel;

| • | the costs associated with being a public company;

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

| • | the costs related to commercializing drug candidates independently;

| • | the timing, receipt and amount of sales of, or royalties on, any approved products; and

| • | any product liability or other lawsuits related to our product candidates.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our common stockholders’ rights. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. Additional capital may not be available when we need it, on terms that are acceptable to us or at all. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market any approved products that we would otherwise prefer to develop and market ourselves, or be unable to continue or expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations and cause the price of our common stock to decline.

We invest our cash on hand in various financial instruments which are subject to risks that could adversely affect our business, results of operations, liquidity and financial condition.

We invest our cash in a variety of financial instruments, principally commercial paper, corporate debt securities and foreign government bonds. All of these investments are subject to credit, liquidity, market and interest rate risk. Such risks, including the failure or severe financial distress of the financial institutions that hold our cash, cash equivalents and investments, may result in a loss of liquidity, impairment to our investments, realization of substantial future losses, or a complete loss of the investments in the long-term, which may have a material adverse effect on our business, results of operations, liquidity and financial condition. In order to manage the risk to our investments, we maintain an investment policy that, among other things, limits the amount that we may invest in any one issue or any single issuer and requires us to only invest in high credit quality securities.

39

We are invol ved in pending securities litigation and an adverse resolution of such litigation may adversely affect our business, financial condition, results of operations and cash flows.

Following our announcement that we have restated our interim financial statements for the quarters ended June 30, 2015 and September 30, 2015 to address errors related to certain stock-based awards to our Chairman and CEO and build-to-suit lease accounting related to one of our research and development and cGMP facilities, we became the subject of a lawsuit alleging securities law violations. This type of litigation can be expensive and disruptive to normal business operations, and the outcome can be difficult to predict regardless of the facts involved. An unfavorable outcome with respect to this type of lawsuit could have a material adverse effect on our business, financial condition, results of operations or cash flows. For additional information regarding this and other lawsuits in which we are involved, see Part II, Item 1. Legal Proceedings.

Risks Relating to Our Business and Industry

The foundation of our business is based upon the success of our aNK cells as a technology platform. Our aNK platform and product candidates derived thereof, including genetically modified haNK, taNK and t-haNK product candidates, will require significant additional clinical testing before we can potentially seek regulatory approval and launch commercial sales.

Our business and future success depend on our ability to utilize our aNK cells as a technology platform, and to obtain regulatory approval for one or more product candidates derived from it, and then successfully commercialize our product candidates addressing numerous therapeutic areas. Our aNK platform and our haNK, taNK and t-haNK product candidates are in the early stages of development and may never become commercialized. All of our product candidates developed from our technology platform will require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before they can be successfully commercialized. Because all of our product candidates are based on the same core aNK technology, if any of our product candidates encounter safety or efficacy problems, developmental delays or regulatory issues or other problems, these could impact the development plans for our other product candidates.

Utilizing haNK and taNK cells represents a novel approach to immunotherapy, including cancer treatment, and we must overcome significant challenges in order to successfully develop, commercialize and manufacture our product candidates.

We have concentrated our research and development efforts on utilizing aNK cells as an immunotherapy platform and genetically modified aNK cells as product candidates based on this platform. We believe that our product candidates represent a novel approach to immunotherapy, including cancer treatment. Advancing this novel immunotherapy creates significant challenges for us, including:

| • | educating medical personnel regarding the potential side effect profile of our cells;

| • | enrolling sufficient numbers of patients in clinical trials;

| • | developing a reliable, safe and effective means of genetically modifying our cells;

| • | manufacturing our cells on a large scale and in a cost-effective manner;

| • | submitting applications for and obtaining regulatory approval, as the FDA and other regulatory authorities have limited experience with commercial development of immunotherapies for cancer; and

| • | establishing sales and marketing capabilities, as well as developing a manufacturing process and distribution network to support the commercialization of any approved products.

We must be able to overcome these challenges in order for us to successfully develop, commercialize and manufacture our product candidates utilizing haNK and taNK cells.

Even if we successfully develop and commercialize our haNK product candidate for pancreatic cancer, we may not be successful in developing and commercializing our other product candidates, and our commercial opportunities may be limited.

While our most advanced product candidate and program is now haNK in pancreatic cancer, after transitioning our aNK product candidate to haNK for Merkel cell carcinoma, we believe that our future success is highly dependent upon our ability to successfully develop and commercialize our other product candidates as well. We are simultaneously pursuing preclinical and clinical development of a number of product candidates spanning several therapeutic areas, including various types of cancer and infectious and inflammatory diseases. For example, we are devoting substantial resources toward the development of haNK product candidates, which we plan to develop as combination therapies with commercially approved mAbs and late-stage product candidates, and taNK product candidates, which we plan to develop for acute myeloid leukemia, or AML, Non-Hodgkin’s lymphoma, or NHL, and solid tumors such as breast, ovarian, lung, head and neck and colorectal cancers. In addition, our ability to realize the full value of our aNK platform will depend on our success in pursuing our other planned product candidates for a wide range of other indications.

40

Even if we are successful in continuing to build our pipeline of additional product candidates based on our technology platform, obtaining regulatory appr ovals and commercializing any approved product candidates will require substantial additional funding beyond the net proceeds of our IPO and are prone to numerous risks of failure. Investment in biopharmaceutical product development involves significant ri sks that any product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile to the satisfaction of regulatory authorities, gain regulatory approval or become commercially viable. We cannot assure you that we will be able to su ccessfully advance any product candidates through the development process. Our research programs may initially show promise in identifying additional product candidates, but ultimately fail to yield additional product candidates for clinical development or commercialization for many reasons, including the following:

| • | our additional product candidates may not succeed in preclinical or clinical testing due to failing to generate enough data to support the initiation or continuation of clinical trials or due to lack of patient enrollment in clinical trials;

| • | a product candidate may be shown to have harmful side effects or other characteristics in larger scale clinical studies that indicate it is unlikely to meet applicable regulatory criteria;

| • | competitors may develop alternatives that render our product candidates obsolete or less attractive;

| • | we may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates from our technology platform;

| • | product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

| • | the market for a product candidate may change during our program so that the continued development of that product candidate is no longer reasonable;

| • | a product candidate may not be capable of being manufactured in commercial quantities at an acceptable cost, or at all; and

| • | a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors.

If any of these events occur, we may be forced to abandon our development efforts for a product candidate or the entire platform, or we may not be able to identify, discover, develop or commercialize additional product candidates, which would have a material adverse effect on our business and could potentially cause us to cease operations.

*We may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to, the FDA may not permit us to proceed in a timely manner, or at all.

Prior to commencing clinical trials in the United States for any of our product candidates, we may be required to have an allowed IND for each product candidate. As of the date of this filing, we have numerous INDs for clinical trials that have been allowed in the U.S., including ten for our cryopreserved haNK product candidate as part of our NANT Cancer Vaccine, or NCV, program. We are required to file additional INDs prior to initiating our planned clinical trials. We believe that the data from previous preclinical studies will support the filing of additional INDs, to enable us to undertake additional clinical studies as we have planned. However, submission of an IND may not result in the FDA allowing further clinical trials to begin and, once begun, issues may arise that will require us to suspend or terminate such clinical trials. Additionally, even if relevant regulatory authorities agree with the design and implementation of the clinical trials set forth in an IND or clinical trial application, these regulatory authorities may change their requirements in the future. The fact that we are pursuing novel technologies may also exacerbate these risks with respect to our product candidates, and as a result we may not meet our anticipated clinical development timelines.

*We face significant competition in the biopharmaceutical industry, and many of our competitors have substantially greater experience and resources than we have.

Even if our aNK platform products prove successful, we might not be able to remain competitive because of the rapid pace of technological development in the biopharmaceutical field. Our haNK, taNK and t-haNK product candidates will compete with other cell-based immunotherapy approaches using T- and dendritic cells. We are aware of companies developing product candidates focused on natural killer, or NK, cells. These companies include Bristol-Myers Squibb, Celgene Corporation, and Innate Pharma. Companies that are currently focused on T-cell based treatments include Adaptimmune Limited, Adicet Bio, Amgen Inc., Autolus, Bellicum Pharmaceuticals, Inc., Bluebird Bio, Inc., Celgene Corporation/Juno Therapeutics, Cell Design Labs, Cell Medica Limited, Cellectis SA, Celyad, Gilead Sciences/Kite Pharma, GlaxoSmithKline plc, Green Cross LabCell, Immune Therapeutics, Immunocore Limited, Intrexon Corporation, Iovance Biotherapeutics, Kiadis Pharma Netherlands B.V., MolMed, S.p.a., Mustang Bio, Inc., Novartis AG, Pfizer Inc., Precision Biosciences, Inc., Takara Bio, Inc., Transposagen Biopharmaceuticals, Unum Therapeutics, and Ziopharma Oncology, Inc. There are currently two approved T-cell based treatments (CAR-T), which are marketed by Novartis AG and Gilead Sciences/Kite Pharma. There is currently one approved dendritic cell-based cancer vaccine, PROVENGE, which is marketed by Valeant Pharmaceuticals for the treatment of metastatic castration resistant prostate cancer. Other companies focused on developing dendritic cell-based product candidates include Argos Therapeutics, Inc., Biovest International, Inc., ImmunoCellular Therapeutics, Ltd., Immune Design, Inc., Inovio Pharmaceuticals, Inc., Intrexon Corporation, Medigene AG, and Northwest Biotherapeutics, Inc.

41

Many of our current or potential competitors have greater financial and other resources, larger r esearch and development staffs, and more experienced capabilities in researching, developing and testing products than we do. All of these companies also have more experience in conducting clinical trials, obtaining FDA and other regulatory approvals, and manufacturing, marketing and distributing therapeutic products. Smaller or early-stage companies like us may successfully compete by establishing collaborative relationships with larger pharmaceutical companies or academic institutions. Mergers and acquisi tions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Our commercial opportunity could be reduced or eliminated if our competitor s develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any products that we may develop. Furthermore, currently approved products could be discovered to h ave application for treatment of cancer and other diseases, which could give such products significant regulatory and market timing advantages over any of our product candidates. In addition, large pharmaceutical companies or other companies with greater r esources or experience than us may choose to forgo therapy opportunities that would have otherwise been complementary to our product development and collaboration plans. Our competitors may succeed in developing, obtaining patent protection for, or commerc ializing their products more rapidly than us, which could result in our competitors establishing a strong market position before we are able to enter the market. A competing company developing or acquiring rights to a more effective therapeutic product for the same diseases targeted by us, or one that offers significantly lower costs of treatment, could render our products noncompetitive or obsolete. We may not be successful in marketing any product candidates we may develop against competitors.

Our business plan involves the creation of a complex integrated ecosystem capable of addressing a wide range of indications. As a result, our future success depends on our ability to prioritize among many different opportunities.

We do not have sufficient resources to pursue development of all or even a substantial portion of the potential opportunities that we believe will be afforded to us by our planned integrated ecosystem. Because we have limited resources and access to capital to fund our operations, our management must make significant prioritization decisions as to which product candidates to pursue and how much of our resources to allocate to each. Our management has broad discretion to suspend, scale down, or discontinue any or all of these development efforts, or to initiate new programs to treat other diseases. If we select and commit resources to opportunities that we are unable to successfully develop, or we forego more promising opportunities, our business, financial condition and results of operations will be adversely affected.

Our planned integrated ecosystem is to be comprised of multiple novel technologies that have never been tested in combination with our product candidates, and we do not know whether our attempts to use them in combination will be effective.

Our business strategy includes using our integrated discovery engine to introduce new product candidates in combination with technologies that were developed by other companies with whom we have entered into strategic collaborations. Each technology and collaboration is unique and has its own risks, and the failure of any individual technology or the combination could materially impair our ability to successfully pursue our own aNK platform and related product candidates.

Our Joint Development and License Agreement with Sorrento Therapeutics, Inc., or Sorrento, expired in December 2017. During our exclusive term, no joint taNK product candidates were identified for development. Although we have been free to independently pursue Her2Neu, CSPG4, CD33, CD123 GD2 and other specified antibodies during the Sorrento exclusive term and are now free to independently pursue all antibodies, we are reliant on third parties for such antibodies on which to base our taNK product candidates. We do not know if we can obtain such antibodies from third parties on commercially reasonable terms and such reliance on third parties may delay our development and increase the associated development costs.

We have also entered into collaborations with affiliates of NantWorks, LLC, or NantWorks, to provide us with access to their database of genomic, transcriptomic and proteomic information collected from a broad array of tumor cell and peripheral blood samples. Our rights to use the database are non-exclusive and are governed by agreements cancelable with 90 days’ notice, and we therefore cannot guarantee that we would ultimately have any competitive advantage based on our use of this technology. The database also may not be able to identify novel tumor-associated antigens that are targetable with our technology and the genetic and proteomic analysis capability may not be effective as a companion diagnostic to guide therapeutic treatments.

Although we have agreements with these parties, we cannot control their actions and they may make mistakes, work with our competitors, or not devote sufficient time and attention to us. The arrangements may become cost-prohibitive for us, and their technologies may become obsolete or better options may be available that we are unable to utilize. Using our technology in combination with theirs has never been tried, and we cannot assure you that we will be successful in producing product candidates in connection with these arrangements.

42

*Clinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and clinical trials may not be predictive of future clinical trial results, we may not be able to rely on the aNK and haNK phase I and II clinical trials data for our other product candidates, a nd our clinical trials may fail to adequately demonstrate substantial evidence of safety and efficacy of our product candidates.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. A failure of one or more of our clinical trials can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates in later stages of clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if our clinical trials are completed, the results may not be sufficient to support obtaining regulatory approval for our product candidates. In addition, our strategy and anticipated timelines are predicated upon our ability to utilize the phase I and II clinical trial data for aNK and haNK observed to date to support our planned clinical trials for all of our product candidates, including our haNK, taNK and t-haNK product candidates. To date, we have several INDs for our haNK product candidates, and we cannot offer assurances that the FDA will allow us to utilize the phase I and II aNK and haNK data to support other planned clinical trials or allow our anticipated INDs for (1) planned phase I or phase Ib/IIa clinical trials for our other product candidates, (2) planned phase IIb/III clinical trials for our haNK and taNK product candidates as potential combination therapies, or (3) any other planned clinical trials, including registration studies.

We have in the past experienced delays in our ongoing clinical trials and we may experience additional delays in the future. We do not know whether future clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can be delayed, suspended or terminated by us, regulatory authorities, clinical trial investigators, and ethics committees for a variety of reasons, including failure to:

| • | generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation of clinical trials;

| • | obtain regulatory approval, or feedback on clinical trial design, to commence a clinical trial;

| • | identify, recruit and train suitable clinical investigators;

| • | reach agreement on acceptable terms with prospective Contract Research Organizations, or CROs, and clinical trial sites;

| • | obtain and maintain institutional review board, or IRB, approval at each clinical trial site;

| • | identify, recruit and enroll suitable patients to participate in a clinical trial;

| • | have a sufficient number of patients complete a clinical trial or return for post-treatment follow-up;

| • | ensure clinical investigators observe clinical trial protocol or continue to participate in a clinical trial;

| • | address any patient safety concerns that arise during the course of a clinical trial;

| • | address any conflicts with new or existing laws or regulations;

| • | add a sufficient number of clinical trial sites;

| • | timely manufacture sufficient quantities of product candidate for use in clinical trials; or

| • | raise sufficient capital to fund a clinical trial.

Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ or caregivers’ perceptions as to the potential advantages of the drug candidate being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the data safety monitoring board for such clinical trial or by the FDA or any other regulatory authority, or if the IRBs of the institutions in which such clinical trials are being conducted suspend or terminate the participation of their clinical investigators and sites subject to their review. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements, including Good Clinical Practices, or GCPs, or our clinical protocols, inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

43

If we experience delays in the completion of, or termination of, any clinical tri al of our product candidates for any reason, the commercial prospects of our product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clin ical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condit ion and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

We may be unable to obtain regulatory approval for our product candidates. The denial or delay of any such approval would delay commercialization and have a material adverse effect on our potential to generate revenue, our business and our results of operations.

The research, development, testing, manufacturing, labeling, packaging, approval, promotion, advertising, storage, recordkeeping, marketing, distribution, post-approval monitoring and reporting, and export and import of biopharmaceutical products are subject to extensive regulation by the FDA, and by foreign regulatory authorities in other countries. These regulations differ from country to country. To gain approval to market our product candidates, we must provide regulatory authorities with substantial evidence of safety, purity and potency of the product for each indication we seek to commercialize. We have not yet obtained regulatory approval to market any of our product candidates in the United States or any other country. Our business depends upon obtaining these regulatory approvals.

The FDA can delay, limit or deny approval of our product candidates for many reasons, including:

| • | our inability to satisfactorily demonstrate with substantial clinical evidence that the product candidates are safe, pure and potent for the requested indication;

| • | the FDA’s disagreement with our clinical trial protocol or the interpretation of data from preclinical studies or clinical trials;

| • | the population studied in the clinical trial not being sufficiently broad or representative to assess safety in the full population for which we seek approval;

| • | our inability to demonstrate that clinical or other benefits of our product candidates outweigh any safety or other perceived risks;

| • | the FDA’s determination that additional preclinical or clinical trials are required;

| • | the FDA’s non-approval of the labeling or the specifications of our product candidates;

| • | the FDA’s failure to accept the manufacturing processes or facilities of third-party manufacturers with which we contract; or

| • | the potential for approval policies or regulations of the FDA to significantly change in a manner rendering our clinical data insufficient for approval.

Even if we eventually successfully complete clinical testing and receive approval of any regulatory filing for our product candidates, the FDA may only grant approval contingent on the performance of costly additional post-approval clinical trials. The FDA may also approve our product candidates for a more limited indication or a narrower patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. To the extent we seek regulatory approval in foreign countries, we may face challenges similar to those described above with regulatory authorities in applicable jurisdictions. Any delay in obtaining, or our inability to obtain, applicable regulatory approval for any of our product candidates would delay or prevent commercialization of our product candidates and would materially adversely impact our business, results of operations, financial condition and prospects.

Use of our product candidates could be associated with side effects or adverse events.

As with most biopharmaceutical products, use of our product candidates could be associated with side effects or adverse events which can vary in severity and frequency. Side effects or adverse events associated with the use of our product candidates may be observed at any time, including in clinical trials or once a product is commercialized, and any such side effects or adverse events may negatively affect our ability to obtain regulatory approval or market our product candidates. Side effects such as toxicity or other safety issues associated with the use of our product candidates could require us to perform additional studies or halt development or sale of these product candidates or expose us to product liability lawsuits which will harm our business. We may be required by regulatory agencies to conduct additional preclinical or clinical trials regarding the safety and efficacy of our product candidates which we have not planned or anticipated. We cannot assure you that we will resolve any issues related to any product-related adverse events to the satisfaction of the FDA or any regulatory agency in a timely manner or ever, which could harm our business, prospects and financial condition.

44

In the phase I clinical trial of aNK conducted by Rush University in 12 patients, one case of transient grade 4 hypoglycemia and several mild-to-moderate fevers were seen in five out of six patients receiving higher doses. In the phase I clinical trial of aNK in 15 patients conducted by the University of Frankfurt, one report of mild fever and a report of sustained back pain were o bserved. In the phase I clinical trial of aNK in seven patients conducted at the University of Pittsburgh, one report of grade 2 fever, chills and transient hypotension, responsive to supportive care was observed. In the phase I clinical trial of aNK in 12 patients conducted at the Princess Margaret Hospital, four grade 1-2 transient fevers and chills were observed. If we are successful in commercializing our product candidates, the FDA and other foreign regulatory agency regulations will require that we re port certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We may inadvertently fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adver se event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA or other foreign regulatory agencies could take action including criminal prosecution, th e imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of future products.

*The clinical and commercial utility of our aNK platform is uncertain and may never be realized.

Our aNK platform is in the early stages of development. To date, aNK cells have only been evaluated in early clinical trials including four published phase I clinical safety trials in approximately 46 patients. These clinical trials were designed to evaluate safety and tolerability, and not designed to produce statistically significant results as to efficacy. Most of the data to date regarding aNK cells were derived from clinical trials not conducted by us, including physician-sponsored clinical trials, and utilizing product not manufactured by us but which we believe is comparable to aNK. To date, the Company has opened eight clinical trials to evaluate cryopreserved haNK cells in company sponsored clinical trials, though we are still very early in enrollment. Success in early clinical trials does not ensure that large-scale clinical trials will be successful nor does it predict final results. In addition, we will not be able to treat patients if we cannot manufacture a sufficient quantity of NK cells that meet our minimum specifications. In addition, our haNK and Her2.taNK product candidates have only been tested in a small number of patients. Results from these clinical trials may not necessarily be indicative of the safety and tolerability or efficacy of our products as we expand into larger clinical trials.

We may not ultimately be able to provide the FDA with substantial clinical evidence to support a claim of safety, purity and potency sufficient to enable the FDA to approve aNK platform product candidates for any indication. This may be because later clinical trials fail to reproduce favorable data obtained in earlier clinical trials, because the FDA disagrees with how we interpret the data from these clinical trials, or because the FDA does not accept these therapeutic effects as valid endpoints in pivotal clinical trials necessary for market approval. We will also need to demonstrate that aNK platform product candidates are safe. We do not have data on possible harmful long-term effects of aNK platform product candidates and do not expect to have this data in the near future. As a result, our ability to generate clinical safety and effectiveness data sufficient to support submission of a marketing application or commercialization of our aNK platform therapy is uncertain and is subject to significant risk.

*We have limited experience as a company conducting clinical trials and have relied on third parties to conduct many of our preclinical studies and clinical trials. Any failure by a third party or by us to conduct the clinical trials according to Good Clinical Practices and in a timely manner may delay or prevent our ability to seek or obtain regulatory approval for or commercialize our product candidates.

All four completed phase I clinical trials with aNK have been investigator-initiated studies sponsored by the investigator’s institution. To date, the only company sponsored studies to engage in patient enrollment have been for the following indications: Merkel cell, pancreatic, head & neck, triple negative breast, squamous cell, and haNK in advanced solid tumor. Additional phase Ib/II and phase II clinical trials in various indications are newly opened, including for colorectal and hepatocellular cancers and chordoma. This relative lack of experience may contribute to our planned clinical trials not beginning or completing on time, if at all. Large-scale clinical trials will require significant additional resources and reliance on CROs, clinical investigators, or consultants. Consequently, our reliance on outside parties may introduce delays beyond our control. Our CROs and other third parties must communicate and coordinate with one another in order for our trials to be successful. Additionally, our CROs and other third parties may also have relationships with other commercial entities, some of which may compete with us. If our CROs or other third parties conducting our clinical trials do not perform their contractual duties or regulatory obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols, GCPs, or other regulatory requirements or for any other reason, we may need to conduct additional clinical trials or enter into new arrangements with alternative CROs, clinical investigators or other third parties. We may be unable to enter into arrangements with alternative CROs on commercially reasonable terms, or at all.

45

We and the third part ies upon which we rely are required to comply with GCPs. GCPs are regulations and guidelines enforced by regulatory authorities around the world, through periodic inspections, for products in clinical development. If we or these third parties fail to compl y with applicable GCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and have to be repeated, and our submission of marketing applications may be delayed or the regulatory authorities may require us to perform addi tional clinical trials before approving our marketing applications. We are subject to the risk that, upon inspection, a regulatory authority will determine that any of our clinical trials fail to comply or failed to comply with applicable GCP regulations. In addition, our clinical trials must be conducted with material produced under cGMP and Good Tissue Practice, or GTP, regulations, which are enforced by regulatory authorities. In addition, our clinical trials must be conducted with material produced unde r cGMP regulations, which are enforced by regulatory authorities. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be significantly impacted if our CROs, clinical investigators or other third parties violate federal or state healthcare fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

We also anticipate that part of our strategy for pursuing the wide range of indications potentially addressed by our aNK, haNK, taNK and t-haNK platforms will involve further investigator-initiated clinical trials. While these trials generally provide us with valuable clinical data that can inform our future development strategy in a cost-efficient manner, we generally have less control over not only the conduct but also the design of these clinical trials. Third-party investigators may design clinical trials involving our product candidates with clinical endpoints that are more difficult to achieve or in other ways that increase the risk of negative clinical trial results compared to clinical trials we may design on our own. Negative results in investigator-initiated clinical trials, regardless of how the clinical trial was designed or conducted, could have a material adverse effect on our prospects and the perception of our product candidates.

Moreover, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. In addition, some of our trials are being run by an entity controlled by our employees. Under certain circumstances, the Company may be required to report some of these relationships to the FDA. The FDA may conclude that a financial relationship between the company and a principal investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial of regulatory approval of one or more of our product candidates.

*We are heavily dependent on our senior management, particularly Drs. Patrick Soon-Shiong and Barry Simon, and a loss of a member of our senior management team in the future could harm our business.

If we lose members of our senior management, we may not be able to find appropriate replacements on a timely basis, and our business could be adversely affected. Our existing operations and continued future development depend to a significant extent upon the performance and active participation of certain key individuals, including Drs. Patrick Soon-Shiong, our Chairman and CEO and our principal stockholder, and Barry Simon, our President and Chief Administrative Officer. Although Dr. Soon-Shiong will primarily focus on NantKwest matters and is highly active in our management, he does devote a certain amount of his time to a number of different endeavors and companies, including NantWorks, a collection of multiple companies in the healthcare and technology space, which he founded in 2011. The risks related to our dependence upon Dr. Soon-Shiong are particularly acute given his ownership percentage, the commercial and other relationships that we have with entities affiliated with him, role in our company and reputation. If we were to lose Drs. Soon-Shiong or Simon, we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially adversely affected.

Competition for qualified personnel in the biotechnology and pharmaceuticals industry is intense due to the limited number of individuals who possess the skills and experience required. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options and warrants that vest over time. Additionally, we provided warrants that vest upon the achievement of certain performance milestones to Dr. Soon-Shiong. These performance warrants provided to Dr. Soon-Shiong have fully vested. The value to employees of stock options and warrants that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. We face significant competition for employees, particularly scientific personnel, from other biopharmaceutical companies, which include both publicly-traded and privately-held companies, and we may not be able to hire new employees quickly enough to meet our needs. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. Except with respect to Dr. Simon, we do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We may not be able to attract and retain quality personnel on acceptable terms, or at all, which may cause our business and operating results to suffer.

46

*Dr. Soon-Shiong, our Chairman and CEO and our principal stockholder, h as significant interests in other companies which may conflict with our interests.

Our Chairman and CEO, Dr. Soon-Shiong, is the founder of NantWorks. The various NantWorks companies are currently exploring opportunities in the immunotherapy, infectious disease and inflammatory disease fields. In particular, we have agreements with NantOmics, LLC (“NantOmics”), NanoCav, LLC (“NanoCav”), NantCell, Inc. (“NantCell”), NantBio, Inc. (“NantBio”), VivaBioCell S.p.A. (“VivaBioCell”), Liquid Genomics, Inc. (“Liquid Genomics”) and Altor BioScience, LLC (“Altor”) to provide services, technology and equipment for use in our efforts to develop our product pipeline. Dr. Soon-Shiong holds a controlling interest in these entities. As a result, they or other companies affiliated with Dr. Soon-Shiong may compete with us for business opportunities or, in the future, develop products that are competitive with ours (including products in the other therapeutic fields in which we may target in the future). In addition, we may enter into an agreement relating to an IL-15 superagonist product developed by an affiliate and we are also pursuing supply arrangements for various investigational agents controlled by affiliates to be used in our clinical trials. If Dr. Soon-Shiong was to cease his affiliation with us or with NantWorks, these entities may be unwilling to continue these relationships with us on commercially reasonable terms, or at all, and as a result may impede our ability to control the supply chain for our combination therapies. These collaboration agreements do not typically specify how sales will be apportioned between the parties upon successful commercialization of the product. As a result, we cannot guarantee that we will receive a percentage of the revenue that is at least proportional to the costs that we will incur in commercializing the product candidate.

In January 2018, we entered into another sublease agreement with NantBio related to our San Diego, California, facility. This agreement for space and services was effective as of December 1, 2017 for a term of 24 months. Our Chairman and CEO has a controlling interest in NantBio. As a result, Dr. Soon-Shiong’s interests may not be aligned with our other stockholders and he may from time to time be incentivized to take certain actions that benefit his other interests and that our other stockholders do not view as being in their interest as investors in our company. Moreover, even if they do not directly relate to us, actions taken by Dr. Soon-Shiong and the companies with which he is involved could impact us. Given we changed our corporate name to NantKwest during 2015, this is particularly true of the various NantWorks companies.

*We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this growth.

To effect our business plan, we will need to rapidly add other management, accounting, regulatory, manufacturing and scientific staff. As of June 30, 2018, we had 184 employees. We will need to attract, retain and motivate a significant number of new additional managerial, operational, sales, marketing, financial, and other personnel, as well as highly skilled scientific and medical personnel, and to expand our capabilities to successfully pursue our research, development, manufacturing and commercialization efforts and secure collaborations to market and distribute our products. This growth may strain our existing managerial, operational, financial and other resources. We also intend to add personnel in our research and development and manufacturing departments as we expand our clinical trial and research capabilities. Moreover, we will need to hire additional accounting and other personnel and augment our infrastructure as a result of operating as a public company. Any inability to attract and retain qualified employees to enable our planned growth and establish additional capabilities or our failure to manage our growth effectively could delay or curtail our product development and commercialization efforts and harm our business.

*We have limited manufacturing experience and may not be able to manufacture haNK or taNK cells on a large scale or in a cost-effective manner.

haNK and Her2.taNK cells have been grown in various quantities in closed cell culture systems and small scale bioreactors. With all manufacturing efforts being conducted in-house, we will need to develop the ability to grow haNK and taNK cells on a large scale basis in a cost efficient manner. While we have made great strides with our haNK production, including a validated cryopreserved form of the product, we have not demonstrated the ability to manufacture these cells beyond quantities sufficient for our clinical programs. We have not demonstrated the ability to manufacture our taNK cells beyond quantities sufficient for research and development and limited clinical activities. We have also experienced increases in manufacturing costs and sporadic decreases in manufacturing yield of both haNK and taNK cells. In addition, we have no experience manufacturing our NK cells specifically at the capacity that will be necessary to support commercial sales. The novel nature of our technology also increases the complexity and risk in the manufacturing process. In 2017, we opened our Culver City, California, site for the manufacture of cryopreserved haNK cells for our planned clinical trials and plan to open our larger El Segundo, California, site in 2018 for the manufacture of all of our haNK and taNK cells for our clinical trials and, if we receive FDA approval, initial commercialization. However, we may encounter difficulties in obtaining the approvals for, and designing, constructing, validating and operating, any new manufacturing facility. We may also be unable to hire the qualified personnel that we will require to accommodate the expansion of our operations and manufacturing capabilities. If we relocate our manufacturing activities to a new facility during or after a pivotal clinical trial, we may be unable to obtain regulatory approval unless and until we demonstrate to the FDA’s satisfaction the similarity of our haNK and taNK cells manufactured in the new facility to our cells manufactured in prior facilities. If we cannot adequately demonstrate similarity to the FDA, we could be required to repeat clinical trials, which would be expensive, and would substantially delay regulatory approval.

47

Because our product candidates are cell-based, their manufacture is complicated. In addition, we rely on certain third party suppliers for manufacturing supplies such as X-VIVO 10 media to grow and produce our cells. Reliance on such third-party suppl iers exposes us to supply interruptions and shortages that could have an adverse effect on our ability to produce product. Moreover, our present production process may not meet our initial expectations as to reproducibility, yield, purity or other measurem ents of performance. Any supply interruption from third parties and entities that are affiliated with Patrick Soon-Shiong and/or NantWorks could materially harm our ability to manufacture our product candidates until a new source of supply, if any, could b e identified and qualified. We may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. In addition, we may have to customize a bioreactor system to our manufacturing process. Because our manuf acturing process is unproven, we may never successfully commercialize our products. In addition, because the clinical trials were conducted using a system that will not be sufficient for commercial quantities, we may have to show comparability of the diffe rent versions of systems we have used. For these and other reasons, we may not be able to manufacture haNK and taNK cells on a large scale or in a cost-effective manner.

aNK platform cells have been produced at academic institutions associated with our other clinical trial sites. In the past, the lack of production of aNK platform cells has caused delays in the commencement of our clinical trials. We have been establishing NK cell production capacity to meet anticipated demand for our planned clinical trials but may not be able to successfully build out our capacity to meet our current and anticipated future needs. Any damage to or destruction of our facility and equipment, prolonged power outage, contamination or shut down by the FDA or other regulatory authority could significantly impair or curtail our ability to produce haNK and taNK cells.

We are dependent on third parties to store our aNK, haNK, taNK or t-haNK cells, and any damage or loss to our master cell bank would cause delays in replacement, and our business could suffer.

The aNK cells of our master and working cell banks are stored in freezers at a third party biorepository (BioReliance) and also stored in our freezers at our production facility. If these cells are damaged at both facilities, including by the loss or malfunction of these freezers or our back-up power systems, as well as by damage from fire, power loss or other natural disasters, we would need to establish replacement master and working cell banks, which would impact clinical supply and delay our patients’ treatments. If we are unable to establish replacement cell banks, we could incur significant additional expenses and liability to patients whose treatment is delayed, and our business could suffer.

If we or any of our third party manufacturers that we may use do not maintain high standards of manufacturing, our ability to develop and commercialize haNK, taNK or t-haNK cells could be delayed or curtailed.

We and any third parties that we may use in the future to manufacture our products must continuously adhere to cGMP regulations rigorously enforced by the FDA through its facilities inspection program. If our facilities or the facilities of third parties who we may use in the future to produce our products do not pass a pre-approval inspection, the FDA will not grant market approval for haNK, taNK or t-haNK cells. In complying with cGMP, we and any third-party manufacturers must expend significant time, money and effort in production, record-keeping and quality control to assure that each component of our haNK, taNK or t-haNK cell therapies meets applicable specifications and other requirements. We or any of these third-party manufacturers may also be subject to comparable or more stringent regulations of foreign regulatory authorities. If we or any of our third-party manufacturers fail to comply with these requirements, we may be subject to regulatory action, which could delay or curtail our ability to develop, obtain regulatory approval of, and commercialize haNK, taNK or t-haNK cells. If our component part manufacturers and suppliers fail to provide components of sufficient quality, and that meet our required specifications, our clinical trials or commercialization of haNK, taNK or t-haNK cells could be delayed or halted, and we could face product liability claims.

If we or our third-party manufacturers that we may engage use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials, by us and any third-party manufacturers that we may use in the future. We and our manufacturers are subject to federal, state and local laws and regulations in the United States governing the use, manufacture, storage, handling and disposal of medical and hazardous materials. Although we believe that our procedures for using, storing and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or injury resulting from medical or hazardous materials. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from medical or hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, prospects, financial condition or results of operations.

48

We have not yet developed a validated methodology for freezing and thawing large quantities of taNK cells, which we believe will be required for the storage and distribution of our taNK product candidates.

We have not demonstrated that taNK cells can be frozen and thawed in large quantities without damage, in a cost-efficient manner and without degradation over time. We may encounter difficulties not only in developing freezing and thawing methodologies, but also in obtaining the necessary regulatory approvals for using such methodologies in treatment. If we cannot adequately demonstrate similarity of our frozen product to the unfrozen form to the satisfaction of the FDA, we could face substantial delays in our regulatory approvals. If we are unable to freeze taNK cells for shipping purposes, our ability to promote adoption and standardization of our products, as well as achieve economies of scale by centralizing our production facility, will be limited. Even if we are able to successfully freeze and thaw taNK cells in large quantities, we will still need to develop a cost-effective and reliable distribution and logistics network, which we may be unable to accomplish. For these and other reasons, we may not be able to commercialize haNK or taNK cells on a large scale or in a cost-effective manner.

We will rely on third party healthcare professionals to administer haNK or taNK cells to patients, and our business could be harmed if these third parties administer these cells incorrectly.

We will rely on the expertise of physicians, nurses and other associated medical personnel to administer haNK or taNK cells to clinical trial patients. If these medical personnel are not properly trained to administer, or do not properly administer, haNK or taNK cells, the therapeutic effect of haNK or taNK cells may be diminished or the patient may suffer injury.

In addition, if we achieve the ability to freeze and thaw our taNK cells, third-party medical personnel will have to be trained on proper methodology for thawing haNK or taNK cells received from us. If this thawing is not performed correctly, the cells may become damaged and/or the patient may suffer injury. While we intend to provide training materials and other resources to these third-party medical personnel, the thawing of haNK or taNK cells will occur outside our supervision and may not be administered properly. If, due to a third-party error, people believe that haNK or taNK cells are ineffective or harmful, the desire to use haNK or taNK cells may decline, which would negatively impact our business, reputation and prospects. We may also face significant liability even though we may not be responsible for the actions of these third parties.

Even if any of our product candidates receive regulatory approvals, they may fail to achieve the broad degree of market acceptance and use necessary for commercial success.

Any potential future commercial success of any of our product candidates will depend, among other things, on its acceptance by physicians, patients, healthcare payors, and other members of the medical community as a therapeutic and cost-effective alternative to commercially available products. Because only a few cell-based therapy products have been commercialized, we do not know to what extent cell-based immunotherapy products will be accepted as therapeutic alternatives. If we fail to gain market acceptance, we may not be able to earn sufficient revenues to continue our business. Market acceptance of, and demand for, any product that we may develop, if approved for commercial sale, will depend on many factors, including:

| • | our ability to provide substantial evidence of safety and efficacy;

| • | convenience and ease of administration;

| • | prevalence and severity of adverse side effects;

| • | availability of alternative and competing treatments;

| • | cost effectiveness;

| • | the ability to offer appropriate patient access programs, such as co-pay assistance;

| • | the extent to which physicians recommend our products to their patients;

| • | effectiveness of our marketing and distribution strategy and pricing of any product that we may develop;

| • | publicity concerning our products or competitive products; and

| • | our ability to obtain sufficient third-party coverage and adequate reimbursement.

If haNK and taNK cells are approved for use but fail to achieve the broad degree of market acceptance necessary for commercial success, our operating results and financial condition will be adversely affected. In addition, even if haNK and taNK cells gain acceptance, the markets for treatment of patients with our target indications may not be as significant as we estimate.

49

Even if we are able to commercialize any product candidates, such products may become subject to unfavorable pricing regulations, third-party reimbursement p ractices or healthcare reform initiatives, which would harm our business.

The regulations that govern marketing approvals, pricing and reimbursement for new drugs vary widely from country to country. In the United States, recently enacted legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay the commercial launch of the product and negatively impact the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if any product candidates we may develop obtain marketing approval.

Our ability to successfully commercialize any products that we may develop also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. Government authorities also impose mandatory discounts for certain patient groups and may seek to increase such discounts at any time. Future regulation may negatively impact the price of our products, if approved. It may be difficult to promptly obtain coverage and profitable payment rates from both the government-funded and private payors for any of our approved product candidates, and this may have a material adverse effect on our operating results, our ability to raise capital and our overall financial condition.

There are risks inherent in our business that may subject us to potential product liability suits and other claims, which may require us to engage in expensive and time-consuming litigation or pay substantial damages and may harm our reputation and reduce the demand for our product.

Our business exposes us to product liability risks, which are inherent in the testing, manufacturing, marketing and sale of biopharmaceutical products. We will face an even greater risk of product liability if we commercialize haNK, taNK and t-haNK cells. For example, we may be sued if any product we develop allegedly causes or is perceived to cause injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Even a successful defense would require significant financial and management resources.

Certain aspects of how haNK, taNK and t-haNK cells are processed and administered may increase our exposure to liability. Medical personnel administer haNK, taNK and t-haNK cells to patients intravenously in an outpatient procedure. This procedure poses risks to the patient similar to those occurring with infusions of other cell products, such as T-cells and stem cells, including blood clots, infection and mild to severe allergic reactions. Additionally, haNK, taNK and t-haNK cells or components of our haNK, taNK and t-haNK cell therapy may cause unforeseen harmful side effects. For example, a patient receiving haNK, taNK and t-haNK cells could have a severe allergic reaction or could develop an autoimmune condition to materials infused with the haNK, taNK t-haNK cells.

In addition, we have not conducted studies on the long-term effects associated with the media that we use to grow our haNK, taNK and t-haNK cells. Similarly, we expect to use media in freezing our haNK, taNK and t-haNK cells for shipment. These media could contain substances that have proved harmful if used in certain quantities. As we continue to develop our haNK, taNK and t-haNK cell therapy, we may encounter harmful side effects that we did not previously observe in our prior studies and clinical trials. Additionally, the discovery of unforeseen side effects of haNK, taNK and t-haNK cells could also lead to lawsuits against us.

Regardless of merit or eventual outcome, product liability or other claims may, among other things, result in:

| • | decreased demand for any approved products;

| • | injury to our reputation and significant negative media attention;

| • | withdrawal of clinical trial participants or cancellation of clinical trials;

| • | costs to defend the related litigation;

| • | a diversion of management’s time and our resources;

| • | substantial monetary awards to clinical trial participants or patients;

50

| • | regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;

| • | exhaustion of any available insurance and our capital resources;

| • | loss of revenue;

| • | a potential decrease in our share price; and

| • | the inability to commercialize any products we develop.

Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the commercialization of our products. We obtained product liability insurance covering our clinical trials with policy limits that we believe are customary for similarly situated companies and adequate to provide us with coverage for foreseeable risks. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. If we determine that it is prudent to increase our product liability coverage due to the commercial launch of any approved product, we may be unable to obtain such increased coverage on acceptable terms, or at all. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when we obtain approval for marketing our product candidates, we intend to expand our insurance coverage to include the sale of the applicable products; however, we may be unable to obtain this liability insurance on commercially reasonable terms. If a successful product liability or other claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover these claims and our business operations could suffer.

We currently have no marketing and sales organization and have no experience in marketing products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.

We currently have no sales, marketing or distribution capabilities and have no experience as a company in marketing products. If we develop internal sales, marketing and distribution organization, this would require significant capital expenditures, management resources and time, and we would have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.

If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we expect to pursue collaborative arrangements regarding the sales, marketing and distribution of our products. However, we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, their sales forces may not be successful in marketing our products. Any revenue we receive would depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the sales, marketing and distribution efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales, marketing and distribution efforts of our product candidates. There can be no assurance that we will be able to develop internal sales, marketing distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in the United States or overseas.

A variety of risks associated with marketing our product candidates internationally could materially adversely affect our business.

We plan to seek regulatory approval of our product candidates outside of the United States and, accordingly, we expect that we will be subject to additional risks related to operating in foreign countries if we obtain the necessary approvals, including:

| • | differing regulatory requirements in foreign countries;

| • | unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

| • | economic weakness, including inflation, or political instability in particular foreign economies and markets;

| • | compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

| • | foreign taxes, including withholding of payroll taxes;

| • | foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

| • | difficulties staffing and managing foreign operations;

| • | workforce uncertainty in countries where labor unrest is more common than in the United States;

51

| • | differing payor reimbursement regimes, governmental payors or patient self-pay systems, and price controls;

| • | potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;

| • | challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

| • | production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

| • | business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with international operations may materially adversely affect our ability to attain or maintain profitable operations.

We have formed, and may in the future form or seek, strategic alliances or enter into additional licensing arrangements in the future, and we may not realize the benefits of such alliances or licensing arrangements.

We have formed, and may in the future form or seek, strategic alliances, create joint ventures or collaborations or enter into additional licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop. For example, we entered into an agreement whereby Viracta granted to us exclusive world-wide rights to Viracta’s phase II drug candidate, VRx-3996, for use in combination with our platform of natural killer cell therapies. However, if Viracta fails to raise sufficient capital to complete their pivotal phase II trial, if their trial is unsuccessful, or if our future clinical trial of NK cell therapy in combination with VRx-3996 fails, the value of the Viracta license would be materially adversely affected.

Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our product candidates could delay the development and commercialization of our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition and results of operations.

Our internal computer systems, or those used by our contractors or consultants, may fail or suffer security breaches.

Our business model involves the storage and transmission of clinical trial and other data on our systems and on the systems of our consultants and contractors, and security breaches expose us to a risk of loss of this information, governmental fines and penalties, litigation and/or potential liability, in addition to negative publicity. Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. Our security measures and those of our contractors and consultants may also be breached due to employee error, malfeasance or otherwise. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed, ongoing or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on affiliated entities and third parties for research and development of our product candidates and to conduct clinical trials and may rely on third parties for the manufacture of our product candidates and similar events relating to their computer systems could also have a material adverse effect on our business.

We expect that these risks and exposures related to our internal computer systems will remain high for the foreseeable future due to the rapidly evolving nature and sophistication of cyber threats to our internal computer systems. There can be no assurance that our efforts to implement adequate security measures will remain sufficient to protect the Company against future cyber attacks. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, suffer damage to our reputation, the further development and commercialization of our product candidates could be delayed and our stock price could decline.

52

Future acquisitions and investments could disrupt our business and harm our financial condition and operating res ults.

Our success may depend, in part, on our ability to expand our products and services. In some circumstances, we may determine to do so through the acquisition of complementary businesses and technologies rather than through, or in conjunction with, internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. The risks we face in connection with acquisitions include:

| • | diversion of management time and focus from operating our business to addressing acquisition integration challenges;

| • | retention of key employees from the acquired company;

| • | coordination of research and development functions;

| • | integration of the acquired company’s accounting, management information, human resources and other administrative systems;

| • | liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, employee disputes, and alleged violations of laws; and

| • | unanticipated write-offs or charges.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses or the write-off of goodwill, any of which could harm our financial condition or operating results.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations, and those of our contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, acts of terrorism, acts of war and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We may rely on third-party manufacturers to produce and process our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. Our corporate headquarters are in California near major earthquake faults and fire zones. Our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

Our employees, affiliates, independent contractors, clinical investigators, CROs, data safety and monitoring boards, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, and insider trading.

We are exposed to the risk of employee fraud, misconduct or other illegal activity by our employees, affiliates, independent contractors, clinical investigators, CROs, data safety and monitoring boards, consultants, commercial partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to:

| • | comply with the laws of the FDA and other similar foreign regulatory bodies;

| • | provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies;

| • | comply with manufacturing standards we have established;

| • | comply with healthcare fraud and abuse, privacy and security and other laws in the United States and similar foreign fraudulent misconduct laws;

| • | comply with federal securities laws regulating insider trading; or

| • | report financial information or data accurately or to disclose unauthorized activities to us.

53

If we obtain FDA approval of any of our product candidates and begin co mmercializing those products in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. These laws may impact, among other things, our curre nt activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrang ements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promoti on, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also include the collection and/or use of information obtained in the course of patient recruitment for clini cal trials. The healthcare laws that may affect our ability to operate include, but are not limited to:

| • | the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or providing any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs;

| • | federal civil and criminal false claims laws and civil monetary penalty laws, including the civil False Claims Act, which impose criminal and civil penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment or approval from the federal government including Medicare and Medicaid, that are false or fraudulent or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

| • | the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal statutes that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

| • | HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose requirements, including mandatory contractual terms, on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information;

| • | the federal Physician Payments Sunshine Act, created under the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, which we refer to collectively as ACA, and its implementing regulations, which require certain manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services, or HHS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members by the 90th day of each subsequent calendar year, and disclosure of such information will be made by HHS on a publicly available website; and

| • | federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers.

Additionally, we are subject to state and foreign laws and regulations that are analogous to the healthcare laws and regulations described above, among others, some of which may be broader in scope and may apply regardless of the payor. Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and relevant compliance guidance promulgated by the federal government; some state laws require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and some state and foreign laws govern the privacy and security of health information in ways that differ, and in certain cases are more stringent than, HIPAA, thus complicating compliance efforts.

54

We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter empl oyee misconduct, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming fro m a failure to be in compliance with such laws or regulations. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will con clude that our business practices do not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not success ful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and/or administrative penalties, damages, disgorgement, monetary fines, possible exclusion from p articipation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our busi ness and our results of operations. Defending against any such actions can be costly, time-consuming, and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brou ght against us, our business may be impaired.

Competing generic medicinal products or biosimilars may be approved.

In the European Union, or E.U., there exists a process for approval of generic biological medicinal products once patent protection and other forms of data and market exclusivity have expired. Arrangements for approval of biosimilar products exist in the United States, as well. Other jurisdictions are considering adopting legislation that would allow the approval of generic biological medicinal products. If generic medicinal products are approved, competition from such products may substantially reduce sales of our products.

Public opinion and scrutiny of cell-based immunotherapy approaches may impact public perception of our company and product candidates, or may adversely affect our ability to conduct our business and our business plans.

Our platform utilizes a relatively novel technology involving the genetic modification of human cells and utilization of those modified cells in other individuals, and no NK cell-based immunotherapy has been approved to date. Public perception may be influenced by claims, such as claims that cell-based immunotherapy is unsafe, unethical, or immoral and, consequently, our approach may not gain the acceptance of the public or the medical community. Negative public reaction to cell-based immunotherapy in general could result in greater government regulation and stricter labeling requirements of cell-based immunotherapy products, including any of our product candidates, and could cause a decrease in the demand for any products we may develop. Adverse public attitudes may adversely impact our ability to enroll clinical trials. Moreover, our success will depend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing, and their patients being willing to receive, treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments they are already familiar with and for which greater clinical data may be available. More restrictive government regulations or negative public opinion could have an adverse effect on our business or financial condition and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop. Adverse events in our clinical trials, even if not ultimately attributable to our product candidates, and the resulting publicity could result in increased governmental regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our potential product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidates.

Our business may be materially affected by changes to fiscal and tax policies. Negative or unexpected tax consequences could adversely affect our results of operations.

The Tax Cuts and Jobs Act of 2017 was approved by Congress on December 20, 2017. This legislation will make significant changes to the U.S. Internal Revenue Code. Such changes include a reduction in the corporate tax rate and limitations on certain corporate deductions and credits, among other changes. Certain of these changes could have a negative impact on our business. In addition, adverse changes in financial outlook of our operations or changes in tax law could lead to changes in our valuation allowances against deferred tax assets on our consolidated balance sheets, which could materially affect our results of operations.

Risks Relating to Government Regulation

We may fail to obtain or may experience delays in obtaining regulatory approval to market our aNK platform product candidates, which will significantly harm our business.

We do not have the necessary approval to market or sell aNK platform products in the United States or any foreign market. Before marketing aNK platform product candidates, we must successfully complete extensive preclinical studies and clinical trials and rigorous regulatory approval procedures. We cannot offer assurances that we will apply for or obtain the necessary regulatory approval to commercialize aNK platform product candidates in a timely manner, or at all.

55

Conducting clinical trials is uncertain and expensive and often takes many years to complete. The results from preclinical testing and early clinical trials are often not predictive of results obtained in later clinical trials. In conducting clinical trials, we may fail to establish the effectiveness of haNK, taNK and haNK c ells for the targeted indication or we may discover unforeseen side effects. Moreover, clinical trials may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Clinical trials are also often s ubject to unanticipated delays. In addition, haNK, taNK and t-haNK cells are produced in small scale cell culture systems and we may be unable to adapt the production method to large scale production systems. Also, patients participating in the trials may die before completion of the clinical trial or suffer adverse medical effects unrelated to treatment with haNK, taNK and t-haNK cells. This could delay or lead to termination of our clinical trials. A number of companies in the biotechnology industry have suffered significant setbacks in every stage of clinical trials, even in advanced clinical trials after positive results in earlier clinical trials.

To date, the FDA has approved only a few cell-based therapies for commercialization. The processes and requirements imposed by the FDA may cause delays and additional costs in obtaining regulatory approvals for our product candidates. Because our aNK platform product is novel, and cell-based therapies are relatively new, regulatory agencies may lack experience in evaluating product candidates like our aNK platform products. This inexperience may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our aNK platform products. In addition, the following factors may impede or delay our ability to obtain timely regulatory approvals, if at all:

| • | our limited experience in filing and pursuing Biologics License Applications, or BLAs, necessary to gain regulatory approvals related to genetically modified cancer cell line therapies;

| • | any failure to develop substantial evidence of clinical efficacy and safety, and to develop quality standards;

| • | a decision by us or regulators to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks;

| • | regulatory inspections of our clinical trials, clinical trial sites or manufacturing facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials if investigators find us not to be in compliance with applicable regulatory requirements;

| • | our ability to produce sufficient quantities of haNK or taNK cells to complete our clinical trials;

| • | varying interpretations of the data generated from our clinical trials; and

| • | changes in governmental regulations or administrative action.

Any delays in, or termination of, our clinical trials could materially and adversely affect our development and collaboration timelines, which may cause our stock price to decline. If we do not complete clinical trials for haNK, taNK and t-haNK cells and seek and obtain regulatory approvals, we may not be able to recover any of the substantial costs we have invested in the development of haNK, taNK and t-haNK cells.

Even if we obtain regulatory approvals for aNK related platform products, those approvals and ongoing regulation of our products may limit how we manufacture and market our products, which could prevent us from realizing the full benefit of our efforts.

If we obtain regulatory approvals, our aNK platform products, and our manufacturing facilities will be subject to continual regulatory review, including periodic unannounced inspections, by the FDA and other United States and foreign regulatory authorities. In addition, regulatory authorities may impose significant restrictions on the indicated uses or impose ongoing requirements for potentially costly post-approval studies. aNK platform product candidates would also be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping and submission of safety and other post-market information. These and other factors may significantly restrict our ability to successfully commercialize haNK and taNK cell therapies.

Manufacturers of biopharmaceutical products and their facilities, vendors and suppliers are subject to continual review and periodic unannounced inspections by the FDA and other regulatory authorities for compliance with cGMP regulations, which include requirements relating to quality control and quality assurance as well as to the corresponding maintenance of records and documentation. Furthermore, our manufacturing facilities must be approved by regulatory agencies before these facilities can be used to manufacture aNK platform products, and they will also be subject to additional regulatory inspections. Any material changes we may make to our manufacturing process or to the components used in our products may require additional prior approval by the FDA and state or foreign regulatory authorities. Failure to comply with FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market.

56

We must also report adverse events that occur when our products are used. The discovery of previously unknown problems with aNK, haNK, taNK and t-haNK cells and therapies or our manufacturing facilities may result in restrictions or sanctions on our p roducts or manufacturing facilities, including withdrawal of our products from the market or suspension of manufacturing. Regulatory agencies may also require us to reformulate our products, conduct additional clinical trials, make changes in the labeling of our product or obtain re-approvals. This may cause our reputation in the market place to suffer or subject us to lawsuits, including class action suits.

In addition, if we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

| • | issue warning letters that can produce adverse publicity;

| • | impose civil or criminal penalties;

| • | suspend regulatory approval;

| • | suspend any ongoing clinical trials;

| • | refuse to approve pending applications or supplements to applications filed by us;

| • | impose restrictions on operations, including costly new manufacturing requirements;

| • | seize or detain products or request us to initiate a product recall; or

| • | pursue and obtain an injunction.

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the product, manufacturing, and in many cases reimbursement of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In some cases, the price that we intend to charge for our products is also subject to approval by regulatory authorities.

We may also submit marketing applications in other countries. Regulatory authorities in jurisdictions outside of the United States have requirements for approval of product candidates with which we must comply prior to marketing in those jurisdictions. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.

We may seek orphan drug status or breakthrough therapy designation for one or more of our product candidates, but even if either is granted, we may be unable to maintain any benefits associated with breakthrough therapy designation or orphan drug status, including market exclusivity.

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition or for which there is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for a disease or condition will be recovered from sales in the United States for that drug or biologic. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full BLA to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. In 2012, the FDA established a Breakthrough Therapy Designation which is intended to expedite the development and review of products that treat serious or life-threatening conditions.

We may seek orphan drug status for one or more of our products candidates, but exclusive marketing rights in the United States may be lost if we seek approval for an indication broader than the orphan designated indication and may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. In addition, we may seek breakthrough therapy designation for one or more of our product candidates, but there can be no assurance that we will receive such designation.

57

We will need to obtain FDA approval of any proposed product brand names, and any failure or del ay associated with such approval may adversely impact our business.

A biopharmaceutical product cannot be marketed in the United States or other countries until we have completed rigorous and extensive regulatory review processes, including review and approval of a brand name. Any brand names we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office, or the USPTO. The FDA may object to a product brand name if they believe the name creates potential for confusion or inappropriately implies medical claims. If the FDA objects to any of our proposed product brand names, we may be required to adopt an alternative brand name for our product candidates. If we adopt an alternative brand name, we would lose the benefit of our existing trademark applications for such product candidate and may be required to expend significant additional resources in an effort to identify a suitable product brand name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our product candidates.

Coverage and reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance.

There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Therefore, market acceptance and sales of our products, if approved, in both domestic and international markets will depend significantly on the availability of adequate coverage and reimbursement from third-party and/or government payors for any of our products and may be affected by existing and future healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and establish approved lists, known as formularies, and establish payment levels for such drugs. Formularies may not include all FDA-approved drugs for a particular indication. Private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment under Medicare Part D may result in a similar reduction in payments from non-governmental payors. We cannot be certain that coverage and adequate reimbursement will be available for any of our products, if approved, or that such coverage and reimbursement will be authorized in a timely fashion. Also, we cannot be certain that reimbursement policies will not reduce the demand for, or the price paid for, any of our products, if approved. If reimbursement is not available or is available on a limited basis for any of our products, if approved, we may not be able to successfully commercialize any such products.

Reimbursement by a third-party or government payor may depend upon a number of factors, including, without limitation, the third-party or government payor’s determination that use of a product is:

| • | a covered benefit under its health plan;

| • | safe, effective and medically necessary;

| • | appropriate for the specific patient;

| • | cost-effective; and

| • | neither experimental nor investigational.

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement or to have pricing set at a satisfactory level. If reimbursement of our products, if any, is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels such as may result where alternative or generic treatments are available, we may be unable to achieve or sustain profitability.

Assuming we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.

In the United States, third-party payors include federal and state healthcare programs, government authorities, private managed care providers, private health insurers, and other organizations. No uniform policy of coverage and reimbursement for products exists among third-party payors, and third-party payors are increasingly challenging the price, examining the medical necessity, and reviewing the cost-effectiveness of medical drug products and medical services, in addition to questioning their safety and efficacy. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained. We or our collaborators may need to conduct expensive pharmaco-economic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain the FDA approvals.

58

In some foreign countries, particularly in Europe, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiatio ns with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct additional clinical trials that compare the cost-effectiveness of our products to other available therapies. If reimbursement of any of our products, if approved, is unavailable or limited in scope or amount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achi eve or sustain profitability of our products in such country.

Recent legislative and regulatory activity may exert downward pressure on potential pricing and reimbursement for our products, if approved, that could materially affect the opportunity to commercialize.

The United States and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell any of our products profitably, if approved. Among policy-makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

| • | the demand for any of our products, if approved;

| • | our ability to set a price that we believe is fair for any of our products, if approved;

| • | our ability to generate revenues and achieve or maintain profitability;

| • | the level of taxes that we are required to pay; and

| • | the availability of capital.

In March 2010, ACA became law in the United States. The goal of ACA is to reduce the cost of healthcare, broaden access to health insurance, constrain healthcare spending, enhance remedies against fraud and abuse, add transparency requirements for the healthcare and health insurance industries, impose taxes and fees on the health industry, impose additional health policy reforms, and substantially change the way healthcare is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, ACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of any of our products, if they are approved. Provisions of ACA relevant to the pharmaceutical industry include the following:

| • | an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, not including orphan drug sales;

| • | an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively;

| • | a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts on negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

| • | extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

| • | expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level, thereby potentially increasing manufacturers’ Medicaid rebate liability;

| • | expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

| • | new requirements for certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions to report annually certain financial arrangements with physicians and teaching hospitals, as defined in ACA and its implementing regulations, including reporting any payment or “transfer of value” provided to physicians and teaching hospitals and any ownership and investment interests held by physicians and their immediate family members during the preceding calendar year;

| • | expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;

59

| • | a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research; and

| • | a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected.

The ACA has been modified and amended recently, including the elimination of the individual mandate that individuals purchase healthcare insurance. Furthermore, the current presidential administration and Congress are also expected to attempt more broad sweeping changes to the current health care laws. We face uncertainties that might result from modification or repeal of any of the provisions of the ACA, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the pharmaceutical and biotechnology industry as a whole is currently unknown. But, any changes to the ACA are likely to have an impact on our results of operations, and may have a material adverse effect on our results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States may have on our business.

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.

Our products and solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our products and solutions outside of the United States must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers.

In addition, changes in our products or solutions or changes in applicable export or import laws and regulations may create delays in the introduction, provision, or sale of our products and solutions in international markets, prevent customers from using our products and solutions or, in some cases, prevent the export or import of our products and solutions to certain countries, governments or persons altogether. Any limitation on our ability to export, provide, or sell our products and solutions could adversely affect our business, financial condition and results of operations.

We are subject to U.S. and foreign anti-corruption and anti-money laundering laws with respect to our operations and non-compliance with such laws can subject us to criminal and/or civil liability and harm our business.

We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other state and national anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, third-party intermediaries, joint venture partners and collaborators from authorizing, promising, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. We currently use contract research organizations abroad for clinical trials. In addition, we may engage third party intermediaries to sell our products and solutions abroad once we enter a commercialization phase for our product candidates and/or to obtain necessary permits, licenses, and other regulatory approvals. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize or have actual knowledge of such activities. We adopted an anti-corruption policy in connection with the consummation of the IPO of our common stock in July 2015. The anti-corruption policy mandates compliance with the FCPA and other anti-corruption laws applicable to our business throughout the world. However, there can be no assurance that our employees and third party intermediaries will comply with this policy or such anti-corruption laws. Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other investigations, or other enforcement actions are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense and compliance costs and other professional fees. In certain cases, enforcement authorities may even cause us to appoint an independent compliance monitor which can result in added costs and administrative burdens.

60

Risks Relating to Our Intellectual Property

*If our efforts to protect the intellectual property related to our product candidates are not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and contractual agreements, including confidentiality agreements to protect the intellectual property related to our product candidates and technology. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in the market. We believe that we have worldwide commercial rights to the NK-92 cell line and we believe that we control commercial use of our haNK, taNK and t-haNK cells in key territories. We have developed and in-licensed numerous patents and patent applications and we possess substantial know-how and trade secrets relating to the development and commercialization of natural killer cell-based immunotherapy product candidates, including related manufacturing processes and technology. Our owned and licensed patent portfolio consists of patents and pending patent applications in the U.S. disclosing subject matter directed to certain of our proprietary technology, inventions, and improvements and our most advanced product candidates, as well as licensed and owned patents and pending applications in jurisdictions outside of the U.S., that, in many cases, are counterparts to the foregoing U.S. patents and patent applications. We believe we have intellectual property rights that are necessary to commercialize haNK, taNK and t-haNK cells. However, our patent applications may not result in issued patents, and, even if issued, the patents may be challenged and invalidated. Moreover, our patents and patent applications may not be sufficiently broad to prevent others from practicing our technologies or developing competing products. We also face the risk that others may independently develop similar or alternative technologies or may design around our proprietary property.

The patent application process, also known as patent prosecution, is expensive and time-consuming, and we and our current or future licensors and licensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, these and any of our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. Defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, for example with respect to proper priority claims, inventorship, etc. If we or our current licensors, or any future licensors or licensees, fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our current licensors, or any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid and unenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

The strength of patents in the biopharmaceutical field involves complex legal and scientific questions and can be uncertain. This uncertainty includes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law or rules in ways affecting the scope or validity of issued patents. The patent applications that we own or in-license may fail to result in issued patents in the United States or foreign countries with claims that cover our product candidates. We are currently involved in a dispute with the US. Patent and Trademark Office over one of our patent applications, as described in Part II, Item 1. Legal Proceedings of this Quarterly Report on Form 10-Q. Even if patents do successfully issue from the patent applications that we own or in-license, third parties may challenge the validity, enforceability or scope of such patents, which may result in such patents being narrowed, invalidated or held unenforceable.

For example, patents granted by the European Patent Office, or EPO, may be challenged, also known as opposed, by any person within nine months from the publication of their grant. In this regard, we note that a third party filed an opposition in the EPO seeking revocation of one of our European patents relating to composition of matter claims and method of use claims, and the EPO subsequently revoked that patent in April 2017. The same third party also filed an opposition in the EPO seeking revocation of a related European patent with broader composition of matter and method of use claims in October 2015. Oral proceedings before the EPO Opposition Division for this patent were held in March 2018 and all issues were maintained and remain in full force and effect.

Any successful challenge to our patents could deprive us of exclusive rights necessary for the successful commercialization of our product candidates. Furthermore, even if they are unchallenged, our patents may not adequately protect our product candidates, provide exclusivity for our product candidates, or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents we hold or pursue with respect to our product candidates is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize our product candidates.

Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its earliest effective non-provisional filing date. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our product candidates, we may be open to competition from generic versions of our product candidates. Further, if we encounter delays in our development efforts, including our clinical trials, the period of time during which we could market our product candidates under patent protection would be reduced.

61

In addition to the protection afforded by patents, we also rely on trade secret protection to protect proprietary know-how that may not be patentable or that we elect not to patent, processes for which patents may be difficult to obtain or enforce, and any other elements of our product candidates, and our product development processes (such as a manufacturing and formulation technologies) that involve proprietary know-how, information or technology that is not covered by patents. However, t rade secrets can be difficult to protect. If the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating any trade secrets. Misappropriation or unauthorized disclosure of our trade secrets could significantly affect our competitive position and may have a material adverse effect on our business. Furthermore, trade secret protection does not prevent competitors from independently developing substantially equivalent informat ion and techniques and we cannot guarantee that our competitors will not independently develop substantially equivalent information and techniques. The FDA, as part of its Transparency Initiative, is currently considering whether to make additional informa tion publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all.

In an effort to protect our trade secrets and other confidential information, we require our employees, consultants, advisors, and any other third parties that have access to our proprietary know-how, information or technology, for example, third parties involved in the formulation and manufacture of our product candidates, and third parties involved in our clinical trials to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. However, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed despite having such confidentiality agreements. Adequate remedies may not exist in the event of unauthorized use or disclosure of our trade secrets. In addition, in some situations, these confidentiality agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, or advisors have previous employment or consulting relationships. To the extent that our employees, consultants or contractors use any intellectual property owned by third parties in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. If we are unable to prevent unauthorized material disclosure of our trade secrets to third parties, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents. Obtaining and enforcing patents in the pharmaceutical industry involves both technological and legal complexity, and therefore, is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained.

For our U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act, or the American Invents Act, or AIA, was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has developed regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent law associated with the AIA. It still remains unclear what other, if any, impact the AIA will have on the operation of our business. Moreover, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-inventor-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application. Furthermore, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technology and the prior art allow our technology to be patentable over the prior art. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to either (1) file any patent application related to our product candidates or (2) invent any of the inventions claimed in our patents or patent applications.

62

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. This applie s to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party co uld potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party ma y attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent prosecution process. Periodic maintenance fees and various other governmental fees on any issued patent and/or pending patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of a patent or patent application. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees. While an inadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are many situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to maintain the patents and patent applications directed to our product candidates, our competitors might be able to enter the market earlier than should otherwise have been the case, which would have a material adverse effect on our business.

Third-party claims alleging intellectual property infringement may adversely affect our business.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties, for example, the intellectual property rights of competitors. Our research, development and commercialization activities may be subject to claims that we infringe or otherwise violate patents owned or controlled by third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our activities related to our product candidates may give rise to claims of infringement of the patent rights of others. We cannot assure you that our product candidates will not infringe existing or future patents. We may not be aware of patents that have already issued that a third party, for example a competitor in our market, might assert are infringed by our product candidates. It is also possible that patents of which we are aware, but which we do not believe are relevant to our product candidates, could nevertheless be found to be infringed by our product candidates. Nevertheless, we are not aware of any issued patents that we believe would prevent us from marketing our product candidates, if approved. There may also be patent applications that have been filed but not published that, when issued as patents, could be asserted against us.

Third parties making claims against us for infringement or misappropriation of their intellectual property rights may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our product candidates. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. Defense of these claims, regardless of their merit, would cause us to incur substantial expenses, and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us by a third party, we may have to (1) pay substantial damages, including treble damages and attorneys’ fees if we are found to have willfully infringed the third party’s patents; (2) obtain one or more licenses from the third party; (3) pay royalties to the third party; and/or (4) redesign any infringing products. Redesigning any infringing products may be impossible or require substantial time and monetary expenditure. Further, we cannot predict whether any required license would be available at all or whether it would be available on commercially reasonable terms. In the event that we could not obtain a license, we may be unable to further develop and commercialize our product candidates, which could harm our business significantly. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.

Defending ourselves or our licensors in litigation is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

63

*We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time consuming.

Third parties may infringe or misappropriate our intellectual property, including our existing patents, patents that may issue to us in the future, or the patents of our licensors to which we have a license. As a result, we may be required to file infringement claims to stop third-party infringement or unauthorized use. Further, we may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Generic drug manufacturers may develop, seek approval for, and launch generic versions of our products. If we file an infringement action against such a generic drug manufacturer, that company may challenge the scope, validity or enforceability of our or our licensors’ patents, requiring us and/or our licensors to engage in complex, lengthy and costly litigation or other proceedings.

For example, if we or one of our licensors initiated legal proceedings against a third party to enforce a patent covering our product candidates, the defendant could counterclaim that the patent covering our product candidates is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent.

In addition, within and outside of the United States, there has been a substantial amount of litigation and administrative proceedings, including interference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in various foreign jurisdictions, regarding patent and other intellectual property rights in the biopharmaceutical industry. Recently, the AIA introduced new procedures including inter partes review and post grant review. The implementation of these procedures brings uncertainty to the possibility of challenges to our patents in the future, including those that patents perceived by our competitors as blocking entry into the market for their products, and the outcome of such challenges.

In March 2009, we received a final rejection in one of our original patent applications pertaining to certain limited methods of use claims for NK-92 from the U.S. Patent and Trademark Office (the USPTO), but the USPTO allowed claims on all of the other proposed claims, including other methods of use. We appealed this decision with the USPTO Board of Appeals and, in the fall of 2013, the Board of Appeals reversed the Examiner’s rejection of the claim to certain limited methods of use with NK-92, but affirmed the Examiner’s rejection of the remaining patent claims. In December 2013, we brought an action in the U.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as we disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment. On September 24, 2015, we filed a notice of appeal to the United States Court of Appeals for the Federal Circuit. In September 2015, the USPTO filed a Motion for Expenses seeking $0.1 million for attorney’s fees and the USPTO’s expert witness fees. In February 2016, the U.S. District Court denied the USPTO’s Motion for Expenses for attorney’s fees and granted Director’s Motion for Expenses for the USPTO’s expert witness fees. The USPTO filed a notice of appeal on April 5, 2016. In May 2017, the Federal Circuit affirmed the U.S. District Court’s summary judgment ruling. The formal mandate was issued on June 26, 2017. In June 2017, the Federal Circuit reversed the U.S. District Court’s fees ruling and remanded the case for the U.S. District Court to enter an award of $0.1 million in favor of the USPTO. On August 31, 2017, a majority of active Federal Circuit judges voted to vacate the June 2017 decision and hear the case en banc sua sponte. On July 27, 2018, the Federal Circuit sitting en banc affirmed the U.S. District Court. The USPTO may seek rehearing or Supreme Court review.

Such litigation and administrative proceedings could result in revocation of our patents or amendment of our patents such that they do not cover our product candidates. They may also put our pending patent applications at risk of not issuing, or issuing with limited and potentially inadequate scope to cover our product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. Additionally, it is also possible that prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, may, nonetheless, ultimately be found by a court of law or an administrative panel to affect the validity or enforceability of a claim, for example if a priority claim is found to be improper. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection could have a material adverse impact on our business.

Enforcing our or our licensor’s intellectual property rights through litigation is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able to sustain the costs of litigation more effectively than we can because of greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or administrative proceedings, there is a risk that some of our confidential information could be compromised by disclosure. In addition, during the course of litigation or administrative proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.

64

If we fail to comply with our obligation in any of the agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to ou r business.

Licensing of intellectual property rights is of critical importance to our business and involves complex legal, business and scientific issues. We rely on our exclusive license from Hans Klingemann, M.D., Ph.D., one of our founders and the inventor of our aNK and related platform product cell therapies, and may rely on our exclusive licenses from Rush University Medical Center and other licensors such as Fox Chase Cancer Research Center and the University Health Network. If we fail to comply with the diligence obligations or otherwise materially breach our license agreement, and fail to remedy such failure or cure such breach, the licensor may have the right to terminate the license.

Our obligation to pay royalties to Dr. Klingemann under the license agreement, as amended, runs until the expiration of the underlying patents and the license agreement may be terminated earlier by either party for material breach. Under the license agreement, we have the right to enforce the licensed patents. Our license agreement with Rush University Medical Center terminates on the 12th anniversary of our first payment of royalties, at which point the license is deemed perpetual, irrevocable, fully-paid royalty-free, exclusive license, and may be terminated earlier by either party for material breach.

Disputes may arise between us and our licensors regarding intellectual property rights subject to a license agreement, including:

| • | the scope of rights granted under the license agreement and other interpretation-related issues;

| • | our right to sublicense intellectual property rights to third parties under collaborative development relationships; and

| • | our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations.

While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek to preserve our rights under the patents licensed to us, we may not be able to do so in a timely manner, at an acceptable cost or at all. Generally, the loss of any one of our current licenses, or any other license we may acquire in the future, could materially harm our business, prospects, financial condition and results of operations.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could limit our ability to compete.

Because we operate in the highly technical field of research and development, we rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors, to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. We may also be subject to claims that former employees, consultants, independent contractors, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose our rights therein. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

65

We may not be able to protect our intelle ctual property rights throughout the world.

We strive to control cell line distribution as well as limit commercial use through licenses and material transfer agreements with third parties in addition to its patents and patent applications. However, a company may illicitly obtain our cells or create their own modified variants and attempt to commercialize them in foreign countries where we do not have any patents or patent applications where legal recourse may be limited. For example, we believe that a company in China may be using our NK-92 cell line without our permission. This may have a significant commercial impact on our foreign business operations.

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing countries. For example, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement on infringing activities is inadequate. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. In addition, certain countries in Europe and certain developing countries, including India and China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we may have limited remedies if our patents are infringed or if we are compelled to grant a license to our patents to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license. Finally, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.

Risks Relating to Our Common Stock

*Our Chairman and CEO and entities affiliated with him collectively own a significant majority of our common stock and will exercise significant influence over matters requiring stockholder approval, regardless of the wishes of other stockholders.

As of June 30, 2018, our Chairman and CEO, Patrick Soon-Shiong, M.D., and entities affiliated with him, collectively own approximately 59.1% of the outstanding shares of our common stock. Additionally, Dr. Soon-Shiong holds options, a warrant, and restricted stock units to purchase or receive an aggregate of 20.4 million additional shares of our common stock, which would give him and his affiliates ownership of approximately 67.5% of our outstanding shares of common stock if they were fully vested and exercised in full. In addition, pursuant to the Nominating Agreement between us and Cambridge Equities, LP, or Cambridge, an entity that Dr. Soon-Shiong controls, Cambridge has the ability to designate one director to be nominated for election to our board of directors for as long as Cambridge continues to hold at least 20% of the issued and outstanding shares of our common stock. Dr. Soon-Shiong was selected by Cambridge to hold this board seat. Dr. Soon-Shiong and his affiliates will therefore have significant influence over management and significant control over matters requiring stockholder approval, including the annual election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated control will limit stockholders’ ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected.

The market price of our stock may fluctuate significantly, and investors may have difficulty selling their shares.

Prior to our IPO in July 2015, there was no public market for our common stock. Although our common stock is listed on The NASDAQ Global Select Market, or NASDAQ, the market for our shares has demonstrated varying levels of trading activity. You may not be able to sell your shares quickly or at the market price if trading in shares of our common stock is not active. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

66

The market price of our common stock has been and may continue to be volatile.

The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:

| • | the commencement, enrollment or results of the planned clinical trials of our product candidates or any future clinical trials we may conduct, or changes in the development status of our product candidates;

| • | any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

| • | adverse results or delays in clinical trials;

| • | our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

| • | adverse regulatory decisions, including failure to receive regulatory approval of our product candidates;

| • | changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;

| • | our failure to commercialize our product candidates;

| • | additions or departures of key scientific or management personnel;

| • | unanticipated serious safety concerns related to the use of our product candidates;

| • | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

| • | our ability to effectively manage our growth;

| • | variations in our quarterly operating results;

| • | our cash position;

| • | announcements that our revenue or income are below or that costs or losses are greater than analysts’ expectations;

| • | publication of research reports about us or our industry, or immunotherapy in particular, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

| • | changes in the market valuations of similar companies;

| • | general economic slowdowns;

| • | sales of large blocks of our common stock;

| • | fluctuations in stock market prices and volumes;

| • | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

| • | significant lawsuits, including patent or stockholder litigation; and

| • | the other factors described in this “Risk Factors” section.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, such as the securities litigation described in Note 8 – Commitments and Contingencies – Securities Litigation to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

67

*Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plan and the warrant held by our Chairman and CEO, cou ld result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market the market price of our common stock could decline significantly. In particular, the options, warrant, and restricted stock units to purchase or receive common stock held by our Chairman and CEO at June 30, 2018, may entitle him to acquire up to an aggregate of 20.4 million additional shares of our common stock, or approximately 25.7% of our outstanding common stock. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

Certain holders of approximately 46.2 million shares of our common stock, including shares issuable upon the exercise of outstanding options and warrants, are entitled to certain rights with respect to the registration of their shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the market price of our common stock.

In addition, we expect that additional capital may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock.

We have incurred and will continue to incur costs as a result of operating as a public company and our management has been and will be required to devote substantial time to new compliance initiatives and corporate governance practices, including maintaining an effective system of internal control over financial reporting.

As a public company listed in the United States, and increasingly after we are no longer an “emerging growth company,” we have incurred and will continue to incur significant additional legal, accounting and other expenses that we did not incur as a private company. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including Sarbanes-Oxley and regulations implemented by the Securities and Exchange Commission, or SEC, and NASDAQ may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to create a larger finance function with additional personnel to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

As a public company in the United States, we are required, pursuant to Section 404 of Sarbanes-Oxley, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. We must disclose any material weaknesses identified by our management in our internal control over financial reporting, and, when we are no longer an “emerging growth company,” we will need to provide a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our independent registered public accounting firm was not engaged to perform an audit of our internal control over financial reporting for the years ended December 31, 2018 and 2017, or for any other period. Accordingly, no such opinion was expressed.

Even after we develop these new procedures, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate and material weaknesses in our internal control over financial reporting may be discovered. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no absolute assurance that all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction.

68

To fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to do so in a timely manner, or a t all. In addition, in the process of evaluating our internal control over financial reporting, we expect that certain of our internal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not be able to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject t o sanctions or investigations by regulatory authorities, such as the SEC or NASDAQ, and investors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we are unable to certify that our internal contr ol over financial reporting is effective and in compliance with Section 404, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or stock exchanges, and we could lose investor confidence in the accuracy and completen ess of our financial reports, which could hurt our business, the price of our common stock and our ability to access the capital markets.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

*We have made restatements of our financial statements in the past, and this may affect shareholder confidence in the Company’s financial reporting in the future, which could in turn have a material adverse effect on our business and stock price.

As disclosed in our Current Report on Form 8-K filed with the SEC on March 10, 2016, we have restated our interim financial statements for the quarters ended June 30, 2015 and September 30, 2015. The restatements, which are included in our 2015 Annual Report, are attributable to certain stock-based awards to the Company’s Chairman and Chief Executive Officer (CEO) and build-to-suit lease accounting related to one of its research and development and cGMP facilities. Specifically, errors resulted from the modification of the performance-based vesting criteria to a combination of performance-based and services-based vesting criteria of a warrant subsequent to the grant date and the value of non-cash, stock-based compensation expense recorded by the Company for the quarters ended June 30, 2015 and September 30, 2015. The error related to the use of build-to-suit lease accounting, which resulted from the Company’s involvement in the construction of structural improvements to the leased facility space and, therefore, was deemed the owner, for accounting purposes, of the construction project having a non-cash impact for the quarters ending June 30, 2015 and September 30, 2015.

Although we have remediated the material weakness associated with the restatements described above, if any additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to further restate our financial results. In addition, if we are unable to successfully remediate any future material weaknesses in our internal controls or if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.

We have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

Because we are relying on the exemptions from corporate governance requirements as a result of being a “controlled company” within the meaning of the NASDAQ listing standards, you do not have the same protections afforded to stockholders of companies that are subject to such requirements.

Our Chairman and CEO, Dr. Patrick Soon-Shiong, and entities affiliated with him, control a majority of our common stock. As a result, we are a “controlled company” within the meaning of the NASDAQ listing standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain NASDAQ corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors and (2) the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. We have elected not to have a nominating and corporate governance committee in reliance on the “controlled company” exemptions. Accordingly, you do not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.

69

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act enacted in April 2012, or the JOBS Act, and may remain an “emerging growth company” for up to five years following the completion of our IPO, or December 31, 2020, although, if we have more than $1.07 billion in annual revenue, the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. For as long as we remain an “emerging growth company,” we are permitted and intend to continue to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include:

| • | being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations” disclosure;

| • | not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

| • | not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

| • | reduced disclosure obligations regarding executive compensation; and

| • | exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have taken advantage of reduced reporting requirements in our public filings. In particular, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Investors may find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be reduced or more volatile.

Our ability to use our net operating loss carryforwards, or NOLs, and certain other tax attributes to offset future taxable income may be subject to certain limitations.

As of December 31, 2017, we had U.S. federal, state and foreign NOLs of approximately $165.9 million, $136.2 million and $0.2 million, respectively, which begin to expire in various years starting with 2022, if not utilized. As of December 31, 2017, we also had federal and state research and development tax credit carryforwards of approximately $3.2 million and $1.9 million, respectively. Under Sections 382 and 383 of Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its future post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We completed an IRC Section 382/383 analysis in 2016 regarding the limitation of net operating loss and research and development credit carryforwards. As a result of the analysis, we have derecognized deferred tax assets for net operating losses and federal and state research and development credits of $0.8 million and $1.2 million from our deferred tax asset schedule as of December 31, 2017 and 2016, respectively.

We are a U.S.-based company subject to tax in the U.S. and in Korea. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities, and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be overturned by jurisdictional tax authorities, which may have a significant impact on our global provision for income taxes.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The U.S. recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

70

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

*We are not subject to the provisions of Section 203 of the Delaware General Corporation Law, which could negatively affect your investment.

We elected in our amended and restated certificate of incorporation to not be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns (or, in certain cases, within three years prior, did own) 15% or more of the corporation’s voting stock. Our decision not to be subject to Section 203 will allow, for example, our Chairman and CEO (who with members of his immediate family and entities affiliated with him owned approximately 59.1% of our common stock as of June 30, 2018) to transfer shares in excess of 15% of our voting stock to a third-party free of the restrictions imposed by Section 203. This may make us more vulnerable to takeovers that are completed without the approval of our board of directors and/or without giving us the ability to prohibit or delay such takeovers as effectively.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders. These provisions include:

| • | a requirement that special meetings of stockholders be called only by the board of directors, the president or the chief executive officer;

| • | advance notice requirements for stockholder proposals and nominations for election to our board of directors; and

| • | the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock.

These anti-takeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:

| • | We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.

| • | We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.

71

| • | We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately det ermined that such person is not entitled to indemnification.

| • | We are not obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification.

| • | The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.

| • | We may not retroactively amend our bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

To the extent that a claim for indemnification is brought by any of our directors or officers, it would reduce the amount of funds available for use in our business.

72

ITEM 2. UNREGISTERED SALES OF EQUI TY SECURITIES AND USE OF PROCEEDS.

(a) Recent Sale of Unregistered Securities

None

(b) Use of Proceeds from Public Offering of Common Stock

On July 27, 2015, our Registration Statement on Form S-1, as amended (Reg. No. 333- 205124) was declared effective in connection with the initial public offering (IPO) of our common stock, pursuant to which we sold 9,531,200 shares at a price to the public of $25.00 per share. The offering closed on July 31, 2015, as a result of which we received net proceeds of approximately $221.5 million after underwriting discounts and offering expenses. Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Citigroup Global Markets Inc., Jefferies LLC and Piper Jaffray & Co. acted as joint book-running managers for the offering, and MLV & Co. LLC Inc. acted as co-manager. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates. In November 2015, the board of directors approved a share repurchase program allowing the Chief Executive Officer (CEO) or Chief Financial Officer (CFO), on behalf of the Company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50 million of our outstanding shares of common stock, exclusive of any commissions, markups or expenses. We may use the proceeds from the IPO to conduct such repurchases. Accordingly, our use of proceeds from the initial public offering is as follows:

| • | approximately $2.0 million to fund e x penses in connection with our phase II clinical trial for our aNK product candidate for Merkel cell carcinoma single agent therapy, Merkel cell carcinoma combination treatment, and pancreatic combination therapy, which we expect will be sufficient to fund the clinical trials;

| • | approximately $76.0 million to fund expenses in connection with our current and planned phase I and Ib/II haNK trials, however, we expect that we will need to use additional proceeds to fund future registration vaccine trials related to our haNK product candidate;

| • | approximately $5.0 million to fund expenses in connection with our planned phase I clinical trials for taNK for diseases and malignancies, which we expect will be sufficient to fund the clinical trials;

| • | approximately $93.0 million to establish our planned cGMP manufacturing facilities and processes and the hiring of additional personnel; and

| • | the remaining amounts for other research and development activities, working capital and general corporate purposes, including up to $50.0 million to repurchase our common stock (exclusive of any commissions, markups or expenses) from time to time, in the open market or in privately negotiated transactions.

We may also use a portion of the net proceeds from the offering and our existing cash to in-license, acquire or invest in complementary business, technologies, products or assets. However, we have no current plans, commitments or obligations to do so.

(c) Issuer Purchases of Equity Securities

Stock Repurchase—In November 2015, the board of directors approved a share repurchase program (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 will be based on market conditions and other factors, including price, regulatory requirements and other corporate considerations. The 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 expect to finance the purchases with existing cash balances. The repurchased shares are formally retired through board approval. At June 30, 2018, $19.1 million remained authorized for repurchase under the Company’s stock repurchase program and no shares were repurchased during the three months ended June 30, 2018.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

73

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

The documents listed below are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

Exhibit Number |  | Description |  |  |  |  |  |  |  |  |  |
10.1*+ |  | Letter Agreement with Barry Simon dated May 3, 2018 |  |  |  |  |  |  |  |
10.2*+ |  | Offer of Employment Letter with Sonja Nelson dated June 11, 2018 |  |  |  |  |  |  |  |
31.1* |  | Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Executive Officer |  |  |  |  |  |  |  |
31.2* |  | Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Financial Officer |  |  |  |  |  |  |  |
32.1** |  | Section 1350 Certification of Chief Executive Officer |  |  |  |  |  |  |  |
32.2** |  | Section 1350 Certification of Chief Financial Officer |  |  |  |  |  |  |  |
101.INS |  | XBRL Instance Document |  |  |  |  |  |  |  |
101.SCH |  | XBRL Taxonomy Extension Schema Document |  |  |  |  |  |  |  |
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document |  |  |  |  |  |  |  |
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document |  |  |  |  |  |  |  |
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document |  |  |  |  |  |  |  |
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document |  |  |  |  |  |  |  |

* | Filed herewith.

** | The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of NantKwest, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in such filing.

+ | Indicates a management contract or compensatory plan.

74

SIGNAT URES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  | NANTKWEST, INC.
Dated: August 6, 2018 |  | By: |  | /s/ Patrick Soon-Shiong
|  |  |  | Patrick Soon-Shiong
|  |  |  | Chief Executive Officer and Chairman
|  |  |  | (Principal Executive Officer)
|  | By: |  | /s/ Sonja Nelson
|  |  |  | Sonja Nelson
|  |  |  | Chief Financial Officer
|  |  |  | (Principal Financial Officer)

75