Fate Therapeutics
Annual Report 2018

Plain-text annual report

Better Cells For Better Therapies® 2018 Annual Report Developing first-in-class cellular immunotherapies for cancer and immune disorders by programming cell function and fate NK cells T cells CD34+ cells induced Pluripotent Stem Cell Platform a renewable source for off-the-shelf engineered cell products UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (cid:95)(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 (cid:134)(cid:134) TRANRR SITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 001-36076 FATE THERAPEUTICS, INC. (Exact name of registrant as specifieff d in its charter) Delaware (State or other jurisdiction of incorporation or organization) 3535 General Atomics Court, Suite 200, San Diego, CA (Address of principal executive officeff s) 65-1311552 (I.R.S. Employer Identification No.) 92121 (Zip Code) (858) 875-1800 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $0.001 par value Name of each exchange on which registered NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:95) or No (cid:134) ed to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) or No (cid:95) Indicate by check mark if the registrant is not requirqq 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 requirqq ements for the past 90 days. Yes (cid:95) or No (cid:134) Indicate by check mark whether the registrant has submitted electronically everyrr Interactive Data File required to be submitted 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 such files). Yes (cid:95) No (cid:134) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained tion statements incorporated by reference in herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or informarr Part III of this Form 10-K or anynn amendment to this Form 10-K. (cid:95) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smamm ller reporting rr compam ny, or an emerging growth compam ny. 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 (cid:134) Non-accelerated filer Emerging growth compm any (cid:134) (cid:134) Smaller reportinrr g compm any (cid:95) (cid:95) 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. (cid:134) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No (cid:95) The aggregate market value of the common stock held by non-affiff liates of the registrant was approximately $488,652,000 as of Juneuu 30, 2018 based upon the closing sale price on The Nasdaq Global Market reported for such date. Shares of common stock held by each executive director and certain holders of more than 10% of the outstanding shares of the registrant’s common stock have been excluded in that such persons may be deemed to be affiliates. Shares of common stock held by other persons, including certainrr shares of common stock, have not been excluded in that such persons are not deemed to be affilff iates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. other holders of more than 10% of the outstanding officer and uu The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of March 1, 2019 was 64,999,547. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s defiff nitive proxy statement to be filed with the Securities and Exchange Commission, or SEC, on or before the date 120 days after the conclusion of the registrant’s fiscal year ended Decemberm 31, 2018 pursuant to Regulation 14A in connection with the registrant’s 2019 Annual Meeting of Stockholders are incorporr rated by reference into Part III of this annual reportrr on Form 10-K. FATE THERAPEUTICS, INC. Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2018 TABLE OF CONTENTS PART I FORWAR RR Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. D-LOOKING STATEMENTS ...................................................................................................................................... Business..................................................................................................................................................................... Risk Factors............................................................................................................................................................... Unresolved Staff Comments...................................................................................................................................... Properties................................................................................................................................................................... Legal Proceedings ..................................................................................................................................................... Mine Safety Disclosures............................................................................................................................................ Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of u Equityt Securities................................................................................................................................................... Selected Financial Data ............................................................................................................................................. Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................... Quantitative and Qualitative Disclosures About Market Risk................................................................................... Financial Statements and Supplem entaryrr Data ......................................................................................................... Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................... Controls and Procedures............................................................................................................................................ Other Information...................................................................................................................................................... Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Exhibits and Financial Statement Schedules ............................................................................................................. Item 15. Item 16. Form 10-K Summary................................................................................................................................................. SIGNATURES................................................................................................................................................................................ Directors, Executive Office rs and Corporate Governance ........................................................................................ Executive Compensation ........................................................................................................................................... Securitytt Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................. Certain Relationships and Related Transactions, and Director Independence .......................................................... Principal Accounting Fees and Services.................................................................................................................... ff Page 1 2 28 55 55 56 56 57 58 59 73 74 102 102 104 105 105 105 105 105 106 106 111 PART I FORWAR RR D–LOOKING STATEMENTS by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the federal securities laws. All statements other than statements of historical This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as xx assumptm ions that, even if they never materialize or prove incorrect, could cause our results to differff materially from those expres impliedm Private Securities Litigation Reform Act of 1995 and other facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identifyff statements by words such as “anticipate,” “believe,” “contemplate, “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: ” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” forward-looking m t sed or (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) our plans to research, develop and commercialize our product candidates; the initiation, progress, success, cost and timing of our clinical trials and product development activities; the therapeutic potential of our product candidates, and the disease indications for which we intend to develop our product candidates; our ability and timing to advance our product candidates into, and to successfully initiate, conduct, enroll and complete, clinical trials; the timing and likelihood of, and our ability to obtain and maintain, regulatoryrr clearance of our IND applications for and regulatory approval of our product candidates; our ability to manufacturett the timing and costs of such manufacture; tt our product candidates for clinical development and, if appa roved, forff commercialization, and our ability to source clinical and, if approved, commercial materials and supplies used to manufacturet candidates; our product the performance of third parties in connection with the development and manufacture of our product candidates, including third parties conducting our clinical trials as well as third-party suppliers and manufacturers; the potential of our technology platform, including our induced pluripotent stem cell (iPSC) product platform, and our plans to apply our platform to research, develop and commercialize our product candidates; our ability to attract and retain strategic collaborators with development, regulatory and commercialization expertise; the potential benefits of strategic collaboration agreements and our ability, and the ability of our collaborators, to successfully develop product candidates under the respective collaborations; our ability to obtain funding for our operations, including funff productd candidates; ding necessary to initiate and complete clinical trials of our our ability to develop sales and marketing capabilities, whether commercialize our product candidates, if approved; t alone or with actual or potential collabor a ators, to our ability to successfully commercialize our product candidates, if approved; the size and growtht of the potential markets for our product candidates and our ability to serve those markets; regulatory developments and approval pathways in the United States and foreig ff n countries for our product candidates; the potential scope and value of our intellectual property rights; our ability, and the ability of our licensors, to obtain, maintain, defend and enforce intellectual property rights protecting our product candidates, and our ability to develop and commercialize our productd proprietaryr candidates without infringing the rights of third parties; our ability to recruit rr and retain key personnel; our ability to obtain fundff ing for our operations; 1 (cid:120) (cid:120) (cid:120) the accuracy of our projections and estimates regarding our revenues, expenses, capital requirements, cash utilization and need for additional financing; developments relating to our compem titors and our industrytt ; and other risks and uncertainties, including those described under Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K. Any forff ward-looking statements in this Annual Report on Form 10-K reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different froff m any futurtt e results, performance or achievements expressed or by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations impliedm include, among other things, those listed under Part I, Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. tt This Annual Report on Form 10-K also contains estimates, projeco , our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject circumstances reflected in this informff ation. Unless other data from reports, research surveys, studies t medical and general publications, government data and similar sources. , and similar data prepared by market research firms and other third parties, industrytt l events or circumstances may differ materially from events and tions and other information concerning our industrytt t wise expressly stated, we obtained this industryt to uncertainties and actuatt , business, market and other u In this Annual Report on Formrr 10-K, unless the context requires other “us” means Fate Therapeutics, Inc. and its subsidiaries. tt wise, “Fa“ te Therapeutics,” “Company,yy ” “we,” “our,r ” and ITEM 1. Business General Description of Our Business We are a clinical-stage biopharmaceutical compamm ny dedicated to the development of programmed cellular immunotherapies for cancer and immune disorders. We are developing first-in-class cell therapya that better cell therapies start with better cells. product candidat aa es based on a simplm e notion: we believe To create better cell therapies, we use a therapeutic approach that we generally refer to as cell programming. For certain of our cell therapy productd candidates, we use pharmacologic modulators, such as small molecules, to enhance the biological properties and therapeutic function of healthy donor cells ex vivo before our product candidates are administered to a patient. In other cases, we use human iPSCs to generate a clonal master iPSC line having preferred biological properties, and direct the fate of the clonal master iPSC line to create our cell therapya such as monoclonal antibodies, we believe clonal master iPSC lines can be made and used as a renewablea turing cell therapy products which are well-defined and uniform in composition, can be repeatedly mass produced at significant scale in a shelf to treat many patients. ff cost-effectiv product candidate. Analogous to master cell lines used to manufacture biopharmaceutical drug products e manner, and can be delivered off-tff he- source for manufacff t Utilizing these therapeutic a approaches, we program cells of the blood and immune system, including natural killer (NK) cells, T cells and CD34+ cells, and are advancing a pipeline of programmed cellular immunotherapies in the therapea utic areas of immuno- oncology and immuno-regulation. 2 ff The foll programming partners t hips: owing table summarizes our programmed cellular immunotherapies currently under development and our cell Product Candidate Cell Type Stage of Development Therapeutic Area Commercial Rights mII muno-Oncology FATE-NK100 FATE-NK100 FATE-NK100 FT500 FT516 FT596 FT538 FT819 FT-ONO1 FT-ONO2 tion Regula - Immuno- II ProTmunem ™ FT301 Cellll Programming Partnershrr Engineered T Cells 3 ip Notes: Donor NK Donor NK Donor NK iPSC-NK iPSC-NK iPSC-NK iPSC NK iPSC-T iPSC-T iPSC-T Phase 1 Phase 1 Phase 1 Relapsed / Refractory AML 1 Recurrent Ovarian Cancer 1 Advanced Solid Tumors IND Allowed Advanced Solid Tumors IND Allowed Hematologic Malignancies Hematologic Malignancies Hematologic Malignancies Hematologic Malignancies Hematologic Malignancies Advanced Solid Tumors Preclinical Preclinical Preclinical Research Research Worldwide Worldwide Worldwide Worldwide Worldwide Worldwide Worldwide Worldwide Joint 2 Joint 2 Donor cell graft iPSC-MDSC Phase 2 Preclinical Prevention of Acute GvHD Immune Disorders Worldwide Worldwide Preclinical Hematologic / Solid Tumors Juno Therapeutics [1] Clinical trial is being conducted as an investigator-initiated study at the Masonic Cancer Center, University of Minnesota. [2] Subject to Collaboration and Option Agreement with Ono Pharmaceutical Co. Ltd. [3] Collaboration excludes all cell types derived from iPSCs including engineered T cells. Our Cell Programming Approach The use of human cells as therapeutic entities has disease-transforming potential, and compelling evidence of their medical of severe, life-threatening diseases. One of the most successful and widespread applications of benefitff exists across a broad spectrumrr cell therapy is hematopoietic cell transplantation (HCT), with over 60,000 procedures performff ed worldwide on an annual basis. HCT holds curative potential for patients afflicted with hematologic malignancies, such as leukemia and lymphoma, and with rare genetic disorders, such as hemoglobinopathit es, inherited metabolic disorders and immune deficiencies. Building upon this well-established medical precedent, the clinical investigation of hematopoietic cells, including NK cells, T ative applications in the field of cancer immunotherapy to control, and potentially eradicate, tumor growth. cells and CD34+ cells, as therapies for the treatment of human diseases is rapidly expanding. Many of these clinical trials are investigating transformff One particular formff revolutionaryrr and potentially curative therapy for patients with certain hematologic malignancies; in fact, in 2017, two CAR T-cell therapia es were apa proved by the U.S. Food and Drurr g Administration (FDA). While advancements in the sourcing, engineering and expansion of cells have opened new avenues for their use as therapeutic entities, we believe the biological properties and therapea utic function of cells can be enhanced ex vivo prior to patient administration to maximize therapeutic benefit. chimeric antigen receptor (CAR) T-cell therapy, has recently emerged as a of cancer immunotherapy, a We are using advanced molecular characterization tools and technologies to identify small molecule and biologic modulators -physiologic activation or inhibition of therapea utically-relevant genes and cell-surface proteins, such as that promote rapida those involved in the homing, proliferation and survival of CD34+ cells or those involved in the persistence, proliferation and anti- tumor activity of NK cells and T cells. We apply our deep understandi the potential therapeutic benefits of ex vivo cell programming in the settings of cancer and immunem ng of the hematopoietic system to rapidly assess and quantify disorders. We believe that this and suprau aa 3 highly differentiated therapeuti function of cells ex vivo prior to adoptive transfer – is a reproducible, scalable and cost-effective approach to maximize the safety and efficacy of cell therapia es. c approach – systematically and precisely programming the biological properties and therapeutic a Human iPSCs, with their unique dual capacity to be indefinitely expanded and differentiated in culture into any type of cell in the body, hold revolutionary potential for creating better cell therapies. cells can be induced to a pluripotent state through the expression of certain genes was recognized witht Science and Medicine. We believe iPSCs can be used to overcome key limitations inherent in manya candidates undergoing development today, including the requirement to source, isolate, engineer and expand cells from an individual patient or healthy donor with each batch of production. These batch-to-batch manufact tt uri expensive, and can result in variablea The groundbreaking discovery that fully differentiated human cell product identity, purity and potency as well as manufacff the 2012 Nobel Prize in of the cell therapy product ng requirements are logistically complm ex and turing failures. a ff tion, can be repeatedly mass produced at significan Analogous to master cell lines used to manufacture biopharmaceutical drug products such as monoclonal antibodies, we believe clonal master iPSC lines can be made and used as a renewable source for manufacturing cell therapy products which are well-defined and uniform in composim t scale in a cost-effective manner, and can be delivered off-ff the-shelf to treat many patients. We are applying our expertise in iPSC biology to genetically engineer, isolate and select single-cell iPSCs for clonal expansion, characterization and cryopreservation as clonal master iPSC lines. We direct the fate of clonal master iPSC lines to create cells of the immunem t shelf cellular immunotherapies derived from clonal master iPSC lines. Our iPSC product platform is supported by an intellectual property portfolio of over 100 issued patents and 100 pending patent applications that we own or license. system, including NK cells, T cells and CD34+ cells, and are advancing a pipeline of off-tff he- ff Our Business Strategy Cellular immunm otherap t ies undergoing clinical investigation todaya most often rely on the use of a patient’s own cells. The requirement to source, engineer, expand and deliver cells patient-by-patient is logistically complm ex, resource intensive and expexx nsive, and can result in significant batch-to-batch variability in productd Significant hurdles remain to ensure that cellular immunotherapies can be consistently manufacturett effective manner and at the scale necessary, to support broad patient access and wide-spread commercialization. identity, purity and potency as well as in manufacturi d and reliably delivered, in a cost- ng failures. tt Rather than rely on the use of a patient’s own cells, we seek to use healthy donor cells and clonal master iPSC lines to manufacture, develop and commercialize first-in-class cellular immunotherapies in the therapea utic areas of immuno-oncology and immuno-regulation. We believe our approach has the potential to improve costs, shorten time to treatment and reach more patiaa ents. The key pillars of our business strategy are to: cell product consistency and potency, reduce manufacturing mm (cid:120) (cid:120) t-in-class allogeneic cellular ient and expedited development and review programs. For example,m Effiff ciently develop and commercialize first-in-class allogeneic cellular immunotherapies for severe, life-threatening diseases where treatment options are limited. We are clinically developing firsff immunotherapia es for cancer and immune disorders. We are advancing our product candidates to improve patients with severe, life-thrt eatening diseases, where the unmet need is significant and where regulatory agencies offer efficff ProTmunmm e as a first-in-class hematopoietic cell graft for the prevention of life-threatening complmm ications, including graft- versus-host disease (GvHD), in patients undergoing allogeneic HCT. GvHD is a leading cause of morbidity and mortality in patients undergoing allogeneic HCT, and there are currently no therapies approved by the FDA for the prevention of n GvHD. The FDA has granted Fast Track designation, and the FDA and the European Commission have granted Orpha Drug Designation and Orpha We are also developing our n Medicinal Product Designation, respectively, for ProTmune.m product candidate FATE-NK100, which is manufacturett d using healthy donor cells, as a first-in-class, adaptive memory NK cell cancer immunotherapy. FATE-NK100 is currently being clinically investigated in three Phase 1 studies for the treatment of patients with relapsea incidences of morbidity and mortality and the rare disease nature of many of our target indications, we believe clinical trials that we conduct will generally require relatively small numbers of subjects and that our development patht a appr hematologic malignancies and advanced solid tumors. Due to high we are developing our product candidate oval may be efficient. d/refractory the lives of to m rr r ff ff Exploit our dominant leadership position in iPSC technology to develop and commercialize universal, off-the-shelf cell products for the treatment of hematologic malignancies and solid tumors. We have developed an indud stry- leading iPSC product platform, and we believe the manufacture of cell products using clonal master iPSC lines has the potential to revolutionize the field of cancer immunotherapy. Our first-of-kind iPSCs in a one-time genetic modification event, and selecting a single iPSC for maintenance as a clonal master iPSC line. Analogous to master cell lines used to manufacture biopharmaceutical drug products such as monoclonal antibodies, we believe clonal master iPSC lines can be used as a renewable source for manufacff well-defined and uniform in composition, and can be delivered off-tff he-s can be repeatedly mass produced at significant scale in a cost-effecff approach involves engineering human turing cell therapy products which are helf to treat many patients. tive manner, m ff t 4 ff ff of NK cells and T cells from clonal master iPSC lines. Our We have amassed unrivaled expertise in the manufact urett expertise includes: generating, engineering, isolating and characterizing single-cell iPSC clones; creating and cryopreserving clonal master iPSC lines; differentiating these clonal master cell lines to produce NK cells and T cells; and regulatory affair s to enable clinical investigation of iPSC-derived cell products. We believe our iPSC-derived NK cell and T-cell product candidates have the potential to be administered in multi-dose, multi-cycle treatment regimens, including in combim nation with cycles of other cancer treatments, to drive deeper and more durablea FDA cleared our IND application for FT500, a universal, off-the-shelf, iPSC-derived NK cell product candidate for use in combination with checkpokk our IND application for FT516, a universal, off-the-s affinity, non-cleavable CD16 Fc receptor forff hematologic malignancies. FT500 is the first-ever iPSC-derived cell therapy, and FT516 is the first-ever engineered iPSC- derived cell therapy, allowed to proceed to clinical investigation in the United States by the FDA. int blockade therapy for the treatment of solid tumors; and in February 2019, the FDA cleared helf, iPSC-derived NK cell product candidate that expresses a high- use in combim nation with monoclonal antibody therapy for the treatment of responses. In November 2018, the t (cid:120) (cid:120) Forge collaborations with leading researchers and top medical centers to accelerate development of and rapidly translate our iPSC-derived cell product candidates into first-in-human clinical trials. The research and development of iPSC-derived cell product candidates requires an exceptional team of people and scientific, manufacturing and clinical expertise across a range of disciplines. We have and will continue to seek collaborations with leading researchers, investigators and top medical centers for the research, development, manufacture and clinical translation of our iPSC- derived cell product candidates. Among our collaborations is a partnership with the University of Minnesota, led by Dr. Jeffreff y S. Miller, a renowned NK cell biologist and clinical investigator, to suppu ort the development of FT500 and FT516 product candidates, and a partners renowned T-cell biologist and a recognized founder of CAR T-cell therapy, iPSC-derived CAR T-cell immunotherapies, ff maximize our potential to successfully investigation of our iPSC-derived cell product candidates, and effici derived cell product candidates. a build our iPSC product platform, accelerate the clinical translation and clinical hip with Memorial Sloan Kettering Cancer Center, led by Dr. Michel Sadelain, a including FT819. We believe this approach to research and development will ently establish clinical proof-of-concept for our iPSC- the development of engineered u to support a ff tt a Selectively share our iPSC product platform with industry-leading strategic partners for the development of highly differentiated cellular immunotherapies. The research, development and clinical investigation of cell therapies for the treatment of human diseases is rapidly expax nding. We believe we are uniquely positioned as an expert partner of choice for industry-leading developers seeking to maximize the therapeutic potential of cell therapies for the treatment of cancer. Additionally, since iPSCs have the unique capaci itely expanded and differentiated in culture into any type of cell in the body, we believe there is significant opportuntt leading iPSC product platform and intellectual property position into other disease areas. We will continue to seek partnersh tt producd t candidates for the treatment of human diseases. ips with institutions and compam nies for the research, development and commercialization of iPSC-derived cell ty to be genetically engineered, indefinff ity to broadly exploit our industrytt aa - Our Product Pipeline & Partnerships Immuno-Oncologygg Product Candiddd ates dd Natural killer (NK) cells have an innate ability to rapidly seek and destroy abnormal cells, such as cancer or virally-infected cells, and represent one of the body’s first lines of immunological defenff destroy abnormal cells through multiple mechanisms while leaving normal healthy cells unharmed. These cytotoxic mechanisms include: direct killing by binding to stress ligands expressed by abnormal cells and releasing toxic granules; indirect killing by producing and releasing proinflammatory and chemotactic cytokines that play a pivotal role in orchestrating the adaptive immune response; and antibody-mediated targeted killing by binding to and enhancing the cancer-killing effect of therapeutic antibodies through a process known as antibody-dependent cellular cytotoxicity (ADCC). se. NK cells have the unique ability to selectively identify and T cells, or T lymphocytes, m play a critical role in adaptive immunity and are distinguished from other t cells of the immune system m by the presence of a T-cell receptor (TCR) on their surface. TCRs are generated by DNA rearrangement and positively selected for their capacity to engage host major histocompatibili ((cid:302)(cid:533) T cells), rearrange their alpha and beta chains on the TCR, which confers specificity and enables T cells to recognize non-self molecules, known as non-self antigens, expressed on the surface of transformed or foreign cells. Antigens inside a cell are bound to, and are routinely brought to the surfaceff antigen complm ex, become activated and destroy the targeted cell. Manyaa of the antigens recognized by T cells are those expressed on the surface of cancer cells. Unlike NK cells, T cells are limited by antigen-specific binding of their TCR in order to induce cellular cytotoxicity. of a cell, by MHC class I molecules. Upon antigen recognition, T cells bind to the MHC- ty complm ex (MHC) molecules. The majoa rity of T cells, termed alpha beta T cells We are developing NK cell and T-cell cancer immunotherapies with a focus on developing next-generation cell products intended to synergize with checkpoint inhibitor and monoclonal antibody therapies and to target tumor-associated antigens. 5 FATE-NK100 Adaptive Memory Natural Killer Cell Product Candidate Adaptive memory NK cells are a highly specialized and functionally distinct subset of NK cells. In July 2015, we entered into a research collaboration with the University of Minnesota led by Dr. Jeffrey S. Miller, Professor of Medicine at the University of Minnesota and Deputy Director of the University of Minnesota Masonic Comprehensive Cancer Center, to develop an adaptive memory NK cell product candidate for cancer. In the setting of allogeneic HCT, a retrospective studytt University of Minnesota found that HCT recipients with a high absolute numbem r of adapta ive memory NK cells (>2.5 cells/(cid:541)l of blood; n=54) at six monthst post-HCT had a 2-year disease relapse rate of 16%, as compam red to 46% in recipients witht a low absolute numberm of adaptive memory NK cells (0.1–2.5 cells/(cid:541)l of blood; n=16). Additionally, published preclinical findings from the University of Minnesota investigators demonstratt ted that adaptive memory NK cells have enhanced effector function, long-term persistence and greater resistance to immunmm e checkpoint pathways. by investigators at the We are developing FATE-NK100, a first-in-class NK cell cancer immunm otherapy comprmm ised of adaptive memory NK cells. Through the application of our cell programming expertise and ouruu specific knowledge of modulators involved in the persistence, proliferation and anti-tumtt or activity of immune cells, we identifieff d a combination of pharmacological modulators consisting of a cytokine and a small molecule (FT1238) that induces the robust formation of adaptia quantities. We produce FATE-NK100 using these pharmacological modulators in a seven-day manufacturing process. In August 2017, preclinical data describing the unique properties and anti-tumor activity of FATE-NK100 were published in Cancer Research (doi:10.1158/0008-5472.CAN-17-0799), a peer-reviewed journal of the American Association of Cancer Research. As described in the publu ication, we have observed in preclinical studies that FATE-NK100 has enhanced anti-tumor activity across a broad range of liquid and solid tumors, improm ved persistence and increased resistance to immune checkpok ays as compared to conventional NK cell therapies that are being clinically administered today. Additionally, we have observed in preclinical studies that FATE- NK100 significantly augments ADCC against cancer cells when administered in combination with a monoclonal antibody, including antibodies that target CD20, HER2 and EGFR antigens. ve memory NK cells in therapeutically-relevant int pathwt FATE-NK100 is produced d using the peripheral blood of a healthy donor in a feeder-free, seven-day manufacturing tt process during which NK cells are programmed ex vivo with our combination of pharmacological modulators. While patient-specific T cells are most commonly utilized in cancer immunotherapy, NK cells sourced from healthy donors have been safely administered to patients for over a decade without eliciting GvHD or triggering significant side effects, such as cytokine release syndrome. FATE- NK100 is currently being evaluated in three clinical trials. t tory or relapsea apy in subjects with refracff r lymphodepleting chemotherapya The VOYAGE Study. VOYAGE is an ongoing open-label, accelerated dose-escalation, Phase 1 clinical trial of FATE-NK100 a (AML). The clinical trial is designed to assess d acute myelogenous lymphomm as a monother the safety and determine the maximumm dose of a single intravenous infusion of FATE-NK100 as a monotherapy when administered afteff levels of FATE-NK100 are intended to be assessed using an accelerated dose-escalation design, proceeding in cohorts of one subject per dose level until a dose-limiting toxicity (DLT) is observed. If a DLT is observed at a dose level, a cohort of three subjects will be enrolled at that dose level. If, at any time, more than one subject at a dose level experiences a DLT, the dose level shall be considered to exceed the maximum dose level and dose escalation will stop. A total of ten subjects is expected to be enrolled at the maximum dose level. utaneous interleukin-2 (IL-2) administration. Up to three dose followed by a short course of sub-cu In November 2018, we reported initial clinical data from the ongoing VOYAGE study as of an October 22, 2018 data cutoff. As of that date, a total of four subjects, each with refractory or relapsed disease at the time of enrollment, were treated with a single infusion of FATE-NK100 as monotherapy. morphologic leukemia-free state at Day 14 as assessed by bone marrow biopsy; however, the anti-leukemic activity in each of these three subjects u dose levels achieved a complm ete response. No DLTs or serious adverse events related to FATE-NK100 were reported. A DLT unrelated to FATE-NK100 was reported in one subject at the second dose level. was transient, and each of these three subjects subsequently had progressive disease. No subjects treated at the first two All three subjects treated at the second dose level (1-3x107 cells per kg) achieved a a The Phase 1 clinical trial is currently being conducted at the Masonic Cancer Center, University of Minnesota as an investigator- sponsored study. The APOLLO Study. APOLLO is an ongoing open-label, accelerated dose-escalation, Phase 1 clinical trial of FATE-NK100 in women with ovarian, fallopian tubeu as a monotherapyaa t on, platinum-based treatment. The clinical trial is designed to assess the safety and determine the maximum dose of a single infusion via intratt peritone catheter of FATE-NK100 as a monotherapy when administered after outpati followed by a short course of sub-cutaneous IL-2 administration. Up to three dose levels of FATE-NK100 are intended to be assessed using an accelerated dose-escalation design, proceeding in cohorts of one subjeb ct per dose level until a DLT is observed. If, at any time, more than one subjeu escalation will stop. A total of ten subjects is expected to be enrolled at the maximum dose level. ct at a dose level experiences a DLT, the dose level shall be considered to exceed the maximumm dose level and dose or primary peritoneal cancer resistant to, or recurrenrr ent lymphmm oconditioning chemotherapya al a t 6 In Novembem r 2018, we reported initial clinical data from the ongoing APOLLO studtt y as of an October 22, 2018 data cutoff.ff As of that date, a total of four subjeb cts, each with progressive disease at the time of enrollment, were treated with a single infusio FATE-NK100 as monotherapy. One subject at the second dose level (1-3x107 cells per kg) had stabla e disease at one-month follow-up, was treated with a second dose of FATE-NK100, and remained on studt y and maintained disease control subjects, one each at the first dose level (1x107 cells per kg), the second dose level and the third dose level (3-10x107 cells per kg) had progressive disease at one-month follow-up. No DLTs were reported. One serious adverse event related to FATE-NK100 was reported (Grade 3: abdominal pain). for 6.2 months. Three other n of ff t The Phase 1 clinical trial is currently being conducted at the Masonic Cancer Center, University of Minnesota as an investigator- sponsored study. The DIMENSION Study. DIMENSION is an open-label, accelerated dose-escalation, Phase 1 clinical trial of FATE-NK100 as a monotherapy and in combim nation with monoclonal antibody therapya approved therapia es. The clinical trial is designed to assess the safety and determine the maximumm dose of a single intravenous infusion of FATE-NK100 when administered after outpatient lymphocm IL-2 administration. The DIMENSION studytt onditioning chemotherapya is designed with three treatment regimens: in subjects with advanced solid tumors who have failed followed by a short course of sub-cutaneous (cid:120) (cid:120) (cid:120) Regimen A: FATE-NK100 as a monothera of FATE-NK100 are intended to be assessed using an acceleratedaa the clinical trial will convert immediately to a traditional 3+3 design. We intend to have the third dose level follow a traditional 3+3 design to confirm tolerability. A twenty-subject expansion cohort is expected to be enrolled at the maximumm dose level. ed solid tumor malignancies. Up to three dose levels dose-escalation design. In the event a DLT is observed, in subjects with advanca pya t Regimen B: FATE-NK100 in combim nation with trastuztt umab in subjects with human epidermal growth factor receptor 2 positive (HER2+) advanced breast cancer, HER2+ advanced gastric cancer or other advanced HER2+ solid tumors. Up to four dose levels of FATE-NK100 are intended to be assessed using an accelerated dose-escalation design. In the event a DLT is observed, the clinical trial will convert immediately to a traditional 3+3 design. We intend to have the third and fourtht dose levels follow a traditional 3+3 design to confirm tolerability. A twenty-subjeb ct expansion cohort is expected to be enrolled at the maximumm dose level. Regimen C: FATE-NK100 in combim nation with cetuximab in subju ects with advanced colorectal cancer (CRC) or head and neck squamous cell cancer (HNSCC), or other epidermal growtht tumors. Up to four dose levels of FATE-NK100 are intended to be assessed using an accelerated dose-escalation design. In the event a DLT is observed, the clinical trial will convert immediately to a traditional 3+3 design. We intend to have the third and fourt is expected to be enrolled at the maximumm dose level. ht dose levels follow a traditional 3+3 design to confirm tolerability. A twenty-subject expansion cohort factor receptor 1 positive (EGFR1+) advanced solid ff . Three of five subjeu In Novembem r 2018, we reported initial clinical data from the ongoing DIMENSION studtt yd as of an October 22, 2018 data cutoff.ff u As of that date, one-month follow up data were available for seven subjects following multiple prior lines of therapya u disease at one-month follow-up: one subject dose level (3-10x107 cells per kg). These two subjects at the third dose level each received a second dose of FATE-NK100, and remained on studytt monotherapya disease at one-month follow-up.u Each of the two subjects in the cetuximab combination regimen had progressive disease at one-month follow-up: one subjeb ct at the run-in dose level (1x106 cells per kg) and one subject at the first dose level (1x107 cells per kg). No DLTs were reported, and no serious adverse events related to FATE-NK100 were reported. , each with progressive disease at the time of enrollment regimen had stable t at the first dose level (1x107 cells per kg) and one subject at the third dose level) had progressive treated at the second dose level (1-3x107 cells per kg) and two subjects treated at the third as of the data cutoff (94 and 149 days, respectively). The two other cts treated with FATE-NK100 in the monotherapy with ongoing disease control regimen (one subject subjects in the u t t FT500: iPSC-derived NK Cell Product Candidate for Checkpoint Inhibitor Combination Therapia es that block inhibitoryrr immunological signaling pathways have transformff ed the oncology landscape. For examplm e, the use of monoclonal antibody-based therapies commonly refeff rred to as checkpoint inhibitors, which target the PD1 receptor upregulated on activated T cells or its ligands (programmed death ligands 1 and 2 (PD-L1 and PD-L2)) expressed on tumor cells, have achieved tunately, more than 60% of patients treated witht checkpoint inhibitors will long term remissions in multiple tumor indications. Unforff not respond or will relapse. As a result, there is significant unmet need for novel therapeutic approaches to overcome resistance to checkpoint inhibitors. One common mechanism of intrinsic and acquired resistance to checkpoik beta-2-microglobulin, or B2M, an essential componem critical role in tumor-antigen presentation. A recent longitudinal analysis in a cohort of patients treated with several checkpokk int inhibitors identified B2M expression defects in approximately 30% of patients with progressing disease. In fact, loss of heterozygosity in B2M was found to be enriched three-folff d in non-responders (~30%) vs. responders (~10%) and was associated with poor overall survival. Additionally, complm ete loss of B2M expression was found only in non-responders. These findff B2M expression can contritt bute to tumor evasion of T-cell responses and disease progression. ings suggest that defects in nt inhibitors is deletions or loss of heterozygosity in nt of major histocompatimm bility complm ex (MHC) class I molecules which play a 7 One potential strategy to overcome resistance to checkpoint inhibitors, especially in patients whose heterogenous tumor burden includes B2M expression defects, is through the administration of allogeneic NK cells, which have the inherent capability to recognize and directly kill cells with MHC class I down-regulation. The mechanism of killing is through the release of perforins exposing large amounts of tumor antigens and through the secretion of a numbem r of cytokines and chemokines, both of which can activate and oxicity, NK cells can also secrete proinflammatory cytokines, which facilitate an adaptive immunemm t T cells can induce tumor-resident T cells to re-engage and elicit an anti-tumor response, and chemotactic cytokines, which can recruir to the tumor site. As such, allogeneic donor NK cells may have the potential to overcome resistance to checkpoint inhibitors in certain patients by directly killing tumt or cells and by potentiating an adaptive immunem response. In addition to direct cytotyy response. We are developing FT500 as a universal, off-the-shelf NK cell cancer immunotherapya for the treatment of advanced solid tumors, both as a monotherapy and in combination with FDA-appa iPSC, and clonally-expanded this single iPSC to generate the clonal master iPSC line for productio efficient and reproducible differentiation process, we have shown that one iPSC can create over one million NK cells, providing a substantially pure population of NK cells that is well-defined and of uniform composition. In preclinical studies, FT500 displays multiple potential mechanisms by which it may synergize with T cells to activate the immunem non-responsive to checkpoint inhibitors alone. In particular, in an in vitro three-dimensional tumor spheroid model, FT500 in combim nation with activated T cells and an anti-PD1 antibody significantly enhanced the elimination of target cancer cells, as compared to FT500 alone, activated T cells alone and activated T cells in combim nation with anti-PD1 antibody. system in patients with tumors that are roved checkpoint inhibitor therapya . We isolated and selected a single n of FT500. Using a proprietaryaa , d In Novembem r 2018, the FDA issued a letter informing us that our FT500 IND application was allowed and that we can proceed cleared by the FDA with human clinical investigation of FT500. To our knowledge, FT500 is the first-ever iPSC-derived cell therapya for clinical investigation in the United States. ff outpatient lymphocm Our clinical trial of FT500 is expected to be the first-ever clinical investigation in the U.S. of an iPSC-derived cell product. The open-label, multi-center, repeat-dose, multi-cycle, dose-escalation Phase 1 clinical trial is designed to assess the safety and determine the maximummm dose of FT500 when administered after advanced solid tumors. The studtt y includes two treatment regimens: FT500 as a monothet salvage therapy; and, in subjects who have failed or progressed on checkpokk atezolizumab), FT500 in combination with the checkpok int inhibitor on which the subject has failed or progressed. The studyt assess three once weekly doses of FT500 (Day 1, Day 8, Day 15); a second treatment cycle of three once weekly doses of FT500 may be administered for certain subjects receive treatment with the checkpoint inhibitor on which the subjec dose beginning on Day 8. Up to two dose levels of FT500 are intended to be assessed (1 x 108 cells per dose and 3 x 108 cells per dose) with the potential for higher doses to be defined by protocol amendment. In February FT500, and the clinical trial is now open for enrollment at two top cancer treatment centers. who are clinically stable at Day 29. In the checkpoint inhibitor treatment regimen, subjects will t had most recently progressed at the respective FDA-approved rapy in subjects that are candidates for (nivolumab, pembrm olizumab or 2019, the first subject was treated with onditioning chemotherapya in up to 64 subju ects with int inhibitor therapya will u u rr FT516: iPSC-derived, hnCD16 Engineered NK Cell Product Candidate for Monoclonal Antibody Combination NK cells play a majora role in the anti-tumtt ff or efficacy of certain tumor-antigen targeting monoclonal antibodies. NK cells express CD16, an activating receptor that can bind to the Fc portion of IgG antibodies and transmit immunem response signals. Once activated through CD16, NK cells are able to lyse antibody-coated target cells and secrete cytokines, such as interferon gamma, to recruit and potentiate adaptive immunm e cells, including T cells. This mechanism of ADCC has been proven critical to the treatment of a wide range of human tumor types. d for The anti-tumor efficacy of several FDA-approved monoclonal antibody therapies, including trastuzumab (FDA-approve certain breast and gastric cancers), cetuximab (FDA-approved for certain head and neck, non-small cell lung and colorectal cancers) and rituximaba (FDA-approved for certain cancers Additionally, a numbem r of clinical studies with these FDA-appro efficac ff ff CD16 isoform with increased strength of binding to IgG antibodies. Only about 10% of humans are homozygous for this allele. ved monoclonal antibodies have demonstrated that their anti-tumor ty y is significff antly enhanced in patients having a single nucleotide polymorphism resulting in the expression of a high-affini of the blood and lymphm system), has been shown to be NK cell-dependent. aa aa a We are developing FT516, a targeted NK cell product candidate which is created fromff a master clonal iPSC line engineered to express a high-affinity, non-cleavable CD16 (hnCD16) Fc receptor, as an off-the-s Our novel hnCD16 Fc receptor incorporat es two unique modifications designed to augment the receptor’s binding affinity to IgG antibodies and to block the shedding of the receptor’s expression on the surface of NK cells upon activation. We have engineered iPSCs to express this novel hnCD16 Fc receptor, isolated and selected a single engineered iPSC, and clonally-expanded this single engineered iPSC to generate the clonal master engineered iPSC line for production of FT516. Using a proprietary, efficient and reproducible differentiation process, we have shown that one iPSC can create over one million NK cells, providing a substantially pure population of NK cells that is well-defined and of uniform compositio helf immunotherapy for the treatment of cancer. m n. r t 8 We are developing FT516 as a monotherapya and in combim nation with tumor-antigen targeting monoclonal antibody therapy for the treatment of hematologic malignancies and solid tumors. We have shown that FT516 exhibits potent and persistent anti-tumor activity in vitro and in vivo in multiple tumor cell recognition and killing assays: (cid:120) (cid:120) (cid:120) (cid:120) FT516 exhibits superior direct killing in combination with each of rituximab, trastuzumab and cetuximab in vitro, as compamm red to conventional NK cells sourced from peripheral blood and cord blood, in a killing assay of a human lymphoma cell line positive for CD20 (rituximab) and a human ovarian cancer cell line that is positive for both HER2 (trastuzumab) and EGFR expression (cetuximab); FT516 shows a dose-dependent killing response in combination with rituximab in vitro in a CD20+ human lymphoblast- derived B-lymphocyte cell line killing assay; FT516 augments anti-tumor activity in combination with trastuzumab in vivo, as compared to mice treated with trastuzumab alone, in a HER2+ ovarian cancer model, where the anti-tumtt was durablea displayed tumt with no tumor detectable by imaging in 80% of the mice as compam red to trastuzumab alone where all mice or activity at Week 6 of FT516 plus trastuzumab or burden; and FT516 augments anti-tumor activity and promotes prolonged survival in combim nation with rituximaba in vivo, as compam red to expanded peripheral blood NK cells in combination with rituximab, in a human lymphm oma cancer model, where FT516 in combination with rituximab suppou rted a survival rate of 50% at Day 200. In April 2018, we executed an award agreement with the Califorff niar Institute of Regenerative Medicine (CIRM) pursuant to which CIRM awarded us up to $4.0 million to advance our FT516 product candidate into a first-in-human clinical trial for the treatment of subjects with advanced solid tumors, including in combim nation with monoclonal antibody therapy (the Award). Pursuantaa to the terms of the Award, we are eligible to receive five disbursements in varying amounts throughout the project period of the Award, which was estimated to be from April 1, 2018 to June 30, 2019. The Award is subju ect to certain co-fuff nding requirements by us, and we are required to provide progress and financial update reports to CIRM. We, in our sole discretion, have the option to treat the Award either as a loan or as a grant. If we do not elect to treat the Award as a loan withit n 10 years of the date of the Award, the Award will be considered a grant. In Decemberm 2018, we discussed with CIRM our intent to pursue the clinical development of FT516 in relapsed / refractory hematologic malignancies in addition to advanced solid tumors, and our preference to first submit an IND application for FT516 in relapsed / refractory hematologic malignancies rather than in advanced solid tumors. In January 2019, we submitted our IND application for FT516 in relapsed / refractory hematologic malignancies, the second product candidate intended for clinical investigation emerging from our iPSC producd t platform, which IND submission was allowed by the FDA in a letter from Februarr 2019. Such letter from the FDA also informed us that we could proceed with human clinical investigation of FT516. We are currentlynn developing a clinical protocol to support a potential submission of an IND application for FT516 in advanced solid tumors. We agreed with CIRM to suspend the Award until such time as we elect to proceed with our submission of an IND application for FT516 in advanced solid tumors. At the time of suspension, an additional $0.5 million was available forff funding under the Award. ry Our clinical trial of FT516 is expected to be the first-ever clinical investigation of an engineered iPSC-derived cell producd t. The open-label, multi-center, repeat-dose, multi-cycle, dose-escalation Phase 1 clinical trial is designed to assess the safety and determine the maximummm dose of FT516 when administered after outpati cutaneous IL-2 administration in up to 99 subjects treatment regimens: FT516 as a monothet Hodgkin's lymphoma (NHL); and FT516 in combim nation with elotuztt umab in subjects with multiple myeloma (MM). The studytt assess three once weekly doses of FT516 (Day 1, Day 8, Day 15); a second treatment cycle of three once weekly doses of FT516 may cts who are clinically stable at Day 29. In the monoclonal antibody treatment regimens, subjects will be administered for certain subjeu receive treatment with the monoclonal antibody beginning four days prior to the first administration of FT500. Up to four dose levels of FT516 are intended to be assessed (0.3 x 108 cells per dose (monoclonal antibody regimens only); 1 x 108 cells per dose; 3 x 108 cells per dose; 9 x 108 cells per dose). in subjects with AML; FT516 in combination with rituximab in subject tory hematologic malignancies. The studtt y includes three ent lymphom conditioning chemotherapya followed by a short course of sub- with relapsa ed/refracff s with non- u rapya will d u t Additional iPSC-derived Cell Product Candidates for Cancer We are applying our iPSC product platforff m to develop othet r clonal master engineered iPSC lines and additional engineered we iPSC-derived cell product candidates, including in collaboration with leading researchers and top medical centers. For example,m entered into a multi-year research collaboration with the University of Californiarr helf, CAR-NK cell cancer immunotherapies. The collaboration is being led by Dan S. Kaufman, M.D., Ph.D., Professor of Medicine in the Division of Regenerative Medicine and Director of Cell Therapy at UC San Diego School of Medicine. We also entered into a multi-year partners t using clonal master iPSC lines. The research and development activities under the collaboration are being led by Dr. Michel Sadelain, Director of the Center for Cell Engineering and the Stephen and Barbara Friedman Chair at Memorial Sloan Kettering Cancer Center. the development of off-tff he-shelf engineered T-cell product candidates hip witht Memorial Sloan Kettering Cancer Center forff , San Diego to develop off-tff he-s t 9 FT596. CAR T-cell therapya has recently emerged as a revolutionaryrr and potentially curative therapya for patients with hematologic malignancies, including refractory cancers. In 2017, two autologous CD19-specific CAR T-cell therapia es were approved by the FDA for the treatment of certain relapsed/refractory leukemias and lymphomm investigators continue to focus on the development of autologous CAR T-cell therapies, we are developing CAR NK cell product candidates created from clonal master engineered iPSC lines as off-ff the-shelf cancer immunothera a pies malignancies and solid tumors. as. While most researchers and clinical for the treatment of hematologic t We are developing FT596, a universal, off-thet -shelf CAR NK cell product candidate derived from a clonal master engineered iPSC line incorporating “CAR4RR ”, a novel CAR construct specifically designed to augment NK cell signaling. CAR4 was developed by our collaborator Dr. Kaufma signaling domain and mediates strong antigen-specific NK cell signaling in vitro. In preclinical studies using an ovarian cancer xenograft model, Dr. Kaufma survival as compared to iPSC-derived NK cells containing a CAR construct commonly used with CAR T-cell therapy. an has shown that iPSC-derived CAR4RR NK cells markedly inhibit tumor growth and significantly prolong an, and contains the transmembrane domain of NKG2D, the 2B4 co-stimulatory domain, and the CD3(cid:535) FT596 is derived from a clonal master iPSC line engineered to include the expression of CD19-specific CAR4 to convey ADCC, and a novel IL-15 receptor fusion antigen specificity, a high-affinity, non-cleavable CD16 (hnCD16) Fc receptor to enhance for cytokine-independent persistence. Using a research iPSC line for production of FT596, we have shown in preclinical studies that FT596: aa (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) shows cytokine-freeff expansion in vitro and extended persistence in vivo in various immunocomprm omised mouse strains; mediates CAR-directed specificity and cytotoxicity against multiple CD19-positive target cell lines in vitrott ; mediates rituximab-induced ADCC against CD20-positive, CD19-negative ARH-77 and Raji target cell lines in vitro; promotes enhanced and extended survival in vivo compam red to control of leukemia; and t groups in a CD19-positive Nalm6 xenograft model complmm etely eradicates, in combination with rituxi cytotoxicity assay. tt mab,a CD19+ and CD19- target cell lines in vitro in a mixed-culture FT538. We are developing FT538, a universal, off-the-shelf NK cell product candidate derived from a clonal master engineered for the treatment of multiple myeloma (MM). CD38 is roved monoclonal antibody that has iPSC line, for use in combination with anti-CD38 monoclonal antibody therapya highly and uniformly expressed on MM cells. Daratumummm ab, which is the only FDA-appaa demonstrated single agent efficacy mechanisms, including ADCC. However, because CD38 is also expressed on the surface of activated NK cells, daratumtt treatment can induce NK cell fratricide, which likely impairsm cells. In addition, NK cell function is oftenff therapy, a a therapeuti the treatment of MM. further reducing the effeff ctiveness of daratumt c benefit of maintaining NK cell numbers and function in patients to support umm ab. Collectively, preclinical and clinical observations suggest a potential daratumtt d/refractory MM, effectively targets CD38 and induces MM cell death through multiple essed or absent in patients witht MM as a result of the cancer itself and/or from cancer the effectiveness of ADCC-mediated targeting and elimination of MM ummm ab-mediated ADCC and augment in relapseaa ummm ab suppru u ff FT538 is derived from a clonal master iPSC line engineered to include the expression of a hnCD16 Fc receptor to enhance ADCC and a novel IL-15 receptor fusion for cytokine-independent persistence, and to completely eliminate CD38 expression to mitigate NK cell frat that: ricide. We have generated NK cells from master engineered iPSC lines, and have shown in preclinical studies ff (cid:120) (cid:120) (cid:120) (cid:120) CD38 deficiency protected NK cells from fratricide mediated by daratumummm ab in vitro; hnCD16 iPSC-derived NK cells mediate robust anti-myeloma activity with daratumtt augmented by elimination of CD38 expression; ummm ab in vitro, which is furff ther hnCD16, CD38-null iPSC-derived NK cells demonstrate more durable ADCC with increased serial killing potential in combim nation with daratumumm ab in vitro; and there is no significant differen between hnCD16, CD38-null iPSC-derived NK cells and hnCD16 iPSC-derived NK cells. ce in NK cell differentiation, expansion, activation or ability to mediate natural cytotoxicity ff FT819. We are developing CAR T-cell productd candidates created from clonal master engineered iPSC lines as off-thet -shelf cancer immunotherapies for the treatment of liquid and solid tumors. In September 2016, we announced a multi-year partnership with Memorial Sloan Kettering Cancer Center for the development of off-the-s master iPSC lines. Research and development activities under the collaboration are being led by Dr. Michel Sadelain, Director of the Center for Cell Engineering and the Stephen and Barbara Friedman Chair at Memorial Sloan Kettering Cancer Center. helf engineered T-cell product candidates using clonal t 10 t tt hip with Memorial Sloan Kettering Cancaa In connection with the formation of our partaa ners property arising from all research and development activities under the partnership. In May 2018, we licensed from er Center, we exclusively licensed from Memorial Sloan Kettering foundational intellectual property covering iPSC-derived cellular immunotherapy, including T cells and NK cells derived from iPSCs engineered with CARs, for human therapeutic use. We also secured an exclusive option to exclusively license intellectual Memorial Sloan Kettering Cancer Center additional intellectual the 1XX CAR construct, certain targeted gene modifications. Embodim Sadelain in March 2017 demonstrating that directing a CD19-specific CAR to the T-cell receptor (cid:302) constant (TRACRR uniform CAR expression in human peripheral blood T cells, enhances exhaustion, and in Novembem r 2018 demonstrating that CAR T cells utilizing a novel 1XX CAR signaling domain exhibited enhanced antitumor effff icacy, and of genetically-engineered CAR T cells, including methods of making these cells using CRISPR for ments of this additional intellectual property include preclinical data published by Dr. persistence and long-term cytotoxicity as well as a decrease in T-cell exhaustion. property covering composm itions of novel CAR constructs, including T-cell potency, and delays effecff tor T-cell differentiation and ) locus results in a a r ff t We are developing FT819, a first-of-kind CD19-specific CAR T-cell producd t candidate derived from a clonal master engineered iPSC line. The engineered features the TRAC locus to convey antigen specificff to mitigate GvHD. We have generated CD8(cid:302)(cid:533)+ T cells from master engineered iPSC lines, and have shown in preclinical studies CD8(cid:302)(cid:533)+ TCR-null, CD19-specific CAR T cells derived from master engineered iPSC lines: of the clonal master iPSC line include the targeted integration of a CD19-specific 1XX CAR into egulated CAR expression and completely eliminate TCR expression ity, promote TRAC-r RR t tt that (cid:120) (cid:120) (cid:120) (cid:120) consist of bi-allelic disruption of TCR expression at the genetic level and demonstrate regulated expression of 1XX CAR under the control of the endogenous TRACRR promoter; display antigen-specific anti-tumtt compamm rable to peripheral blood CD19-specific CAR T cells; or potency in vitro, including cytokine release and targeted cellular cytotoxicity, do not respond or proliferate lymphocyte m ff reaction, indicating the risk of GvHD is alleviated; and against HLA-mismatched (CD19-) peripheral blood mononuclear cells as targets in a mixed effeff ctively control tumor progression in vivo compamm rable to peripheral blood CD19-specific CAR T cells in a preclinical mouse model of acute lymphobl astic leukemia. m Other Immuno-Oncology Product Candidates. We are appl a ying our iPSC product platform to research and develop additional off-the-shelf, iPSC-derived cell product candidates. In Novembem r 2018, we entered into an exclusive option agreement with the Max Delbrücrr k Center for Molecular Medicine (MDC) to obtain rights to intellectual property covering novel humanized CAR constructs that uniquely and specifically bind B-cell Maturation Antigen (BCMA). Under the agreement with MDC, we have the righthh to exclusively license the portfolio for all cell products, including CAR NK- and T-cell products, derived from iPSCs. In data published by MDC scientists, anti-BCMA CAR T cells equipped with its unique humanized extracellular antigen-binding domains show higher affinit anti-BCMA antigen-binding domains. These differentiated properties conveyed botht greater selectivity in recognizing target B cells and more robust killing of target B cells in vitro, including malignant B cells with low expression levels of BCMA. Additionally, in in vivo proof-of-concept studt CAR T cells mediated anti-tumor activity in xenotransplant mouse models of multiple myeloma and of mature B-cell non-Hodgkin lymphoma, where BCMA surface expression is up to 4-fold lower as compared to mouse models of multiple myeloma. ies, MDC scientists demonstrated that anti-BCMA y and greater specificity than other ff t e Immuno-Re- gula tion Product Candiddd atdd estt ProTmune™ Allogeneic HCT has been performed globally for decades with curative intent in patients with a wide range of hematologic malignancies and rare genetic disorders. The procedure involves transferff the administration of chemotherapy and/or radiation therapya donor-sourced hematopoietic cell graft play an essential role in determining outcomes of allogeneic HCT. Donor-sourced CD34+ cells have the unique ability to engraft and reconstitute a new blood and immunm e system, and donor-sourced immune cells, such as T cells, have an impom rtant protective role following HCT in eradicating residual cancer cells and providing protection against life-threatening infections. The engraftment of donor-sourced CD34+ cells is essential for successfulff engraftment leaves a patient severely immuno-compromm Additionally, while the donor-sourced immune cells impartm a serious complmm ication where donor-sourced T cells recognize antigens on a patient’s cells as foreign and attack the patient’s cells. ised and exposed to exceedingly high risk of early morbidity and mortality. . The biological properties of the various cell populations present in the ring donor-sourced hematopoietic cells to a patient following reconstitution, and any delay in, or failure of,ff effect, allo-reactive T cells can causea a critical immunotherapeutic GvHD, a According to the Center for Internar tional Blood and Marror w Transplant Research, approximately 30,000 allogeneic HCT procedures are performed globally each year. Hematopoietic cells for use in allogeneic HCT can be obtained from multiple donor sources including umbilical procedures utilize mPB as the donor hematopoietic cell source. While the use of mPB is associated with faster rates of neutroptt engraftmff cord blood, bone marrow and mobilized peripheral blood (mPB). Approximately 65% of allogeneic HCT ent compamm red to other cell sources like bone marrow and umbilicm al cord blood, approximately 35-60% of patients undergoing hil m 11 mPB HCT develop acute GvHD and 70-80% of patients undergoing mPB HCT experience at least one severe infection within the first 180 days following HCT. Additionally, approximately 50% of patients undergoing HCT experience cancer relapsea first two years following HCT. We believe our cell programming approach has the potential to reduce the three leading causes of morbidity and mortality associated with allogeneic HCT – namely, graft-versus-host disease, severe infection m and to improve outcomes in patients undergoing allogeneic HCT. s and disease relapse – or die within the ff We are developing ProTmunem as an investigational programmed cellular immunotherapya for use as a next-generation allogeneic a is produced by modulating donor-sourced mPB ex vivo with two small molecules, 16,16-dimethyl n E2 (FT1050) and dexamethasone (FT4145), to enhance the biological properties and therapea utic function of the graft’s HCT cell graft. ProTmunem prostaglandi cells. The programmed mPB graft is administered to a patient as a one-time intravenous therapy. Based on preclinical data, we believe ProTmune has the potential to suppress the GvHD response and maintain the anti-tumor, or graft-versus-leukemia (GvL), activity of donor T cells. We have demonstrated that FT1050-FT4145 programmed CD4+ and CD8+ T cells of mPB are functionally less allo- reactive in vitro, exhibiting a decrease both in the expression levels of T-cell activation markers, including ICOS and 41BB, and in the production of pro-inflammatory cytokines, and an increase in the production of potent anti-inflammatory cytokines including IL-10. We are conducting a multi-center Phase 1/2 clinical trial of ProTmunemm in adult subjects with hematologic malignancies undergoing mPB HCT following myeloablative conditioning, a clinical trial which we refer to as the PROTECT studytt objectives of the PROTECT study are to evaluate safety and tolerability, and to assess the potential of ProTmunem GvHD, which is a leading cause of morbidity and mortality in patients undergoing HCT. There are currently no FDA-approved therapies for the prevention of GvHD in patients undergoing allogeneic HCT, giving rise to a significant unmet medical need. All subjeb cts in the PROTECT study are being followed for a period of two years following HCT. to prevent acute . The primary In December 2018, we reported clinical data from the Phase 1 stage of PROTECT. The Phase 1 stage of PROTECT included seven subjects. Underlying hematologic diseases included three subjects with acute lymphoblastic leukemia (ALL), three with acute myeloid leukemia (AML) and one with myelodysplastic syndrome (MDS). As of a Novembem r 26, 2018 data cut-off,ff subjects remained on studt y with median time on studtt y of 516 days [Day 151 – 616], and the following key safety and effiff cacy data were reported: fivff e of seven (cid:120) (cid:120) (cid:120) (cid:120) ProTmune was well-tolerated. There were no events of graftff failure and no serious adverse events related to ProTmune reported by investigators. There were no reported events of cancer relapse. a At Day 100, all seven subjects receiving ProTmunem GvHD during the first 100 daysa time to resolution of the maximum GvHD grade was 7 days [range: 5-8 days]. following HCT, all of whom responded to standard-of-cff are steroid treatment. The median were alive and relapse-free; and three subju ects experienced acute At Day 365, five of seven subjects receiving ProTmunem in two subjects u without moderate-to-severe chronic GvHD. (Subject 1 on Day 228; Subject 3 on Day 151); and three of seven subjects were alive, relapse-freff e and were alive and relapse-free, witht non-relapse mortality occurring A tabular summary of the reported clinical data from the Phase 1 stage of PROTECT is presented below: PROTECT Phase 1 Clinical Data (as of November 26, 2018 data cut-off) Subject Days on Studydd Hematologic Malignancy CD34+ cell dose (x106/kg) CD3+ cell dose (x108/kg) ProTmune-related SAEs 1 228 MDS 10.3 3.1 None 2 616 AML 4.6 1.8 None 3 151 AML 10.9 2.6 None 4 524 ALL 4.8 2.8 5 516 ALL 3.2 2.0 6 481 ALL 3.0 1.2 7 468 AML 9.4 2.8 None None None None Day of Neutrophil Engraftment 1 Day 14 Day 18 Day 22 Day 15 Day 16 Day 18 Day 19 Day 100 Acute GvHD / Grade (CIBMTR) None None Grade 2 None Grade 2 Grade 3 None e Treatment Responsiv s Time to Resolution of Maximaa um Grade Day 365 Moderate-to-Severe Chronic GvHD Cancer Relapse-free Overall Survival 1 As measured from the daya following HCT --- --- n/a Yes No --- --- None Yes Yes 12 Yes 7 daysyy n/a Yes No --- --- None Yes Yes Yes 8 days None Yes Yes Yes 5 daya syy Yes Yes Yes --- --- Yes Yes Yes tt subjeu in up to 60 adultd The ongoing Phase 2 stage of PROTECT is a randomized, controlled and double-blinded clinical trial assessing the safety and cts with hematologic malignancies undergoing matched unrelated donor HCT following effiff cacy of ProTmunem myeloablative conditioning. Subjects are being randomized, in a 1:1 ratio, to receive either ProTmunem unrelated donor mobilized peripheral blood cell graft.ff The primaryrr efficacy endpoint of PROTECT is cumulative incidence of Grades 2-4 acute GvHD by Day 100 following HCT, where prospective clinical studies have shown that 40% to 80% of patients undergoing matched unrelated donor transplant experience Grades 2-4 acute GvHD. Additional endpoints, such as rates of cancer relapse, chronic GvHD, non-relapse mortality, overall survival and overall survival with freedom from cancer relapse and from moderate-to-severe chronic GvHD, are also being assessed. Fiftff een U.S. centers are currently open for enrollment in the Phase 2 stage of PROTECT. In Decemberm 2018, we reported that over 30 subjects had been treated in the randomized, control PROTECT study. or a conventional matched blinded Phase 2 led and double- u tt In June 2016, the FDA granted Fast Track designation for ProTmunemm for the reduction of incidence and severity of acute GvHD in patients undergoing allogeneic HCT. In September 2016, the FDA granted Orphan Drugrr Designation and, in October 2016, the European Commission granted Orphan jurisdiction broadly covers subjects u cancers and genetic disorders. undergoing allogeneic HCT across diseases for which the procedure is performff Medicinal Product Designation, for ProTmune.mm The orphan designation granted in each rr ed, including blood FT301 Autoimmunem diseases arise from abnormal immune responses in which the body’s immune system attacks and damages its own tissues. Some of the most common autoimmune diseases include rheumatoid arthritis, type-1 yy (SLE or lupus), multiple sclerosis, inflammatoryr bowel disease, celiac disease and asthmt people in the U.S. suffer from autoimmunity, heart disease. a. It is estimated that more than 23 million which makes it the third most common category of illness in the U.S. after cancer and diabetes, systemic lupus erythematosus m Auto-reactive T lymphocy m tes are key players in aberrant autoimmune responses. We believe that certain biological mechanisms, which have been demonstrated to suppress T-cell activity against cancer cells, can be exploited to suppru destruction of normal tissues. For examplm e, myeloid-derived suppress that are often found in the tumor microenvironment, where these cells function to inhibit antigen-specific and non-specific T-cell activation and proliferation through a diverse set of mechanisms. While MDSCs can impedem potent immuno-suppressive properties may serve to immunologically check auto-reactive T lymphocytes for the destruction of healthy tissue in certain autoimmunem T-cell responses against cancer, the cells’ that are directly responsible or cells (MDSCs) are a naturally occurring population of cells and inflammatory disorders. ess auto-reactive T-cell m u MDSCs are rare in healthy donors and, although abundant in tumor-bearing patients, repurposing tumor-derived MDSCs for therapeutic use may pose undesirable risks. As a result, a need exists to generate MDSCs in large quantities, particularly from healthy donor sources, in order to explore the therapeutic potential of MDSCs. Using a proprietary, efficient and reprodudd cible differentiation process, we have shown the potential to create a substantially pure population of iPSC-derived MDSCs that is well-defined. Preclinical studies of iPSC-derived MDSCs have shown that the cells suppress T-cell activity and proliferation in vitro and attenuate GvHD in vivo in a xenogeneic mouse model. Important immunologically-mismatched cells. ly, these immuno-regulatoryrr properties were demonstrat ed using m tt We are developing FT301, an off-ff the-shelf, immuno-regulatory cell product candidate derived from a clonal master iPSC line. We believe FT301 has broad therapeutic potential across multiple disease indications, including graft-versus-host disease, multiple sclerosis, ulcerative colitis and others. Our Cell Prograo mmingn Partnerships Ono Pharmaceutical In Septemberm 2018, we entered into a collaboration and option agreement with Ono Pharmaceutical Co. Ltd. (Ono) for the joint iPSC-derived CAR T-cell product candidates. The first off-the-shelf, iPSC- development and commercialization of two off-the-shelf, derived CAR T-cell candidate (Candidate 1) targets an antigen expressed on certain lymphoblastic leukemias, and the second off-the- shelf, iPSC-derived CAR T-cell candidate (Candidate 2) targets a novel antigen identified by Ono expressed on certain solid tumors (each a Candidate and, collectively, the Candidates). Pursuant to the agreement, we are jointly conducting research and development activities under a joint development plan with Ono, with the goal of advancing each Candidate to a pre-defined preclinical milestone. t We have granted to Ono, during a specifiedff period of time, an option to obtain an exclusive license under certain intellectual property rights to develop and commercialize (a) Candidate 1 in Asia, where we retain rights for development and commercialization in all other territories of the world and (b) Candidate 2 in all territories of the world, where we retain rights to co-develop and co- commercialize Candidate 2 in the United States and Europe under a joint arrangement with Ono under which we are eligible to shareaa 13 at least 50% of the profits and losses. For each Candidate, the option will expire upon the earliest of: (a) the achievement of the pre- defined preclinical milestone, (b) termination by Ono of research and development activities for the Candidate and (c) the date that is the later of (i) four years after the Effecti development plan. We maintain worldwide rights of manufacture ve Date and (ii) completion of all applicable activities contemplated for both Candidates. under the joint mm ff ff Under the terms of the agreement, Ono paid us an upfront, non-refundable and non-creditable payment of $10.0 million in connection with entering into the agreement. Additionally, as consideration for our conduct of research and preclinical development under a joint development plan, Ono pays us annual research and development fees set fortht development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan. Further, Ono has agreed to pay us up to an additional $40.0 million, subju ect to the achievement of a preclinical milestone and the exercise by t payment and Ono of its options to develop and commercialize Candidate 1 and Candidate 2. Such feff es are in addition to the upfronff research and development fees. in the annual budget included in the joint tt Subject to Ono’s exercise of the options and to the achievement of certain clinical, regulatory and commercial milestones witht respect to each Candidate in specified territories, we are entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subject commercialize Candidate 2 as described above. We are also eligible to receive tiered royalties ranging from the mid-single digits to the low-double digits based on annual net sales by Ono of each Candidate in specifieff d territories, with such royalties subject to certain reductions. n by 50% if we elect to co-develop and co- d to reductio u The agreement will terminate with respect to a Candidate if Ono does not exercise its option for a Candidate within the option t party may terminate the agreement in the event of breach, insolvency or patent challenges by the other party; provided, period, or in its entirety if Ono does not exercise any of its options for the Candidates withit n their respective option periods. In addition, either that Ono may terminate the agreement in its sole discretion (x) on a Candidate-by-Candidate basis at any time after the second anniversary of the effective date of the agreement or (y) on a Candidate-by-Candidate or country-by-countryt the expiration of the option period, subject to certain limitations. The agreement will expire on a Candidate-by-Candidate and country-by- country basis upon the expiration of the applicable royalty term, or in its entirety upon the expiration of all applicable payment obligations under the agreement. basis at any time after ff Juno Therapeutics In May 2015, we entered into a strategic research collabora a tion and license agreement with Juno Therapeutics, a Inc. (Juno) bringing together our expertise in hematopoietic cell biology and cell programming with Juno’s scientific and development leadership in CAR and T-cell receptor (TCR) immunotherapy. Under the collaboa modulators that improve TCR immunotherapies. TCR immunotherapia es incorporat the function of T cells, including for molecules that enhance the therapea utic properties of CAR T-cell and Juno is responsible for the development and commercialization of genetically engineered CAR T-cell and ration, we screen for and seek to identify small molecule ing our modulators. m a r Under the agreement, subject to the selection by Juno of designated tumor-associated antigen targets which selection may be made by Juno on a target-by-target basis, we agreed to grant Juno an exclusive worldwide license to certain of our intellectual property, including our intellectual engineered CAR T cell and TCR immunotherapies (excluding those derived from iPSCs) using or incorporr modulators directed against such designated tumor-associated antigen targets. We have retained exclusive rights to such intellectuat l property, including our intellectual property arising under the collaboration, for all other purposes. property arising under the collaboration, to make, use, sell and otherwise exploit genetically- rating small molecule t Pursuant to the terms of the agreement, Juno paid us an upfront, non-refundable and non-creditable payment of $5.0 million, and purchased one million shares of our common stock, at $8.00 per share, for an aggregate purchase price of $8.0 million. Additionally, Juno agreed to fund all of our collaboration research activities during the research term of the agreement with minimumm annual research payments of $2.0 million to us. The initial research term of the agreement is four years ending in May 2019. Juno has the option to extend the exclusive research term for an additional two years beyond the initial four-year term, subject to the payment of a ration during the one-time, non-refundable extension fee of $3.0 million and the continued funding of our activities under the collaboa extended term, with minimumm annual research payments of $4.0 million to us during the two-year extension period. Additionally, if Juno elects to exercise its extension option, we then have the option to require Juno to purchase up to $10.0 million of our common stock at a premium equal to 120% of the then thirty-day trailing volume weighted average trading price. Juno may terminate the agreement upon six (6) months’ written notice to us. We are eligible under the agreement to receive selection fees for each tumor-associated antigen target selected by Juno and bonus selection fees based on the aggregate numberm of tumor-associated antigen targets selected by Juno. Additionally, in connection with each Juno therapya creditable milestone payments totaling up to approximately $51.0 million, in the aggregate, per therapya rates our small molecule modulators, Juno has agreed to pay us non-refundable, non- upon the achievement of that uses or incorporr 14 various clinical, regulatory and commercial milestones. Additionally, in connection with the third Juno therapy and the fifth Juno rates our small molecule modulators, Juno has agreed to pay us additional non-refundabla e, non-creditable therapy that uses or incorporr bonus milestone payments totaling up to approximately $116.0 million and $137.5 million, respectively, in the aggregate, per therapya and commercial milestones. upon the achievement of various clinical, regulatory,r Beginning on the date of the first commercial sale (in each country)r for each Juno therapya molecule modulators, and continuing until the later of i) the expiration of the last valid patent claim, ii) ten years after commercial sale, or iii) the expiration of all data and other regulatoryr exclusivity periods afforded each therapy, Juno has agreed to pay us royalties in the low single-digits on net sales of each Juno therapy that uses or incorporates our small molecule modulators. such first that uses or incorporates our small ff During the term of our research activities under the agreement, we have agreed to collaborate exclusively with Juno on the (excluding those research and development of small molecule modulators with respect to CAR T-cell and TCR immunotherapies derived from iPSCs) against certain tumor-associated antigen targets designated by Juno. Furthermt agreement, we will be unablea using small molecule modulators to enhance the therapea utic properties of CAR T-cell and TCR immunotherapies against certain tumor-associated antigen targets selected by Juno. to conduct, or enable third parties to conduct, research, development and commercialization activities ore, during the term of the a In March 2018, Juno was acquired by Celgene Corporation (Celgene). This acquisition did not affect the terms of the Juno Agreement. On January 3, 2019, Celgene announced that it had entered into a definitive merger agreement with Bristol-Myers Squibbi Compam ny (BMS), under which BMS will acquire Celgene. Additional iPSC Platformff Technologies In Septemberm 2018, we entered into an exclusive license agreement with the J. David Gladstone Institutt es (Gladstone) under which we obtained an exclusive license to certain patents and patent applications for the research, development, manufacturing, and commercialization of human therapea utics derived from iPSCs (the Gladstone License Agreement). The licensed patent rights cover the generation of iPSCs using CRISPR-mediated gene activation. This new approach for inducing pluripotency uses CRISPR to directly target a specific location of the genome and activate endogenous gene expression, and does not rely on established methods of cellular reprogramming that require the transduction of multiple transcription factors. The discoveryrr was made by a team of scientists led by Sheng Ding, Ph.D., a senior investigator at Gladstone and one of our scientific founders. In consideration for the rights granted under the Gladstone License Agreement, we issued to Gladstone 100,000 shares of our common stock pursuant to an exemptionm reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a public offering. from registration under the Securities Act of 1933, as amended (the Securities Act), in ff Additionally, we paid Gladstone an upfront fee of $0.1 million and are obligated to pay Gladstone milestone payments in an aggregate amount of up to approximately $1.9 million upon the achievement of specified clinical and regulatory milestones and tiered royalties in the low single digits on net sales of licensed products developed using the licensed intellectual property rights. We are also obligated to pay Gladstone a tiered percentage in the low to mid-single digits of certain income received by us in connection with the sublicense of the licensed patent rights. Our Intellectual Property Overview , our platforff m technologies and any other We seek to protect our product candidates and our cell programming technology through a varieaa ty of methods, including seeking and maintaining patents intended to cover our products and compositions, their methods of use and processes for their manufacturett We seek to obtain domestic and international patent protection and, in addition to filing and prosecuting patent applications in the United States, we typically file counterpart patent applications in additional countries where we believe such foreign filing is likely to be beneficial, including Europe, Japan, Canada, Australia and China. We continually assess and refine our intellectual property strategy in order to best fortify our position, and file additional patent applications when our intellectual property strategy warrants ies to develop and maintain such filings. We also rely on know-how, continuing technological innovation and in-licensing opportunit our proprietary position. We have entered into exclusive license agreements with various academic and research institutions to obtain the rights to use certain patents for the development and commercialization of our productd inventions that are commercially importan t to the development of our business. candidates. t t m t As of March 1, 2019, our intellectual propertytt portfolff io is composed of over 200 issued patents and 150 patent applications thataa we license from academic and research institutions, and over 100 issued patents or pending patent applications that we own. These patents and patent applications generally provide us with the rights to develop our product candidates in the United States and worldwide. This portfolff programming approach for enhancing the therapeutic function of cells ex vivo, and our platformff io covers compositions of programmed cellular immunotherapeutics, including ProTmunm e, our cell for industrial-scale iPSC generation 15 and engineering. We believe that we have a significant intellectual propertyrr programming of hematopoietic and immune cells and to the derivation, genetic engineering, and diffeff position and substantial know-how relating to the rentiation of iPSCs. We cannot be sure that patents will be granted with respect to any of our owned or licensed pending patent applications or with respect to any patent applications we may own or license in the future, nor can we be sure that any of our existing patents or any patents we may own or license in the future will be usefulff Our Intellectual Property” for additional information on the risks associated with our intellectual propertytt strategy and portfolff in protecting our technology. Please see “Risk Factors—Risks Related to io. Intellectual Property Relatingtt to the Progragg mmingn of Hematopoietic and Immune Cells As of March 1, 2019, we own 12 families of U.S. and foreign patents and pending patent applications covering our cell m tions of programmed cellular immunm otherapies. This portfolio includes 70 issued patents or programming technology and composim pending patent applications relating to methods of programming the biological properties and therapea utic function of cells ex vivo, and the resulting therapeutic compositions claims covering (i) therapea utic composit have been programmed ex vivo with one or more agents to optimize their therapea utic function for application in oncology and immunem disorders and (ii) methods of programming cells including by the activation or inhibition of therapea utically-relevant genes and cell- surface proteins, such as those involved in the homing, proliferation and survival of hematopoietic cells or those involved in the persistence, proliferation and reactivity of immune cells. Any U.S. patents withit n this portfolio that have issued or may yet issue from pending patent applications will have statutoryrr expiration dates between 2030 and 2039. of hematopoietic and immune cells. Patents and patent applications in this portfolio include ions of hematopoietic and immune cells, including T cells, NK cells, and CD34+ cells, that m Additionally, we have an exclusive license to an intellectual property rr portfolio consisting of two families of issued patents and pending patent applications co-owned by the Children’s Medical Center Corporation and The General Hospital Corporation. As of March 1, 2019, we currently have exclusive rights to 50 issued patents or patent applications in the United States and worldwide relating to methods for programming hematopoietic stem cells ex vivo using modulators that up-regulate the prostaglandin signaling pathway or its downstream mediators. These patent rights consist of issued patents (including U.S. Patents 8,168,428 and 8,563,310) claiming methods for the exee vivo programming of hematopoietic stem cells using FT1050, including hematopoietic stem cells obtained from mobilized peripheral blood, cord blood, and bone marrow. Pending patent applications in the United States and foreign jurisdictions are directed to therapeutic composit ions of hematopoietic stem cells in which the cells have been modulated by increasing prostaglandin activity, methods of preparing these composimm expansion and self-renewal using modulators that increase prostaglandin signaling activity. Any U.S. patents within this portfolio that have issued or may yet issue will have a statuttt ory expiration date in 2027. tions, and methods of promoting hematopoietic reconstitution, m We have also licensed exclusive rights to two famff ilies of issued patents and patent applications from the Indiana University Research and Technology Corporation. This portfolio includes patent applications claiming methods of enhancing HCT procedures by altering prostaglandin activity in hematopoietic stem cells as well as an issued U.S. pateaa nt and patent applications claiming methods of enhancing viral transduction efficiency in the genetic engineering of stem cells, including hematopoietic stem cells. These applications describe methods of increasing mobilization of stem cells from a stem cell donor, and methods for increasing hematopoietic stem cells homing and engraftment in a stem cell transplant recipient. One family of applications is directed to preferentially modulating certain receptors present on hematopoietic stem cells to increase the therapea utic potential of such cells for homing and engraftment. Claims in these applications specifically cover the modulation of mobilized peripheral blood by altering prostaglandin activity and methods for increasing viral transduction efficiency for gene therapy. will expire in 2029 or 2030. this portfolio Any patents that have issued or that may issue from patent applications in a ff We also have licensed exclusive rights to three families of patent applications fromff the University of Minnesota. This portfolio includes 20 patent applications pending in the United States andn foreign jurisdictions directed to composim tions of NK cells, including adaptive memory NK cells and genetically-engineered NK cells, and therapea utic strategies for the treatment of cancer using these NK cells. These applications also describe methods of enhancing NK cell cytotoxicity by genetically engineering the CD16 Fc receptor in immune cells, including iPSC-derived NK cells, and describe methods of increasing NK cell tumor specificity and cytotoxicity by incorporating CARs on NK cells. Any patents that may issue from patent applications pending in this portfolio will expire in 2035 or 2036. Intellectual tt Property Relating to iPSC Technology ll As of March 1, 2019, we own 10 patent families directed to programming the fate of somatic cells ex vivo, including patent ntiation of iPSCs into specialized cells with therapeutic potential. These patent applications cover our proprietaryrr applications pending in the U.S. and internati related to differeff small molecule-enhanced iPSC platform, including novel reprogramming factors and methods of reprogramming to obtain iPSCs. Our intellectual property portfolio also includes gene editing compositions directing the fate of cells to obtain homogenous cell populations in the hematopoietic lineage, including CD34+ cells, T cells and NK onally related to ouruu platform for industrial-scale iPSC generation and applications and methods of genetic engineering, as well as methods of m r 16 cells. Our proprietaryr maintaining genomic stability. Any patents issued from these patent applications will expire on dates ranging from 2031 to 2038. highly-efficient iPSC derivation, selection, engineering, and clonal expansion while intellectual property enables a Additionally, we have licensed from the Whitehead Institute for Biomedical Research a portfoli ff o of four patent families discovery and therapeutic purporr including issued patents and pending applications broadly applicable to the reprogramming of somatic cells. Our license is exclusive in commercial fields, including for drugrr from somatic cells and, as of March 1, 2019, includes 12 issued U.S. patents (including U.S. Patents 8,071,369, 7,682,828 and 9,497,943) claiming composit pluripotent state), and methods of making a cell more susceptible to reprogramming. Specificaff of matter patent issued in the United States covering a cellular composition comprmm ising a somatic cell having an exogenous nucleic m acid that encodes an OCT4 protein. OCT4 is the key pluripotency gene most commonly required for the generation of iPSCs. These issued patents and any patents that may issue from these pending patent applications will expire on dates ranging from 2024 to 2029. ions used in the reprogramming of mammalian somatic cells to a less differentiated state (including to a lly, the portfolio includes a compom sition io covers the generation of human iPSCs ses. This portfolff mm We also have exclusive licenses from The Scripps Research Institute to a portfolio of seven patent families relating to m and methods forff reprogramming mammalian somatic cells, which covers non-genetic and viral-free reprogramming compositions mechanisms, including the use of various small molecule classes and compomm unds and the introduction of cell-penetrating proteins to reprogram mammalian somatic cells. This portfolff provide compom sition of matter protection for a class of small molecules, including thiazovivin, that is critical for inducing the generation, and maintaining the pluripotency, of iPSCs, and compositions and methods of using the small molecule. Any issued U.S. patents and any patents that may issue from patent applications pending in the U.S. and internationally in this portfolio will have statutory expiration dates ranging from 2026 to 2032. io includes issued U.S. patents (including U.S. Patents 8,044,201 and 8,691,573) that We also have exclusively licensed from The Memorial Sloan-Kettering Cancer Center (MSK) intellectual property covering the m on of iPSC-derived T cells and their use in cellular immunotherapy, and haveaa production and compositi patent families covering novel CAR constructs as well as off-the-shelf CAR T cells, including the use of CRISPR and other innovative technologies for their production. Collectively, this portfolio covers composim , composm itions of T cells and NK cells derived from pluripotent cells which are engineered with CARs, methods of engineering pluripotent cell lines, methods of deriving CAR-T cells from CAR expressing pluripotent stem cells, and methods of using CRISPR for producing off-the-shelf T-cell immunotherapia es. Any patents that may issue from patent applications pending in the U.S. and internationally in this portfolio will have expiration dates between 2034 and 2038. a license from MSK to two tions of CAR constructs rr Our Material Technology License Agreements Children’s’ Medical Center Corporation In May 2009, we entered into a license agreement with Children’s Medical Center Corporation (CMCC) for rights relating to l Property Relating to the Programming of therapea utic compositions of modulated HSCs and methods for promoting reconstitution of the hematopoietic system using modulators of the prostaglandin pathway, as described in more detail above under “Intellectuat Hematopoietic Cells.” Under our agreement with CMCC, we acquired an exclusive royalty-bearing, subliu to make, use and sell products covered by the licensed patent rights, and to perform licensed processes, in each case, in all fields. CMCC retains a non-exclusive right to practice and use the patent rights for research, educational, clinical or charitable purporr also to license other academic and nonprofitff organizations to practice the patent rights for research, educd ational, and charitaba le (but excluding any clinical use and commercialization of the patent rights to the extent granted to us under the license purposes agreement). Our license is also subject to pre-existing rights of the U.S. government and rights retained by the Howard Hughes Medical Institute and the General Hospital Corporation to use the patent rights for research purposes. Additionally, if we make any discoveryrr or invention that is described in a patent application and is not within the scope of the licensed patent rights but would not have been made but for the licensed patent rights, we are required to disclose the invention to CMCC and enter into a non-exclusive license agreement with CMCC, for no more than a nominal fee, for CMCC to practice the invention solely for internal research purpr oses or clinical purposes and not for commercial purposes. censable, worldwide license ses, and rr Under the terms of the license agreement, we are required to pay to CMCC an annual license maintenance fee during the term of the agreement. We also are required to make payments to CMCC of up to $5.0 million per product in development, regulatory and sales milestones. If commercial sales of a licensed product commence, we will pay CMCC royalties at percentage rates ranging in the low- to mid-single digits on net sales of licensed products in countries where such product is protected by patent rights. Our obligation to pay royalties continues on a countrytt such country,r royalty percentage has been reached. In the event that we sublicense the patent rights, CMCC is also entitled to receive a percentage of the sublu icensing income received by us. by country basis until the expiration of all licensed patent rights covering licensed products in and our royalty payments will be reduced by other payments we are required to make to third parties until a minimum Under the license with CMCC, we are obligated to use commercially reasonable efforts ff soon as practicable, and also to use good faith and diligent efforts products reasonably available to the public during the term of the agreement. We are also required to use good faith and diligent ff to bring a licensed product to market as to manufacture and distribute a licensed product, and make licensed 17 efforts to meet the milestones set forth in development plans as part of the agreement, subject to any revisions to the development plans that may be permitted under certain circumstances. Additionally, if a third party expresses interest in an area under the license that we are not pursuing, under the terms of our agreement with CMCC, we may be required to sublic third party. ense rights in that area to the u The agreement will continue until the last to expire of the patent rights. We may terminate the agreement by providing prior written notice to CMCC, and CMCC has the right to terminate the agreement if we fail to pay royalties or otherwise materially breach the agreement and fail to cure such breach within a specified grace period. CMCC may also terminate the agreement should we cease operations or in the event of our bankruptcy or insolvency. The Universitrr ytt of Minnesota In Decemberm 2016, we entered into a license agreement with the Regents of the University of Minnesota for rights relating to m compositions and methods relating to NK cells, to modifications of cytotoxic receptors naturtt ally expressed on NK cells including the CD16 Fc receptor, and to CARs for expression on NK cells. Under our agreement with the University of Minnesota, we acquired an exclusive royalty-bearing, sublicensable, worldwide license to make, use and sell licensed products in all fields for commercial purposes. The licensed patent rights are described in more detail above under “Intellectual Property Relating to the Programming of Hematopoietic Cells.” The University of Minnesota retains the right to practice the patent rights for research, teaching and educational purposes, including in corporate-sponsored research subject to certain limitations during the initial three years of the license agreement. The University of Minnesota also retains the right to license other academic and non-profit research institutes to practice purposes, but not for corporate-sponsored research. Our license is also subju ect d the patent rights for research, teaching and educational to pre-existing rights of the U.S. government. Under the terms of the license agreement, we are required to pay the University of Minnesota an annual license maintenance fee of the agreement, and are also required to make payments of up to $4.6 million for development, regulatory and during the termr commercial milestones achieved with respect to each of the firsff commence, we will also be required to pay royalties at percentage rates in the low-single digits on net sales of licensed products. Our royalty payments are subject to reduction for any third-partytt payments required to be made until a minimumm royalty percentage has been reached. In the event that we sublicense the patent rights, the University of Minnesota is also entitled to receive a percentage of the sublu icensing income received by us. t three licensed products. If commercial sales of a licensed product Under the license agreement with the University of Minnesota, we are obligated to use commercially reasonable efforts to develop and make commercially available licensed products. In partaa icular, we are required to conduct activities toward specific development milestones of licensed products on an annual basis. The agreement will continue until the abandonment of all patent rights or expiration of the last to expire licensed patent. The University of Minnesota may terminate the agreement if we default ance of any of our obligations and fail to cure the defaulta within a specified grace period. The University of Minnesota may also terminate the agreement if we cease to carry out our business or become bankruk ptu of Minnesota and payment of all amounts due to the University of Minnesota through the date of termination. or insolvent. We may terminate the agreement for any reason upon prior written notice to the University in the performff ff Memorial Sloan Ketteringn Cancer Centertt In May 2018, we entered into an amended and restated license agreement with Memorial Sloan Kettering Cancer Center. The agreement amends and restates the exclusive license agreement we entered into with Memorial Sloan Kettering Cancer Center in August 2016, under which we obtained rights relating to compositions and methods covering iPSC-derived cellular immunotherapy, a including T cells and NK cells derived from iPSCs engineered with CARs. Pursuant to the amended and restated license agreement, we continue to hold exclusive rights to the foregoing patents and patent applications, and obtained additional licenses to certain patents and patent applications relating to composition cells, including the use of CRISPR and other m innovative technologies for their production. s and methods covering novel CAR constructs as well as off-the-shelf CAR T t Under our amended and restated agreement with Memorial Sloan Kettering Cancer Center, we have royalty-bearing worldwide licenses to make, use and sell licensed products in all fields for human therapeutic uses. The licensed patent rights are described in more detail above under “Intellectual Property Relating to iPSC Technology.” For those patent families where our rights are exclusive, Memorial Sloan Kettering Cancer Center retains the right to practice the patent rights for research, teaching and non-clinical research purposes, and to license other academic and non-profit research institutes to practice the patent rights for research, teaching and non- clinical research purposes. Our licenses are also subject to pre-existing rights of the U.S. government. t Under the terms of the amended and restated agreement, we are required to pay Memorial Sloan Kettering Cancer Center an annual license maintenance fee during the term of the agreement, and are also required to make payments of up to $12.5 million for development, regulatory and commercial milestones achieved with respect to each licensed products. If commercial sales of a licensed product commence, we will also be required to pay royalties at percentage rates up to the high-single digits on net sales of licensed 18 products. Our royalty payments are subject to reducti percentage has been reached. In the event that we subliu to receive a percentage of the sublicensing income received by us. Additionally, in the event a licensed product achieves a specified clinical milestone, Memorial Sloan Kettering Cancer Center is then eligible to receive additional milestone payments, where the amount of such payments owed to Memorial Sloan Kettering Cancer Center are contingent upon certain increases in the price of ouruu common stock following the date of achievement of such clinical milestone. on for any third-partytt payments required to be made until a minimumm royaltytt cense the patent rights, Memorial Sloan Kettering Cancer Center is also entitled d Under the amended and restated agreement with Memorial Sloan Kettering Cancer Center, we are obligated to use commercially reasonablea and commit a minimumm amount of funding toward specific development milestones of licensed products on an annual basis. efforts to develop and make commercially available licensed products. In particular, we are required to conduct activities The agreement will continue until the abandonment of all patent rights or expiration of the last to expire licensed patent. Memorial Sloan Kettering Cancer Center may terminate the agreement if we default in the performance of any of our obligations and fail to cure the defaulta within a specifieff d grace period, if we cease to carry out our business or become bankruptu or insolvent, or if we institute a proceeding to challenge the patent rights. We may termin Memorial Sloan Kettering Cancer Center. ate the agreement for any reason upon prior written notice to rr Whitehead Institute for Biomedical Research In February 2009, we entered into a license agreement with the Whitehead Institute for Biomedical Research, as amended in October 2009 and Septemberm 2010, for rights relating to composm itions and methods for reprogramming somatic cells to a less differentiated or pluripotent state. Under our agreement with the Whitehead Institute, we acquired an exclusive royalty-bearing, sublicensable, worldwide license to make, use and sell licensed products in all fields for commercial purposes, excluding the sale or distribution of reagents for basic research use. The licensed patent rights are described in more detail above under “Intellectuatt l Property Relating to iPSC Technology.” The Whitehead Institute retains the right to practice the patent rights for research, teaching and educational purposes, including in corporate-sponsored research under limited circumstances and in some cases only after obtaining our consent. The Whitehead Institute also retains the right to license other academic and non-profit research institutt es to practice the patent rights for research, teaching and educatio dd subju ect to pre-existing rights of the U.S. government. nal purposes, but not for corporate-sponsored research. Our license is also Under the terms of the license agreement, we are required to pay the Whitehead Institute an annual license maintenance fee during the term of the agreement, and are also required to make payments of up to $2.3 million for development and regulatory milestones achieved with respect to licensed products. If commercial sales of a licensed product commence, we will also be required to pay royalties at percentage rates in the low-single digits on net sales of licensed products. Our royalty payments are subject to reduction for any third-party payments required to be made until a minimummm royalty percentage has been reached. In the event that we sublicense the patent rights, the Whitehead Institute is also entitled to receive a percentage of the sublicensing income received by us. Under the license agreement with the Whitehead Institute, we are obligated to use commercially reasonable efforts to develop and commercialize licensed products, and to make licensed products or processes reasonably available to the public. In particular, we are required to commit a minimumm amount of funding toward the development of a licensed product on an annual basis or conduct activities toward specific development milestones. The agreement will continue until the abandonment of all patent rights or expiration of the last to expire licensed patent. The Whitehead Institute may terminate the agreement if we default in the performance of any of our obligations and fail to cure the defauff within a specifiedff terminate the agreement if we cease to carryrr out our business or become bankrupt any reason upon prior written notice to the Whitehead Institute and payment of all amounts due to the Whitehead Institute through the date of termination. grace period, or if we institute a proceeding to challenge the patent rights. The Whitehead Institute may also or insolvent. We may terminate the agreement for rr lt The Scrippspp Research Institute ii We have entered into various license agreements with The Scripps Research Institute (TSRI) for rights relating to compositio m ns u a sable, and methods for reprogramming somatic cells, including the use of various small molecule classes and compounds in the reprogramming and maintenance of iPSCs. Under our agreements with TSRI (thet TSRI License Agreements), we acquired exclusive covered by the licensed patent rights, and to perform royalty-bearing, sublicen Property licensed processes, in each case, in all fields. The licensed patent rights are described in more detail above under “Intellectual Relating to iPSC Technology.” TSRI retains a non-exclusive right to practice and use the patent rights for non-commercial education al and research purposes, and to license other academic and non-profitff research institutions to practice the patent rights for internal basic research and education purposes. Under certain of our TSRI License Agreements, other patent rights for their internal use only. Our license is also subject to pre-existing rights of the U.S. government. worldwide licenses to make, use and sell products third parties maintain a right to practice the d d aa tt t 19 Under the terms of the TSRI License Agreements, we are required to pay to TSRI annual minimummm fees during the term of each agreement. Additionally, upon the achievement of specific regulatory and commercial milestones, we are required to make payments to TSRI of up to approximately $1.8 million under each of the TSRI License Agreements. We will also be required to pay TSRI royalties at percentage rates ranging in the low- to mid-single digits on net sales of licensed products. In the event that we sublicense the patent rights, TSRI is also entitled to receive a percentage of the sublicensing income received by us. Under the TSRI License Agreements, we are obligated to use commercially reasonablea efforts to meet the development benchmarks set out in development plans under each of the TSRI License Agreements, or otherwise expend a minimumm specified amount per year for produd ct development. TSRI has the right to terminate any TSRI License Agreement if we fail to performff our obligations under the applicabla e agreement, including failure to meet any development benchmark or to use commercially reasonabla e and due diligence to develop a licensed product, or if we otherwise breach the agreement, challenge the licensed patent rights, ff efforts are convicted of a feff lony involving the development or commercialization of a licensed product or process, or become insolvent. We may terminate any of our TSRI License Agreements by providing ninety days’ written notice to TSRI. Each TSRI License Agreement otherwise terminates upon the termination of royalty obligations under such agreement. Manufacturing TT ProTmune ™e ProTmunemm m is a composition of ex vivo programmed human mobilized peripheral blood cells. ProTmunem is producd ed by treating qualified human mobilized peripheral blood with two small molecules, FT1050 and FT4145, in a multi-step process that is performed on the day of HCT. Currently, the manufacture of ProTmunemm iated is performed at clinical cell processing facilities operated by or affilff with our clinical sites. The manufacturing process consists of functionally closed unit operations. We aim to continue to develop manufacturi ng processes to further standardize the manufacture of ProTmunem across clinical cell processing facilities. tt Human peripheral blood cells from a donor, whose tissue typeyy closely matches the patient’s, are used as the starting cellular source material for the manufacture of ProTmune.mm HCT centers can electronically access a worldwide network of donor registries, which collect and transfer human peripheral blood cells from donors, to source these cells on behalf of patients. We expect donor registries to continue to collect and transfer, and HCT centers to continue to source, human peripheral blood cells for our manufacture of ProTmune.m such as bags and tubing sets. To date, we have obtained all componem FT4145 and programming media, from third-party manufacturtt ers and suppliers, which include, in some instances, sole source manufacturers and suppliers. We do not currently have long-term commitments or supply agreements in place to obtain human peripheral blood cells and certain compomm nents used in the manufacture of ProTmune.m Other components used in the manufacture of ProTmune include programming media as well as disposabla e materials, nts required for the manufacturett of ProTmune,m including FT1050, For the conducd t of our Phase 1/2 clinical trial of ProTmune, the clinical cell processing facility at each participating site is qualified and trained by our technical staff to manufacture ProTmune.m processing facility for each of the first two subjects administered ProTmunem by the clinical cell processing facility staff after final processing, including filtration, final packaging, rapid release testing, and labeling. In the future, we may manufact at facilities operated by us, by transplant centers, or by third parties. Our technical representative(s) are on-site at the clinical cell at a participating site. ProTmunem is released immediately ProTmunem urett ff FATE-NTT 0 K10NN FATE-NK100 is a first ff -in-class NK cell cancer immunotherapy comprised of adapta ive memory NK cells. The cell therapya product candidate is manufactured using peripheral blood (PB) leukocytes from a CMV seropositive donor, where the donor is typically a HLA haplo-identical donor, and is depleted of CD3+ (T-lymphocytes) and CD19+ (B-lymphocytes) population is culturet combim nation, including a cytokine and a small molecule GSK3(cid:533) inhibitor, to expand and enrich for NK cells that phenotypically have been associated with the adaptive memory phenotype. d for seven days in a feeder-free environment and in a media containing a proprietary pharmacologic modulator . This starting cell m For the conducd t of Phase 1 clinical trials, FATE-NK100 is manufacturett processing facility operated by or affiliated with such clinical site. Each clinical cell processing facility is trained and qualifiedff manufacturett additional medical center cell therapy facilities, contract witht manufacturett of FATE-NK100 for use in clinical trials or for commercial therapeutic use. FATE-NK100 by our technical staff prior to manufacturett ers, or operate our own facilities for the of FATE-NK100 for clinical use. We may in the futurtt e qualify third-party manufactur ff d at each participating clinical site by a clinical cell to Other reagents and excipients used in the manufacture of FATE-NK100 include the pharmacologic modulators used in programming FATE-NK100 as well as the culturt e media used in the seven-day manufacff excipients required forff turers and supplu currently have long-term commitments or suppuu ly agreements in place to obtain these components used in the manufacff NK100. ure of FATE-NK100 are obtained today from third-party manufacff the manufact ff turing process. All of these reagents and iers. We do not ture of FATE- 20 Off-thff - e-Shel ll fll Cellular Immunother tt apies Created from Mastertt Pluripotent Cellll Lines The manufacture of our off-the-shelf cellular immunotherapy product candidates created from iPSCs involves a three-stage process: (cid:120) (cid:120) (cid:120) The first stage is intended to generate a clonal master iPSC line and generally consists of the following steps: (i) obtain appropriately-consented normal human donor cells, such as fibroblasts or hematopoietic cells, and conduct transfusion transmissible disease testing on the donor cells; (ii) induction of pluripotency in the donor cells using a proprietary transgene integration-free and footprtt iPSCs; (iv) isolation and selection of a single iPSC, followed by clonal expansion of the single iPSC to produce a clonal master iPSC line forff int-freeff method of reprogramming; (iii) genetic engineering, where applicable, of candidate manufacture. cell productd The second stage is intended to derive the cell product population of interest and generally consists of the following steps: (i) expansion and differentiation of the clonal master iPSC line to produce CD34+ definff cells; and (ii) further interest. itive hematopoietic progenitor expansion and diffff erff entiation of these progenitor cells to produce the cell producd t population of t The third stage is intended to derive the final cell product candidate and generally consists of the following steps: (i) washing the cell producd t population; (ii) formulating the cell producd t population in an infusion media for intravenous administration of the final cell product candidate; and (iii) cryop aliquots of the final cell product candidate and storing these aliquots in single-dose infusion bags. reserving individuald r tt We are manufacturing our iPSC-derived cell producd t candidates for use in research and preclinical development, and ng certain elements used to produce clinical supplies of ouru product candidates. Currently, we contract with third parties, manufacturi including medical center cell therapy facilities and contract manufacturtt ing organizations (CMOs), for the conduct of some or all of the activities required for manufacturing our iPSC-derived cell product candidates for use in clinical investigation. We expect that we will of some or all of the continue to contract with third parties, including medical centernn activities required for manufacturing our iPSC-derived cell product candidates. Additionally, we have initiated build out of our own GMP manufacturi ng facility, and plan to continue investing in our manufacturing capabia lities and technology. In the futurtt e we may manufacture our iPSC-derived cell product candidates for clinical or commercial supply at facilities we own or operate. cell therapy facilities and CMOs, for the conductd tt t As part of our manufacturtt ing process, we endeavor to utilize cGMP grade materials and reagents, if commercially available; however, certain critical materials and reagents are currently qualifieff d for research use only. Additionally, we obtain key componemm required for the manufacture of our iPSC-derived cell product candidates from third-party manufacturett in some instances, sole source manufacturers and suppliers u m place to obtain certain key components used in the manufacture of our iPSC-derived cell product candidates. . We do not currently have long-term commitments or supply rs and supplie u rs, which include, agreements in nts u Marketing & Sales We currr ently intend to commercialize any products that we may successfully ff develop. We currently have no experience in marketing or selling therapea utic products. To market any of our products independently would require us to develop a sales force with technical expertise along with establishing commercial infrastructure and capabilit productd commercial infrastructure. We plan to further candidates. candidates also may include the use of strategic partners, distributors, a contract sales force or the establishm evaluate these alternatives as we approach approval for the first of our product ies. Our commercial strategy for marketing our ent of our own a a t Government Regulation rr and marketing of biological products and drugs federal, state, local, and foreign statutes and regulations. The FDA and compam rable In the United States, the FDA regulates biological products under the Federal Food, Drug, and Cosmetic Act (the FDCA) and under the FDCA and related regulations. Biological the Public Health Service Act (the PHS Act) and related regulations, and drugs products and drugs are also subject to other t regulatory agencies in state and local jurisdictions and in foreign countries imposm e substantial requirements upon the clinical development, manufacturett entities regulate research and development activities and the testing, manufacture, quality control, safety, effect labeling, storage, distribution, record keeping, reporting, approval or licensing, advertising and promotion, and importm our products. Failure to complmm y with the applicable U.S. regulatory requirements at any time during the product development process or after approval may subject an applicant to administrative or judicial sanctions. FDA sanctions include refusal to approve pending applications, suspension or revocation of an approval or license, clinical hold, warning or untitled letters, product recalls, productdd seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, mandated corrective advertising or communications In addition, government regulation may delay or prevent marketing of product candidates for a considerable period of time and imposm e costly procedures upon our activities. with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties. . These agencies and other feff deral, state, local, and foreign iveness, packaging, and expox rt of m rr ff 21 Marketingn Apprpp oval The process required by the FDA before biological products and drugs rr may be marketed in the United States generally involves the following: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) complmm etion of nonclinical laboratoryr and animal tests according to good laboratory practices (GLPs) and applicable requirements for the humane use of laboratory animals or other applicable regulations; submission to thet FDA of an IND application which must become effff ecti ff ve before human clinical trials may begin; performance of adequate and well-controlled human clinical trials according to the FDA’s regulations commonly referred to as good clinical practices (GCPs) and any additional requirements for the protection of human research subjects their health information, to establish the safety and efficacy or uses; of the proposed biological product or drug for its intended use and u ff for a biological product, submu includes subu stantive evidence of safety, purity, and potency from results of nonclinical testing and clinical trials, and, for a rr drug, ff effica ission to the FDA of a Biologics License Application (BLA) for marketing approval that ission of a New Drugr Application (NDA) that includes substa ntive evidence of the product’s safety and submu cy; u satisfactory complmm etion of an FDA pre-appr a assess complmm iance with cGMPs to assure that the facilities, methods and controls FDA’s current good tissue practices (cGTPs) for the use of human cellular and tissue products to prevent the introduction, transmission or spread of communicable oval inspection of manufacturing facilities where the product is produced to are adequate, and, if applicable, the diseases; m tt potential FDA audit of the nonclinical study sites and clinical trial sites that generated the data in support of the BLA or NDA; and FDA review and approval, or licensure, of the BLA and review and approval of the NDA which must occur beforff e a biological product and a drugrr can be marketed or sold. U.S. Biologico al Products and Drug Developmen ll t Process Before testing any biological product or drugrr ies to assess the potential safetyff animal studt must comply with federal regulations and requirements including GLPs. candidate in humans, nonclinical tests, including laboratory evaluations and and activity of the product candidate, are conducted. The conduct of the nonclinical tests Prior to commencing the first clinical trial, the trial sponsor must submit the results of the nonclinical tests, together with tt ng information, analytical data, anynn availablea clinical data or literature and a proposed clinical protocol, to thet r receipt by the FDA unless the FDA, within the 30-day time period, raises concerns or of the clinical trial and places the trial on a clinical hold. In such case, the sponsor of the IND application a clinical hold on manufacturi FDA as part of an initial IND application. Some nonclinical testing may continue even after the IND application is submitted. The IND application automatically becomes effeff ctive 30 days afteff questions about the conductd must resolve any outstanding concerns with the FDA before the clinical trial may begin. The FDA also may imposemm ongoing clinical trials due to safety concernsr FDA authorization and then only under terms authot each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that site. An IRB is charged with protecting the welfare and rights of study subjects and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject or his or her legal representative and must monitor the clinical trial until complm eted. , a trial may not recommence without an independent institutional review board (IRB) for If a clinical hold is imposed rized by the FDA. Further, or non-compliance. m a t Clinical trials involve the administration of the product candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employe protocols detailing, among other t and the parameters to be used to monitor subject safety, including rules that assure a clinical trial will be stopped if certain adverse events occur. Each protocol and any amendments to the protocol must be submitted to the FDA and to the IRB. Information about certain clinical studies must be submitted with specificff s to the National Institutes of Health for public dissemination at www.clinicaltrials.gov. d by or under the trial sponsor’s control. Clinical trials are conducted under , subject selection and exclusion criteria, things, the objectives of the clinical trial, dosing procedures timeframea mm dd For purposes of BLA or NDA approval, human clinical trials are typically conducted in three sequential phases that may overlap: (cid:120) Phase 1—The investigational productd of some products for severe or life-thrt eatening diseases, especially when the product may be too inherently toxic to ethically administer to healthyt provide early evidence on effectiveness. is initially introduced into healthy human subjects and tested for safety. volunteers, the initial human testing is ofteff n conducted in patients. These trials may also In the case ff 22 (cid:120) (cid:120) Phase 2—These trials are conducted in a limited numbem r of patiaa ents in the target population to identify possible adverse effeff cts and safety risks, to preliminarily evaluate the effica dosage tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials. cy of the product for specific targeted diseases and to determine ff Phase 3—Phase 3 trials are undertaken to provide statistically significant evaluate dosage, potency, and safety in an expanded patient population at multiple clinical trial sites. They are performed after ff overall benefit-risk relationship of the investigational product, and to provide an adequate basis for product approval and physician labeling. has been obtained, and are intended to establish the evidence of clinical efficacy and to further preliminaryrr evidence suggesting effect iveness of the productd ff ff ff Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials may be requiq red by the FDA as a condition of approval and are used to gain additional experience from the treatment of patients in the intended indication, particularly for long-term safety follow-up. The FDA has statutory authot clinical trials to address safetytt to be considered reliable for regulatory purposes. rity to require post-market issues. All of these trials must be conducted in accordance with GCP requirements in order for the data During all phases of clinical development, regulatoryrr agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Within 15 calendar days after the sponsor determines that the information qualifies for reporting, written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events; any findings from other studies, tests in laboratoryrr animals or in vitro testing that suggest a significant risk for human subjects; or any clinically importm increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. The sponsor also must notify the FDA of any unexpected fatal or life-thrt eatening suspected adverse reaction within seven calendar days after the sponsor’s initial receipt of the information. ant Regulatory authorities, a data safety monitoring board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the participants are being exposed to an unacceptablea terminate approval of a clinical trial at its institution if the trial is not being conducted in accordance with the IRB’s requirements or if has been associated with unexpected serious harm to patients, and the trial may not recommence without the the investigated productd IRB’s authorization. health risk. Similarly, an IRB can suspend or Typically, if a product is intended to treat a chronic disease, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more. Concurrently with clinical trials, compam nies usually complmm ete additional animal studies and must also develop additional information about the physical characteristics of the investigational product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. To help reduce the risk of the introduction of adventitious agents with the use of biological products, the PHS Act emphasmm t whose attributes cannoaa process must be capable of consistently producing quality batches of the product candidate be precisely defined. The manufacturing and, among other things, the sponsor must develop methods for testing the identity, strength,t quality, potency, and purity of the final biological product. demonstrate that the biological product candidate does not undergo unacceptabla e deterioration over its shelf life. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to izes the impom rtance of manufacturi for products ng control t d d tt tt t A drugr being studied in clinical trials may be made available to individual patients in certain circumstances. Pursuant to the 21st Century Cures Act (thet Cures Act), as amended, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug. This requirement applies on the earlier of the first initiation of a Phase 2 or Phase 3 trial of the fast track product, or investigational drug, or as applicable, 15 days after the drug receives a designation as a breakthrough therapy, . regenerative advanced therapya a U.S.SS Review and Approv pp al Processes In order to obtain approval to market a biological product in the United States, a BLA must be submitted to the FDA that provides data establishing to the FDA’s satisfaction the safety, purity and potency of the investigational product for the proposed indication. Similarly, for a drug, an NDA must be submitted to the FDA that provides data demonstrating the drug is safe and e. Both a BLA and an NDA include all data available from nonclinical studies and clinical trials, together with detailed effectiv information relating to the product’s manufacture and composition, and proposed labeling. ff Under the Prescription Drug User Fee Act (PDUFA), as amended, each BLA and NDA must be accompam nied by a user fee. The FDA adjusts d the user feeff the PDUFA user fees on an annual basis. According to the FDA’s fee schedule, for an application requiring clinical data, such as a BLA and an NDA, will be $2,588,478 forff effective beginning on October 1, 2018 fiscal year 2019. PDUFA d 23 an annual prescription drug product program fee for biologics and drugs ($309,915 for fiff scal year 2019). Fee waivers or also imposes m reductions are available in certain circumstances, including a waiver of the application feeff business. Additionally, no user fees are assessed on BLAs or NDAs for products designated as orphan drugs includes a non-orphrr an indication. for the first application filed by a small , unless the product also rr The FDA has 60 days from its receipt of a BLA or NDA to determine whether the application will be accepted for filing based ff u to review before the FDA accepts it for filinff ntly complete to permit substantive review. The FDA may on the agency’s threshold determination that the application is sufficie refuse to file any BLA or NDA that it deems incomplm ete or not properly reviewabla e at the time of submission and may request additional inforff mation. In this event, the BLA or NDA must be resubmitted with the additional information. The resubmitted application also is subject FDA reviews the BLA or NDA to determine, among other things, whethet use, and has an acceptable purity profileff preserve the product’s identity, safety, biological product standards. The FDA may refer applications for novel products or products or efficacy to an advisory committee, typically comprised of clinicians and other t whether advisoryr committee, but it considers such recommendations carefully when making decisions. that present difficult questions of safety experts, for evaluation and a recommendation as to the application should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an g. After the BLA or NDA submission is accepted for filing, the for its intended ff d in accordance with cGMPs to assure and strength, quality, potency, and purity, and for a biological product, whether it meets the , and whether the product is being manufacturett r the proposed product is safe and effective d ff tt processes and facff . The FDA will not t ilities are in complm iance with cGMP requirements Before approving a BLA or NDA, the FDA will inspect the facilities at which the product is manufactured tt approve the product unless it determines that the manufacturing and adequate to assure consistent production of the product within required specifications. For a human cellular or tissue producdd t, the FDA also will not approve the product if the manufacturer is not in complmm iance with cGTPs. FDA regulations also require tissue establishments to register and list their human cells, tissues, and cellular and tissue based products (HCT/Ps) with the FDA and, when applicable, to evaluate donors through screening and testing. Additionally, before approving a BLA or NDA, the FDA may inspect clinical sites to assure that the clinical trials were conducted in compliance with IND study requirements and GCPs. If the FDA determines the manufacturi facilities are not acceptable, it typically will outline the deficiencies and often will require the facility to take corrective action and provide documentation evidencing the implm ementation of such corrective action, which may delay further review of the application. If the FDA finds that a clinical site did not conduct the clinical trial in accordance with GCPs, the FDA may determine the data generated by the site should be excluded from the primary efficacy analyses provided in the BLA or NDA, and request additional testing or data. Additionally, the FDA ultimately may still decide that the application does not satisfy the regulatoryr criteria for approval. ng process or manufacturing tt tt The FDA also has authority to require a Risk Evaluation and Mitigation Strategy (REMS) from manufacturers to ensure that the or drug outweigh its risks. A sponsor may also voluntarily propose a REMS as part of the BLA or ission. The need for a REMS is determined as part of the review of the BLA or NDA. Based on statutory standards, benefits of a biological productd NDA submu elements of a REMS may include “dear doctor letters,” a medication guide, more elaboa some cases restrictions on distribution. These elements are negotiated as part of the BLA or NDA approval, and in some cases mayaa delay the approval date. Once adopted, REMS are subject to periodic assessment and modification. rate targeted educational programs, and in d u After the FDA complm etes its initial review of a BLA or NDA, it will communica m either be approved, or it will issue a complm ete response letter to communmm icate that the BLA or NDA will not be appr form. The complete response letter usually describes all of the specific deficff deficiencies identifiedff may be minor, for example,mm trials. Additionally, the complm ete response letter may include recommended actions that the applicant might take to place the applicant in a condition for approval. If a complm ete response letter is issued, the applicant may either resubmit the BLA or NDA to address all of the deficiencies identified in the letter, or withdraw the application, or request a hearing. a iencies in the BLA or NDA identifiedff requiring labeling changes, or majoa r, for example,m requiring additional clinical by the FDA. The te to the sponsor that the biological product will oved in its current One of the performance goals of the FDA under PDUFA is to review 90% of standard BLAs and NDAs in 10 months and 90% of priority BLAs and NDAs in six months, whereupon a review decision is to be made. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs and NDAs and its review goals are subject to change from time to time. The review process and the PDUFA goal data may be extended by three months if the FDA requests or the BLA or NDA applicant other se provides rr t wi additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date. Even if a product candidate receives regulatory approval, the approval may be limited to specific disease states, patient use may otherwi populations and dosages, or the indications forff contraindications, warnings, or precautions be included in the product labeling. The FDA may imposem product distribution, prescribing, or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require Phase 4 post-marketing clinical trials and testing and surveillance programs to monitor the safetff ytt of even after approved products that have been commercialized. Further, regulatory approval is obtained, later discovery of previously unknown problems with a product may result in the impositi on of new restrict product from the market. ions on the product or complm ete withdrawal of the r, the FDA may require that certain restrictions and conditions on se be limited. Furthet t mm rr ff tt 24 Expedited Development and Review Programs The FDA has a Fast Track program intended to facilitate the development and expedite the review of new drugs and biological products that are intended to trett at a serious or life-thrt eatening condition or disease and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combim nation of the product and the specific indication for which it is being studied. The sponsor of a biological product or drugrr may request the FDA to designate the biologic or drugrr as a Fast Track product at any time during clinical development. Unique to a Fast Track productd marketing application on a rolling basis before the complm ete application is submitted if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptabla e, and the sponsor pays any required user fees upon submu , the FDA may consider for review sections of the ission of the first section of the appli cation. a Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA ff ff ive therapya where no satisfactory alternative therapy exists or a rt to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drugr ement in the treatment, diagnosis or prevention of a disease compam red to marketed products. The FDA will attemptmm programs intended to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it has the potential to provide safeff and effect significant improvm to direct additional resources to the evaluation of an application for a biological product or drug designated forff effoff their safety and effect iveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well- controlled tt than irreversible morbidity or mortality, that is benefit, or on the basis of an effff ect reasonablya r clinical benefitff , taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a biological product or drug receiving accelerated approval performff marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials. on a surrogate endpoint that is reasonably likely to predict a clinical r aa likely to predict an effect on irreversible morbidity or mortality or othet clinical trials establishing that the productd d ff adequate and well-controlled post- or biological products studied for nt that can be measured earlier priority review in an on a clinical endpoi has an effect ff The FDCA also requires FDA to expedite the development and review of a breakthrough therapya . A biological product or drug can be designated as a breakthrt ough therapy if it is intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that it may demonstrate substantial mm improve significant endpoints. A sponsor may request that a biological product or drugrr during the clinical development of the product. If so designated, FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with, and providing advice to, the sponsor throughout the product’s development, and taking steps to facilitate an effici trials is as efficient as practicable. ent review of the development program and to ensure that the design of the clinical ment over existing therapies on one or more clinically be designated as a breakthrough therapy at any time u ff Fast Track designation, priority review, accelerated approval, and breakthrough therapya designation do not change the standards for approval but may expedite the development or approval process. Accelerated Apprpp oval for Regenerativtt e Advanced Therapies As part of the Cures Act, Congress amended the FDCA to create an accelerated approval program for regenerative advanced ff d Regenerative advanc concurrerr ntly with or at any time after ed therapies do not include those human cells, tissues, and cellular e tening disease or condition. A drug sponsor may request that FDA designate a drug as a regenerativaa therapies, which include cell therapies, therapea utic tissue engineering products, human cell and tissue products, and combim nation products using any such therapia es or products. dd and tissue based products regulated solely under section 361 of the PHS Act and 21 CFR Part 1271. The new program is intended to facilitate efficient development and expedite review of regenerative advanced therapies, which are intended to treat, modify, reverse, or cure a serious or life-threa advanced therapya to determine whether the drug meets the criteria, including whether there is preliminary clinical evidence indicating that the drug has the potential to address unmet medical needs for a serious or life-thrt eatening disease or condition. A BLA or NDA for a regenerative advanced therapy may be eligible for priority review or accelerated approval through (1) surrogate or intermediate endpoints reasonably likely to predict long-term clinical benefit or (2) reliance upon data obtained from a meaningful numberm of sites. Benefits of such designation also include early interactions with FDA to discuss any potential surrogate approval. A regenerative advanced therapya fulfill such requirements through the submission of clinical evidence, clinical studies, patient registries, or othet r sources of real world evidence, such as electronic health records; the collection of larger confirmatory data sets; or post approval monitoring of all patients treated with such therapy prior to its approval. or intermediate endpoint to be used to support accelerated to post approval requirements mayaa submission of an IND. FDA has 60 calendar daysa that is granted accelerated approval and is subject u ff r U.S. Patent Term Restoration and Marketing Exclusivity Under certain circumstances, U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. Patent term restoration can compensate for time lost during producd t development and the regulatory review process by returnir ng up to five years of patent life for 25 ff e date of an IND application (falling afteff or its use. However, patent term restoration cannot extend the remaining term of a patent beyond a a patent that covers a new productd total of 14 years from the product’s approval date. The period of patent term restoration is generally one-half the time between the effectiv r issuance of the patent) and the submission date of a BLA or NDA, plus the time between the submu one patent applicable to an approved product is eligible for the extension and the application forff to the expiration of the patent. The application for patent termr Officff e in consultation with the FDA. A patent term extension is only available when the FDA approves a biological product or drugrr for the first time. ission date of the BLA or NDA and the approval of that application, provided the sponsor acted with diligence. Only prior the extension must be submittedtt to approval by the U.S. Patent and Trademark extension is subject b With the Hatch-Waxman Amendments, Congress authorized the FDA to approve generic drugs r that are the same as drugs previously approved by the FDA under the NDA provisions of the FDCA. To obtain approval of a generic drug, submit to the agency an abbreviated new drug application (ANDA) which relies on the preclinical and clinical testing previously conducted for a drugr must find that the generic version is identical to the RLD with respect to the active ingredients, the route of administration, the dosage form, and the strength of the drug. The FDA must also determi approved under an NDA, known as the reference listed drurr g (RLD). For the ANDA to be approved, the FDA ne that the generic drurr g is bioequivalent to the innovator drug. an applicant must r rr An abbreviated approval pathwt ay for biological products shown to be biosimilar to, or interchangeablea with, a FDA-licensed was created by the Biologics Price Compem tition and Innovation Act of 2009, which was part of the reference biological productd Patient Protection and Affordable Care Act of 2010 (PPACA). This amendment to the PHS Act attemptmm s to minimize duplicative testing. Biosimilarity, which requires that there be no clinically meaningful differeff reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or trials. Interchangeability requires that a biological product is biosimilar to the reference biological product and the product must demonstrate that it can be expected to produce the same clinical results as the referff ence product and, for products administered multiple times, the product and the reference product may be switched afteff safety risks or risks of diminished efficacy relative to exclusive use of the reference biological product. r one has been previously administered withot ut increasing en the biological productd nces betwett and the d . A reference biological product is granted twelve years of exclusivity from the time of first licensure of the reference productd The first biological product submitted under the abbreviated approv reference product has exclusivity against othet year after the first commercial marketing, (ii) 18 months after approval if there is no legal challenge, (iii) 18 months after the resolution in the applicant’s favor of a lawsuit challenging the biologic’s patents if an application has been submitted, or (iv) 42 months after the application has been approved if a lawsuit is ongoing within the 42-month period. itting under the abbreviated approval pathway forff al pathway that is determined to be interchangeable with the a r biologics submu the lesser of (i) one A biological product or drug can obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds exclusivity six months to existing exclusivity periods and patent terms. This six-montht exclusivity, which runs from the end of other protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study. t Orphan Designagg tion Under the Orphr an Drug Act, the FDA may grant orpha rr n designation to biological products and drugrr s intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and forff which there is no reasonable expectation that the cost of developing and making a biological product or drug in the United States for this type of disease or condition will be recovered from sales of the product. Orphan designation must be requested before submitting a BLA or NDA. After the FDA grants orphan designation, the identity of the applicant, the name of the therapeutic agent and its designated orphan use are disclosed publicly by the FDA. Orphan designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. d If a biological product or drug that receives orphan designation is the first such product approved by FDA for the orphan an product exclusivity, which for seven years prohibits the FDA from approving another application to indication, it receives orphrr market the same product for the same indication. Orphan product exclusivity will not bar approval of another product under certain circumstances, including if the new product is shown to be clinically superior to the approved productd otherwise makes a majoa r contribution to patient care. More than one product may or safety or a demonstration that the new productd also be approved by the FDA for the same orphan indication or disease as long as the products are diffeff rent. If a biological productd drug designated as an orpha n product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity. Orphan drug status in the European Union has similar, but not identical, benefits. on the basis of greater efficacy rr or Pediadd tric Research Equitytt Act Under the Pediatric Research Equity Act (PREA), as amended, a BLA or NDA or supplement must contain data to assess the safety and effeff ctiveness of the biological product or drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpop ulation for which the product is safeff and effecff tive. The intent of PREA is u 26 s that include a new active ingredient, new indication, new dosage form, new dosing to compem l sponsors whose products have pediatric applicability to study those products in pediatric populations. The FDCA requires manufacturtt ers of biological products and drugrr regimen or new route of administration to submu submitted not later than 60 days after the end-of-Phase 2 meeting with the FDA; or if there is no such meeting, before the initiation of any Phase 3 trials or a combined Phase 2 and Phase 3 trial; or if no such trial will be conducted, no later than 210 days before submitting a marketing application or supplement. The FDA may grantnn deferff its terms, PREA does not apply to any biological product or drug for an indication for which orphrr unless the FDA issues regulations stating other rr t wis assessment is not required for an application to market a product for an orphan it a pediatric study plan to the FDA as part of the IND application. The plan must be e. Because the FDA has not issued any such regulations, submission of a pediatraa ic ls for submission of data or full or partial waivers. By an designation has been granted, -designated indication. rar rr Other Regulatll iott ns We are also subjb ect to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturin g . We may incur practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances significaff nt costs to comply with such laws and regulations now or in the futut re. u tt Competition The biotechnology and pharmaceutical industries are characterized by rapia d innovation, intense and dynamic compem tition and a d on proprietary products. While we believe that our technology, scientific knowledge and experience in the field of strong emphasis m cellular immunmm otherapy provide us with competitive advantages, we face potential compem tition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research instituti combim nations of existing and new therapies. with existing therapies and new therapies, including combinations thereof,ff that may become available in the future. d y develop and commercialize will compem te Any product candidates that we successfull ons, as well as standard-of-care treatments, new products undergoing development and a ff t We are developing ProTmunem as a next-generation mobilized peripheral blood graft for patients undergoing allogeneic HCT. aa threatening complications that compromise the procedure’s curative patient outcomes, we is designed to replace a standard-of-care mobilized peripheral blood graft to improve m The product candidate is intended to prevent GvHD and othet potential. While ProTmunem are aware of other compamm nies and medical centers that are developing adjunct Kiadis Pharma Netherlands B.V., or treatments for GvHD and othet Incyte Corporation, Bristol-Myers Squibb, and Alexion Pharmaceuticals, Inc. r life-ff d a therapies , such as Bellicum Pharmaceuticals, Inc. and r life-thrt eatening complications of HCT, such as AbbVie Inc., a a Cellular immunotherapies t helf NK- and T-cell product candidates, including FT500 and FT516, as We are developing FATE-NK100 and our off-t ff he-s cancer immunotherapies. for the treatment of cancer have recently been an area of significant research and development by academic institutions and biopharmaceutical compamm nies. While we believe our focus on NK cells, as well as our use of master pluripotent cell lines to create our product candidates, is highly differentiated, a number of companies are currently focused Limited, Allogene Therapea utics, on the development of cellular immunotherapies Inc., Atara Biotherapeutic Cellectis SA, Celyad SA, CRISPR Therapeutics AG, Gilead Sciences, Inc., Green Cross Corporation, Intrexon Corporation, Juno Therapea utics, Inc. (acquired by Celgene Corporation), Kite Pharma, Inc. (acquired by Gilead Sciences, Inc.), NantKwest, Inc., Novartis AG, Sorrento Therapeutics, Inc. and ZIOPHARM Oncology, Inc.. Smaller or early-stage companies may also prove to be significant compem titors, particularly through collaborative arrangements with large and established compam nies. ration (pending acquisition by Bristol-Myers Squibb Company), for the treatment of cancer, including Adaptimmunem s, Inc., bluebird bio, Inc., Celgene Corporr a a We compem te against our competitors in recruiting and retaining qualified scientific and management personnel and establishing clinical study sites and subject enrollment for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs. Many of our compem titors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of productd FDA and other successful than us in obtaining approval for treatments and achieving widespread market acceptance. candidates, obtaining regulatory approvals of treatments and commercializing those treatments. Accordingly, our compem titors may be more t We anticipate that we will face intense and increasing competition as new products enter the market and advanced technologies m ent from governmrr become available. We expect any treatments that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and delivery, price, the level of generic compem tition and the availabila reimbursem compemm titors 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. Our competitors also may obtain FDA or other regulatory approval for their productd s more rapidly than we may obtain approval for ours, which could result in our compem titors establishing a strong market position before we are able to enter the market. ent and other third-party payers. Our commercial opportunity could be reduced or eliminated if our ity of tt 27 Insurance We maintain product liability insurance for our clinical trials. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for products in development. However, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonabla e cost or in sufficient amounts to protect us against losses due to liability. In addition, we may not be able to obtain commercially reasonable product liability insurance for any d products approved for marketing. Employees As of Decemberm 31, 2018, we employed m 104 employees, mm all of whom are full-time employees, mm including 57 in research and development, 33 in clinical development and regulatory affairs and 14 in general and administrative. We have never had a work stoppage, and none of our employm consider our emplm oyee relations to be good. ees is represented by a labor organization or under any collective bargaining arranrr gements. We Corporate Information We were incorporated in Delaware in 2007, and are headquartered in San Diego, CA. Our principal executive office is located at 3535 General Atomics Court, Suite 200, San Diego, CA 92121, and our telephone numbem r is (858) 875-1800. Our website address is www.fatff etherapea utics.com. We do not incorporate the information on or accessible through our website into this Annual Report on Form 10-K, and you should not consider any information on, or that can be accessed through, our website a part of this Annual Report on Form 10-K. We own various U.S. federal trademark registrations and applications, and unregistered trademarks, including the following marks referred to in this document: Fate Therapeutics®, our corporate logo, ProTmunemm TM and ToleraCyteTM. All other trade names referred to in this document are the property of their respective owners. Solely for convenience, the trademarks and trade to without the symbom ls® and ™, but such references should not be constrtt uer d as any indicator that names in this document are referff cable law, their rights thereto. their respective owners will not assert, to the fulff lest extent under appli trademarks or redr a t On October 4, 2013, we complm eted our initial publiu c offeff ring. As of Decemberm 31, 2018, we no longer qualify as an “emerging growtht company” as defined in the Jumpsm tart Our Business Startupsu Act of 2012, as amended (thet longer eligible to take advantage t public compamm nies. of specified reduced disclosure and other requirements that are otherwi aa JOBS Act). As such, we are no se applicable generally to Information about Segments and Geographic Areas In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), Topic 280, Segment Reporting, we have determined that we operate as one operating segment. Decisions regarding our overall operating performance and allocation of our resources are assessed on a consolidated basis. Our operations and assets are predominantly located in the United States. Available Information We post our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on the Investors and Media section of our public website (www.fatetherapeutics.com) as soon as reasonabla y practicable after we electronically file such material with, or furnish it to, the SEC. In addition, you can read our SEC filings over the Internet t website at www.sec.gov. The contents of these websites are not incorporated into this Annual Report on Form 10-K. Further, references to the URLs for these websites are intended to be inactive textual references only. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. at the SEC’s our r t Item 1A. Risk Factors You shouldll carefull yll consider the followi rr and e and/or in our other public filings. The occurrence growth prospectstt or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described in our public filings when evaluating our business. as well as the other informat could harm our business, financial condition, results of operations ng risk factors, tt risksii ll of any of theseee ion in this Annual Report on Formrr 10-K,- n e rr 28 Risks Related to the Discovery, Development and Regulation of Our Product Candidates We may face delays in initiating, conductingn or completingn our clinical trials,s and we may not be able to initiaii completett them at all. te, conduct or We have not complm eted the clinical trials necessary to support an application for approval to market any of our productd FATE-NK100, or FT500. Furthermore, we have not initiated or conducted any clinical trials candidates, including ProTmune,m r product candidates that we may identify.ff We, or any necessary to support an application for approval to market FT516 or any othet investigators who initiate or conduct clinical trials of our product candidates, mayaa experience delays in our current or future clinical trials, and we do not know whether we or our investigators will be able to initiate, enroll patients in, or complmm ete, clinical trials of our product candidates on time, if at all. Current and future clinical trials of our product candidates may be delayed, unsuccessful or terminated, or not initiated at all, as a result of many factors, including factors related to: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) difficulties in identifying eligible patients for participation in clinical trials of our product candidates, due in part to ouruu foff cus on the development of certain of our product candidates for the treatment of rare diseases; difficulties enrolling a sufficient numbem r of suitable patients to conductdd difficulti es relating to patients enrolling in studie s of therapeutic producd t candi clinical trials of our product candidates, including dates sponsored by our compem titors; aa ff tt difficulties determining suitable doses of our novel cell product candidates for evaluation in clinical trials; difficulties in obtaining agreement from regulatory authorities on studytt and sufficff productd iency of data, demonstrating efficff acy and safetyff candidates; endpoints, achieving studytt endpoints, the amount , and complm eting data analysis in clinical trials for any of our tt difficff ulties in obtaining agreement from regulatory authorities on the preclinical safety and efficacy data, the manufacturi to initiate and conduct clinical trials for any of our productd that we may identify; t ng requirements, and the clinical trial design and parameters necessary for an IND application to go into effecff candidates, including FT819 and any other product candidates the occurrence of unexpected safety issues or adverse events in any current or subsequent clinical trial of our product candidates; securing and maintaining the support of clinical investigators and investigational sites, including investigators and sites who may conductd approval at each site for the conduct of our clinical trials; clinical trials under an investigator-sponsored IND with our financial support, and obtaining IRB governmental or regulatory delays, failure to obtain regulatory approval, or uncertainty or changes in regulatory requirements, policy or guidelines; reaching agreement on acceptable terms with third-party service providers and clinical trial sites, the terms of which can rent service providers and clinical trial sites; u be subject to extensive negotiation and may vary significantly among diffeff failure, by us, cell processing facilities at our clinical trial sites, or third parties that we contract with, to manufacturett certain of our product candidates consistently, and in sufficient quantities, in accordance with our protocol-specified manufacturi ng requirements and applicable regulatory requirements; tt re, or the failure of investigators, third-party service providers, or clinical trial sites, to ensure the proper and our failu ff timely conduct of and analysis of data from clinical trials of our product candidates; inability to reach agreement on clinical trial design and paraa meters with regulatoryr authorities, investigators and IRBs; failure or delays in obtaining sufficient quantities of suitable raw materials and equipment necessary for the manufact of any product candidate; ff urett the costs of conducting clinical trials or manufacturing timelines for these activities being longer than we anticipate; tt of ouru product candidates being greater than we anticipate or the data monitoring committees recommending suspension, termination or a clinical hold for various reasons, including concernsrr about patient safety; the serious, life-threatening diseases of the patients enrolled in our clinical trials, who may die or sufferff events during the course of the trials for reasons that may not be related to our product candidates; adverse medical failure of patients to complmm ete clinical trials due to safetyff issues, side effecff ts, or other reasons; and approval of compem titive agents that may materially alter the standard of care or otherwise render our product candidates or clinical trial designs obsolete. 29 If there are delays in initiating or conducting any clinical trials of our productd candidates or any of these clinical trials are terminated before complm etion, the commercial prospects of our productd conducting or complm eting our clinical 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. Furthermt lead to, a delay in the initiation, conduct or complm etion of clinical trials may also ultimately lead to the denial of regulatory approval of our productd operations, and market price of shares of our common stock. candidates. Any of these occurrences would significantly harm our business, prospects, financial condition, results of candidates will be harmed. In addition, any delays in initiating, ore, many of the factors that cause, or If we encounter difficulties enrolling patients in our clinical trials, our clinical otherwiseii adversely affected. ll development ll activities couldll be delayed or We are required to identifyff and enroll a sufficff ient number of patients witht the disease under investigation for each of our ongoing and planned clinical trials of our product candidates, and we may not be able to identify and enroll a sufficient patients, or those with required or desired characteristics and who meet certain criteria, in a timely manner. For example,m to the development of ProTmunemm , there are currently only a limited numberm of specialized transplant centers that perform hematopoietic stem cell transplants (HSCTs) and among physicians who perform HSCTs, some may not choose to performff procedures under conditions that fall addition, we will be compem ting with other clinical trials for product candidates being developed by our compemm titors in the same therapeutic areas, and potential patients who might be eligible for enrollment in one of our clinical trials may instead choose to enroll in a trial being conducted ff within our protocols, which would have an adverse effect on our ability to develop ProTmunm e. In by one of our compem titors. numbem r of withtt respect these d ff Our ability, and the abila ity of investigators, to enroll patients in clinical trials that we are conducting or supporting, including in our current Phase 1/2 PROTECT clinical trial of ProTmunm e, our clinical trial of FT500, and our clinical trials of FATE-NK100, ted by factors including: certain of which are investigator-sponsored, is affecff (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the ability to identify, solicit and recruit a sufficient numbem r of patients; severity of the disease under investigation; design of the trial protocol; the relatively small size and nature of the patient populations for certainrr of our clinical trials; eligibility criteria for the trials in question; perceived risks and benefits of the product candidate under study, including any perceived risks associated with iPSC- derived producd t candidates such as FT500, which we believe is the firff st ever iPSC-derived cell therapya cleared by the FDA for clinical investigation in the United States; the availability of compem ting therapies and clinical trials; efforts to facilitate timely enrollment in clinical trials; the availability of time and resources at the limited numbem r of institutions at which our clinical trials are or will be conducted; the availability of cells suitable for the manufacture of our clinical producd t candidates from eligible and qualified donors for certain of our product candidates, including ProTmune and FATE-NK100; the ability to monitor patients adequately during and after treatment; and the proximity and availability of clinical trial sites for prospective patients. If we have difficulty enrolling a sufficient numberm of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have an adverse effect condition, results of operations, and market price of shares of our common stock. ff on our business, prospects, financial Development of our product candidates will require substantial preclinical or clinical developme nt offf or obtainii additional funding, tt approval for, our product candidates. atll orytt e regul ll ii tt without which we will be unable to complete We are currently advancing ProTmune,m FATE-NK100, and FT500 through clinical development, and conducting preclinical research and development activities in our other programs. Drug development is expensive, and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance our current producd t candidates in clinical trials and seek to initiate clinical development for additional product candidates. 30 As of Decemberm 31, 2018, our cash and cash equivalen qq ts and short-term investments were $201.0 million. We intend to use our candidates, including rr cash and cash equivalents to fund the advancement of ProTmunem , FATE-NK100, our iPSC-derived cell productd FT500 and FT516, and our ongoing preclinical, discovery and research programs, and for working capital and general corporate purposes . However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt finff ancings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic and licensing arrangements or a combination of these and to commercialize, ProTmune, a approa FATE-NK100, FT500 and FT516, and any other product candidates we may identify and develop. Even if we believe we have sufficff have specific strategic considerations. Our future capital requirements will depend on many factors, including, but not limited to: ches. In any event, we will require additional capital to obtain regulatory approval for, ient funds for our currr ent or futurtt e operating plans, we may seek additional capital if market conditions are favorable or if we a ff (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the progress, results, size, timing and costs of our current Phase 1/2 PROTECT clinical trial of ProTmune, the Phase 1 clinical trials of FT500 and of FATE-NK100, certain of which are being conducted under an investigator-sponsored clinical trial agreement with the University of Minnesota, and any additional clinical trials we may initiate, conduct or suppou rt for our product candidates, including for FT516 and our other iPSC-derived cell product candidates; the progress, results, size, timing and costs of our preclinical, process development and manufacturing studies activities necessary to initiate and conduct clinical trials for our product candidates; tt , and continued progress in our research and development programsaa manufacturi prospective clinical development candidate, as well as potential futurtt e clinical trials of any additional product candidates we may identify for development; in order for an IND application to go into effect for a research activities that may be necessaryrr , including preclinical studi es, process development, ng and other tt t tt our ability and the ability of our investigators to initiate and conduct, and the progress, results, size, timing and costs of, clinical trials of our product candidates, including ProTmune,mm support any application for regulatoryr approval; FATE-NK100, FT500, and FT516, that will be necessary to our ability to manufacture, including ProTmune, FATE-NK100, FT500 and FT516, as well as potential futurett for clinical development and commercialization, and the timing and costs associated with such manufacture; third parties for the manufacture of, our productd or enter into arrangements witht tt tt clinical development candidates, both candidates, our ability to maintain, expand and defend the scope of ouruu intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, or other costs we may incur, in connection with the licensing, filing, prosecution, defenff se and enforcement of any patents or other intellectual property rights; the cost of manufacturtt candidates and the establishment of a sales and marketing organization either internally or in partner party; and ing and commercialization activities and arrangements, including the manufacturing of our product ship with a third aa our ability to establish and maintain strategic arrangements and alliances with third-partytt collaborators including our existing collaborations with Ono Pharmaceutical Ltd., Juno Therapeutics, Inc., the University of Minnesota, and Memorial Sloan Kettering, to advance the research, development and commercialization of therapeutic products. ff Any additional fundraising effort s may divert our management from their day-to-day activities, which may adversely affeff ct our ability to develop and commercialize our producd t candidates. In addition, we cannot guarantee that futurtt e financing will be availablea in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrer nce of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restritt ctive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We rr could also be required to seek funds through arrangements with collaborative partners or otherwise at a differff ent stage than otherwi se would be desirablea e agree to terms unfavorablea rr and we may be required to relinquish rights to some of our technologies or product candidates or other t wis to us, any of which may have a material adverse effeff ct on our business, operating results and prospects. If we cannot raise additional capital or obtain adequate funds, we may be required to curtail significantly our research and clinical programs or may not be able to continue our research or clinical development of our product candidates. Our failure to raise additional capital, or obtain adequate q of operations, and market price of shares of our common stock. funds, will have a material adverse effect on our business, prospects, financial condition, results 31 al developme o nt of ProTPP mune TT r product candidates, could be substantt ,e FATE-NEE K1NN 00, and FT500,0 and the initiat ll of clinic tially delayed if we are requirei d to conduct unantici iontt tt al development of FT51TT 6 and our tt pii atedtt studies, includingii preclinical l trials,s or if the FDA imposes other requireii ments or restrictions including on the manufacu ture, ofo our product Our clinic ll othett studies or clinicaii dd candidates. ff , manufacturi The FDA may require us to generate additional preclinical, productd r product candidates, including FT516 and our other iPSC-derived cell productd ng, or clinical data as a condition to continuing our current clinical trials of ProTmunem , FATE-NK100, or FT500, or initiating and conducting any future clinical trials of ProTmune,mm FATE-NK100, or FT500, or our othet Additionally, the FDA may in the future haveaa iPSC-derived cell product candidates, including FATE-NK100, FT500, or the initiation of clinical trials for FT516 or any of our other dates the protocols, processes, materials and facilities we use to manufacturtt e our product candidates and potential futurtt e product candi in support of clinical trials. Any requirements to generate additional data, or redesign or modify our protocols, processes, materials or facilities, or other of the current or future clinical trials for our product candidates and subsequent development activities for our product candidates, and could require us to incur additional development or manufacturing costs and resources, seek funding for these increased costs or resources or delay our timeline for, or cease, our preclinical or clinical development activities for our product candidates, or could create uncertainty and additional complm exity in our ability to obtain regulatory approval for our product candidates. additional comments, requirements or imposm itions by the FDA, may cause delays in the initiation or conductd requirements, on the conduct of our clinical trials of ProTmunm e, comments, or imposem candidates. aa t t Further, if the results of our clinical trials are inconclusive, or if there are safety concernsr or adverse events associated with ProTmune,m may identify,ff we may: FATE-NK100, our iPSC-derived cell product candidates, including FT500 and FT516, or any other product candidates we (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) be delayed in obtaining, or unable to obtain, regulatory approval for such product candidates; be required to amend the protocols for our clinical trials, perform additional nonclinical studies or clinical trials to supportrr approval or be subject to additional post-marketing testing requirements; obtain approval for indications or patient populations that are not as broad as intended or desired; obtain approval with labea contraindications; or ling that includes significant use or distribution restrictions or safety warnings or in the event a productd restrictions on its use. candidate is approved, have regulatory authorities withdraw their approval of the product or impom se If our clinical development activities for any of our product candidates are delayed or suspended, or we fail to obtain or maintain regulatory approvals with an acceptable scope, our business, prospects, financial condition and results of operations will be harmed. If we fail to complete the preclinical or clinical developme business would be significan tly harmed. i ll nt of, or to obtaintt e regul tt atll ory approval for, our product candidates,s our All of our product candidates are currently in research or early clinical development, including ProTmune, FATE-NK100, FT500 and FT516, and our other regulatory approval for any of our product candidates. Only a small percentage of research and development programs ultimately result in commercially successfulff purity and potency, or efficacy profiles necessary to supportrr further preclinical study, clinical development or regulatory approval. iPSC-derived cell product candidates. We have not completed clinical development of or obtained products, and we cannot assure you that any of our product candidates will demonstrate the safety, ff t We may delay or cancel our ongoing research and development activities and our current or planned clinical development for any of our product candidates, including ProTmune, FATE-NK100, FT500, FT516, and our othet candidates, for a variety of reasons, including: r iPSC-derived cell product (cid:120) (cid:120) (cid:120) (cid:120) ning that a product candidate is ineffective, ff causes harmf ulff r ff side effects, or otherwise presents unacceptable safety determi r risks during preclinical studi tt es or clinical trials; difficulties in manufaff cturtt quantity, suitablea acceptablea ing a productd ff form, or in a cost-effecti to the FDA for the conduct of clinical trials or forff marketing approval; candidate, including the inability to manufacff ture a product candidate in a sufficient ve manner, or under protocols and processes and with materials and facilities difficulty establishing predictive preclinical models for demonstration of safety and effiff cacy of a product candidate in one or more potential therapeutic areas for clinical development; the proprietary rights of third parties, which may preclude us froff m developing, manufact product candidate; ff uring or commercializing a 32 (cid:120) (cid:120) (cid:120) determining that a product candidate may be uneconomical to develop, manufacture, or commercialize, or may fail to achieve market acceptance or adequate reimbum rsement; candidate into or through clinical development, regulatory approval and commercialization in any particular tegic partners that may be necessary for advancement of a our inability to secure or maintain relationships with strat productd indication(s) or geographi c territory(ies); or a our prioritization of other product candidates for advancement, including a decision to cease research and development of any existing product candidate due to our determination that another greater potential for clinical development, regulatory approval, or commercialization, including potentially greater tt therapea utic benefit, a more favorablea process, or more favorablea marketing exclusivity, including greater market acceptance or commercial potential, or more advantageous intellectual property position. safety or efficacy profile, a more consistent or more cost effective manufacturi of our existing or future producd t candidates has ng t Additionally, we will only be able to obtain regulatory approval to market a product candidate if we can demonstrate, to the a a priate standards required for approv ng activities, and clinical trials, whether candidates depends on, among other things, complm etion of additional preclinical studies, process development and tt tion of the FDA or compam rable foreign regulatory authorities, in well-designed and conducted clinical trials that such productd rwise satisfacff candidate is manufactured in accordance with applicable regulatory requirements, is safe, pure and potent, or effective, and othett meets the appro al for a particular indication. Our ability to obtain regulatoryr approval of our productd manufacturi that do not potentially outweigh the therapeutic benefit, and whether our manufact inforff mation about product manufact authority. The final results of our current and future clinical trials may not meet the FDA’s or other regulatory agencies’ requirements to approve a product candidate for marketing, and the regulatory agencies may otherwise determine that our manufacturing operations es and clinical trials that we currently do not anticipate. are insufficff approval. We may need to conduct preclinical studi If we fail to complmm ete preclinical or clinical development of, or obtain regulatoryrr approval for, our productd candidates, we will not be able to generate any revenues from productdd agreements may be impairm ed, which will harm our business, prospects, financial condition and results of operations. our clinical trials demonstrate statistically significant efficacy with safety profiles regulatory agencies agree that the data from our clinical trials and ff uring operations to, and inspection of manufacff ission of turing facilities by, the relevant regulatory sales and our ability to receive milestone or other payments under any collaboration ent to support approval. Securing regulatory approval also requires the submu ing operations are suffici ient to support urtt u ff ff t t tt Our product candidates are cellular therapeutics, and the manufacture of our cell product candidates, derived cell product candidaii couldll substantialii ii risks commercialization of our product candidates couldll be substantially delayll impose additional tt complym withtt and FT516, is complex and subject increase our costs and limit supply requirements on our manufact regulatortt yr requireme tes includingdd ed or restrictt FT500TT of our product candidates for clinical developme uring operations or if we are required to change our manufactu nts. lyll u dd b o ff ii nt, and ted if the FDA or other regulatll ortt yr authoritiestt operatiott ns to ff ringii to a multitude of risks. These manufacturing particularly our iPSC- Manufacture of our cell product candidates involves novel manufacturi tt ng processes that present significant challenges and are of our cell product candidates also requires processing steps that are more complex than s and other cellular immunotherapies including, for FT500 and FT516 and our other subject to multiple risks. The manufacturett those required for most small molecule drugr iPSC- derived product candidates, reprogramming human fibroblasts to obtain iPSCs, in some cases genetically engineering these iPSCs, and differentiating the iPSCs to obtain the desired cell product candidate. As a result of the complmm exities in manufacturtt cost to manufact tt and the manufacturing molecule chemical compounds, developing optimized and reproducible manufact tt uring candidates, and none of our manufact Although we are working to develop reproducd ible and commercially viable manufacturing processes for our product candidates, doing so is a difficult and uncertain task. processes are less reliable and are more difficult to reproduce. We are still ing of our productd processes for clinical and commercial-scale manufacturtt ing processes have been validated for commercial producd tion of our product candidates. candidates in particular, is generally higher than traditional small ure biologics in general, and our cell productd ing biologics, the urtt mm ff ff ff t We may make changes as we continue to develop and refine the manufacturi tt ng processes for our product candidates for ff advanced clinical trials and commercialization, and we cannot be sure that even minor changes in these processes will not cause our ance producd t candidates to perform different of the product once commercialized. In some circumstances, changes in our manufact processes, materials or facilities used, may require us to performff clinical data from patients prior to undertaking additional clinical studies or filing for regulatory approval for a product candidate. These requirements may lead to delays in our clinical development and commercialization plans for our product candidates, and may increase our development costs substantially. ly and affect the results of our ongoing clinical trials, future clinical trials, or the performff additional preclinical or compam rability studies, or to collect additional uring operations, including to our protocols, ff In addition, the manufacturing processes forff any products that we may develop are subject to FDA and foreign regulatory authority approval requirements, and we will need to meet, and our CMOs or other applicable FDA and foreign regulatory authority requirements on an ongoing basis. The requirements to manufact third party manufacturers will need to meet, all ProTmune in urett ff t 33 tt ff ff ff ff e of any of these productd candidates in complm iance with applicable regulatory requirements. Any ng protocols, processes, materials or facilities, and any delays in, or inability to, establish ated with our clinical sites, we may be required to identify alternative protocols, processes, materials or in complm iance with regulatory requirements as necessary for marketing approval. While our product candidates, FATE-NK100, FT500, and FT516 are currently manufactured by third-party cell processing facilities, including ng operations acceptable to the FDA for ProTmune, FATE-NK100, or any of our iPSC-derived cell product candidates, close proximity to transplant centers within a short period of time before transplantation, and to manufact ure FATE-NK100 within a short period of time before administration to a patient, may present unprecedented complexities associated with ensuring consistent manufacturett including ProTmune,m facilities operated by or affili facilities for the manufactur tt requirements to modify our manufact uri manufacturi including FT500 and FT516, could require us to incur additional development costs or result in delays to our clinical development. If we or our CMOs or other ers are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candaa manufacturett authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay initiation or completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforff operations and prospects. idates, there is no assurance that either we or our CMOs or other third-party regulatory rs will be able to manufactutt re the approved product to specifications acceptable to the FDA or other ts, increase our cost of goods, and have an adverse effecff t on our business, financial condition, results of third-party manufactur ff t t Our inability to manufacture sufficient or our or their failure to supply sufficient quantitiestt materially and adversely affect our business. rr ff quantities of our product candidates, or the loss of our third-padd rers,s of our product candidates at acceptable quality levelsll or prices, or at all, wouldll rty contract u manufactu tt Developing manufacturing processes to suppu s and commercialization requirements is a difficult and uncertain , t task, and there are risks associated with scaling to the level required for clinical trials or commercialization, including, among others cost overruns, potential problems with process scale-out, process reproducibility, stability and purity issues, lot consistency, and timely availability of acceptablea trials or commercialization, we may not be able to produce our producd t candidates in a sufficff reagents and raw materials. If we are unable to scale to the level required for the conduct of clinical ient quantity to meet demand. ort clinical studie tt While certain elements required for the production of our product candidates are currently manufactured tt internally at our tt ng process know-how and certain intermediates to third parties, facilities, we rely, and expect to continue to rely, on third parties to manufacture our product candidates for use in conducting clinical trials. As such, we are required to transfer certain manufacturi including clinical cell processing facilities operated by our clinical trial sites, and larger-scale facilities operated by either ing manufacturing testing by us, to facilitate manufactutt re of our product candidates for clinical trials and commercialization. Transferr and processes and know-how is complm ex and involves review and incorporation of both documented and undocumented processes that may have evolved over time. In addition, transferri processes to meet the specificff our product candidates will need to conduct significant development work to transfer these processes and manufacturett product candidates for clinical trials and commercialization. In addition, we may be required to demonstrate the compam rability of material generated by any CMO or third parties that we engage for manufact produced and used in testing. The inability to manufacturett comparable drugrr development of our product candidates. uring our product candidates with material previously product by us or our CMO could delay the continued requirements of a given facility. We and any CMOs or third parties that we engage for manufacturing ent facilities may require utilization of new or differeff ng production to differ each of our a CMO, or nt ff ff ff ff tt As we leverage third parties for the manufact ff uret of our product candidates, we also intend to manufacture our product candidates ourselves, including some or all of the clinical supply of FT500 and FT516 for our ongoing and planned clinical trials. To do so, we will need to scale up our own manufacturing internally to manufacture our own productdd be required to make significant investments to establish GMP manufacturing capabilities and facilities, and our efforts to scale our own manufacturing operations may not succeed. For example, we may encounter problems with shortages of qualified personnel, raw materials or key contract ities delays in commissioning and receiving regulatory approvals for our manufacturing capabil or facilities could delay our development plans, including the conduct of our clinical trials, and thereby limit our opportunities for growth.t candidates for the conduct of our clinical trials or commercialization. Accordingly, we will operations, as we do not currently have the infrastructure or capability ors. Further, a tt t t ff a tt tt ng capaa bili Even if we are successfulff tt in developing manufact uri ties sufficient for clinical and commercial suppu ly, problems with ng operations, even minor deviations from the normal protocols, processes or materials, could result in product defects or ng failures that result in lot failures, product recalls, product liability claims or insufficient supplies of our product manufacturi manufacturi candidates for our ongoing and planned clinical trials or eventual used in manufacff adequate quantities and quality of clinical grade materials that meet FDA, European Medicines Agency, or other applicable standards or specificat n yields and costs. Any such events could delay or prevent our ability to obtain regulatory approval for or commercialize ProTmune, FATE-NK100, FT500, FT516 or our other product candidates, which would adversely affect turing our product candidates are research-grade only, and we may encounter problems obtaining or achieving our business, financial condition and results of operations. ions with consistent and acceptable productio ore, certain of the components curreuu commercialization. Furthermt d ff ff t ntly 34 We studydd our product candidate or unacceptabl ii ell side effects ff tt s in patient tt tt populatll ions with signi and require us to abandon or limit ii ificant comorbidities that tt our clinical development ll i activities. maya result in deaths or serious adverserr aa radiation, and/or othet Patients treated with ProTmunm e,FATE-NK100, or FT500 in our ongoing clinical trials, including investigator-sponsored trials of product candidates that we may develop, r high dose or myeloablative treatments in the course of treatment of their or adverse events, including death, that are unrelated to our product candidates. our product candidates, as well as patients who may undergo treatment with FT516 and other may also receive chemotherapy, disease, and may therefore experience side effects While these side effect studies. The inclusion of critically ill patients in our clinical studies may result in deaths or other underlying disease or to other advancing ProTmune,mm approval, and would impaim r our ability to commercialize our producd t candidates. Any inability to advance ProTmune, FATE-NK100, FT500, FT516, or any other t the value of our common stock would decline. therapia es or medications that such patients may receive. Any of these events could prevent us from FATE-NK100, FT500, or other product candidates through clinical development, and from obtaining regulatoryr s or adverse events may be unrelated to our product candidates, they may still affect the success of our clinical product candidate through clinical development would have a material adverse effect adverse medical events due to on our business, and ff ff ff t t t Because our productd time, the cost and our ability to successfully initiate, conduct and completell regulatll ory s are based on novel technologies, it is difficult and reimbursement approvals, requirei d for commercialization of our product candidates. candiddd atedd tt i to predicdd t the regulatory approval process and the clinical development, and obtaintt the necessaryr Our cell programming technology and platform for generating cell therapy products using iPSCs represent novel therapeutic approaches, and to our knowledge there are currently no iPSC-derived cell producd ts approved anywhere in the world for commercial sale. As such, it is difficult to accurately predict the type and scope of challenges we may incur during development of our product candidates, and we face uncertainties associated with the preclinical and clinical development, manufacture and regulatory requirements for the initiation and conduct of clinical trials, regulatoryrr approval, and reimbursement required for successfulff commercialization of these product candidates. In addition, becauseaa clinical or preclinical stage, we are currer ntly assessing safetff y in humans and have not yet been able to assess the long-term effects treatment. Animal models and assays may not accurately predict the safetff ytt and efficff acy of our product candidates in our target patient populations, and appropriate models and assays may not exist for demonstrating the safety and purity of our product candidates, r particularly FT500 and FT516, and any other iPSC-derived cell producd t candidates we develop, as requiq red by the FDA and othet regulatory authorities for ongoing clinical development and product approval. our iPSC-derived cell productd candidates are all in the early of ff The preclinical and clinical development, manufacture, and regulatory requirements for approval of novel product candidates such as ours can be more expensive and take longer than for other more well-known or extensively studied pharmaceutical or biopharmaceutical product candidates due to a lack of prior experiences on the side of both developers and regulatory agencies. Additionally, due to the uncertainties associated with the preclinical and clinical development, manufacture, and regulatory requirements for approval of our product candi plans or our manufacturing activities and plans, or be required to meet stricter regulatory requirements for approval. Any such modifications or changes could delay or prevent our ability to develop, manufact product candidates, which would adversely affect our business, financial condition and results of operations. dates, we may be required to modify or change our preclinical and clinical development , obtain regulatoryr approval or commercialize our uret aa ff Cellular immunothet rapia es, and stem cell therapies and iPSC-derived cell therapies in particular, represent relatively new therapeutic areas, and the FDA has cautioned consumers about potential safety risks associated with cell therapies. To date, there are relatively few approved cell therapies. As a result, the regulatory approval process for product candidates such as ours is uncertarr may be more expensive and takea extensively studied technologies and therapeutic designation that supports the use of a productdd a makes cost required to obtain regulatoryrr approval in the United States for ProTmune.mm to prevent acute graft-versus-host disease in patients undergoing allogeneic HSCT, which ne the clinical endpoints and data requiqq red to supportrr an application or regulatory approval, and the time and longer than the approval process for product candidates based on other, better known or more tly no FDA approved producdd ts witht a label approaches. For example,mm it difficult to determi there are currenrr in and a aa r Regulatory requirements in the United States and in other t countries governing cell therapya products have changed frequently within the FDA, the Center for Biologics Evaluation and Research, or CBER, restructured and and the FDA or other regulatory bodies may change the requirements, or identify different regulatoryrr pathways, for approval for any of our product candidates. For example,m created a new Office of Tissues and Advanced Therapies to better align its oversight activities with FDA Centers for Drugs and Medical Devices. It is possible that over time new or different divisions may be established or be granted the responsibility for regulating cell and/or gene therapy products , including iPSC-derived cell products change our regulatoryrr strategy complmm ete the preclinical and clinical development and manufacturett may lengthent Changes in regulatory authorities and advisory groups,u or any new requirements or guidelines they promulgate, regulatory review process, require us to perform additional studies, increase our development and manufacturin g costs, lead to changes in regulatory pathways, positions and interpretations, delay or prevent approval and commercialization of our product of, and obtain regulatory approval for, our product candidates. the tions for regulatory approval, which could delay and impairm , such as ours. As a result, we may be required to or to modify our applica our ability to m d d a tt tt 35 candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we will be required to consult with the FDA and other regulatory authorities, and our products will likely be reviewed by an FDA advisoryrr committee. We also must comply with applicable requirements, and if we fail to do so, we may be required to delay or discontinue development of our product candidates. Delays or unexpected costs in obtaining, or the failure to obtain, the regulatory approval necessary to bring a potential product to market could impairm to generate sufficient product revenues to maintain our business. a our ability Preliminary ii studiesdd latertt data and interimii or future clinical trials. resultsll we disclo ii se, and results from earlier studies, may not be predictive of the final results, or of All of our productd candidates are still in an early stage of development, and we cannot be assured that the development of any of our product candidates will ultimately be successful. Although we may from time to time disclose results from preclinical testing or preliminary data or interim results from our clinical studies of our product candidates, such results from preclinical testing, process development and manufacturing activities, and earlier clinical studi es, including clinical studies with similar product candidates, are not necessarily predictive of future results, including clinical trial results. While we have demonstrated in preclinical models that a ent in survival, as ff single administration of ProTmune resulted in a statistically-significant compam red to vehicle-treated cells, we may not observe similar results in future preclinical or clinical studies of ProTmune, including our Phase 1/2 PROTECT study. Additionally, the data reported from the Phase 1 stage of PROTECT as of the November 26, 2018 data cut-off date may not continue for these subjects or be repeated or observed in ongoing or future studi es involving ProTmune, including in the Phase 2 stage of the PROTECT study. It is possible that subjects for whom events of acute GvHD have been reduced or eliminated may experience acute GvHD in the future, as there is limited data concernirr ng long-term safety and efficacy following treatment with ProTmune.m adequate safetytt or efficacy profile to support further development or commercialization. may not demonstrate in the Phase 2 stage of PROTECT, or in subseu reduction in GvHD score and improvem Accordingly, ProTmunem mm t tt quent trials, an The results of our current and future clinical trials may differ from results achieved in earlier preclinical and clinical studies for a variety of reasons, including: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) we may not demonstrate the potency and effiff cacy benefits observed in previous studies; tt s to improm ve, standardize and automate the manufacture of our product candidates, including ProTmune,m FATE- ff our effort NK100, FT500 and FT516, and any resulting deviations in the manufacturett affect the safety, purity, potency or efficacy of such product candidates; of our product candidates, may adversely differff ences in studt y design, including differences ff in conditioning regimens, eligibility criteria, and patient populations; advancements in the standard of care may affect our ability to demonstrate efficacy or achieve study endpoints in our currer nt or future clinical trials; and safety issues or adverse events in patients that enroll in our current or future clinical trials. Even if our current and planned clinical trials are successful, we will need to conduct additional clinical trials, which may tt ng protocols, processes, materials or facilities or under differeff include registrational trials, trials in additional patient populations or under different treatment conditions, and trials using different manufacturi approvals for our product candidates from the FDA and regulatory authorities outside the United States to market and sell these product candidates. Our failure to meet the requirements to support marketing approval for our productd future clinical trials would subsu tantially harm our business and prospects. nt manufacturing conditions, before we are able to seek candidates in our ongoing and Even if we obtain regulatll ory tt approval for a product candidate, ii our products willii remainii subject to regulatortt yr scrutiny.yy t t a regulatory authot ng protocols, processes, materials Any product candidate for which we obtain marketing approval, along witht post-marketing information, reports, registration and listing requirements, requirements relating to current cGMP, quality the manufacturi oval clinical data, labeling and promotional activities for such product, will be subju ect to rities. These requirements include submissions of safety and facilities, qualification testing, post-appr continual and additional requirements of the FDA and other and other t control, quality assurance and corresponding maintenance of records and documents, and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval products to ensure such products are marketed only for the approved indications and in accordance with the provisions of the apprpp oved labeling. Later discovery of previously unknown problems with our product candidates, manufacturing operations, or failure to complmm y with regulatoryrr candidates to market and or being precluded from manufacturing or selling our product candidates, any of which could significantly harm our business. requirements, may lead to various adverse conditions, including significant delays in bringing our product marketing and promotion of pharmaceutical and biological a 36 We expect to rely on orpha drugu designationii orphrr rr an drugu designations for our other product candiddd ates. dd n drug status tt tt to develop and commercialize certain of our product candidat es, ii s may not conferff marketing exclusivity or other expexx ctedtt commercialii benefitsff but our existing orphan and we maya not be able to obtain We expect to rely on orphan drugrr exclusivitytt for ProTmunem and may rely on orphrr an drug exclusivity for othet r product rr n drugrr , and Cosmetic Act, and up to ten years of market designation in the United States for ex vivo programmed mobilized peripheral blood for for treatment in hematopoietic stem cell transplantation. While we have been granted these orphan designations, even if we candidates that we may develop. Orphan drug status confers seven years of marketing exclusivity in the United States under the aa Federal Food, Drugrr indication. We have been granted orpha the prevention of GvHD in patients undergoing allogeneic hematopoietic cell transplantaa ProTmunemm are the first to obtain marketing approval of our productd designations to exclude other compamm nies from manufacturing or selling biological producd ts using the same principal molecular structural features for the same indication beyond these timeframes. Furthermore, any marketing exclusivity in Europe can be reduced from ten years to six years if the initial designation criteria have significantly changed since the market authorization of the orphan product. In addition, we may be unablea developing or may pursue. candidates for the applicable indications, we will not be able to rely on these ing exclusivity in Europe for a particular product in a specified product candidates that we are currenrr tion, and in the European Union for designations for any other to obtain orphan drugrr tly t rr n drugrr For any product candidate for which we are granted orpha designation in a particular indication, it is possible that another company also holding orphan drugrr n designation for the same product candidate will receive marketing approval for the same indicatioaa before we do. If that were to happen, our applications for that indication may not be approved until the compemm ting compamm ny’s period of exclusivity expires. Even if we are the first to obtain marketing authorization for an orphrr indication in the United States, there are circumstances under which a competing product may be approved for the same indication during the seven-year period of marketing exclusivity, such as if the later productd , or if the later product is deemed a differff ent product than ours. Further, the seven-year marketing exclusivity would not prevent compemm titors from obtaining approval of the same productd designation, or for the use of other types of products in the same indications as our orpha candidate as ours for indications otht er than those in which we have been granted orphan drug is shown to be clinically superior to our orphan productd n producd t. an drugr rr tt We may be subject to certaitt nii privacyc and security laws. Anyn failure to comply withtt financial condition. e regul iontt atll s, includindd gn federal and statett healthcare fraud and abuse laws and healthll infon rmation these regulations could have a materi tt al adverserr effect on our business and If we obtain FDA approval for any of our producd t candidates and begin commercializing those products in the United States, our and abuse laws, false operations may be subject to various federal and state healthcare laws, including, without limitation, frauda claims laws, data privacy and security laws, as well as transparency laws regarding payments or other items of value provided to healthcare providers. These laws may impacm t, among other things, our proposed sales, marketing and education programs. In addition, we may be subject the federal government and the states in which we conduct our business. It is possible that some of our business activities could be subject to challenge under one or more of these laws. If our operations are found to be in violation of any of the laws described above or any othet penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. r governmental regulations that apply to us, we may be subject to to patient privacy regulation by botht u Risks Related to Our Reliance on Third Parties expexx rience manufacff WeWW have limitedi commercial scale.ee We are, and expexx ct tott continue ofo our product candidates for use in clinical trials and for commercial sale, ifi approved.dd Our business could be harmed if those third parties fail to performr our product candidates on a clinical scale,e and no expexx rience manufacu ii dent on third parties to conduct some or all aspects of manufacturingn ii ori ly. tt satisfact s to be, depenee turing on a turingii We currently rely, and expect to continue to rely, on third parties aa trial sites, to manufacture our product candidates for use in conducting clinical trials and for commercial sale upon approval of any of our productd quality control protocols utilized in certain commercial settings. In addition, we have not yet caused our product candidates to be manufacturett candidates. In some cases these third parties are academic, research or similar institutions that may not apply the same d or processed on a commercial scale and may not be able to do so for any of our product candidates. , including cell processing facilities associated with clinical The facilities used to manufacture our product candidates must be evaluated by the FDA or othet r foreign regulatoryr agencies pursuant to inspections that will be conducted after we submit an application to the FDA or other foreign regulatoryrr agencies. If the FDA or a comparable foreign regulatory authot urt e of our product candidates or if it later finds deficiencies or withdraws any such approval in the future, we may need to find alternative manufacff candidates, if approved. rity finds deficiencies witht or does not approve these facilities for the manufact our ability to develop, obtain regulatory approval for or market our productdd turing facilities, which would significff antly impactmm ff 37 ff aa urett Reliance on third parties for manufact of our product candidates entails certain risks, including reliance on the third partytt tt for does not maintain the financial resources information, including our trade our product candidates or any products we may ng relationship by the third party, based on its own lly commercialize in accordance with our specifications, misappropriation of our proprietaryrr regulatoryrr complm iance and quality assurance, the possibility that the third-party manufacturer to meet its obligations, the possibility that the third party fails to manufacturett eventuatt secrets and know-how, and the possibility of termination of our manufact tt uri business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our product candidates and any products that we may eventually commercialize be manufactured according to cGMP, cGTP and similar jurisdictional standards. These requirements include, among other things, quality control , quality assurance and the maintenance of records and documentation. The FDA or similar foreign regulatory agencies may also implm ement new standards at any time, or change their interpretations and enforcement of existing standards for manufacture, packaging or testing of products. We have little control over our manufacff productd sufficff of our product candidates. In addition, such failure could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure of outside suppli the product candidate, total or partial suspension of production, suspension of ongoing clinical trials, refusal to appr ove pending applications or supplemental applications, detention of product, refusal to permit the impom rt or export of products, injunction or m imposing turers’ compliance with these regulations and standards. Any failure by third parties that are manufacturing ouru processes, including any failure to deliver ient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any candidates to complmm y with cGMP or cGTP or failure to scale up manufacturing civil and criminal penalties. es of u a ff ff t We currently depend on third-party cell processing facilitill es for the manufacture of ProTmune and FATE-NK100 under specific conditions. Any failure by these facilities result in delayll syy to our clinical developme dd candidates. ii consistently our ability to obtainii approval for, or commercialize, to manufacture our product candidates nt plans and impairm and under the proper conditions may these product ii ll dd ii ff ff urett ProTmunemm of ProTmunem overseeing all aspects of producd t manufacff of these product candidates for commercialization may require each of the clinical ture and release prior to applying for marketing approval, we do not through to final product analytical testing and release. The manufact Clinical cell processing facilities operated by or affiliated with our clinical sites currently manufacturett the activities of these third-party cell processing faff cilities and are complm etely dependent on their ability to complm y with requirements and to properly execute the protocol for the manufacture of any of our product candidates. In particular, if the ff and FATE-NK100 are manufactured to complm y with cGMP and other regulatory and FATE- NK100 for use in our clinical trials of these product candidates. We will be required by the FDA to standardize the manufacturtt e of ProTmum ne and FATE-NK100, and any other product candidates we may develop, including our oversight for facility and raw material and vendor qualification and FATE-NK100 for use in registrational clinical trials and commercialization will be subjeb ct to the requirements of applicable regulatory authorities, including the FDA, and the anticipated manufacture cell processing facilities at which ProTmunem requirements, and be subject to inspections by the FDA or other applicable regulatory authorities that would be conducted after the submu ission of a BLA or other marketing application. Althot ugh we are responsible for ensuring complm iance with applicablea requirements and forff control tt regulatoryr FDA requires each of the clinical cell processing facilities to comply with cGMP, there can be no guarantee that they will be able to do so. Because of these manufacturing requirements, if the applicable clinical cell processing facilities are unable to manufacture any of our producd t candidates, including ProTmunmm e and FATE-NK100, in a manner that conforff ms to our specificati ons and the FDA’s strict regulatory requirements, we may be required to identify alternative processes or facilities for the manufacture of such product candidate, which may require us to spend significant additional time and resources, and would impm air our abia lity to manufacture, complmm ete the clinical development of, and to commercialize, such product candidate. To complmm y with applicablea manufacturi not limited to biosafetyff operations, including its physical facility or layout, environmentalnn procedures. If a clinical cell processing facility is unwilling or unable to comply with these regulatory or manufacturtt it will be restricted or prohibited from manufacturing such productd for administration to patients. Any failure by these clinical cell processing facilities to properly manufacture ProTmune or FATE-NK100 may adversely affect the safety and effiff cacy profile of such product candidate or causea urett prohibitions on the manufact on our business. have an adverse effect ng requirements, the clinical cell processing facility may be required to possess or obtain certain equipment, including but cabinets, warming devices, cell washing devices, freezers or other materials, or to modify aspects of its systems, monitoring systems, quality systems or training the clinical and the commercial setting, which would the FDA or other regulatory authorities to imposem and use of ProTmune or FATE-NK100 in botht candidate and making it availablea ing requirements, regulatory and restrictions or regulatory ff ff ff tt 38 to depend on strategic We expect xx under the Ono Agreegg ment,tt for the development and commercialization of certain of our product candidates in certainii or geographic territories, and if these arrangements are unsuccessful, development,tt manufactu arrangements, such as our collaboration arrangement with Ono tt indications re or commercialization of any of our product candidates thisii couldll result in delaysyy and other obstacles in the partnerships and collaborationii our results of operations.ss and materially harmrr u dd s tt For some programs, we currently depend, and expect to continue to depend, on third-partytt collaborators and strategic partners to design and conduct our clinical trials. As a result, we may not be able to conduct these programs in the manner or on the time schedule we currently contemplam te, which may negatively impactm partners t negatively affeff cted. our business operations. In addition, if any of these collaborators or strategic withdraw support for our programs or proposed products their development, our business could be , or otherwise impairm d tt In addition, we currently depend, and expect to continue to depend, upon strategic collaboration partner t s for the financial resources and conduct of activities for the development and commercialization of certain of our productd candidates. For example,m under the Ono Agreement we have agreed to jointly develop and commercialize with Ono two iPSC-derived CAR T cell product candidates, and additionally we are relying on Ono for the conductdd commercialization of these products. As such, we will not have sole control over the course of development of these product candidates arising under the Ono Agreement, or any other or collaboration arrangement. This lack of contrott could cause delays or other difficff ulties in the development and commercialization of such product candidates, which may prevent complmm etion of research and development activities and intended IND filings in a timely fashion, if at all. Our reliance on strategic collaboration partners, including Ono, for the development and commercialization of our product candidates entails risks to which we may not other l over the development and commercialization of certain of our product candidates product candidates that we may develop under a future strategic partnership of certain activities relating to the development and t wise be subject, including: t (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) a collabor a strategies, or a merger, acquisition, sale or downsizing of its compam ny or business unit; ation partner may shift its priorities and resources away from our programs due to a change in business a collaboration partner may cease development in therapea utic areas which are the subject of our partners tt hips; a collaboration partner may change the success criteria for a particular aa delaying or ceasing development of such program or candidate; program or potential productd candidate thereby a significant ff milestone payments tied to such activities, thereby impacti m delay in initiation or conduct of certain activities by a collaboration partner could delay our receipt of ng our ability to fund our own activities; a a collabor ation partner could develop a product that competes, either directly or indirectly, with our product candidates; a collaboration partner with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or sale of a product; a collaboration partner with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unablea to meet demand requirements; a collaboration partner may exercise its rights under the agreement to terminate the partnership; a dispute may arise betwett a program or product candidate resulting in a delay in milestones, royalty payments or termination of a program; and concerning the research, development or commercialization of en us and a collaboration partner tt a collaboration partner may use our proprietaryr rights in such property. information or intellectual property in such a way as to jeopardize our In addition, the termination of the Ono Agreement or any futurtt e strategic partnership or collaboration into may prevent us from receiving any milestone, royalty payments, sharing of profits, and other of these events could have a material adverse effecff two iPSC-derived CAR T cell product candidates being developed under the Ono Agreement, and may adversely impactm operations and financial condition. a arrangement that we enter benefits under such agreement. Any t on our ability to develop and commercialize our product candidates, including the our results of t We have entered into a strategic research collaboration and license identificaff tion and applicationtt maya be terminated, rr business and operating results. or may not be successful,ll due to a number of fact of small molecule modulatll ortt ee ff ll ii agreement with Juno Therapeutics, Inc. to pursue rr the srr to program certain genetically-en ii gineered T cells. Our collaboration ortt s,rr which couldll have a material adverserr effect on our We are party to a strategic research collaboration a and license agreement with Juno Therapeutics, a Inc. (Juno) (acquired by Celgene Corporation) for the identification and application of small molecule modulators for programming the therapea utic propertirr es of genetically engineered CAR and TCR based cellular immunotherapies the agreement, Juno has agreed to fund our collabora tion research activities for an initial research term ending in May 2019, subju ect to directed against certain targets designated by Juno. Under a aa 39 a two-year extension under certain circumstances, and we are eligible to receive target selection fees and clinical, regulatory, and commercial milestones, as well as royalties on sales, should any therapia es using our modulators be developed and commercialized. Our collaboration with Juno may be terminated, or may not be successful, due to a number of factors. For example,mm we may be unable to identify small molecule modulators that are effective in modulating genetically engineered T-cell therapies, or Juno may elect not to develop any genetically engineered T-cell therapies incorporating any modulators that are identified through the collaboration. Additionally, Juno may terminate the agreement upon six (6) months’ written notice to us. If the collaboration these or other reasons, or is otherwise terminated for any reason, we may not receive all or any of the research program funding, target selection fees, milestone payments or royalties under the agreement. Any of the foregoing could result in a material adverse effect on our business, results of operations and prospects and would likely cause our stock price to decline. is unsuccessful for a a In addition, during the term of our research activities under the agreement, we have agreed to collabor a ate exclusively with Juno on the research and development of small molecule modulators with respect to T cells (othet have been genetically engineered to express CARs or T-cell receptors against certain targets designated by Juno. Furthermore, during the term of the agreement, we will be unablea commercialization activities using small molecule modulators to program T-cell therapia es that have been genetically engineered to express CARs or T-cell receptors directed against certain targets selected by Juno, unless such T cells are derived from iPSCs. These restrictions may prevent us from exploiting our small molecule modulators or impairm our ability to pursue research, development and commercialization opportunit to conduct, or enable third parties to conduct, research, development and ies that we would otherwise deem to be beneficial to our business. r than T cells derived from iPSCs) that tt In March 2018, Juno was acquired by Celgene Corporation (Celgene). This acquisition did not affect the terms of our agreement with Juno Agreement. On January 3, 2019, Celgene announced that it had entered into a definitive merger agreement with Bristol- Myers Squibb Compam ny (BMS), under which BMS will acquire Celgene. The acquisition of Juno by Celgene, and the acquisition of Celgene by BMS, may result in organizational and personnel changes, shiftsff in business focus or other developments that may have a material adverse effect on our collaboration agreement with Juno. Cell-based therapia es depeee nd on the availabii required to be acceptabtt or at all.ll We rely on third-party suppliell rs for various and do not have supplyll arrangemn product candidates ii ii le to the FDA, and such reagents, materials, and equipment maya not be available materials and equipment which in each case are to us on acceptee able ll tt terms ll ility of reagea nts and specialii ized components, materials and equipment required for the manufacture of our ents for certain of these components. u q of our product candidates, including ProTmune,m Manufacturing our product candidates requires many reagents and othet ff manufactu ed to support our needs. Reagents and other key materials from these suppliers may have inconsistent r specialty materials and equipment, some of which are manufactured or supplied by small companies with limited resources and experience to support commercial biologics production. To date, we and our clinical cell processing facilities have purchased equipment, materials and disposables, such as automated cell washing devices, automated cell warming units, commercially availablea media and cell transfer and wash sets, used for the manufacturett these suppliers may not have the capacity to support may otherwise be ill-equipp attributes and introduce variability into our manufactured productd possible adverse events. We rely on the general commercial availabila candidates, and do not have supply contracts with many of these suppli acceptable terms or at all. Even if we are able to enter into such contracts, we may be limited to a sole third-party for the supply of certain required components, including our pharmacologic modulators and components for our cell processing media. An inabia lity to continue to source product from any of these suppliers, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands, or quality issues, could adversely affect our ability to satisfy demand for our product candidates, which could adversely and materially affect our product sales and operating results or our ability to conduct clinical trials, either of which could significantl y harm our business. FATE-NK100, FT500, and FT516 from third-party suppliers. Some of red under cGMP by biopharmaceutical firms or ity of materials required for the manufacture of our product ers and may not be able to obtain supply contracts with them on candidates, which may contribute to variabla e patient outcomes and commercial products d u a ff t If we are required to change suppliers, or modify the compom nents, equipment, materials or disposabla es used for the manufacturett of our product candidates, we may be required to change our manufa additional data to regulatory authorities in order to use any alternative components, equipment, materials or disposables, any of which could set back, delay, or increase the costs required to complete our clinical development and commercialization of our product candidates, including ProTmune,m FATE-NK100, FT500, and FT516. Additionally, any such change or modification may adversely affect the safety, efficacy or potency of our product candidates, and could adversely affect our clinical development of our product candidates and harm our business. cturing operations or clinical trial protocols or to provide aa 40 We face a varietytt of challenges and uncertaitt ntii s, includingii of certain of our product candidate dd TT ProTmun e and FATE-NEE K1NN 00. iestt associatedtt with our dependence ee e on human donor material for the manufactur ff Certain of our product candidates, including ProTmunem and FATE-NK100, are manufactured from the blood of third-party donors, which subjects the manufacture of such product candidates to the availability and quality of the third-party donor material. The selection of the appropriate donor material for manufacturett coordination between clinical and manufacturi of our ProTmune and FATE-NK100 product candidates requires close ng personnel. tt ProTmunemm is manufacturett d using mobilized peripheral blood, or mPB, which is currently procured directly by the clinical cell processing facilities from the National Marrow Donor Program (NMDP) for our ongoing Phase 1/2 PROTECT clinical study. The availability of mPB for the manufacture of ProTmunem depends on a numberm of regulatory,rr political, economic and technical factors including: outside of our control, t (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) government policies relating to the regulation of mPB for clinical use; NMDP and individuald blood bank policies and practices relating to mPB acquisition and banking; the pricing of mPB; the methods used in searching for and matching mPB to patients, which involve emerging technology related to current and future mPB parameters that guide the selection of an appropriate unit of mPB for transplantation; and methods for the procurement and shipment of mPB and its handling and storage at clinical sites. Additionally, we do not have control over the supply, availability, price or types of mPB that these clinical cell processing facilities use in the manufacff ture of ProTmune. We rely heavily on these third parties to procure mPB that is collected in complm iance with government regulations and within the current standard of care. In addition, we may identify specific characteristics of specific units of mPB, such as the volume and red blood cell content, which may limit the ability to use such units in the manufacture of ProTmunem meet our specifications may limit the potential inventory of mPB eligible for use in the manufacff even though this mPB may otherwise be suitable for use in allogeneic transplant. As a result, the requirement for mPB to ture of ProTmune. In the United States, the banking and use of mPB does not require a BLA, and mPB is not an FDA licensed product. However, (FACT), the NMDP, and the American Association of Blood Banks (AABB), as applicable. In our current Phase 1/2 the FDA does require that units of mPB adhere to and meet the standards set forth by the Foundation for Accreditation for Cell Therapya PROTECT clinical trial of ProTmunem , ProTmune is manufactured using unlicensed mPB units. It may be possible that in the future, regulatory policy could change, and the FDA may later require that mPB units be licensed, and that ProTmunemm only licensed mPB units. Any inability to procure sufficient supplies of mPB will adversely affect commercialize ProTmune.m our ability to develop and be manufacff ff tured using t Further , manufacture of our ProTmunem and FATE-NK100 product canda idates from donor material involves complex processes, with specialized equipment and highly skilled and trained personnel. The processes for manufacturi susceptible to additional risks, given the need to maintain aseptic conditions throughout the manufacturi with viruses or other pathogens in either the donor material or materials utilized in the manufacturing process or ingress of microbiological material at any point in the process may result in contaminated or unusable product. Such contaminations could result in delays in the development of our product candidates. Such contaminations could also increase the risk of adverse side effect ng these product candidates are ng process. Contamination tt s. ff tt parties to conduct certain research and developll ment activtt WeWW currentlyll rely on thirdi candidates. If these third parties do not successfull yll carry out their contratt ctual dutiestt able to timely develop,pp manufacture,e obtaintt tt could be substanti ally harmed. regulatll ory ff tt approval for or commercialize our product candidates and our business ities and clinicii al trialsll of our product or meet expexx cted deadlindd es, we may not be We rely upon third parties, including medical institutions, clinical investigators, cell processing laboratories, and clinical research organizations (CROs), for the conduct of certain research and preclinical development activities, process development and manufacturing activities, and for the conduct, management, and supervision of clinical trials of our productd have direct control over the activities of these third parties, and may have limited influence over their actual performance. Our reliance on these third parties and CROs does not relieve us of our responsibilities to ensure that our clinical studies are conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards. candidates. We do not We are responsible for complying, and we are responsible for ensuring that our third-party service providers and CROs comply, with applicablea GCP for conducting activities for all of our product candidates in clinical development, including conducting our clinical trials, and recording and reporting data from these trials. Regulatory authorities enforce these regulations through periodic inspections of trial sponsors, principal investigators and trial sites. We cannot assure that upon inspection by a given regulatory rity will determine that any of ouruu clinical trials complmm y with applicable GCP requirements. In authority, such regulatory authot d under applicable regulatory requirements. addition, our registrational clinical trials must be conducted with productd produced 41 If these third parties and CROs do not successfully carry out their contractual duties or obligations, meet expected deadlines or tt ng, or clinical data they obtain is comprommm successfully complmm ete activities as planned, or if the quality or accuracy of the research, preclinical development, process development, manufacturi manufacturing requirements or for other reasons, our research, preclinical development, process development and manufact activities, and clinical trials, and the development of our product candidates, may be extended, delayed or terminated, and we may not be able to obtain regulatoryrr approval for or successfully commercialize our productd parties or CROs are terminated for any reason, the development of our product candidates may be delayed or impaired, unablea candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed. ised due to the failure to adhere to applicable regulatory and uring to advance our product candidates. As a result, our results of operations and the commercial prospects for our product candidates. Further, if our agreements with third and we may be m ff If conflicts ariseii limit our abilityll between tt m to impleme us and our collaboll nt our strategies. tt ratortt srr or strategice partners, these parties maya act inii a manner adverse to us and couldll If conflicts arise between our corporr rate or academic collaborators or strategic partners and us, the other party may act in a are conducting multiple product development efforts manner adverse to us and could limit our ability to implem ment our strategies. Some of our academic collaborators and strategic partners t collaborators or strategic partnett rs, however, may develop, either alone or with others, products in related fields that are competitmm with the products or potential producd ts that are the subject of these collaborations. Competing products, either developed by the collaba orators or strategic partners collaborator’s or partner’s support for our product candidates. within each area that is the subject of the collaboa tegic partners have rights, may result in the withdrawal of our tt ration with us. Our or to which the collaborators or strat ive ff t Some of our collaborators or strategic partners could also become our compem titors in the future. Our collabora a tors or strategic could develop compem ting products, preclude us from entering into collaborations with their competitors, fail to obtain timely partners t regulatoryr approvals, terminate their agreements with us prematurely, or fail to devote sufficient resources to the development and commercialization of products. Any of these developments could harm our product development efforff ts. Risks Related to Our Intellectual Property If we are unable to protect our intell candidates, other harm our business. tt ii tt companies couldll develop products based on our discoveries, which may reduce demand for our products and ecll tual property, or obtain and maintaitt nii patent protett ction for our technologygg and product ff Our commercial success will depend in part on our ability to obtain and maintain intellectual property protection for our productd ure them and the methods for using them, and also for our cell programming technology in candidates, the operations used to manufact order to prevent third parties from making, using, selling, offering to sell or impom rting our product candidates or otherwise exploiting our cell programming approach. The scope of patent protection in the biotechnology and pharmaceutical field involves complmm ex legal and scientificff questions and can be uncertain. As a result, the issuance, scope, validity, enforceability, and commercial value of our exclusive licenses to patent portfolios for our product candidates and cell programmaa patent rights are uncertain. We own and haveaa technology, althout gh we cannot be certain that our existing patents and patent applications provide adequaq te protection or that any additional patents will issue to us with claims that provide adequate protection of our other product candidates. Further, we cannot predict the breadth of claims that may be enforced in our patents if we attemptm to enforce them or if they are challenged in court or in to secure and maintain protection for our product candidates and cell programming technology, or other proceedings. If we are unablea if any patents we obtain or license are deemed invalid and unenforceable, our ability to commercialize or license our technology could be adversely affected. ing Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or compem titive to ours or impom rtant to our business. Since patent applications in the United States and most other are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that any patent application owned by a third party will not have prioritytt over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition, reexamination, review, reissue, post grant review or invalidity proceedings before U.S. or non- U.S. patent offices. proceedings in either the courts or patent offices our patents or the patents of our licensors is narrorr wed, or if a patent of ours or our licensors is judged invalid or unenforceable, in any such proceedings. The scope, validity or enforceability of our patents or the patents of our licensors may be challenged in such in the United States and abroad, and our business may be harmed if the coverage of countries ff ff t 42 We depeee nd on our licensorsrr to prosecute and maintainii patents ii failur e by our licensorsrr to effectively ll protect these intell tt ectua ff tt and patent applications that are materi to our business. Any o l propert ytt rights couldll adversely rr s and operations. tt alii affect our busines ii FATE- Certain rights to our key technologies and product candidates, including intellectual property relating to ProTmune,m NK100, and our iPSC technology are licensed from third parties. As a licensee of third-party intellectual property, we rely on our licensors to file and prosecute patent applications and maintain patents, and othet t some of our license agreements. We have not had and do not have primary control patents, patent applications and other intellectual property rights, and we cannot be certain that such activities will result in valid and enforceablea intellectual property rights. Additionally, our licensors may have the right to control enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents and we cannot be certain that our licensors will allocate sufficient resources or prioritize enforcement of such patents or defense of such claims to protect our interests in the licensed patents. Even if we are not a party to these legal actions, an adverse outcome could harm our business becausea frff om continuing to license intellectual property that we may need to operate our business. rwise protect the licensed intellectual property under over these activities for certain of our licensed it might prevent us patents and other t If we fail to complyll withii technologies. our obligati i ons underdd our license agreements, we could lose rights i to our product candiddd ates dd or key We have obtained rights to develop, market and sell some of our product candidates, including ProTmunem and FATE-NK100, through intellectual property license agreements with third parties payment, royalty and other obligations on us. If we fail to comply with our obligations under our license agreements, we could lose some or all of our rights to develop, market and sell products covered by these licenses, and our ability to form collaborations or partnerships may be impmm aired. In addition, disputes may arise under our license agreements with third parties, which could prevent or impam ir our ability to maintain our current licensing arrangements on acceptable terms and to develop and commercialize the affeff cted productd . These license agreements imposem various diligence, milestone candidates. rr We may be involvedll propertytt rightgg s,tt which couldll cause us to divert our resources and could put our intellectual property at risk. cement or defense of pate or other proceedings in litigationtt to the enforff ll ngii relati ff ii nt and other intelle tt ctual If we choose to go to court to stop anothet r party from using the inventions claimed in any patents we obtain, that individual or gement lawsuits, we may be required to fiff le interferences, oppositions, ex parte reexaminations, post-grant company has the right to ask the court to rulrr e that such patents are invalid or should not be enforced against that third party. In addition to patent infrinff review, or inter partes review proceedings before the U.S. Patent and Trademark Office ff r proceedings relating to intellectual property are unpredictable and expensive, and would consume patent offices. Litigation and othet time and resources and divert the attention of managerial and scientificff personnel even if we were successful in any such proceeding. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available forff development, and other proceedings. Some of our compem titors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating or successfully challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compem te in the marketplace. activities. We may not have sufficient financial or other resources to adequately conduct such litigation or (the USPTO) and corresponding foreign research, t There also is a risk that a court or patent officff e in such proceeding will decide that our patents or the patents of our licensors are not valid or are not enforff ceable, and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of such patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to such patents. If we were not successful in defending our intellectual property, our competitors could develop and market products based on our discoveries, which may reduce demand for our products. We or our stratt development effoff tegic partnett rts and stoptt rs may infrin nge ll us from commercializll the intellectu ii al propertytt rights of othett rs,s which may prevent or delay our product ing,gg or increase the costs of commercializing,gg our product candidd dates. Our success will depend, in part, on our ability to operate without infringing the proprietary rights of third parties. There is a substantial amount of litigation, botht within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, ex parte reexaminations, post-grant review, and inter partes review proceedings before the USPTO and corresponding foreign patent office 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 product candidates. As the biotechnology and pharmaceutical industrit es expand and more patents are issued, the risk increases that our productd candidates may be subject to claims of infringement of the patent rights of third parties. s. ff 43 We cannot guarantee that the manufacture, use or marketing of ProTmunemm , FATE-NK100, our iPSC-derived cell product m r productd methods of manufacture or methods for treatmet candidates that we develop, or the use of our cell programming candidates, including FT500 and FT516, or any othet technology, will not infringe third-party patents. There may be third-party patents or patent applications with claims to materials, cell compositions, compemm titors may have filed, and may in the futuret patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the futurtt e and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover aspects of the manufacture of any of our product candidates, any compositions formed during the manufacture, or any final product itself, the holders of any such patents may be able to block our ability to commercialize such productd candidate unless we obtained a license under the applicable patents, or until such patents expire. Such a license may not be availabla e on commercially reasonablea all. file, patent applications covering products and technologies similar to ours. Because nt related to the use or manufacturett of our product candidates. Our terms or at If a patent infringement suit were brought against us, we may be forced to stop or delay developing, manufacturing, or selling potential products that are claimed to infringe a third party’s intellectual property rights, unless that third-party grants us rights to use its intellectual property. If we are unable to obtain a license or develop or obtain non-infringing technology, or if we fail to defend an infriff ngement action successfully, or if we are found to have infringed a valid patent, we may incur substantial monetary damages, encounter significant delays in bringing our product candidates to market and be precluded from manufacff candidates, any of which could harm our business significantly. turing or selling our product t We may be subject to claims trade secrets.tt ll that our emplm oyees, ll ee consultants or inde pendent ii contractors have wrongfully used or disclosed alleged In conducting our business operations, we have obtained confidential and proprietary information from third parties. In mm individuals who were previously employed addition, we employmm compemm titors or potential compemm titors. Although we try to ensure that our employee use the proprietary inforff mation or know-how of others in their work for us, we may be subject consultants or independent contractors have inadvertently or otherwi of their former employers claims, in addition to paying monetary damages, we could lose valuable intellectual property rights or personnel, which could adversely affect our business. Even if we are successful in defenff ding against these claims, litigation could result in substantial costs and be a distraction to management. at other biotechnology or pharmaceutical compam nies, including our s, consultants and independent contractors do not to claims that we or our empmm loyees, inforff mation parties. Litigation may be necessary to defend against these claims. If we fail in defending any such se used or disclosed trade secrets or other proprietaryr t or other m mm u rr We may be subject to claill ms ii challengingn the inventorship of our patents and other intellectual ll property. We may be subject to claims that former employees r intellectual property as an inventor or co-inventor. If we fail in defending any such claims, we may lose valuable intellectual property rights, such as exclusive ownership of,ff or right to use, valuable intellectual property. We may also be subject to monetary damaaa and any of these outcomes could have a material adverse impact on our business. , collaborators, or other third parties have an interest in our patents or othet ges, mm Proprietary information and inve disclosure of our trade secretstt and other ii tt ent agreementstt withii rr proprietartt yr inforn mat . iontt ntiott n assignmgg our employm eesee and third partiestt may not prevent unauthoriz tt ed In addition to the protection afforded by patents, we also rely upon unpan tented trade secrets and imprm ovements, proprietary know-how, and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, through confidentiality agreements with our collaborators, emplomm yees and consultants. We also have invention or patent assignment agreements with our emplm oyees and some, but not all, of our collaborators and consultants. Trade secrets, however, may be difficult to protect, and if our employm for any such breach, and our trade secrets may otherwise become known or independently discovered by our competitors, which would adversely affect ees, collaborators or consultants breach these agreements, we may not have adequate remedies our business position. ff s couldll dimi Changes in the patent law in the Uniteii d Statett .yy and technology tt protect our product candiddd atdd estt ii niii ll shii the value of patents ff in general, thereby impairing our abilityll to As is the case with other biotechnology companies, our success is heavily dependent on intellectual property rights, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore obtaining and enforcing biotechnology patents is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently impm lementing wide-ranging patent reforff m legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certainrr 44 situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combim nation of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. patents could change in unpredictable ways that would weaken our ability r The term of our patents tt may not be suffici ff e ent to effec tivelyll protect our market position and products.tt Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however, the lifeff of a patent, and the protection it affords covering our product candidates, once the patent life has expired for a product, we may be open to competition from other products. If protect our products and business, our business and results of operations will be the lives of our patents are not sufficient to effectively adversely affected. , is limited. Even if we obtain patents ff ff Risks Related to the Commercialization of Our Product Candidates We do not have experience marketing any productd products are approved we may be unable to commercialize them successfully. candiddd atdd estt and do not have a sales force or distrib ii utiott n capabiliii ties, ii and if our We currently have no experience in marketing and selling therapea utic products. If any of our product candidates are approved ships ilities internally or we may selectively seek to enter into partner tt for marketing, we intend to establish marketing and sales capaba with other entities to utilize their marketing and distribution capabilities. If we are unablea capabilities on our own or effectively partner witht third parties, our productd revenues will suffer. to develop adequate marketing and sales The commercial success of our product candidates party payers and others in the medical community. dd will depee end upon the degre ee of market rr tt acceptee anc e by physicia yy ns,s patients, third- The commercial success of our products, if approved for marketing, will depend in part on the medical communmm ity, patients and third-party payers accepting our product candidates as effff ecff acceptance, we may not generate significant product revenue and may not become profitable. if approved for marketing, will depend on a number of factors, including: d products, a tive and safe. If these products do not achieve an adequate level of The degree of market acceptance of our (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the safety and efficacy of the products, and advantages over alternative treatments; the labeling of any approved product; the prevalence and severity of any side effect labeling; ff s, including any limitations or warnings contained in a product’s approved the emergence, and timing of market introduction, of compem titive products; the effeff ctiveness of our marketing strategy; and suffiff cient third-party insurance coverage or governmental reimbursement. Even if a potential product displays a favorablea es and clinical trials, market acceptance of the product will not be known until after it is launched. Any failure to achieve market acceptance for our product candidates will harm our business, results and financial condition. efficacy and safety profile in preclinical studi tt We expect to face uncertaintytt regardingdd dd FT516, and anyn other product candidates that we maya develop. If pricing commercial success will be impaired. the pricing of our product candidates, m ff includingii policies for our product candidates ProTmune, FATE-NK100, n dd KK are unfavorable, FT500, and our product candidates in particular, we face significant uncertainty as to the pricing of any such products Due to the novel nature of our product candidates, and the targeted indication of HSCT procedures in general and our cellular for which we d immunotherapya apy product candidates that we develop may receive marketing approval. While we anticipate that pricing for any cellular immunotm t her of life-threatening diseases where therapeutic options will be relatively high due to their anticipated use in the prevention or treatment an drugrr are limited, the biopharmaceutical industrytt products. In particular, drug pricing and other healthcare costs continue to be subject to intense political and societal pressures, which we anticipate will continue and escalate on a global basis. These pressures may result in harm to our business and reputation, causea our stock price to decline or experience periods of volatility and adversely affect results of operations and our ability to raise funds. has recently experienced significant pricing pressures, including in the area of orphrr t 45 The insurance coverage and reimbu adequate coverage and reimbu ii rsement for new products couldll rsement status of newly-ll approved productstt ii limi tii our product revenues. ii is uncertain. Failure to obtain or maintainii Our ability to commercialize any of our product candidates successfully will depend in part on the extent to which d m m ent for these products reimbursem and related treatments will be available from government healtht administration authorities, private health insurers, and other organizations. The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford expensive treatments, such as HSCT. There is significant uncertainty related to the insurau nce coverage and reimbursem ent of newly approved producdd ts by government and third-party payers. In particular, there is no body of established practices and precedents for reimbursem authority or private payer will decide with respect to reimbursem ement. If reimburm sement or insurance coverage is m qualifyff not available, or is available only to limited levels, we mayaa not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be sufficient generate income. ent levels for novel products such as ours. Our products may not and it is diffiff cult to predict what the regulatory ment, or may be subject to limited reimbursm ent of cellular immunotherapies, for coverage or direct reimburse to allow us to establish or maintain pricing to m m a a ff In addition, reimbursem m ent agencies in foreign jurisdictions may be more conservative than those in the United States. ff nt to generate commercially reasonable revenues and profits. Moreover, increasing effor Accordingly, in markets outside the United States, the reimbursement for our products may be reduced compam red with the United States and may be insufficie governmental and third-party payers, in the United States and abroad, to capa or reduce healthcare costs may cause such organizatioaa ns to limit both coverage and level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for our product candidates. Failure to obtain or maintain adequate reimbursem marketing approval will adversely affeff ct our abila operating results, our ability to raise capital needed to commercialize products, and our overall financial condition. ity to achieve commercial success, and could have a material adverse effect ent for any products for which we receive on our ts by m ff ff t oppopp rtunitiii es forff If the markerr and our business maya suffer. successfully identifyi u tt patient our product candidatestt are smallerll thantt we believe theye are, our revenues maya be advdd erselyll affecff ted Because the target patient populations of our product candidates are small,ll we must be ablell to a stt and capture i a significan t market share to achieve and maintain ii ff profitab ii ility. We focus our research and development on product candidates for orphan rr diseases. Our projections of botht the numbem r of people who have these diseases, as well as the subseu with our product candidates, are based on estimates. These estimates may prove to be incorrect, and new studies may change the estimated incidence or prevalence of these diseases. The numberm of patients in the United States, Europe and elsewhere may turn out to be lower than expected or may not be otherwise difficult ff because our target patient populations are small, we will be required to capture profitability. to identify or gain access to, all of which would adversely affect our results of operations and our business. Additionally, a significant market share to achieve and maintain t of people with these diseases who have the potential to benefit fromff amenable to treatment with our products, or new patients may become increasingly treataa ment d a t Healthctt are legise lative or regue latorytt reform measures may have a nege ativtt e impact on our business ii and results of operations. In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatoryrr changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval marketing approval. activities, and affect our ability to profitably sell any product candidates for which we obtain a Among policy makers and payors a 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. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly initiatives. In March 2010, the ACA was passed, which subsu tantially changed the way healthcare is finff anced by both the governmr and private insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA, among other things: affected by majora legislative ent m a (cid:120) (cid:120) established an annual, nondeductible fee on any entity that manufactures drugs and biologic agents apportioned among these entities according to their market share in some government healthcare programs; expanded the entities eligible for discounts under the 340B drug pricing program; increased the statutoryrr minimumm rebates a manufacturett average manufacturer price for most branded innovator drugs r must pay under the Medicaid Drugrr Rebate Program, to 23.1% and 13% of the and generic drugs, respectively and capped at 100% of the Average Manufacturet certain specified branded prescription the total rebate amount forff r Price, or AMP; m or imports a a rr tt expanded the eligibility criteria for Medicaid programs by, among othet to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers r things, allowing states to offeff ’ Medicaid rebate liability; tt r Medicaid coverage 46 (cid:120) (cid:120) (cid:120) (cid:120) addressed a new methodology by which rebates owed by manufacturtt ers under the Medicaid Drugrr Rebate Program are calculated for certain drugs and biologics that are inhaled, infused, instilled, implamm nted, or injen cted; introduced a new Medicare Part D coverage gap discount program, in which manufacturers of-sal ff as a condition for the manufacturer’s outpati e discounts offff negotiated prices of applicable brand drugs to be covered under Medicare Part D; must agree to offer 50% point- to eligible beneficiaries during their coverage gapa period, r ent drugs r t tt created a new Patient-Centered Outcomes Research Institute to oversee, identifyff priorities in, and conduct compam rative clinical effectiveness research, along with funding for such research; and established a Center for Medicare and Medicaid Innovation at CMS to test innovative payment and service deliveryrr models to lower Medicare and Medicaid spending, potentially including prescription drug. Since January 2017, the Trumr entation of any provision of the ACA that would imposm e a fiscal or regulatory burden on states, individuals, healthcare pm administration has signed two Executive Orders designed to delaya the implm ementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, implemm providers, health insurers, or manufacturett sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. Further, on June 14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk corridor payments to third-partytt payors who argued were owed to them. The effects reimbursem ent on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known. rs of pharmaceuticals or medical devices. The second Executive Order terminates the cost- from, or delay the grant exemptions of this gap in m m m ff ff In July 2018, the Centers for Medicare and Medicaid Services, or CMS, published a final rule permitting further collections and payments to and from certain Affordable Careaa Act qualifiedff health plans and health insurance issuers under the Affordable Care Act risk adjd ustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjust t d ment. setting benchmarks for insurers in the individual and small group marketplaces, which may have the effeff ct of relaxing the essential health benefitsff In addition, CMS has recently published a final rule that would give states greater flexibility, starting in 2020, in required under the ACA for plans sold through such marketplaces. Since its enactment, some of the provisions of the ACA have yet to be fully implem mented, while certain provisions have been subju ect to judicial, congressional, or executive challenges. As a result, there have been delays in the implementation of, and action taken to repeal or replace, certain aspects of the ACA. The U.S. Supreme Court has upheld certain key aspects of the legislation, including a tax-based shared responsibility payment imposed on certain individuals who fail to maintain qualifying health coverage for all or part of a year or pay a penalty, which is commonly known as the “individual mandate.” However, as a result of tax reform legislation passed in Decembem r 2017, the tax-based shared responsibility payment imposed qualifyiff ng health coverage for all or part of a year or pay a penalty, which is commonly known as the “individual mandate” has been eliminated effective January 1, 2019. On Decemberm 14, 2018, a U.S. District Texas District Court Judge, ruled that the individual mandate is a critical and inseverabla e feature of the Afforda therefore, ff are invalid as well. The Trumpm Administration and CMS have both stated that the ruling will have no immediate effect, and on Decemberm 30, 2018 the Texas District Court Judge issued an order staying the judgment pending appeal. it was repealed as part of the Tax Cuts and Jobs Act of 2017, the remaining provisions of the Affordable Care Act rn District of Texas, or the Court Judge in the Northet on certain individuals who fail to maintain Care Act, and becausea blea m m ff tt On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employm implem mentation of certain Affordablea sponsored insurance plans, the annual fee imposm ed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other Affordablea “donut hole.” Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referr things, amends the ed to as the er- ff t In July 2018, the Centers for Medicare and Medicaid Services, or CMS, published a final rule permitting further collections and payments to and from certain Affordable Careaa Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjd ustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjust t d ment. setting benchmarks for insurers in the individual and small group marketplaces, which may have the effeff ct of relaxing the essential health benefitsff In addition, CMS has recently published a final rule that would give states greater flexibility, starting in 2020, in required under the ACA for plans sold through such marketplaces. Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013, and due to subsequent legislative amendments to the statutt e, including the BBA, will remain in effect through 2027, unless additional reduced Medicare payments to Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, further several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overparr yments to providers from three to five years. These new laws may result in additional reduction other healthcare funding, which could have an adverse effeff ct on customers for our product candidates, if approved, and, accordingly, our financial operations. s in Medicare and d t 47 Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical and biologics pricing t t tt rr m and biologics. Such scrutiny has resulted in several recent congressional ent program reimbursem pmm administration’s budget proposal for fiscal year 2019 contains further futut re legislation, including, for examplmm e, practices in light of the rising cost of prescription drugs inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform governmr ent methodologies for products. At the federal level, the Trumrr drug price control measures that could be enacted during the 2019 budget process or in other measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a “Blueprint”, or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals aimed at improving the availability, competitiveness, and adoption of biosimilars as affordable alternatives to branded biologics. Under the plan, the FDA is directed to issue guidance to address certain practices that aim to delay or block generic compemm tition, while also issuing new policies to bring more biosimilars to market as alternatives to brand-name biologics. More recently, the Trumpmm administration announced a complex proposal to reduce Medicare spending by substantially reducing the price of physician-administered drugs, including biologics such as cellular therapeutics, under Medicare Part B. Under this proposal, pharmacy-benefit managers would have an increased role in managing drugs Medicare for drugs under Part B would be linked to the prices paid for such drugs International Pricing Index, and in most cases these prices are lower than in the U.S. However, if the International Pricing Index model were adopted as proposed, it would not take effecff therefore difficult to predict the impactm physicians for administering drugs physicians are uncertain. The Department of Health and Human Services, or HHS, has already started the process of soliciting feedbacd Septemberm 2018, CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugrr to include in thet these, and other proposed measures will require authorization through additional legislation to become effective, Congress and the Trumr costs. At the state level, legislatures are increasingly passing legislation and impm lementing regulations designed to control pharmaceutical and biological productd ment constraints, discounts, restrictions on certain pricing, including price or patient reimburse product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage impm ortation from other countries and bulk purchasing. s and biological products, for which payment is available through or under Medicare or Medicaid, or biological producd t. Although a number of pm administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drugr and pricing in the Part B program, and the price paid by rr it will have on our business. The proposal also includes a new payment model for reimbursm under Part B, and the consequences of this payment model on the prescribing practices of advertisement the Wholesale Acquisition Cost, or list price, of that drugrr k on some of these measures and, at the same, is immediately implemm enting others under its existing authority. For examplm e, in dand would phase in over five yyears, and it is industrialized countries as reflected in an t until 2020 at the earliest t in other ing m rr rr In addition, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drugrr Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. products that have complm eted a Phase I clinical trial and that are undergoing investigation for FDA approval. We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved drug. Any reduction in reimbursm implemm profitability, or commercialize our drugs. ement from Medicare or other government programs may result in a similar reduction in payments from private payors. The entation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain In addition, FDA regulations and guidance may be revised or reinterpreted by the FDA in ways that may significantly affect our ff significan t burdens on, or otherwise materially delay, the FDA’s ability to engage in routine business and our products. The Trumpm administration has also taken several executive actions, including the issuance of a numbem r of Executive Orders, that could imposem oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing ult to predict how these requirements will be interpreted and implm emented and the extent to which they will applications. It is difficff restrictions on the FDA’s ability to impacm t the FDA’s ability to exercise its regulatoryrr authot engage in oversight and implm ementation activities in the normal course, our business may be negatively impacm ted. Any new for compounding under Sections regulations or guidance, including implm ementation of or new guidance regarding the frameworksr 503A and 503B of the FDCA, or revisions or reinterpretations of existing regulations or guidance, may imposem additional costs or lengthen FDA review times for ProTmunem , FATE NK-100 or any future product candidates. We cannot determine how changes in our business in the future. Such regulations, statutes, policies, or interpretations when and if issued, enacted or adopted, may affect changes could, among other things, require: rity. If these executive actions imposem ff (cid:120) (cid:120) additional clinical trials to be conducted prior to obtaining approval; changes to manufactur ff ing methods; 48 (cid:120) (cid:120) recalls, replacements, or discontinuance of one or more of our products; and additional recordkeeping. Such changes would likely require substantial time and impose significant costs, or could reduce the potential commercial value FATE NK-100 or other productd of ProTmune,m addition, delays in receipt of or failure to receive regulatory clearances or approvals for any othet financial condition, and results of operations. candidates, and could materially harm our business and our financial results. In r products would harm our business, Risks Related to Our Business and Industry The successee o developme of our product candidadd nts within the fieldll of HSCT and cellular tes,s includingn ProTmuTT ll TT ne, FATE-NK apy, some of which are beyoe nd our contrott 10KK 0, FT500, and FT516, is substantially depenee l. TT immunother tt dent on Our product candidates, including ProTmune, FATE-NK100, FT500, and FT516, are designed and are being developed as therapea utic entities for use as cellular immunotherapies. and in the practice of HSCT in particular, will negatively affeff ct our ability to develop and commercialize our product candidates. If the market for HSCT procedures declines or fails to grow at anticipated levels for any reason, or if the need for patients to undergo HSCT procedurd es is obviated due to the development and commercialization of therapea utics targeting the underlying cause of diseases addressed by HSCT, our business prospects will be significantly harmed. Any adverse developments in the field of cellular immunotherapy generally, a tt We face competition from other competett effectivel y.ll tt tt ll biotechnol ogy ii rr and pharmaceutic al companies, and our operating resultsll will suffer if we fail to The biotechnology and pharmaceutical industries are intensely compemm titive and subjec nt technological change. We face compem tition from biotechnology and pharmaceutical compam nies, universities, and other research institutions, and many of our compem titors have greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing organizations and facilities. In particular, there are several compam nies and institutt developing products that may obviate the need for HSCT, may be compem titive to product candidates in our research and development pipeline, or may render our product candidates obsolete or noncompetitiv m market for our products may be reduced or eliminated, and we may not achieve commercial success. e. Should one or more of these products be successful, the t to rapid and significaff ions u t We maya not be ablell to manage our business ii effectively if we are unable to attract and retaitt nii key personnel and consultants. ll We may not be able to retain or attract qualified management, finance, scientific and clinical personnel and consultants due to businesses. If we are the intense competition for qualified personnel and consultants among biotechnology, pharmaceutical and other not able to retain and attract necessary personnel and consultants to perform the requisite operational roles and accomplm ish ouruu business objectives, we may experience constraints that will significantly abia lity to raise additional capital and our ability to implemm ment our business strategy. the achievement of our development objectives, our impedem ff t If we fail to maintaintt system of disclosure accurate financial statements or comply withtt applicable regulations could be impaired. an effectivett and procedures and internal control tt controls ll tt s,ll our abilityll to produce As a publu ic compam ny, we are required to comply with the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act), and the related rules and regulations of the SEC, expanded disclosure requirements, accelerated reporting requirements and more complmm ex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establa ishing and maintaining corporr tt controls over financial reporting and disclosure controls and procedures. Effective financial reports and are importm t l control are necessary for us to produce reliablea rate oversight and adequate internarr ant to help prevent financial fraud. ff internal We cannot assure that we will not have materaa control over financial reportirr ng. If we are unable to successfully remediateaa anynn material weakness or significantnn deficiency in our internal control over financial reporting, or identifnn yff anynn materaa advdd ersely affected, we mayaa be unable to maintann in compliance with securities lawaa addition to applicable stock exchange esses or significant deficiencies that may exist, the accuracy and timing of our financaa ial reportinrr g mayaa be listing requirements, and our stock price mayaa decline materaa requirements regarding timely filing of periodic reportsrr ial weaknesses or significan t deficiencies in our internal ially as a result. ial weaknaa in nn aa ff 49 We are party to a loan and securityii agreement that containsii financing activities. tt operatingn and financial covenants that may restrict our business and In July 2014, we entered into an amended and restated loan and security agreement with Silicon Valley Bank (SVB) pursuant to which we were extended term loans in the aggregate principal amount of $20.0 million. In July 2017, we entered into an amendment to the loan and security agreement, pursuant to which SVB extended an additional term loan to us in the aggregate principal amount of $15.0 million, a portion of which was applied to repay in full our previously outstanding debt to SVB under the agreement. Borrowings under the loan and security agreement, as amended, are secured by substantially all of our assets, excluding certain intellectual property rights. The loan and security agreement restricts our ability, among other things, to: t (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) sell, transfer or otherwise dispose of any of our business or property, subject to limited exceptions; make material changes to our business or management; enter into transactions resulting in significant changes to the voting control of our stock; make certain changes to our organizational structure; tt consolidate or merge with other entities or acquire other entities; incur additional indebtedness or create encumbrm ances on our assets; pay dividends, other than dividends paid solely in shares of our common stock, or make distributions on and, in certain cases, repurchase our stock; enter into transactions with our affiliff ates; repay suboru dinated indebtedness; or make certain investments. In addition, we are required under our loan agreement to maintain our deposit and securiuu ties accountsnn withtt SVB andaa to comply withii variaa ous operating covenants and default clausaa es that mayaa restrict or fully pursuu ue our business strategies. A breach of anynn of these covenants or clausaa es could result in a defaultaa agreement,nn which could cause all of the outstuu anding indebtedness under the facility to become immediately due and payaaa bla e. to financaa e our operations, engage in business activtt ouruu abilitytt tt under the loan and securitytt ities or expand If we are unable to generate sufficien ff t cash to repay our debt obligations when they become due and payable, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively affect our business operations and financial condition. If we engage in an acquisitioii n, reorganizati our business operations or our stockholders. ii onii ii or business combination, we willii incur a varietytt of risks that couldll adversely affect ff From time to time, we have considered, and we will consider in the futurtt e, strategic business initiatives intended to further the expansion and development of our business. These initiatives may include acquiring businesses, technologies or products or entering into business combinations with other companies. If we pursue such a strategy, we could, among other things: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) issue equity securities that would dilute our current stockholders’ percentage ownership; incur substantial debt that may place strains on our operations; spend substantial operational, financial and management resources to integrate new businesses, technologies and products; assume substantial actual or contingent liabilities; reprioritize our development programs and even cease development and commercialization of our product candidates; or merge with, or otherwise enter into a business combination with, another company in which our stockholders would receive cash or shares of the other company on terms that certain of our stockholders may not deem desirable. Although we intend to evaluate and consider acquisitions, reorganiaa zations and business combinations in the futurett , we have no agreements or understandings with respect to any acquisition, reorganization or business combim nation at this time. 50 We face potential tt product liability exposure ee far in excess of our limited insurance coverage. The use of our productd candidates in clinical trials, and the sale of any products for which we obtain marketing approval, liability claims. Product liability exposes us to the risk of productd hospitals, medical centers, healthcare providers, pharmaceutical compamm nies, and consumers, or by others selling, manufacturing or otherwise coming into contact with our productd candidates. We carryrr product liability insurance and we believe our product liability insurance coverage is sufficient in light of our currr ent clinical programs. In addition, if and when we obtain marketing approval for product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unablea us against losses due to liability. to obtain insurance coverage for any approved products on commercially reasonable terms or in sufficien claims might be brought against us by participants in clinical trials, t amounts to protect a ff On occasion, large judgments have been awarded in class action lawsuits based on drugs or medical treatments that had . In addition, under some of our agreements with clinical trial sites, we are required to indemnifyff unanticipated adverse effects and their personnel against productd against us or any third parties whom we are required to indemnify could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect r claims. A successful product liability claim, or a series of claims, brought our results of operations and business. liability and othet the sites ff ff rr adverse events, including death,t Patients with the diseases targeted by ouruu product candidates are often already in severe and advanced stages of disease and have nt, patients botht known and unknown significant pre-existing and potentially life-threatening healtht may sufferff for a variety of reasons. Such events, whether ntial amounts of money to injured patients, delay, negatively u candidates, could subject us to costly litigation, require us to pay substa affect or end our opportunity to receive or maintain regulatory approval to market our products, or require us to suspend or abandon our commercialization effor investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt commercialization efforts, delay our regulatory approval process, or impacm t and limit the type of regulatory approvals our producd t candidates receive or maintain. As a result of these factors, a productd material adverse effect on our business, financial condition or results of operations. ts. Even in a circumstance in which we do not believe that an adverse event is related to our products, the our development and risks. During the course of treatmet or not resulting from our product liability claim, even if successfully defended, could have a ff rr t We use hazardous tt storage dd or dispii osal of these materialsll could be time consuming and costly.ll chemicals,s biologic ll al materials and infectious agentstt in our busines ii s. Any claill msii ,gg relating to improper handlidd ngii Our research and development and manufacturtt ing operations involve the controll t ed use of hazardous materials including chemicals, biological materials and infectious disease agents. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Our emplm oyees requirements and insider ii ll trading. may engage in miscii onduct or other improper activities,s includingn noncompliance withtt e regula tory stantt dards and t misconducd t. Misconduct by employe We are exposed to the risk of emplomm yee fraud or other es could include intentional failures to complm y with the regulations of the FDA or foreign regulators, to provide accurate information to the FDA or foreign regulators, to complm y with healthcare frauda and abuse laws and regulations in the United States and abroad, to report financial information or data accurately or to disclose unauta horized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subju ect to extensive laws and regulations intended to prevent fraud, practices. Employee of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. If any actions alleging such conduct are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant effecff abusive er use of information obtained in the course and independent contractor misconduct could also involve the impropm a misconduct, kickbacks, self-dff ealing and other t on our business, including the impositio n of significant fines or other sanctions. mm m m tt t Our business activitiii es maya be subject, payment transpar perceived failure to comply withii b encyc laws, healthtt s directly or indireci tly,ll to federal and statett healthcll are frauff d and abuse laws, physicianii inforn marr tion privacy and security laws, and anti-bribery ii and anti-corruptionii laws. Our actual or such laws or their relevant foreigni counterparts could adversely affect our business. Our business activities may be subject to the Foreign Corrupt Practices Act, or FCPA, various federal and state fraud and abuse laws, including, without limitation, physician sunshine laws and regulations, and similar anti-bribery or anti-corruption regulations or rules of other countries in which we operate. The FCPA generally prohibits improper either directly or indirectly, to foreign governmr officff rr t wise ial action, or other sometimes referred to as the “Physician Payments obtain or retain business. Additionally, the U.S. federal physician payment transparency requirements, enting ents and their officials and political parties by U.S. persons in order to influeff Sunshine Act,” created under the Afforff dable Care Act, and their implemm payments or offers of paymentsnn , laws, nce m u a 51 t rr turers of drugs nt interests held by physicians, other , devices, biologics and medical supplies for which payment is available under Medicare, transfers of value made to physicians, other healthcare providers, and teaching hospitals, as are providers, and their immediate family members. The Insurance Portability and Accountability Act of 1996, or HIPAA, imposm es criminal and civil liability for knowingly and ng any healthcare benefit program or knowingly and willfully falsifying, concealing or covering up by any trick or regulations, require manufacff Medicaid or the Children’s Health Insurance Program to report annually to the Centers for Medicare and Medicaid Services, information related to payments or other well as ownership and investmet federal Healtht a willfully defraudi device a material fact or making any materially false statements in connection with the delivery of, or payma benefits, items or services. HIPAA also imposes requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perforff m services for them that involve the use, or disclosure of,ff individually identifiable information without appropriate authorization. Because of the breadth of these laws and the limited statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. There is no certainty that all of our emplm oyees, agents, suppliers, manufacturers, contractors, or collaborators, or those of our affilff will comply with all applicable laws and regulations, particularly given the high level of complm exity of these laws. health information, relating to the privacy, security and transmission of individually ent for, healthcare identifiable health healthct iates, d ff t In addition, as of May 25, 2018, the General Data Protection Regulation, or GDPR, regulates the collection and use of personal data in the EU. The GDPR covers any business, regardless of its location, that provides goods or services to residents in the EU and, thus, could incorporate our activities in EU membem r states. The GDPR imposes strict requirements on controllers and processors of personal data, including special protections for “sensitive information,” which includes health and genetic information of individuals residing in the EU. GDPR grants individuals the opportunity to objeb ct to the processing of their personal information, allows them to request deletion of personal information in certain circumstances, and provides the individual with an express right to seek legal remedies in the event the individual believes his or her rights haveaa been violated. Further, the GDPR imposm es strict rules on the transfer of personal data out of the EU to regions that have not been deemed to offer “adequate” privacy protections, such as the U.S. currently. Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU member states, which may deviate slightly from the GDPR, may result in warninr g letters, mandatory audits and finff ancial penalties, including fines of up to 4% of global revenues, or €20,000,000, whichever is greater. As a result of the implem mentation of the GDPR, we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules. tt There is significant uncertainty related to the manner in which data protection authorities will seek to enforce complm iance withtt GDPR. For example, it is unclear whether the authorities will conductd solely after complm aints are filed claiming a violation of the GDPR. The lack of complm iance standards and precedent, enforcement uncertainty and the costs associated with ensuring GDPR compliance may be onerous and adversely affect our business, financial condition, results of operations and prospects. random audits of compamm nies doing business in the EU, or act Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our emplomm yees, the closing down of facilities, including those of our suppliers and manufacff business activities in sanctioned countries, implem mentation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our produd cts in one or more countries manufact ng or continuing to develop our products, and could materially damage our reputation, our brand, our internar tt uri expansion efforts, our ability to attract and retain emplom yees, and our business, prospects, operating results, and financial condition. turers, requirements to obtain export licenses, cessation of as well as difficulties in tional ff tt Risks Related to Our Financial Condition and the Ownership of Our Common Stock We have a limii incur significant losses for the foreseeable future. history, have incurred signi ited operatingii ificaii nt losses since our inception, tt tt and anticipa te that we will continue ii to We are a clinical-stage biopharmaceutical compam ny formed in 2007 with a limited operating history. We have not yet obtained regulatory approval for any of our product candidates or generated any revenues from therapeua tic producd t sales. Since inception, we have incurred significant net losses in each year and, as of Decemberm 31, 2018, we had an accumulm ated deficit of $285.4 million. We expect to continue to incur losses for the foreseeable futurett product candidates, including for ProTmunmm e, FATE-NK100, FT500 and FT516, and our other development activities. We also expect to incur significant operating development of,ff and seek regulatory approval for, our product candidates, in-license or acquire new producd t candidates for development, implem ment additional infrastructur e e and internal systems, and hire additional scientific, clinical, and administrativaa personnel. We anticipate that our net losses for the next several years could be significant as we conduct our planned operations. as we continue to fund our ongoing and planned clinical trials of our ongoing and planned research and and capital expenditures as we continue our research and aa t t 52 Because of the numerous risks and uncertainties associated with pharmaceutical, biological, and cell therapya product ility. In addition, our expenses could increase if we are required by the FDA, or compam rablea to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve development, we are unablea profitabff foreign regulatory authorities, to perform studies or trials in addition to those currently expected, or if there are any delays in complm eting our clinical trials, preclinical studies, process development, manufacturing activities, or the research and development of any of our product candidates. The amount of our future net losses will depend, in part, on the rate of increase in our expenses, our ability to generate revenues and ouruu ability to raise additional capital. These net losses have had, and will continuenn working capital. to have, an adverse effect on our stockholders’ equity and Our stock price is subject to fluctuation based on a variety of factors. ff The market price of shares of our common stock could be subject to wide fluctuations as a result of many risks listed in this section, and othet r risks beyond our control, including: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the timing of the initiation of, and progress in, our current and planned clinical trials; the results of our clinical trials and preclinical studt product candidates or indications similar to ours; ies, and the results of clinical trials and preclinical studi tt es by others for developments related to the FDA or to regulations applicable to cellular immunotherapies generally or our productd candidates in particular including, but not limited to, regulatory pathways and clinical trial requirements for approvals; announcements by us or our competitors of significant acquisitions, strategic partnershi a capital commitments; tt ps, joint ventures, tt collaborations or developments related to proprietary rights including patents, litigation matters and our ability to obtain patent protection for our technologies; additions or departures tt of key management or scientific personnel; or anticipated changes in our research and development activities and our business prospects, including in relation t actual to our compem titors; developments of technological innovations or new therapeutic products by us or other t s in the field of immunotherapy; announcements or expectations of additional equity or debt financing effor ff ts; sales of our common stock by us, including pursuant to the terms of our stock purchase agreement with Juno Therapea utics, Inc., or by our insiders or our other stockholders; share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; comments by securities analysts; fluctuations in our operating results; and general economic and market conditions. These and other market and industryt factors may cause the market price and demand for our common stock to fluctuatt te substantially regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and The NASDAQ Global Market and biotechnology compam nies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these compamm nies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the compam ny that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit and this could divert the time and attention of our management. Our principal ii stockholders ll ii exercise signifi cant i control over our company. As of March 2, 2019, our executive officers, directors and entities affiliated with our five percent stockholders beneficially own, in the aggregate, shares representing approximately 46.6% of our outstanding voting stock. If, in accordance with the CoD (as such term is defined in Note 7 of the Notes to the Consolidated Financial Statements herewith) relating to the Class A Convertible Preferff Stock, Redmile (as such term is defined in Note 7 of the Notes to the Consolidated Financial Statements herewith) elects to remove certain limitations on the percentage of the Company’s outstanding common stock that it may own such that the 2,819,549 shares of Class A Convertible Preferred Stock currently held by Redmile become fully convertible at Redmile’s option into 14,097,745 shares red 53 of common stock, the beneficial ownership of our executive officers, directors and entities affiliated with our five percent stockholders would increase to 55.9%. Although we are not aware of any voting arrangements in place among these stockholders, if these stockholders were to choose to act togethet affair s and control all matters submitted to our stockholders for approval, including the election of directors and approval of any ff merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may have the effeff ct of delaying or preventing a change in contrott market price of our common stock. l of our company or affecting the liquidity and volatility of our common stock, and might affect the r, as a result of their stock ownership, they would be able to influence our management and We may sellll additional equitytt or debt securitiii es or enter into other ii diluti on to our stockholdell rs and impose restree ictions or lill mi taii ii tt tions on our business. arrangements to fund our operations, which may result in We expect that significant additional capital will be needed in the futut re to continue our planned operations, and we may seek rr ff ive by the SEC in Septemberm 2016. We also registered all of by the SEC in January 2017. As a result, all of these shares are red Stock issued by us in our November 2016 private placement candidates, issue additional equity or debt securities, or otherwis we registered all of the 5,250,000 shares of common stock issued by us in our August 2016 privateaa additional funding through a combim nation of equity offerings, debt financings, state or government grants, strategic alliances, licensing and collaboration arrangements, or other third-party business arrangements. These financing activities may have an adverse effect on our stockholders’ rights, the market price of our common stock and on our operations and may require us to relinquish rights to some of our technologies, intellectual property or productd e agree to terms unfavorable to us. For example,m placement transaction for resale on a Form S-3, which was declared effect the 6,766,915 shares of common stock issued by us and all 14,097,745 shares of common stock issuable upon the conversion of an aggregate of 2,819,549 shares of Class A Convertible Preferff transaction for resale on a Form S-3, which was declared effective ff currer ntly availablea for resale to the public, which may result in dilution to our stockholders. In addition, pursuant to a shelf registration statement declared effective by the SEC in May 2018, we may sell up to $6.2 million in the aggregate of shares of our common stock, ng, and pursuant to a shelf preferred stock, debt securities, warrants and/or units after giving effecff registration statement declared effective by the SEC in August 2017, we may sell up to a remaining $54.0 million in the aggregate of shares of our common stock, preferred stock, debt securities, warrants and/dd or units. The August 2017 registration statement also provides for the resale by Juno of up to one million shares of common stock held by Juno pursuant to the Stock Purchase Agreement entered into in May 2015. Further, in Novembem r 2018 we filed a Form S-3 pursuant to which we may issue up to $50.0 million in common stock in sales deemed to be an “at the market offering” as defined by the Securities Act of 1933, as amended (the Securities Act) and, so long as we qualifyff as a “well-known seasoned issuer” as defined in Rule 405 of the Securities Act, an unlimited amountm of shares of our common stock, preferr ed stock, debt securities, warrants and/odd r units. Any sale or issuance of securities pursuant to a registration statement or otherwise may result in dilution to our stockholders and may cause the market price of our stock to decline, and new investors could gain rights superior to our existing stockholders. In addition, we are party to an amended and restated loan and security agreement, as amended, with SVB, which imposes restrictive covenants on our operations. Any future debt finff ancings may imposem rwise adversely affecff additional restrictive covenants or othet additional equity financings will be dilutive to our stockholders. Furthermt availablea t the holdings or the rights of our stockholders, and any ore, additional equity or debt financing might not be t to our Septemberm 2018 public offeri to us on reasonable terms, if at all. mm ff ff We have broad discretion over the use of our cash and cash equivalents and may not use them effecti ff vely. Our management has broad discretion to use our cash, cash equivalents and any additional funds that we may raise to fund our operations and could spend these funds in ways that do not improve stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect We may invest our cash and cash equivalent on our business, cause the price of our common stock to decline or delay the development of our product candidates. s in a manner that does not produce income or that loses value. our results of operations or enhance the value of our common m q ff Provisioii more diffi ns of Delaware law or our chartertt icff ultll for you to change manageme documents could delayll nt. a or prevent an acquisiii tioii n of our company,n and could make itii Provisions of Delaware law, our amended and restated certificff ate of incorporation, r and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in contrott transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include: l that stockholders may consider favorabla e, including (cid:120) (cid:120) a classified board of directors with limitations on the removal of directors; advance notice requirements for stockholder proposals and nominations; 54 (cid:120) (cid:120) (cid:120) the inability of stockholders to act by written consent or to call special meetings; the ability of our board of directors to make, alter or repeal our amended and restated bylaws; and the authot rity of our board of directors to issue preferred ff stock with such terms as our board of directors may determine. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. r, even if the acquisition proposal or tender offer These provisions might also discourage a potential acquisition proposal or tender offeff is at a premium over the then-current market price for our common stock. Comprehensive tax reforff mrr legll islation could adversely rr affect our business and financial condition. On Decemberm 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the Tax Act), that includes significant changes to the taxation of business entities. These changes include, among others, a permanent reduction to the corporate income tax rate, limiting interest deductions, limiting the deduction for net operating losses and eliminating net operating loss carrybacy ks (thot ugh any such tax losses may be carried forward indefinitely), in each case, for losses arising in our taxable years beginning after Decemberm 31, 2017, allowing for the expensing of capital credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs diseases or conditions generally referred to as “orphan drugs”). We continue to examine the impactm have on our business. However, the effect of the Tax Act on our business, whether adverse or faff vorablea become evident for some period of time. We urge you to consult with your own legal and tax advisors with respect to applicable tax laws, including this legislation, and the potential tax consequences of investing in our common stock. expenditures and modifying or repealing many business deductions and this tax reform legislation may , is uncertain, and may not for rare a rr Our ability to use our net operating loss carryfoyy rwardsdd and certain other liabilitii ytt may increase. tt tax benefitii stt maya be limited and, as a resultll ,tt our future taxaa of $136.8 million and $137.5 million, research As of Decemberm 31, 2018, we had federal and California net operating loss carryforwards ff ff ff rr future taxablea rds of $8.2 million and $5.4 million, respectively. The federal research and development tax ration’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purpos respectiv yely, which beggin to expire in various amounts in 2027. As of Decembem r 31, 2018, we also had federal and Califorff niarr and development tax credit carryforff warr credit carryforwards will begin to expire in 2035 unless previously utilized, while the California carryforwar indefinitelyy. These net operati gng loss and tax credit carryyfrr orff war ds could expire unused and be unavailable to offset future income tax liabilities. In addition, in general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses or tax credits, or income or taxes. Generally, a change of more than 50 percentage points in the ownership of a NOLs or credits, to offset corporr es. We have determined that we triggered an ownership change limitation in November 2009 and again in May 2015. We have determined that we do not believe there were any ownership changes from May 2015 through Decemberm 2018. We have not analyzed periods subsequent to Decemberm 2018. We may experience additional ownership changes as a result of shifts in our stock ownership in the futurt e. Limits on our ability to use our pre-change NOLs or credits to offset U.S. federal taxable income could potentially result in increased future tax liability to us if we earn net taxable income in the futurtt e. In addition, under the Tax Act the amount of NOLs generated in taxabla e periods beginning afteff income in such year, where taxable income is determined without regard to the NOL deduction itself.ff The Tax Act generally eliminates the ability to carryrr back any NOL to prior taxable years, while allowing post-2017 unused NOLs to be carried indefini ytely. r December 31, 2017, that we are permitted to deduct in any taxable year is limited to 80% of our taxablea ds will carry forward forwarr rd rr r rr ITEM 1B. Unresolved Staff Comments None. ITEM 2. Properties Facilities As of Decemberm 31, 2018, we occupieu d approximately 48,000 squaq re feet of office and laborato a ry space in San Diego, under a non-cancelablea Californiar 24,000 square q lease. We believe that our facilities are adequate for our current needs. operating lease through Decemberm 2028. During January 2019, we began to occupy an additional feet of office and laboratoryr space in the same building as our existing space under the same non-cancelable operating 55 ITEM 3. Legal Proceedings We are not a party to any material legal proceedings at this time. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonablya t on our business. Regardless of the t on us because of defense and settlement costs, diversion of management resources and outcome, litigation can have an adverse effecff other factors. expected to have a material adverse effecff ITEM 4. Mine Safety Disclosures Not applicable. 56 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our ticker symbolm is “FATE”, as traded and reported by The NASDAQ Global Market. Holders of Common Stock As of March 1, 2019, there were approximately 41 stockholders of record of our common stock. The approximate numberm of holders is based upon the actual numbem r of holders registered in our records at such date and excludes holders in “street name” or persons, partnerships, associations, corporations, or other positions listings maintained by depository trust companies. entities identified in securityu t Performance Graph Set forth below is a graph compamm ring the cumulative total return on an indexed basis of a $100 investment in the Company’s common stock, the NASDAQ Compom site® (US) Index and the NASDAQ Biotechnology Index commencing on October 1, 2013 (the date our common stock began trading on the NASDAQ Global Market) and continuing through Decemberm 31, 2018. The past performff ance of our common stock is no indication of future performance. 300 250 200 150 100 50 0 s r a l l o D Fate NASDAQ Composite Index NASDAQ Biotechnology Assumes $100 invested on Oct .1, 2013; Assumes dividend reinvested; Fiscal year ending Dec 31, 2018 57 Dividends We have never declared or paid any dividends on our capita a l or common stock. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors. Securities Authorized forff Issuance under Equity Compensation Plans Information about our equity compemm nsation plans is incorporr rated herein by reference to Item 12 of Part III of this Annual Report. Recent Sales of Unregistered Securities During the year ended December 31, 2018, we did not issue or sell any unregistered securities not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K. Issuer Purchases of Equity Securities We did not repurchase any securities during the year ended Decemberm 31, 2018. ITEM 6. Selected Financial Data The following selected data should be read in conjunction with our financial statementstt located elsewhere in this Annual Report on Form 10-K and “Ite“ m 7. Manage MM ment’s Discussion and Analysisii of Financial Condition and Resultstt of Operations”. Consolidated Statements of Operations Data (in thousands, except share and per share data): 2018 Years Ended and as of December 31, 2016 2015 2017 2014 Revenue: Collaboration revenue Operating expenses: Research and development General and administrative income (expense), net Total operatingg expenses Loss from operations Total other t Net loss Other comprehensive income (loss) Comprm ehensive loss Net loss per common share, basic and diluted Weighted-average common shares used to compute basic and diluted net loss per share a Consolidated Balance Sheet Data (in thousands): Cash and cash equivalents Short-term investments and related maturity receivables Working capital Total assets Long-term debt, current portion Long-term debt, net of current portion Deferred revenue, current portion Deferred revenue, non-current portion Convertible preferred stock Accumulated defici t yytt Total stockholders’ equitq ff $ 4,740 $ 4,106 $ 4,402 $ 2,431 $ —— 56,024 15,808 71,832 (67,092) 494 (66,598) 1 34,358 11,873 46,231 (42,125) (827) (42,952) (2) 26,452 9,913 36,365 (31,963) (1,499) (33,462) (1) (66,597) $ (1.19) $ (42,954) $ (1.02) $ (33,463) $ (1.05) $ 19,861 10,352 30,213 (27,782) (2,210) (29,992) —— (29,992) $ (1.18) $ 16,435 8,469 24,904 (24,904) (979) (25,883) —— (25,883) (1.27) 56,195,650 41,982,167 31,754,140 25,484,262 20,451,840 190,514 $ 10,493 177,933 213,032 2,438 12,446 7,588 7,500 36,289 (285,396) 160,469 $ 88,952 $ 11,997 91,547 105,292 —— 14,808 2,105 724 36,289 (218,798) 88,609 $ 3,503 78,136 95,048 8,187 2,501 2,105 2,829 36,289 (175,846) 64,809 $ —— 52,211 67,958 7,550 10,688 2,401 4,934 —— (142,384) 77,189 $ 73,154 $ 38,038 $ 49,101 —— 45,291 51,183 1,535 18,073 —— —— —— (112,392) 28,340 $ $ $ $ 58 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discuii ssion and analysis ll of our financial condition and results of operations together with our consolidated financial statements and relatll ed notes included under Item 8 of this Annual Report on Formrr 10-K. The following discussion contains ii those expresseee “Item“ tt l d or implied in any forward-l ooking statementstt as a result of various factors, including those set forth under the caption and uncertainties. Our actual resultstt couldll differ materially from ng statements that involve risks 1A. Risk Factors.” forward-looki rr Overview We are a clinical-stage biopharmaceutical compam ny dedicated to the development of programmed cellular immunotherapies for cancer and immune disorders. We are developing first-in-class cell therapy product candidates based on a simplm e notion: we believe that better cell therapies start with better cells. To create better cell therapies, we use a therapeua tic approach that we generally refer to as cell programming. For certain of our product candidates, we use pharmacologic modulators, such as small molecules, to enhance the biological properties and therapeuticuu function of healthy donor cells ex vivo before our product candidates are administered to a patient. In other cases, we use humanm iPSCs to generate a clonal master iPSC line having preferred biological properties, and direct the fate of the clonal master iPSC line to urett create our cell therapya biopharmaceutical drug products such as source for manufacturing cell therapy products monoclonal antibodies, we believe clonal master iPSC lines can be used as a renewablea which are well-defined and can be delivered off-the-shel immunm e system, including naturat immunotherapia es in the therapea utic areas of immuno-oncology and immuno-regulation. f to treat many patients. Utilizing these therapeutic approaches, we program cells of the blood and l killer (NK) cells, T cells and CD34+ cells, and are advancing a pipeline of programmed cellular tion, can be repeatedly mass produced at significant scale in a cost-effective manner, product candidate. Analogous to master cell lines used to manufact and uniform in composimm a ff t We have entered into a research collaboration and license agreement with the Regents of the University of Minnesota to develop shelf NK cell cancer immunotherapies derived from clonal master iPSC lines. Additionally, we have entered into a research e- off-tff he- t collaboration and license agreement with Memorial Sloan Kettering Cancer Center (Memorial Sloan Kettering) to develop offff -thff shelf, engineered T-cell cancer immunotherapies derived from clonal master iPSC lines. We have entered into a collaboration and option agreement with Ono Pharmaceutical Co. Ltd. for the joint development and commercialization of two off-the-shelf iPSC-derived CAR T-cell productd candidates. We were incorporated r in Delaware in 2007, and are headquartered in San Diego, CA. Since our inception in 2007, we have u ntially all of our resources to our cell programming approach and the research and development of our product devoted substa candidates, the creation, licensing and protection of related intellectual property, and the provision of general and administrative support for these activities. To date, we have funded our operations primarily through the public and private sale of common stock, the private placement of preferred stock and convertible notes, commercial bank debt and revenues from collaboration activities and grants. We have never been profitaff ble and have incurred net losses in each year since inception. Substana tially all of our net losses resulted from costs incurred in connection with our research and development programs and frff om general and administrative costs associated with our operations. We expect to continue to incur operating losses for at least the foreseeablea future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses will increase substantially in connection with our ongoing and planned activities as we: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) conduct our clinical trial of ProTmunem under our own Investigational New Drugrr application; conduct our clinical trials of FATE-NK100, including under investigator-sponsored clinical trial agreements with the University of Minnesota and under our own IND application; conduct our clinical trials of FT500 and FT516 under our own IND applications; conduct GMP manufacture, candidates, including those undergoing clinical investigation and IND-enabling preclinical development; process development and technology transfer activities for the production of our product tt source clinical supplies and materials used to manufacture our producd t candidates; conduct preclinical research, process development, manufacturing and development activities to support the clinical translation of our first-in-class product candidates derived from master iPSC lines; conduct clinical trials of our product candidates; build-out our own GMP manufacturing capabilities; 59 (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) continue our research and development activities, including under our collaboration agreement with Ono; maintain, prosecute, protect, expand and enforce our intellectual property portfolio; engage with regulatory authorities for the development of, and seek regulatory approvals for, our product candidates; hire additional clinical, manufacturing, candidates; t regulatory, quality control tt and technical personnel to advance our product hire additional scientific personnel to advance our research and development efforts; ff and hire general and administrative personnel to continue operating as a public compam ny and support our operations. We do not expect to generate any revenues from sales of any therapea utic productd s unless and until we successfull ff y complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years.aa If we obtain regulatory approval for any of our product candidates, we expect to incur significaff nt commercialization expenses related ng and distribution. Accordingly, we will seek to fund our operations through public or to productd r private equity or debt financings or other sources. However, we may be unable to raise additional funds or enter into such othet arrangements when needed on favorablea would have a negative effect on our financial condition and ability to develop our productd terms or at all. Our failure to raise capital or enter into such other sales, marketing, manufacturi arrangements when needed candidates. tt t Financial Operations Overview We conduct substantially all of our activities through Fate Therapeutics, Inc., a Delaware corporation, at our facilities in Sana Diego, California. Fate Therapeutics, Inc. owns 100% of the voting shares of Fate Therapea utics Ltd. (Fate Ltd.), incorporated in the United Kingdom, whose operations have not been material to date. Effective May 2018, Fate Therapeutics, Inc. owns 100% of the voting shares of Tfinity Therapea utics, Inc. (Tfinity) and previously owned the majora ity of the voting shares of Tfinity and controlled Tfinity for consolidation purposes. To date, Tfinity has not had any material operations. The following information is presented on a consolidated basis to include the accounts of Fate Therapeutics, Inc., Tfinity, and Fate Ltd. All intercompany transactions and balances are eliminated in consolidation. In Februarr ry 2019, Fate Therapeutics B.V. (Fate B.V.), a wholly owned subsidiary of Fate Therapeutics, Inc. was incorporated in the Nethet rlands. The operations have Fate B.V. have not been material to date. Collaborationtt Revenue To date, we have not generated any revenues from therapeutic product sales. Our revenues have been derived from collaboration agreements and government grants. Agreegg ment with Ono Pharmac rr eutical Co., Ltd.tt On Septembem r 14, 2018, we entered into a Collaboration and Option Agreement (the Ono Agreement) with Ono Pharmaceutical Co. Ltd. (Ono) for the joint development and commercialization of two off-tff he-shelf, iPSC-derived CAR T-cell productd Pursuant to the terms of the Ono Agreement, we received an upfront, Additionally, we are entitled to receive fees for the conduct of research and preclinical development under a joint development plan, which fees are estimated to be $20.0 million in aggregate (of which $5.0 million was received in October 2018). candidates. and non-creditable payment of $10.0 million. non-refundablea u We concluded that Ono represented a customer and in accordance with Accounting Standards Codificff ation (ASC) 606, Revenue from Contracts with Customersrr , we determined that the initial transaction price under the Ono Agreement equals $30.0 million, consisting of the upfront, non-refundable and non-creditable payment of $10.0 million and the aggregate estimated research and obligations under the Ono Agreement, including ouruu development fees of $20.0 million. In addition, we identified our performance grant of a license to Ono to certain of our intellectual property subject to certai rr n conditions, our conduct of research services, and our participation in a joint steering committee. We determined that all performance obligations should be accounted for as one combined performance obligation since no individual performance obligation is distinct, and that the combim ned performff transferred over the expected term of the conduct of the research services, which is estimated to be four years. ance obligation is r During the year ended December 31, 2018, we recognized $0.6 million of collaboration revenue under the Ono Agreement. As of Decemberm 31, 2018, aggregate deferrer d revenue related to the Ono Agreement was $14.4 million. 60 Agreement withtt Juno Therapeua tics, Inc. On May 4, 2015, we entered into a strategic research collabora tion and license agreement (the Juno Agreement) with Juno a Therapeutics, Inc. (Juno) to screen for and identify small molecule modulators that enhance the therapea utic properties of Juno’s genetically-engineered T-cell immunotherapies. Pursuant to the terms of the Juno Agreement, we received an upfrff ont, non-refundablea and non-creditable payment of $5.0 million and Juno purchased 1,000,000 shares of our common stock at $8.00 per share for an aggregate purchase price of $8.0 million. Additionally, we have received, and are entitled to receive, minimumm annual research payments of $2.0 million for the conduct of research services during the initial four-year term of the Juno Agreement. We determined that the common stock purchase by Juno represented a premium of $3.40 per share, or $3.4 million in aggregate (Equity Premium), and the remaining $4.6 million was recorded as issuance of common stock in shareholders’ equity. q In accordance with ASC 606, we determined that the transaction price under the Juno Agreement equals $16.4 million, consisting of the upfront, non-refundable and non-creditable payment of $5.0 million, the $3.4 million Equity Premium and $8.0 million of estimated payments for the conduct of research services during the initial four-year term. In addition, we identified our performance obligations under the Juno Agreement, including our grant of an exclusive worldwide license to certain of our intellectual property subject to certain conditions, our conduct of research services and our participation in a joint research committee. We determined that all performance obligations should be accounted for as one combim ned performance obligation since no individual perforff mance obligation is distinct, and that the combim ned performance obligation is transferred ratably over the expected term of conduct of the research services, which is fouff r years. t In connection with the Juno Agreement, we have recognized $4.1 million and $4.1 million, respectively, during the years ended nsive Loss. As of December 31, 2018 and 2017, as collaboration revenue in the Consolidated Statements of Operations and Comprehe Decemberm 31, 2018, aggregate deferred revenue related to the Juno Agreement was $0.7 million. m Research and Development o Expenses Research and development expenses consist of costs associated with the research, preclinical development, manufacturett clinical development of our product candidates, the research and development of our cell programming technology including our iPSC productd expensed as incurred and include: platform, and the performance of research and development activities under ouruu collaboration agreements. These costs are and (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) salaries and employee-re m lated costs, including stock-based compem nsation; costs incurred under clinical trial agreements with investigative sites; costs to acquire, develop and manufacturett preclinical study and clinical trial materials, including our product candidates; costs associated with conducting our preclinical, process development, manufacturing, clinical and regulatory activities, including fees paid to third-party professional consultants, service providers and suppliers; costs incurred under our collaboration agreements; costs for research, laba oratory and manufacturing t ; materials and supplies u costs incurred to license and maintain intellectuat l property; and facilities, depreciation and other t expenses including allocated expenses for rent and maintenance of facilities. We plan to increase our current level of research and development expenses for the foreseeable future as we continue the clinical and preclinical development of ouru product candidates, research and develop our cell programming technology including our iPSC product platforff m, and performff University of Minnesota and Memorial Sloan Kettering. Our current planned research and development activities over the next twelve months consist primarily of the following: our obligations under collaboration agreements including under our agreements witht Ono, (cid:120) (cid:120) (cid:120) (cid:120) d conducti ng clinical trials of our productd candidates; conducting GMP manufacture, process development and technology transfer activities for the producti candidates, including those undergoing clinical investigation and IND-enabling preclinical development; d on of our product source clinical supplies and materials used to manufacture our producd t candidates; conducting preclinical research, process development, manufacturtt ing and clinical translation activities to investigate the therapea utic potential of our immuno-oncology product candidates, and initiating and conducting first-in-human clinical trials of such product candidates; 61 (cid:120) (cid:120) conducting preclinical research and process development activities to investigate the therapeutic potential of our immuno- regulatory product candidates; and perforff ming research, preclinical development, process development, manufacturing under our sponsored research and collaboration agreements, including ouruu agreements witht Ono, University of Minnesota and Memorial Sloan Kettering. and clinical translation activities tt Due to the inherently unpredictablea naturtt e of preclinical and clinical development, and given ouru novel therapeutic approach and the currer nt stage of development of our product candidates, we cannot determine and are unablea timelines we will require and the costs we will incur for the development of our product candidates, including ProTmune,m NK100, FT500, FT516 and our other product candidates derived from clonal master iPSC lines. Clinical and preclinical developmentnn r materially from expectations. In addition, we cannot forecast timelines and costs, and the potential of development success, can diffeff which product candidates may be subjeb ct to futurtt e collaborations, when such arrangements will be secured, if at all, and to whataa t our development plans and capia tal requirements. degree such arrangements would affecff to estimate with certainty the FATE- General and Admidd nistra ii tive Expenses General and administrative expenses consist primarily of salaries and employee-relate m d costs, including stock-based m compemm nsation, for our employe es in executive, operational, finance and human resource functions; professional fees for accounting, legal and tax services; costs for obtaining, prosecuting and maintaining our intellectual property; and other costs and fees, including director and officer insurance premiums, to support our operations as a public company. We anticipate that our general and administrative expenses will increase in the future as we increase our research and development activities, maintain complm iance with exchange listing and SEC requirements and continue to operate as a public compam ny. tt Other Income (ExpeEE nse)e Other income (expense) consists primarily of interest income earned on cash and cash equivalents, interest income from short- term investments (including the amortization of discounts and premiums), and interest expense. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compem nsation. We base our estimates on historical experience, known trends and events, and various othet the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differff from these estimates under different assumptm ions or conditions. r factors that are believed to be reasonablea under the circumstances, x While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report, we believe that the following critical accounting policies reflect the more significant procedures, estimates and assumptions used in the preparation of our consolidated financial statements. Revenue Recognigg tioii n During the first quarter of 2018, we adopted Accounting Standards Update 2014-09 (ASU 2014-09), Topic 606, which created a single, principle-based revenue recognition model that supersedes and replaces nearly all existing U.S. GAAP revenue recognition guidance. We adopted ASU 2014-09 in the first quarter of 2018 using the full retros updated standard had on our internarr not have a material impactm pective method. We evaluated the effff eff ct that the l processes, financial statements and related disclosures, and we determined that the adoption did on our historical consolidated financial statements. tt We recognize revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration we are entitled to receive in exchange for such product or service. In doing so, we follow a five-step approach: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the perforff mance obligations, and (v) recognize revenue when (or as) the customer obtains control of the product or service. We consider the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. We apply the revenue recognition standard, including the use of any practical expedients, consistently to contracts witht similar characteristics and in similar circumstances. tt 62 tt A customer is a party that has entered into a contract with us, where the purpose of the contract is to obtain a productd of our ordinaryrr activities in exchange for consideration. To be considered a contract, (i) the contract service that is an output approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights regarding the product or the service to be transferred can be identified, (iii) the payment terms for the product or the service to be transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of future cash flows is expected to change as a result of the contract), and (v) it is probable that we will collect substantially all of the consideration to which we are entitled to receive in exchange for the transfer of the product or the service. or a must be tt A performance obligation is defined as a promise to transfer a product or a service to a customer. We identify each promise to or services, or a series of products and services that are substantially the same transfer a product or a service (or a bundle of products and have the same patternr of transfer) that is distinct. A product or a service is distinct if botht product or the service eithet to transfer the product or the service to the customer is separateaa ly identifiable from other promises in the contract. promise to transfer a product or a service is a unit of accounting for revenue recognition. If a promise to transfer a productd is not separately identifiable from other promises in the contract, such promises should be combim ned into a single performance obligation. r on its own or together with other resources that are readily availablea (i) the customer can benefit from the to the customer and (ii) our promise Each distinct or a servirr ce d tt The transaction price is the amount of consideration we are entitled to receive in exchange for the transfer of control of a nt, the effects of any variable elements, noncash considerations and consideration payable to the customer. If a significant product or a service to a customer. To determine the transaction price, we consider the existence of any significan componem financing component exists, the transaction price is adjusted for the time value of money. If an element of variability exists, we must estimate the consideration we expect to receive and use that amount as the basis for recognizing revenue as the product or the service is transferff method, which is the sum of probability-weighte amount method, which identifies the single most likely amount in a range of possible consideration amounts. to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value d amounts in a range of possible consideration amounts, and (ii) the mostly likely redrr a ff t t financing If a contract has multiple performance obligations, we allocate the transaction price to each distinct performance obligation in an ff amount that reflects the consideration we are entitled to receive in exchange for satisfying each distinct performance obligation, revenue is recognized when (or as) we transferff control of the product or the service applicable to such performance obligation. To date, for collaboration arrangements that represent a single performance obligation, the revenues are recognized over time based on costs incurred compam red to total estimated costs. each distinct performance obligation. For In those instances where we first receive consideration in advance of satisfying its performance obligation, we classify such consideration as deferred revenue until (or as) we satisfyff such performance obligation. In those instances where we first satisfy our performance obligation prior to our receipt of consideration, the consideration is recorded as accounts receivable. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial. Accrued Research and Development Expexx nses As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process se notified of the actual cost. The majorit involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been ed and the associated cost incurrerr d for the service when we have performed on our behalf and estimating the level of service performff not yet been invoiced or other y of our service providers invoice us monthly in arrears for a rr t wi services performed or when contrtt actual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances knownw to us at that time. We periodically confirm the accuracy of our of accrued research and development expenses estimates with the service providers and make adjustments if necessary. Examplesm include amounts owed to clinical research organizations, to investigative sites in connection with clinical trials, to sponsored research organizations, to service providers in connection with preclinical development activities and to service providers related to producdd t manufacturi ng, development and distribution of clinical supplies. tt We base our accrued expenses related to clinical trials on our estimates of the services performed and efforts expended pursuant to our contractual arrangements, including those witht clinical research organizations. The financial terms of these agreements are sometimes subject to negotiation, vary from contractt t to contract and may result in uneven payment flows. There may be instances in which payments made to our service providers will exceed the level of services performed and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successfulff enrollment of patients and the complm etion of clinical milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort ff d we adjust to be expended in each period. If the actual timing of the perforff mance of services or the level of effort the accrual or prepaid accordingly. varies from ouruu estimate, ff 63 Although we do not expect our estimates to be materially different from expenses actually incurred, if our estimates of the statuaa s s from the actual status and timing of servirr ces perforff med, we may report amounts that are too and timing of services perforff mer high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred. ff d differ Stoctt k-Based Compensation Stock-based compem nsation expense represents the grant date fair value of employee stock option and restricted stock unit grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. For stock option grants with performance-based milestones, the expense is recorded over the remaining service period after the milestone is probablea milestones and market conditions, expense is recorded over the derived service period afteff performance-based milestone is probable or the performff grants using the Black-Scholes option pricing model, with the exception of option grants with botht performance-based milestones and market conditions, which are valued using a lattice based model. The fair value of restricted stock units is based on the closing price of our common stock as reported on The NASDAQ Global Market on the date of grant. or the performance condition has been achieved. For stock option grants with both performance-based ance condition has been achieved. We estimate the fair value of stock option r the point when the achievement of the the point when the achievement of ff We account for stock options and restrict value approach. Stock options and restricted stock awards to non-emplom yees are subject to periodic revaluation over their vesting terms. For stock option grants with performff condition is determined to be probabla e of achievement or when it has been achieved. ance-based milestones, the expense is recorded over the remaining service period after the point when the performance ed stock awards to non-employm ees using the fair ff tt We generally estimate the fair value of our stock option awards to employees m and non-emplm oyees using the Black-Scholes ff , position within the industry, and with historical share price information sufficient to meet the expected life of the stock- option pricing model, which requires the inpun t of highly subjective assumptions, including (a) the risk-free interest rate, (b) the expected volatility of our stock, (c) the expected term of the award and (d) the expected dividend yield. Due to the lack of an adequate history of a public market for the trading of our common stock and a lack of adequate compam ny specific historical and impliedm volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar compam nies that are pubu licly traded. For these analyses, we have selected compam nies with compam rable characteristics to ours including enterprise value, risk profiles based awards. We computem equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a suffiff cient amount of historical information regarding the volatility of ouruu own stock price becomes available. We have estimated the expected ” method, whereby, the expected life equals the average of the vesting term m life of our employee and the original contractual tt on the yields of zero-coupon U.S. Treasury securities. See Note 7 of the Notes to the Consolidated Financial Statements for additional information. the historical volatility data using the daily closing prices for the selected compam nies’ shares during the periods withit n the expected life of the option are based stock options using the “simplifm iedff term of the option. The risk-freeff interest rates forff q Total stock-based compensation expense for the years ended Decemberm 31, 2018, 2017, and 2016, was $6.3 million, $3.6 million, and $3.2 million, respectively. Expense related to unvested emplm oyee stock option grants not yet recognized as of Decemberm 31, 2018 was approximately $15.9 million and the weighted-average period over which these grants are expected to vest is 3.1 years. As of Decemberm 31, 2018, the unrecognized compensation cost related to outstanding restricted million, which is expected to be recognized as expense over approximately 0.8 years. stock units was $0.4 tt Other Company Information JOBSOO Act On April 5, 2012, the Jumpstart Our Business Startups JOBS Act), was enacted. Section 107 of the JOBS Act provides that an “emerging growtht compam ny” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complm ying with new or revised accounting standards. In other words, an “emerging growtht compam ny” can delay the adoption of certain accounting standards until those standards would otherwise apply to private compam nies. As of December 31, 2018, we no longer qualify as an emerging growth compam ny. Act of 2012 (thet tt Subject to certain conditions set forth in the JOBS Act, as we are no longer an “emerging growtht company,” we are subject to certain additional requirements, including without limitation, (i) providing an auditor’s attestation report on our system of internal ls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requiq rement that controt may be adopted by the Public Compam ny Accounting Oversight Board regarding mandatoryrr audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. 64 Recent Accounting Pronouncements For a discussion of recently issued accounting pronouncements, please see Note 1 of the Notes to the Consolidated Financial Statements. Results of Operations Comparison of Years Ended December 31, 2018 and 2017 The following table summarizes the results of our operations for the years ended December 31, 2018 and 2017: Collaboration revenue Research and development expenses General and administrative expenses Total other (income) expense, net t Years Ended December 31, 2018 2017 Increase/ (Decrease) $ (in thousands) 4,740 $ 56,024 15,808 (494) 4,106 $ 34,358 11,873 827 634 21,666 3,935 (1,321) Revenue. During the years ended Decemberm 31, 2018 and 2017, we recognized revenue of $4.7 million and $4.1 million, respectively, under our collaboration agreements with Ono and Juno. Research and developme Research and development expenses were $56.0 million for the year ended Decemberm 31, 2018, compared to $34.4 million for the year ended Decemberm 31, 2017. The increase in research and development expenses includes the following changes: nt expenses. o x (cid:120) (cid:120) (cid:120) (cid:120) $7.8 million increase in third-party professional consultant and service provider expenses relating to the manufacture and clinical development of our product candidates and the conduct of our research activities, including under our research collaboration agreements; $6.7 million increase in licensing expenses primarily associated with entering into the Amended MSK License with Memorial Sloan Kettering Cancer Center in May 2018 and entering into the Gladstone License in September 2018; $4.3 million increase in emplmm oyee compensation and benefitff s expense, including employee-stock based compensation expense; $2.5 million increase in expenditures for laboratory equipment, materials and supplies relating to the conduct of our clinical trials and our manufacturing and research activities. General and administrative expenses. General and administrative expenses were $15.8 million for the year ended Decemberm 31, 2018, compared to $11.9 million for the year ended Decemberm 31, 2017. The increase in general and administrative expenses includes the following changes: (cid:120) (cid:120) (cid:120) $2.2 million increase in emplmm oyee compem nsation and benefits expense, including empm loyee stock-based compensation expense; and $0.8 million increase in advisoryr expenses primarily relating to legal, accounting and intellectual property-r services. tt elated $0.5 million increase in third-party professional consultant expenses primarily relating to market research, business development and recruit ing activities. r tt Other (income) expense, net. Other (income) expense, net, was $(0.5) million and $0.8 million for the years ended d December 31, 2018 and 2017, respectively. Other (income) expense, net for each period consisted primarily of interest income earneaa on cash and cash equiva lents, interest income from short-term investments (including the amortization of discounts and premiums) and interest expense relating to our term loans with Silicon Valley Bank. The year ended Decemberm 31, 2017 also included a $0.1 million loss on debt extinguishment related to the amendment of our loan agreement with Silicon Valley Bank. q 65 Comparison of Years Ended December 31, 2017 and 2016 The following table summarizes the results of our operations for the years ended December 31, 2017 and 2016: Collaboration revenue Research and development expenses General and administrative expenses r expense, net Total othet Years Ended December 31, 2017 2016 Increase/ (Decrease) $ (in thousands) 4,106 $ 34,358 11,873 827 4,402 $ 26,452 9,913 1,499 (296) 7,906 1,960 (672) Revenue. During the years ended Decemberm 31, 2017 and 2016, we recognized revenue of $4.1 million and $4.4 million, respectively, under the Juno Agreement. Research and developme Research and development expenses were $34.4 million for the year ended Decemberm 31, 2017, compared to $26.5 million for the year ended Decemberm 31, 2016. The increase in research and development expenses includes the following changes: nt expenses. o x (cid:120) (cid:120) (cid:120) (cid:120) $4.1 million increase in third-party professional consultant and service provider expenses relating to the manufacture and clinical development of our product candidates and the conduct of our research activities, including under our research collaboration agreements; $1.7 million increase in emplmm oyee compensation and benefits expense, including employee-stock based compensation expense; $1.4 million increase in facility rent expense due to an office ff and lab space expansion in January 2017; and $0.5 million increase in expenditures for laboratory equipment, materials and supplies relating to the conduct of our clinical trials and our manufacturing and research activities. General and administrative expenses. General and administrative expenses were $11.9 million for the year ended Decembem r 31, 2017, compared to $9.9 million for the year ended Decemberm 31, 2016. The increase in general and administrative expenses includes the following changes: (cid:120) (cid:120) (cid:120) $1.2 million increase in intellectual property-related expenses; $0.3 million increase in third-party professional consultant expenses; and $0.2 million increase in facility rent expense due to an office and laba space expansion in January 2017. Other expense, net. Other t expense, net, was $0.8 million and $1.5 million for the years ended Decemberm 31, 2017 and 2016, respectively. Other expense, net for each period consisted primarily of interest expense relating to our term loans with Silicon Valley Bank, interest income earned on cash and cash equiva amortization of discounts and premiums). The year ended Decemberm 31, 2017 also included a $0.1 million loss on debt extinguishment related to the amendment of our loan agreement with Silicon Valley Bank. lents, and interest income from short-term investments (including the q Liquidity and Capital Resources We have incurred losses and negative cash flows from operations since inception. As of December 31, 2018, we had an accumulmm ated deficit of $285.4 million and anticipate that we will continue to incur net losses for the foreseeable future. The following table sets fortht a summary of the net cash flow activity for each of the years ended December 31: Net cash used in operating activities Net cash used in investing activities Net cash provided yby financi gng activities Net increase in cash, cash equivalents and restricted cash 2018 2017 (in thousands) 2016 $ $ (38,650) $ (463) 140,780 101,667 $ (36,817) $ (10,196) 47,356 343 $ (29,823) (4,114) 57,737 23,800 66 Operatingtt tt Activiti es Cash used in operating activities increased from $36.8 million for the year ended Decemberm 31, 2017 to $38.7 million for the year ended December 31, 2018. The primary driver of this change in cash used in operating activities was our increase in net loss from 2017 to 2018, partially offset by an increase of $14.4 million in deferred revenue resulting primarily from entering into our collaboration agreement with Ono and a one-time, non-cash expense of $6.1 million incurrerr d from the issuance of common stock to Memorial Sloan Kettering Cancer Center and Gladstone in connection with those license agreements. Cash used in operating activities increased from $29.8 million for the year ended Decemberm 31, 2016 to $36.8 million for the year ended December 31, 2017. The primary driver of this change in cash used in operating activities was our increase in net loss from 2016 to 2017, partially offset by an increase of $1.0 million in deferred rent resulting from the office and lab expansion in January 2017 and an increase of $1.0 million in accounts payablea and accrued expenses. Agreement withtt Ono Pharmac rr eutical Co.CC , Ltd.t On Septemberm 14, 2018, we entered into the Ono Agreement with Ono for the joint development and commercialization of two candidates (each a Candidate and collectively the Candidates). Under the terms of the -shelf, iPSC-derived CAR T-cell productd off-tff het Ono Agreement, Ono paid to us an upfrff ont, non-refundable and non-creditable payma consideration for our conduct of research and preclinical development under a joint development plan, Ono pays us annual research and development fees set forth in the annual budget included in the joint development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan. Further, under the terms of the Ono Agreement, Ono has agreed to pay us up to an additional $40.0 million, subject to the achievement of a preclinical milestone and the exercise by Ono of its options to obtain exclusive licenses to develop and commercialize the Candidates. Such fees are in addition to the upfront payment and research and development fees. ent of $10.0 million. Additionally, as Subject to Ono’s exercise of its options to obtain exclusive licenses to develop and commercialize the Candidates and to the achievement of certain clinical, regulatory and commercial milestones witht entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subject 31, 2018, we have not received any such milestone payments. We are also eligible to receive tiered royalties ranging from the mid- single digits to the low-doubleu territories, with such royalties digits based on annual net sales by Ono of each Candidate in specifiedff subju ect to certain reductions. As of Decemberm 31, 2018, no royalties have been paid to us. to reduction by 50% if we elect to co-develop and co-commercialize Candidate 2 as described above. As of Decembem r respect to each Candidate in specified territories, we are u As a direct result of our entry into the Ono Agreement, we incurred an aggregate of $2.0 million in sublu icense consideration to existing licensors of ours. The $2.0 million sublicense consideration represents an asset under ASC 340, Other Assets and Deferred Costs. As of Decemberm 31, 2018, $1.0 million of such consideration has been paid, while the remaining $1.0 million remains in account payable. Agreement with Juno Therapeutics, Inc. On May 4, 2015, we entered into a strategic research collabora a tion and license agreement with Juno to screen for and identifyff small molecule modulators that enhance the therapea utic properties of Juno’s genetically-engineered T-cell immunotherapies. to the terms of the Juno Agreement, Juno paid us an upfront, non-refundablea and non-creditabla e payment of $5.0 million, and purchased one million shares of our common stock, at $8.00 per share, for an aggregate purchase price of $8.0 million. Additionally, Juno agreed to fund all of our collaboration research activities for an initial four-year research term beginning on the effectivett date of the Juno Agreement, with minimumm annual research payments of $2.0 million to us. Juno has the option to extend the exclusive research term for an additional two years beyond the initial four-year term, subjeb ct to the payment of a one-time, non-refundable extension fee of $3.0 million and the continued funding of our activities under the collaboration during the extended term, with minimumm annual research payments of $4.0 million to us during the two-year extension period. As of Decembem r 31, 2018, we have received a total of $6.8 million of such research payments. We received a $0.5 million research payment during January 2019. a Pursuant We are eligible under the Juno Agreement to receive selection fees for each tumor-associated antigen target selected by Juno and bonus selection fees based on the aggregate numbem r of tumor-associated antigen targets selected by Juno. Additionally, in connection with each Juno therapy that uses or incorporate non-creditable milestone payments totaling up to approximately $51.0 million, in the aggregate, per therapy upon the achievementnn of various clinical, regulatory and commercial milestones. Additionally, in connection with the third Juno therapy and the fifth Juno therapya that uses or incorporates our small molecule modulators, Juno has agreed to pay us additional non-refundabla e, non-creditable bonus milestone payments totaling up to approximately $116.0 million and $137.5 million, respectively, in the aggregate, per therapya upon the achievement of various clinical, regulatory, and commercial milestones. As of Decemberm 31, 2018, we have not received any selection fees or milestone payments. s our small molecule modulators, Juno has agreed to pay us non-refundable, r 67 Beginning on the date of the first commercial sale (in each country)r for each Juno therapya molecule modulators, and continuing until the later of i) the expiration of the last valid patent claim, ii) ten years after commercial sale, or iii) the expiration of all data and other regulatoryr exclusivity periods afforded each therapy, Juno has agreed to pay us royalties in the low single-digits on net sales of each Juno therapy that uses or incorporates our small molecule modulators. As of Decemberm 31, 2018, no royalties have been paid to us. such first that uses or incorporates our small ff In March 2018, Juno was acquired by Celgene Corporation (Celgene). This acquisition did not affect the terms of our agreement with Juno Agreement. On January 3, 2019, Celgene announced that it had entered into a definitive merger agreement with Bristol- Myers Squibb Compam ny (BMS), under which BMS will acquire Celgene. Memorial Sloan Kettering Cancer Center License Agreement On May 15, 2018, we entered into an Amended and Restated Exclusive License Agreement with Memorial Sloan Kettering Cancer Center (MSK). The agreement amends and restates the license agreement entered into between us and MSK on August 19, 2016. In consideration for the additional rights granted under the May 2018 agreement, we issued 500,000 shares of our common stock to MSK, which shares were valued at $4.8 million on the date of agreement. We also paid an upfront cash fee of $0.5 million, and we are obligated to pay milestone payments upon the achievement of specified clinical, regulatory and commercial milestones and royalty payments to MSK on net sales of licensed products. We are also obligated to pay MSK a percentage of certain sublu icense income received by us. Furthermore, in the event a licensed product achieves a specified clinical milestone, MSK is then eligible to receive additional milestone payments, where the amount of such paymaa price of the Company’s common stock following the date of achievement of such clinical milestone. ents owed to MSK are contingent upon certain increases in the J. David Glall dstone Institutes License Agreement On September 11, 2018, we entered into an exclusive license agreement with the J. David Gladstone Institutes (Gladstone). Pursuant to the Gladstone license agreement, we issued 100,000 shares of our common stock to Gladstone, which shares were valued at $1.3 million on the date of the agreement. We also paid an upfrff ont cash fee of $0.1 million, and we are obligated to pay milestone payments in an aggregate amount of up to approximately $1.9 million upon the achievement of specified clinical, regulatory and commercial milestones and as well as royalties to Gladstone in the low single digits on net sales of licensed products. We are also obligated to pay Gladstone a tiered percentage in the low to mid-single digits of certain sublicense income received by us. Investintt gn Activtt ities During the years ended Decemberm 31, 2018, 2017 and 2016, investing activities used cash of $0.5 million, $10.2 million and $4.1 million, respectively. During the year ended December 31, 2018 we purchased $55.7 million in U.S. Treasuries as short-term investments, offset by $57.5 million in maturities of these short-term investments. During the year ended Decemberm 31, 2017, we purchased $40.0 million in U.S. Treasuries as short-term investments, offset investments. The remaining investing activities for the periods presented were primarily attributablea equipment. by $31.5 million in maturities of these short-term to the purchase of property and ff Financing Activities ii Financing activities provided cash of $140.8 million for the year ended December 31, 2018, which primarily consisted of the $134.9 million of net proceeds from our Septemberm 2018 public Californff for Regenerative Medicine (CIRM) award. ia Institutet u offeff ring of common stock and $3.5 million of proceeds from the Financing activities provided cash of $47.4 million for the year ended December 31, 2017, which primarily consisted of $43.2 million of net proceeds from our Decemberm 2017 public offering of common stock and $15.0 million of proceeds from the July 14, 2017 amendment to our loan agreement with Silicon Valley Bank, offset by $10.8 million of principal payments on our term loans outstanding with Silicon Valley Bank. Financing activities provided cash of $57.7 million forff million of net proceeds from our Novembem r 2016 private placement issuance of Class A convertible preferre net proceeds from our November 2016 private placement issuance of common stock and $10.2 million of net proceeds from our August 2016 private placement issuance of common stock, offset with Silicon Valley Bank. by $7.7 million of principal payments on our term loans outstanding the year ended December 31, 2016, which primarily consisted of $36.4 d stock, $18.6 million of ff ff From our inception through Decemberm 31, 2018 we have funded our consolidated operations primarily through the public and private sale of common stock, the private placement of preferre from collaboration activities and grants. As of Decemberm 31, 2018, we had aggregate cash and cash equivalents investments of $201.0 million. d stock and convertible notes, commercial bank debt and revenues and short-term q ff 68 Public Offff erff ing of Common Stock In Septemberm 2018, we complm eted a public offering of common stock in which investors, certain of which are affiliated with our directors, purchased 10,648,149 shares of our common stock at a price of $13.50 per share under our shelf registration statement. Gross proceeds from the offering were $143.8 million. After giving effect to $8.9 million in underwriting discounts, commissions and expenses related to the offering, net proceeds were $134.9 million. In Decemberm 2017, we complm eted a public offering of common stock in which investors purchased 10,953,750 shares of our common stock at a price of $4.20 per share under a shelf registration statement. Gross proceeds from the offering were $46.0 million. After giving effect to an estimated $3.0 million of costs relateaa d to the offeff proceeds were $43.0 million. ring (of which $0.3 million was paid during 2018), net California Institute for Regee nerative Medicine Award disbursements in varying amounts totaling $4.0 million throughout the projeco On April 5, 2018, we executed an award agreement with CIRM pursuant to which CIRM awarded us up to $4.0 million to candidate into a first-in-human clinical trial for the treatment of subjects with advanced solid tumors, advance our FT516 productd including in combim nation with monoclonal antibody therapya receive fiveff to be from April 1, 2018 to June 30, 2019 (the Project Period). In Decemberm 2018, we discussed with CIRM our intent to pursue the clinical development of FT516 in relapsed / refractory hematologic malignancies in addition to advanced solid tumors, and our preference to first submit an IND application for FT516 in relapsed / refractory hematologic malignancies rather than in advanced solid tumors. In January 2019, we submu ry hematologic malignancies, which IND submission was allowed by the FDA in February 2019. We agreed with CIRM to suspend the Award until such time as we elect to proceed witht our submission of an IND application for FT516 in advanced solid tumors. At the time of suspension, an additional $0.5 million was available for funding under the Award. (the Award). Pursuant to the terms of the Award, we are eligible to itted our IND application for FT516 in relapsed / refracto t period of the Award, which was estimated ff The Award is subject to certain co-funding requirements by us. Following the conclusion of the Project Period, we, in our sole discretion, have the option to treat the Award either as a loan or as a grant. In the event we elect to treat the Award as a loan, we will be obligated to repay i) 60%, ii) 80%, iii) 100% or iv) 100% plus interest at 7% plus LIBOR, of the total Award to CIRM, where such repayment rate is dependent upon the phase of clinical development of FT516 at the time of our election. If we do not elect to treat the Award as a loan within 10 years of the date of the Award, the Award will be considered a grant and we will be obligated to pay to CIRM a royalty on commercial sales of FT516 until such royalty payments equal nine times the total amount awarded to us under the Award. Private Placements of Common and Convertible Preferred Stock In Novembem r 2016, we complm eted a private placement of stock in which investors purchased shares of our Class A convertible Preferred Stock and common stock. We issued 2,819,549 shares of non-voting Class A Preferred Stock at $13.30 per share, each of which is convertible into five shares of common stock upon certain conditions. We also issued 7,236,837 shares of common stock at $2.66 per share. Gross proceeds from the private placement were $56.7 million. After giving effect placement, net proceeds were $54.9 million. to costs related to the private ff In August 2016, we completed a private placement of common stock in which investors purchased 5,250,000 shares of our common stock at a price of $1.96 per share. Gross proceeds from the private placement were $10.3 million, and after giving effeff ct to costs related to the private placement, net proceeds were $10.2 million. Silicon Valleye Bank Debt Facilitytt On July 30, 2014, we entered into an Amended and Restated Loan and Security Agreement (Restated LSA) with Silicon Valley Bank (Bank), collateralized by substantially all of our assets, excluding certain intellectual property. The Restated LSA amends and restates the Loan and Securitytt Agreement, dated as of January 5, 2009, as amended, by and betwett Agreement). Pursuant to the Restated LSA, the Bank agreed to make loans to us in an aggregate principal amount of up to $20.0 million, comprmm ised of (i) a $10.0 million term loan, funded at the closing date (Term A Loan) and (ii) subject to the achievement of a specifiedff Decemberm 31, 2014 (each, Term B Loan). On Decemberm 24, 2014, we elected to draw $10.0 million under the Term B Loan. clinical milestone, additional term loans totaling up to $10.0 million in the aggregate, which were available untilnn en us and the Bank (Loan On July 14, 2017, the Company and the Bank entered into an amendment (SVB Loan Amendment) of the Restated LSA where in the principal amount of $15.0 million (2017 Term Loan), a portion of the Bank extended an additional term loan to the Companym which was applied to repay in full all amounts previously outstanding under the Restated LSA. Following such repayment in full of the Companmm y’s existing outstanding debt with the Bank under the Restated LSA, cash proceeds to the Companm y from the remaining portion of the Term Loan were $7.5 million. 69 The 2017 Term Loan matures on January 1, 2022 (Term Loan Maturi aa ty Date). The 2017 Term Loan bears interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%; provided, however, that in no event shall such interest rate exceed 8.25%. Interest is payaba le on a monthly basis on the first day of each month. From August 1, 2017 through January 1, 2019 (Interest-only Period), the Companymm payments of interest only. In January 2019, after achievement of a product development milestone, the Companym elected to extend the Interest-only Period from January 1, 2019 through and including to July 1, 2019. The Company is required to repay the principal, plus monthly payments of accrued interest, in 30 equal monthlyt installments based on a 30-month amortization schedule. The Compam ny’s final payment, due on the Term Loan Maturity Date, shall include all outstanding principal and accrued and unpaid interest under the 2017 Term Loan, plus a 7.5% final payment fee. was required to make monthly Subju ect to certain conditions, including the payment of a prepayment fee in the amount 1% of the principal amount of the Term Loan for any prepayment made before July 14, 2019, the Company may voluntarily prepay all, but not less than all, of the 2017 Term Loan. In connection with the SVB Loan Amendment, the Company issued to the Bank on the First Amendment Effeff ctive Date a warrant to purchase up to an aggregate of 91,463 shares of the Company’s common stock, subject to adjustmd equal to $3.28 per share. All such warrants have been exercised as of December 31, 2018. ent, at an exercise price We are required under the Loan Agreement, as amended by the SVB Loan Amendment, to maintain our deposit and securities accounts with the Bank and to complm y with various defaulta operations, engage in business activities or expand or fully pursue our business strategies. clauses could result in a defaulta become immediately due and payable. under the Loan Agreement, which could causea clauses and operating covenantsaa a tt that may restrict our ability to financaa A breach of any of these covenants or e our all of the outstanding indebtedness under the facility to Agreement withtt Juno Therapeutics, Inc. Pursuant to the terms of our Agreement with Juno, Juno purchased one million shares of our common stock, at $8.00 per share, for an aggregate purchase price of $8.0 million in May 2015, $4.6 million of which was considered an equity component of the transaction. Registration Statemen tt ts on Form S-3 In Novembem r 2018, we filed an automatic shelf registration statement (File No. 333-228513), which became effectiv ff e upon filing. The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time. The specific terms of any offering, if any, under the automatic shelf registration statement would be established at the time of such offering. Additionally, we entered into a sales agreement with Leerink Partners LLC (Leerink) with respect to an at-the-market offeri ff aggregate offering price of up to $50.0 million through Leerink as its sales agent. r and sell, from time to time at our sole discretion, shares of our common stock having an ng program, under which we may offeff In May 2018, the SEC declared effective a shelf registration statement filed by us in May 2018 (File No. 333-224680). The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time. The specificff terms of any offering, if any, under the shelf registration statement would be establa ished at the time of such offering. As of December ing, we are eligible to issue an aggregate of $6.2 million in securities 31, 2018, afteff under this shelf registration statement. t to our Septemberm 2018 public offerff r giving effecff In August 2017, the SEC declared effective a shelf registration statement filed by us in August 2017 (File No. 333-219987). The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time. The specific g. As of Decemberm terms of any offering, if any, under the shelf registration statement would be established at the time of such offerin 31, 2018, after to our Decembem r 2017 public offering, we are eligible to issue an aggregate of $54.0 million in securities under the shelf registration statement. In addition, this registration statement registered for resale one million shares of common stock held by Juno, which were issued in May 2015 as described below. giving effect ff ff ff Operating Capia tal Requirementstt We anticipate that we will continue to incur losses for the foreseeable future, and we expect the losses to increase as we continue the research and development of,ff and seek regulatoryr approvals for, our productd and development activities pursuant to our collaboration agreements with Juno and Ono. Our product candidates have not yet achieved regulatory approval, and we may not be successful in achieving commercialization of our productd candidates and conduct additional research candidates. 70 We believe our existing cash and cash equivalents and short-term investments as of Decemberm 31, 2018 will be sufficien t to fund our projected operating requirements for at least the next twelve months. However, we are subjec uncertainties incident in the research and development of therapeutic products. For example, the FDA or other regulatory authorities may require us to generate additional data or conduct additional preclinical studies or clinical trials, or may imposem beyond those that we currently anticipate. Additionally, it is possible for a product candidate to show promising results in preclinical to obtain regulatoryr approvals. As a result studies or in clinical trials, but fail to establish sufficient safety and efficac of these and other risks and uncertainties and the probabia lity of success, the duration and the cost of our research and development activities required to advance a product candidate cannot be accurately estimated and are subject to considerabla e variation. We may b r unknown factors and unforeseen expenses in the course of our research and encounter difficulties, complm ications, delays and othet requirements and could adversely affect our liquidity. development activities, any of which may significantly increase our capital y data necessaryrr other requirements u a ff ff t to all the risks and We will require additional capital for the research and development of our product candidates and to perform our research and development obligations under our collaboration agreements with Juno and Ono, and we may be forced to seek additional funds sooner than expected to pursue our research and development activities. We expect to finance our capital requirements in the foreseeable futurtt e through the sale of public or private equitytt or debt securities. However, additional capital may not be available to us a on reasonable terms, if at all. If we are unablea have to significantly delay, scale back or discontinue the research or development of one or more of our producd t candidates. If we do raise additional funds through the issuance of additional equity or debt securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and the existence of securities witht common stock. Additionally, if we incur indebtedness, we may become subject to financial or other restrict, impam ir or affect our ability to conduct our business, such as requiring us to relinquish rights to certain of our product candidates or technologies or limiting our ability to acquire, sell or license intellectual property rights or incur additional debt. Any of these events could significantly harm our business, operations, financial condition and prospects. in sufficient amounts or on terms acceptablea rights that may be senior to those of ouruu covenants that could adversely to raise additional capital to us, we may t Our forecast of the period of time through which our existing cash and cash equiva q lents and short-term investments will be adequate to support our operations is a forward-looking statement and involves significant risks and uncertainties. We have based this forecast on assumptmm ions that may prove to be wrong, and actual results could vary materially adversely affect our capital resources and liquidity. We could utilize our available capital resources sooner than we currently expect. The amount and timing of futurtt e funding requirements, both near- and long-term, will depend on many factors, including, but not limited to: from our expectations, which may aa (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the initiation, timing, progress, size, duration, costs and results of our clinical trials and preclinical studies for our productdd candidates; the numbem r and the naturtt e of product candidates that we pursue; the cost of manufactutt ring and process development of our producd t candidates, including the cost of supplies and materials to support these activities; the time, cost and outcome of seeking and obtaining regulatory approvals; the extent to which we are required to pay milestone or othet such payments; r payments under our in-license agreements and the timing of the extent to which milestones are achieved under our collaboration agreements with Juno and Ono, and the time to achievement of such milestones and our receipt of any associated milestone payments; the cost of filing, prosecuting, defending and enforcing any patent claims and other t intellectual property rights; the expansion of our research and development activities, including our need and ability to hire additional employm procure additional equipment, materials and supplies; ees and the establishment and continuation of collaborations a and strategic alliances; the timing and terms of future in-licensing and out-licensing transactions; and the cost of establia reimbursem m shing sales, marketing, manufacturing and distribution capabilities for, and the pricing and ent of, any products for which we may receive regulatory approval. If we cannot continue or expand our research and development operations, or otherwise capitalize on our business opportunities, because we lack sufficient capital, our business, operations, financial condition and prospects could be materially adversely affecte ff d. 71 Contractual Obligations and Commitments The following table summarizes our contractual tt obligations at Decemberm 31, 2018 that are expected to affect ff our liquidity and cash flows in future periods: (in thousands) Long-term debt (including interest and fees) Operatingg lease obliggations Total Total 18,480 41,221 59,701 $ $ $ $ Less than 1 Year Years 1 - 3 Years 3 - 5 More than 5 Years 3,720 3,019 6,739 $ $ 13,131 7,634 20,765 $ $ 1,629 8,098 9,727 $ $ —— 22,470 22,470 Our long-term debt bears interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%; provided, however, that in no event shall such interest rate exceed 8.25%. The amounts in the tablea also reflect the actuat above assume payment at our current interest rate of 8.25%, which is subject to change. The amounts in the above tabla e l Interest-only Period through July 31, 2019. e feeff We lease certain office and laboa ratory space under a non-cancelable operating lease. In May 2018, we amended the operating lease, extending the term of the lease through approximately 2028 and agreeing to lease additional space comprmm ising approximately 24,000 squarq The lease is lease. In addition to rent, the lease is subject to certain fixed amenities fees. The above tabla e includes all such fixed fees. subject to additional variable charges for common area maintenance and other costs. We maintain the right to terminate the lease afteff r October 2025, subject to our delivery to the landlord of twelve months’ prior written notice and an early termination payment of $2.5 million. See Note 6 of the Consolidated Financial Statements for further details. t in the same building as our existing space for a total occupancy of approximately 72,000 square feet under the ff We have no material contratt ctual obligations not fully recorded on our Consolidated Balance Sheets or fully disclosed in the notes to the financial statements. We have obligations under various license agreements to make futureu payments to third parties that become due and payable on t sales) or on the subliu the achievement of certain development, regulatory and commercial milestones (such as the start of a clinical trial, filing for product approval with the FDA or other productd the table above becausea receipt of revenue from the sale of products and, therefore, we may require additional debt or equity These commitments include: oval by the FDA or other regulatory agencies, product launch or . We have not included these commitments on our balance sheet or in the achievement and timing of these events is not fixed and determinable. Certain milestones are in advance of cense of our rights to another partyaa regulatory agencies, product appr capital to make such paymenmm ts. q a (cid:120) (cid:120) (cid:120) Under a license agreement with Children’s Medical Center Corporation pursuant to which we license certain patents relating to our ex vivo cell programming approach and our programmed hematopoietic cell therapia es, we are required to make annual maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximumm aggregate milestone payments we may be obligated to make per product are $5.0 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low- to mid-single digits. The royalty is subju ect to reduction for any third- party payments required to be made, with a minimumm floor in the low single digits. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of any sublicense income. Under a license agreement with the Whitehead Institute for Biomedical Research, pursuant to which we license certain patents relating to our iPSC product platform, we are required to make annual maintenance payments and payments based upon development, regulatoryrr and commercial milestones for any products covered by the in-licensed intellectual property. The maximummm aggregate milestone payments we may be obligated to make per product are $2.3 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, witht a minimumm floor in the low single digits. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of any sublicense income. Under license agreements with The Scripps Research Institute (TSRI), pursuant to which we license certain patents relating to our iPSC product platform, we are required to make annual maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate milestone payments we may be obligated to make are $1.8 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low- to mid-single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under these agreements, and we will be required to pay a percentage of any sublicense income. u d 72 (cid:120) (cid:120) Under a license agreement with the Regents of the University of Minnesota, pursuant to which we license certain patents cells expressing relating to compositions and uses of NK cells and to composm itions of engineered receptors and immunem such receptors, we are required to make annual maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property.tt The maximumm aggregate milestone payments we may be obligated to make per product are $4.6 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of any sublicense income. Under a license agreement with Memorial Sloan Kettering Cancer Center, pursuant to which we license certain patents relating to compositions and uses of T cells derived from iPSCs, CARs and genetic modifications using CRISPR, we are required to make annual maintenance payments and payments based upon development, regulatoryrr and commercial milestones for any products covered by the in-licensed intellectual property.tt The maximumm aggregate milestone payments we may be obligated to make per producd t are $12.5 million. We will also be required to pay a royalty on net sales of producd ts covered by the in-licensed intellectual property up to the high-single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimumm floor in the low- to mid-single digits. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of any sublicense income. Additionally, in the event a licensed product achieves a specified clinical milestone, Memorial Sloan Kettering Cancer Center is then eligible to receive additional milestone payments, where the amount of such payments owed to Memorial Sloan Kettering Cancer Center are contingent upon certain increases in the price of our common stock following the date of achievement of such clinical milestone. We enter into contracts in the normal course of business, including with clinical sites and professi tt conduct of clinical trials, contract manufacturers preclinical research studies, professi and materials. These contracts generally provide for termination on notice, and therefore are cancela the table of contractual obligations and commitments. onal service providers for the for the production of our producd t candidates, contract research service providers for toryrr supplies and not included in onal consultants for expert advice and vendors for the sourcing of clinical and labora ble contracts aa a ff ff ff t Off-Balance Sheet Arrangements We did not have, during the periods presented, and we do not currently have, any off-ff balance sheet arrangements, as defineff d in the rules and regulations of the SEC. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk related to changes in interest rates. As of Decemberm 31, 2018, our cash and cash equival consisted of cash and money market mutual funds, and our short-term investments consisted of United States treasuries with maturities up to twelve monthst is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature and low risk profileff instrumr results of operations. from the date of acquisition. Ouru primary exposure to market risk is interest income sensitivity, which of the ents in our portfolio, a 10% change in market interest rates would not have a material impam ct on our financial condition and/or ents q Our outstanding debt under the SVB Loan Amendment bears interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%, provided that in no event shall such interest rate exceed 8.25%. Given the floor and ceiling of the interest rate, the maximumm interest expense increase of a 10% change in market interest rates would be $0.1 million annually and would not have a material impactm operations. ncial condition and/or results of on our finaff 73 ITEM 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Stockhokk lders of Fate Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Fate Therapea utics, Inc. (thet Company) s and comprehensive loss, convertible preferredr m 2018 and 2017, the related consolidated statements of operation stockholders' equity and cash flows for each of the three years in the period ended Decemberm 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at Decembem r 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended Decemberm 31, 2018, in conformity with U.S. generally accepted accounting principles. as of Decemberm 31, stock and m aa We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of Decemberm 31, 2018, based on criteria established in Internal Control-Integrated Frameworkr framework), and our report dated March 5, 2019 expressed an unqualified opinion thereon. issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Basis for Opinion These financial statements are the responsibility of the Compam ny’s management. Our responsibility is to express an opinion on ’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required the Companym to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whethett fraud. r due a to error or fraud, and performing procedures s include examining, on a test basis, evidence that respond to those risks. Such proceduredd regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. dd /s/ Ernst & Young LLP We have serverr d as the Company’s auditor since 2009. San Diego, Califorff nir a March 5, 2019 74 Fate Therapeutics, Inc. Consolidated Balance Sheets (In thousands, except par value and share data) December 31, 2018 2017 $ $ $ 190,514 500 10,493 3,689 205,196 5,125 227 1,958 526 213,032 4,205 10,926 2,106 —— 7,588 2,438 27,263 3,401 7,500 549 1,404 12,446 88,952 —— 11,997 1,647 102,596 2,550 122 —— 24 105,292 1,678 7,254 —— 12 2,105 —— 11,049 1,347 724 175 —— 14,808 3 3 65 445,799 (2) (285,396) 160,469 213,032 $ 53 295,934 (3) (218,798) 77,189 105,292 $ $ $ $ Assets Current assets: Cash and cash equivalents Accounts receivable Short-term investments and related maturity receivables Prepaid expenses and other current assets a Total currr ent assets Property and equipment, net Restricted cash Collaboration contract Other assets Total assets Liabilities and Stockholders’ Equity Current liabilities: asset tt Accounts payablea Accruerr d expenses Current portion of CIRM award liabilitytt Currer nt portion of deferrer d rent Currenrr Longg–term debt, current portion t portion of deferred revenue Total current liabilities Deferred rent Deferred revenue Accruerr d expenses CIRM award liability,tt net of current portion Long–term debt, net of current portion Commitments and contingencies (Note 6) Stockholders’ Equity:t Preferff red stock, $0.001 par value; authorized shares—5,000,000 at Decemberm 31, 2018 and Decemberm 31, 2017; 2,819,549 Class A convertible preferred shares issued and outstanding at Decemberm 31, 2018 and Decemberm 31, 2017 Common stock, $0.001 par value; authorized shares—150,000,000 at Decemberm 31, 2018 and Decembem r 31, 2017; issued and outstanding—64,693,681 at Decemberm 31, 2018 and 52,648,601 at Decembem r 31, 2017 Additional paid–dd in capital Accumulm ated other comprehensive loss t Accumulated defici Total stockholders’ equitq yytt k Total liabilities and stockhold ers’ equityytt ff accompam nying notes. 75 Fate Therapeutics, Inc. Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Collaboration revenue Operating expenses: and development General and administrative Total operatingg expenses Loss from operations r income (expense): terest income Interest expense Loss on extingguishment of debt t Total other Net loss income (expense), net her comprehensive income (loss): Unrealized ggain (loss) on available-foff r-sale securities, net Comprm ehensive loss Net loss per common share, basic and diluted Weighted–dd average common shares used to compute basic and diluted net loss per share For the Years Ended December 31, 2017 2016 2018 $ 4,740 $ 4,106 $ 4,402 56,024 15,808 71,832 (67,092) 2,190 (1,696) —— 494 (66,598) $ 1 (66,597) $ (1.19) $ 34,358 11,873 46,231 (42,125) 559 (1,268) (118) (827) (42,952) $ (2) (42,954) $ (1.02) $ 26,452 9,913 36,365 (31,963) 138 (1,637) —— (1,499) (33,462) (1) (33,463) (1.05) $ $ $ 56,195,650 41,982,167 31,754,140 See accompam nying notes. 76 Fate Therapeutics, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (In thousands, except share data) Convertible red Stock Preferff Shares Common Stock Comprehensive Accumulated Amount Shares Amount —— $ —— 28,716,570 $ Loss Deficit —— $ (142,384) $ Additional Paid-in Capital 29 $180,393 $ Total Stockholders’ Equity Accumulated Other Balance at December 31, 2015 Exercise of stock options, net of issuance costs Repurchase liability for unvested equity awards Stock–kk b– ased compmm ensation Private placement issuances of common stock, net of offeff costs ring Private placement issuance of Series A convertible preferred ff stock, net of offeri Senior executive incentive bonuses ng costs paid in common stock Unrealized loss on shortrr -term investments Net loss —— —— —— —— —— 136,368 —— —— —— —— —— —— —— 187 1 3,184 —— 12,486,837 12 28,785 2,819,549 —— —— —— 3 —— —— —— —— —— —— —— 36,286 46,731 —— 121 —— —— —— —— —— —— —— —— —— —— —— —— 38,038 187 1 3,184 28,797 36,289 121 Balance at December 31, 2016 2,819,549 $ 3 41,386,506 $ Exercise of stock options, net of issuance costs Issuance of common stock upon vesting of restricted stock units Stock–kk b– ased compmm ensation Issuance of warrants for common stock Public offering of common stock, ng costs net of offeri ff Private placement issuances of common stock, net of offeff costs ring Private placement issuance of Series A convertible preferred ff stock, net of offeri ng costs Unrealized loss on shortrr -term investments Net loss —— —— —— —— —— —— —— —— —— —— —— 83,220 5,125 —— —— —— 10,953,750 —— —— —— —— —— —— —— —— Balance at December 31, 2017 2,819,549 $ 3 52,648,601 $ Exercise of stock options, net of issuance costs Issuance of common stock upon cashless warrant exercises Publu ic offer ings of common stock, ff net of offeri ff ng costs Stock–kk b– ased compmm ensation Issuance of common stock for license agreements Unrealized gain on short-term investments Net loss —— —— —— —— —— —— —— —— 694,830 —— 102,101 —— 10,648,149 —— —— —— 600,000 —— —— —— —— Balance at December 31, 2018 2,819,549 $ 3 64,693,681 $ —— —— 41 $248,957 $ —— —— —— (33,462) (1) —— (1) $ (175,846) $ (1) (33,462) 73,154 —— 1 —— —— 11 —— —— 226 (1) 3,606 217 42,968 (13) (26) —— —— —— —— —— —— —— —— —— —— —— —— —— —— 226 —— 3,606 217 42,979 (13) (26) —— —— 53 $295,934 $ —— —— —— (42,952) (2) —— (3) $ (218,798) $ (2) (42,952) 77,189 1 —— 11 —— —— 2,692 —— 134,780 6,293 6,100 —— —— —— —— —— —— —— —— —— —— 2,693 —— 134,791 6,293 6,100 —— —— 65 $445,799 $ —— —— —— (66,598) 1 1 (66,598) —— (2) $ (285,396) $ 160,469 See accompam nying notes 77 Fate Therapeutics, Inc. Consolidated Statements of Cash Flows (in thousands) 2018 Years Ended December 31, 2017 2016 $ (66,598) $ (42,952) $ (33,462) Cash flows from operating activities Net loss Adjud stments to reconcile net loss to net cash used in operating activities ation and amortization Stock–kk b– ased compensation Amortization of debt discounts and debt issuance costs Amortization of premiums and discounts on investments, net Amortization of collaboration contratt ct asset Noncash interest expense Deferred rent Deferred revenue Issuance of common stock for license agreements Cash payments included in loss on extinguishment of debt Non-cash loss on extinguishment of debt Changges in assets and liabilities: receivable Prepaid expenses and other assets Accounts payyable and accrued expenses Net cash used in operating activities sh flows from investingg activities ds from sale of propertytt and equipment Purchase of propertytt and equiq pment Purchases of short-term investments Maturities of short-term investments Net cash used in investingg activities h flows from financing activities uance of common stock from equity incentive plans, net of repurchases and issuance costs Proceeds from publu ic offerff Proceeds from private placement issuances of common stock, net of issuance ings of common stock, net of issuance costs costs Proceeds from private placement issuance of preferred stock, net of issuance costs Proceeds from CIRM award Proceeds from long–term debt Payments on long–term debt Cash payments included in loss on extinguishment of debt yPayments of debt issuance costs Net cash provided yby financi gng activities Net change in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash at begginningg of the period Cash, cash equivalents and restricted cash at end of the period Supplemental disclosure of cash flow information Interest paid Supplemental schedule of noncash investing and financing activities Issuance of warrants for common stock in connection with longg–term debt $ $ $ See accompam nying notes. 78 1,204 6,293 76 (335) 42 373 192 12,259 6,100 —— —— (500) (2,010) 4,254 (38,650) —— (2,303) (55,660) 57,500 (463) 2,693 134,577 971 3,606 81 (25) —— 321 1,085 (2,105) —— 88 30 —— (428) 2,511 (36,817) —— (1,725) (39,971) 31,500 (10,196) 205 43,206 881 3,184 139 171 —— 492 (7) (2,401) —— —— —— —— (381) 1,561 (29,823) 18 (457) (19,675) 16,000 (4,114) 186 —— —— (65) 28,849 —— 3,510 —— —— —— —— 140,780 101,667 89,074 190,741 1,242 $ $ (128) —— 15,000 (10,764) (88) (10) 47,356 343 88,731 89,074 2,314 —— $ 217 $ $ $ 36,391 —— —— (7,689) —— —— 57,737 23,800 64,931 88,731 1,067 —— Fate Therapeutics, Inc. Notes to Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies Organization Fate Therapeut a ics, Inc. (the Company) m was incorporated in the state of Delaware on April 27, 2007 and has its principal operations in San Diego, California. The Company is a clinical-stage biopharmaceutical compamm ny dedicated to the development of programmed cellular immunotherapies and T-cell immuno-oncology programs, including off-the-shelf engineered product candidates derived from clonal master iPSC lines, and immuno-regulatory programs, including product candidates to prevent life-threatening complications in patients undergoing hematopoietic cell transplantation and to induce immune tolerance in patients witht autoimmune disease. Its adoptive cell therapy programs are based on the Companym and direct the fate of immunemm ’s novel ex vivo cell programming apa proach, which it applies to modulate the therapea utic function for cancer and immune disorders. The Company’s cell therapya pipeline is comprised of NK- cells. a As of Decemberm 31, 2018, the Companymm has devoted substu antially all of its efforts to product development, raising capital a and and has not generated any revenues from any sales of its therapea utic products. To date, the Company’s building infrastrutt cturett revenues have been derived from collabor a ation agreements and governmr ent grants. Public Equity Offerings In September 2018, the Company complm eted a public offeff ring of common stock in which investors, including investors affiliff ated with the directors of the Company, purchased 10,648,149 shares of its common stock at a price of $13.50 per share under a shelf registration statement. Gross proceeds from the offeff related to the offering, net proceeds were $134.9 million. ring were $143.8 million, and, after giving effeff ct to $8.9 million of costs In Decemberm 2017, the Company complm eted a public offering of common stock in which investors purchased 10,953,750 shares of its common stock at a price of $4.20 per share under a shelf registration statement. Gross proceeds from the offering were $46.0 ing (of which $0.3 million was paid during the year ended ff million, and after giving effect Decemberm 31, 2018), net proceeds were $43.0 million. to $3.0 million of costs related to the offerff Private Placements of Common Stock and Convertible Preferred Stock In Novembem r 2016, the Company complm eted a private placement of common and preferff red stock in which investors, including investors affiliated with the Compam ny’s directors and officff ers, purchased convertible preferred stock and common stock of the Company. The Company issued 2,819,549 shares of non-voting Class A Preferred Stock at $13.30 per share, each of which is convertible into five shares of common stock upon certain conditions. The Compamm ny also issued 7,236,837 shares of common stock at $2.66 per share. Gross proceeds from the private placement were $56.7 million. After giving effect placement, net proceeds were $54.9 million. The Company also entered into a registration rights agreement (thet Registration Agreement) with certain of the purchasers in the November 2016 placement, excluding those purchasers affiliated with the Companm ynn ’s directors and officers, requiring the Company to register for the resale of the relevant shares. The Compam ny registered all of the relevant shares issued in the placement for resale on a Form S-3 filed with the SEC, as required under the Registration Rights Agreement, and the registration statement was declared effective in Januaryrr 2017. See Note 7 to the Consolidated Financial Statements for additional information related to this offering. to costs related to the private Rights ff tt ff In August 2016, the Company complm eted a private placement of common stock in which investors purchased 5,250,000 shares of the Company’s common stock at a price of $1.96 per share. Gross proceeds froff m the private placement were $10.3 million. Afteff r giving effect issued in the private placement transaction forff resale on a Form S-3 filed with the Securities and Exchange Commission (thet required under a registration rights agreement entered into by the Company with the purchasers of the common stock, and the registration statement was declared effective to costs related to the private placement, net proceeds were $10.2 million. The Company also registered all of the shares SEC), as in Septemberm 2016. ff Use of Estimates The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP). The preparation of the Company’s consolidated financial statements requires it to make estimates and assumptmm ions that impam ct the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liaba ilities in the Companym consolidated financial statements relate to accrued expenses. Althot ugh these estimates are based on the Compam ny’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptm ions. ’s consolidated financial statements and accompam nying notes. The most significant estimates in the Companym ’s 79 Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, Fate Therapeutics Ltd., rated in the United States. To date, the aggregate diaries have not been significant and all intercompam ny transactions and balances have been eliminated in incorporated in the United Kingdom, and Tfinity Therapeutics, Inc., incorporr operations of these subsiu consolidation. Segment Reporting Operating segments are identifiedff as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performff ance. The Company views its operations and manages its business in one operating and reportable segment. Fair Value of Financial Instruments The carrying amounts of accounts payablea and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borror wing rates available to the Compamm ny for loans with similar terms, which is considered a Level 2 input as described below, the Compm any believes that the fair value of long-term debt approximates its carrying value. each majora The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an forff exit price, representing the amount that would be received to sell an asset or paid to transferff between market participants. As such, fair value is a market-based measurement that should be determined based on assumptm ions that market participants would use in pricing an asset or liability. As a basis for considering such assumptm ions, the accounting guidance establia shes a three- tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: a liability in an orderly transaction Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other t than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptm ions. Financial assets measured at fair value on a recurring basis consist of the Companym ’s cash equivalents and short-term investments. Cash equival following tablea 2017 (in thousands): q ents consisted of money market funds and short-term investments consisted of U.S. treasuries. The presents the Company’s assets which were measured at fair value on a recurring basis as of Decemberm 31, 2018 and As of December 31, 2018: Cash equivalents U.S. Treasuryyrr debt securities Total assets measured at fair value on a recurrir gng basis As of December 31, 2017: Cash equivalents U.S. Treasuryyrr debt securities Total assets measured at fair value on a recurrir gng basis Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ $ $ 190,514 10,493 201,007 88,952 11,997 100,949 $ $ $ $ —— $ —— —— $ —— $ —— —— $ —— —— —— —— —— —— Total 190,514 10,493 201,007 88,952 11,997 100,949 $ $ $ $ The Company obtains pricing inforff mation from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, and bid and/or offers. ff None of the Companm y’s non-financial assets or liabilities is recorded at fair value on a non-recurring basis. No transfers between levels have occurrer d during the periods presented. 80 As of Decemberm 31, 2018 and 2017, the Company had no material liabilities measured at fair value on a recurring basis. Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents include cash in readily available checking and savings accounts, money market accounts and money market funds. The Company considers all highly liquid investments with an original maturity of three months or less from the dateaa of purchase to be cash equivq alents. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows as of Decemberm 31, 2018, 2017 and 2016 (in thousands): Cash and cash equivalents Restricted cash Total cash, cash equivalents, and restrict tt ed cash shown in the statement of cash flows December 31, 2018 December 31, 2017 December 31, 2016 190,514 $ 227 88,952 $ 122 88,609 122 190,741 $ 89,074 $ 88,731 $ $ Amounts included in restricted cash represent security deposits required to secure the Company’s credit card limit and its facilities lease. Short-Term Investments ff Available-f a or- sale securities are carried at fair value, with the unrealized gains and losses reporterr d in comprehensive income. The amortized cost of availabla e-for-sale debt securities is adjud sted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary,rr based on the specific identification method. Interest and dividends on securities classifiedff income. if any, on available-for-sale securities are included in othet r income or expense. The cost of securities sold is as available-for-sale are included in interest Concentration of Credit Risk Financial instruments, which potentially subject the Compam ny to a significant concentration of credit risk, consist primarily of cash and cash equivalents, and short-term investments. The Compam ny maintains deposits in federally insured financial institutions in excess of federally insured limits. The Compam ny has not experienced any losses in such accounts and management believes that the Compam ny is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits and investments are held. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally two to five years) and generally consist of furniture and fixtures, computers, scientific and office equipmq process costs related to facilities construct ion. Repairs and maintenance costs are charged to expense as incurred. rr ent, and in- Impairment of Long-Lived Assets Long-lived assets consist primarily of property and equipment. An impairmm ent loss is recorded if and when events and circumstances indicate that assets might be impam ired and the undiscounted cash flows estimated to be generated by those assets are the Compam ny measures the amount of any less than the carryirr ng amount of those assets. If the carrying amount is not recoverable, impam irment by compam ring the carrrr ying value of the asset to the present value of the expected futff urtt e cash flows associated with the use of the asset. While the Company’s current and historical operating losses and negative cash flows are indicators of impairmm management believes that futurett recognized any impairmm cash flows to be received support the carryirr ng value of its long-lived assets and, accordingly, has not ent losses since inception. ent, a 81 Deferred Rent Deferred rent consists of the difference between cash payments, lease incentives, and the recognition of rent expense on a straight-line basis for the facilities the Compam ny occupies. The Company’s lease for its facilities provides for fixed increases in minimumm annual rental payments. The total amount of rental payments due over the lease term are charged to rent expense ratably over the life of the lease. Revenue Recognition The Company recognizes revenue in a manner that depicts the transfer of contrott follows a five-step approach: (i) identify the contract with a customer, (ii) identify the performance obligations in the (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize or a service to a customer and reflects the amount of the consideration the Company is entitled to receive in exchange for such product or service. In doing so, the Companym contract, tt revenue when (or as) the customer obtains control relevant facts and circumstances when applying the revenue recognition standard. The Company applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances. of the product or service. The Companym considers the terms of a contract and all l of a productd t A customer is a party that has entered into a contract with the Company, where the purpose of the contract is to obtain a product t of the Company’s ordinary activities in exchange for consideration. To be considered a contract, (i) the must be approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights or a service that is an output contract t regarding the product or the service to be transferred can be identified, ff transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of futurtt e cash flows is expected to change as a result of the contract), and (v) it is probable that the Compam ny will collect substantially all of the consideration to which it is entitled to receive in exchange for the transfer of the product or the service. (iii) the payment terms for the producd t or the service to be A perforff mance obligation is defined as a promise to transfer a product or a service to a customer. The Company identifies each promise to transfer a product or a service (or a bundle of products the same and have the same pattern of transfer) that is distinct. A product or a service is distinct if both (i) the customer can benefit from the productd Companym Each distinct promise to transfer a product or a service is a unit of accounting forff product or a service is not separately identifiaff blea t performance obligation. or the service either on its own or together with other resources that are readily available to the customer and (ii) the ’s promise to transfer the product or the service to the customer is separately identifiable from other promises in the contract. or services, or a series of products and services that are substantially such promises should be combined into a single revenue recognition. If a promise to transfer a from other promises in the contract, dd The transaction price is the amount of consideration the Company is entitled to receive in exchange for the transfer of control of a product or a service to a customer. To determine the transaction price, the Companym financing component, the effects of any variable a significant financing component exists, the transaction price is adjusted for the time value of money. If an element of variability exists, the Companym product or the service is transferred to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method, which is the sum of probabilit y-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range must estimate the consideration it expects to receive and uses that amount as the basis for recognizing revenue as the elements, noncash considerations and consideration payable to the customer. If a considers the existence of any significant of possible consideration amounts. a aa If a contract has multiple performance obligations, the Company allocates the transaction price to each distinct performance obligation in an amount that reflects the consideration the Compamm ny is entitled to receive in exchange for satisfying performance obligation. For each distinct performance obligation, revenue is recognized when (or as) the Company transfers control of the product or the service applicabla e to such performance obligation. each distinct ff In those instances where the Companym first receives consideration in advance of satisfying its performance obligation, the Company classifies such consideration as deferred revenue until (or as) the Compam ny satisfies such performance obligation. In those instances where the Company first satisfiesff recorded as accounts receivable. its performance obligation prior to its receipt of consideration, the consideration is The Company expenses incremental costs of obtaining and fulfilling a contract as and when incurredr if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial. Otherwise, assets if they are incremental to the contract such costs are capitalized as contract . recognition of the underlying contract and amortized to expense proportionate to revenue tt tt t Research and Development Costs All research and development costs are expensed as incurred. 82 Patent Costs Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expendituret s is uncertain. Stock-Based Compensation Stock-based compem nsation expense represents the cost of the grant date fair value of employee m stock option and restricted stock unit grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. For stock option grants forff which vesting is subject to performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable or the performff grants for which vesting is subject to botht performance-based milestones and market conditions, expense is recorded over the derived service period after the point when the achievement of the performance-based milestone is probable or the performance condition has been achieved. The Compam ny estimates the fair value of stock option grants using the Black-Scholes option pricing model, with the exception of option grants for which vesting is subjeu using a lattice-based model. The fair value of restricted stock units is based on the closing price of the Company’s common stock as reported on The NASDAQ Global Market on the date of grant. The Company recognizes forfeitures for all awards as such forfeiturt es occur. ct to botht performance-based milestones and market conditions, which are valued ance condition has been achieved. For stock option The Company accounts for stock options and restricted stock awards to non-employees m using the fair value approach. Stock are subject to periodic revaluation over their vesting terms. For stock option ct to performance-based milestones, the expense is recorded over the remaining service period after options and restricted stock awards to non-employees grants for which vesting is subjeu the point when the performance condition is determined to be probablea m of achievement or when it has been achieved. Convertible Preferred Stock The Company applies the relevant accounting standards to distinguish liabilities from equity when assessing the classification and measurement of preferr value. Conditionally redeemable preferff stockholders’ equity. ff ed stock. Preferred shares subject to mandatory redemptm ions are considered liabilities and measured at fair red shares are considered tempom rary equity. All other t preferred shares are considered as The Company applies the relevant accounting standards for derivatives and hedging (in addition to distinguishing liabilities from equity) when accounting for hybrid contracts that contain conversion options. Conversion options must be bifurff cated from the host instruments and accounted for as free standing financial instruments according to certain criteria. These criteria include circumstances when (i) the economic characteristics and risks of the embedde related to the economic characteristics and risks of the host contractt derivative instrument and the host contract is not re-measured at fair value under otherwi changes in fair value reported in earnings as they occurred, and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently measured at fair value at each reporting date, with the changes in fair value reported in earnings. d derivative instruments are not clearly and closely t, (ii) the hybrid instrument that embodm ies both the embedded se applicable accounting principles with m rr Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differeff change in tax rates on deferred nces are expected to reverse. The effect tax assets and liabilities is recognized in income in the period that includes the enactment date.aa of a ff ff The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporaryrr differences, projected futurett taxable income, tax-planning strategies, and results of recent operations. If management determines that the Compam ny would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjusd provision for income taxes. tment to the deferred tax asset valuation allowance, which would reduce the The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more- likely-than-not recognition threshold, management recognizes the largest amount of tax benefitff that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Companym recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability. 83 Comprehensive Loss Comprm ehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. Other comprmm ehensive loss included unrealized losses on available-for-sale securities, which was the only diffeff rence between net loss and comprm ehensive loss for the applicable periods. Net Loss Per Common Share Basic net loss per common share is calculated by dividing the net loss by the weighted-average numbem r of common shares outstanding for the period, without consideration for common stock equivalents. Excluded from the weighted-average number of shares outstanding are shares which have been issued upon the earlyaa unvested restricted stock totaling 3,284 shares for the year ended December 31, 2016. Dilutive common stock equivalents are comprm ised of convertible preferff units outstanding under the Company’s stock option plans. For all periods presented, there is no differ shares used to calculate basic and diluted common shares outstanding due to the Company’s net loss position. red stock, warrants for the purchase of common stock, and common stock options and restricted stock ence in the numbem r of common exercise of stock options and are subjeu vesting and ct to futurett ff Potentially dilutive securities not included in the calculation of diluted net loss per common share because to do so would be anti-dilutive are as follows (in common stock equivalent shares): Warrants for common stock Common stock options Restricted stock units Series A convertible preferff red stock (if converted) 2018 85,094 6,980,581 188,625 14,097,745 21,352,045 As of December 31, 2017 225,756 5,458,043 212,625 14,097,745 19,994,169 2016 134,113 3,910,350 525,250 14,097,745 18,667,458 Going Concern Assessment Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Company determined that there are no conditions or events that raise substantial doubt about its ability to continue as a going concern as of the date of the issuance of these financial statements. Recently Adopted Accounting Pronouncements In Novembem r 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016- 18 (ASU 2016-18), which requires that a 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 years beginning afteff this guidance did not have a material impacm t on the Company’s consolidated financial statements. r December 15, 2017. The Company adopted the update retrospectively to each period presented. The adoption of cash equiq valents. ASU 2016-18 is effeff ctive for fiscal tt In August 2016, the FASB issued ASU 2016-15, which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The Companynn adopted ASU 2016-15 on January 1, 2018. The Company adopted the update retrospectively to each period presented and adjusted Decemberm 31, 2017 to reclassifyff cash payments included in the loss on extinguishment of debt from an operating activity to a financing activity. the Consolidated Statements of Cash Flows for the year ended d (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize In May 2014, the FASB issued ASU 2014-09 related to Accounting Standards Codification (ASC) Topic 606, which created a single, principle-based revenue recognition model that will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance. Entities will recognize revenue in a manner that depicts the transfer of goods or services to customers and reflects the amount of the consideration which the entity expects to be entitled to receive in exchange for those goods or services. The model provides that entities follow five steps: (i) identify the contract with a customer, (ii) identifyff contract, tt revenue when (or as) the customer obtains controt l of the product or service. For public business entities, ASU 2014-09 is effective beginning in the first quarter of 2018 using one of two prescribed transition methods: retrospectively to each prior reporting period presented (full date of initial application (tht e cumulmm ative catch-up transition method). The Companmm y adopted ASU 2014-09 in the first quarter of 2018 using the full retrott processes, financial statements and related disclosures, and has determined that the adoption did not have a material impact on the Company’s historical consolidated financial statements. retrospective method), or retrospectively with the cumulm ative effect of initially applying the guidance recognized at the spective method. The Compam ny has evaluated the effect that the updated standard had on its internal the performance obligations in the ff 84 Recently Issued Accounting Pronouncements In Novembem r 2018, the FASB issued ASU 2018-18, which clarifies the interaction between ASC Topic 808, Collaborative Arrangementstt , and ASC Topic 606, Revenue from Contracts with Customers. The guidance, among othet transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019. The Companym consolidated financial statements. believes that the adoption of this guidance will not have a material impactm ff ’s on the Companym r items, clarifies that certain In August 2018, the FASB issued ASU 2018-13, which amends the disclosure requirements in ASC Topic 820 by adding, changing, or removing certain disclosures. ASU 2018-13 is effecff tive for fiscal years beginning after Decemberm 15, 2019. The Compam ny believes that the adoption of this guidance will not have a material impam ct on the Company’s consolidated financial statements. In June 2018, the FASB issued ASU 2018-07. ASU 2018-07 expands the scope of ASC 718, Compensation- Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemplm oyees. Consistent with the accounting requirement for employm ASC 718 will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered. ASU 2018-07 is effective for fiscal years beginning after Compam ny believes that the adoption of this guidance will not have a material impam ct on the Company’s consolidated financial statements. ee share-based payment awards, nonemployee share-based payment awards within the scope of ff Decemberm 15, 2018. The In Februarr ry 2016, the FASB issued ASU 2016-02, Leases, which requires a lessee to recognize a lease liability and a right-of-ff ff use asset for all leases with lease terms of more than 12 montht s. This guidance is effeff ctive for annual reporting periods beginninn ng after December 15, 2018, including interim periods within those years, and early adoption is permitted. Companie s may adopt this guidance using a modified retrospective approach for leases that exist or are entered into afteff in the financial statements. In July 2018, the FASB issued ASU 2018-11, which provides the option of an additional transition method that allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulmm ative-effect adjustment to the opening balance of retained earnings in the period of adoption. While the Company is continuing to evaluate its significant lease of the adoption of the new lease guidance on its consolidated financial statements, the arrangement to assess the potential impactmm Company adopted the new lease guidance on January 1, 2019, using a modified retrott spective approach, using the effective date as the date of initial application. Consequently, financial information and disclosures required under the new guidance will not be provided for dates and periods prior to January 1, 2019. The Compam ny anticipates that the adoption will result in an increase in assets of approximately $17.0 million and an increase of liabilities of approximately $19.0 million recorded on its Consolidated Balance Sheet for leases commencing prior to the effective date. The Companym Consolidated Statements of Operations and Comprm ehensive Loss or the Consolidated Statements of Cash Flows. does not expect the guidance to have a material effect on the r the beginning of the earliest compamm rative period m 2. Collaboration and License Agreements Ono Collaboration and Option Agreement On Septemberm 14, 2018, the Company entered into a Collaboration and Option Agreement (the Ono Agreement) with Ono Pharmaceutical Co. Ltd. (Ono) for the joint development and commercialization of two off-the-shelf, iPSC-derived CAR T-cell product candidates. The first off-the-s lymphoblastic leukemias, and the second off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 2) targets a novel antigen identified by Ono expressed on certain solid tumors (each a Candidate and, collectively, the Candidates). helf, iPSC-derived CAR T-cell candidate (Candidate 1) targets an antigen expressed on certain t Pursuant to the Ono Agreement, the Compam ny and Ono are jointly conducting research and development activities under a joint development plan, with the goal of advancing each Candidate to a pre-defined preclinical milestone. The Company has granted to Ono, during a specified period of time, an option to obtain an exclusive license under certain intellectual property rights to develop and commercialize (a) Candidate 1 in Asia, with the Compam ny retaining rights for development and commercialization in all other territories of the world and (b) Candidate 2 in all territories of the world, with the Company retaining the right to co-develop and co- commercialize Candidate 2 in the United States and Europe under a joint arrangement whereby it is eligible to share at least 50% of the profiff ts and losses (each, an Option). For each Candidate, the Option will expire upon the earliest of: (a) the achievement of the pre-definff ed preclinical milestone, (b) termination by Ono of research and development activities for the Candidate and (c) the date that is the later of (i) four years after ive Date and (ii) complm etion of all applicable activities contemplated under the joint development plan (the Option Period). the Effect ture for both Candidates. The Company has maintained worldwide rights of manufacff ff 85 Under the terms of the Ono Agreement, Ono paid the Company an upfroff nt, non-refundable and non-creditable payment of $10.0 million in connection with entering into the Ono Agreement. Additionally, as consideration for the Company’s conduct of research and preclinical development under a joint development plan, Ono paysa annual research and development fees set forth in the annual budget included in the joint development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan. The Company received $5.0 million in October 2018 as a prepayment for the first year of research and development. the Companym Further, under the terms of the Ono Agreement, Ono has agreed to pay the Compam ny up to an additional $40.0 million, subject to the achievement of a preclinical milestone (Option Milestone) and the exercise by Ono of the Options (Option Exercise Fees) during the Option Period. Such fees are in addition to thet upfront payment and research and development fees. Subject to Ono’s exercise of the Options and to the achievement of certain clinical, regulatory and commercial milestones (Milestones) with respect to each Candidate in specified territories, the Company is entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subju ect to reduction by 50% if the Company elects to co-develop and co-commercialize Candidate 2 as described above. The Compam ny is also eligible to receive tiered royalties (Royalties) ranging from the mid-single digits to the low-double digits based on annual net sales by Ono of each Candidate in specified terrir tories, with such royalties subject to certain reductions. The Ono Agreement will terminate with respect to a Candidate if Ono does not exercise its Option for a Candidate within the Option Period, or in its entirety if Ono does not exercise any of its Options for the Candidates within their respective Option Periods. In addition, either party may terminate the Ono Agreement in the event of breach, insolvency or patent challenges by the other party; provided, that Ono may terminate the Ono Agreement in its sole discretion (x) on a Candidate-by-Candidate basis at any time after the second anniversaryrr of the effecff tive date of the Ono Agreement or (y) on a Candidate-by-Candidate or country-by-country basis at any time after the expiration of the Option Period, subject to certain limitations. The Ono Agreement will expire on a Candidate-by- Candidate and country-by-countrytt applicablea payment obligations under the Ono Agreement. basis upon the expiration of the applicablea or in its entirety upon the expiration of all royalty term, r The Company applied Accounting Standards Codification (ASC) 808, Collaborative Arrangements and determined that the Ono Agreement is applicable to such guidance. The Company concluded that Ono represented a customer and applied relevant guidanca from ASC 606, Revenue from Contracts with CustoCC mers (ASC 606) to evaluate the appropriate accounting for the Ono Agreement. In accordance with this guidance, the Company identified its performance obligations, including its grant of a license to Ono to certain of its intellectual property subject to certain conditions, its conducd t of research services, and its participation in a joint steering determined that its grant of a license to Ono to certain of its intellectual property subject to certain committee. The Companym conditions was not distinct from other performance obligations because such grant is dependent on the conduct and results of the research services. As a result, the license is classified as symbolic intellectual determined that its conduct of research services was not distinct from other performance obligations since such conduct is dependent on the guidance of the joint steering committee. Accordingly, the Company determined that all performance obligations should be accounted for as one combined performance obligation, and that the combined performance obligation is transferred over the expected term of the conduct of the research services, which is estimated to be four years. property under ASC 606. Additionally, the Company e t The Company also assessed, in connection with the upfront, non-refundable and non-creditable payment of $10.0 million received in Septemberm 2018 and the $5.0 million prepayment of the first-year research and development fees in October 2018, whether a significant financing compomm nent exists under the Ono Agreement. Such assessment evaluated whether: (i) a subsu tantial amount of the consideration is variable, (ii) the amount, or timing of payment, of the consideration would have varied based on the occurrerr nce or non-occurrence of future events that are not substantially within the control of the Company or Ono, and (iii) the timing of the transfer of the performance obligations is at the discretion of Ono. Based on its assessment, the Companym significant financing component. concluded that there was not a The Company also assessed the effects ff of any variabla e elements under the Ono Agreement. Such assessment evaluated, among other things, the likelihood of receiving (i) preclinical milestone and option fees, (ii) various clinical, regulatory and commercial milestone payments, and (iii) royalties on net sales of either product Candidate. Based on its assessment, the Compam ny concluded that, based on the likelihood of these variable components occurring, there has not been a significff ant variable element included in the transaction price to date. In accordance with ASC 606, the Company determined that the initial transaction price under the Ono Agreement equals $30.0 million, consisting of the upfroff nt, non-refundable and non-creditabla e payment of $10.0 million and the aggregate estimated research and development fees of $20.0 million. The upfront payment of $10.0 million was recorded as deferred recognized as revenue over time in conjunction with the Company’s conduct of research services over the estimated four-year period based on actual costs incurred compam red to estimated total costs expected to be incurred under the Ono Agreement, as the research and development activities are the primary component of the combined performance obligation. The Company recorded the $5.0 million prepayment of the first-year research and development fees as deferred, and such fees will be recognized as revenue as the research services are delivered. revenue and will be ff 86 The Company has not assigned a transaction price to any Option Milestone, Milestones or Option Exercise Fees given the subsu tantial uncertainty related to their achievement and has not assigned a transaction price to any Royalties. As a direct result of the Compam ny’s entry into the Ono Agreement, the Company incurred an aggregate of $2.0 million in nse consideration to existing licensors of the Company, of which $1.0 million was paid during the year ended Decemberm 31, sublice u 2018. The $2.0 million in sublu icense consideration represents an asset under ASC 340, Other $2.0 million asset will be amortized to research and development expense in conjunct under the Ono Agreement. As of December 31, 2018, the contract m n tt tt asset had a balance of $2.0 million. ion with the Compam ny’s revenue recognition Assets and Deferred Costs. As such, the The Company recognized revenue of $0.6 million under the Ono Agreement for the year ended Decemberm 31, 2018. Such revenue was comprm ised of $0.4 million associated with research services and $0.2 million associated with the upfront payment. These amounts were initially recorded in deferred revenue. As of Decembem r 31, 2018, aggregate deferred revenue related to the Ono Agreement was $14.4 million, of which $6.9 million is classified as current. Juno Collaboration and License Agreement a m On May 4, 2015, the Company entered into a strategic research collaboratio erapies. Under the Juno Agreement, the Compam ny is primarily responsible for screening and identifying n and license agreement (the Juno Agreement) with Juno Therapea utics, Inc. (Juno) to screen for and identifyff small molecules that enhance the therapeutic properties of Juno’s genetically- engineered T-cell immunoth small molecule modulators of immunological cells, while Juno is primarily responsible for the development and commercialization of engineered T-cell immunotherapies rating the Compamm ny’s modulators. Subjec associated antigen targets which selection may be made by Juno on a target-by-target basis, the Compam ny agreed to grant Juno an exclusive worldwide license to certain of its intellectual property, including its intellectuat make, use, sell and otherwise modulators directed against such designated tumor-associated antigen targets. The Compam ny retained exclusive rights to such intellectual property, including its intellectual property arising under the collabora of those designated tumor-associated antigen targets selected by Juno. The Juno Agreement will end on the date that no further payments are due under the Juno Agreement, unless terminated earlier pursuant to the terms of the Juno Agreement. exploit genetically-engineered T-cell immunm otherapies tion, for all other purposes, including its use outside t to the selection by Juno of designated tumor- l property arising under the collaboration, to using or incorporating small molecule incorporr u a a t t t ent of Pursuant to the terms of the Juno Agreement, Juno paid the Compam ny an upfront, non-refundable and non-creditable payma $5.0 million and purchased 1,000,000 shares of the Compam ny’s common stock at a price of $8.00 per share for an aggregate purchase price of $8.0 million. The Company determined that this common stock purchase represented a premium of $3.40 per share, or $3.4 million in aggregate (Equity Premium), and the remaining $4.6 million was recorded as issuance of common stock in shareholders’ equity. Additionally, Juno agreed to fund all of the Compamm ny’s collaboration research activities for an initial four-year research term ff date of the Juno Agreement, with minimum annual research payments of $2.0 million to the Compam ny. beginning on the effective Juno has the option to extend the exclusive research term for an additional two years beyond the initial four-year term, subjeb ct to the payment of a one-time, non-refundable extension fee of $3.0 million and the continued funding of the Company’s activities under the collaboration during the extended term, with minimum annual research payments of $4.0 million to the Company during the two-year extension period. Upon exercise of the research term extension, the Company has the option to require Juno to purchase up to $10.0 million of the Compamm ny’s common stock at a premium equal to 120% of the then thirty-day trailing volume weighted average trading price of the Company’s common stock. Under the Juno Agreement, the Companym is eligible to receive selection fees for each tumor-associated antigen target selected by Juno and bonus selection fees based on the aggregate numbu Additionally, in connection with each Juno therapya es the Company’s small molecule modulators, Juno has agreed to pay the Company non-refundable, non-creditable milestone payments totaling up to approximately $51.0 million in the aggregate per therapy upon the achievement of various clinical, regulatory and commercial milestones (Milestone Fees). Additionally, in connection with the third Juno therapy and the fiftht Juno therapya modulators, Juno has agreed to pay the Company additional non-refundable, non-creditablea approximately $116.0 million and $137.5 million, respectively, in the aggregate, per therapy upon the achievement of various clinical, regulatory,rr er of tumor-associated antigen targets selected by Juno (Selection Fees). and commercial milestones (Bonus Milestone Fees). bonus milestone payments totaling up to tes the Compam ny’s small molecule that uses or incorporat that uses or incorpora rr rr Under the Juno Agreement, beginning on the date of the first commercial sale (in each country) for each Juno therapy that uses or incorporates the Company’s small molecule modulators, and continuing until the later of: (i) the expiration of the last valid patent rr claim, (ii) ten years after such first commercial sale, or (iii) the expiration of all data and other regulatory exclusivity periods affor each therapya , Juno has agreed to pay the Company royalties in the low single-digits on net sales of each Juno therapy that uses or incorporates the Compamm ny’s small molecule modulators (Royalty Payments). ff ded 87 The Company applied ASC 606 to evaluate the appropriate accounting for the Juno Agreement. In accordance with this rr its perforff mance obligations, including its grant of an exclusive worldwide license to certain of its conditions, its conduct of research services and its partaa icipation in a joint research committee. guidance, the Compam ny identifiedff intellectual property subju ect to certainrr The Company determined that its grant of an exclusive worldwide license to certain of its intellectual property subject to certain conditions was not distinct frff om other performance obligations because such grant is dependent on the conduct and results of the research services. As a result, the exclusive worldwide license is classified as symbolm ic intellectuat Additionally, the Company determined that its conduct of research services was not distinct from other performance obligations since such conduct is dependent on the guidance of the joint research committee. Accordingly, the Company determined that all performance obligations should be accounted for as one combined performance obligation since no individual performance obligation is distinct, and that the combim ned performance obligation is transferre services, which is four years. d ratably over the expected term of conduct of the researaa ch l property under ASC 606. ff : (i) a substu The Company also assessed, in connection with the upfront, non-refundable and non-creditable payment of $5.0 million and the financing component exists under the Juno Agreement. Such assessment evaluated $3.4 million Equity Premium, whether a significant whether t have varied based on the occurrence or non-occurrence of futurtt e events that are not substantially within the control of the Company or Juno, and (iii) the timing of the transfer of the performance obligations is at the discretion of Juno. Based on its assessment, the Company concluded that there was not a significant financing compomm nent. antial amount of the consideration is variabla e, (ii) the amount, or timing of payment, of the consideration would ff The Company also assessed the effects ff of any variabla e elements under the Juno Agreement. Such assessment evaluated, among other things, the likelihood of receiving (i) various clinical, regulatory and commercial milestone payments and (ii) royalties on net sales of any Juno therapies the Compam ny’s small molecule modulators. Based on its assessment, the Company concluded that based on the likelihood of these variable components occurring there was not a significant variable element included in the transaction price. that use or incorporate a r In accordance with ASC 606, the Company determined that the initial transaction price under the Juno Agreement equals $16.4 million, consisting of the upfront, non-refundable and non-creditable payment of $5.0 million, the $3.4 million Equity Premium and $8.0 million of estimated payments forff and non-creditable payment of $5.0 million and the $3.4 million Equity Premium were recorded as deferred revenue, and are being recognized as revenue ratably over four years, which approximates the level of effort ance obligation. relative to the total effort expected to satisfyff the conduct of research services during the initial four-year term. The upfront, non-refundable to satisfy the Compam ny’s performance obligation the Company’s performff ff The Company has not assigned a transaction price to any Selection Fees given the substantial uncertaintytt related to their occurrence. Since the Selection Fees are closely aligned with the previously discussed combined performance obligation, any such futurtt e consideration in connection with selection fees will be recognized in conjn unction with the combim ned performance obligation. Additionally, the Company has not assigned a transaction price to any Milestone Fees or Bonus Milestone Fees given the substant ial uncertainty related to their achievement. Since any performance obligation would be complete at the time of milestone achievement, any future consideration in connection with milestone payments will be recognized on the date of achievement. Finally, the Compam ny any has not assigned a transaction price to any Royalty Payments given the substantial uncertainty performff tes the Company’s small molecule modulators, any future consideration in connection witht Royalty Payments will be recognized on the date of sale. ance obligation would be complete at the time of potential sale of each Juno therapy that uses or incorpora related to their achievement. Since u rr rr ii Total revenue recognized under the Juno Agreement for the years ended December 31, 2018, 2017 and 2016 was $4.1 million, $4.1 million, and $4.4 million, respectively. Such revenue for each period presented included $2.1 million associated with the upfront fee and the Equity Premium, and $2.0 million, $2.0 million, and $2.3 million for the years ended December 31, 2018, 2017, and 2016, respectively, associated with research services. As of December 31, 2018, aggregate deferred revenue related to the Juno Agreement was $0.7 million, all of which is classified as current. In March 2018, Juno was acquired by Celgene Corporation (Celgene). This acquisition did not affect the terms of the Juno Agreement. On January 3, 2019, Celgene announced that it had entered into a definff Compam ny (BMS), under which BMS will acquire Celgene. itive merger agreement with Bristol-Myers Squibbi Memorial Sloan Kettering Cancer Center License Agreement On May 15, 2018, the Company entered into an Amended and Restated Exclusive License Agreement (thet Amended MSK License) with Memorial Sloan Kettering Cancer Center (MSK). The Amended MSK License amends and restates the Exclusive License Agreement entered into between the Company and MSK on August 19, 2016 (thet Original MSK License), pursuant to which the Company entered into an exclusive license agreement with MSK forff ons and methods covering iPSC- derived iPSC-derived cellular immunotherapy, including T cells and NK cells derived from iPSCs engineered with CARs. rights relating to compositi m aa 88 Pursuant to the Amended MSK License, MSK granted to the Compamm ny additional licenses to certain patents and patent ts and off-the-shelf CAR T cells, including the use of CRISPR and other innovative applications relating to new CAR construcr technologies for their production, in each case to research, develop, and commercialize licensed products in the field of all human therapea utic uses worldwide. The Company has the right to grant sublice the Amended MSK License, in which case it is obligated to pay MSK a percentage of certain sublice Compam ny. nses to certain licensed rights in accordance with the terms of nse income received by the u u The Company issued 500,000 shares of the Company’s common stock to MSK (thett MSK Shares) and, in return,rr MSK returner d ity Therapeua its entire interest in Tfinff License, Tfinity is a wholly-owned subsidiary of the Company. The MSK Shares were issued pursuant to an exemptm ion from registration under the Securities Act of 1933, as amended (thet regarding transactions by an issuer not involving a public offering. tics, Inc. (Tfinity) to the Companm y. As a result, as of the effective date of the Amended MSK Securities Act), in reliance on Section 4(a)(2) of the Securities Act Additionally, the Company paid an upfront fee of $0.5 million. The Companym is also obligated to pay to MSK an annual license maintenance fee during the term of the agreement, and milestone payments upon the achievement of specified clinical, regulatoryrr and commercial milestones forff s as well as royalty payments on net sales of licensed products. licensed productd Furthermt ore, in the event a licensed product achieves a specified clinical milestone, MSK is then eligible to receive additional milestone payments, where the amount of such payments owed to MSK are contingent upon certain increases in the price of the Company’s common stock following the date of achievement of such clinical milestone. Given the high degree of uncertainty surrounding the achievement of clinical milestones and the requisite increase in the price of the Company’s common stock, the Compam ny has not recorded a liabia lity for such payments. During the year ended December 31, 2018, the Company recognized an aggregate of $5.3 million of research and development expenses, consisting of the $0.5 million upfront cash payment to MSK and the issuance of the MSK Shares, valued at $4.8 million, associated with the Amended MSK License. Gladstone License Agreement On Septemberm 11, 2018, the Company entered into an exclusive license agreement (the Gladstone License Agreement) with the J. David Gladstone Institutes (Gladstone). Pursuant to the Gladstone License Agreement, Gladstone granted to the Company exclusive licenses to certain patents and Patent Rights) for the research, development, manufacturi ng, and commercialization of human therapeutics patent applications (thet derived from iPSCs. The Patent Rights cover the use of the clustered regularly interspaced short palindromic repeat (CRISPR) and engineered nuclease-deactivated CRISPR-associated protein-9 (dCas9) system, known as the CRISPR activation (CRISPRa) system, for cellular reprogramming and iPSC generation. ff In consideration for the rights granted under the Gladstone License Agreement, the Company issued to Gladstone 100,000 shares of the Company’s common stock (the Gladstone Shares). The Gladstone Shares were issued pursuant to an exemptionm registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a publu ic offerin g. ff from Additionally, the Company paid Gladstone an upfront fee of $0.1 million and is obligated to pay Gladstone milestone payments in an aggregate amount of up to approximately $1.9 million upon the achievement of specified clinical, regulatory and commercial milestones as well as tiered royalties in the low single digits on net sales of human therapeutic products covered by the Patent Rights. The Company is also obligated to pay Gladstone a tiered percentage in the low- to mid-single digits of certain income received by the Compam ny in connection with the sublicense of the Patent Rights. u During the year ended December 31, 2018, the Company recognized an aggregate of $1.4 million of research and development expenses, consisting of the $0.1 million upfroff nt cash payment to Gladstone and the issuance of the Gladstone Shares, valued at $1.3 million, associated with the Gladstone License Agreement. 3. California Institute for Regenerative Medicine Award On April 5, 2018, the Compam ny executed an award agreement with the Californiarr Institute for Regenerative Medicine (CIRM) (the Award). Pursuant to the terms of the Award, the Company is eligible to receive five disbursements in varying pursuant to which CIRM awarded the Compam ny $4.0 million to advadd nce the Compam ny’s FT516 product candidate into a first-in- human clinical trial for the treatment of subject s with advanced solid tumors, including in combination with monoclonal antibodydd therapya totaling $4.0 million, witht one disbursement receivablea complmm etion of certain milestones throughout the project period, which was estimated to be from April 1, 2018, to June 30, 2019 (the , and the Company is required to provide Project Period). The Award is subjeb ct to certain co-funding requirements by the Companym upon the execution of the Award, and four disbursements receivablea amounts u rr upon the 89 CIRM progress and financial update reports throughout the Project Period. In Decemberm 2018, the Company discussed with CIRM its intent to pursue the clinical development of FT516 in relapsed / refractoryrr hematologic malignancies in addition to advanced solid tumors, and the Company’s preference to first submit an IND application for FT516 in relapsed / refractoryr hematologic malignancies rather than in advanced solid tumors. In January 2019, the Compam nya submitted its IND application for FT516 in relapsed / refractoryrr hematologic malignancies, which IND submission was allowed by the FDA in Februaryrr 2019. The Company and CIRM have agreed to suspend the Award until such time as the Compam ny elects to proceed with its submission of an IND application for FT516 in advanced solid tumors. At the time of suspension, an additional $0.5 million was available for funding under the Award. Pursuant to the terms of the Award, the Company, in its sole discretion, has the option to treat the Award either as a loan or as a grant. In the event the Company elects to treat the Award as a loan, the Company will be obligated to repay i) 60%, ii) 80%, iii) 100% or iv) 100% plus interest at 7% plus LIBOR, of the total Award to CIRM, where such repayment rate is dependent upon the phase of clinical development of FT516 at the time of the Company’s election. If the Companym within 10 years of the date of the Award, the Award will be considered a grant and the Company will be obligated to pay to CIRM a royalty on commercial sales of FT516 until such royalty payments equal nine times the total amount awarded to the Companym under the Award. does not elect to treat the Award as a loan Since the Compam ny may, at its election, repaya some or all of the Award, the Compam ny accounts for the Award as a liability until has received aggregate disbursements under the Award in the amount of Consolidated Balance Sheets and the time of election. As of December 31, 2018, the Companym $3.5 million. The aggregate amount received is recorded as a CIRM Liabilit classifiedff as current or non-current based on the potential amount payable within twelve months of the currer nt balance sheet date. y on the accompanying m a 4. Short-term Investments The Company invests portions of excess cash in United States treasuries with maturities ranging from three to twelve months from the purchase date. These debt securities are classifieff d as short-term investments in the accompam nying Consolidated Balance Sheets and are accounted for as available-for-sale securities. The following table summarizes the Company’s short-term investments accounted for as available-for-sale securities as of Decemberm 31, 2018 and 2017 (in thousands): December 31, 2018 U.S. Treasuryyrr debt securities Total December 31, 2017 U.S. Treasuryyrr debt securities Total Maturity (in years) Amortized Cost Unrealized Losses Unrealized Gains Estimated Fair Value 1 or less 10,495 $ 10,495 $ (2) (2) $ —— 10,493 —— $ 10,493 1 or less 12,000 $ 12,000 $ (3) (3) $ —— 11,997 —— $ 11,997 The Company reviewed its investment holdings as of December 31, 2018 and determined that the unrealized losses were not other-than-temporaryrr unrealized losses because the Compam ny does not intend to sell the underlying securities prior to maturt ity and it is not more likely than not that the Compam ny will be required to sell these securities before the recovery of their amortized cost basis. During the years ended December 31, 2018 and 2017, the Compam ny did not recognize any impam irment or gains or losses on sales of available-for-sale securities. 90 5. Property and Equipment Property and equipment consist of the following (in thousands): m equipment Furniture and fixtut res Computer ff and office mm Softwar e tt Leasehold improvem Scientific equipment Constructt Propertyt and equipment, gross Less accumulated depreciation and amortization Propertyy and equipment, net tion-in-process ents—b— uilding December 31, 2018 2017 $ $ 516 688 103 288 7,868 1,987 11,450 (6,325) 5,125 $ $ 508 527 103 180 6,371 —— 7,689 (5,139) 2,550 Depreciation expense related to property and equipment was $1.2 million, $1.0 million, and $0.9 million, for the years ended ent have been Decemberm 31, 2018, 2017, and 2016, respectively. No material gains or losses on the disposal of property and equipmq recorded for the years ended December 31, 2018, 2017, and 2016. As of December 31, 2018, $0.2 million of fixed assets had not been paid. Construcr tion-in-process represents cost incurrer d under a tenant improm vement allowance and costs incurrer d by the Compam ny in space, which the Company began to occupy in Januaryrr 2019 (see Note 6 for ff facility connection with the construction of its expanded further details). x 6. Accrued Expenses, Long-Term Debt, Commitments and Contingencies Accrued Expenses Current accrued expenses consist of the follo ff wing (in thousands): Accruerr d payyroll and other emplmm yoyee benefits Accrued clinical trial related costs Accruerr d other Accruerr d expenses December 31, 2018 December 31, 2017 $ $ 2,938 $ 4,729 3,259 10,926 $ 1,761 3,323 2,170 7,254 -term accruer d expenses consist primarily of the accrual for the final payment fee associated with our long-term debt. Long-Term Debt Long-term debt and unamortized discount balances are as follows (in thousands): Long-term debt Less debt issuance costs and discount, net of current portion Long-term debt, net of long-term portion of debt issuance costs and discount Less current portion of longg-term debt Longg-term debt, net Current portion of long-term debt current portion of debt issuance costs and discount Current portion of longg-term debt, net 91 December 31, 2018 December 31, 2017 $ 15,000 $ 15,000 (54) (192) 14,946 (2,500) 12,446 2,500 (62) 2,438 $ $ $ 14,808 —— 14,808 —— —— —— $ $ $ SVBVV Loan Amendment On July 14, 2017 (thet First Amendment Effective Date), the Company entered into the First Amendment (the SVB Loan Amendment) to the Amended and Restated Loan and Security Agreement (the Restated LSA) between the Compam ny and Silicon Valley Bank (thet Bank) dated July 30, 2014. The SVB Loan Amendment amends the Restated LSA. Pursuant to the SVB Loan Amendment, the Bank extended an additional term loan to the Company on July 14, 2017 in the of which was applied to repay in full the Company’s existing principal amount of $15.0 million (the 2017 Term Loan), a portion outstanding debt with the Bank under the Restated LSA, which included outstanding principal, accruerr d interest, and final payment fees. Following such repayment in full of the Compamm ny’s existing outstanding debt with the Bank under the Restated LSA, cash proceeds to the Compam ny from the remaining portion of the 2017 Term Loan were $7.5 million. rr The 2017 Term Loan matures on January 1, 2022 (the Term Loan Maturity Date) and bears interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%; provided, however, that in no event shall such interest rate exceed 8.25%. Interest is payable on a monthly basis on the first day of each month.t The interest rate as of Decemberm 31, 2018 was 8.25%. From August 1, 2017 through January 1, 2019 (the Interest-only Period), the Company was required to make monthly payments of interest only. In January 2019, after achievement of a product development milestone, the Company elected to extend the Interest- only Period from January 1, 2019 through and including to July 31, 2019. The Company is required to repay the principal, plus monthly payments of accrued interest, in 30 equal monthlyt installments based on a 30-month amortization schedule. The Company’s final payment, due on the Term Loan Maturtt ity Date, shall include all outstanding principal and accrued and unpaid interest under the 2017 Term Loan, plus a 7.5%, or $1.1 million, final payment fee. This final payment fee is being accrued as interest expense over the term of the 2017 Term Loan and recorded in accrued expenses. In connection with the SVB Loan Amendment, the Compam ny issued to the Bank on the First Amendment Effective Date a fully ent, at an exercise price equal to $3.28 per share. The aggregate fair value of the 2017 Warrant was 2017 Warrant), expiring in July 2024, to purchase up to an aggregate of 91,463 shares of the Company’s exercisable warrant (thet common stock, subject to adjustmd determined to be $0.2 million using the Black-Scholes option pricing model and was recorded as a debt discount on the 2017 Term Loan. This debt discount is amortized to interest expense over the term of the 2017 Term Loan using the effective interest method. The Company determined the effective interest rate of the 2017 Term Loan to be 10.2% as of the First Amendment Effective Date. In Septemberm 2018, the 2017 Warrant was fully exercised in exchange for 67,952 shares of the Company’s common stock in a cashless transaction. The Company determined the repayment of the Restated LSA and issuance of the 2017 Term Loan was a debt extinguishment and accounted for the 2017 Term Loan at fair value as of the First Amendment Effeff ctive Date, accordingly. During the year ended Decemberm 31, 2017, the Company recorded a loss on debt extinguishment of $0.1 million, which was primarily related to the unaccrued amount of the final payment fee under the Restated LSA that was paid in connection with the 2017 Term Loan. The Company is required under its loan agreement with the Bank to maintain its deposit and securities accounts with the Bank and to comply with various operating covenants and default clauses. A breach of any of these covenants or clauses could result in a default under the agreement, which would cause all of the outstanding indebtedness under the facility to become immediately due and a payable. The Company has maintained complm iance with all such covenants and clauses to date. For the years ended Decemberm 31, 2018 and 2017, the Company recorded $1.7 million and $0.8 million, respectively, in aggregate interest expense related to the 2017 Term Loan. Restated LSA On July 30, 2014, the Compam ny entered into the Restated LSA with the Bank, collateralized by substantially all of the Compam ny’s assets, excluding certain intellectual property. Pursuanta Companym in an aggregate principal amount of up to $20.0 million, comprm ised of (i) a $10.0 million term loan, funde date (thet Term A Loan) and (ii) subject to the achievement of a specified clinical milestone, additional term loans totaling up to $10.0 million in the aggregate, which were available until Decemberm 31, 2014 (each, a Term B Loan). On Decemberm 24, 2014, the Compam ny elected to draw on the full $10.0 million under a Term B Loan. to the Restated LSA, the Bank agreed to make loans to the d at the closing ff The Term A Loan and the Term B Loan were scheduled to mature on January 1, 2018 and June 1, 2018, respectively. The Company was required to make a final payment fee of 7.5%, equaling $0.8 million, of the funded amount for each of the Term A Loan and Term B Loan on the respective maturity dates. These final payment fees were accrued as interest expense over the terms of the loans and recorded in accrued expenses. 92 In connection with the funding of the Term B Loan, the Company issued the Bank and one of its affiliates fully-exercisable warrants to purchase an aggregate of 98,039 shares of the Company’s common stock (the 2014 Warrants) at an exercise price of $4.08 per share. In March 2018, a portion of the 2014 Warrants were exercised in exchange for 34,149 shares of the Company’s common stock in a cashless transaction. As of Decemberm 31, 2018, warrants to purchase 49,020 shares of the Company’s common stock remain outstanding subject to thet 2014 Warrants. The 2014 Warrar nts expire in Decemberm 2021. For the years ended December 2017, and 2016, the Companm y recorded $0.5 million and $1.6 million, respectively, in aggregate interest expense related to the Term A and Term B Loans. Warranr ts to purchase 36,074 shares of the Company’s common stock at a weighted average exercise price of $7.21 per share issued in connection with a prior debt agreement between the Company and the Bank in 2009 remain outstanding as of Decemberm 31, 2018, with such warrarr nts to purchase 5,305 and 30,769 shares of the Company’s common stock having expiration dates in January 2019 and August 2021, respectively. Facility Lease The Company leases certain officeff and laboratory space under a non-cancelablea operating lease. In Maya 2018, the Company amended the operating lease, extending the term of the lease through 2028 and agreeing to lease additional space in the same building as its existing space. With respect to the construction of the additional space, the Company received a $1.9 million tenant imprm ovement allowance from its landlord and accounts forff incurred. Costs under the tenant improvm imprm ovement allowance had been utilized, and the Company has spent $0.1 million on construcrr to occupy this additional space in January 2019. ement allowance were paid directly by the landlord. As of December 31, 2018, the full such costs as property and equipment with an offseff tion related costs. The Company began t to deferred rent as tenant ff The lease is subject u to additional charges for common area maintenance and other t costs. In connection with the lease, the Company has a cash-collateralized irrevocablea minimum rent and fixed amenities payments, assuming no early termination, under the operating lease are $41.2 million. The Company maintains the right to terminate the lease after October 2025, subject to the Company’s delivery to the landlord of twelve months’ prior written notice and an early termination payment of $2.5 million. standby letter of credit in the amount of $0.2 million. As of Decemberm 31, 2018, future In January 2015, the Company entered into a sublease for additional laboratory space. The sublease was accounted forff as an operating lease and expired in Septemberm 2017. No future payments remain under the subleu ase. Aggregate contractual rent expense was $2.3 million, $2.3 million, and $1.3 million for the years ended Decemberm 31, 2018, 2017, and 2016, respectively. License Agreements The Company has entered into exclusive license agreements with certain academic institutions and universities pursuant to which the Compam ny acquired certain intellectual property. Pursuant to each agreement, as consideration for an exclusive license to the intellectual property, the Compam ny paid a license fee, reimbursed the institution for historical patent costs and, in certain instances, issued the institution shares of restricted common stock. Additionally, under each agreement, the institution is generally eligible to consideration including, but not limited to, annual maintenance fees, royalties, milestone payments and sublicensing receive futurett fees. Each of the license agreements is generally cancelable by the Compam ny, given appropriate prior written notice. Minimummm annual payments to maintain these cancelable licenses total an aggregate of $0.3 million. m 93 Commitments Future minimumm payments under the long-term debt and the non-cancelable operating leases as of December 31, 2018 are as follows (in thousands): Long–Term Debt Operating Leases Total Years Ending Decemberm 31, 2019 2020 2021 2022 2023 Thereafteff r Total Less interest Less additional payments due upon maturitytt Less unamortized debt discount and debt issuance costs Less current portion of longg-term debt, net Longg–term debt, net of current portion $ $ $ $ $ 3,720 6,818 6,313 1,629 —— —— 18,480 (2,355) (1,125) (116) (2,438) 12,446 3,019 3,761 3,873 3,989 4,109 22,470 41,221 $ $ 6,739 10,579 10,186 5,618 4,109 22,470 59,701 The Company’s long-term debt bears interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%; provided, however, that in no event shall such interest rate exceed 8.25%. The amounts in the table above assume payment at the current interest rate, which is subject to change. The amounts in the above tablea reflect the Interest-only Period through July 31, 2019. Under the Company’s non-cancelable facilities operating lease, in addition to rent, the lease is subject to certain fixed amenities fees. The above table includes all such fixeff and other t twelve months’ prior written notice and an early termination paymaa ent of $2.5 million. costs. The Compam ny maintains the right to terminate the lease after October 2025, subju ect to our delivery to the landlord of d fees. The lease is subject to additional variable charges for common area maintenance 7. Convertible Preferff red Stock and Stockholders’ Equity Convertible Preferred Stock In November 2016, the Company completed a privateaa placement of stock in which invest ors, includi ed stock and commomm n stock of the Companynn (thett Novembem r 2016 tors affiliated with the ng invesnn nn ll ff le Preferff rrr ed Stock (thett Class A Preferred) at $13.30 per rerr d filed with the Delaware Secretary of State on Novembem r 22, 2016 (thett CoD). directors and offiff cers of the Company,nn purchased convertirr bli e preferr Placement). The Companynn issued 2,819,549 shares of non-voting Class A Convertibrr share, each of which is convertible into five shares of common stock upon certainrr Preferff ences, Rights and Limitations of the Class A Preferff The Class A Preferredrr were purchased exclusll CoD prohibited Redmidd le from convertirr ng the Class A Preferred into shares of the Companynn ’s common stock if,ff as a result of conversion, Redmidd le, together withtt Percentage Limitation), which percentage less than or equal to 19.99% or (ii) subject to approval of the Companynn ’s stockhokk lders to the extent required in accordance withtt NASDAQ Global Market to an aggregate of 14,097,745 shares of common stock upon the conversion of the outstand Redmidd le has the right to increase the Redmidd le Percentage Limitation to anynn percentage in excess of 19.99% at its election. The Companynn also issued 7,236,837 shares of common stock at $2.66 per share as partaa of the Novembem r 2016 Placement. Gross proceeds from the Novembem r 2016 Placement were $56.7 million, and after giving effect to costs related to placement, net proceeds were $54.9 million. er in excess of 19.99%. On May 2, 2017, the Companynn ’s stockholders approved the issuance of up iateaa s, would ownww more than 9.99% of the Companynn ’s common stock then issued andaa could change at Redmile’s election upon 61 days’ notice to the Companynn to (i) anyaa outsuu tanding (the Redmile othett ree numbuu the tedaa withtt Redmidd le Group, LLC (collectively, Redmidd le). The terms of the conditions definff ed in the Certirr ficateaa of Designation of ing shares of Class A Preferred. ively by entities affilia rules, anynn numbuu As a result, its affilff er nn uu aa rr ff The Class A Preferred are non-voting shares and haveaa le into five shares of the Companynn ’s common stock at a conversion price of $2.66 per share, which was the fair value of the Companynn ’s common stock on the date of issuance. Holders of the Class A Preferredrr liquidation preferences of the Class A Preferred areaa pari passu amoaa ff Preferr converterr d to common stock).kk er of shares held by each such holder (trett ated for this purpose as if the Class A Preferred had been have the same dividend rights as holders of the Companynn ’s common stock. Additionally, the ng holders of the Companynn ’s common stock and holders of the Class A a stated paraa value of $0.001 per share and are convertibrr ed, pro rata based on the numbuu 94 The Companynn evaluate l d the Class A Preferred for liability or equity classification under ASC 480, Distii ingun ishingn Liabilities from rr ned that equity treatment was appropriate because the Class A Preferred did not meet the definition of the liability nts defined thereunder for convertirr bli e instrumeuu Equity, and determi instrumeuu embom dy an obligation to buyuu back the shares outsuu ide of the Companynn ’s control in a manne Additionally, the Companynn determi guidance of ASC 480 given that they are not redeemable for cash or othtt er assets (i) on a fixed or determi holder, and (iii) upon the occurrence of an event that is not solely within control of the Company.nn rr ned that the Class A Preferff , the Class A Preferredrr nts. Specifically aa ff rerr d would be recorded as permaneaa nt equity, not tempormm aryrr equity, based on the rr nabla e date,aa (ii) at the option of the are not mandaa atorily redeemable and do not r thataa could require the transfer of assets. The Company also evaluated the Class A Preferred in accordance with the provisions of ASC 815, Derivatives and Hedging, including the consideration of embm edded derivatives requiring bifurcu ation from the equity host. Based on this assessment, the Compam ny determined that the conversion option is clearly and closely related to the equity host, and thus, bifurcation is not required. The issuance of convertible preferred stock could generate a beneficial conversion feature (BCF), which arises when a debt or d conversion option that is beneficial to the investor (or in-tht e-money) at inception because ve strike price that is less than the market price of the underlying stock on the commitmentnn date. conversion price of $2.66 per common share, which was equal to the market price of the equity security is issued with an embedde m the conversion option has an effecti The Class A Preferred have an effective Compam ny’s stock on the commitment date. Therefore, no BCF was present. ff ff The Company also entered into a registration rights agreement (thet Registration tt purchasers in the November 2016 Placement, excluding those purchasers affiliated with the Companym registered all of the relevant shares issued in the requiring the Company to register for the resale of the relevant shares. The Companymm Novembem r 2016 Placement for resale on a Form S-3 filed with the SEC, as required under the Registration Rights Agreement, and the registration statement was declared effective in January 2017. ff ff Rights Agreement) with certain of the , ’s directors and officers Description of Securities Dividends As of Decemberm 31, 2018, the Board of Directors of the Companym has not declared any dividends. 2013 Stock Option and Incentive Plan, and Inducement Equity Plan On August 28, 2013, the Company’s board of directors and stockhok lders approved and adopted the 2013 Stock Option and t awards to individuals who are then employmm Incentive Plan (the 2013 Plan). The 2013 Plan became effective immediately prior to the Compamm ny’s IPO. The 2013 Plan was subsequently amended in Maya 2017. Under the 2013 Plan, the Compam ny may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other ees, offiff cers, directors or consultants of the Company or its subsidiaries. A total of 1,020,000 shares of common stock were initially reserved for issuance under the 2013 Plan, and in May 2017, stockholders approved an additional 2,500,000 shares of common stock for issuance under the 2013 Plan. The shares issuable pursuant to awards granted under the 2013 Plan will be authorized, but unissued shares. The shares of common stock underlying any awards from the 2013 Plan and a previously existing equity plan from 2007 that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of common stock, expire or are otherwise terminated (other than by exercise) will be added back to the shares of common stock availablea for issuance under the 2013 Plan. In addition, the numbem r of shares of stock availablea for issuance under the 2013 Plan will be automatically increased each January 1 by 4% of the outstanding numberm of shares of the Companym such lesser numberm as determined by the compem nsation committee of the Companym ’s board of directors. ’s common stock on the immediately preceding Decemberm 31 or Recipients of stock options under the 2013 Plan shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair value of such stock on the date of grant. Under the 2013 Plan, stock options generally vest 25% on the first anniversary of the original vesting date, with the balance vesting monthly over the remaining three years, or vest monthly over four years, unless they contain specific perforff mar a nce maximumm term of stock options granted under the 2013 Plan is ten years. and/or market-based vesting provisions. The Inducdd ement Planll On May 10, 2016, the Compamm ny’s board of directors approved the Fate Therapeutics, Inc. Inducement Equity Plan (thet mm Inducement Plan), the purpose of which is to enablea officers and employe m the Company may grant non-qualifiedff stock options and restricted stock units. A total of 500,000 shares of common stock were initially reserved for issuance under the Inducedd ment Plan. In January 2019 and January 2018, an additional 200,000 shares and 400,000 shares, respectively, of common stock were reserved for issuance under the Inducement Plan. The shares of common stock the Company to grant equity awards to induce highly-qualified prospective ent with the Company. Under the Inducement Plan, by the Company to accept employm es who are not employed mm 95 underlying any awards from the Inducement Plan that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of common stock, expire or are otherwise terminated (other than by exercise) under the Inducement Plan will be added back to the shares of common stock available for issuance under the Inducement Plan. Employee Stock Purchase Plan On September 13, 2013, the Company’s board of directors approved and adopted the 2013 Employee mm Stock Purchase Plan (thet ESPP). A total of 729,000 shares of common stock were initially reserved for issuance under the ESPP. In addition, the numberm of shares of stock available for issuance under the ESPP will be automatically increased each January 1, beginning on January 1, 2015, by the lesser of (i) 2% of the outstanding numberm of shares of the Company’s common stock on the immediately preceding Decemberm 31, (ii) 450,000 shares, or (iii) such lesser numberm as determined by the compensation committee of the Company’s board of directors. No purchases have been made to date under the ESPP. Stock Options and Restricted Stock Unit Awards Stock Options. The following table summarizes stock option activity and related information under all equity plans for the years ended Decemberm 31, 2018, 2017 and 2016: Outstanding at Decemberm 31, 2015 Granted rcised d ingg at Decemberm 31, 2016 Granted Exercised d ingg at Decemberm 31, 2017 Granted Exercised d ingg at Decemberm 31, 2018 Options vested and expected to vest at December 31, 2018 Options exercisable at December 31, 2018 Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (in 000s) 4.59 2.62 1.44 3.58 3.77 3.09 2.79 3.50 3.52 8.30 3.88 4.36 5.58 5.59 4.24 6.92 $ 1,486 8.28 $ 682 7.99 $ 14,754 7.87 7.86 7.00 $ $ $ 51,497 50,985 29,470 Options 2,587,474 2,245,240 (136,368) (785,996) 3,910,350 2,522,920 (83,220) (892,007) 5,458,043 3,251,980 (694,830) (1,034,612) 6,980,581 6,916,914 3,430,415 $ $ $ $ $ $ of Decemberm 31, 2018, 2017 and 2016, the outstanding options included zero, 73,600, and 73,600, respectively, of ance-based options for which the achievement of the performff performff probable. The aggregate grant date fair value of these options at Decemberm 31, 2018, 2017 and 2016, was zero, $0.1 million and $0.1 million, respectively. ance-based vesting provisions was determined not to be For the years ended Decemberm 31, 2018, 2017 and 2016, the Companym granted its employees m and directors 3.3 million, 2.5 million and 2.2 million stock options, respectively, at a weighted-average grant date fair value per share equal to $8.28, $2.29 and $1.80, respectively. As of Decemberm 31, 2018, 2017 and 2016, the unrecognized compensation cost related to outstanding options (excluding those with unachieved performar be recognized as expense over approximately 3.1 years, 2.6 years and 2.6 years, respectively. nce-based conditions) was $15.9 million, $5.8 million and $4.9 million, respectively, which was expected to The total intrinsic value, which is the amount by which the exercise price was exceeded by the price of the Compam ny’s common stock on the date of exercise, of stock options exercised during the year ended Decemberm 31, 2018 was $5.5 million. Total cash received upon the exercise of stock options was $2.7 million for the year ended Decemberm 31, 2018. 96 Restricted Stock Units. The following table summarizes Restricted Stock Unit activity and related information under all equity plans for the years ended Decembem r 31, 2018, 2017 and 2016: Outstandingg at Decemberm 31, 2015 Granted Vested d ingg at Decemberm 31, 2016 Granted Vested Cancelled Outstandingg at Decemberm 31, 2017 Granted Vested d Outstandingg at Decemberm 31, 2018 Restricted Stock Units expected to vest at Decemberm 31, 2018 Number of Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Vesting Period Aggregate Intrinsic Value (in 000s) 525,250 —— —— —— 525,250 —— (225,125) (87,500) 212,625 —— —— (24,000) 188,625 180,625 $ $ $ $ $ 4.89 —— —— —— 4.89 —— 4.89 4.89 4.89 —— —— 4.89 4.89 4.89 3.80 $ 1,770 2.80 $ 1,318 1.80 $ 1,299 0.80 0.80 $ $ 2,420 2,317 As of Decemberm 31, 2018, 2017 and 2016, the unrecognized compensation cost related to outstanding restricted stock units was $0.4 million, $0.9 million, and $1.8 million respectively, which was expected to be recognized as expense over approximately 0.8 years, 1.8 years, and 2.8 years respectively. Stock-Based Compensation Expense The allocation of stock-based compem nsation for all stock awards is as follows (in thousands): Research and development General and administrative Total stock-based compensation expense Years Ended December 31, 2017 2018 $ $ 3,654 2,639 6,293 $ $ 2,095 1,511 3,606 $ $ 2016 1,802 1,382 3,184 Employee Stock Option Grants.tt The weighted-average assumptm ions used in the Black-Scholes option pricing model to determine the fair value of the emplmm oyee stock option grants were as follows: Risk–kk free interest rate Expected volatility Expected term (in years) Expected dividend yyield Years Ended December 31, 2017 2.0% 90.1% 6.0 0.0% 2018 2.5% 79.3% 6.0 0.0% 2016 1.6% 79.9% 6.0 0.0% Risk-free interest rate. The Companym bases the risk-freeff interest rate assumptm ion on observed interest rates appropriate for the expected term of the stock option grants. Expected dividend yield. The Companym bases the expected dividend yield assumptmm ion on the fact that it has never paid cash dividends and has no present intention to paya cash dividends. Expex cted volatll ility. Due to thet Compam ny’s limited operating history and lack of compam ny-specific historical or impliem d volatility, the expected volatility assumptmm ion is based on historical volatilities of a peer group of similar compam nies whose share prices are publu icly available. The peer group was developed based on companies in the biotechnology industry. 97 Expected term. The expected term represents the period of time that options are expected to be outstanding. As the Compam ny does not have suffici an average of the contractual ent historical exercise behavior, it determines the expected lifeff assumptm ion using the simplm ifieff d method, which is tt term of the option and its vesting period. ff Non-EmpEE loyeeo Stock Option Grants. The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the non-employee stock option grants were as follows: Risk–kk free interest rate Expected volatility Expected term (in years) Expected dividend yyield Years Ended December 31, 2017 2.1% 87.4% 8.5 0.0% 2018 2.7% 79.7% 7.9 0.0% 2016 1.5% 83.1% 6.4 0.0% Warrants to Purchase Common Stock in Connection with Debt Issuance As a result of the financing of the Loan Amendment on July 14, 2017, the Compam ny issued SVB fully-exercisable warrants to purchase an aggregate of 91,463 shares of the Compamm ny’s common stock at an exercise price of $3.28 per share. The warrants would was fully exercised in exchange for 67,952 shares of the Company’s have expired in July 2024. In September 2018, the 2017 Warrant common stock in a cashless transaction. See Note 6 of the Notes to the Consolidated Financial Statements for additional information on the debt issuance. rr The fair value of the warrants was determined to be $0.2 million, which was recorded to additional paid-in capital as a debt discount. The weighted- average assumptmm ions used in the Black-Scholes option pricing model to determine the fair value of the warrants issued were as follows: Risk–kk free interest rate Expected volatility Expected term (in years) Expected dividend yyield Common Stock Reserved for Future Issuance Common stock reserved for future issuance is as follows: ff ed stock (if converted) Common stock warrants Convertible preferr Common stock options Restricted stock units Awards available under the 2013 Plan Awards available under the Inducement Plan Emplom yyee stock purchase plan As of July 14, 2017 2.1% 88% 7.0 0.0% December 31, 2018 85,094 14,097,745 6,980,581 188,625 3,605,510 379,178 729,000 26,065,733 2017 225,756 14,097,745 5,458,043 212,625 3,572,112 100,000 729,000 24,395,281 98 8. Income Taxes The following is a reconciliation of the Company’s expected federal income tax provision (benefit) to the actual t income tax provision (in thousands): Tax computed at federal statutoryrr ate tax, net of federal tax benefit rate nces Permanent differeff Stock compem nsation R&D tax credits Reserve for uncertain tax positions Tax attribute limitation Tax Cuts and Jobs Act Other Valuation allowance Income tax expense $ Years Ended December 31, 2017 (14,603) $ (1,315) 795 539 (2,934) 1,326 —— 25,280 46 (9,134) 2018 (13,985) $ (1,620) 22 (307) (3,301) 1,160 —— —— 304 17,727 $ —— $ —— $ 2016 (11,377) (2,089) 292 968 (971) 2,076 54 —— (74) 11,121 —— Significant components of the Compam ny’s deferred tax assets are summarized as follows (in thousands): Deferred tax assets: Section 59e amortization Net operating losses R&D tax credits Depreciation and amortization Deferred revenue Stock compem nsation Other Deferred tax assets Valuation allowance Net deferred tax assets As of December 31, 2018 2017 $ $ 19,069 30,981 9,163 1,653 3,906 1,482 1,106 67,360 (67,360) $ —— $ 14,365 27,699 5,421 581 594 876 96 49,632 (49,632) —— valuation allowance of $67.4 million and $49.6 million at Decemberm 31, 2018 and 2017, respectively, has been established to ff offset the deferred tax assets, as realization of such assets is uncertain. At Decemberm 31, 2018, the Company had federal and California net operating loss (NOL) carryforwards of $136.8 million and NOL carrr yforwards $137.5 million, respectively, which may be available to offset begin to expire in 2027 and 2028, respectively, unless previously utilized. At Decemberm 31, 2018, the Company had federal and California research and development (R&D) credit carryfrr orff warr credit carryforwards will begin to expire in 2035 unless previously utilized. The California R&D credit carryforwards will carry forward indefinitely. rds of $8.2 million and $5.4 million, respectively. The federal R&D tax income. The federal and Californiarr taxablea futurett ff Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (thet Code), substa u ntial changes in the rr ff rds, credit carryforff war taxable income. The tax benefits related to future utilization of federal and state net operating loss ds, and other deferred tax assets may be limited or lost if cumulm ative changes in ownership exceeds Company’s ownership may limit the amount of net operating loss and research and development credit carryforff warr used annually in the future to offff set carryforff warr 50% withit n any three-year period. The Company completed a study to assess whether an ownership change, as defined by Section 382 of the Code, had occurred from the Companym determined that several ownership changes had occurrer d. Accordingly, the Compam ny reduced its deferred tax assets related to the federal NOL carryforwards and the federal R&D credit carryforwards that are anticipated to expire unused as a result of these ownership changes. These tax attributes were excluded from deferred tax assets with a corresr allowance witht no net effect on income tax expense or the effective tax rate. The Compam ny updated the study through December 31, 2018 and concluded there were no ownership changes during the years ended Decemberm 31, 2016, 2017, and 2018. Future ownership changes may further ’s formation through December 31, 2015. Based upon this study, the Companym limit the Compam ny’s ability to utilize its remaining tax attributes. ponding reduction of the valuation rds that could be t 99 The Company files income tax returns t in the United States and California, and has historically filed income tax returns in Canada. The Company currently has no years under examination by any jurisdiction; however, the Compam ny is subjeb ct to income tax examination by federal, Califorff nian and Canadian tax authorities for years beginning in 2015, 2014, and 2014, respectively. However, to the extent allowed by law, the taxing authot generated and carried forward, and make adjust rities may have the right to examine prior periods where NOLs and tax credits were nts up to the amount of the carryf d met ards. orwff r The change in the Compam ny’s unrecognized tax benefits is summarized as follows (in thousands): Balance at December 31, 2015 Increase related to current year tax positions Increase related to prior year tax positions Decrease related to prior yyear tax positions Balance at December 31, 2016 Increase related to current year tax positions Increase related to prior year tax positions Decrease related to prior yyear tax positions Balance at December 31, 2017 Increase related to current year tax positions Increase related to prior year tax positions Decrease related to prior yyear tax positions Balance at December 31, 2018 $ $ $ $ 3,869 2,268 1,625 (32) 7,730 4,077 6 (13) 11,800 1,798 148 (199) 13,547 The Company does not anticipate that the amount of unrecognized tax benefits as of Decemberm 31, 2018 will significantly change within the next twelve months. Due to the valuation allowance recorded against the Company’s deferred tax assets, none of the total unrecognized tax benefits as of Decembem r 31, 2018 would reduce the effect recognized interest or penalties in its Consolidated Statements of Operations and Comprehensive Loss since inception. ive tax rate if recognized. The Companym has not ff The Company adopted ASU No. 2016-09 on January 1, 2017. ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the financial statements. The Company had excess tax benefits for which a benefitff could not be previously recognized of $0.1 million. Due to the full valuation allowance on the deferred tax assets, there was no impam ct to the Companymm ’s consolidated financial statements as a result of the adoption. The Tax Cuts and Jobs Act (the Act) was enacted on Decemberm 22, 2017. The Act reduces the US federal corporate tax rate from 34% to 21%. The reduction in the federal tax rate caused the Compam ny to remeasure its deferred tax assets and liabilit Decemberm 31, 2017. The remeasurement resulted in a provisional income tax expense of $25.3 million, offset by an equal reduction in the valuation allowance during the year ended Decemberm 31, 2017. During 2018, the Company finalized its analysis of the provisional impam ct associated with the remeasurement of deferred tax assets. There was no change in the provisional remeasurement amount previously recorded during 2017. ies at a On Decemberm 22, 2017, SEC Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of US GAAP in situations when a registrant does not haveaa inforff mation available, prepared, or analyzed (including computations) in reasonabla e detail to complmm ete the accounting for certain income tax effect of the Act. The impacm t of the Act was finalized during the year ended Decemberm 31, 2018, and no change was made froff m the previously reported provisional amount. the necessaryrr 9. Employee Benefits Effect ff age. Employees m the terms of the plan, employmm been made by the Company since the adoption of the 401(k) plan. ive January 1, 2009, the Compam ny adopted a defined contribtt ution 401(k) plan for emplm oyees who are at least 21 years of are eligible to participate in the plan beginning on the first day of the calendar quarter following date of hire. Under ees may make voluntary contributions as a percent of compem nsation. No matching contributions have 100 10. Selected Quarterly Financial Data (in thousands, except per share data) (unaudited) 2018 Revenues Total operating expenses Net loss Basic and diluted net loss per common share 2017 Revenues Total operating expenses Net loss Basic and diluted net loss per common share First Quarter Second Quarter Third Quarter Fourth Quarter $ $ $ $ $ 1,026 15,080 (14,135) $ 1,027 20,632 (19,654) $ 1,026 17,718 (16,782) (0.27) $ (0.37) $ (0.31) $ $ 1,027 10,998 (10,126) (0.24) $ $ 1,026 10,596 (9,645) (0.23) $ $ 1,026 11,366 (10,684) (0.26) $ 1,661 18,402 (16,027) (0.25) 1,027 13,271 (12,497) (0.29) 101 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures. We are responsible for maintaining disclosure controls t and procedures, t and procedures are controls and other as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submu it under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information requiqq red to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulm ated and communicated to our management, including the individual serving as our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls tt recognizes that any controls assurance of achieving the desired control object and procedures. relationship of possible controls , no matter how well designed and operated, can provide only reasonable and not absolute ives, and management necessarily applies its judgment in evaluating the cost-benefitff b and procedures, management and procedures d tt tt tt Based on our management’s evaluation (witht the participation of the individual serving as our principal executive officff er and principal financial officeff the individual serving as our principal executive officer and principal financial officer has concluded that our disclosure controls procedures were effective at the reasonablea r) of our disclosure controls and procedurd es as required by Rules 13a-15 and 15d-15 under the Exchange Act, assurance level as of December 31, 2018, the end of the period covered by this report. and tt Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for tt over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the establishing and maintaining adequate internal control Exchange Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our and principal financial officer, to provide reasonable management, including the individual serving as our principal executive officer assurance regarding the reliability of financial reporting and the preparation of financial statements for external r accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of the Companym Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Frameworkr assessment, our management concluded that, as of Decembem r 31, 2018, our internal control over financial reporting was effective based on those criteria. over financial reporting based on the criteria set forth by the Committee of (2013 Framework)r ’s internal control purposes in ff tt . Based on this Our independent registered publiu c accounting firm, Ernst & Young LLP, has audited the financial statements included in this Form 10-K and has issued an unqualified opinion on the effectiv 31, 2018. The report of Ernsrr Report on Form 10-K. ff t & Young LLP is included witht eness of our internal controt l over financial reporting as of Decemberm the financial statements included under Part II, Item 8 of this Annual Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended Decemberm 31, 2018 that have materially affected r internal control over financial reporting. ff , or are reasonabla y likely to materially affecff t, our 102 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Fate Therapeutics, Inc. Opinion on Internal Control over Financial Reporting We have audited Fate Therapea utics, Inc.’s internal control tt over financial reporting as of Decembem r 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Fate Therapeutics, Inc. (thet Compam ny) maintained, in all material respects, effective internal control over financial reporting as of Decemberm 31, 2018, based on the COSO criteria. We also have audited, in accordance with the standards of the Publu ic Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Companym as of Decemberm 31, 2018 and 2017, the related consolidated statements of operations and comprmm ehensive loss, convertible preferred stock and stockholders' equity and cash flows for each of the three years in the period ended Decemberm 31, 2018, and the related notes and our report dated March 5, 2019 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control tt over fiff nancial reporting and for its ff veness of internal control over financial reporting included in the accompanym tt Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal assessment of the effecti Internal Control financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. ing Management’s Report on control over r We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. aa Our audit included obtaining an understanding of internal control tt ff weakness exists, testing and evaluating the design and operating effective performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonablea basis for our opinion. over financial reporting, assessing the risk that a material ness of internal control based on the assessed risk, and Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A compamm ny’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonablea assets of the compamm ny; (2) provide reasonabla e assurance that transactions are recorded as necessaryr to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditurtt es of the compam ny are being made only in accordance with authorizations of management and directors of the compam ny; and (3) provide reasonable assurance regarding prevention or timely detection of unauta horized acquisition, use, or disposition of the company’s assets that could have a material effeff ct on the financial statements. detail, accurately and fairly reflect the transactions and dispositions of the Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to futurett changes in conditions, or that the degree of complm iance with the policies or procedures may deteriorate. periods are subject to the risk that controls may become inadequate q becausa e of /s/ Ernst & Young LLP San Diego, CA March 5, 2019 103 ITEM 9B. Other Information None. 104 PART III ITEM 10. Directors, Executive Officers and Corporate Governance Except as set fortht below, the inforff mation required by this item is contained in our definitive proxy statement (the Proxy Statement), to be filed with the SEC in connection with the Annual Meeting of Stockholders within 120 days after the conclusion of our fiscal year ended Decemberm 31, 2018 and is incorporated in this Annual Report on Form 10-K by reference. We have adopted a written code of business conduct and ethics t our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A current copy of the code is posted on the Corporate Governance section of our website, which is located at www.fatetherapeutics.com. If we make any substantive amendments to, or grant any waivers from, the code of business conductd ethics for our principal executive officer, principal financial officer, principal accounting officer, controller or persons perforff ming similar functions, or any officer or director, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K. that applies to our directors, officer s and empmm loyees, including and ff ff ITEM 11. Executive Compensation The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by referff ence. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by referff ence. ITEM 13. Certain Relationships and Related Party Transactions, and Director Independence The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by referff ence. ITEM 14. Principal Accounting Fees and Services The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by referff ence. 105 ITEM 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report: (1) Index list to Financial Statements: PART IV Report of Independent Registered Public Accounting Firm ........................................................................................................... Consolidated Balance Sheets .......................................................................................................................................................... ensive Loss ................................................................................................. Consolidated Statements of Operations and Comprehm Consolidated Statements of Convertible Preferr ..................................................................... Consolidated Statements of Cash Flows ......................................................................................................................................... Notes to Consolidated Financial Statements................................................................................................................................... ed Stock and Stockholders’ Equity.tt ff Page 74 75 76 77 78 79 (2) Financial Statement Schedules All other schedules are omitted because they are not required or the required information is included in the financial statements or notes thereto. (3) Exhibits The exhibits listed in the accompanm ying Exhibit Index are filed or incorporated by reference as part of this report. ITEM 16. Form 10-K Summary None. 106 EXHIBIT INDEX Incorporated by Reference Exhibit Title Form File No. Exhibit Filing Date Amended and Restated Certificate currently in effect ff of Incorporation of the Registrant, as // S-1/A 3 33-190608 3.2 August 29, 2013 Certificate of Designation of Preferences, Rights and Limitations of Class A Convertible Preferred Stock 8-K 001-36076 3.1 Novembem r 29, 2016 Amended and Restated Bylaws of the Registrant, as currently in effect S-1/A 333-190608 3.4 August 29, 2013 Specimen Common Stock Certificate S-1/A 333-190608 4.1 August 29, 2013 Warrant to Purchase Stock issued to Silicon Valley Bank on January 5, 2009 S-1 333-190608 4.2 August 13, 2013 First Amendment to Warrant to Purchase Stock dated January 5, 2009 by and betwett en the Registrant and SVB Financial Group, dated August 25, 2011 S-1 333-190608 4.3 August 13, 2013 Warrant to Purchase Stock issued to Silicon Valley Bank on August 25, 2011 S-1 333-190608 4.4 August 13, 2013 Form of Warrant to Purchase Common Stock issuable to Silicon Valley Bank and its affiliates 8-K 001-36076 10.2 August 5, 2014 Exhibit Number 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 4.6† Stock Purchase Agreement between the Registrant and Juno Therapeutics, Inc., dated as of May 4, 2015 10- Q/A 001-36076 4.2 November 6, 2015 10.1# 2007 Equity Incentive Plan and forms of agreements thereunder // S-1/A 3 33-190608 10.1 August 29, 2013 10.2# 10.3# Amended and Restated 2013 Stock Option and Incentive Plan and forms of agreements thereunder 8-K 001-36076 10.1 May 2, 2017 Form of Unrestricted Stock Award Agreement under the 2013 Stock Option and Incentive Plan 8-K 001-36076 10.2 January 7, 2015 10.4# m 2013 Employee Stock Purchase Plan // S-1/A 3 33-190608 10.24 September 16, 2013 10.5# Amended and Restated Emplm oyment Agreement by and between the Registrant and Scott Wolchko, dated January 14, 2018 10-K 001-36076 10.5 March 5, 2018 10.6# Amended and Restated Senior Executive Incentive Bonus Plan 8-K 001-36076 10.1 January 7, 2015 10.7# Amended and Restated Non-Employee mm Director Compensation Policy 10.8# Fate Therapeutics, Inc. Inducd ement Equity Plan 10.9# Form of Stock Option Agreement under Fate Therapeutics, Inc. Induced ment Equity Plan — — — — — — Filed herewith Filed herewith S-8 333-211484 99.2 May 20, 2016 10.10# Form of Restricted Stock Unit Award Agreement under Fate Therapeutics, Inc. Inducd ement Equity Plan S-8 333-211484 99.3 May 20, 2016 107 Exhibit Title Form File No. Exhibit Filing Date Incorporated by Reference Exclusive License Agreement by and betwett Children's Medical Center Corporation, dated May 13, 2009 en the Registrant and S-1 333-190608 10.9 August 13, 2013 Exhibit Number 10.11† 10.12† Collaboration and License Agreement, between the Registrant and Juno Therapeutics, Inc., dated as of May 4, 2015 001-36076 10.1 Novembem r 6, 2015 10- Q/A 10.13 10.14 10.15 10.16 10.17 10.18 10.19 Lease Agreement by and between the Registrant and ARE-3535/3565 General Atomics Court, LLC, dated Decemberm 3, 2009 S-1 333-190608 10.14 August 13, 2013 First Amendment to Lease Agreement by and betwett ARE-3535/3565 General Atomics Court, LLC, dated October 1, 2011 en the Registrant and S-1 333-190608 10.15 August 13, 2013 Second Amendment to Lease Agreement by and betwett en the Registrant and ARE-3535/3565 General Atomics Court, dated September 26, 2013 // S-1/A 3 33-190608 10.25 Septembem r 30, 2013 Third Amendment to Lease Agreement by and betwett en the Registrant and ARE-3535/3565 General Atomics Court, dated September 2, 2014 10-K 001-36076 10.15 March 3, 2016 Fourth Amendment to Lease Agreement by and betwett and ARE-3535/3565 General Atomics Court, dated March 2, 2015 en the Registrant 10-K 001-36076 10.16 March 3, 2016 Fifth Amendment to Lease Agreement by and between the Registrant and ARE-3535/3565 General Atomics Court, dated June 1, 2016 10-Q 001-36076 10.2 August 8, 2016 Amended and Restated Investor Rights Agreement, dated August 8, 2013 by and between the Registrant and the stockholders named therein S-1 333-190608 10.19 August 13, 2013 10.20† Amendment to Amended and Restated Investor Rights Agreement by and between the Registrant and the stockholders named thereto, dated as of May 4, 2015 10- Q/A 001-36076 10.2 Novembem r 6, 2015 10.21 Form of Indemnification Agreement // S-1/A 3 33-190608 10.20 August 29, 2013 10.22 Amended and Restated Loan and Security Agreement by and betwett Registrant and Silicon Valley Bank, dated as of July 30, 2014 en the 8-K 001-36076 10.1 August 5, 2014 10.23† Whitehead Institute for Biomedical Research Exclusive Patent License 10-K 001-36076 10.23 March 12, 2015 Agreement between the Registrant and the Whitehead Institute for Biomedical Research, dated as of February 24, 2009 10.24† License Agreement between the Registrant and The Scripps Research Institute, dated as of July 13, 2009 10-K 001-36076 10.24 March 12, 2015 10.25† License Agreement between the Registrant and The Scripps Research Institute, dated as of May 25, 2010 10-K 001-36076 10.25 March 12, 2015 10.26† License Agreement between the Registrant and The Scripps Research t Institute, dated as of August 26, 2010 10-K 001-36076 10.26 March 12, 2015 10.27 Securities Purchase Agreement, dated August 6, 2016, by and among the Registrant and the Purchasers 8-K 001-36076 10.1 August 8, 2016 108 Exhibit Number 10.28 10.29 10.30 10.31 Exhibit Title Form File No. Exhibit Filing Date Incorporated by Reference Registration Rights Agreement, dated August 6, 2016, by and among the Registrant and the Purchasers 8-K 001-36076 10.2 August 8, 2016 Securities Purchase Agreement, dated November 21, 2016, by and among the Registrant and the Purchasers 8-K 001-36076 10.1 Novembem r 22, 2016 Registration Rights Agreement, dated Novembem r 21, 2016, by and among the Registrant and the Purchasers 8-K 001-36076 10.2 Novembem r 22, 2016 First Amendment to Amended and Restated Loan and Security Agreement, by and between the Registrant and Silicon Valley Bank, dated July 14, 2017 10-Q 001-36076 10.1 August 14, 2017 10.32# Severance and Change in Control Policy 10-K 001-36076 10.32 March 5, 2018 10.33# Offer Letter by and between the Registrant and Cindy R. Tahl, dated — — — Filed herewith October 23, 2009 10.34 10.35 Sixth Amendment to the Lease Agreement by and betwett and ARE-3535/3565 General Atomics Court, dated May 31, 2018 en the Registrant 10-Q 001-36076 10.1 August 6, 2018 Amended and Restated Exclusive License Agreement by and betwett Registrant and Memorial Sloan Kettering Cancer Center, dated May 15, 2018 en the 10-Q 001-36076 10.2 August 6, 2018 10.36† Exclusive License Agreement by and between the Registrant and The David Gladstone Institutes, dated Septemberm 11, 2018 10-Q 001-36076 10.1 Novembem r 1, 2018 10.37† Collaboration and Option Agreement by and between the Registrant and Ono Pharmaceutical Co., Ltd., dated Septembem r 14, 2018 10- Q/A 001-36076 10.2 February 8, 2019 10.38# Offer Letter by and between the Registrant and Bahram Valamehr, dated — November 23, 2009 — — — — — 14.1 Amended Code of Business Conduct and Ethics 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 24.1 Power of Attornerr y (included on signature page to this Annual Report) 31.1 32.1 ff er pursuant to Rules 13a-14 and 15-d-14 promulm gated pursuant to Certification of Principal Executive Officer Officff the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Principal Financial r and Principal Financial er pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Certification of Principal Executive Office Officff Section 906 of the Sarbanes-Oxley Act of 2002 ff 109 — — — — — — — — — — — — Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith — — — Filed herewith Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbakk se Document 101.DEF XBRL Taxonomy Extension Definff ition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document — — — — — — — — — — — — — — — — — — Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith †Certain provisions of this Exhibit have been omitted pursuant to a request for confidential treatment. #Indicates a management contract or any compensatory plan, contract or arrangement. 110 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authot rized. Fate Therapeutics, Inc. Date: March 5, 2019 By: /s/ J. SCOTT WOLCHKO J. Scott Wolchko Presidendd t and Chiefe Executive Officer (Principal Executive Officer Signatory) ff and Authorizedii KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints J. Scott Wolchko as his or her attorney-in-fact, amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-i n-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof.ff with the power of substitution, for him or her in any and all capaci ties, to sign any a ff r Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in thet capacities and on the dates indicated: SIGNATURE /s/ J. SCOTT WOLCHKO J. Scott Wolchko /s/ WILLIAM H. RASTRR ETTER William H. Rastetter, Ph.D. /s/ JOHN D. MENDLEIN John D. Mendlein, Ph.D., J.D. /s/ TIMOTHY P. COUGHLIN Timothy P. Coughlin /s/ MICHAEL LEE Michael Lee /s/ AMIR NASHAT Amir Nashat, Sc.D. /s/ ROBERT S. EPSTEIN Robert S. Epstein TITLE President and Chief Executive Officer and Director (Principal Executive Officer, Principal Financial Offiff cer, and Principal Accounting Officer) DATE March 5, 2019 Chairman of the Board and Director March 5, 2019 Vice Chairman of the Board and Director March 5, 2019 March 5, 2019 March 5, 2019 March 5, 2019 March 5, 2019 Director Director Director Director 111 www.fatetherapeutics.com 3535 General Atomics Court | Suite 200 San Diego, CA 92121 (858) 875-1800 NASDAQ: FATE 

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