NantKwest, Inc.
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016OR☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITIONPERIOD FROM TO NANTKWEST, INC.(Exact name of Registrant as specified in its Charter) Delaware43-1979754( State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.) 3530 John Hopkins CourtSan Diego, California92121(Address of principal executive offices)(Zip Code)(858) 633-0300Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, par value $0.0001per share The NASDAQ Stock Market LLC(NASDAQ Global Select 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 ☐ NO ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒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 preceding12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 andpost such files). YES ☒ NO ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “largeaccelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ (Do not check if a small reporting company) Small reporting company ☐Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on theNASDAQ Global Select Market on June 30, 2016, was approximately $185.4 million. The number of shares of Registrant’s common stock outstanding as of March 10, 2017 was82,296,621.DOCUMENTS INCORPORATED BY REFERENCEAs noted herein, the information called for by Part III is incorporated by reference to specified portions of the Registrant’s definitive proxy statement to be filed in conjunction withthe Registrant’s 2017 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the Registrant’s fiscal year ended December 31, 2016. Table of Contents PagePART I Item 1.Business5Item 1A.Risk Factors45Item 1B.Unresolved Staff Comments80Item 2.Properties80Item 3.Legal Proceedings81Item 4.Mine Safety Disclosures82 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities83Item 6.Selected Financial Data86Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations87Item 7A.Quantitative and Qualitative Disclosures About Market Risk107Item 8.Consolidated Financial Statements and Supplementary Data108Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure151Item 9A.Controls and Procedures151Item 9B.Other Information152 PART III Item 10.Directors, Executive Officers and Corporate Governance153Item 11.Executive Compensation153Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters153Item 13.Certain Relationships and Related Transactions, and Director Independence153Item 14.Principal Accounting Fees and Services153 PART IV Item 15.Exhibits, Financial Statement Schedules154 2Explanatory NoteAs used in this Annual Report on Form 10-K, or Annual Report, for the year ended December 31, 2016, the terms the “Company,” “our,” “us”or “we” refer to NantKwest, Inc.3PART IForward-Looking StatementsThis Annual Report on Form 10-K, or this Annual Report, may contain “forward-looking statements” within the meaning of the federal securities lawsmade pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A, “Risk Factors” in this AnnualReport. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future eventsor otherwise. These statements, which represent our current expectations or beliefs concerning various future events, may contain words such as “may,”“will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or other words indicating future results, though not all forward-looking statementsnecessarily contain these identifying words. Such statements may include, but are not limited to, statements concerning the following: •our ability to pioneer immunotherapy, implement precision cancer medicine and change the current paradigm of cancer care; •our expectations regarding the potential benefits of our strategy and technology; •our expectations regarding the operation of our product candidates and related benefits; •our ability to utilize multiple modes to induce cell death; •our beliefs regarding the benefits and perceived limitations of competing approaches, and the future of competing technologies and ourindustry; •details regarding our strategic vision and planned product candidate pipeline; •our beliefs regarding the success, cost and timing of our product candidate development activities and clinical trials; •our expectations regarding our ability to utilize the Phase I aNK clinical trial data to support the development of all of our product candidates; •the timing or likelihood of regulatory filings or other actions and related regulatory authority responses, including any planned IND filings orpursuit of accelerated regulatory approval pathways or orphan drug status and breakthrough therapy designations; •our ability to implement an integrated discovery ecosystem and the operation of that planned ecosystem, including being able to regularly addneoepitopes and subsequently formulate new product candidates; •the ability and willingness of strategic collaborators, including certain affiliates of NantWorks, to share our vision and effectively work with usto achieve our goals; •the ability and willingness of various third parties to engage in research and development activities involving our product candidates, and ourability to leverage those activities; •our ability to attract additional third party collaborators; •our expectations regarding the ease of administration associated with our product candidates; •our expectations regarding the patient compatibility associated with our product candidates; •our beliefs regarding the potential markets for our product candidates and our ability to serve those markets; •our ability to produce an “off-the-shelf” therapy; •our beliefs regarding the potential manufacturing and distribution benefits associated with our product candidates, and our ability to scale upthe production of our product candidates; •our plans regarding our planned manufacturing facility; •our ability to obtain and maintain regulatory approval of any of our product candidates, and any related restrictions, limitations and/orwarnings in the label of any approved product candidate; •our ability to commercialize any approved products; •the rate and degree of market acceptance of any approved products; •our ability to attract and retain key personnel;4 •the accuracy of our estimates regarding any future revenue as well as our future operating expenses, future revenue, capital requirements andneeds for additional financing; •our ability to obtain funding for our operations, including funding necessary to complete further development and any commercialization ofour product candidates; •our ability to obtain and maintain intellectual property protection for our product candidate and not infringe upon the intellectual property ofothers; •regulatory developments in the United States and foreign countries; •our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act; and •our use of the proceeds from our initial public offering.In addition, you should refer to the “Risk Factors” section of this Annual Report for a discussion of other important factors that may cause actualresults to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that theforward-looking statements in this Annual Report will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, theinaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as arepresentation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake noobligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.This Annual Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certaindiseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that isbased on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstancesmay differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business,market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical andgeneral publications, government data, and similar sources. Item 1. BusinessOverviewWe are a pioneering clinical-stage immunotherapy company focused on harnessing the power of the innate immune system by using the natural killercell to treat cancer, infectious diseases and inflammatory diseases. Natural killer, or NK, cells are the body’s first line of defense due to their innate ability torapidly seek and destroy abnormal cells, such as cancer or virally-infected cells, without prior exposure or activation by other support molecules required toactivate adaptive immune cells such as T-cells.We believe that our proprietary NK cell line, coupled with our planned integrated discovery ecosystem, positions us to implement precision cancermedicine by leveraging the advances that have evolved during the past decade and addressing newly discovered challenges of cancer. Cancer is onlyrecently understood to be a complex of rare diseases, with hundreds of patient-specific, cancer-promoting mutated proteins, some known and many moreunknown called neoepitopes. Identifying and targeting these mutated proteins is our strategy to overcome the challenges of cancer in the era of genomics,transcriptomics and immuno-oncology. We believe neoepitopes, which are newly discovered antigens selectively expressed on the cancer cells and not onthe essential normal tissue, represent large untapped targeting opportunities for immune effector cells such as our activated NK cells.Multiple Modes of Tumor Cell Killing. Our immuno-oncology NK platform has multiple modes to potentially induce cell death against the tumor orinfected cell by: (1) direct killing by binding to stress ligands expressed by the diseased cell with the release of toxic granules directly into the tumor cell;(2) antibody mediated killing by binding to antibodies administered in combination and enhancing the cancer killing effect of the administered antibody,enabling targeted cell killing through antibody dependent cellular cytotoxicity, or ADCC; and (3) target activated killing by binding to known or newlydiscovered tumor-specific antigens expressed on the surface of tumor cells and inducing cell death by the release of toxic granules directly into the tumor celland by the release of cytokines and chemokines which recruit additional innate and adaptive immune responses, including the recruitment of cytotoxic T-cells.Our targeted therapeutic areas include: (1) cancer, focusing on bulky hematological malignancies, solid tumors as well as cancer stem cells,(2) infectious diseases, including viral, fungal and bacterial infections, and (3) inflammatory diseases, ranging from rare inherited diseases to more prevalentautoimmune disorders.5Our Integrated Discovery Ecosystem for Precision Medicine. In order to effectively target newly discovered neoepitopes, we plan to integrate thefollowing ecosystem to help drive the development of genetically modified NK cells anticipated to be directed against these cancer-promoting mutatedproteins: (1) a high-speed supercomputing infrastructure to help identify both known antigens on the surface of tumor cells and neoepitopes in clinicalpatients suffering from cancer, in a timely manner and at large scale; (2) a next-generation genomic and transcriptomic sequencing infrastructure to identifythe expression of the neoepitopes on the surface of the tumor cell, developed by our affiliate entity NantOmics; (3) delivering the neoepitope via anadenoviral vector developed by an affiliate entity to induce IgG1 in-vivo production and ADCC activity by our High Affinity NK Cell (haNK) (4) a diverselibrary of human antibodies from which to interrogate and extract an antibody matching the neoepitope; and (5) an aNK and haNK cell potentially capable ofbeing produced as a scalable cell-based “off-the-shelf” therapy without the need for patient compatibility matching. We expect to regularly add newlydiscovered neoepitopes from our discovery engine, and we believe the thousands of newly discovered antigens selectively expressed on the cancer cells andnot on the essential normal tissue will provide us with the ability to create new and targeted libraries of antibodies to be potentially delivered as living drugsfor metastatic cancer cells and cancer stem cells.Direct Killing: aNK Platform. We have developed a unique NK cell which we believe is capable of being produced as a cell-based “off-the-shelf”therapy, with killing potential for cancer and virally-infected cells. Unlike normal NK cells, our NK cells do not express inhibitory receptors, which diseasedcells often utilize to turn off the killing function of NK cells. We have developed a unique activated NK, or aNK, cell which lacks these inhibitory receptorsbut retains activation receptors that enable selective targeting and killing of diseased cells. The killing mechanism of our aNK cells is increased compared tonormal NK cells by virtue of delivering a larger payload of compounds responsible for the direct killing of diseased cells. We believe our aNK cells can begrown at commercial scale as an on demand, living drug using our proprietary manufacturing and distribution processes.Safety studies of aNK cells in multiple phase I clinical trials have been conducted in a variety of bulky hematological cancers and solid tumors,enrolling over 40 patients to date, with encouraging evidence of single-agent activity and a durable remission, including complete responses in liquidtumors. Based on these clinical trials, we plan to develop the therapeutic applications of this aNK platform through molecular engineering of our aNK cellsdesigned to leverage the multiple modes of killing available to aNKs, including antibody-mediated killing, our haNK platform, and antigen targeted killing,our taNK platform, described below.Antibody-Mediated Killing: haNK Platform. We have genetically modified our aNK cells to incorporate high-affinity CD16 receptors, which bind toantibodies. These high-affinity NK, or haNK, cells are designed to directly bind to antibodies, such as Herceptin, Erbitux and Rituxan and may be able toenhance the cancer killing effect of these therapeutic antibodies by facilitating targeted cell killing through ADCC. Antibodies are prevalently used to treatcancer and generate over $50.0 billion in reported annual sales. Several studies have suggested long term response to these antibodies correlates with apatient’s NK cells expressing the high affinity CD16 receptor. We believe, based on currently available information, that only approximately 10% to 20% ofthe addressable patient population for antibody therapies carries high-affinity CD16 receptors. This implies that our haNK product candidates may havesignificant market potential as a combination therapy to potentially address a large number of patients who have poor responses to antibody products.Furthermore we plan to initiate combination therapy trials utilizing adenoviral vector platforms developed by an affiliate entity to deliver tumor associatedantigens as well as neoepitopes to induce in-vivo production of IgG1 and maximize ADCC killing utilizing our haNK platform. We have advanced our haNKplatform to maximize production via the successful development of a high affinity CD16 IL-2 independent cell line. A Good Manufacturing Practice, orGMP, master and working cell banks of such a line have been successfully established in the last quarter.Target Activated Killing: taNK Platform. We have genetically modified our aNKs to incorporate chimeric antigen receptors, or CARs, to targetspecific antigens on the surface of abnormal cells. These target activated Natural Killer, or taNK, cells are designed to directly bind to tumor-specific antigensin bulky hematological cancers and solid tumors and induce cell death by the release of toxic granules directly into the tumor cell and by the release ofcytokines and chemokine’s which recruit additional innate and adaptive immune responses, including the recruitment of cytotoxic T-cells. These tumor-specific antigens can be divided into the following four classes, which can be targeted by our taNK platform: (1) checkpoint inhibitors expressed on thesurface of tumor cells such as PD-L1; (2) well-established tumor surface antigens such as HER2 and CD19; (3) newly discovered neoepitopes; and (4) novelsurface receptors associated with cancer stem cells. In the last 6 months the HER2.taNK has passed several regulatory milestones in Europe and we anticipateinitiation of a phase I/II clinical trial in HER2 positive glioblastoma by the third quarter of 2017, as well as a U.S. phase I clinical trial in metastatic breastcancer shortly thereafter.6Potential Advantages of our aNK Platform over T-Cell and Other Current ImmunotherapiesThe immune system has two components: innate immune cells, such as NK cells, which are always switched on to attack diseased cells, and adaptiveimmune cells, such as T-cells, which are mobilized to mount a delayed response. Our proprietary aNK platform is specifically designed to potentially addressmany of the limitations associated with current adaptive autologous cellular immunotherapies. We believe key limitations of adaptive autologousimmunotherapy are the need to retrieve non-compromised immune cells from a cancer patient and the requirement for a complex and costly manufacturingprocess to develop the therapy. As a consequence of this need to harvest active T-cells, current phase I clinical trials for autologous CAR-T cell therapies inlarge part enroll patients from highly selected, earlier-stage disease in bulky hematological cancers. In contrast, our allogeneic, “off-the-shelf” NK cells donot rely on the patient’s own immune system, which is often compromised, to achieve their therapeutic effect. •Innate immune response. aNK cells are always activated and can naturally detect and rapidly destroy a wide variety of diseased cells withoutprior exposure to pathogens, antigens or activation by stimulatory molecules. In contrast, the adaptive immune system requires co-stimulationfor activation, resulting in delayed killing. •Promotion of adaptive immune response. aNK cells stimulate the adaptive component of the immune system by producing chemokines andother molecules that activate and recruit adaptive immune cells, including T-cells, to attack the diseased cells. •Enhancement of ADCC effect with high-affinity NK (haNK) cells. Our haNK product candidates may have significant market potential as acombination therapy with approved monoclonal antibodies (mAbs) targeting tumor associated antigens as well as neoepitope inducedantibodies, potentially addressing a large number of patients who have poor responses to antibody products. •Wide therapeutic potential across multiple tumor types and even late-stage disease. In preclinical studies and phase I safety clinical trials todate, aNK cells have demonstrated activity in a spectrum of cancers, including bulky hematological cancers and solid tumors, even in late-stage cancer patients who have failed multiple rounds of chemotherapy, radiation and stem cell transplantation. •Ability to attack cancer stem cells. aNK and haNK cells have been shown in preclinical studies to attack cancer stem cells, which are resistantto conventional chemotherapy. •Application in diseases beyond cancer. We believe aNK cells have the potential to treat diseases beyond cancer such as infectious andinflammatory diseases because of the inherent ability of NK cells to kill virally infected and abnormal cells. Preclinical studies in Ebola virusdemonstrate this capability. •Well tolerated. aNK cells are hypo-immunogenic and have shown no dose limiting toxicities in over 40 patients who have received therapy todate, even when some patients received as many as 18 infusions of aNK cells over six cycles. In contrast, phase I clinical trials of CAR-T celltherapy have experienced challenges, such as reports of severe adverse toxicities of cytokine release syndrome and neurotoxicity in a numberof patients. •Ease of administration. aNK cells may be administrable in outpatient facilities, offering physicians the flexibility to titrate and re-dose therapybased on patient tolerability and need. In contrast, CAR-T cell therapy is a complex and costly procedure, at times requiring hospitalization,pre-conditioning and intensive care unit admission following severe adverse toxicities associated with cytokine release syndrome. •Virtually universal patient compatibility. aNK cells do not require patient-donor matching or a minimum level of patient immuno-competence. •Low-cost, efficient and scalable manufacturing. aNK and haNK cells have the potential to be expanded on a large scale and readily suppliedon demand from what we believe is the world’s only Good Manufacturing Practices, or GMP, compliant NK cell bank, a proprietary asset of ourcompany.7Clinical Trials to Date. aNK cells have been evaluated as a monotherapy in over 40 patients to date in four phase I and one phase 2 trial (Merkel cellcarcinoma) clinical trials. Unlike many cell-based adaptive immunotherapy clinical trials, pre-conditioning agents such as IL-2 were not administered toenhance therapeutic effect and all patients in the aNK phase I clinical trials had very advanced cancer having failed multiple rounds of standardchemotherapy, radiation and even stem cell transplantation and were not preselected. The safety profile showed minimal adverse effects, and no dose limitingtoxicities even when some patients received as many as 18 infusions of our aNK cells over six cycles. Infusions of aNK cells up to 1x1010 cells/m2 were welltolerated. Even in these late-stage patients refractory to standard therapy, encouraging evidence of activity in cancers, including bulky hematological cancersand solid tumors, was observed, including some patients with durable remission. One patient with Hodgkin’s lymphoma has had a sustained completeresponse for more than five years post treatment. Activity was also noted in bulky hematological cancers with stable disease and partial responses in patientswith diffuse large B cell lymphoma and with multiple myeloma, with durable stabilization of disease for over two years in a patient with diffuse large B celllymphoma. In solid tumors, encouraging responses were seen in patients with advanced lung cancer who failed surgery, radiation and chemotherapy, withthree out of four patients demonstrating partial response or stable disease. In patients with metastatic renal cell carcinoma, or RCC, who failed standardtherapy, including surgery, radiation and chemotherapy, stable disease and partial responses were noted in five out of 11 patients who received doses rangingfrom 1x108 to 1x109 aNK cells.Product Candidate Pipeline. We plan to use these phase I clinical trials of aNK cells conducted to date to serve as the foundation to our developmentstrategy, along our three distinct modes of tumor cell killing, each with its own attributes, targeted therapeutic areas and pipeline. The excellent safety profileand demonstrated biological activity of our aNK cells make them ideal candidates for combination strategies, which we will pursue.Direct Killing. Our aNK cells have activation receptors that naturally bind to stress-induced proteins. They possess a unique property in that they lackCD16 receptors and therefore are resistant to attack by certain deadly viruses. We are developing our aNK product candidates for the treatment of virally-induced cancers such as polyoma virus induced Merkel Cell Carcinoma (MCC), Human Papilloma Virus (HPV) induced cervical and head and neck cancersas well as infectious diseases such as Ebola and other serious viral, fungal and bacterial infections. We have initiated a phase II clinical trial for our aNKproduct candidate in MCC. Data derived from treating the first 3 subjects demonstrates again indication-specific safety and encouraging signs of biologicalactivity as a monotherapy. In this study one patient had a mixed response and one patient obtained a radiologic complete response, which has been durableto date. To further enhance aNK activity, this program has been amended to include administration of ALT-803 (an IL-15 superagonist). Patient enrollmentin this amended trial has started with the first patient enrolled at the end of January 2017 with the aNK plus ALT-803 combination dosed in the first patient inearly February 2017. The treatment was well tolerated with no dose limiting adverse events. Enrollment of our second patient occurred in February 2017with the first dose planned by the end of March 2017. Additionally, we intend to pursue combination therapies with low-dose metronomic cytotoxic agentsand radiation therapy which we believe would augment the ability of our aNK cells to attack the cancer cells through multiple combined points of attack.Antibody-Mediated Killing. Our haNK cells are genetically engineered to over-express high-affinity CD16 receptors, designed to enhance thetherapeutic efficacy of antibodies through ADCC. We intend to develop our haNK product candidates as combination therapies with widely-used FDA-approved antibody products such as Herceptin, Erbitux, Darzalex and Rituxan, in addition to combining haNK with avelumab (anti-PD-L1) and an IL-15super-agonist in studies at the National Cancer Institute (NCI), under a Cooperative Research and Development Agreement (CRADA) agreement. The lattertrial is expected to enroll patients at three sites, including the NCI, and commence immediately after phase I safety for single-agent dosing has beendetermined.We believe that our haNK product candidates will enable us to address larger markets and earlier stages of cancer therapy. Our haNK cells are currentlybeing used in lot-release quality control testing of commercial antibody products by a growing number of biopharmaceutical companies. As these companiesdevelop and launch their antibody products, we intend to leverage the development performed by these biopharmaceutical companies who have licensed ourhaNK cells for non-therapeutic use by initiating studies of our haNK product candidates in combination with these antibodies, with the goal of thecombination potentially enhancing the activity of these antibodies in patients with low affinity CD16 receptors. This is evidenced by a small subgroup ofsubjects (<10%) with naturally occurring high-affinity variants of the CD16 receptor experiencing significantly increased benefit through therapy with theaforementioned approved antibody products. We believe this enhanced efficacy provides a rationale for studying haNK combinations with these newantibodies, whether during the development phase or after commercial launch by the biopharmaceutical company. We plan to accelerate clinicaldevelopment of our aNK and haNK product candidates by entering into phase II and phase II/III clinical trials with our product candidates in combinationwith marketed drugs.Furthermore we plan to initiate combination therapy trials utilizing adenoviral vector platforms developed by an affiliate entity to deliver tumorassociated antigens as well as neoepitopes to induce in-vivo production of IgG1 and maximize ADCC killing utilizing our haNK platform. We haveadvanced our haNK platform to maximize production via the successful development of a high affinity CD16 IL-2 independent cell line. GMP master andworking cell banks of such a line have been successfully established in the last quarter.8Target Activated Killing. Our taNK cells are genetically engineered to directly bind to tumor surface antigens by incorporating CARs to targetspecific antigens on the surface of abnormal cells. Our taNK cells are designed to directly bind to tumor-specific antigens in multiple bulky hematologicalmalignancies and solid tumors and induce cell death by the release of toxic granules directly into the tumor cell, by the release of cytokines and chemokineswhich recruit additional innate and adaptive immune responses and by the recruitment of cytotoxic T-cells. We intend to target the four classes of tumorspecific antigens: (1) checkpoint inhibitors expressed on the surface of tumor cells such as PD-L1; (2) well-established tumor surface antigens such as HER2and CD19; (3) newly discovered neoepitopes; and (4) novel surface receptors associated with cancer stem cells. We believe our taNK product candidates maybe able to treat patients with bulky hematological malignancies and solid tumors, the latter being an area in which other cell-based immunotherapies, such asCAR-T cell therapies, have been challenged. An investigational new drug application (IND) was submitted to the Federal Institute for Vaccines andBiomedicines, also known as the Paul Ehrlich Institute (PEI), in Germany in late 2016. Pending approval, we will initiate enrollment in a European phase I/IIclinical trial for our HER2.taNK product candidate in patients with HER2 positive Glioblastoma, currently anticipated by mid-2017. In addition, we plan tosubmit a U.S. IND for a phase I clinical trial with our HER2.taNK product candidate in patients with HER2 positive solid tumors, currently planned for mid-2017 with initiation of study enrollment in the second half of 2017. Experienced Management TeamSince the founding of our company in 2002, we have assembled a team of proven, experienced and visionary leaders in biotechnology. Our team is ledby Patrick Soon-Shiong, M.D., FRCS (C), FACS, our Chairman and Chief Executive Officer (CEO). Dr. Soon-Shiong was first introduced to us in 2006 whenour technology was at a very early stage of development and he provided us with advice and scientific development strategies, including demonstration ofactivity in the clinical setting following radiation of the cells and demonstration of safety and activity following multiple infusions in patients with bothsolid and liquid tumors at the end stage of disease. Dr. Soon-Shiong made an equity investment in our company in December 2014 and joined as our ChiefMedical Officer in January 2015 and became our Chairman and CEO in March 2015. Dr. Soon-Shiong, a renowned surgeon and scientist, has pioneered noveltherapies for both diabetes and cancer, published over 100 scientific papers in the United States, and was issued over 230 worldwide patents ongroundbreaking advancements spanning myriad fields. He performed the first encapsulated islet stem cell transplant in a diabetic patient in the United States.He invented, developed and launched the first nanoparticle delivery system of human albumin, Abraxane. Dr. Soon-Shiong was founder, Chairman and CEOof American Pharmaceutical Partners (sold to Fresenius SE for approximately $4.6 billion in 2008), Abraxis BioScience (sold to Celgene Corporation forapproximately $3.8 billion in 2010) and NantWorks, an ecosystem of companies to create a transformative global health information and next generationpharmaceutical development network.9Barry Simon, M.D., our President and Chief Administrative Officer, who was our CEO from May 2007 until March 2015 and our President and ChiefOperating Officer from March 2015 to December 2016, brings decades of drug development and executive leadership experience from Roche Labs., F.Hoffmann-La Roche, Connetics Corp. and Immunomedics.In 2015 and 2016, the company recruited seasoned executives to lead manufacturing, clinical development, regulatory affairs, medical affairs, andquality control and continues to build the management and manufacturing infrastructure.Vision and Mission StatementOur vision is to be the premier immunotherapy company harnessing the power of the innate immune system and the NK cell to pioneer precisionmedicine in the treatment of cancer, infectious diseases and inflammatory diseases. Our mission is to leverage an integrated and extensive genomics andtranscriptomics discovery engine to identify antibodies targeted to newly discovered neoepitopes and to mobilize the human immune system of cancerpatients to kill tumor cells and facilitate long-term remission. We expect to regularly add newly discovered neoepitopes from our discovery engine, and webelieve the thousands of newly discovered antigens selectively expressed on the cancer cells and not on the essential normal tissue will provide us with theability to continue to create new and targeted libraries of antibodies to be potentially delivered as living drugs for metastatic cancer cells and cancer stemcells. By combining the natural killer cell with technologies that activate all elements of the immune system including the dendritic cell, T-cell, and B-cell,our goal is to drive long-lasting remission in patients with cancer.Our StrategyOur goal is to become the leader in the field of immunotherapy by changing the paradigm of care to precision medicine through harnessing the powerof the innate immune system, the natural killer cell and activate the entire ecosystem of immune cells, to treat cancer, infectious diseases and inflammatorydiseases. The key elements of our strategy include: •Utilize the multiple modes of killing by innate immune therapy. We plan to pursue a comprehensive clinical development plan designed tomaximize the commercial potential and clinical knowledge of our aNK cells and the role of innate and adaptive immunotherapy as thebackbone in the treatment of cancer, as monotherapy and in combination with chemotherapy, radiation and surgical therapies. We intend topursue accelerated regulatory approval pathways and seek indications to attempt to obtain orphan drug status and breakthrough therapydesignation, where appropriate, as well as pursue large market opportunities in many solid tumors. •aNK. Our initial aNK product candidates will focus on diseases with viral etiologies given that aNK cells already possess multiple activatingreceptors that detect stress antigens associated with viral infections. We have already initiated a combination trial that enhances NK activityusing ALT-803. We also intend to pursue combination opportunities with therapeutics having synergistic mechanisms of action, such as incombination with adenoviral vectors, cytotoxic agents such as paclitaxel and 5FU administered at low-dose. •haNK. Our haNK product candidates will aim to leverage the large addressable market of already approved monoclonal antibodies, such asHerceptin, Erbitux and Rituxan, in the treatment of multiple tumors. Antibodies are prevalently used and generate over $50.0 billion in globalannual sales. We believe, based on currently available information, that only approximately 10% to 20% of the addressable patient populationfor antibody therapies carries high-affinity CD16 receptors. We expect to address the approximately 80% to 90% of patients who are receivingthese antibodies but have developed resistance and may benefit from our high-affinity CD16 aNK administered in combination. We havecleared the FDA for first in human studies which are starting in the first quarter of 2017. We anticipate several IND submissions for clinicaltrials with our haNK product candidate in combination with different monoclonal antibodies in 2017, as well as combinations with adenoviralvector and ALT-803 developed by affiliate entities to drive in-vivo IgG1 production and enhance NK activity, respectively. •taNK. Our taNK product candidates will aim to address well-established tumor surface antigens, such as HER2. We believe our taNK productcandidates may be able to treat patients with bulky hematological cancers and solid tumors, areas in which other cell-based immunotherapies,such as CAR-T cell therapies, have been challenged. We have a German IND pending approval and plan to initiate phase I/II clinical trials forour HER2.taNK product candidate for HER2 positive glioblastoma in in the second quarter of 2017.10 •Leverage our integrated discovery engine to discover neoepitopes. Through our strategic collaborations with affiliates of NantWorks, we planto identify both known antigens on the surface of patient tumor cells and identify the surface expression of neoepitopes from clinical samplesand interrogate antibody libraries to identify antibodies that are matches for these neoepitopes. Through our cohesive and expansive discoveryengine, we plan to identify such antibodies to target newly discovered neoepitopes, thereby driving the development of our product candidatepipeline and establishing just-in-time precision medicine. We expect to regularly add newly discovered neoepitopes from our discoveryengine. We believe the thousands of newly discovered antigens, selectively expressed on the cancer cells and not on the essential normaltissue, will provide us with the ability to create new and targeted libraries of antibodies to be potentially delivered as living drugs formetastatic cancer cells and cancer stem cells. •Pursue opportunities with adenoviral vector and cytokine combination partnerships to induce in-vivo production of antibodies and ADCCkilling. We plan to initiate combination therapy trials utilizing adenoviral vector platforms and combinations with novel cytokines to delivertumor associated antigens as well as neoepitopes to induce in-vivo production of IgG1 and maximize ADCC killing utilizing our haNKplatform. We have advanced our haNK platform to maximize production via the successful development of a high affinity CD16 IL-2independent cell line. A GMP master cell bank of such a line has been successfully established in the last quarter. •Pursue opportunities with pharmaceutical companies for commercially approved antibodies and select late-stage antibodies in development.Numerous biopharmaceutical companies have previously licensed our haNK cells for non-therapeutic use in order to select and validate theirantibodies for development. A growing number of these biopharmaceutical companies have also used our haNK cells as a lot release qualitycontrol test for their therapeutic antibodies. As a result of these prior non-clinical collaborations for assay testing, we plan to leverage thedevelopment performed by these biopharmaceutical companies for therapeutic purposes by initiating studies of our haNK product candidates,with the combination potentially enhancing the activity of these antibodies in patients with low affinity CD16 receptors. We believe thispotential for enhanced efficacy provides a rationale for studying haNK combinations with these new antibodies, whether during thedevelopment phase or after commercial launch by the biopharmaceutical company. •Accelerate clinical development of aNK and haNK by entering into phase II and phase II/III clinical trials with our product candidates incombination with marketed drugs and select late-stage product candidates. A large number of monoclonal antibodies and chemotherapydrugs are being marketed for multiple indications. Published data show these antibodies generally have enhanced activity in patients withhigh-affinity NK cells. Published data also show that chemotherapy agents such as 5FU, cyclophosphamide and paclitaxel, when administeredin low doses, generally enhance the immune system. We plan to accelerate clinical development of our haNK product candidates by enteringinto investigator-initiated and company-sponsored phase II and phase II/III clinical trials of our haNK product candidates administered incombination with commercially approved antibodies and select late-stage antibodies in development. We also plan to accelerate clinicaldevelopment of our aNK product candidates by entering into investigator-initiated and company-sponsored phase II and phase II/III clinicaltrials of our aNK product candidates administered in combination with approved chemotherapy agents. We believe this approach mayaccelerate the development and potential commercialization of our product pipeline. •Establish low-cost, scalable manufacturing capabilities to support late-stage clinical trials and global commercialization. We believe ouraNK cells offer a unique advantage of a simplified, on-demand manufacturing process that is relatively easy to scale. We are building a state-of-the-art, cell-based manufacturing facility with the capacity to support large-scale clinical trials and commercialization. We are developingnovel manufacturing methods, both in equipment utilizing state-of-the-art optics and proprietary media, designed to maximize the attributes ofour NK platform. •Extend our NK platform to address diseases beyond cancer. We believe our aNK cells have the potential to treat diseases beyond cancer suchas infectious and inflammatory diseases because of the inherent role of NK cells to kill virally infected and abnormal cells. Preclinical studiesin Ebola virus demonstrate this capability. In addition to Ebola, we plan to investigate and develop our aNK cells for the treatment of HIV,tuberculosis and influenza, among others.11Our aNK Platform as the Foundation for our haNK and taNK Product CandidatesBased on the unique characteristics of NK cells described above, we are aiming to expand the potential therapeutic applications of our aNK platformthrough molecular engineering of our aNK cells designed to leverage the multiple modes of killing available to aNKs, including antibody-mediated killing,our haNK platform, and antigen targeted killing, our taNK platform, described below. 12Antibody-Mediated Killing: haNK Platform. As shown below, we have genetically modified our aNK cells to incorporate high-affinity CD16receptors, which bind to antibodies. These haNK cells are designed to directly bind to concurrently administered antibodies such as Herceptin, Erbitux andRituxan to potentially enhance the cancer killing effect of the antibody, enabling enhanced targeted cell killing through ADCC. 13Target Activated Killing: taNK Platform. As shown below, we have genetically modified our aNK cells to incorporate chimeric antigen receptors, orCARs, to target specific antigens on the surface of abnormal cells. These taNK cells are designed to directly bind to tumor-specific antigens in multiple bulkyhematological cancers and solid tumors and induce cell death by the release of toxic granules directly into the tumor cell, by the release of cytokines andchemokines which recruit additional innate and adaptive immune responses and by the recruitment of cytotoxic T-cells. These tumor-specific antigens can bedivided into the following four classes, which can be targeted by our taNK platform: (1) checkpoint inhibitors expressed on the surface of tumor cells such asPD-L1; (2) well-established tumor surface antigens such as HER2 and CD19; (3) neoepitopes; and (4) novel surface receptors associated with cancer stemcells. 14aNKSafety studies of our aNK cells in multiple phase I clinical trials have been conducted in a variety of advanced hematological cancers and solid tumortypes in more than 40 patients to date, with encouraging evidence of single-agent biological activity and a durable remission.aNK Results from the American Society of Hematology conference, December, 2015 1Twelve patients with relapsed/refractory hematological malignancies who relapsed after undergoing stem cell transplantation were enrolled in thisdose escalation study with aNK monotherapy. The number of cycles of aNK administered ranged from 1-6, with four patients having a response to therapy: #1(mixed- transient) #3 (CR-alive 8 years post therapy), #5 (clinical-transient) and #6 (mixed-transient). Toxicities were minimal and infrequent with somepatients experiencing grade I fever, chills, fatigue, blurry vision and nausea, with only one grade II toxicity event (fever & chills), which occurred during anaNK infusion (Figure 1). 1 “NK-92 Therapy Is Well Tolerated, Has Minimal Toxicity and Shows Efficacy in a phase I Trial of Patients with Relapsed/Refractory HematologicalMalignancies Relapsing after Autologous Stem Cell Transplantation” ASH 2015, Williams, et. al.15Cytokine release was not triggered by aNK infusions in a subset of evaluated patients, through a transient rise in TGF-β for patient #3 was noted belowin figure 2. 16Based on these clinical trials, we plan to develop the therapeutic applications of this aNK platform through molecular engineering of our aNK cellsdesigned to leverage the multiple modes of killing available to aNKs including antibody-mediated killing, our haNK platform, and antigen targeted killing,our taNK platform, as shown in the image below. Our aNK, haNK and taNK Development Strategy and Product Candidate PipelineOur aNK, haNK and taNK Development StrategyWithin each aNK, haNK and taNK family of product candidates, we are developing a product candidate pipeline strategy designed to utilize aNK asthe platform and accelerate haNK and taNK development based on safety, dosing regimens and manufacturing capabilities established in phase I clinicaltrials of aNK to date. We plan to advance a broad pipeline of aNK, haNK and taNK product candidates to potentially address a wide spectrum of diseasesranging from orphan diseases to more prevalent indications.aNK and haNK Accelerated Development Strategy •Antibody combinations. We plan to accelerate our aNK and haNK programs by pursuing opportunities with pharmaceutical companies forcommercially approved antibodies and select late-stage antibodies in development. Numerous biopharmaceutical companies have licensed ourhaNK cells for non-therapeutic use in order to select and validate their monoclonal antibodies for development. Certain biopharmaceuticalcompanies have also used our haNK cells as a lot release quality control test for their therapeutic antibodies, as well as a method to selectantibodies to develop which elicit an enhanced ADCC effect. Consequently, we plan to leverage the development performed by thesebiopharmaceutical companies by initiating studies of our haNK product candidates in combination with these antibodies, which maypotentially enhance the activity of these antibodies in patients with low affinity CD16 receptors. Approximately 90% of normal, healthyindividuals have low affinity CD16 receptors. We believe this provides a rationale for studying haNK combinations with these new antibodies,whether during the development phase or after commercial launch, and upon receipt of regulatory approval, by the biopharmaceuticalcompany.17 •Chemotherapy, adenoviral and cytokine combinations. We also intend to accelerate our aNK and haNK programs by entering into phase II andphase II/III clinical trials with our product candidates in combination with marketed drugs. A large number of antibodies and chemotherapydrugs are being marketed for multiple indications. Published data shows these antibodies have generally enhanced activity in patients withhigh-affinity NK cells. Published data also shows that chemotherapy agents such as 5FU, cyclophosphamide and paclitaxel, when administeredin low doses, generally enhance the immune system. We plan to accelerate clinical development of our haNK product candidates by enteringinto investigator-initiated and company-sponsored phase II and phase II/III trials of the product candidates administered in combination withcommercially marketed drugs and select late-stage product candidates in development. We have started combining aNK with ALT-803 andalso plan to accelerate clinical development of our aNK product candidates by entering into investigator-initiated and company-sponsoredphase II and phase II/III trials of these product candidates administered in combination with approved chemotherapy agents. We believe thisapproach may accelerate the development and potential commercialization of our product candidate pipeline.taNK/Neoepitope Development StrategyThrough our strategic collaborations, we intend to identify both known antigens on the surface of tumor cells and neoepitopes in clinical patients,identify the expression of the neoepitopes on the surface of the tumor cell and interrogate large diverse libraries of antibodies to extract antibodies matchingthese neoepitopes. Through this cohesive and expansive discovery engine, we plan to identify antibodies to target newly discovered neoepitopes, therebydriving the development of our product candidate pipeline and establishing just-in-time precision medicine. We expect to regularly add newly discoveredneoepitopes from our discovery engine, and we believe the thousands of newly discovered antigens selectively expressed on the cancer cells and not on theessential normal tissues may provide us with the ability to create new and targeted libraries of antibodies to be potentially delivered as living drugs.18Near Term Clinical Development of haNKhaNK product candidates are aNK cells genetically engineered to over-express high-affinity CD16, a receptor that allows direct binding of NK cells toantibodies, potentially enhancing their cancer killing effects through ADCC. We expect that our haNK product candidates will initially be used incombination with widely-used therapeutic antibodies such as Herceptin, Erbitux and Rituxan. Therapeutic antibodies represent an important pillar ofimmunotherapy and are integral to the treatment paradigm of a variety of diseases. However, the actual cancer cell-killing efficacy of many of theseantibodies is largely dependent on ADCC, which involves antibody recruitment of NK and other immune cells to kill the antibody-bound cancer cells. If thepatient’s immune system is compromised, the efficacy of the antibody is limited. As such, there is strong rationale to administer additional immune cells inthe form of haNK in combination with antibodies to induce higher ADCC and therapeutic effects in these patients. We plan to develop haNK productcandidates in combination with antibodies in order to potentially address larger markets and earlier lines of treatment. 19Validating haNK through non-clinical applications and in vitro studiesNon-clinical applicationshaNK cells have been widely utilized by over 40 biopharmaceutical companies to date for in vitro ADCC testing of their antibodies in developmentand in certain instances their commercially available antibody products. For example, our haNK cells have been adapted for use in commercial assays such asBiotek’s automated Delfia ADCC assay system and Roche and Acea’s xCELLigence system. haNK cells have also been deployed under unsolicited non-exclusive, non-clinical licenses for commercial ADCC assay testing applications by most of the large pharmaceutical developers of antibodies. 20In vitro studiesThe graphs below depict the increasing ADCC killing activity of our haNK cells in the presence of increasing concentrations of either Herceptin orRituxan observed in in vitro studies. The comparative killing activity of low-affinity 176F expressing aNK, or laNK, cells and aNK alone observed are alsodepicted below. Figure 1. aNK, laNK and haNK cells were tested separately in killing of SK-OV-3 ovarian cancer cells in the presence of varying concentrations ofHerceptin. The assay was performed by loading the tumor cells with radioactive chromium-51 and measuring the release by cytotoxicity in a 4 hour assay.aNK cells expressing the high-affinity 176V variant responded to lower dose of Herceptin (0.001 ug/mL) and exhibited stronger maximal killingresponse, as compared to cells expressing the low-affinity 176F variant. Parental aNK cells, lacking CD16 expression, did not exhibit any ADCC responsetoward the SK-OV-3 cells and Rituxan did not trigger any ADCC response since this antibody was not designed to target SKOV3 cells.Figure 2. aNK cells expressing the high-affinity 176V variant responded to a lower dose of Rituxan (0.001 ug/mL) and exhibited stronger maximalkilling response, as compared to cells expressing the low-affinity 176F variant. Parental aNK cells, lacking CD16 expression, did not exhibit any ADCCresponse toward the 721.221 B-cell lymphoma cells and Herceptin did not trigger any ADCC response since this antibody was not designed to target 721.221cells.Source: J Immunol. 2008 May 1;180(9):6392-401.21In addition, the graphs below depict the synergistic activity of the combination of Herceptin and Perjeta (HER2/HER3) to mediate ADCC killingobserved in in vitro studies. Through the application of haNK cells to kill HER2 positive gastric carcinoma cells, the activity observed in the combination ofHerceptin and Perjeta was significantly greater than either agent alone. 22Rationale for developing high-affinity NK cells (haNK) in combination with approved antibodies and potentially any therapeutic antibody that utilizes theADCC killing pathwayIn multiple clinical trials conducted by third parties, patients who were homozygous for high-affinity CD16 (V/V) generally experienced betterresponses to exogenous antibody therapy than patients who were carriers of a low affinity CD16 allele (F carriers or F/F or V/F). The illustration from onestudy below shows the difference in progression-free survival between HER2 positive breast cancer patients treated with Herceptin who have thehomozygous high-affinity form of CD16 and those who have the low affinity form to be as much as 20% at 48 months. 23Data from three clinical trials demonstrating this point are shown below. The rationale therefore for combining high-affinity CD16 NKs (haNKs) withRituxan and Herceptin in patients with low affinity CD16 alleles (F carriers or F/F or V/F), should enhance the killing effect of these antibodies and achievethe results for patients with V/V alleles. Antibodies are prevalently used and generate over $50.0 billion in reported global annual sales. It has been reported that perhaps only approximately10% to 20% of the addressable patient population for antibody therapies carry high-affinity CD16 receptors. This implies that our haNK product candidatesmay have significant market potential for these and potentially all antibody products that kill via the ADCC pathway as a combination therapy to address alarge number of patients who have poor responses with antibodies.24Strategic plan to establish combination immunotherapy studies with haNK by entering into phase II trials with commercially approved antibodies andselect late-stage antibodies in development.Antibody combinations. We plan to pursue opportunities for our haNK program with biopharmaceutical companies and their respective approved andlate-stage antibody products. Numerous companies have licensed these haNK cells for laboratory testing and development of their antibody candidates.Certain biopharmaceutical companies have also used these haNK cells in commercial lot release-quality control testing of commercial batches of antibodyproduct for clinical use.ADCC contributes to clinical efficacy of a broad range of antibody therapeutics. In 2011, F. Hoffmann-La Roche reported the development of an in-vitro ADCC method based on our natural killer cell line as effectors to measure the ADCC activity of a humanized IgG1 antibody directed against the humanCD20 antigen. Their data show that this assay is capable of measuring small changes in ADCC and can therefore be used to test therapeutic antibodiesagainst cell-surface targets for their depleting activity. We believe this report supports our approach and the therapeutic potential of our haNK platform. As aresult, our accelerated strategy is to leverage the development performed by these biopharmaceutical companies who have licensed our haNK cells for non-therapeutic use by initiating phase II and phase II/III clinical trials of our haNK product candidate in combination with commercially approved antibodiesand select late-stage antibodies in development, the combination potentially enhancing the activity of these antibodies in patients with low affinity CD16receptors. The following table lists many of the commercial antibody products that can potentially be paired up with haNK therapy.Antibodies Approved for Cancer Treatment Generic Name Type Target andLocation Indications Year ofFDA/EMAApproval Mode of Action PatientSelectionRituximab Chimeric IgG1 CD20 (B cells) CLL, NHL(first line) 1997/1998 CDC and ADCC Based on diseasestage and typeCD20 positive Ofatumumab Human IgG1k CD20 (B cells) CLL 2009/2010 CDC and ADCC Not available Obinutuzumab HumanizedIgG1 CD20 (B cells) CLL 2013/2012 ADCC Not available Alemtuzumab HumanizedIgG1 CD52 (lymphoid cells) CLL 2001/2001 CDC and ADCC Not available;evidence suggestingpatients with 17pdeletion or p53mutation benefitmore Trastuzumab HumanizedIgG1 HER2 (tumor cellmembrane) BC, adjuvant andmetastaticadvanced gastriccancer (first line) 1998/2000 Downregulation ofHER2 signaltransduction; ADCC Based on HER2expression (positiveby IHC and/or FISH) Pertuzumab HumanizedIgG1 HER2 (tumor cellmembrane) BC 2012/2013 Inhibition of HER2dimerization Based on HER2expression (positiveby IHC and/or FISH) Bevacizumab HumanizedIgG1 VEGF(microenvironment) CRC, RCC,NSCLC(nonsquamous),GBM 2004/2005 Inhibition of VEGFsignaling Not available Ramucirumab Fully humanIgG1 VEGFR2(microenvironment) Gastric cancer 2014/—* Inhibition of VEGFsignaling Not available 25Generic Name Type Target andLocation Indications Year ofFDA/EMAApproval Mode of Action PatientSelectionCetuximab Chimeric IgG1 EGFR (tumor cellmembrane) CRC, HNSCC 2004/2004 Downregulation ofEGFR signaling;ADCC CRC: based onEGFR expression(positive) and KRASmutation status(wild type); HNSCC(high EGFRexpression): noselection Panitumumab Human IgG2 EGFR (tumor cellmembrane) CRC 2006/2007 Downregulation ofEGFR signaling;ADCC EGFR expression(positive) and KRASmutation status(wild type) Ipilimumab Human IgG1k CTLA-4 (T cells) Melanoma 2011/2011 Induces immuneresponse by CTLA-4 Not available MPDL2380A Human IgG1 PD-L1 (tumor cellmembrane) Bladder cancer 2014/—† Induces immuneresponse byblocking PD-L1 andPD-1 interaction Based on PD-L1expression Catumaxomab Mouse and ratIgG EpCAM (tumor cell);CD3 andFcyRs (immuneeffector cells) Malignant ascites —/2009§ Inducing immuneresponse Not available * Ramucirumab was granted orphan status by EMA in 2012 for hepatocellular carcinoma and gastric cancer.† MDPL3280A was granted breakthrough therapy designation by FDA in May 2014 for metastatic urothelial bladder cancer.§ Catumaxornab was granted orphan status by FDA in 2006 for ovarian cancer and in 2009 for gastric cancer.Abbreviations: ADCC, antibody-dependent cellular cytotoxicity; BC, breast cancer, CDC, complement-dependent cytotoxicity; CLL, chroniclymphocytic leukemia; CRC, colorectal cancer; CTLA-4, cytotoxic T-lymphocyte–associated antigen 4; EGFR, epidermal growth factor receptor; EMA,European Medicines Agency; EpCAM, epithelial cell adhesion molecule; FcyRs, Fc receptor for immunoglobulin G; FDA, US Food and DrugAdministration; FISH, fluorescent in situ hybridization; GBM, glioblastoma; HER2, human epidermal growth factor receptor 2; HL, Hodgkin’s lymphoma;HNSCC, head and neck squamous cell carcinoma; IgG, immunoglobulin G; IHC, immunohistochemistry; NHL, non-Hodgkin’s lymphoma; NSCLC, non–small-cell lung cancer; PD-1, programmed death receptor 1; PD-L1, programmed death receptor 1 ligand; RCC, renal cell cancer; VEGF, vascular endothelialgrowth factor; VEGFR2, vascular endothelial growth factor receptor 2.Source: J Clin Oncol. 2015 May 1;33(13):1491-504. doi: 10.1200/JCO.2014.57.8278. Epub 2015 Mar 16.Phase I/II haNK Product CandidatesWe have received FDA clearance to proceed with our first-in-human haNK study in patients with advanced solid cancers and plan to initiate this trialin the second quarter of 2017. Subsequently, we plan to expand into multiple indications, such as malignant melanoma, triple negative breast cancer, non-small cell lung, renal, prostate and squamous cell cancers, in combination with a variety of commercially available antibody products. These studies arecurrently in the advanced stages of planning for initiation shortly after initial single agent safety has been demonstrated.26Examples include:Solid Tumors—avelumab-haNK. We plan to target a variety of malignancies by combining haNK with the anti-PD-L1 antibody, avelumab, in clinicaltrials to be conducted in part at the NCI through our existing Cooperative Research and Development Agreement (CRADA). This combination has beenthoroughly evaluated in both in-vitro and in-vivo experiments internally and independently at the NCI. Solid Tumors—Herceptin-haNK. We intend to develop Herceptin-haNK for the treatment of HER2 expressing tumors. HER2 is expressed in a varietyof solid tumors including breast, ovarian, gastric, brain, bladder, and head & neck cancers. It is reported that approximately 20% of breast cancers are HER2positive and Herceptin is part of the standard of care for these tumors, but approximately 70% of patients receiving Herceptin for the treatment of breastcancer demonstrate or develop resistance to the drug. We believe there is strong rationale for combining haNK with Herceptin with the goal of augmentingHerceptin efficacy via enhanced ADCC against cancer cells. We plan to initially address HER2 positive metastatic breast cancer with our Herceptin-haNKproduct candidate. Solid Tumors—Others. Multiple other combinations, such as Erbitux-haNK, Darzalex-haNK and others are currently being explored respectively forcolorectal cancer, multiple myeloma and other areas of unmet needs.Chemotherapy, adenoviral, cytokine and antibody combinations. We plan to advance our aNK and haNK programs by entering into phase II andphase II/III clinical trials with our product candidates in combination with marketed drugs and select late-stage product candidates. We have completed pre-clinical studies that show enhanced anti-tumor activity of aNK activity with the addition of ALT-803; therefore, we are adopting clinical trial designs thatutilize this combination and we have initiated enrollment of our first combination protocol for Merkel cell carcinoma. A large number of monoclonalantibodies and chemotherapy drugs are being marketed for multiple indications. Published data show these antibodies have generally enhanced activity inpatients who naturally bear high-affinity NK cells. Published data also show that chemotherapy agents such as 5FU, cyclophosphamide and paclitaxel, whenadministered in low doses, generally enhance the immune system. We plan to accelerate clinical development of our haNK product candidates by enteringinto investigator-initiated and company-sponsored phase II and phase II/III clinical trials of our haNK product candidates administered in combination withapproved antibodies and select late-stage product candidates. We also plan to accelerate clinical development of our aNK product candidates by enteringinto investigator-initiated and company-sponsored phase II and phase II/III clinical trials of these product candidates administered in combination withapproved chemotherapy agents. We believe this approach may accelerate the development and potential commercialization of our product candidatepipeline.taNKWe have genetically modified our aNK platform to express chimeric antigen receptors (CARs) that target specific antigens found on the surface ofcancerous cells. These CAR expressing aNK cells, generally called taNKs, are designed to directly bind to tumor-specific antigens commonly expressed onmultiple types of solid tumors and hematological malignancies and in turn, become activated to induce killing through the release of toxic granules directlyinto the tumor cell. Additionally, these taNKs cells release cytokines and chemokines which stimulate and recruit additional innate and adaptive immuneresponses, including the recruitment of cytotoxic T-cells. These tumor-specific antigens can be divided into four classes, all of which can be targeted by ourtaNK platform: (1) checkpoint inhibitors expressed on the surface of tumor cells such as PD-L1; (2) well-established tumor surface antigens such as HER2 andCD19; (3) newly discovered neoepitopes; and (4) novel surface receptors associated with cancer stem cells.A typical CAR construct includes the following components: •A single-chain Fv fragment, or scFv, which is derived from a human antibody and recognizes the target antigen on the surface of a diseasedcell; and •CD3ζ chain which provides the initial signal to the taNK cell and activates its mechanisms when the receptor binds to an antigen.27The construct of our taNK product candidates is depicted schematically below. As illustrated below, we believe that interrogating antibody librarieswill allow for the selection of appropriate antibodies that can in turn be converted into CARs that selectively target and bind to known or novel tumor surfaceantigens. The antibody-derived scFv region (which includes the Fc region) is expected to bind to the targeted antigen, while a CD3ζ segment inside the taNKcell induces the taNK to release cytotoxic compounds to destroy the targeted diseased cell. Unlike CAR-T and TCR therapies, our taNK cells can incorporatebut do not require a co-stimulatory domain, such as CD28 or 4-1BB, which is another signaling component for immune cell activation and survival. Lead Phase I/II taNK Product CandidateSolid TumorsHER2.taNK for HER2-expressing Solid Tumors. We are developing HER2.taNK for the treatment of solid tumors expressing the HER2 antigen,including breast and brain bladder cancers. Over-expression of HER2 has been shown to play an important role in the development and progression of severalaggressive types of cancers including breast, bladder, brain, head & neck, gastric, ovarian and uterine cancers. This antigen is expressed in up to 20% ofbreast and up to 30% of bladder cancer patients. The overall HER2 cancer market was over $7.0 billion in 2014 based on annual sales of Herceptin reportedby PDL Biopharma, Inc. We have generated compelling proof-of-principle in vivo pre-clinical data below for HER2.taNK and we submitted the equivalent ofan IND to the PEI in late 2016 with an anticipated start date for treating HER2 positive glioblastoma patients by mid-2017. Our U.S. IND submission forHER2.taNK in HER2 positive cancers is currently planned for mid-2017.28The data below demonstrate in vivo results for HER2.taNK in glioblastoma xenograft immune-compromised mice model. The images on the bottomleft show reduction in tumor burden from day 49 to day 84. The symptom-free survival curve on the bottom right shows statistically significant greater effectin the HER2.taNK treated arm compared to treatment with unmodified aNK cells and placebo. 29The images below show targeted killing of HER2 positive breast cancer cells (red cells) by our HER2.taNK (gray cell). Our Her2.taNK product has been established as a fully compliant clinical grade master cell bank and stands as a ready source of clinical trial material. 30Additionally, our specific subtype of Her2.CAR, FRP5, has been safely administered as systemic infusions in phase I clinical trials. 2ManufacturingOur manufacturing strategy is being designed to meet the demand needs of clinical supply and commercial launch. We are establishing our ownmanufacturing facilities and we currently use facilities operated by one or more third party clinical manufacturing organizations, or CMOs. We are buildingout a state-of-the-art, cell-based manufacturing capacity to support large-scale clinical trials and commercialization. We are developing novel manufacturingmethods, both in equipment utilizing state-of–the-art optics and proprietary media to maximize the attributes of our NK platform. We believe that thisautomated, closed platform manufacturing process will give us the ability to conduct manufacturing in a non-classified, lower cost manufacturingenvironment.Unlike the manufacturing process involved in autologous adaptive immunotherapy of CAR-T cells, which can have high unit manufacturing costsand complex processes, including harvesting T-cells from patients, genetically engineering the T-cells ex vivo, multiplying the T-cells to obtain the desireddose, and ultimately infusing the T-cells back into a patient’s body, manufacturing our allogeneic “off-the-shelf” aNK and haNK cells involves a rapid,scalable and cost efficient process. The cells are stored and maintained in qualified master cell banks in cryopreserved form. The cells are thawed into smallscale cell culture and repeatedly doubled in number until the desired dose is achieved. The process is accomplished using all disposables. The cells are grownin a commercially available media, supplemented where required with IL-2, human AB serum and other amino acids. In-process testing for cleanliness andidentity are performed.Clinical product final formulation occurs at each clinical site where the local site laboratory prepares the final formulation for administration to thepatient. The laboratory tests for cleanliness, identity and potency. A single manufacturing run can sufficiently produce multiple patient cycles. Clinical manufacturing currently occurs at Baylor University Center for Cell and Gene Therapy. We are in the process of building our own aNK andhaNK cell production facilities with the goal of meeting our anticipated product candidate needs for the foreseeable future and have established anoperational production site at one of our facilities in the first quarter of 2017. Additionally, we are in the process of further increasing capacity by engaging acommercial, international contract manufacturing organization to provide more product candidate production capacity as well as potentially provide us withprocess development capabilities for scale up into large scale production and cryopreservation final form. We plan to develop this commercial relationshipwith a CMO for their manufacturing expertise and global reach as well as establish our own manufacturing capability to scale for global trials. 2 J Clin Oncol. 2015 May 20; 33 (15): 1688-96. obi: 10.1200/JCO. 2014.58.0225. Epub 2015 Mar 23.31CompetitionThe biopharmaceutical industry is characterized by intense and dynamic competition to develop new technologies and proprietary therapies. Anyproduct candidates that we successfully develop and commercialize will have to compete with existing therapies and new therapies that may becomeavailable in the future. We believe that our proprietary aNK platform, differentiated aNK, haNK and taNK product candidates, strategic collaborations andcell-based immunotherapy expertise may provide us with competitive advantages. However, we face potential competition from various sources, includinglarger and better-funded pharmaceutical, specialty pharmaceutical and biotechnology companies, as well as from academic institutions, governmentalagencies and public and private research institutions. The key competitive factors affecting the success of any approved product will include the efficacy,safety profile, pricing, method of administration and level of promotional activity.Our aNK, haNK and taNK product candidates will compete with other cell-based immunotherapy approaches using T- and dendritic cells. We areaware of companies developing product candidates focused on NK cells. These companies include Bristol-Myers Squibb, Celgene Corporation and InnatePharma. Companies that are currently focused on T-cell based treatments include Adaptimmune Limited, Amgen Inc., Bellicum Pharmaceuticals, Inc.,bluebird bio, Inc., Celgene Corporation, Cellectis SA, GlaxoSmithKline plc, Intrexon Corporation, Juno Therapeutics, Inc., Kite Pharma, Inc., Novartis AG,Pfizer Inc. and Ziopharm Oncology, Inc. There is currently one approved dendritic cell-based cancer vaccine, PROVENGE, which is marketed by ValeantPharmaceuticals for the treatment of metastatic castrate-resistant prostate cancer. Other companies focused on developing dendritic cell-based productcandidates include Argos Therapeutics, Inc., Biovest International, Inc., ImmunoCellular Therapeutics, Ltd., Immune Design, Inc., Inovio Pharmaceuticals,Inc., Intrexon Corporation and Northwest Biotherapeutics, Inc.Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we doand significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of treatmentsand commercializing those treatments. Accordingly, our competitors may be more successful than us in obtaining approval for treatments and achievingwidespread market acceptance. Our competitors’ treatments may be more effective, or more effectively marketed and sold, than any treatment we maycommercialize and they may render our treatments obsolete or non-competitive before we can recover the expenses of developing and commercializing anyof our treatments.Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smallernumber of our competitors. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel andestablishing clinical study sites and subject registration for clinical studies, as well as in acquiring technologies complementary to, or necessary for, ourprograms. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large andestablished companies.We anticipate that we will face intense and increasing competition as new therapies enter the market and advanced technologies become available.We expect any treatments that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administrationand delivery, price, the level of generic competition and the availability of reimbursement from government and other third-party payors.32Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, havea better safety profile, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or otherregulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong marketposition before we are able to enter the market. In addition, we expect that our therapeutic products, if approved, will be priced at a significant premium overcompetitive generic products and our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use ofgeneric products.Intellectual PropertyWe strive to protect and enhance the proprietary technology, inventions, and improvements that are commercially important to our business,including seeking, maintaining, and defending patent rights, whether developed internally or licensed from third parties. Our policy is to seek to protect ourproprietary position by, among other methods, filing patent applications in the United States and in jurisdictions outside of the United States related to ourproprietary technology, inventions, improvements, and product candidates that are important to the development and implementation of our business. Wealso rely on trade secrets and know-how relating to our proprietary technology and product candidates, continuing innovation, and in-licensingopportunities to develop, strengthen, and maintain our proprietary position in the field of NK cell-based immunotherapy. We expect to rely on dataexclusivity, market exclusivity, patent term adjustment and patent term extensions when available, as well as on regulatory protection afforded throughorphan drug designations. Our commercial success may depend in part on our ability to obtain and maintain patent and other proprietary protection for ourtechnology, inventions, and improvements; to preserve the confidentiality of our trade secrets; to maintain our licenses to use intellectual property owned bythird parties; to defend and enforce our proprietary rights, including our patents; and to operate without infringing on the valid and enforceable patents andother proprietary rights of third parties.We have developed and in-licensed numerous patents and patent applications and we possess substantial know-how and trade secrets relating to thedevelopment and commercialization of NK cell-based immunotherapy product candidates, including related manufacturing processes and technology. As ofDecember 31, 2016, our owned and licensed patent portfolio consists of patents and pending patent applications in the U.S. disclosing subject matterdirected to certain of our proprietary technology, inventions, and improvements and our most advanced product candidates, as well as licensed and ownedpatents and pending applications in jurisdictions outside of the U.S., that, in many cases, are counterparts to the foregoing U.S. patents and patentapplications. For example, these patents and patent applications include claims directed to: •Natural Killer Cell Lines and Methods of Use; •Genetically Modified Human Natural Killer Cell Lines; •Treatment of Viral and Bacterial Diseases using Natural Killer Cell Lines; •Treatment of Specific Diseases using Natural Killer Cell Lines; •Treatment of Cancer using Natural Killer Cell Lines; •Protocol and Media for Storage and Transport of NK-92 Cell Line; •Combination Therapy using Natural Killer Cell Lines; and •Antibody fragments that specifically bind to human ErbB2.As for the NK cell-based immunotherapy products and processes we develop and commercialize, in the normal course of business, we intend to pursue,when possible, composition, method of use, dosing and formulation patent protection. We may also pursue patent protection with respect to manufacturingand drug development processes and technology. The patents and patent applications outside of the U.S. in our portfolio are held primarily in Europe,Canada and Australia.33Individual patents extend for varying periods of time, depending upon the date of filing of the patent application, the date of patent issuance, and thelegal term of patents in the countries in which they are obtained. Generally, patents issued for applications filed in the United States are effective for 20 yearsfrom the earliest effective filing date. The patent term may be adjusted to compensate for delayed patent issuance, when such delays are caused by the patentoffice or successful appeals against patent office actions. There is no limit on this patent term adjustment. In addition, in certain instances, a patent term canbe extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. The restoration period cannot be longer thanfive years and the total patent term, including the restoration period, must not exceed 14 years following FDA approval. The duration of patents outside ofthe United States varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date. Our issuedpatents will expire on dates ranging from 2018 to 2032. If patents are issued on our pending patent applications, the resulting patents are projected to expireon dates ranging from 2018 to 2036. However, the actual protection afforded by a patent varies on a product-by-product basis, from country-to-country, anddepends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legalremedies in a particular country, and the validity and enforceability of the patent.The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. No consistent policy regardingthe scope of claims allowable in patents in the field of immunotherapy has emerged in the United States. The patent situation outside of the United States iseven more uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect ourinventions and enforce our intellectual property rights, and more generally could affect the value of our intellectual property. In particular, our ability to stopthird parties from making, using, selling, offering to sell, or importing products that infringe our intellectual property will depend in part on our success inobtaining and enforcing patent claims that cover our technology, inventions, and improvements. With respect to both licensed and company-ownedintellectual property, we cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patentapplications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will becommercially useful in protecting our products and the methods used to manufacture those products. Moreover, even our issued patents do not guarantee usthe right to practice our technology in relation to the commercialization of our products. However, the area of patent and other intellectual property rights inbiotechnology is an evolving one with many risks and uncertainties, and third parties may have blocking patents that could be used to prevent us fromcommercializing our patented product candidates and practicing our proprietary technology. Our issued patents and those that may issue in the future may bechallenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related products or limit the length of the term ofpatent protection that we may have for our product candidates. In addition, the rights granted under any issued patents may not provide us with protection orcompetitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies. Forthese reasons, we may have competition for our product candidates. Moreover, because of the extensive time required for development, testing and regulatoryreview of a potential product, it is possible that, before any particular product candidate can be commercialized, any related patent may expire or remain inforce for only a short period following commercialization, thereby reducing any advantage of the patent.As of December 31, 2016, our registered trademark portfolio contained seven registered trademarks in the United States, seven registered trademarks inforeign jurisdictions (four of which are Madrid Protocol trademarks), eight pending trademark applications in the United States, and 25 pending trademarkapplications in foreign jurisdictions. We may also rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficultto protect. We seek to protect our technology and product candidates, in part, by entering into confidentiality agreements with those who have access to ourconfidential information, including our employees, contractors, consultants, collaborators, and advisors. We also seek to preserve the integrity andconfidentiality of our proprietary technology and processes by maintaining physical security of our premises and physical and electronic security of ourinformation technology systems. Although we have confidence in these individuals, organizations, and systems, agreements or security measures may bebreached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or may be independentlydiscovered by competitors. To the extent that our employees, contractors, consultants, collaborators, and advisors use intellectual property owned by othersin their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For this and more comprehensive risks related to ourproprietary technology, inventions, improvements and products, please see the section on “Risk Factors—Risks Related to Intellectual Property.”Licenses. We hold the worldwide rights, title and interest to the NK-92 cell line and we believe that we control commercial use of our NK-92 cells inkey territories. We also maintain and exclusively control the only clinical grade master cell bank for NK-92. The original NK-92 cell line was isolated byHans G. Klingemann, M.D., Ph.D., our founder and Vice President of Research and Development, and all patents and patent applications pertaining to thiscell line are now in the name of NantKwest, Inc. or ZelleRx Corporation, our former name. In February 2003, we obtained an exclusive, worldwide licensefrom Dr. Klingemann to the NK-92 cell line, and related NK-92 patents and know-how, including the NK-92 cell line, that had been assigned to him by theBritish Columbia Cancer Agency, to manufacture, use and sell products covered by the scope of any valid claim in any of the licensed patents.Dr. Klingemann subsequently assigned the cell line and those patents to us, but we are still obligated to pay a single-digit royalty on sales of licensedproducts to Dr. Klingemann, as well as to pay the British Columbia Cancer Agency a small percentage of our profits from the sale of the NK-92 cell line thatDr. Klingemann obtained from them.34In July 2004, we entered into an exclusive license agreement with Fox Chase Cancer Center or Fox Chase, pursuant to which we were granted anexclusive, worldwide, sublicensable license under certain patents and know-how pertaining to CD16 receptors-bearing NK-92 cell lines. We agreed to payFox Chase low single-digit royalties on sales of licensed products. We are also obligated to pay Fox Chase a percentage of the royalties and othercompensation we receive from sublicensees of our rights from Fox Chase. Fox Chase is obligated to assign the licensed patents to us if we commence a PhaseIII clinical trial of a licensed product and, if this does not occur, our license expires when the last of the licensed patents expires.In March 2004, we entered into a license agreement with Rush University Medical Center pursuant to which Rush granted us an exclusive, worldwide,sublicensable license to certain intellectual property related to clinical use of NK-92 to develop and commercialize products and processes for the treatmentof melanoma renal cancer, or for the diagnosis or treatment of non-melanoma and non-renal cancer. In consideration for the license, we are obligated to pay toRush single-digit royalties on sales of licensed products with a minimum royalty payment of $25,000 per year, as well as non-material milestone paymentsupon completion of certain clinical, regulatory and commercialization milestones. We also agreed to pay to Rush a portion of certain payments that wereceive under sublicensing arrangements. The license has a term of 12 years from 2006, the year in which royalty payments were first made, and includescustomary termination rights for us and Rush.In May 2005, we entered into a license agreement with University Health Network pursuant to which we obtained from University Health Network anexclusive, worldwide, sublicensable license to certain intellectual property relating to NK-92 clinical trials data from University Health Network to developand commercialize products and processes for the diagnosis and treatment of certain hematological malignancies. Our license from University HealthNetwork will automatically expire if we have not filed for regulatory approval or launched a licensed product within specified periods of time, and alsoincludes other customary termination rights for both us and University Health Network.In December 2014, we entered into a joint development and license agreement with Sorrento Therapeutics to exclusively collaborate on thedevelopment and commercialization of therapeutic applications of certain effector cell lines as may be agreed between the parties, which exclusively extendsto certain rights of each party included in each agreed collaboration. Pursuant to this agreement, the parties have agreed to use certain of our NK-92 cellsexclusively with Sorrento’s CARs and certain other CARs not excluded under the agreement to develop and commercialize joint products as may be agreedbetween the parties. To fund our joint research and development efforts, Sorrento has agreed to make research credit payments that are not material in each ofDecember 2015 and 2016, which amounts would be reduced by certain expenses for which we are responsible under the agreement. The research creditpayments will be paid in the form of full-time employee expense credits by Sorrento, for our portion of any development costs, and a laboratory credit formaintaining a laboratory on Sorrento’s premises. Each joint product developed by the parties will be driven by one party, as mutually agreed upon by adesignated steering committee comprised of three representatives from each party. That designated party, in each circumstance, will initiate and controldevelopment, testing, regulatory approval, commercialization, and, subject to certain conditions, out-licensing of the applicable joint product, and will bearall costs associated with the development of the joint cell line or joint product, including any costs associated with obtaining any necessary rights to thirdparty intellectual property, unless the other party shares in such costs. Revenues generated from each joint cell line or joint product will be apportionedbetween Sorrento and us, depending upon the stage of development and each party’s contribution towards the development costs. Each of the parties willown an undivided interest in and to all rights, title and interest in and to the joint product rights. As of the date hereof, the parties have not yet agreed uponany projects under the joint development and license agreement; therefore Sorrento has no rights to use our NK cells or other technologies or intellectualproperty rights or to begin related research, development or commercialization activities and we are free to pursue, and are actively pursuing, research,development and commercialization activities with antibodies that may bind to various targets, including PDL1, ROR-1, CD33 and CD123. The agreementexpires upon the later of the completion of the series of our collaborative research and development efforts or three years. We and Sorrento each have theright to terminate the agreement and the licenses granted thereunder if the other party is dissolved or is declared bankrupt or insolvent or remains in default ofany material obligations following a sixty day cure period to remedy the default.In February 2010, we entered into a 17-year agreement with Intrexon Corporation pursuant to which we granted to Intrexon a worldwide,sublicensable license which may be exclusive with respect to certain indications designated by Intrexon, under certain patents relating to NK-92 cells todevelop and commercialize modified NK-92 cells that express Intrexon’s proprietary gene sequences for use as therapeutic and prophylactic agents inhumans in specified therapeutic areas. Intrexon paid us a one-time license fee and is also obligated to pay non-material milestone payments with respect tospecific indications, a royalty on net sales of the licensed products and a portion of the revenue Intrexon receives from third party sublicensees of its rightsfrom us. Intrexon has the right to terminate the agreement upon 180 days’ notice and both Intrexon and we have the right to terminate the agreement for theother’s uncured breach of the agreement.We have licensed or sub-licensed our cell lines and intellectual property to numerous other pharmaceutical and biotechnology companies for non-clinical uses such as laboratory testing. Such licenses generally require the licensee to pay an upfront fee and annual research and commercial fees forproducts sold using our intellectual property and cell lines.35Government RegulationThe FDA and other regulatory authorities at federal, state, and local levels, as well as in foreign countries, extensively regulate, among other things,the research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging, storage, distribution, recordkeeping, approval, advertising, promotion, marketing, post-approval monitoring, and post-approval reporting of biologics such as those we are developing.We, along with third-party contractors, will be required to navigate the various preclinical, clinical and commercial approval requirements of the governingregulatory agencies of the countries in which we wish to conduct studies or seek approval or licensure of our product candidates. The process of obtainingregulatory approvals and the subsequent compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure ofsubstantial time and financial resources.The process required by the FDA before biologic product candidates may be marketed in the United States generally involves the following: •completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s current Good Laboratory Practices, orGLP, regulation; •submission to the FDA of an IND, which must become effective before clinical trials may begin and must be updated annually or whensignificant changes are made; •approval by an independent Institutional Review Board, or IRB, or ethics committee for each clinical site before the clinical trial is begun; •performance of adequate and well-controlled human clinical trials to establish the safety, purity and potency of the proposed biologic productcandidate for its intended purpose; •preparation of and submission to the FDA of a Biologics License Application, or BLA, after completion of all required clinical trials; •a determination by the FDA within 60 days of its receipt of a BLA to file the application for review; •satisfactory completion of an FDA Advisory Committee review, if applicable; •satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the proposed product is producedto assess compliance with Good Manufacturing Practices, or GMP, and to assure that the facilities, methods and controls are adequate topreserve the biological product’s continued safety, purity and potency, and of selected clinical investigational sites to assess compliance withcurrent Good Clinical Practices, or cGCPs; and •FDA review and approval of the BLA to permit commercial marketing of the product for particular indications for use in the United States,which must be updated annually and when significant changes are made.The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our productcandidates will be granted on a timely basis, if at all. Prior to beginning the first clinical trial with a product candidate, we must submit an IND to the FDA. AnIND is a request for authorization from the FDA to administer an investigational new drug product to humans. The central focus of an IND submission is onthe general investigational plan and the protocol(s) for clinical studies. The IND also includes results of animal and in vitro studies assessing the toxicology,pharmacokinetics, pharmacology, and pharmacodynamic characteristics of the product; chemistry, manufacturing, and controls information; and anyavailable human data or literature to support the use of the investigational product. An IND must become effective before human clinical trials may begin.The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises safety concerns or questionsabout the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstandingconcerns or questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin a clinical trial.When a clinical trial using genetically engineered cells is conducted at, or sponsored by, institutions receiving NIH funding for recombinant DNAresearch, prior to the submission of an IND to the FDA, a protocol and related documentation is submitted to and the study is registered with the NIH Office ofBiotechnology Activities, or OBA, pursuant to the NIH Guidelines for Research Involving Recombinant DNA Molecules, or NIH Guidelines. Compliancewith the NIH Guidelines is mandatory for investigators at institutions receiving NIH funds for research involving recombinant DNA, and many companiesand other institutions not otherwise subject to the NIH Guidelines voluntarily follow them. The NIH is responsible for convening the Recombinant DNAAdvisory Committee, or RAC, a federal advisory committee that discusses protocols that raise novel or particularly important scientific, safety, or ethicalconsiderations at one of its quarterly public meetings. The OBA will notify the FDA of the RAC’s decision regarding the necessity for full public review of aprotocol. RAC proceedings and reports are posted to the OBA web site and may be accessed by the public. If the FDA allows the IND to proceed, but the RACdecides that full public review of the protocol is warranted, the FDA will request at the completion of its IND review that sponsors delay initiation of theprotocol until after completion of the RAC review process.36Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators inaccordance with cGCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical study.Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety andthe effectiveness criteria to be evaluated. A separate submission to the existing IND must be made for each successive clinical trial conducted during productdevelopment and for any subsequent protocol amendments. Furthermore, an independent Institutional Review Board, or IRB, for each site proposing toconduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before the clinical trial begins at that site, andmust monitor the study until completed. Regulatory authorities, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, includinga finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also includeoversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board, which providesauthorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinicaltrial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirementsgoverning the reporting of ongoing clinical studies and clinical study results to public registries.For purposes of BLA approval, human clinical trials are typically conducted in three sequential phases that may overlap. •Phase I. The biological product is initially introduced into healthy human subjects and tested for safety. In the case of some products for severeor life-threatening diseases, the initial human testing is often conducted in patients. •Phase II. The biological product is evaluated in a limited patient population to identify possible adverse effects and safety risks, topreliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosingschedule. •Phase III. Clinical trials are undertaken to further evaluate dosage, clinical efficacy, potency, and safety in an expanded patient population atgeographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk to benefit ratio of the product andprovide an adequate basis for product labeling. •Phase IV. In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved togain more information about the product. These so-called Phase IV studies may be made a condition to approval of the BLA.Phase I, Phase II and Phase III testing may not be completed successfully within a specified period, if at all, and there can be no assurance that the datacollected will support FDA approval or licensure of the product. Concurrent with clinical trials, companies may complete additional animal studies anddevelop additional information about the biological characteristics of the product candidate, and must finalize a process for manufacturing the product incommercial quantities in accordance with GMP requirements. To help reduce the risk of the introduction of adventitious agents with use of biologicalproducts, the Public Health Service Act, or PHSA, emphasizes the importance of manufacturing control for products whose attributes cannot be preciselydefined. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, mustdevelop methods for testing the identity, strength, quality and purity of the final product, or for biologics, the safety, purity and potency. Additionally,appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergounacceptable deterioration over its shelf life.BLA Submission and Review by the FDAAssuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development,nonclinical studies and clinical trials are submitted to the FDA as part of a BLA requesting approval to market the product for one or more indications. TheBLA must include all relevant data available from pertinent preclinical and clinical studies, including negative or ambiguous results as well as positivefindings, together with detailed information relating to the product’s chemistry, manufacturing, controls, and proposed labeling, among other things. Datacan come from company-sponsored clinical studies intended to test the safety and effectiveness of a use of the product, or from a number of alternativesources, including studies initiated by investigators. The submission of a BLA requires payment of a substantial User Fee to FDA, and the sponsor of anapproved BLA is also subject to annual product and establishment user fees. These fees are typically increased annually. A waiver of user fees may beobtained under certain limited circumstances.37Within 60 days following submission of the application, the FDA reviews a BLA to determine if it is substantially complete before the agency acceptsit for filing. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission and may request additionalinformation. In this event, the BLA must be resubmitted with the additional information. Once a BLA has been filed, the FDA’s goal is to review theapplication within ten months after it accepts the application for filing, or, if the application relates to an unmet medical need in a serious or life-threateningindication, six months after the FDA accepts the application for filing. The review process is often significantly extended by FDA requests for additionalinformation or clarification. The FDA reviews a BLA to determine, among other things, whether a product is safe, pure and potent and the facility in which itis manufactured, processed, packed, or held meets standards designed to assure the product’s continued safety, purity and potency. The FDA may convene anadvisory committee to provide clinical insight on application review questions. Before approving a BLA, the FDA will typically inspect the facility orfacilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities arein compliance with GMP requirements and adequate to assure consistent production of the product within required specifications. FDA regulations alsorequire tissue establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through screening and testing.Additionally, before approving a BLA, the FDA will typically inspect one or more clinical sites to assure compliance with cGCP. If the FDA determines thatthe application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will requestadditional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that theapplication does not satisfy the regulatory criteria for approval.The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA maynot grant approval on a timely basis, or at all, and we may encounter difficulties or unanticipated costs in our efforts to secure necessary governmentalapprovals, which could delay or preclude us from marketing our products. After the FDA evaluates a BLA and conducts inspections of manufacturingfacilities where the investigational product and/or its drug substance will be produced, the FDA may issue an approval letter, a Complete Response Letter or anot approval letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. AComplete Response Letter indicates that the review cycle of the application is complete and the application is not ready for approval. A Complete ResponseLetter may request additional information or clarification. The FDA may delay or refuse approval of a BLA if applicable regulatory criteria are not satisfied,require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.If regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which such product may be marketed. Forexample, the FDA may approve the BLA with a Risk Evaluation and Mitigation Strategy, or REMS, plan to mitigate risks, which could include medicationguides, physician communication plans, or other restrictions to assure safe use, such as restricted distribution methods, patient registries and other riskminimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controlsand specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is notmaintained or if problems occur after the product reaches the marketplace. The FDA may require one or more Phase IV post-market studies and surveillance tofurther assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the resultsof these post-marketing studies. In addition, new government requirements, including those resulting from new legislation, may be established, or the FDA’spolicies may change, which could delay or prevent regulatory approval of our products under development.A sponsor may seek approval of its product candidate under programs designed to accelerate FDA’s review and approval of new drugs and biologicalproducts that meet certain criteria. Specifically, new drugs and biological products are eligible for fast track designation if they are intended to treat a seriousor life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. For a fast track product, the FDA may considersections of the BLA for review on a rolling basis before the complete application is submitted if relevant criteria are met. A fast track designated productcandidate may also qualify for priority review, under which the FDA sets the target date for FDA action on the BLA at six months after the FDA accepts theapplication for filing. Priority review is granted when there is evidence that the proposed product would be a significant improvement in the safety oreffectiveness of the treatment, diagnosis, or prevention of a serious condition. If criteria are not met for priority review, the application is subject to thestandard FDA review period of 10 months after FDA accepts the application for filing. Priority review designation does not change the scientific/medicalstandard for approval or the quality of evidence necessary to support approval.38Under the accelerated approval program, the FDA may approve a BLA on the basis of either a surrogate endpoint that is reasonably likely to predictclinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect onirreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lackof alternative treatments. Post-marketing studies or completion of ongoing studies after marketing approval are generally required to verify the biologic’sclinical benefit in relationship to the surrogate endpoint or ultimate outcome in relationship to the clinical benefit. In addition, the Food and DrugAdministration Safety and Innovation Act, or FDASIA, which was enacted and signed into law in 2012, established breakthrough therapy designation. Asponsor may seek FDA designation of its product candidate as a breakthrough therapy if the product candidate is intended, alone or in combination with oneor more other drugs or biologics, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the therapy maydemonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observedearly in clinical development. Sponsors may request the FDA to designate a breakthrough therapy at the time of or any time after the submission of an IND,but ideally before an end-of-phase II meeting with FDA. If the FDA designates a breakthrough therapy, it may take actions appropriate to expedite thedevelopment and review of the application, which may include holding meetings with the sponsor and the review team throughout the development of thetherapy; providing timely advice to, and interactive communication with, the sponsor regarding the development of the drug to ensure that the developmentprogram to gather the nonclinical and clinical data necessary for approval is as efficient as practicable; involving senior managers and experienced reviewstaff, as appropriate, in a collaborative, cross-disciplinary review; assigning a cross-disciplinary project lead for the FDA review team to facilitate an efficientreview of the development program and to serve as a scientific liaison between the review team and the sponsor; and considering alternative clinical trialdesigns when scientifically appropriate, which may result in smaller or more efficient clinical trials that require less time to complete and may minimize thenumber of patients exposed to a potentially less efficacious treatment. Breakthrough designation also allows the sponsor to file sections of the BLA forreview on a rolling basis. We may seek designation as a breakthrough therapy for some or all of our product candidates.Fast Track designation, priority review and breakthrough therapy designation do not change the standards for approval but may expedite thedevelopment or approval process.Orphan DrugsUnder the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, defined as adisease or condition with a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000individuals in the United States and when there is no reasonable expectation that the cost of developing and making available the drug or biologic in theUnited States will be recovered from sales in the United States for that drug or biologic. Orphan drug designation must be requested before submitting a BLA.After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA.If a product that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for which ithas such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including afull BLA, to market the same biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to theproduct with orphan drug exclusivity or if FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability ofsufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. Orphan drugexclusivity does not prevent the FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for adifferent disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the BLA applicationuser fee.A designated orphan drug many not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it receivedorphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request fordesignation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the raredisease or condition.39Post-Approval RequirementsAny products manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including,among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, distribution, and advertising andpromotion of the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to priorFDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such productsare manufactured, as well as new application fees for supplemental applications with clinical data. Biologic manufacturers and their subcontractors arerequired to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certainstate agencies for compliance with GMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers.Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before beingimplemented. FDA regulations also require investigation and correction of any deviations from GMP and impose reporting requirements upon us and anythird-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of productionand quality control to maintain compliance with GMP and other aspects of regulatory compliance. We cannot be certain that we or our present or futuresuppliers will be able to comply with the GMP regulations and other FDA regulatory requirements. If our present or future suppliers are not able to complywith these requirements, the FDA may, among other things, halt our clinical trials, require us to recall a product from distribution, or withdraw approval of theBLA.Future FDA and state inspections may identify compliance issues at our facilities or at the facilities of our contract manufacturers that may disruptproduction or distribution, or require substantial resources to correct. In addition, discovery of previously unknown problems with a product or the failure tocomply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved BLA, including withdrawal or recall ofthe product from the market or other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing.The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the productreaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or withmanufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information;imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMSprogram. Other potential consequences include, among other things: •restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; •fines, warning letters or holds on post-approval clinical studies; •refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product licenseapprovals; •product seizure or detention, or refusal to permit the import or export of products; or •injunctions or the imposition of civil or criminal penalties.The FDA closely regulates the marketing, labeling, advertising and promotion of biologics. A company can make only those claims relating to safetyand efficacy, purity and potency that are approved by the FDA and in accordance with the provisions of the approved label. The FDA and other agenciesactively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among otherthings, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties, and exclusion from participation in governmentalhealth programs, like Medicare and Medicaid. Physicians may prescribe legally available products for uses that are not described in the product’s labelingand that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that suchoff-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice oftreatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use of their products.40Other Healthcare Laws and Compliance RequirementsOur sales, promotion, medical education, clinical research and other activities following product approval will be subject to regulation by numerousregulatory and law enforcement authorities in the United States in addition to FDA, including potentially the Federal Trade Commission, the Department ofJustice, the Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services and state and localgovernments. Our promotional and scientific/educational programs must comply with the federal Anti-Kickback Statute, the False Claims Act, physicianpayment transparency laws, privacy laws, security laws, and additional federal and state laws similar to the foregoing.The federal Anti-Kickback Statute prohibits, among other things, the knowing and willing, direct or indirect offer, receipt, solicitation or payment ofremuneration in exchange for or to induce the referral of patients, including the purchase, order or lease of any good, facility, item or service that would bepaid for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value,including cash, improper discounts, and free or reduced price items and services. The federal Anti-Kickback Statute has been interpreted to apply toarrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the other. Althoughthere are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harborsare drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may besubject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exceptionor regulatory safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the legality of the arrangement will beevaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intentrequirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, thefederal Anti-Kickback Statute has been violated. The government has enforced the federal Anti-Kickback Statute to reach large settlements with healthcarecompanies based on sham research or consulting and other financial arrangements with physicians. Further, a person or entity does not need to have actualknowledge of the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items orservices resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Manystates have similar laws that apply to their state health care programs as well as private payors.Federal false claims and false statement laws, including the federal civil False Claims Act, or FCA, imposes liability on persons or entities that, amongother things, knowingly present or cause to be presented claims that are false or fraudulent or not provided as claimed for payment or approval by a federalhealth care program. The FCA has been used to prosecute persons or entities that “cause” the submission of claims for payment that are inaccurate orfraudulent, by, for example, providing inaccurate billing or coding information to customers, promoting a product off-label, submitting claims for servicesnot provided as claimed, or submitting claims for services that were provided but not medically necessary. Actions under the FCA may be brought by theAttorney General or as a qui tam action by a private individual in the name of the government. Violations of the FCA can result in significant monetarypenalties and treble damages. The federal government is using the FCA, and the accompanying threat of significant liability, in its investigation andprosecution of pharmaceutical and biotechnology companies throughout the country, for example, in connection with the promotion of products forunapproved uses and other illegal sales and marketing practices. The government has obtained multi-million and multi-billion dollar settlements under theFCA in addition to individual criminal convictions under applicable criminal statutes. In addition, certain companies that were found to be in violation ofthe FCA have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate integrityagreements, restricting the manner in which they conduct their business.The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, amongother things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-partypayors; knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement inconnection with the delivery of or payment for healthcare benefits, items or services; and willfully obstructing a criminal investigation of a healthcareoffense. Like the federal Anti-Kickback Statute, the Affordable Care Act amended the intent standard for certain healthcare fraud statutes under HIPAA suchthat a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources toinvestigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws. Also, many states have similar fraud and abusestatutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid andother state programs. Additionally, to the extent that our products, once commercialized, are sold in a foreign country, we may be subject to similar foreignlaws.41In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. ThePatient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act,among other things, imposed new reporting requirements on certain manufacturers of drugs, devices, biologics and medical supplies for which payment isavailable under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, for payments or other transfers of value made bythem to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Coveredmanufacturers are required to collect and report detailed payment data and submit legal attestation to the accuracy of such data to the government each year.Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 millionper year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completelyreported in an annual submission. Additionally, entities that do not comply with mandatory reporting requirements may be subject to a corporate integrityagreement. Certain states also mandate implementation of commercial compliance programs, impose restrictions on covered manufacturers’ marketingpractices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians and other healthcare professionals.We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and their respective implementing regulations, imposesspecified requirements on certain health care providers, plans and clearinghouses (collectively, “covered entities”) and their “business associates,” relating tothe privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standardsdirectly applicable to “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmitprotected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminalpenalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to filecivil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. Inaddition, certain states have their own laws that govern the privacy and security of health information in certain circumstances, many of which differ fromeach other and/or HIPAA in significant ways and may not have the same effect, thus complicating compliance efforts.If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject topenalties, including, without limitation, civil and criminal penalties, damages, fines, disgorgement, the curtailment or restructuring of our operations,exclusion from participation in federal and state healthcare programs, imprisonment, contractual damages, reputational harm, and diminished profits andfuture earnings, any of which could adversely affect our ability to operate our business and our financial results.In addition to the foregoing health care laws, we are also subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws,which generally prohibit companies and their intermediaries from making improper payments to government officials or private-sector recipients for thepurpose of obtaining or retaining business. We adopted an anti-corruption policy in connection with the initial public offering of our common stock in July2015. The anti-corruption policy mandates compliance with the FCPA and similar anti-bribery laws applicable to our business throughout the world.However, we cannot assure you that such a policy or procedures implemented to enforce such a policy will protect us from intentional, reckless or negligentacts committed by our employees, distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result infines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.42Coverage and ReimbursementSales of pharmaceutical products depend significantly on the extent to which coverage and adequate reimbursement are provided by third-partypayors. Third-party payors include state and federal government health care programs, managed care providers, private health insurers and otherorganizations. Although we currently believe that third-party payors will provide coverage and reimbursement for our product candidates, if approved, wecannot be certain of this. Third-party payors are increasingly challenging the price, examining the cost-effectiveness, and reducing reimbursement formedical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. The U.S.government, state legislatures and foreign governments have continued implementing cost containment programs, including price controls, restrictions oncoverage and reimbursement and requirements for substitution of generic products. Adoption of price controls and cost containment measures, and adoptionof more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. We may need to conductexpensive clinical studies to demonstrate the comparative cost-effectiveness of our products. The product candidates that we develop may not be consideredcost-effective and thus may not be covered or sufficiently reimbursed. It is time consuming and expensive for us to seek coverage and reimbursement fromthird-party payors, as each payor will make its own determination as to whether to cover a product and at what level of reimbursement. Thus, one payor’sdecision to provide coverage and adequate reimbursement for a product does not assure that another payor will provide coverage or that the reimbursementlevels will be adequate. Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will beapproved. Reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.Healthcare ReformThe United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change thehealthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere,there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/orexpanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by majorlegislative initiatives.By way of example, in March 2010, the Affordable Care Act was signed into law, intended to broaden access to health insurance, reduce or constrainthe growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insuranceindustries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among the provisions of the Affordable Care Act ofimportance to our potential drug candidates are: •an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportionedamong these entities according to their market share in certain government healthcare programs; •an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of theaverage manufacturer price for branded and generic drugs, respectively; •a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that areinhaled, infused, instilled, implanted or injected; •a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiatedprices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s outpatient drugsto be covered under Medicare Part D; •extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations; •expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the federal povertylevel, thereby potentially increasing a manufacturer’s Medicaid rebate liability; •expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and •a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research.43In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes include, amongothers, the Budget Control Act of 2011, which mandates aggregate reductions to Medicare payments to providers of up to 2% per fiscal year effective April 1,2013, and, due to subsequent legislative amendments, will remain in effect through 2024 unless additional Congressional action is taken. In January 2013,President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to severalproviders, including hospitals and cancer treatment centers, increased the statute of limitations period for the government to recover overpayments toproviders from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a materialadverse effect on customers for our product candidates, if approved, and, accordingly, our financial operations.We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorouscoverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product. Any reduction inreimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementationof cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize ourdrugs. Furthermore, the current presidential administration and Congress are also expected to attempt broad sweeping changes to the current health carelaws. We face uncertainties that might result from modifications or repeal of any of the provisions of the Affordable Care Act, including as a result of currentand future executive orders and legislative actions. The impact of those changes on us and potential effect on the pharmaceutical and biotechnologyindustries as a whole is currently unknown. But, any changes to the Affordable Care Act are likely to have an impact on our results of operations, and mayhave a material adverse effect on our results of operation. We cannot predict what other healthcare programs and regulations will ultimately be implementedat the federal or state level or the effect of any future legislative or regulation in the United States may have on our business.Foreign RegulationIn addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales anddistribution of our products to the extent we choose to develop or sell any products outside of the United States. The approval process varies from country tocountry and the time may be longer or shorter than that required to obtain FDA approval. The requirements governing the conduct of clinical trials, productlicensing, pricing and reimbursement vary greatly from country to country.GermanyWe filed an application to commence clinical studies in Germany with the German federal institute for vaccines and biomedicines (“Paul-Ehrlich-Institut – PEI”), a regulatory Agency of the German Federal Ministry of Health. Clinical trials shall be performed to allow data on the safety and efficacy ofthe relevant medicinal product to be collected. The results of the clinical trial must subsequently be included in the application for marketing authorizationand are assessed by the regulatory authorities. The entity responsible for a clinical trial application and its subsequent conduct is called the “sponsor” inaccordance with European Union Law. The role of the clinical trial sponsor goes beyond the actual financing and extends to the overall responsibility for theproper conduct of the clinical trial including the proper manufacturer and labelling of the investigational medicinal product.The process required by applicable law before a clinical trial with an investigational biologic product candidates may commence generally involvesthe following: •a legal representative situated within the European Economic Area, if the sponsor`s registered place of business is situated outside theEuropean Union, •approval by the respective competent federal higher authority (for biological products the PEI). •a favorable opinion from the ethics committee competent for the federal state where the study is conducted •an insurance policy in favor of the clinical trial participants in the event that a person is killed or a person's body or health is injured during thecourse of the clinical trial, which provides benefits (at least 500,000 € for each case), even when no one else is liable for the damage, with aninsurance carrier authorized to conduct business in a Member State of the European Union or another State Party to the Agreement on theEuropean Economic Area •the clinical trial participants informed consent documented in writing, including the purpose and scope of the recording and use of personaldata, especially medical data •as part of an initial clinical trial application, a signed clinical trial protocol, the investigator`s brochure, an investigational medicinal productdossier regarding manufacturing and quality including the result of a pharmacological-toxicological test of the medicinal product inaccordance with the prevailing state of scientific knowledge and a stability protocol for the biological investigational medicinal product44 •reporting of ongoing clinical studies and subsequently clinical study results to the EudraCT-register of the European Medicines Agency(EMA)When assessing the application for approval of a clinical trial involving an investigational biological product, the PEI and the ethics committee willconsider the following: •when the investigational medical product is using genetically modified organisms, unjustifiable harmful effects on the health of third personsor the environment may not to be expected, •medical justifiability of the foreseeable risks and inconveniences, compared with the benefit for the clinical trial participants, and theanticipated significance of the medicinal product for medical science, •conduct of the clinical trial in an appropriate facility by a suitably qualified investigator and the trial is managed by an investigator who canprovide evidence of at least two years' experience in the clinical trial of medicinal products, •a plan for the further medical treatment and supervision of the clinical trial participants after the end of the clinical trial in accordance with theGCP Ordinance - GCP-VWhen the investigational medical product is a somatic cell therapeutics, after the confirmation of receipt of the application dossier conforming to theregulations the period of time for the evaluation of the contents by the PEI is ninety days. The PEI might only accept the application subject to certainconditions. The conduct of a clinical trial consists of four phases (I. to IV.). The character of Phase I to Phase IV are similar to those described above. Duringthe course of the clinical trial, the sponsor is obliged to promptly notify the PEI and ethics committee of unexpected adverse events and/or of any amendmentto the clinical trial protocol.EmployeesAs of December 31, 2016, we had 82 employees. Our ability to manage growth effectively will require us to continue to implement and improve ourmanagement systems, recruit and train new employees and select qualified independent contractors. None of our employees are represented by a labor unionor covered by collective bargaining agreements, and we believe our relationship with our employees is good. Item 1A. Risk FactorsInvesting in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as other informationincluded in this Annual Report on Form 10-K, or Annual Report, including our financial statements and the related notes, and the section titled“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” any of which may be relevant to decisions regarding aninvestment in or ownership of our stock. The occurrence of any of these risks could have a significant adverse effect on our reputation, business, financialcondition, results of operations, growth and ability to accomplish our strategic objectives. We have organized the description of these risks into groupingsin an effort to enhance readability, but many of the risks interrelate or could be grouped or ordered in other ways, so no special significance should beattributed to the groupings or order below.Risks Related to Our Financial Condition and Capital RequirementsWe are a clinical-stage biopharmaceutical company with a limited operating history and have incurred significant losses since our inception, and weanticipate that we will continue to incur losses for the foreseeable future, which makes it difficult to assess our future viability.We are a clinical-stage biopharmaceutical company with a limited operating history upon which our business can be evaluated. To date, we havegenerated minimal revenue from non-exclusive license agreements with biopharmaceutical companies to which we have granted the right to use our cell linesand intellectual property for non-clinical laboratory testing, and we have no products approved for commercial sale and have not generated any revenue fromproduct sales. We have incurred operating losses on an annual basis since our formation and we may never become profitable. As of December 31, 2016, wehad an accumulated deficit of approximately $387.1 million. We incurred net losses of $120.8 million, $236.9 million, and $6.2 million for the years endedDecember 31, 2016, 2015 and 2014, respectively. Our losses have resulted principally from costs incurred in ongoing preclinical studies, clinical trials andoperations, research and development expenses, as well as general and administrative expenses.45A critical aspect of our strategy is to invest significantly in expanding our aNK platform and the development of our product candidates. We expect toincur significant expenses as we continue to expand our business, including in connection with conducting research and development across multipletherapeutic areas, participating in clinical trial activities, continuing to acquire or in-license technologies, maintaining, protecting and expanding ourintellectual property, seeking regulatory approvals and, upon successful receipt of FDA approval, commercializing our products. We will also incur costs aswe hire additional personnel and increase our manufacturing capabilities, including potentially pursuant to the lease or purchase of a facility, for themanufacturing of our product candidates for our planned clinical trials and, upon potential receipt of FDA approval, for our initial commercializationactivities. Moreover, we do not expect to have any significant product sales or revenue for a number of years. These losses have had and, as our operatinglosses continue to increase significantly in the future due to these expenditures, will continue to have an adverse effect on our stockholders’ equity andworking capital. Because of the numerous risks and uncertainties associated with our product development efforts, we are unable to predict when we maybecome profitable, if at all. Additionally, our net losses may fluctuate significantly from quarter to quarter, and as a result a period to period comparison ofour results of operations may not be meaningful.We do not have any therapeutic products that are approved for commercial sale. Our ability to generate revenue from product sales and achieve andmaintain profitability depends significantly on our success in a number of factors.We currently do not have any therapeutic products that are approved for commercial sale. We have not received, and do not expect to receive for atleast the next several years, if at all, any revenues from the commercialization of our product candidates if approved. To obtain revenue from sales of ourproduct candidates that are significant or large enough to achieve profitability, we must succeed, either alone or with third parties, in developing, obtainingregulatory approval for, manufacturing and marketing therapies with commercial potential. Our ability to generate revenue and achieve profitability dependssignificantly on our success in many areas, including: •our research and development efforts, including preclinical studies and clinical trials of our aNK platform and our product candidates; •developing sustainable, scalable, reliable and cost-effective manufacturing and distribution processes for our product candidates, includingestablishing and maintaining commercially viable supply relationships with third parties and establishing our own Good ManufacturingPractices, or GMP, manufacturing facilities and processes; •addressing any competing technological and industry developments; •identifying, assessing, acquiring and/or developing new technology platforms and product candidates across numerous therapeutic areas; •obtaining regulatory approvals and marketing authorizations for product candidates; •launching and commercializing any approved products, either directly or with a collaborator or distributor; •obtaining market acceptance of and acceptable reimbursement for any approved products; •completing collaborations, licenses and other strategic transactions on favorable terms, if at all; •maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and •attracting, hiring and retaining qualified personnel.Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs associated withcommercializing any approved product candidate and we may not generate significant revenue from sales of such products, resulting in limited or noprofitability in the future. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity andworking capital for the foreseeable future. Any failure to become and remain profitable may adversely affect the market price of our common stock, ourability to raise additional capital and our future viability.We will need to obtain substantial additional financing to complete the development and any commercialization of our product candidates, and a failureto obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our commercializationefforts, product development or other operations.Since our inception, we have used substantial amounts of cash to fund our operations and expect our expenses to increase substantially in theforeseeable future. Developing our product candidates and conducting clinical trials for the treatment of cancer and other diseases will require substantialamounts of capital. We will also require a significant additional amount of capital to commercialize any approved products.46As of December 31, 2016, we had cash and cash equivalents of $8.1 million and $278.4 million of marketable securities. We are using and expect tocontinue to use the net proceeds from our initial public offering (IPO) and the concurrent private placement to fund expenses in connection with our plannedclinical trials, our planned manufacturing facility and processes and the hiring of additional personnel, and for other research and development activities,working capital and general corporate purposes. We believe that such proceeds, together with our existing cash and cash equivalents, will be sufficient tofund our operations for at least the foreseeable future. However, changing circumstances may cause us to consume capital significantly faster than wecurrently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We may requireadditional capital for the further development and any commercialization of our product candidates and may need to raise additional funds sooner if wechoose to expand more rapidly than we presently anticipate.Our future capital requirements may depend on many factors, including: •the timing of, and the costs involved in, preclinical and clinical development and obtaining any regulatory approvals for our productcandidates; •the costs of manufacturing, distributing and processing our product candidates; •the number and characteristics of any other product candidates we develop or acquire; •our relative responsibility for developing and commercializing taNK product candidates covered by our joint development and licenseagreement with Sorrento Therapeutics; •our ability to establish and maintain strategic collaborations, licensing or other commercialization arrangements and the terms and timing ofsuch arrangements; •the degree and rate of market acceptance of any approved products; •the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments; •the expenses needed to attract and retain skilled personnel; •the costs associated with being a public company; •the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing intellectual property claims, including litigationcosts and the outcome of such litigation; •the timing, receipt and amount of sales of, or royalties on, any approved products; and •any product liability or other lawsuits related to our product candidates.To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders willbe diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our common stockholders’ rights. Debtfinancing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additionaldebt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangementswith pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates,or grant licenses on terms that may not be favorable to us. Additional capital may not be available when we need it, on terms that are acceptable to us or at all.If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our productdevelopment or future commercialization efforts or grant rights to develop and market any approved products that we would otherwise prefer to develop andmarket ourselves.We invest our cash on hand in various financial instruments which are subject to risks that could adversely affect our business, results of operations,liquidity and financial condition.We invest our cash in a variety of financial instruments, principally commercial paper, corporate debt securities and foreign government bonds. All ofthese investments are subject to credit, liquidity, market and interest rate risk. Such risks, including the failure or severe financial distress of the financialinstitutions that hold our cash, cash equivalents and investments, may result in a loss of liquidity, impairment to our investments, realization of substantialfuture losses, or a complete loss of the investments in the long-term, which may have a material adverse effect on our business, results of operations, liquidityand financial condition. In order to manage the risk to our investments, we maintain an investment policy that, among other things, limits the amount that wemay invest in any one issue or any single issuer and requires us to only invest in high credit quality securities.47The restatement of our interim financial statements for the quarters ended June 30, 2015 and September 30, 2015 may affect shareholder confidence, mayconsume a significant amount of our time and resources, and may have a material adverse effect on our business and stock price.As disclosed in our Current Report on Form 8-K filed with the SEC on March 10, 2016, we have restated our interim financial statements for thequarters ended June 30, 2015 and September 30, 2015. The restatements, which are included in our 2015 Annual Report, are attributable to certain stock-based awards to the Company’s Chairman and Chief Executive Officer (CEO) and build-to-suit lease accounting related to one of its research anddevelopment and GMP facilities. Specifically, errors resulted from the modification of the performance-based vesting criteria to a combination ofperformance-based and services-based vesting criteria of a warrant subsequent to the grant date and the value of non-cash, stock-based compensation expenserecorded by the Company for the quarters ended June 30, 2015 and September 30, 2015. The error related to the use of build-to-suit lease accounting, whichresulted from the Company’s involvement in the construction of structural improvements to the leased facility space and, therefore, was deemed the owner,for accounting purposes, of the construction project having a non-cash impact for the quarters ending June 30, 2015 and September 30, 2015.Although we have remediated the material weakness associated with the restatements described above, if any additional material weaknesses orsignificant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements maycontain material misstatements and we could be required to further restate our financial results. In addition, if we are unable to successfully remediate anyfuture material weaknesses in our internal controls or if we are unable to produce accurate and timely financial statements, our stock price may be adverselyaffected and we may be unable to maintain compliance with applicable stock exchange listing requirements. We are involved in pending securities litigation and an adverse resolution of such litigation may adversely affect our business, financial condition, resultsof operations and cash flows.Following our announcement that we have restated our interim financial statements for the quarters ended June 30, 2015 and September 30, 2015 toaddress errors related to certain stock-based awards to the Company’s Chairman and CEO and build-to-suit lease accounting related to one of our researchand development and GMP facilities, we became the subject of a lawsuit alleging securities law violations. This type of litigation can be expensive anddisruptive to normal business operations, and the outcome can be difficult to predict regardless of the facts involved. An unfavorable outcome with respect toany of these lawsuits could have a material adverse effect on our business, financial condition, results of operations or cash flows. For additional informationregarding this and other lawsuits in which we are involved, see Part II, Item 1, Legal Proceedings.Risks Relating to Our Business and IndustryThe foundation of our business is based upon the success of our aNK cells as a technology platform. Our aNK platform and other product candidatefamilies, including genetically modified taNK and haNK product candidates, will require significant additional clinical testing before we can potentiallyseek regulatory approval and launch commercial sales.Our business and future success depend on our ability to utilize our aNK cells as a technology platform, and to obtain regulatory approval of, and thensuccessfully commercialize, our product candidates addressing numerous therapeutic areas. Our aNK platform and our product candidate families haNK andtaNK are in the early stages of development and may never become commercialized. All of our product candidates developed from our technology platformwill require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access tosufficient commercial manufacturing capacity and significant marketing efforts before they can be successfully commercialized. Because all of our productcandidates are based on the same core aNK technology, if any of our product candidates encounter safety or efficacy problems, developmental delays orregulatory issues or other problems, these could impact the development plans for our other product candidates.Utilizing aNK, haNK, and taNK cells represents a novel approach to immunotherapy, including cancer treatment, and we must overcome significantchallenges in order to successfully develop, commercialize and manufacture our aNK and other product candidates.We have concentrated our research and development efforts on utilizing aNK cells as an immunotherapy platform and genetically modified aNK cellsas product candidates based on this platform. We believe that our product candidates represent a novel approach to immunotherapy, including cancertreatment. Advancing this novel immunotherapy creates significant challenges for us, including: •educating medical personnel regarding the potential side effect profile of our cells; •enrolling sufficient numbers of patients in clinical trials; •developing a reliable, safe and effective means of genetically modifying our cells;48 •manufacturing our cells on a large scale and in a cost-effective manner; •submitting applications for and obtaining regulatory approval, as the FDA and other regulatory authorities have limited experience withcommercial development of immunotherapies for cancer; and •establishing sales and marketing capabilities, as well as developing a manufacturing process and distribution network to support thecommercialization of any approved products.We must be able to overcome these challenges in order for us to successfully develop, commercialize and manufacture our product candidatesutilizing aNK, haNK, and taNK cells.Even if we successfully develop and commercialize our aNK product candidate for Merkel cell carcinoma, we may not be successful in developing andcommercializing our other product candidates, and our commercial opportunities may be limited.While our most advanced product candidate is our aNK product candidate for Merkel cell carcinoma, which is currently in Phase II and for which weare currently recruiting additional study subjects, we believe that our future success is highly dependent upon our ability to successfully develop andcommercialize our other product candidates as well. We are simultaneously pursuing preclinical and clinical development of a number of product candidatesspanning several therapeutic areas, including various types of cancer and infectious and inflammatory diseases. For example, we are devoting substantialresources toward the development of haNK product candidates, which we plan to develop as combination therapies with commercially approved mAbs andlate-stage product candidates, and taNK product candidates, which we plan to develop for acute myeloid leukemia, or AML, bulky hematological cancersand solid tumors. In addition, our ability to realize the full value of our aNK platform will depend on our success in pursuing our other planned productcandidates for a wide range of other indications.Even if we are successful in continuing to build our pipeline of additional product candidates based on our technology platform, obtaining regulatoryapprovals and commercializing any approved product candidates will require substantial additional funding beyond the net proceeds of our IPO and areprone to numerous risks of failure. Investment in biopharmaceutical product development involves significant risks that any product candidate will fail todemonstrate adequate efficacy or an acceptable safety profile to the satisfaction of regulatory authorities, gain regulatory approval or become commerciallyviable. We cannot assure you that we will be able to successfully advance any product candidates through the development process. Our research programsmay initially show promise in identifying additional product candidates, but ultimately fail to yield additional product candidates for clinical developmentor commercialization for many reasons, including the following: •our additional product candidates may not succeed in preclinical or clinical testing due to failing to generate enough data to support theinitiation or continuation of clinical trials or due to lack of patient enrollment in clinical trials; •a product candidate may be shown to have harmful side effects or other characteristics in larger scale clinical studies that indicate it is unlikelyto meet applicable regulatory criteria; •competitors may develop alternatives that render our product candidates obsolete or less attractive; •we may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates from our technologyplatform; •product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights; •the market for a product candidate may change during our program so that the continued development of that product candidate is no longerreasonable; •a product candidate may not be capable of being manufactured in commercial quantities at an acceptable cost, or at all; and •a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors.If any of these events occur, we may be forced to abandon our development efforts for a product candidate or the entire platform, or we may not be ableto identify, discover, develop or commercialize additional product candidates, which would have a material adverse effect on our business and couldpotentially cause us to cease operations.49We may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to, the FDA may not permit us toproceed in a timely manner, or at all.Prior to commencing clinical trials in the United States for any of our product candidates, we may be required to have an allowed IND for each productcandidate. We currently have two primary IND’s that have been allowed in the U.S., one for our aNK product candidate for Merkel cell carcinoma, and one forour haNK product candidate for Advanced Solid Tumors. We are required to file additional INDs prior to initiating our planned clinical trials. We believethat the data from previous preclinical studies will support the filing of additional INDs, to enable us to undertake additional clinical studies as we haveplanned. However, submission of an IND may not result in the FDA allowing further clinical trials to begin and, once begun, issues may arise that will requireus to suspend or terminate such clinical trials. Additionally, even if relevant regulatory authorities agree with the design and implementation of the clinicaltrials set forth in an IND or clinical trial application, these regulatory authorities may change their requirements in the future. The fact that we are pursuingnovel technologies may also exacerbate these risks with respect to our product candidates, and as a result we may not meet our anticipated clinicaldevelopment timelines.We face significant competition in the biopharmaceutical industry, and many of our competitors have substantially greater experience and resources thanwe have.Even if our aNK cell therapy proves successful, we might not be able to remain competitive because of the rapid pace of technological development inthe biopharmaceutical field. Our aNK, haNK and taNK product candidates will compete with other cell-based immunotherapy approaches using T- anddendritic cells. We are aware of companies developing product candidates focused on NK cells. These companies include Bristol-Myers Squibb, CelgeneCorporation and Innate Pharma. Companies that are currently focused on T-cell based treatments include Adaptimmune Limited, Amgen Inc., BellicumPharmaceuticals, Inc., bluebird bio, Inc., Celgene Corporation, Cellectis SA, GlaxoSmithKline plc, Intrexon Corporation, Juno Therapeutics, Inc., KitePharma, Inc., Novartis AG, Pfizer Inc. and Ziopharm Oncology, Inc. There is currently one approved dendritic cell-based cancer vaccine, PROVENGE, whichis marketed by Valeant Pharmaceuticals for the treatment of metastatic castration resistant prostate cancer. Other companies focused on developing dendriticcell-based product candidates include Argos Therapeutics, Inc., Biovest International, Inc., ImmunoCellular Therapeutics, Ltd., Immune Design, Inc., InovioPharmaceuticals, Inc., Intrexon Corporation and Northwest Biotherapeutics, Inc.Many of our competitors have greater financial and other resources, larger research and development staffs, and more experienced capabilities inresearching, developing and testing products than we do. All of these companies also have more experience in conducting clinical trials, obtaining FDA andother regulatory approvals, and manufacturing, marketing and distributing therapeutic products. Small companies like us may successfully compete byestablishing collaborative relationships with larger pharmaceutical companies or academic institutions. In addition, large pharmaceutical companies or othercompanies with greater resources or experience than us may choose to forgo therapy opportunities that would have otherwise been complementary to ourproduct development and collaboration plans. Our competitors may succeed in developing, obtaining patent protection for, or commercializing theirproducts more rapidly than us. A competing company developing or acquiring rights to a more effective therapeutic product for the same diseases targeted byus, or one that offers significantly lower costs of treatment, could render our products noncompetitive or obsolete.Our business plan involves the creation of a complex integrated ecosystem capable of addressing a wide range of indications. As a result, our futuresuccess depends on our ability to prioritize among many different opportunities.We do not have sufficient resources to pursue development of all or even a substantial portion of the potential opportunities that we believe will beafforded to us by our planned integrated ecosystem. Because we have limited resources and access to capital to fund our operations, our management mustmake significant prioritization decisions as to which product candidates to pursue and how much of our resources to allocate to each. Our management hasbroad discretion to suspend, scale down, or discontinue any or all of these development efforts, or to initiate new programs to treat other diseases. If we selectand commit resources to opportunities that we are unable to successfully develop, or we forego more promising opportunities, our business, financialcondition and results of operations will be adversely affected.Our planned integrated ecosystem is to be comprised of multiple novel technologies that have never been tested in combination with our productcandidates, and we do not know whether our attempts to use them in combination will be effective.Our business strategy includes using our integrated discovery engine to introduce new product candidates in combination with technologies that weredeveloped by other companies with whom we have entered into strategic collaborations. Each technology and collaboration is unique and has its own risks,and the failure of any individual technology or the combination could materially impair our ability to successfully pursue our own aNK platform and relatedproduct candidates.50With respect to our agreement with Sorrento Therapeutics, Inc., or Sorrento, we have not yet jointly developed any taNK product candidates. AlthoughSorrento has one of the largest fully human antibody libraries in the world, Sorrento’s antibodies may not be compatible with our taNK product candidatesand there may be other libraries that would be more compatible with our technology and would produce better results for us. To the extent that we useantibodies from other parties for our taNK product candidates, we would still be required to pay royalties to Sorrento.We have also entered into collaborations with affiliates of NantWorks to provide us with access to their database of genomic and proteomicinformation collected from a broad array of tumor cell samples. Our rights to use the database are non-exclusive and are governed by agreements cancelablewith 90 days’ notice, and we therefore cannot guarantee that we would ultimately have any competitive advantage based on our use of this technology. Thedatabase also may not be able to identify novel tumor-associated antigens that are targetable with our technology and the genetic and proteomic analysiscapability may not be effective as a companion diagnostic to guide therapeutic treatments.Although we have agreements with these parties, we cannot control their actions and they may make mistakes, work with our competitors, or notdevote sufficient time and attention to us. The arrangements may become cost-prohibitive for us, and their technologies may become obsolete or betteroptions may be available that we are unable to utilize. Using our technology in combination with theirs has never been tried, and we cannot assure you thatwe will be successful in producing product candidates in connection with these arrangements.Clinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and clinical trials may not bepredictive of future clinical trial results, we may not be able to rely on the aNK Phase I clinical trial data for our other product candidates, and our clinicaltrials may fail to adequately demonstrate substantial evidence of safety and efficacy of our product candidates.Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. A failure of one or more of our clinicaltrials can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not bepredictive of the results of later-stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates in laterstages of clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials. Anumber of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safetyprofiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if our clinical trialsare completed, the results may not be sufficient to support obtaining regulatory approval for our product candidates. In addition, our strategy and anticipatedtimelines are predicated upon our ability to utilize the Phase I clinical trial data for aNK observed to date to support our planned clinical trials for all of ourproduct candidates, including our haNK and taNK product candidates. To date, we have an IND for each of our aNK and haNK product candidates, and wecannot assure you that the FDA will allow us to utilize the Phase I aNK data to support other planned clinical trials or allow our anticipated INDs for (1)planned Phase I or Phase I/II clinical trials for our other product candidates as potential monotherapies, (2) planned Phase II/III clinical trials for our haNKproduct candidates as potential combination therapies, or (3) any other planned clinical trials.We have in the past experienced delays in our ongoing clinical trials and we may experience additional delays in the future. We do not know whetherfuture clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all.Clinical trials can be delayed, suspended or terminated by us, regulatory authorities, clinical trial investigators, and ethics committees for a variety of reasons,including failure to: •generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation of clinical trials; •obtain regulatory approval, or feedback on clinical trial design, to commence a clinical trial; •identify, recruit and train suitable clinical investigators; •reach agreement on acceptable terms with prospective CROs and clinical trial sites; •obtain and maintain institutional review board, or IRB, approval at each clinical trial site; •identify, recruit and enroll suitable patients to participate in a clinical trial; •have a sufficient number of patients complete a clinical trial or return for post-treatment follow-up; •ensure clinical investigators observe clinical trial protocol or continue to participate in a clinical trial; •address any patient safety concerns that arise during the course of a clinical trial; •address any conflicts with new or existing laws or regulations;51 •add a sufficient number of clinical trial sites; •timely manufacture sufficient quantities of product candidate for use in clinical trials; or •raise sufficient capital to fund a clinical trial.Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patientpopulation, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, the design of the clinical trial, competing clinical trials andclinicians’ and patients’ or caregivers’ perceptions as to the potential advantages of the drug candidate being studied in relation to other available therapies,including any new drugs or treatments that may be approved for the indications we are investigating.We could also encounter delays if a clinical trial is suspended or terminated by us, by the data safety monitoring board for such clinical trial or by theFDA or any other regulatory authority, or if the IRBs of the institutions in which such clinical trials are being conducted suspend or terminate theparticipation of their clinical investigators and sites subject to their review. Such authorities may suspend or terminate a clinical trial due to a number offactors, including failure to conduct the clinical trial in accordance with regulatory requirements, including GCPs, or our clinical protocols, inspection of theclinical trial operations or clinical trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issuesor adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions or lackof adequate funding to continue the clinical trial.If we experience delays in the completion of, or termination of, any clinical trial of our product candidates for any reason, the commercial prospects ofour product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, anydelays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize ourability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects.In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial ofregulatory approval of our product candidates.We may be unable to obtain regulatory approval for our product candidates. The denial or delay of any such approval would delay commercialization andhave a material adverse effect on our potential to generate revenue, our business and our results of operations.The research, development, testing, manufacturing, labeling, packaging, approval, promotion, advertising, storage, recordkeeping, marketing,distribution, post-approval monitoring and reporting, and export and import of biopharmaceutical products are subject to extensive regulation by the FDA,and by foreign regulatory authorities in other countries. These regulations differ from country to country. To gain approval to market our product candidates,we must provide regulatory authorities with substantial evidence of safety, purity and potency of the product for each indication we seek to commercialize.We have not yet obtained regulatory approval to market any of our product candidates in the United States or any other country. Our business depends uponobtaining these regulatory approvals.The FDA can delay, limit or deny approval of our product candidates for many reasons, including: •our inability to satisfactorily demonstrate with substantial clinical evidence that the product candidates are safe, pure and potent for therequested indication; •the FDA’s disagreement with our clinical trial protocol or the interpretation of data from preclinical studies or clinical trials; •the population studied in the clinical trial not being sufficiently broad or representative to assess safety in the full population for which weseek approval; •our inability to demonstrate that clinical or other benefits of our product candidates outweigh any safety or other perceived risks; •the FDA’s determination that additional preclinical or clinical trials are required; •the FDA’s non-approval of the labeling or the specifications of our product candidates; •the FDA’s failure to accept the manufacturing processes or facilities of third-party manufacturers with which we contract; or •the potential for approval policies or regulations of the FDA to significantly change in a manner rendering our clinical data insufficient forapproval.52Even if we eventually successfully complete clinical testing and receive approval of any regulatory filing for our product candidates, the FDA mayonly grant approval contingent on the performance of costly additional post-approval clinical trials. The FDA may also approve our product candidates for amore limited indication or a narrower patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessaryor desirable for the successful commercialization of our product candidates. To the extent we seek regulatory approval in foreign countries, we may facechallenges similar to those described above with regulatory authorities in applicable jurisdictions. Any delay in obtaining, or our inability to obtain,applicable regulatory approval for any of our product candidates would delay or prevent commercialization of our product candidates and would materiallyadversely impact our business, results of operations, financial condition and prospects.Use of our product candidates could be associated with side effects or adverse events.As with most biopharmaceutical products, use of our product candidates could be associated with side effects or adverse events which can vary inseverity and frequency. Side effects or adverse events associated with the use of our product candidates may be observed at any time, including in clinicaltrials or once a product is commercialized, and any such side effects or adverse events may negatively affect our ability to obtain regulatory approval ormarket our product candidates. Side effects such as toxicity or other safety issues associated with the use of our product candidates could require us toperform additional studies or halt development or sale of these product candidates or expose us to product liability lawsuits which will harm our business. Wemay be required by regulatory agencies to conduct additional preclinical or clinical trials regarding the safety and efficacy of our product candidates whichwe have not planned or anticipated. We cannot assure you that we will resolve any issues related to any product-related adverse events to the satisfaction ofthe FDA or any regulatory agency in a timely manner or ever, which could harm our business, prospects and financial condition.In the Phase I clinical trial of an aNK conducted by Rush University, one case of transient grade 4 hypoglycemia and several mild-to-moderate feverswere seen in five out of six patients receiving higher doses. In the Phase I clinical trial of aNK conducted by the University of Frankfurt, one report of mildfever and a report of sustained back pain were observed. If we are successful in commercializing our product candidates, the FDA and other foreign regulatoryagency regulations will require that we report certain information about adverse medical events if those products may have caused or contributed to thoseadverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event.We may inadvertently fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have becomeaware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in timefrom the use of our products. If we fail to comply with our reporting obligations, the FDA or other foreign regulatory agencies could take action includingcriminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of future products.The clinical and commercial utility of our aNK and other related platforms is uncertain and may never be realized.Our aNK platform is in the early stages of development. aNK cells have only been evaluated in four Phase I clinical safety trials to date, in over40 patients. These clinical trials were designed to evaluate safety and tolerability, and not designed to produce statistically significant results as to efficacy.Most of the data to date regarding aNK cells were derived from clinical trials not conducted by us, including physician-sponsored clinical trials, and utilizingproduct not manufactured by us but which we believe is comparable to aNK. Success in early clinical trials does not ensure that large-scale clinical trials willbe successful nor does it predict final results. In addition, we will not be able to treat patients if we cannot manufacture a sufficient quantity of aNK cells thatmeet our minimum specifications. In addition, our haNK and taNK product candidates have never been tested in humans, and the results from the aNKclinical trials may not necessarily be indicative of the safety and tolerability or efficacy of haNK and taNK.We may not ultimately be able to provide the FDA with substantial clinical evidence to support a claim of safety, purity and potency sufficient toenable the FDA to approve aNK cells for any indication. This may be because later clinical trials fail to reproduce favorable data obtained in earlier clinicaltrials, because the FDA disagrees with how we interpret the data from these clinical trials, or because the FDA does not accept these therapeutic effects asvalid endpoints in pivotal clinical trials necessary for market approval. We will also need to demonstrate that aNK cells are safe. We do not have data onpossible harmful long-term effects of aNK cells and do not expect to have this data in the near future. As a result, our ability to generate clinical safety andeffectiveness data sufficient to support submission of a marketing application or commercialization of our aNK cell therapy is uncertain and is subject tosignificant risk.53We have limited experience as a company conducting clinical trials and rely on third parties to conduct many of our preclinical studies and clinical trials.Any failure by a third party or by us to conduct the clinical trials according to Good Clinical Practices, or GCPs, and in a timely manner may delay orprevent our ability to seek or obtain regulatory approval for or commercialize our product candidates.To date, only two clinical trials related to our product candidates have been conducted by us. All other clinical trials to date have been investigator-initiated studies sponsored by the investigator’s institution. This lack of experience may contribute to our planned clinical trials not beginning orcompleting on time, if at all. Large-scale clinical trials will require significant additional resources and reliance on contract research organizations, or CROs,clinical investigators, or consultants. Consequently, our reliance on outside parties may introduce delays beyond our control. Our CROs and other thirdparties must communicate and coordinate with one another in order for our trials to be successful. Additionally, our CROs and other third parties may alsohave relationships with other commercial entities, some of which may compete with us. If our CROs or other third parties conducting our clinical trials do notperform their contractual duties or regulatory obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us orneed to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols,GCPs, or other regulatory requirements or for any other reason, we may need to conduct additional clinical trials or enter into new arrangements withalternative CROs, clinical investigators or other third parties. We may be unable to enter into arrangements with alternative CROs on commerciallyreasonable terms, or at all.We and the third parties upon which we rely are required to comply with GCPs. GCPs are regulations and guidelines enforced by regulatory authoritiesaround the world, through periodic inspections, for products in clinical development. If we or these third parties fail to comply with applicable GCPregulations, the clinical data generated in our clinical trials may be deemed unreliable and have to be repeated, and our submission of marketing applicationsmay be delayed or the regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We are subjectto the risk that, upon inspection, a regulatory authority will determine that any of our clinical trials fail to comply or failed to comply with applicable GCPregulations. In addition, our clinical trials must be conducted with material produced under GMP and Good Tissue Practice, or GTP, regulations, which areenforced by regulatory authorities. In addition, our clinical trials must be conducted with material produced under GMP regulations, which are enforced byregulatory authorities. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approvalprocess. Moreover, our business may be significantly impacted if our CROs, clinical investigators or other third parties violate federal or state healthcarefraud and abuse or false claims laws and regulations or healthcare privacy and security laws.We also anticipate that part of our strategy for pursuing the wide range of indications potentially addressed by our aNK, haNK, and taNK platformswill involve further investigator-initiated clinical trials. While these trials generally provide us with valuable clinical data that can inform our futuredevelopment strategy in a cost-efficient manner, we generally have less control over not only the conduct but also the design of these clinical trials. Third-party investigators may design clinical trials involving our product candidates with clinical endpoints that are more difficult to achieve or in other ways thatincrease the risk of negative clinical trial results compared to clinical trials we may design on our own. Negative results in investigator-initiated clinicaltrials, regardless of how the clinical trial was designed or conducted, could have a material adverse effect on our prospects and the perception of our productcandidates.Our successful development of our taNK product candidates depends in part upon our collaboration with Sorrento.In December 2014, we entered into a joint development and license agreement with Sorrento, pursuant to which the parties agreed to exclusivelycollaborate on research, development and commercialization of our taNK product candidates as may be agreed between the parties. Our collaboration withSorrento may not be successful, and we may not realize the expected benefits from this collaboration, due to a number of important factors, including thefollowing: •Sorrento’s technology platform or Sorrento itself could be slow, adversely affecting our ability to develop product candidates as quickly as wewould otherwise be able to; •whether we can successfully resolve disagreements related to which party should advance a particular program; •in the event Sorrento advances a particular program, Sorrento will have sole control over development, spending, commercialization, and out-licensing; •the continued service of certain key employees of Sorrento that we are dependent upon; •the timing and amount of any payments we may receive under these agreements will depend on, among other things, the efforts, allocation ofresources, and successful commercialization of the relevant product candidates by Sorrento and us; and •Sorrento may change the focus of their development or commercialization efforts or pursue or emphasize higher-priority programs, including asa result of a change in control of Sorrento.54A failure of Sorrento to successfully develop our product candidates that are covered by the collaboration, or commercialize such product candidates,or the termination of our agreement with Sorrento may have a material adverse effect on our business, results of operations and financial condition. As of thedate hereof, the parties have not yet agreed upon any projects under the joint development and license agreement; therefore Sorrento has no rights to use ourNK cells or other technologies or intellectual property rights or to begin related research, development or commercialization activities and we are free topursue, and are actively pursuing, research, development and commercialization activities with antibodies that may bind to various targets, including PDL1,ROR-1, CD33 and CD123.We are heavily dependent on our senior management, particularly Drs. Patrick Soon-Shiong and Barry Simon, and a loss of a member of our seniormanagement team in the future could harm our business.If we lose members of our senior management, we may not be able to find appropriate replacements on a timely basis, and our business could beadversely affected. Our existing operations and continued future development depend to a significant extent upon the performance and active participationof certain key individuals, including Drs. Patrick Soon-Shiong, our Chairman and CEO and our principal stockholder, and Barry Simon, our President andChief Administrative Officer. Although Dr. Soon-Shiong will primarily focus on NantKwest matters and is highly active in our management, he does devote acertain amount of his time to a number of different endeavors and companies, including NantWorks, a collection of multiple companies in the healthcare andtechnology space, which he founded in 2011. Additionally, we are dependent on commercial relationships with various other parties affiliated withNantWorks and with Dr. Soon-Shiong, and we may enter into additional relationships in the future, including with respect to using an adenoviral vectordeveloped by an affiliate entity, and if Dr. Soon-Shiong was to cease his affiliation with us or with NantWorks, these entities may be unwilling to continuethese relationships with us on commercially reasonable terms, or at all. The risks related to our dependence upon Dr. Soon-Shiong are particularly acute givenhis ownership percentage, relationships, role in our company and reputation. If we were to lose Drs. Soon-Shiong or Simon, we may not be able to findappropriate replacements on a timely basis and our financial condition and results of operations could be materially adversely affected.To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options and warrants thatvest over time. Additionally, we provided warrants that vest upon the achievement of certain performance milestones to Dr. Soon-Shiong. The value toemployees of stock options and warrants that vest over time may be significantly affected by movements in our stock price that are beyond our control, andmay at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of ourmanagement, scientific and development teams may terminate their employment with us on short notice. We face significant competition for employees,particularly scientific personnel, from other biopharmaceutical companies, which include both publicly-traded and privately-held companies, and we maynot be able to hire new employees quickly enough to meet our needs. Although we have employment agreements with our key employees, these employmentagreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. Exceptwith respect to Dr. Simon, we do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees.Dr. Soon-Shiong, our Chairman and CEO and our principal stockholder, has significant interests in other companies which may conflict with our interests.Our Chairman and CEO, Dr. Soon-Shiong, is the founder of NantWorks. The various NantWorks companies are currently exploring opportunities inthe immunotherapy, infectious disease and inflammatory disease fields. In particular, we have agreements with NantOmics, LLC (“NantOmics”), NanoCav,LLC (“NanoCav”), NantCell, Inc. (“NantCell”), and NantBioScience, Inc. (“NantBioScience”) to provide services, technology and equipment for use in ourefforts to develop our product pipeline. NantWorks holds a controlling interest in each of NantOmics, NanoCav, NantCell, and NantBioScience. As a result,they or other companies affiliated with Dr. Soon-Shiong may compete with us for business opportunities or, in the future, develop products that arecompetitive with ours (including products in the other therapeutic fields in which we may target in the future). As a result Dr. Soon-Shiong’s interests may notbe aligned with our other stockholders and he may from time to time be incentivized to take certain actions that benefit his other interests and that our otherstockholders do not view as being in their interest as investors in our company. Moreover, even if they do not directly relate to us, actions taken by Dr. Soon-Shiong and the companies with which he is involved could impact us. Given we changed our corporate name to NantKwest during 2015: this is particularlytrue of the various NantWorks companies.55We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this growth.To effect our business plan, we will need to rapidly add other management, accounting, regulatory, manufacturing and scientific staff. As ofDecember 31, 2016, we had 82 employees. We will need to attract, retain and motivate a significant number of new additional managerial, operational, sales,marketing, financial, and other personnel, as well as highly skilled scientific and medical personnel, and to expand our capabilities to successfully pursue ourresearch, development, manufacturing and commercialization efforts and secure collaborations to market and distribute our products. This growth may strainour existing managerial, operational, financial and other resources. We also intend to add personnel in our research and development and manufacturingdepartments as we expand our clinical trial and research capabilities. Moreover, we will need to hire additional accounting and other personnel and augmentour infrastructure as we transition to operating as a public company. Any inability to attract and retain qualified employees to enable our planned growth andestablish additional capabilities or our failure to manage our growth effectively could delay or curtail our product development and commercializationefforts and harm our business.We have limited manufacturing experience and may not be able to manufacture aNK, haNK, or taNK cells on a large scale or in a cost-effective manner.aNK cells have been grown in various quantities in closed-bag cell culture systems and smaller quantities in bioreactors. We or our third-partycontractors will need to develop the ability to grow aNK cells on a large scale basis in a cost efficient manner. We have not demonstrated the ability tomanufacture aNK cells beyond quantities sufficient for research and development and limited clinical activities. We have no experience manufacturing aNKcells specifically at the capacity that will be necessary to support large clinical trials or commercial sales, and have limited experience producing haNK andtaNK cells, which may involve a more complex process (es) than manufacturing aNK cells. The novel nature of our technology also increases the complexityand risk in the manufacturing process. We are in the process of locating a site for the manufacture of aNK cells for our planned clinical trials and, if we receiveFDA approval, initial commercialization. However, we may encounter difficulties in obtaining the approvals for, and designing, constructing, validating andoperating, any new manufacturing facility. We may also be unable to hire the qualified personnel that we will require to accommodate the expansion of ouroperations and manufacturing capabilities. If we relocate our manufacturing activities to a new facility during or after a pivotal clinical trial, we may beunable to obtain regulatory approval unless and until we demonstrate to the FDA’s satisfaction the similarity of our aNK cells manufactured in the newfacility to our aNK cells manufactured in prior facilities. If we cannot adequately demonstrate similarity to the FDA, we could be required to repeat clinicaltrials, which would be expensive, and would substantially delay regulatory approval.Because our product candidates are cell-based, their manufacture is complicated. In addition, we rely on certain third party suppliers for manufacturingsupplies such as X-VIVO 10 media formulation to grow and produce the cells. Our present production process may not meet our initial expectations as toreproducibility, yield, purity or other measurements of performance. In addition, we may have to customize a bioreactor system to our manufacturing process.Because our manufacturing process is unproven, we may never successfully commercialize our products. In addition, because the clinical trials wereconducted using a system that will not be sufficient for commercial quantities, we may have to show comparability of the different versions of systems wehave used. For these and other reasons, we may not be able to manufacture aNK cells on a large scale or in a cost-effective manner.aNK cells have been produced at academic institutions associated with our other clinical trial sites. In the past, the lack of production of aNK cells hascaused delays in the commencement of our clinical trials. The Baylor Center for Cellular and Gene Therapy is currently producing aNK cells for our clinicaltrials at various clinical sites. We are adding NK cell production capacity in 2016 to meet anticipated demand for additional clinical trials but may not beable to successfully build at our capacity to meet our current and anticipated future needs. Any damage to or destruction of the Baylor Center facility orequipment, or our facility and equipment, when we secure it, prolonged power outage, contamination or shut down by the FDA or other regulatory authoritycould significantly impair or curtail our ability to obtain and produce aNK cells.We are dependent on third parties to store our aNK, haNK, or taNK cells, and any damage or loss to our master cell bank would cause delays in treatment,and our business could suffer.The aNK cells of our master cell bank are stored in freezers at a third party biorepository (BioReliance), and aNK cells of our working cell bank arestored in freezers at the Baylor facility, and will also be stored in our freezers when we establish a production facility. If these cells are damaged at bothfacilities, including by the loss or malfunction of these freezers or our back-up power systems, as well as by damage from fire, power loss or other naturaldisasters, we would need to establish a replacement aNK master cell bank, which would delay our patients’ treatments. If we are unable to establish areplacement aNK master cell bank, we could incur significant additional expenses and liability to patients whose treatment is delayed, and our businesscould suffer.56If we or any of our third party manufacturers do not maintain high standards of manufacturing, our ability to develop and commercialize aNK, haNK, ortaNK cells could be delayed or curtailed.We and any third parties that we may use in the future to manufacture our products must continuously adhere to GMP regulations rigorously enforcedby the FDA through its facilities inspection program. If our facilities or the facilities of third parties who produce our products do not pass a pre-approvalinspection, the FDA will not grant market approval for aNK, haNK, or taNK cells. In complying with GMP, we and any third-party manufacturers must expendsignificant time, money and effort in production, record-keeping and quality control to assure that each component of our aNK, haNK, or taNK cell therapiesmeets applicable specifications and other requirements. We or any of these third-party manufacturers may also be subject to comparable or more stringentregulations of foreign regulatory authorities. If we or any of our third-party manufacturers fail to comply with these requirements, we may be subject toregulatory action, which could delay or curtail our ability to develop, obtain regulatory approval of, and commercialize aNK, haNK, or taNK cells. If ourcomponent part manufacturers and suppliers fail to provide components of sufficient quality, and that meet our required specifications, our clinical trials orcommercialization of aNK, haNK, or taNK cells could be delayed or halted, and we could face product liability claims.If we or our third-party manufacturers use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liablefor damages.Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials,by us and any third-party manufacturers. We and our manufacturers are subject to federal, state and local laws and regulations in the United States governingthe use, manufacture, storage, handling and disposal of medical and hazardous materials. Although we believe that our procedures for using, storing anddisposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or injury resulting frommedical or hazardous materials. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtailthe use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, andthe liability could exceed our resources. We do not have any insurance for liabilities arising from medical or hazardous materials. Compliance withapplicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development andproduction efforts, which could harm our business, prospects, financial condition or results of operations.We have not yet developed a validated methodology for freezing and thawing large quantities of aNK, haNK, or taNK cells, which we believe will berequired for the storage and distribution of our product candidates.We have not demonstrated that aNK, haNK, or taNK cells can be frozen and thawed in large quantities without damage, in a cost-efficient manner andwithout degradation over time. We may encounter difficulties not only in developing freezing and thawing methodologies, but also in obtaining thenecessary regulatory approvals for using such methodologies in treatment. If we cannot adequately demonstrate similarity of our frozen product to theunfrozen product to the satisfaction of the FDA, we could be required to repeat clinical trials, which would be expensive and substantially delay regulatoryapproval. If we are unable to freeze aNK, haNK, or taNK cells for shipping purposes, our ability to promote adoption and standardization of our products, aswell as achieve economies of scale by centralizing our production facility, will be limited. Even if we are able to successfully freeze and thaw aNK, haNK, ortaNK cells in large quantities, we will still need to develop a cost-effective and reliable distribution and logistics network, which we may be unable toaccomplish. For these and other reasons, we may not be able to commercialize aNK, haNK, or taNK cells on a large scale or in a cost-effective manner.We will rely on third party healthcare professionals to administer aNK, haNK, or taNK cells to patients, and our business could be harmed if these thirdparties administer aNK cells incorrectly.We will rely on the expertise of physicians, nurses and other associated medical personnel to administer aNK, haNK, or taNK cells to clinical trialpatients. If these medical personnel are not properly trained to administer, or do not properly administer, aNK, haNK, or taNK cells, the therapeutic effect ofaNK, haNK, or taNK cells may be diminished or the patient may suffer injury.In addition, if we achieve the ability to freeze and thaw our aNK, haNK, or taNK cells, third-party medical personnel will have to be trained on propermethodology for thawing aNK, haNK, or taNK cells received from us. If this thawing is not performed correctly, the cells may become damaged and/or thepatient may suffer injury. While we intend to provide training materials and other resources to these third-party medical personnel, the thawing of aNK,haNK, or taNK cells will occur outside our supervision and may not be administered properly. If, due to a third-party error, people believe that aNK, haNK, ortaNK cells are ineffective or harmful, the desire to use aNK, haNK, or taNK cells may decline, which would negatively impact our business, reputation andprospects. We may also face significant liability even though we may not be responsible for the actions of these third parties.57Even if any of our product candidates receive regulatory approvals, they may fail to achieve the broad degree of market acceptance and use necessary forcommercial success.Any potential future commercial success of any of our product candidates will depend, among other things, on its acceptance by physicians, patients,healthcare payors, and other members of the medical community as a therapeutic and cost-effective alternative to commercially available products. Becauseonly a few cell-based therapy products have been commercialized, we do not know to what extent cell-based immunotherapy products will be accepted astherapeutic alternatives. If we fail to gain market acceptance, we may not be able to earn sufficient revenues to continue our business. Market acceptance of,and demand for, any product that we may develop will depend on many factors, including: •our ability to provide substantial evidence of safety and efficacy; •convenience and ease of administration; •prevalence and severity of adverse side effects; •availability of alternative and competing treatments; •cost effectiveness; •effectiveness of our marketing and distribution strategy and pricing of any product that we may develop; •publicity concerning our products or competitive products; and •our ability to obtain sufficient third-party coverage and adequate reimbursement.If aNK, haNK, and taNK cells are approved for use but fail to achieve the broad degree of market acceptance necessary for commercial success, ouroperating results and financial condition will be adversely affected. In addition, even if aNK, haNK, and taNK cells gain acceptance, the markets for treatmentof patients with our target indications may not be as significant as we estimate.There are risks inherent in our business that may subject us to potential product liability suits and other claims, which may require us to engage inexpensive and time-consuming litigation or pay substantial damages and may harm our reputation and reduce the demand for our product.Our business exposes us to product liability risks, which are inherent in the testing, manufacturing, marketing and sale of biopharmaceutical products.We will face an even greater risk of product liability if we commercialize aNK, haNK, and taNK cells. For example, we may be sued if any product we developallegedly causes or is perceived to cause injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any suchproduct liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product,negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defendourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Even a successfuldefense would require significant financial and management resources.Certain aspects of how aNK, haNK, and taNK cells are processed and administered may increase our exposure to liability. Medical personneladminister aNK, haNK, and taNK cells to patients intravenously in an outpatient procedure. This procedure poses risks to the patient similar to thoseoccurring with infusions of other cell products, such as T cells and stem cells, including blood clots, infection and mild to severe allergic reactions.Additionally, aNK, haNK, and taNK cells or components of our aNK, haNK, and taNK cell therapy may cause unforeseen harmful side effects. For example, apatient receiving aNK, haNK, and taNK cells could have a severe allergic reaction or could develop an autoimmune condition to materials infused with theaNK, haNK, and taNK cells.In addition, we have not conducted studies on the long-term effects associated with the media that we use to grow our aNK, haNK, and taNK cells.Similarly, we expect to use media in freezing our aNK, haNK, and taNK cells for shipment. These media could contain substances that have proved harmful ifused in certain quantities. As we continue to develop our aNK, haNK, and taNK cell therapy, we may encounter harmful side effects that we did notpreviously observe in our prior studies and clinical trials. Additionally, the discovery of unforeseen side effects of aNK, haNK, and taNK cells could also leadto lawsuits against us.Regardless of merit or eventual outcome, product liability or other claims may, among other things, result in: •decreased demand for any approved products; •injury to our reputation and significant negative media attention; •withdrawal of clinical trial participants or cancellation of clinical trials; •costs to defend the related litigation;58 •a diversion of management’s time and our resources; •substantial monetary awards to clinical trial participants or patients; •regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions; •exhaustion of any available insurance and our capital resources; •loss of revenue; and •the inability to commercialize any products we develop.Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potentialproduct liability claims could prevent or inhibit the commercialization of our products. We are in the process of obtaining product liability insurancecovering our clinical trials with policy limits that we believe are customary for similarly situated companies and adequate to provide us with coverage forforeseeable risks. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amountthat is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. If we determine that it is prudent toincrease our product liability coverage due to the commercial launch of any approved product, we may be unable to obtain such increased coverage onacceptable terms, or at all. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for whichwe have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are notcovered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able tomaintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when we obtain approval for marketing ourproduct candidates, we intend to expand our insurance coverage to include the sale of the applicable products; however, we may be unable to obtain thisliability insurance on commercially reasonable terms. If a successful product liability or other claim or series of claims is brought against us for uninsuredliabilities or in excess of insured liabilities, our assets may not be sufficient to cover these claims and our business operations could suffer.We currently have no marketing and sales organization and have no experience in marketing products. If we are unable to establish marketing and salescapabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.We currently have no sales, marketing or distribution capabilities and have no experience as a company in marketing products. If we develop internalsales, marketing and distribution organization, this would require significant capital expenditures, management resources and time, and we would have tocompete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we expect to pursue collaborative arrangementsregarding the sales, marketing and distribution of our products. However, we may not be able to establish or maintain such collaborative arrangements, or ifwe are able to do so, their sales forces may not be successful in marketing our products. Any revenue we receive would depend upon the efforts of such thirdparties, which may not be successful. We may have little or no control over the sales, marketing and distribution efforts of such third parties and our revenuefrom product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties toassist us with the sales, marketing and distribution efforts of our product candidates. There can be no assurance that we will be able to develop internal sales,marketing distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in the United States oroverseas.A variety of risks associated with marketing our product candidates internationally could materially adversely affect our business.We plan to seek regulatory approval of our product candidates outside of the United States and, accordingly, we expect that we will be subject toadditional risks related to operating in foreign countries if we obtain the necessary approvals, including: •differing regulatory requirements in foreign countries; •unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements; •economic weakness, including inflation, or political instability in particular foreign economies and markets; •compliance with tax, employment, immigration and labor laws for employees living or traveling abroad; •foreign taxes, including withholding of payroll taxes; •foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doingbusiness in another country;59 •difficulties staffing and managing foreign operations; •workforce uncertainty in countries where labor unrest is more common than in the United States; •differing payor reimbursement regimes, governmental payors or patient self-pay systems, and price controls; •potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations; •challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protectintellectual property rights to the same extent as the United States; •production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and •business interruptions resulting from geo-political actions, including war and terrorism.These and other risks associated with international operations may materially adversely affect our ability to attain or maintain profitable operations.We have formed, and may in the future form or seek, strategic alliances or enter into additional licensing arrangements in the future, and we may notrealize the benefits of such alliances or licensing arrangements.We have formed, and may in the future form or seek, strategic alliances, create joint ventures or collaborations or enter into additional licensingarrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our productcandidates and any future product candidates that we may develop.Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities thatdilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategicpartners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership orother alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effortand third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products orbusinesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations andcompany culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies suchtransaction. Any delays in entering into new strategic partnership agreements related to our product candidates could delay the development andcommercialization of our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition andresults of operations.Our internal computer systems, or those used by our contractors or consultants, may fail or suffer security breaches.Our business model involves the storage and transmission of clinical trial and other data on our systems and on the systems of our consultants andcontractors, and security breaches expose us to a risk of loss of this information, governmental fines and penalties, litigation and/or potential liability, inaddition to negative publicity. Despite the implementation of security measures, our internal computer systems and those of our contractors and consultantsare vulnerable to damage from computer viruses and unauthorized access. Our security measures and those of our contractors and consultants may also bebreached due to employee error, malfeasance or otherwise. If such an event were to occur and cause interruptions in our operations, it could result in amaterial disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinicaltrials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on thirdparties for research and development of our product candidates and to conduct clinical trials and may rely on third parties for the manufacture of our productcandidates and similar events relating to their computer systems could also have a material adverse effect on our business.To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure ofconfidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could bedelayed.60Future acquisitions and investments could disrupt our business and harm our financial condition and operating results.Our success may depend, in part, on our ability to expand our products and services. In some circumstances, we may determine to do so through theacquisition of complementary businesses and technologies rather than through, or in conjunction with, internal development. The identification of suitableacquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. The risks weface in connection with acquisitions include: •diversion of management time and focus from operating our business to addressing acquisition integration challenges; •retention of key employees from the acquired company; •coordination of research and development functions; •integration of the acquired company’s accounting, management information, human resources and other administrative systems; •liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, employee disputes,and alleged violations of laws; and •unanticipated write-offs or charges.Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us tofail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally. Futureacquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, incrementaloperating expenses or the write-off of goodwill, any of which could harm our financial condition or operating results.Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.Our operations, and those of our contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, watershortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, acts of terrorism, acts of war and other natural or man-madedisasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm ouroperations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce and process our product candidates.Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers are affected by a man-made or naturaldisaster or other business interruption. Our corporate headquarters are in California near major earthquake faults and fire zones. Our operations and financialcondition could suffer in the event of a major earthquake, fire or other natural disaster.Our employees, independent contractors, clinical investigators, CROs, consultants, commercial partners and vendors may engage in misconduct or otherimproper activities, including noncompliance with regulatory standards and requirements, and insider trading.We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, clinical investigators, CROs,consultants, commercial partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to: •comply with the laws of the FDA and other similar foreign regulatory bodies; •provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies; •comply with manufacturing standards we have established; •comply with healthcare fraud and abuse, privacy and security and other laws in the United States and similar foreign fraudulent misconductlaws; •comply with federal securities laws regulating insider trading; or •report financial information or data accurately or to disclose unauthorized activities to us.61If we obtain FDA approval of any of our product candidates and begin commercializing those products in the United States, our potential exposureunder such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. These laws may impact,among other things, our current activities with principal investigators and research patients, as well as proposed and future sales, marketing and educationprograms. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcareindustry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrictor prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and otherbusiness arrangements generally. Activities subject to these laws also include the collection and/or use of information obtained in the course of patientrecruitment for clinical trials. The healthcare laws that may affect our ability to operate include, but are not limited to: •the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or providingany remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, orin return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for whichpayment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs; •federal civil and criminal false claims laws and civil monetary penalty laws, including the civil False Claims Act, which impose criminal andcivil penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment orapproval from the federal government including Medicare and Medicaid, that are false or fraudulent or knowingly making a false statement toimproperly avoid, decrease or conceal an obligation to pay money to the federal government; •the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal statutes thatprohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefitprogram or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under thecustody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), and knowingly and willfully falsifying,concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, orpayment for, healthcare benefits, items or services relating to healthcare matters; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respectiveimplementing regulations, which impose requirements, including mandatory contractual terms, on certain covered healthcare providers, healthplans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, ordisclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable healthinformation; •the federal Physician Payments Sunshine Act, created under the Patient Protection and Affordable Care Act, as amended by the Health CareEducation Reconciliation Act, which we refer to collectively as ACA, and its implementing regulations, which require certain manufacturers ofdrugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health InsuranceProgram (with certain exceptions) to report annually to the United States Department of Health and Human Services, or HHS, informationrelated to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists andchiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members bythe 90th day of each subsequent calendar year, and disclosure of such information will be made by HHS on a publicly available website; and •federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harmconsumers.Additionally, we are subject to state and foreign laws and regulations that are analogous to the healthcare laws and regulations described above,among others, some of which may be broader in scope and may apply regardless of the payor. Some state laws require pharmaceutical companies to complywith the pharmaceutical industry’s voluntary compliance guidelines and relevant compliance guidance promulgated by the federal government; some statelaws require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers ormarketing expenditures; and some state and foreign laws govern the privacy and security of health information in ways that differ, and in certain cases aremore stringent than, HIPAA, thus complicating compliance efforts.62We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the precautionswe take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us fromgovernmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Efforts to ensure that ourbusiness arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcementauthorities will conclude that our business practices do not comply with current or future statutes, regulations or case law interpreting applicable fraud andabuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting ourrights, those actions could have a significant impact on our business, including the imposition of civil, criminal and/or administrative penalties, damages,disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages,reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate ourbusiness and our results of operations. Defending against any such actions can be costly, time-consuming, and may require significant financial andpersonnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.Competing generic medicinal products or biosimilars may be approved.In the E.U., there exists a process for approval of generic biological medicinal products once patent protection and other forms of data and marketexclusivity have expired. Arrangements for approval of biosimilar products exist in the United States, as well. Other jurisdictions are considering adoptinglegislation that would allow the approval of generic biological medicinal products. If generic medicinal products are approved, competition from suchproducts may substantially reduce sales of our products.Public opinion and scrutiny of cell-based immunotherapy approaches may impact public perception of our company and product candidates, or mayadversely affect our ability to conduct our business and our business plans.Our platform utilizes a relatively novel technology involving the genetic modification of human cells and utilization of those modified cells in otherindividuals, and no NK cell-based immunotherapy has been approved to date. Public perception may be influenced by claims, such as claims that cell-basedimmunotherapy is unsafe or unethical, and our approach may not gain the acceptance of the public or the medical community. In particular, our success willdepend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing treatments that involve the use of ourproduct candidates in lieu of, or in addition to, existing treatments they are already familiar with and for which greater clinical data may be available. Morerestrictive government regulations or negative public opinion could have an adverse effect on our business or financial condition and may delay or impairthe development and commercialization of our product candidates or demand for any products we may develop. Adverse events in our clinical trials, even ifnot ultimately attributable to our product candidates, and the resulting publicity could result in increased governmental regulation, unfavorable publicperception, potential regulatory delays in the testing or approval of our potential product candidates, stricter labeling requirements for those productcandidates that are approved and a decrease in demand for any such product candidates.Risks Relating to Government RegulationWe may fail to obtain or may experience delays in obtaining regulatory approval to market aNK cells or platform products, which will significantly harmour business.We do not have the necessary approval to market or sell aNK cells or platform products in the United States or any foreign market. Before marketingaNK cell product or platform product candidates, we must successfully complete extensive preclinical studies and clinical trials and rigorous regulatoryapproval procedures. We cannot assure you that we will apply for or obtain the necessary regulatory approval to commercialize aNK cell product or platformcandidates in a timely manner, or at all.Conducting clinical trials is uncertain and expensive and often takes many years to complete. The results from preclinical testing and early clinicaltrials are often not predictive of results obtained in later clinical trials. In conducting clinical trials, we may fail to establish the effectiveness of aNK, haNK,and taNK cells for the targeted indication or we may discover unforeseen side effects. Moreover, clinical trials may require the enrollment of large numbers ofpatients, and suitable patients may be difficult to identify and recruit. Clinical trials are also often subject to unanticipated delays. In addition, aNK, haNK,and taNK cells are produced in small scale cell culture systems and we may be unable to adapt the production method to large scale production systems. Also,patients participating in the trials may die before completion of the clinical trial or suffer adverse medical effects unrelated to treatment with aNK, haNK, andtaNK cells. This could delay or lead to termination of our clinical trials. A number of companies in the biotechnology industry have suffered significantsetbacks in every stage of clinical trials, even in advanced clinical trials after positive results in earlier clinical trials.63To date, the FDA has approved only a few cell-based therapies for commercialization. The processes and requirements imposed by the FDA may causedelays and additional costs in obtaining regulatory approvals for our product candidates. Because our aNK cell therapy is novel, and cell-based therapies arerelatively new, regulatory agencies may lack experience in evaluating product candidates like aNK cells or for other related platform products. Thisinexperience may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of aNK cells or otherrelated platform products. In addition, the following factors may impede or delay our ability to obtain timely regulatory approvals, if at all: •our limited experience in filing and pursuing Biologics License Applications, or BLAs, necessary to gain regulatory approvals related togenetically modified cancer cell line therapies; •any failure to develop substantial evidence of clinical efficacy and safety, and to develop quality standards; •a decision by us or regulators to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable healthrisks; •regulatory inspections of our clinical trials, clinical trial sites or manufacturing facilities, which may, among other things, require us toundertake corrective action or suspend or terminate our clinical trials if investigators find us not to be in compliance with applicable regulatoryrequirements; •our ability to produce sufficient quantities of aNK cells to complete our clinical trials; •varying interpretations of the data generated from our clinical trials; and •changes in governmental regulations or administrative action.Any delays in, or termination of, our clinical trials could materially and adversely affect our development and collaboration timelines, which maycause our stock price to decline. If we do not complete clinical trials for aNK, haNK, and taNK cells and seek and obtain regulatory approvals, we may not beable to recover any of the substantial costs we have invested in the development of aNK, haNK, and taNK cells.Even if we obtain regulatory approvals for aNK cells and related platform products, those approvals and ongoing regulation of our products may limithow we manufacture and market our products, which could prevent us from realizing the full benefit of our efforts.If we obtain regulatory approvals, aNK cells, our aNK products, and our manufacturing facilities will be subject to continual regulatory review,including periodic unannounced inspections, by the FDA and other United States and foreign regulatory authorities. In addition, regulatory authorities mayimpose significant restrictions on the indicated uses or impose ongoing requirements for potentially costly post-approval studies. aNK cells and otherproduct candidates would also be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeepingand submission of safety and other post-market information. These and other factors may significantly restrict our ability to successfully commercialize aNK,haNK, and taNK cells and our aNK and related product platform cell therapies.Manufacturers of biopharmaceutical products and their facilities, vendors and suppliers are subject to continual review and periodic unannouncedinspections by the FDA and other regulatory authorities for compliance with GMP regulations, which include requirements relating to quality control andquality assurance as well as to the corresponding maintenance of records and documentation. Furthermore, our manufacturing facilities must be approved byregulatory agencies before these facilities can be used to manufacture aNK cells and related therapies, and they will also be subject to additional regulatoryinspections. Any material changes we may make to our manufacturing process or to the components used in our products may require additional priorapproval by the FDA and state or foreign regulatory authorities. Failure to comply with FDA or other applicable regulatory requirements may result incriminal prosecution, civil penalties, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market.We must also report adverse events that occur when our products are used. The discovery of previously unknown problems with aNK, haNK, and taNKcells and therapies or our manufacturing facilities may result in restrictions or sanctions on our products or manufacturing facilities, including withdrawal ofour products from the market or suspension of manufacturing. Regulatory agencies may also require us to reformulate our products, conduct additionalclinical trials, make changes in the labeling of our product or obtain re-approvals. This may cause our reputation in the market place to suffer or subject us tolawsuits, including class action suits.In addition, if we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatoryrequirements, a regulatory agency may: •issue warning letters that can produce adverse publicity; •impose civil or criminal penalties;64 •suspend regulatory approval; •suspend any ongoing clinical trials; •refuse to approve pending applications or supplements to applications filed by us; •impose restrictions on operations, including costly new manufacturing requirements; •seize or detain products or request us to initiate a product recall; or •pursue and obtain an injunction.Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtainingregulatory approval of our product candidates in other jurisdictions.Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain ormaintain regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negativeeffect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatoryauthorities in foreign jurisdictions must also approve the product, manufacturing, and in many cases reimbursement of the product candidate in thosecountries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than,those in the United States, including additional preclinical studies or clinical trials as clinical studies conducted in one jurisdiction may not be accepted byregulatory authorities in other jurisdictions. In some cases, the price that we intend to charge for our products is also subject to approval by regulatoryauthorities.We may also submit marketing applications in other countries. Regulatory authorities in jurisdictions outside of the United States have requirementsfor approval of product candidates with which we must comply prior to marketing in those jurisdictions. Obtaining foreign regulatory approvals andcompliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction ofour products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or receive applicable marketingapprovals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.We may seek orphan drug status or breakthrough therapy designation for one or more of our product candidates, but even if either is granted, we may beunable to maintain any benefits associated with breakthrough therapy designation or orphan drug status, including market exclusivity.Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition or for which thereis no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for a disease or condition will berecovered from sales in the United States for that drug or biologic. If a product that has orphan drug designation subsequently receives the first FDA approvalfor the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any otherapplications, including a full Biologics License Application, or BLA, to market the same drug or biologic for the same indication for seven years, except inlimited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. In 2012, the FDA established a BreakthroughTherapy Designation which is intended to expedite the development and review of products that treat serious or life-threatening conditions.We may seek orphan drug status for one or more of our products candidates, but exclusive marketing rights in the United States may be lost if we seekapproval for an indication broader than the orphan designated indication and may be lost if the FDA later determines that the request for designation wasmaterially defective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Inaddition, we may seek breakthrough therapy designation for one or more of our product candidates, but there can be no assurance that we will receive suchdesignation.65We will need to obtain FDA approval of any proposed product brand names, and any failure or delay associated with such approval may adversely impactour business.A biopharmaceutical product cannot be marketed in the United States or other countries until we have completed rigorous and extensive regulatoryreview processes, including review and approval of a brand name. Any brand names we intend to use for our product candidates will require approval fromthe FDA regardless of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office, or the USPTO. The FDA may objectto a product brand name if they believe the name creates potential for confusion or inappropriately implies medical claims. If the FDA objects to any of ourproposed product brand names, we may be required to adopt an alternative brand name for our product candidates. If we adopt an alternative brand name, wewould lose the benefit of our existing trademark applications for such product candidate and may be required to expend significant additional resources in aneffort to identify a suitable product brand name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and beacceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our abilityto commercialize our product candidates.Coverage and reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance.There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. Patients who are provided medicaltreatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Therefore, marketacceptance and sales of our products, if approved, in both domestic and international markets will depend significantly on the availability of adequatecoverage and reimbursement from third-party and/or government payors for any of our products and may be affected by existing and future healthcare reformmeasures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they willcover and establish approved lists, known as formularies, and establish payment levels for such drugs. Formularies may not include all FDA-approved drugsfor a particular indication. Private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reductionin payment under Medicare Part D may result in a similar reduction in payments from non-governmental payors. We cannot be certain that coverage andadequate reimbursement will be available for any of our products, if approved, or that such coverage and reimbursement will be authorized in a timelyfashion. Also, we cannot be certain that reimbursement policies will not reduce the demand for, or the price paid for, any of our products, if approved. Ifreimbursement is not available or is available on a limited basis for any of our products, if approved, we may not be able to successfully commercialize anysuch products.Reimbursement by a third-party or government payor may depend upon a number of factors, including, without limitation, the third-party orgovernment payor’s determination that use of a product is: •a covered benefit under its health plan; •safe, effective and medically necessary; •appropriate for the specific patient; •cost-effective; and •neither experimental nor investigational.Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costly processthat could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to the payor. We may not be able toprovide data sufficient to gain acceptance with respect to coverage and reimbursement or to have pricing set at a satisfactory level. If reimbursement of ourproducts, if any, is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels such as may result where alternative or generictreatments are available, we may be unable to achieve or sustain profitability.Assuming we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate or may require co-payments thatpatients find unacceptably high. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significantportion of the cost of our products.66In the United States, third-party payors include federal and state healthcare programs, government authorities, private managed care providers, privatehealth insurers, and other organizations. No uniform policy of coverage and reimbursement for products exists among third-party payors, and third-partypayors are increasingly challenging the price, examining the medical necessity, and reviewing the cost-effectiveness of medical drug products and medicalservices, in addition to questioning their safety and efficacy. Therefore, coverage and reimbursement for products can differ significantly from payor to payor.As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support forthe use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained. We or our collaborators mayneed to conduct expensive pharmaco-economic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition tothe costs required to obtain the FDA approvals.In some foreign countries, particularly in Europe, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries,pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursementor pricing approval in some countries, we may be required to conduct additional clinical trials that compare the cost-effectiveness of our products to otheravailable therapies. If reimbursement of any of our products, if approved, is unavailable or limited in scope or amount in a particular country, or if pricing isset at unsatisfactory levels, we may be unable to achieve or sustain profitability of our products in such country.Recent legislative and regulatory activity may exert downward pressure on potential pricing and reimbursement for our products, if approved, that couldmaterially affect the opportunity to commercialize.The United States and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to changethe healthcare system in ways that could affect our ability to sell any of our products profitably, if approved. Among policy-makers and payors in the UnitedStates and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improvingquality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has beensignificantly affected by major legislative initiatives. There have been, and likely will continue to be, legislative and regulatory proposals at the federal andstate levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that maybe adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare servicesto contain or reduce costs of healthcare may adversely affect: •the demand for any of our products, if approved; •our ability to set a price that we believe is fair for any of our products, if approved; •our ability to generate revenues and achieve or maintain profitability; •the level of taxes that we are required to pay; and •the availability of capital.In March 2010, ACA became law in the United States. The goal of ACA is to reduce the cost of healthcare, broaden access to health insurance,constrain healthcare spending, enhance remedies against fraud and abuse, add transparency requirements for the healthcare and health insurance industries,impose taxes and fees on the health industry, impose additional health policy reforms, and substantially change the way healthcare is financed by bothgovernmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on ourbusiness specifically, ACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of any ofour products, if they are approved. Provisions of ACA relevant to the pharmaceutical industry include the following: •an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportionedamong these entities according to their market share in certain government healthcare programs, not including orphan drug sales; •an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of theaverage manufacturer price for most branded and generic drugs, respectively; •a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts on negotiatedprices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatientdrugs to be covered under Medicare Part D; •extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations;67 •expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal PovertyLevel, thereby potentially increasing manufacturers’ Medicaid rebate liability; •expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; •new requirements for certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare,Medicaid, or the Children’s Health Insurance Program, with specific exceptions to report annually certain financial arrangements withphysicians and teaching hospitals, as defined in ACA and its implementing regulations, including reporting any payment or “transfer of value”provided to physicians and teaching hospitals and any ownership and investment interests held by physicians and their immediate familymembers during the preceding calendar year; •expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new governmentinvestigative powers and enhanced penalties for noncompliance; •a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research,along with funding for such research; and •a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that areinhaled, infused, instilled, implanted, or injected.Furthermore, the current presidential administration and Congress are also expected to attempt broad sweeping changes to the current health carelaws. We face uncertainties that might result from modification or repeal of any of the provisions of the ACA, including as a result of current and futureexecutive orders and legislative actions. The impact of those changes on us and potential effect on the pharmaceutical and biotechnology industry as awhole is currently unknown. But, any changes to the ACA are likely to have an impact on our results of operations, and may have a material adverse effecton our results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level orthe effect of any future legislation or regulation in the United States may have on our business.We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirementsand subject us to liability if we are not in compliance with applicable laws.Our products and solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S.Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign AssetsControls. Exports of our products and solutions outside of the United States must be made in compliance with these laws and regulations. If we fail to complywith these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss ofexport or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration ofresponsible employees or managers.In addition, changes in our products or solutions or changes in applicable export or import laws and regulations may create delays in the introduction,provision, or sale of our products and solutions in international markets, prevent customers from using our products and solutions or, in some cases, preventthe export or import of our products and solutions to certain countries, governments or persons altogether. Any limitation on our ability to export, provide, orsell our products and solutions could adversely affect our business, financial condition and results of operations.We are subject to U.S. and foreign anti-corruption and anti-money laundering laws with respect to our operations and non-compliance with such laws cansubject us to criminal and/or civil liability and harm our business.We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. §201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other state and national anti-bribery and anti-money laundering laws in countries in which weconduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, third-party intermediaries, joint venturepartners and collaborators from authorizing, promising, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the publicor private sector. We currently use contract research organizations abroad for clinical trials. In addition, we may engage third party intermediaries to sell ourproducts and solutions abroad once we enter a commercialization phase for our product candidates and/or to obtain necessary permits, licenses, and otherregulatory approvals. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies orstate-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees,representatives, contractors, partners, and agents, even if we do not explicitly authorize or have actual knowledge of such activities.68We adopted an anti-corruption policy in connection with the consummation of the IPO of our common stock in July 2015. The anti-corruption policymandates compliance with the FCPA and other anti-corruption laws applicable to our business throughout the world. However, there can be no assurance thatour employees and third party intermediaries will comply with this policy or such anti-corruption laws. Noncompliance with anti-corruption and anti-moneylaundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other investigations, or other enforcementactions are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, resultsof operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversionof management’s attention and resources and significant defense and compliance costs and other professional fees. In certain cases, enforcement authoritiesmay even cause us to appoint an independent compliance monitor which can result in added costs and administrative burdens.Risks Relating to Our Intellectual PropertyIf our efforts to protect the intellectual property related to our product candidates are not adequate, we may not be able to compete effectively in ourmarket.We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to ourproduct candidates and technology. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enablecompetitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in the market. We believe that we haveworldwide commercial rights to the NK-92 cell line and we believe that we control commercial use of our aNK, haNK, and taNK cells in key territories. Wehave developed and in-licensed numerous patents and patent applications and we possess substantial know-how and trade secrets relating to thedevelopment and commercialization of Natural Killer cell-based immunotherapy product candidates, including related manufacturing processes andtechnology. Our owned and licensed patent portfolio consists of patents and pending patent applications in the U.S. disclosing subject matter directed tocertain of our proprietary technology, inventions, and improvements and our most advanced product candidates, as well as licensed and owned patents andpending applications in jurisdictions outside of the U.S., that, in many cases, are counterparts to the foregoing U.S. patents and patent applications. Webelieve we have intellectual property rights that are necessary to commercialize aNK, haNK, and taNK cells. However, our patent applications may not resultin issued patents, and, even if issued, the patents may be challenged and invalidated. Moreover, our patents and patent applications may not be sufficientlybroad to prevent others from practicing our technologies or developing competing products. We also face the risk that others may independently developsimilar or alternative technologies or may design around our proprietary property.The patent application process, also known as patent prosecution, is expensive and time-consuming, and we and our current or future licensors andlicensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is alsopossible that we or our current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course ofdevelopment and commercialization activities before it is too late to obtain patent protection on them. Therefore, these and any of our patents andapplications may not be prosecuted and enforced in a manner consistent with the best interests of our business. Defects of form in the preparation or filing ofour patents or patent applications may exist, or may arise in the future, for example with respect to proper priority claims, inventorship, etc., although we areunaware of any such defects that we believe are of material import. If we or our current licensors, or any future licensors or licensees, fail to establish, maintainor protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our current licensors, or any future licensors orlicensees, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could becompromised. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid andunenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.The strength of patents in the biopharmaceutical field involves complex legal and scientific questions and can be uncertain. This uncertainty includeschanges to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law or rules in waysaffecting the scope or validity of issued patents. The patent applications that we own or in-license may fail to result in issued patents in the United States orforeign countries with claims that cover our product candidates. Even if patents do successfully issue from the patent applications that we own or in-license,third parties may challenge the validity, enforceability or scope of such patents, which may result in such patents being narrowed, invalidated or heldunenforceable. For example, patents granted by the European Patent Office may be challenged, also known as opposed, by any person within nine monthsfrom the publication of their grant. Any successful challenge to our patents could deprive us of exclusive rights necessary for the successfulcommercialization of our product candidates. Furthermore, even if they are unchallenged, our patents may not adequately protect our product candidates,provide exclusivity for our product candidates, or prevent others from designing around our claims. If the breadth or strength of protection provided by thepatents we hold or pursue with respect to our product candidates is challenged, it could dissuade companies from collaborating with us to develop, orthreaten our ability to commercialize our product candidates.69Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its earliest effective non-provisionalfiling date. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for ourproduct candidates, we may be open to competition from generic versions of our product candidates. Further, if we encounter delays in our developmentefforts, including our clinical trials, the period of time during which we could market our product candidates under patent protection would be reduced.In addition to the protection afforded by patents, we also rely on trade secret protection to protect proprietary know-how that may not be patentable orthat we elect not to patent, processes for which patents may be difficult to obtain or enforce, and any other elements of our product candidates, and ourproduct development processes (such as a manufacturing and formulation technologies) that involve proprietary know-how, information or technology thatis not covered by patents. However, trade secrets can be difficult to protect. If the steps taken to maintain our trade secrets are deemed inadequate, we mayhave insufficient recourse against third parties for misappropriating any trade secrets. Misappropriation or unauthorized disclosure of our trade secrets couldsignificantly affect our competitive position and may have a material adverse effect on our business. Furthermore, trade secret protection does not preventcompetitors from independently developing substantially equivalent information and techniques and we cannot guarantee that our competitors will notindependently develop substantially equivalent information and techniques. The FDA, as part of its Transparency Initiative, is currently considering whetherto make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietaryinformation, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all.In an effort to protect our trade secrets and other confidential information, we require our employees, consultants, advisors, and any other third partiesthat have access to our proprietary know-how, information or technology, for example, third parties involved in the formulation and manufacture of ourproduct candidates, and third parties involved in our clinical trials to execute confidentiality agreements upon the commencement of their relationships withus. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of theindividual’s relationship with us be kept confidential and not disclosed to third parties. However, we cannot be certain that our trade secrets and otherconfidential proprietary information will not be disclosed despite having such confidentiality agreements. Adequate remedies may not exist in the event ofunauthorized use or disclosure of our trade secrets. In addition, in some situations, these confidentiality agreements may conflict with, or be subject to, therights of third parties with whom our employees, consultants, or advisors have previous employment or consulting relationships. To the extent that ouremployees, consultants or contractors use any intellectual property owned by third parties in their work for us, disputes may arise as to the rights in anyrelated or resulting know-how and inventions. If we are unable to prevent unauthorized material disclosure of our trade secrets to third parties, we may not beable to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financialcondition.Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly on obtaining andenforcing patents. Obtaining and enforcing patents in the pharmaceutical industry involves both technological and legal complexity, and therefore, is costly,time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reformlegislation. Further, recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened therights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination ofevents has created uncertainty with respect to the value of patents, once obtained.For our U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patentlaw. In September 2011, the Leahy-Smith America Invents Act, or the American Invents Act, or AIA, was signed into law. The AIA includes a number ofsignificant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.The USPTO has developed regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent law associatedwith the AIA. It still remains unclear what other, if any, impact the AIA will have on the operation of our business. Moreover, the AIA and its implementationcould increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all ofwhich could have a material adverse effect on our business and financial condition.70An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-inventor-to-file” system fordeciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A thirdparty that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if wehad made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of apatent application. Furthermore, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technologyand the prior art allow our technology to be patentable over the prior art. Since patent applications in the United States and most other countries areconfidential for a period of time after filing, we cannot be certain that we were the first to either (1) file any patent application related to our productcandidates or (2) invent any of the inventions claimed in our patents or patent applications.Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providingopportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013.Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate apatent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the sameevidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTOprocedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirementsimposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and othersimilar provisions during the patent prosecution process. Periodic maintenance fees and various other governmental fees on any issued patent and/or pendingpatent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of a patent or patent application. We havesystems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees. While an inadvertent lapsemay sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are many situations in whichnoncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevantjurisdiction. If we fail to maintain the patents and patent applications directed to our product candidates, our competitors might be able to enter the marketearlier than should otherwise have been the case, which would have a material adverse effect on our business.Third-party claims alleging intellectual property infringement may adversely affect our business.Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties, for example, theintellectual property rights of competitors. Our research, development and commercialization activities may be subject to claims that we infringe or otherwiseviolate patents owned or controlled by third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by thirdparties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patentsare issued, the risk increases that our activities related to our product candidates may give rise to claims of infringement of the patent rights of others. Wecannot assure you that our product candidates will not infringe existing or future patents. We may not be aware of patents that have already issued that a thirdparty, for example a competitor in our market, might assert are infringed by our product candidates. It is also possible that patents of which we are aware, butwhich we do not believe are relevant to our product candidates, could nevertheless be found to be infringed by our product candidates. Nevertheless, we arenot aware of any issued patents that we believe would prevent us from marketing our product candidates, if approved. There may also be patent applicationsthat have been filed but not published that, when issued as patents, could be asserted against us.71Third parties making claims against us for infringement or misappropriation of their intellectual property rights may seek and obtain injunctive orother equitable relief, which could effectively block our ability to further develop and commercialize our product candidates. Further, if a patentinfringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or productcandidate that is the subject of the suit. Defense of these claims, regardless of their merit, would cause us to incur substantial expenses and, and would be asubstantial diversion of employee resources from our business. In the event of a successful claim of infringement against us by a third party, we may have to(1) pay substantial damages, including treble damages and attorneys’ fees if we are found to have willfully infringed the third party’s patents; (2) obtain oneor more licenses from the third party; (3) pay royalties to the third party; and/or (4) redesign any infringing products. Redesigning any infringing productsmay be impossible or require substantial time and monetary expenditure. Further, we cannot predict whether any required license would be available at all orwhether it would be available on commercially reasonable terms. In the event that we could not obtain a license, we may be unable to further develop andcommercialize our product candidates, which could harm our business significantly. Even if we are able to obtain a license, the license would likely obligateus to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to thesame intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations,if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.Defending ourselves or our licensors in litigation is very expensive, particularly for a company of our size, and time-consuming. Some of ourcompetitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources.Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patentlitigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverseeffect on our business, financial condition or results of operations.We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could beexpensive and time consuming.Third parties may infringe or misappropriate our intellectual property, including our existing patents, patents that may issue to us in the future, or thepatents of our licensors to which we have a license. As a result, we may be required to file infringement claims to stop third-party infringement orunauthorized use. Further, we may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly incountries where the laws may not protect those rights as fully as in the United States.Generic drug manufacturers may develop, seek approval for, and launch generic versions of our products. If we file an infringement action against sucha generic drug manufacturer, that company may challenge the scope, validity or enforceability of our or our licensors’ patents, requiring us and/or ourlicensors to engage in complex, lengthy and costly litigation or other proceedings.For example, if we or one of our licensors initiated legal proceedings against a third party to enforce a patent covering our product candidates, thedefendant could counterclaim that the patent covering our product candidates is invalid and/or unenforceable. In patent litigation in the United States,defendant counterclaims alleging invalidity and/or unenforceability are commonplace, and there are numerous grounds upon which a third party can assertinvalidity or unenforceability of a patent.In addition, within and outside of the United States, there has been a substantial amount of litigation and administrative proceedings, includinginterference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in various foreign jurisdictions, regardingpatent and other intellectual property rights in the biopharmaceutical industry. Recently, the AIA introduced new procedures including inter partes reviewand post grant review. The implementation of these procedures brings uncertainty to the possibility of challenges to our patents in the future, including thosethat patents perceived by our competitors as blocking entry into the market for their products, and the outcome of such challenges.In March 2009, we received a final rejection in one of our original patent applications pertaining to certain limited methods of use claims for NK-92from the USPTO (but the USPTO allowed claims on all of the other proposed claims, including other methods of use). We filed a Notice of Appeal to theUSPTO Board of Appeals and Interferences and a Decision on Appeal was rendered in the fall of 2013. That decision reversed the Examiner’s rejection of theclaim to certain limited methods of use with NK-92, but affirmed the Examiner’s rejection of the remaining patent claims. In December 2013, we brought anaction in the U.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as we disagreed with the decision as to the certainlimited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment. On September 24, 2015, wefiled a notice of appeal to the United States Court of Appeals for the Federal Circuit. On February 9, 2017, a three-judge panel of the Federal Circuit heardoral arguments on our appeal and took the matter under submission.72Such litigation and administrative proceedings could result in revocation of our patents or amendment of our patents such that they do not cover ourproduct candidates. They may also put our pending patent applications at risk of not issuing, or issuing with limited and potentially inadequate scope tocover our product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validityquestion, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution.Additionally, it is also possible that prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, may,nonetheless, ultimately be found by a court of law or an administrative panel to affect the validity or enforceability of a claim, for example if a priority claimis found to be improper. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all,of the patent protection on our product candidates. Such a loss of patent protection could have a material adverse impact on our business.Enforcing our or our licensor’s intellectual property rights through litigation is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able to sustain the costs of litigation more effectively than we can because of greater financial resources. Patentlitigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patentlitigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverseeffect on our business, financial condition or results of operations.Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or administrativeproceedings, there is a risk that some of our confidential information could be compromised by disclosure. In addition, during the course of litigation oradministrative proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or publicaccess to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.If we fail to comply with our obligation in any of the agreements under which we license intellectual property rights from third parties or otherwiseexperience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.Licensing of intellectual property rights is of critical importance to our business and involves complex legal, business and scientific issues. We rely onour exclusive license from Hans Klingemann, M.D., Ph.D., one of our founders and the inventor of our aNK and related platform product cell therapies, andmay rely on our exclusive licenses from Rush University Medical Center and other licensors such as Fox Chase Cancer Research Center and the UniversityHealth Network. If we fail to comply with the diligence obligations or otherwise materially breach our license agreement, and fail to remedy such failure orcure such breach, the licensor may have the right to terminate the license.Our obligation to pay royalties to Dr. Klingemann under the license agreement, as amended, runs until the expiration of the underlying patents and thelicense agreement may be terminated earlier by either party for material breach. Under the license agreement we have the right to enforce the licensed patents.Our license agreement with Rush University Medical Center terminates on the 12th anniversary of our first payment of royalties, at which point the license isdeemed perpetual, irrevocable, fully-paid royalty-free, exclusive license, and may be terminated earlier by either party for material breach.Disputes may arise between us and our licensors regarding intellectual property rights subject to a license agreement, including: •the scope of rights granted under the license agreement and other interpretation-related issues; •our right to sublicense intellectual property rights to third parties under collaborative development relationships; and •our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of ourproduct candidates, and what activities satisfy those diligence obligations.While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek to preserveour rights under the patents licensed to us, we may not be able to do so in a timely manner, at an acceptable cost or at all. Generally, the loss of any one of ourcurrent licenses, or any other license we may acquire in the future, could materially harm our business, prospects, financial condition and results ofoperations.73Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information andmay not adequately protect our intellectual property, which could limit our ability to compete.Because we operate in the highly technical field of research and development, we rely in part on trade secret protection in order to protect ourproprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop thesame or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outsidescientific collaborators, sponsored researchers and other advisors, to protect our trade secrets and unpatented know-how. These agreements generally requirethat the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by usduring the course of the party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by theparty in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assignintellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and timeconsuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. Thefailure to obtain or maintain trade secret protection could adversely affect our competitive position.We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information ofthird parties.We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed atother biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors haveinadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Further, we maybe subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing ourproduct candidates. We may also be subject to claims that former employees, consultants, independent contractors, collaborators or other third parties havean ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging our rightto and use of confidential and proprietary information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose ourrights therein. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigationcould result in substantial cost and be a distraction to our management and employees.We may not be able to protect our intellectual property rights throughout the world.We strive to control cell line distribution as well as limit commercial use through licenses and material transfer agreements with third parties inaddition to its patents and patent applications. However, a company may illicitly obtain our cells or create their own modified variants and attempt tocommercialize them in foreign countries where we do not have any patents or patent applications where legal recourse may be limited. This may have asignificant commercial impact on our foreign business operations.Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. Therequirements for patentability may differ in certain countries, particularly developing countries. For example, China has a heightened requirement forpatentability, and specifically requires a detailed description of medical uses of a claimed drug. In addition, the laws of some foreign countries do not protectintellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing ourinventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection todevelop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement oninfringing activities is inadequate. These products may compete with our products, and our patents or other intellectual property rights may not be effectiveor sufficient to prevent them from competing.74Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legalsystems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection,particularly those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing productsin violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert ourefforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applicationsat risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or otherremedies awarded, if any, may not be commercially meaningful. In addition, certain countries in Europe and certain developing countries, including Indiaand China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we may havelimited remedies if our patents are infringed or if we are compelled to grant a license to our patents to a third party, which could materially diminish the valueof those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the worldmay be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license. Finally, our ability to protect andenforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.Risks Relating to Our Common StockOur Chairman and CEO and entities affiliated with him collectively own a significant majority of our common stock and will exercise significant influenceover matters requiring stockholder approval, regardless of the wishes of other stockholders.As of December 31, 2016, our Chairman and CEO, Patrick Soon-Shiong, M.D., and entities affiliated with him, collectively own approximately 57.1%of the outstanding shares of our common stock. Additionally, Dr. Soon-Shiong is the owner of options, a warrant and restricted stock units to purchase anaggregate of 20.3 million shares of our common stock which would give him and his affiliates ownership of approximately 65.6% of our outstanding sharesof common stock if they were fully vested and exercised in full. In addition, pursuant to the Nominating Agreement between us and Cambridge Equities, LP,or Cambridge, an entity that Dr. Soon-Shiong controls, Cambridge has the ability to designate one director to be nominated for election to our board ofdirectors for as long as Cambridge continues to hold at least 20% of the issued and outstanding shares of our common stock. Dr. Soon-Shiong was selected byCambridge to hold this board seat. Dr. Soon-Shiong and his affiliates will therefore have significant influence over management and significant control overmatters requiring stockholder approval, including the annual election of directors and significant corporate transactions, such as a merger or other sale of ourcompany or its assets, for the foreseeable future. This concentrated control will limit stockholders’ ability to influence corporate matters and, as a result, wemay take actions that our stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected.We do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stockwill be and as a result it may be difficult for you to sell your shares of our common stock.Prior to our IPO in July 2015, there was no public market for our common stock. Although our common stock is listed on The NASDAQ Global SelectMarket, the market for our shares has demonstrated varying levels of trading activity. You may not be able to sell your shares quickly or at the market price iftrading in shares of our common stock is not active. Further, an inactive market may also impair our ability to raise capital by selling shares of our commonstock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.The market price of our common stock has been and may continue to be volatile.The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often beenunrelated to the operating performance of particular companies. The market price of our common stock has been and may continue to be highly volatile andcould be subject to wide fluctuations in response to various factors, some of which are beyond our control, including: •the commencement, enrollment or results of the planned clinical trials of our product candidates or any future clinical trials we may conduct, orchanges in the development status of our product candidates; •any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse development with respect tothe applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or arequest for additional information; •adverse results or delays in clinical trials; •our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial; •adverse regulatory decisions, including failure to receive regulatory approval of our product candidates75 •changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals; •our failure to commercialize our product candidates; •additions or departures of key scientific or management personnel; •unanticipated serious safety concerns related to the use of our product candidates; •announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; •our ability to effectively manage our growth; •variations in our quarterly operating results; •our cash position; •announcements that our revenue or income are below or that costs or losses are greater than analysts’ expectations; •publication of research reports about us or our industry, or immunotherapy in particular, or positive or negative recommendations orwithdrawal of research coverage by securities analysts; •changes in the market valuations of similar companies; •general economic slowdowns; •sales of large blocks of our common stock; •fluctuations in stock market prices and volumes; •disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection forour technologies; •significant lawsuits, including patent or stockholder litigation; and •the other factors described in this “Risk Factors” section.In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of acompany’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, whichwould harm our business, operating results or financial condition.Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plan and the warrant heldby our Chairman and CEO, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the marketperceives that our stockholders intend to sell, substantial amounts of our common stock in the public market the market price of our common stock coulddecline significantly. In particular, the options, warrant, and restricted stock units to purchase or receive common stock held by our Chairman and CEO atDecember 31, 2016, may entitle him to acquire up to an aggregate of 20.3 million shares of our common stock, or approximately 24.8% of our outstandingcommon stock. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.Certain holders of approximately 52.7 million shares of our common stock, including shares issuable upon the exercise of outstanding options andwarrants, are entitled to certain rights with respect to the registration of their shares under the Securities Act. Registration of these shares under the SecuritiesAct would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the market price of our common stock.In addition, we expect that additional capital may be needed in the future to continue our planned operations, including conducting clinical trials,commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sellcommon stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sellcommon stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result inmaterial dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock.76We have incurred and will continue to incur costs as a result of operating as a public company and our management has been and will be required todevote substantial time to new compliance initiatives and corporate governance practices, including maintaining an effective system of internal controlover financial reporting.As a public company listed in the United States, and increasingly after we are no longer an “emerging growth company,” we have incurred and willcontinue to incur significant additional legal, accounting and other expenses that we did not incur as a private company. In addition, changing laws,regulations and standards relating to corporate governance and public disclosure, including Sarbanes-Oxley and regulations implemented by the Securitiesand Exchange Commission or SEC, and The NASDAQ Stock Market, or NASDAQ, may increase legal and financial compliance costs and make someactivities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice mayevolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to create a larger finance function withadditional personnel to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrativeexpenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts tocomply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may beharmed.As a public company in the United States, we are required, pursuant to Section 404 of Sarbanes-Oxley, or Section 404, to furnish a report bymanagement on, among other things, the effectiveness of our internal control over financial reporting. We must disclose any material weaknesses identifiedby our management in our internal control over financial reporting, and, when we are no longer an “emerging growth company,” we will need to provide astatement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC isdisclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our independentregistered public accounting firm was not engaged to perform an audit of our internal control over financial reporting for the year ended December 31, 2016or for any other period. Accordingly, no such opinion was expressed.Even after we develop these new procedures, these new controls may become inadequate because of changes in conditions or the degree ofcompliance with these policies or procedures may deteriorate and material weaknesses in our internal control over financial reporting may be discovered. Wemay err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonableassurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no absolute assurancethat all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal controldeficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction.To fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to doso in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting, we expect that certain of our internalcontrol practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not beable to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable toproduce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or NASDAQ, andinvestors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we are unable to certify that ourinternal control over financial reporting is effective and in compliance with Section 404, we may be subject to sanctions or investigations by regulatoryauthorities, such as the SEC or stock exchanges, and we could lose investor confidence in the accuracy and completeness of our financial reports, whichcould hurt our business, the price of our common stock and our ability to access the capital markets.We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may berequired to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract andretain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.We have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of ourcommon stock.We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment ofdividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as the boardof directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur ifour stock price appreciates.77Because we are relying on the exemptions from corporate governance requirements as a result of being a “controlled company” within the meaning of theNASDAQ listing standards, you do not have the same protections afforded to stockholders of companies that are subject to such requirements.Our Chairman and CEO, Dr. Patrick Soon-Shiong, and entities affiliated with him, control a majority of our common stock. As a result, we are a“controlled company” within the meaning of the NASDAQ listing standards. Under these rules, a company of which more than 50% of the voting power isheld by an individual, a group or another company is a “controlled company” and may elect not to comply with certain NASDAQ corporate governancerequirements, including (1) the requirement that a majority of the board of directors consist of independent directors and (2) the requirement that we have anominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’spurpose and responsibilities. We have elected not to have a nominating and corporate governance committee in reliance on the “controlled company”exemptions. Accordingly, you do not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporategovernance requirements.We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies could make our commonstock could be less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act enacted in April 2012, or the JOBS Act, and may remain an “emerging growthcompany” for up to five years following the completion of our IPO, or December 31, 2020, although, if we have more than $1.0 billion in annual revenue, themarket value of our common stock that is held by non-affiliates exceeds $700.0 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the followingDecember 31. For as long as we remain an “emerging growth company,” we are permitted and intend to continue to rely on exemptions from certaindisclosure requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include: •being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements,with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations” disclosure; •not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting; •not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regardingmandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financialstatements; •reduced disclosure obligations regarding executive compensation; and •exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any goldenparachute payments not previously approved.We have taken advantage of reduced reporting requirements in our public filings. In particular, we have not included all of the executivecompensation related information that would be required if we were not an emerging growth company. In addition, the JOBS Act provides that an emerginggrowth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption ofthese accounting standards until they would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as aresult, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.Investors may find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive asa result, there may be a less active trading market for our common stock and the market price of our common stock may be reduced or more volatile.78Our ability to use our net operating loss carryforwards, or NOLs, and certain other tax attributes to offset future taxable income may be subject to certainlimitations.As of December 31, 2016 we had U.S. federal, state and foreign NOLs of approximately $100.0 million, $60.0 million and $0.2 million, respectively,which begin to expire in various years starting with 2023, if not utilized. As of December 31, 2016, we also had federal and state research and developmenttax credit carryforwards of approximately $1.7 million and $0.7 million, respectively. Under Sections 382 and 383 of Internal Revenue Code of 1986, asamended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change taxattributes, such as research tax credits, to offset its future post-change income and taxes may be limited. In general, an “ownership change” occurs if there is acumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply understate tax laws. We completed an IRC Section 382/383 analysis in 2016 regarding the limitation of net operating loss and research and development creditcarryforwards. As a result of the analysis, we have derecognized deferred tax assets for net operating losses and federal and state research and developmentcredits of $1.2 million and $12.7 million from our deferred tax asset schedule as of December 31, 2016 and 2015, respectively.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and tradingvolume could decline.The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business.We do not have any control over these analysts. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more of theanalysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely decline. If one or more of these analysts ceasecoverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price ortrading volume to decline.We are not subject to the provisions of Section 203 of the Delaware General Corporation Law, which could negatively affect your investment.We elected in our amended and restated certificate of incorporation to not be subject to the provisions of Section 203 of the Delaware GeneralCorporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interestedstockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the businesscombination is approved in a prescribed manner. A “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit tothe interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns (or, in certain cases, within three yearsprior, did own) 15% or more of the corporation’s voting stock. Our decision not to be subject to Section 203 will allow, for example, our Chairman and CEO(who with members of his immediate family and entities affiliated with him owned approximately 57.1% of our common stock as of December 31, 2016) totransfer shares in excess of 15% of our voting stock to a third-party free of the restrictions imposed by Section 203. This may make us more vulnerable totakeovers that are completed without the approval of our board of directors and/or without giving us the ability to prohibit or delay such takeovers aseffectively.Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if anacquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, couldmake it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders. These provisionsinclude: •a requirement that special meetings of stockholders be called only by the board of directors, the president or the chief executive officer; •advance notice requirements for stockholder proposals and nominations for election to our board of directors; and •the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval andwhich preferred stock may include rights superior to the rights of the holders of common stock.These anti-takeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws couldmake it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-currentboard of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourageproxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions youdesire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock todecline.79Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reducethe amount of money available to us.Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, ineach case to the fullest extent permitted by Delaware law. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amendedand restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that: •We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to thefullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in goodfaith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to anycriminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful. •We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law. •We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that suchdirectors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification. •We are not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by thatperson against us or our other indemnitees except with respect to proceedings authorized by our board of directors or brought to enforce a rightto indemnification. •The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements withour directors, officers, employees and agents and to obtain insurance to indemnify such persons. •We may not retroactively amend our bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.To the extent that a claim for indemnification is brought by any of our directors or officers, it would reduce the amount of funds available for use inour business.Item 1B. Unresolved Staff Comments.None.Item 2. Properties.The following table, in order of lease expiration, summarizes the facilities we lease as of December 31, 2016, including the locations and size of thefacilities and their designated uses. Location ApproximateSquare Feet Operation Lease Expiration DatesCary, North Carolina 3,067 Office August 2017Cardiff-by-the-Sea, California 2,550 Office August 2018Woburn, Massachusetts 8,153 Laboratory - Research, Office May 2020Culver City, California* 9,500 Laboratory - Research & Manufacturing December 2020El Segundo, California* 24,250 Laboratory - Research & Manufacturing July 2023San Diego, California 44,681 Laboratory - Research, Office July 2023 * Property leased from a related party In September 2016, we entered into a lease agreement with 605 Doug St, LLC, an entity owned by our Chairman and CEO, for approximately 24,250square feet in El Segundo, California, which is to be converted to a research and development laboratory and a Good Manufacturing Practices (GMP)laboratory. We are responsible for the costs to build out the laboratories and have incurred costs of approximately $1.8 million as of December 31, 2016. Thelease runs from July 2016 through July 2023. We have the option to extend the lease for an additional three-year term through July 2026. The monthly rent is$0.1 million with annual increases of 3% beginning in July 2017. 80We lease a total of approximately 2,550 square feet of office space at 2533 South Coast Highway 101, Cardiff-by-the-Sea, California 92007, forgeneral office use, pursuant to an operating lease. We amended this lease to extend the term of the lease through August 31, 2018. Our total monthly leasepayment is currently $12,752 per month, and will increase to $13,199 on September 1, 2017.In March 2016, the Company entered into a lease agreement for an approximately 7,893 square foot facility in Woburn, Massachusetts for a researchand development laboratory, related office and other related uses. The term of the lease is 48 months commencing on April 29, 2016. In June 2016, the leasewas amended to add 260 square feet, for a total of 8,153 square feet. The base rent, including the amendment, is $19,363 per month with a $1 per square footannual increase on each anniversary date. In November 2015, we entered into a facility license agreement with NantWorks, effective in May 2015, for approximately 9,500 square feet of officespace in Culver City, California to be converted to a research and development laboratory and a GMP facility. We were responsible for costs to build out thelaboratory and incurred costs of approximately $3.5 million to complete the conversion. The term of the license extends through December 2020. We havethe option to extend the license through December 2023. The monthly rent is $47,000 with annual increases of three percent (3%) beginning in January2017.In July 2015, we entered into a lease agreement for approximately 3,067 square feet of office space in Cary, North Carolina. The term of the lease is 26months commencing on July 1, 2015. The monthly base rent is $6,070 with three percent (3%) annual increases on each anniversary date. We entered into a lease agreement dated June 19, 2015 with ARE-John Hopkins Court, LLC for approximately 44,681 square foot of laboratory/officespace located at 3530 John Hopkins Court, San Diego, California 92121. The permitted use is research and development laboratory, related office and otherrelated uses. The term of the lease extends for seven years commencing on August 1, 2016 and requires us to pay base monthly rent in the amount of$178,724 per month, with three percent (3%) annual increases on each anniversary of the lease commencement date. On July 22, 2015, we entered into asublease agreement with Novartis Institute for Functional Genomics, Inc., the tenant through July 31, 2016, to sublease this facility prior the leasecommencement date.Item 3. Legal ProceedingsFrom time to time, we may be involved in various other claims and legal proceedings relating to claims arising out of our operations. Except as notedbelow, we are not currently a party to any other legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on ourbusiness. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources andother factors.Securities LitigationIn March 2016, a putative securities class action complaint captioned Sudunagunta v. NantKwest, Inc., et al., No. 16-cv-01947 was filed in federaldistrict court for the Central District of California related to the Company’s restatement of certain interim financial statements for the periods ended June 30,2015 and September 30, 2015 and asserting claims for violation of federal securities laws. Other putative class action complaints containing similarallegations were filed in federal court and in California Superior Court. The state court actions were removed to federal court and all of the actions have beenconsolidated. The consolidated complaint names as defendants the Company, certain of its current and former officers and directors, and various investmentbanks which served as underwriters for the Company’s initial public offering (IPO). The consolidated complaint alleges violations of Sections 11 and 15 ofthe Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaints seekunspecified damages, costs and attorneys’ fees, and equitable/injunctive or other relief on behalf of putative classes of persons who purchased or acquired theCompany’s securities in the IPO and from July 28, 2015 through March 11, 2016. Defendants have filed a motion to dismiss the consolidated complaint. Management intends to vigorously defend these proceedings. At this time, the Company cannot predict how the Court will rule on the merits of the claimsand/or the scope of the potential loss in the event of an adverse outcome. Therefore, based on the information available at present, the Company cannotreasonably estimate a range of loss for this action. Should the Company ultimately be found liable, the liability could have a material adverse effect on theCompany’s results of operations for the period or periods in which it is incurred.On September 6, 2016, a shareholder derivative complaint captioned Bushansky v. Soon-Shiong, et al., No. 37-2016-00030867-CU-SL-CTL was filedin California Superior Court, San Diego County also related to the Company’s restatement of certain interim financial statements. The complaint names asdefendants the Company’s current and former directors and officers and the Company’s outside auditor at the time of the IPO. The complaint alleges theindividual defendants breached their fiduciary duties to the Company’s shareholders and wasted corporate assets, and that the outside auditors committedmalpractice. No causes of action are asserted against the Company, which is named solely as a nominal defendant. The complaint seeks, on behalf of theCompany, unspecified damages, the return of directors’ salaries for unspecified periods, and injunctive relief. Defendants have demurred to the complaint andthe Company has filed a motion to dismiss the complaint based on a corporate charter provision specifying a Delaware forum. 81Appeal of USPTO DecisionIn March 2009, we received a final rejection in one of our original patent applications pertaining to certain limited methods of use claims for NK-92from the U.S. Patent and Trademark Office, or the USPTO (but the USPTO allowed claims on all of the other proposed claims, including other methods of use).We filed a Notice of Appeal to the USPTO Board of Appeals and Interferences, or the USPTO Board, and a Decision on Appeal was rendered in the fall of2013. That decision reversed the Examiner’s rejection of the claim to those certain limited methods of use. In December 2013, we brought an action in theU.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as we disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment. On September 24, 2015, we filed a noticeof appeal to the United States Court of Appeals for the Federal Circuit. On February 9, 2017, a three-judge panel of the Federal Circuit heard oral argumentson our appeal and took the matter under submission.From time to time, we may be involved in various other claims and legal proceedings relating to claims arising out of our operations. We are notcurrently a party to any other legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business.Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and otherfactors.Item 4. Mine Safety Disclosures.Not applicable. 82PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information for Common StockOur common stock began trading on the NASDAQ Global Select Market under the symbol “NK” on July 28, 2015. Prior to that date, there was nopublic trading market for our common stock. No dividends have been declared or paid. The following table sets forth for the periods indicated the high andlow sales prices per share of our common stock as reported on the NASDAQ Global Select Market: Price Range Year Ended December 31, 2016 High Low First Quarter $16.90 $6.10 Second Quarter $10.26 $5.43 Third Quarter $9.60 $5.89 Fourth Quarter $7.95 $5.60 Price Range Year Ended December 31, 2015 High Low Third Quarter (beginning July 28, 2015) $38.48 $10.87 Fourth Quarter $19.48 $10.10 Holders of RecordAs of March 10, 2017, we had approximately 42 holders of record of our common stock. The actual number of stockholders is greater than the numberof record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This numberof holders of record also does not include stockholders whose shares may be held in trust or by other entities.Dividend PolicyNo cash dividends were declared for our common stock during the fiscal year ended in 2016. We currently intend to retain all available funds and anyfuture earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any futuredetermination to declare dividends will be made at the discretion of our board of directors and will depend on, among other factors, our financial condition,operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.Securities Authorized for Issuance Under Our Equity Compensation PlansInformation regarding our equity compensation plans is incorporated by reference to Item 12, “Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters” of Part III of this Annual Report on Form 10-K.Recent Sales of Unregistered SecuritiesNone83Repurchases of Equity Securities by the IssuerIn November 2015, the board of directors approved a share repurchase program (the 2015 Share Repurchase Program) allowing the CEO or CFO, onbehalf of the Company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50.0 million of the Company’soutstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases will be based on marketconditions and other factors, including price, regulatory requirements and other corporate considerations. The program does not require the purchase of anyminimum number of shares and may be suspended, modified or discontinued at any time without prior notice. We expect to finance the purchases withexisting cash balances. The repurchased shares are formally retired through board approval. At December 31, 2016, $34.2 million remained authorized forrepurchase under the Company’s stock repurchase program. Total numberof sharespurchased Average pricepaid per share Total numberof sharespurchased aspart of publiclyannouncedplans orprograms (1) Maximumapproximatedollar value ofshares that mayyet be purchasedunder the plansor programs (1)October 1 - October 31 — $— 1,594,040 $38.1 millionNovember 1 - November 30 439,618 $7.14 2,033,658 $35.0 millionDecember 1 - December 31 124,286 $6.45 2,157,944 $34.2 millionTotal 563,904 $6.99 (1)All repurchases were made under the terms of the 2015 Share Repurchase Program approved by the Company’s board of directors in November 2015.Since its inception, we have repurchased 2,157,944 shares of our common stock under this program for a total cost of approximately $15.8 million. AtDecember 31, 2016, approximately $34.2 million remains authorized for repurchase under the 2015 Share Repurchase Program. The Company hasincurred approximately $36,000 of broker commissions on the repurchases to date.Use of ProceedsOn July 27, 2015, our Registration Statement on Form S-1, as amended (Reg. No. 333- 205124) was declared effective in connection with the IPO ofour common stock, pursuant to which we sold 9,531,200 shares at a price to the public of $25.00 per share. The offering closed on July 31, 2015, as a resultof which we received net proceeds of approximately $221.5 million after underwriting discounts and offering expenses. Merrill Lynch, Pierce, Fenner &Smith, Incorporated, Citigroup Global Markets Inc., Jefferies LLC and Piper Jaffray & Co. acted as joint book-running managers for the offering, and MLV &Co. LLC Inc. acted as co-manager. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii)any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates. In November 2015, the board of directors approved a sharerepurchase program allowing the Chief Executive Officer or Chief Financial Officer, on behalf of the Company, to repurchase from time to time, in the openmarket or in privately negotiated transactions, up to $50.0 million of our outstanding shares of common stock, exclusive of any commissions, markups orexpenses. We may use the proceeds from the IPO to conduct such repurchases. Accordingly, our use of proceeds from the IPO is as follows: •approximately $15.0 million to fund expenses in connection with our Phase II clinical trial for our aNK product candidate for Merkel cellcarcinoma single agent therapy, Merkel cell carcinoma combination treatment, and other diseases and malignancies, which we expect will besufficient to fund the clinical trials; •approximately $5.0 million to fund expenses in connection with our planned Phase I/II clinical trial for haNK for solid tumors, which we expectwill be sufficient to fund the clinical trial; •approximately $14.0 million to fund expenses in connection with our planned Phase I/II clinical trials for CAR2Brain.taNK for Glioblastomaand HER2.taNK for HER2 positive breast cancers, which we expect will be sufficient to fund the clinical trials; •approximately $75.0 million to establish our planned GMP manufacturing facilities and processes and the hiring of additional personnel; and •the remaining amounts for other research and development activities, working capital and general corporate purposes, including up to $50.0million to repurchase our common stock (exclusive of any commissions, markups or expenses) from time to time, in the open market or inprivately negotiated transactions.We may also use a portion of the net proceeds from the offering and our existing cash to in-license, acquire or invest in complementary business,technologies, products or assets. However, we have no current plans, commitments or obligations to do so.84Stock Performance GraphThe following graph compares the cumulative total return to stockholders on our common stock relative to the cumulative total returns of theNASDAQ Composite Index and the NASDAQ Biotechnology Index. An investment of $100 (with reinvestment of all dividends) is assumed to have beenmade in our common stock and in each index on July 28, 2015, the date our common stock began trading on the NASDAQ Global Select Market, and itsrelative performance is tracked through December 31, 2016. The returns shown are based on historical results and are not indicative of, or intended toforecast, future performance of our common stock or the index. This performance graph shall not be deemed “filed” for purposes of Section 18 of theSecurities Exchange Act of 1934, as amended, or the Exchange Act, or incorporated by reference into any filing of NantKwest, Inc. under the Securities Act of1933, as amended, or the Securities Act. 85Item 6. Selected Financial Data.The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” the consolidated financial statements and related notes, and other financial information included in this AnnualReport on Form 10-K, or Annual Report.The selected consolidated statements of operations data for the years ended December 31, 2016, 2015 and 2014 and the selected consolidated balancesheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this Annual Report. Thefollowing selected consolidated statements of operations data for the year ended December 31, 2013 and the selected consolidated balance sheet data as ofDecember 31, 2014 and 2013 are derived from our audited consolidated financial statements not included in this Annual Report. For the Year Ended December 31, (In thousands, except per share data) 2016 2015 2014 2013 Revenue $44 $236 $641 $600 Operating expenses: Research and development 29,153 11,434 1,595 446 Selling, general and administrative 95,391 227,678 4,621 2,423 Total operating expenses 124,544 239,112 6,216 2,869 Loss from operations (124,500) (238,876) (5,575) (2,269)Other income (expense): Investment income, net 3,097 2,988 20 2 Change in fair value of warrant liability — (1,366) (158) 684 Interest expense (66) — (471) (463)Other income, net 88 77 — — Total other income (expense) 3,119 1,699 (609) 223 Loss before income taxes (121,381) (237,177) (6,184) (2,046)Income tax (benefit) expense, net (572) (301) 1 1 Net loss $(120,809) $(236,876) $(6,185) $(2,047) Net loss per share: Basic and diluted $(1.47) $(3.31) $(0.75) $(2.57) Weighted average number of shares during the period: Basic and diluted 81,979,005 71,519,609 8,246,028 797,105 For the Year Ended December 31, (In thousands) 2016 2015 2014 2013 Balance Sheet Data: Cash and cash equivalents $8,083 $175,908 $59,104 $350 Working capital 192,592 291,392 57,489 (3,447)Total assets 317,496 366,849 59,996 1,243 Total liabilities 24,078 10,854 2,405 4,998 Total stockholders' equity 293,418 355,995 57,591 (3,755) 86Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financialstatements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K, or Annual Report. Some of theinformation contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans andstrategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk factors” section of thisAnnual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by theforward-looking statements contained in the following discussion and analysis.OverviewWe are a pioneering clinical-stage immunotherapy company focused on harnessing the power of the innate immune system by using the natural killercell to treat cancer, infectious diseases and inflammatory diseases. Natural killer, or NK, cells are the body’s first line of defense due to their innate ability torapidly seek and destroy abnormal cells, such as cancer or virally-infected cells, without prior exposure or activation by other support molecules required toactivate adaptive immune cells such as T-cells.We believe that our proprietary NK cell line, coupled with our planned integrated discovery ecosystem, positions us to implement precision cancermedicine by leveraging the advances that have evolved during the past decade and addressing newly discovered challenges of cancer. Cancer is onlyrecently understood to be a complex of rare diseases, with hundreds of patient-specific, cancer-promoting mutated proteins, some known and many moreunknown called neoepitopes. Identifying and targeting these mutated proteins is our strategy to overcome the challenges of cancer in the era of genomics,transcriptomics and immuno-oncology. We believe neoepitopes, which are newly discovered antigens selectively expressed on the cancer cells and not onthe essential normal tissue, represent large untapped targeting opportunities for immune effector cells such as our activated NK cells.Multiple Modes of Tumor Cell Killing. Our immuno-oncology NK platform has multiple modes to potentially induce cell death against the tumor orinfected cell by: (1) direct killing by binding to stress ligands expressed by the diseased cell with the release of toxic granules directly into the tumor cell;(2) antibody mediated killing by binding to antibodies administered in combination and enhancing the cancer killing effect of the administered antibody,enabling targeted cell killing through antibody dependent cellular cytotoxicity, or ADCC; and (3) target activated killing by binding to known or newlydiscovered tumor-specific antigens expressed on the surface of tumor cells and inducing cell death by the release of toxic granules directly into the tumor celland by the release of cytokines and chemokines that recruit additional innate and adaptive immune responses, including the recruitment of cytotoxic T-cells.Our targeted therapeutic areas include: (1) cancer, focusing on bulky hematological cancers, malignancies, solid tumors as well as cancer stem cells,(2) infectious diseases, including viral, fungal and bacterial infections, and (3) inflammatory diseases, ranging from rare inherited diseases to more prevalentautoimmune disorders.Our Integrated Discovery Ecosystem for Precision Medicine. In order to effectively target newly discovered neoepitopes, we plan to integrate thefollowing ecosystem to help drive the development of genetically modified NK cells anticipated to be directed against these cancer-promoting mutatedproteins: (1) a high-speed supercomputing infrastructure to help identify both known antigens on the surface of tumor cells and neoepitopes in clinicalpatients suffering from cancer, in a timely manner and at large scale; (2) a next-generation genomic and transcriptomic sequencing infrastructure to identifythe expression of the neoepitopes on the surface of the tumor cell, developed by our affiliate entity NantOmics; (3) delivering the neoepitope via anadenoviral vector developed by an affiliate entity to induce IgG1 in-vivo production and ADCC activity by our High Affinity NK Cell (haNK); (4) a diverselibrary of human antibodies from which to interrogate and extract an antibody matching the neoepitope; and (5) an aNK and haNK cell potentially capable ofbeing produced as a scalable cell-based “off-the-shelf” therapy without the need for patient compatibility matching. We expect to regularly add newlydiscovered neoepitopes from our discovery engine, and we believe the thousands of newly discovered antigens selectively expressed on the cancer cells andnot on the essential normal tissue will provide us with the ability to create new and targeted libraries of antibodies to be potentially delivered as living drugsfor metastatic cancer cells and cancer stem cells.We retain exclusive worldwide rights to clinical and research data, intellectual property and know-how developed with our aNK cells, as well as whatwe believe is the only clinical grade master cell bank of aNK cells in existence.87Since our inception in 2002, we have devoted substantially all of our resources to the discovery and development of our product candidates,including conducting clinical trials, and funding general and administrative support for these operations. As of the date of this filing, the efficacy criterion ofour phase II (two-stage) Merkel cell carcinoma (MCC) study has been met. A study patient with advanced MCC, refractory to multiple prior therapiesincluding checkpoint blockade demonstrated an impressive response, with more than 70% tumor regression maintained beyond the 16-week objective.Moreover, treatment related adverse events in the first three patients treated with a single agent aNK have been limited to grade II or milder, with no serious ordose-limiting adverse events. In addition to this trial being cleared to proceed with recruiting all twenty four study subjects, it was subsequently amended toinclude combination therapy of aNK with the IL-15 superagonist, ALT-803. FDA clearance has been received and the first two patients have been enrolledwith additional patients actively being screened.To date, we have generated minimal revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companiesgranting the right to use our cell lines and intellectual property for non-clinical use. As described below, on June 9, 2015, we spun out these non-exclusivelicense agreements for non-clinical uses to Brink Biologics, Inc. (Brink Biologics) in exchange for all of the issued and outstanding shares of BrinkBiologics, which were subsequently distributed by a dividend to our stockholders. We have not generated any revenue from product sales. We have incurrednet losses in each year since our inception and, as of December 31, 2016, we had an accumulated deficit of approximately $387.1 million. Our net losses wereapproximately $120.8 million, $236.9 million and $6.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. Substantially all of ournet losses resulted from stock-based compensation expense and costs incurred in connection with our research and development programs and from selling,general and administrative costs associated with our operations.As of December 31, 2016, we had 82 employees and currently, we have 88 employees. We expect to continue to incur significant expenses andincreasing operating losses for the foreseeable future, which may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that ourexpenses will increase substantially as we: •continue research and development, including preclinical and clinical development of our existing product candidates; •potentially seek regulatory approval for our product candidates; •seek to discover and develop additional product candidates; •establish a commercialization infrastructure and scale up our manufacturing and distribution capabilities to commercialize any of our productcandidates for which we may obtain regulatory approval; •seek to comply with regulatory standards and laws; •maintain, leverage and expand our intellectual property portfolio; •hire clinical, manufacturing, scientific and other personnel to support our product candidates development and future commercializationefforts; •add operational, financial and management information systems and personnel; and •incur additional legal, accounting and other expenses in operating as a public company.We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain marketing approvalfor one or more of our product candidates, which we do not expect to happen for at least the next several years, if ever. Until such time that we can generatesubstantial revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt financings,government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all, which would have anegative impact on our financial condition and could force us to delay, limit, reduce or terminate our research and development programs orcommercialization efforts. Failure to receive additional funding could cause us to cease operations, in part or in full.Collaboration AgreementsWe anticipate that strategic collaborations will become an integral part of our operations, providing opportunities to leverage our partners’ expertiseand capabilities to further expand the potential of our technologies and product candidates. We believe we are well positioned to become a leader in cell-based immunotherapy due to our broad and vertically integrated platform and through complementary strategic partnerships.88Altor Bio Science Corporation. In August 2016, we entered into an exclusive Co-Development Agreement (the Co-Development Agreement) withAltor Bio Science Corporation (Altor). Under the Co-Development Agreement, we agreed with Altor to exclusively collaborate on the development oftherapeutic applications combining the Company’s proprietary natural killer cells with Altor's ALT-801 and/or ALT-803 products with respect to certaintechnologies and intellectual property rights as may be agreed between the parties for the purpose of jointly developing therapeutic applications of certaineffector cell lines.We will be the lead developer for each product developed by the parties pursuant to the Co-Development Agreement unless otherwise agreed to undera given project plan. Under the terms of the Co-Development Agreement, both parties will grant a co-exclusive, royalty free, fully paid-up, worldwidelicense, with the right to sublicense (only to a third-party contractor assisting with research and development activities under this Co-DevelopmentAgreement and subject to prior consent, not to be unreasonably withheld), under the intellectual property (IP), including the parties interest in the joint IP,solely to conduct any development activities agreed to by the steering committee as set forth in any development plan. Unless otherwise mutually agreed bythe parties in the development plan for a project, we shall be responsible for all costs and expenses incurred by either party related to conducting clinicaltrials and other activities under each development program, including costs associated with patient enrollment, materials and supplies, third-party staffingand regulatory filings.Each company will own an undivided interest in and to all rights, title and interest in and to the joint product rights. The Co-Development Agreementexpires upon the fifth anniversary of the effective date. There was no joint research activity under the Co-Development Agreement during the year endedDecember 31, 2016.Sorrento Therapeutics. In December 2014, we entered into a global/exclusive collaboration with Sorrento Therapeutics, Inc., or Sorrento, to jointlydevelop taNK product candidates as may be agreed between the parties. This transaction allows us to leverage Sorrento’s proprietary G-MAB technologyplatform, one of the largest fully human antibody libraries in the world, to source CARs for our taNK product candidates. The economics from each productcandidate will be dependent on the proportion of the development costs that each party contributes. As of the December 31, 2016, the parties have not yetagreed upon any projects under the Joint Development and License Agreement; therefore Sorrento has no rights to use our NK cells or other technologies orintellectual property rights or to begin related research, development or commercialization activities and we are free to pursue, and are actively pursuing,research, development and commercialization activities with antibodies that may bind to various targets, including PDL1, ROR-1, CD33 and CD123.Agreements with Related PartiesIn June 2015, we spun out Brink Biologics, Inc., or Brink Biologics, and Coneksis, Inc., or Coneksis. Our Chairman and CEO has a controllinginterest in Brink Biologics and Coneksis. For a description of each of these transactions see the disclosure under “Spin-Out of Testing and DiagnosticProducts and Services” and “Spin-Out of Veterinary Oncology Rights” below.Our Chairman and CEO, Dr. Soon-Shiong, founded and has a controlling interest in NantWorks, LLC (NantWorks), which is a collection of multiplecompanies in the healthcare and technology space. We have entered into arrangements with certain affiliates of NantWorks described below that, takentogether, we expect will facilitate the development of new genetically modified NK cells for our product pipeline.In September 2016, we entered into a lease agreement with 605 Doug St, LLC, an entity owned by our Chairman and CEO, for approximately 24,250square feet in El Segundo, California, which is to be converted to a research and development laboratory and a Good Manufacturing Practices (GMP)laboratory. The lease runs from July 2016 through July 2023. We have the option to extend the lease for an additional three year term through July 2026. Themonthly rent is $0.1 million with annual increases of 3% beginning in July 2017. For the year ended December 31, 2016, we recorded rent expense of $0.1million, which is reflected in research and development expense on the consolidated statement of operations.We are responsible for costs to build out the laboratory and have incurred costs of approximately $1.8 million as of December 31, 2016, which isreflected in construction in progress on the consolidated balance sheet. Additionally, in order for the facility to meet our research and development and GMPlaboratory specifications, we started to make certain structural changes as part of the conversion to laboratory space. As a result of these changes, we haveconcluded that we are the “deemed owner” of the building (for accounting purposes only) during the construction period. Accordingly, we recorded a non-cash build-to-suit lease asset of $5.1 million, representing our estimate of the fair market value of the building, and a corresponding construction build-to-suitlease liability, which is recorded as a component of other current and non-current liabilities on the consolidated balance sheet as of December 31, 2016.89In August 2016, the Company entered into a Co-Development Agreement with Altor as further described above and under CollaborativeArrangement-Exclusive Co-Development Agreement in Note 6 of the “Notes to Consolidated Financial Statements.” The Company’s Chairman and CEO isalso the Chairman of Altor and holds a greater than 20% ownership interest therein. Through December 31, 2016, the Company has not incurred any costsunder this Co-Development Agreement.In March 2016, NantBioScience, Inc. (NantBioScience), a NantWorks company, and the National Cancer Institute entered into a cooperative researchand development agreement. The agreement covers NantBioScience and its affiliates, including NantKwest. Under the agreement, we will collaborate on thepreclinical and clinical development of proprietary recombinant NK cells and monoclonal antibodies in monotherapy and in combination immunotherapies.We expect to benefit from the preclinical and clinical research conducted during the first year under this agreement and are providing the first year of fundingunder the five-year agreement. In April 2016, we paid $0.6 million to the National Cancer Institute as a prepayment for this first year of funding. Werecognize research and development expense ratably over a 12-month period and recorded $0.5 million for the year ended December 31, 2016.Under the NantWorks shared services agreement executed in November 2015, but effective August 2015, NantWorks provides corporate, general andadministrative, manufacturing strategy, research and development, regulatory and clinical trial strategy and other support services, and the Company ischarged for the services at cost plus reasonable allocations for indirect costs that relate to the employees providing the services. For the years endedDecember 31, 2016 and 2015, the Company recorded $3.0 million and $1.0 million, respectively, to selling, general and administrative, and $2.1 million and$0.3 million, respectively, in research and development expense under this arrangement on the consolidated statement of operations. In June 2016, theCompany amended the existing shared services agreement with NantWorks whereby the Company can provide support services to NantWorks and/or any ofits affiliates. For the year ended December 31, 2016, the Company recorded expense reimbursements of $0.1 million to selling, general and administrativeexpense and $0.2 million to research and development expense. In November 2015, we entered into a facility license agreement with NantWorks, effective in May 2015, for approximately 9,500 square feet of officespace in Culver City, California, which has been converted to a research and development laboratory and a GMP laboratory. The term of the license extendsthrough December 2020. We have the option to extend the license through December 2023. The annual license fee is $0.6 million with annual increases ofthree percent (3%) beginning in January 2017. For the years ended December 31, 2016 and 2015, we recorded rent expense of $0.2 million and $0.2 million,respectively, included in research and development on the consolidated statement of operations.Under the facility license agreement with NantWorks, we were responsible for costs to build out the laboratory and incurred costs of $3.5 million,which are reflected as property, plant and equipment, net. Additionally, in order for the facility to meet our research and development and GMP laboratoryspecifications, we have made structural changes as part of the conversion from office to laboratory space, and as a result, have concluded that we are the“deemed owner” of the building (for accounting purposes only) during the construction period. Upon completion of construction of this building in August2016, we evaluated the de-recognition of the asset and liability under the provisions of ASC 840-40 Leases – Sale-Leaseback Transactions. We determinedthat the lease does not meet the criteria for sale-leaseback accounting treatment, due to the continuing involvement in the project resulting from thesignificant collateral we provided to the landlord in the form of building improvements. As a result, the building is being accounted for as a financingobligation. The underlying assets of $4.3 million will be depreciated over the building’s estimated useful life, which is generally 39 years. At the conclusionof the license term, we will de-recognize both the net book values of the asset and financing obligation.In June 2015, we entered into an agreement with NantOmics, LLC, or NantOmics, to obtain genomic sequencing and proteomic analysis services, aswell as related data management and bioinformatics services, exclusively from NantOmics. We will have rights to use the data and results generated fromNantOmics’ services in connection with the performance of the particular oncology trial with respect to which the services were performed, but NantOmicswill own the data and results, as well as any other intellectual property it creates in performing these services for us. We are obligated to pay NantOmics afixed, per sample fee, determined based on the type of services being provided. The agreement has an initial term of five years and renews automatically forsuccessive one year periods, unless terminated by us or NantOmics. We and NantOmics have the right to terminate the agreement for convenience on 90 daysprior written notice, or in the event there is a material, uncured breach of the agreement by the other party. For the years ended December 31, 2016 and 2015,under this arrangement we recorded operating expense of $0.2 million and $0.1 million, respectively, to research and development on the consolidatedstatement of operations.90In June 2015, we entered into an agreement with NanoCav, LLC, or NanoCav, a related party, pursuant to which we obtained access to NanoCav’svirus-free cell transfection technologies on a non-exclusive basis. Under the agreement, NanoCav will conduct certain, mutually-agreed feasibility studies, ona fee for service basis, to evaluate the use of its cell transfection technologies with our aNK cells. We may elect to obtain NanoCav’s cell transfectionequipment, and rights to its associated protocols and other intellectual property, for use only for pre-clinical research, or also for use in clinical andcommercial applications. If we choose to qualify the equipment and technologies for GMP use with our products, we are obligated to pay NanoCav an annuallicense fee, which is determined based upon whether we elect to use NanoCav’s technologies for pre-clinical purposes only, or also for clinical andcommercial purposes. In addition, if we use the equipment for clinical and commercial purposes, we are obligated to pay an equipment fee on a cost-plusbasis. We are also obligated to purchase any consumables we require to use with the NanoCav technologies from NanoCav, and to pay for those consumableson a cost-plus basis. We made a feasibility study retainer payment of $45,000. The agreement has an initial term of five years and renews automatically forsuccessive one year periods, unless terminated. We have the right to terminate the agreement for convenience on 90 days prior written notice, and bothNanoCav and we may terminate if there is a material, uncured breach of the agreement by the other party. For the years ended December 31, 2016 and 2015,under this arrangement we recorded operating expense of $0.1 million and $0, respectively, to research and development on the consolidated statement ofoperations.In June 2015, we also entered into a supply agreement with NantCell, Inc., or NantCell, pursuant to which we have the right to purchase NantCell’sproprietary bioreactors, made according to specifications we mutually agree with NantCell, in such quantities as we may require from time to time during theterm of the agreement. We also have the right to purchase reagents and consumables associated with such equipment from NantCell. We made a non-refundable upfront payment to NantCell of $0.5 million, which is creditable against our future equipment purchases under the agreement. We are alsoobligated to pay for any equipment and consumables we purchase from NantCell on a cost-plus basis. The agreement has an initial term of five years andrenews automatically for successive one year periods unless terminated by us or NantCell. We and NantCell have the right to terminate the agreement forconvenience on 90 days prior written notice, or in the event there is a material, uncured breach of the agreement by the other party. We consumed $0.2million of the $0.5 million upfront payment during the year ending December 31, 2016, which is reflected in research and development on the consolidatedstatement of operations.In December 2013, the Company entered into restricted stock purchase agreements with certain officers to sell 7,532,251 shares of the Company’sClass B common stock (Note 10). As consideration for the shares, the officers executed secured promissory notes totaling $1.5 million (the Secured Notes).The Secured Notes accrued interest at 1.64% per annum, and all principal and interest was due and payable on the earlier of (i) the sale of all or substantiallyall of the Company’s stock by the officers and (ii) December 2022. The Secured Notes were collateralized by the underlying Class B common stock. Since theSecured Notes were non-recourse, the restricted stock awards were treated similar to stock options for accounting purposes with the fair value recognizedthrough a charge to compensation expense. The shares of Class B common stock were not considered issued and outstanding in the consolidated financialstatements until the Company received payment against the Secured Notes.In 2013 and 2014, the Company received principal payments under the Secured Notes of $0.2 million and $1.2 million, respectively. Additionally, in2013 and 2014, an officer agreed to offset against his outstanding principal and interest $0.1 million and $23,000, respectively, of amounts the Companyowed to him. Upon receipt of these payments, the Company issued to the officers 1,681,099 and 5,851,152 shares of Class B common stock in 2013 and2014, respectively. As of December 31, 2014, the Secured Notes were settled in full.91Spin-Out of Testing and Diagnostic Products and ServicesOn June 9, 2015, we spun out our business relating to testing and diagnostic products and services to Brink Biologics in exchange for all of the issuedand outstanding shares of Brink Biologics. We subsequently distributed the shares of Brink Biologics by a dividend to our stockholders of record on June 9,2015, on a pro rata basis. Under the spin-out arrangement, we transferred to Brink Biologics all of our existing, revenue-earning, non-exclusive licenseagreements that allow third parties to use our cell lines and intellectual property for non-clinical laboratory testing, and also transferred or licensed to BrinkBiologics our other assets pertaining to testing and diagnostics products and services. Our board of directors determined that our strategic focus is to utilizeour resources to pursue the potential treatment of cancer, infectious diseases and inflammatory diseases, rather than to utilize our resources and intellectualproperty to focus on non-clinical laboratory testing for minimal revenue opportunities as compared to the potential market opportunity that may exist for ourtherapeutic focus. We granted to Brink Biologics worldwide, exclusive licenses, for use only in the field of in vitro and in vivo testing and diagnosticproducts and services and under certain cell lines, trademarks, know-how and patents, including the intellectual property rights licensed to us under ourlicense agreement with Fox Chase Cancer Center. Brink Biologics is restricted in its ability to modify the licensed cell lines, and we will have at least jointownership of any such modifications and the ability to use those modifications outside Brink Biologics’ field. We also have a non-exclusive license to anyresults and data arising from Brink Biologics’ use of our cell lines and intellectual property for our use for internal research purposes and outside of BrinkBiologics’ field. In consideration for the license grants, Brink Biologics is obligated to pay us a low single-digit royalty on amounts received for the sale oflicensed products and services, as well as a low single-digit percentage share of other revenue received by Brink Biologics from the grant of sublicensesunder our rights. For the years ended December 31, 2016 and 2015, we recorded $21,000 and $11,000, respectively, in revenue for royalties. Brink Biologicshas the right to terminate the license agreement for convenience. We have the right to terminate the license agreement if Brink Biologics challenges any ofour patents or the patents licensed to us by Fox Chase Cancer Center. We and Brink Biologics each have the right to terminate the license agreement if theother party is dissolved or is declared bankrupt, or remains in breach of any material obligation following a sixty-day cure period to remedy the breach. Also,as part of the spin-out arrangement, we have agreed to provide certain services to Brink Biologics for a transitional period on a fee-for-service basis. For theyears ended December 31, 2016 and 2015, we recorded service fees from Brink Biologics of $0.1 million and $22,000, respectively, which are recorded inother income on our consolidated statements of operations. We further determined that we have a variable interest in Brink Biologics through our royaltyagreement with Brink Biologics. However, we are not the primary beneficiary, and as such, do not consolidate the entity.Spin-Out of Veterinary Oncology RightsOn June 9, 2015, we spun out our business relating to veterinary oncology to Coneksis in exchange for all of the issued and outstanding shares ofConeksis. We subsequently distributed the shares of Coneksis by a dividend to our stockholders of record on June 9, 2015, on a pro rata basis. In connectionwith the spin-out arrangement, we granted to Coneksis worldwide, exclusive licenses, for use only in the field of veterinary medical research and therapeutics,under certain cell lines, trademarks, know-how and patents, including the intellectual property rights licensed to us under our license agreement with FoxChase Cancer Center. Like Brink Biologics, Coneksis is restricted in its ability to modify the licensed cell lines, and we will have at least joint ownership ofany such modifications and the ability to use those modifications outside Coneksis’ field. We also have a non-exclusive license to any results and dataarising from Coneksis’ use of our cell lines and intellectual property for our use for internal research purposes and outside of Coneksis’ field. In considerationfor the license grants, Coneksis is obligated to pay us a low single-digit royalty on amounts received for the sale of licensed products and services, as well asa low single-digit percentage share of other revenue received by Coneksis from the grant of sublicenses under our rights. Coneksis has the right to terminatethe license agreement for convenience. We have the right to terminate the license agreement if Coneksis challenges any of our patents or the patents licensedto us by Fox Chase Cancer Center. We and Coneksis each have the right to terminate the license agreement if the other party is dissolved or is declaredbankrupt, or remains in breach of any material obligation following a sixty-day cure period to remedy the breach. Finally, as part of the spin-out arrangement,we have agreed to provide certain services to Coneksis for a transitional period on a fee-for-service basis. For the years ended December 31, 2016 and 2015,we recorded $19,000 and $6,000, respectively, for service fees from Coneksis, which are recorded in other income on our consolidated statements ofoperations. We further determined that we have a variable interest in Coneksis through our royalty agreement with Coneksis. However, we are not theprimary beneficiary, and as such, do not consolidate the entity.Inex Bio AcquisitionIn April 2012, we made a strategic decision to enter into a License Agreement, or the Inex License Agreement, with Inex Bio, Inc. or Inex Bio, aRepublic of Korea corporation. Under the Inex License Agreement, we provided Inex Bio with an exclusive license to our technology to be used in productsonly in certain Asian countries. In exchange for the exclusive license, we received a $0.3 million up-front license fee. In addition, we were entitled to receivemilestone payments of up to $0.8 million based upon the completion of certain clinical trials and a 5% royalty on the net sales of applicable products usingour aNK cells. No milestone payments or royalties have ever been due or received under this agreement. 92In May 2012, we acquired 57,000 shares of Inex Bio for $0.2 million, which represented 22.2% of the outstanding shares and 17.4% of the fully-diluted shares of Inex Bio. At that time, Inex Bio had only one other stockholder and one option holder. In February 2015, following Dr. Soon-Shiong and Dr. Henry Ji, one of our former directors, joining us, we determined that reacquiring the rightslicensed in certain Asian countries was of strategic importance to our future potential commercial strategy. Drs. Soon-Shiong and Ji helped facilitate ourreacquisition of these rights through the acquisition of Inex Bio, using their relationships with the other Inex Bio stockholders. Drs. Soon-Shiong and Jifacilitated the acquisition through the formation of Inex Bio Holdings, LLC, or Inex Bio Holdings, which purchased shares of Inex Bio from third partystockholders. Cambridge Equities, LP, an entity of which Dr. Soon-Shiong is the sole member of its general partner, and Eragon Ventures, LLC, an entity ofwhich Dr. Ji was the managing member, each owned fifty percent (50%) of InexBio Holdings. In February and March 2015, InexBio Holdings paid $1.1 million in cash to the third party stockholders to acquire a 67.3% interest in Inex Bio.Following this transaction, we owned a 22.2% interest in Inex Bio, InexBio Holdings owned a 67.3% interest in Inex Bio and the third party stockholdersheld the remainder of the Inex Bio shares. We believed that it was in our best interest for InexBio Holdings to acquire the shares directly from the third partystockholders of Inex Bio because of Dr. Soon-Shiong’s and Dr. Ji’s relationships with the stockholders and our belief that this would be the quickest mannerto effect the acquisition and at the lowest price.On March 30, 2015, we entered into a Stock Purchase Agreement with InexBio Holdings and certain other parties, or the purchase agreement, pursuantto which we acquired all the remaining outstanding shares of Inex Bio not previously owned by us for cash consideration of $8.0 million and the issuance ofa warrant to purchase 3,202,593 shares of our Class A common stock at an exercise price of $2.00 per share. We paid (1) $1.5 million in cash and warrants topurchase 593,072 shares of our Class A common stock valued at approximately $5.2 million to the third party stockholders; and (2) $6.5 million of cash andwarrants to purchase 2,609,520 shares of our Class A common stock valued at $22.7 million to Inex Bio Holdings. The purpose of providing the warrants wasprimarily to avoid having to use additional cash consideration for the acquisition. In addition, the subsequent exercise of the warrants by InexBio Holdingsand other former shareholders of Inex Bio provided us with additional cash to fund our operations. Subsequent to the closing of the transaction, InexBioHoldings exercised the warrant we issued in connection with the transaction for 2,609,520 shares of our common stock for aggregate cash consideration to usof $5.2 million. During the second quarter of 2015, due to the price at which our common stock sold in a series of private placement transactions, we retroactivelyreassessed the estimated fair value per share of our common stock for financial reporting purposes. As a result of our reassessment, we determined that, solelyfor financial reporting purposes, the fair value of our common stock was higher than the fair market values determined in good faith by our board of directorsfor each of the option grant dates from and after January 2015. The exercise price of $2.00 per share for the warrants issued to InexBio Holdings in March2015 was based upon the fair market value determined in good faith by our board of directors. As a result of the retroactive reassessment in the second quarterof 2015, the issuance of the warrants resulted in compensation expense to Dr. Soon-Shiong and to Dr. Ji of $22.7 million.Components of our Results of OperationsRevenueTo date, we have derived substantially all of our revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnologycompanies granting them the right to use our cell lines and intellectual property for non-clinical use. These agreements generally include upfront fees andannual research license fees for such use, as well as commercial license fees for sales of our licensee’s products developed or manufactured using ourintellectual property and cell lines. Our license agreements may also include milestone payments, although to date, we have not generated any revenue frommilestone payments. We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or we have provided the service, thefees are fixed or determinable, and collectability is reasonably assured. We expect our revenue from non-clinical license agreements to decrease to a nominalamount in the future as we have transferred virtually all of our revenue-generating license agreements to Brink Biologics in the spin-out transaction describedabove. In the future, we may generate revenue from license agreements entered into for therapeutic uses. To date, we have not generated any revenue fromproduct sales. If we fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval for them, we maynever be able to generate substantial future revenue.Operating ExpensesWe classify our operating expenses into research and development and selling, general and administrative expenses. Personnel costs includingsalaries, benefits, bonuses and specifically stock-based compensation expense comprise a significant component of our research and development andselling, general and administrative expense categories. We allocate expenses associated with our facilities and information technology costs between thesetwo categories based on the nature of each cost.93Research and DevelopmentResearch and development expense consists of expenses incurred while performing research and development activities to discover and develop ourproduct candidates. This includes conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatoryfilings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expense primarilyconsists of: •clinical trial and regulatory-related costs; •expenses incurred under agreements with investigative sites and consultants that conduct our clinical trials; •manufacturing and testing costs and related supplies and materials; •employee-related expenses, including salaries, benefits, travel and stock-based compensation; and •facility expenses dedicated to research and development.We typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs byproduct candidate or development program, but we do not allocate personnel costs, other internal costs or external consultant costs to specific productcandidates or development programs.Substantially all of our research and development expenses to date have been incurred in connection with our product candidates. We expect ourresearch and development expenses to increase significantly for the foreseeable future as we advance an increased number of our product candidates throughclinical development, including the conduct of our planned clinical trials. The process of conducting clinical trials necessary to obtain regulatory approval iscostly and time consuming. The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature,timing or costs required to complete the remaining development of any product candidates. This is due to the numerous risks and uncertainties associatedwith the development of product candidates.The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following: •per patient trial costs; •the number of sites included in the clinical trials; •the countries in which the clinical trials are conducted; •the length of time required to enroll eligible patients; •the number of patients that participate in the clinical trials; •the number of doses that patients receive; •the cost of comparative agents used in clinical trials; •the drop-out or discontinuation rates of patients; •potential additional safety monitoring or other studies requested by regulatory agencies; •the duration of patient follow-up; and •the efficacy and safety profile of the product candidate.We do not expect any of our product candidates to be commercially available for at least the next several years, if ever.Selling, General and AdministrativeSelling, general and administrative expense consists primarily of salaries and personnel-related costs, including employee benefits and any stock-based compensation, for employees performing functions other than research and development. This includes personnel in executive, finance, humanresources and administrative support functions. Other selling, general and administrative expenses include facility-related costs not otherwise allocated toresearch and development expense, professional fees for auditing, tax and legal services, advertising costs, expenses associated with obtaining andmaintaining patents, consulting costs, royalties and licensing costs, and costs of our information systems.94We expect that our selling, general and administrative expenses will increase for the foreseeable future as we expand operations, internalize themanufacturing of our product candidates (including costs related to building out a state-of-the-art manufacturing facility, as well as hiring additionalemployees to support our manufacturing and processing department), and operate as a public reporting company (including increased fees for outsideconsultants, lawyers and accountants, as well as increased directors’ and officers’ liability insurance premiums). We have incurred and expect that we willcontinue to incur in the future additional costs associated with operating as a public company, including costs to comply with stock exchange listing andSEC requirements, corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public companies.Additionally, if and when we believe that a regulatory approval of a product candidate appears likely, we expect to incur significant increases in our selling,general and administrative expenses relating to the sales and marketing of the approved product candidate.Other Income (Expense)Other income (expense) consists primarily of income from our investments in marketable securities, non-cash costs related to fair value adjustments toour derivative warrant liability, interest expense, and foreign currency transaction expense. In 2010, we issued, in conjunction with a termination and release agreement, a warrant to purchase 114,822 shares of Class A common stock. Weaccounted for the warrant as a derivative liability, which was adjusted to fair value each reporting period. The warrant was exercised in April 2015 and thederivative liability was reclassified to additional paid-in capital.Income TaxIncome tax expense consists of U.S. federal and state income taxes. To date, we have not been required to pay U.S. federal income taxes because of ourcurrent and accumulated net operating losses. Our income tax expense to date relates to income taxes in the States of California and Massachusetts. Our taxbenefit relates to the amortization of deferred tax liabilities at our Korean subsidiary.Results of OperationsComparison of the Years Ended December 31, 2016, 2015 and 2014 (in thousands) Years Ended December 31, Change 2016 2015 2014 2016 vs. 2015 2015 vs. 2014 Revenue $44 $236 $641 $(192) $(405)Operating expenses: Research and development 29,153 11,434 1,595 17,719 9,839 Selling, general and administrative 95,391 227,678 4,621 (132,287) 223,057 Total operating expenses 124,544 239,112 6,216 (114,568) 232,896 Loss from operations (124,500) (238,876) (5,575) 114,376 (233,301)Other income (expense): Investment income, net 3,097 2,988 20 109 2,968 Change in fair value of warrant liability — (1,366) (158) 1,366 (1,208)Interest expense (66) — (471) (66) 471 Other income 88 77 — 11 77 Total other income (expense) 3,119 1,699 (609) 1,420 2,308 Loss before income taxes (121,381) (237,177) (6,184) 115,796 (230,993)Income tax (benefit) expense (572) (301) 1 (271) (302)Net loss $(120,809) $(236,876) $(6,185) $116,067 $(230,691) RevenueRevenue decreased $0.2 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease wasprimarily attributable to the transfer to Brink Biologics in June 2015 of the majority of our then-existing revenue-earning, non-exclusive license agreementsthat allow third parties to use our cell line and intellectual property for non-clinical laboratory testing as discussed above under the heading “Spin-Out ofTesting and Diagnostic Products and Services.” As a result of this spin-out, we will no longer receive revenue from these agreements.95Revenue decreased $0.4 million during the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decrease wasattributable to earning $0.2 million in commercial license fees associated with one of our licensees’ first commercial sale of a product developed using ourintellectual property and cell lines in 2014 that did not re-occur in 2015. Additionally, $0.2 million of the decrease was attributable to the transfer to BrinkBiologics at the beginning of June 2015 of all of our then-existing, revenue-earning, non-exclusive license agreements that allow third parties to use our cellline and intellectual property for non-clinical laboratory testing.Research and DevelopmentResearch and development expense increased $17.7 million during the year ended December 31, 2016 as compared to the year ended December 31,2015. The increase was primarily attributable to a $7.7 million increase in compensation and related expenses driven by increased staff, and fees for servicesrendered under our shared services agreement with NantWorks, $4.1 million in laboratory, preclinical, and clinical trial expenses, $2.8 million for laboratoryand manufacturing facilities and depreciation expense, $2.3 million of clinical and regulatory consultant costs, and $1.2 million for increased amortizationon the technology license acquired on March 30, 2015 in connection with our acquisition of the remaining capital stock of Inex Bio, partially offset by adecrease of $0.4 million in stock compensation expense. We expect our research and development expenses to increase significantly for the foreseeablefuture as we advance an increased number of our product candidates through clinical development and conduct our planned clinical trials.Research and development expense increased $9.8 million during the year ended December 31, 2015 as compared to the year ended December 31,2014. The increase was primarily attributable to $2.5 million in laboratory and clinical trial expenses, $1.7 million in compensation expense related toincreased staff, consultant costs, and shared services, $1.6 million for new laboratory and manufacturing facility expenses, $1.5 million payment for initiallicense fees under a license agreement, $1.3 million in amortization of intangible assets from the Inex Bio acquisition, and $1.1 million for stockcompensation expense related to consultants and an increase in staffing.Selling, General and AdministrativeSelling, general and administrative expense decreased $132.3 million during the year ended December 31, 2016 as compared to the year endedDecember 31, 2015. The decrease was primarily attributable to a $137.0 million decrease in stock compensation expense, of which $91.4 million is related toservice and performance based criteria applicable to warrants granted to our Chairman and CEO pursuant to a Common Stock Purchase Warrant Agreement,or the Warrant Agreement. The stock compensation expense related to the Warrant Agreement includes a $109.4 million reduction of expense related to theachievement of performance milestones, which triggered the vesting of 8,331,750 warrant shares in 2015 versus 370,300 warrant shares in 2016, partiallyoffset by an increase of $10.4 million related to two other performance milestones that were deemed probable of achievement in 2016 and a $7.6 millionincrease related to service-based vesting for a full year in 2016 versus nine months in 2015. In addition to the impact of the Warrant Agreement, the decreasein stock compensation included $22.7 million related to grants to Dr. Soon-Shiong and a former director for their assistance in connection with the assetpurchase of Inex Bio in 2015, $20.0 million decrease related to the stock options and restricted stock units, or RSUs, granted in 2015 to Dr. Soon-Shiong andto Dr. Simon, our President and Chief Administrative Officer (CAO), and $2.9 million decrease related to stock options and RSUs awarded to employees andnon-employees. We expect our stock based compensation expense included in selling, general, and administrative expense to decrease significantly for theforeseeable future.The decrease in selling, general and administrative expense was also attributable to a $5.4 million decrease in personnel costs related to cashconsideration paid to our Chairman and CEO and a former director in association with the acquisition of Inex Bio in 2015. These aforementioned reductionswere offset by increases of $4.4 million in professional and consulting fees for accounting and compliance related services in connection with operating as apublic company, $4.1 million in compensation expense related to increased staff, and fees for services under our shared services agreement with NantWorks,$0.7 million for investment management fees for twelve months in 2016 versus one month in 2015, $0.7 million for contributions made in 2016, and $0.4million for increased travel.96Selling, general and administrative expense increased $223.1 million during the year ended December 31, 2015 as compared to the year endedDecember 31, 2014. The increase was primarily attributable to $209.3 million in stock compensation expense, of which $141.9 million is related to serviceand performance based criteria applicable to warrants granted to our Chairman and CEO pursuant to the Warrant Agreement. The stock compensationexpense related to the Warrant Agreement includes $114.5 million for the achievement of a financing transaction with a strategic partner, which triggered thevesting of 8,331,750 warrant shares in the second quarter of 2015, $22.9 million related to service-based vesting and $4.5 million related to a performancemilestone that was deemed probable of achievement in 2015. In addition to the impact of the Warrant Agreement, the increase in stock compensationincluded $38.2 million related to stock options and RSUs, also granted to our Dr. Soon-Shiong and to Dr. Simon, our President and CAO, $22.7 millionrelated to grants to Dr. Soon-Shiong and a former director for their assistance in connection with the asset purchase of Inex Bio and $6.5 million related tostock options and RSUs awarded to employees and non-employees. In addition, there were increases of $8.1 million in salaries, personnel-related and shared service costs, of which $5.4 million is cash consideration paidto our CEO and a former director in association with the acquisition of Inex Bio, $1.6 million is related to an increase in staffing, and $1.0 million is relatedto shared service costs. There were also increases in expenses of $2.1 million for legal costs primarily to protect and maintain our patents and a $1.4 millionincrease related to becoming and operating as a public company, including director and office insurance premiums, legal fees and registration fees. There wasalso an increase of $1.2 million for accounting and public relations services as well as $1.0 million in increased travel expenses. These increases werepartially offset by a $0.2 million decrease in royalties and cost of licensing, which was primarily attributable to the transfer of the majority of our existingrevenue-earning, non-exclusive license agreements that allow third parties to use our cell line and intellectual property for non-clinical laboratory testing toBrink Biologics at the beginning of June 2015.Other Income (Expense)Other income increased $1.4 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase wasprimarily attributable to $1.4 million of other expense related to fair value adjustment on our derivative warrant liability recognized in 2015 and a $0.1million increase in net investment income related to our investments in marketable securities.Other income increased $2.3 million during the year ended December 31, 2015 as compared to the year ended December 31, 2014. The increase wasprimarily attributable to a $3.0 million increase in investment income related to a realized gain of $2.5 million from the sale of equity securities and a $0.5million increase in dividend and interest income. There was also a reduction of $0.5 million in interest expense as the Company paid off all its debt in2014. This decrease in expense was partially offset by an increase in the fair value adjustment of $1.2 million related to our derivative warrant liability in2015.Income Tax (Benefit) Expense, NetIncome tax benefit increased by $0.3 million during the year ended December 31, 2016, as compared to the year ended December 31, 2015. Theincrease was attributable to income tax benefits related to losses at InexBio.Income tax benefit increased by $0.3 million during the year ended December 31, 2015, as compared to the year ended December 31, 2014. Theincrease was attributable to income tax benefits related to losses at InexBio.Liquidity and Capital ResourcesSources of LiquidityAs of December 31, 2016, we had cash and cash equivalents of $8.1 million compared to $175.9 million as of December 31, 2015. In addition, as ofDecember 31, 2016, investments in marketable securities were $278.4 million, of which $190.8 million were short-term investments as compared to $173.4million in marketable securities, of which $118.3 million were short-term investments, as of December 31, 2015.97Recent Equity TransactionsIn November 2015, the board of directors approved a share repurchase program allowing our CEO or our Chief Financial Officer, on behalf of theCompany, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50.0 million of our outstanding shares ofcommon stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases will be based on market conditions and otherfactors, including price, regulatory requirements and other corporate considerations. The program does not require the purchase of any minimum number ofshares and may be suspended, modified or discontinued at any time without prior notice. We expect to finance the purchases with existing cashbalances. During the year ended December 31, 2016, an aggregate of 2,157,944 shares were repurchased for $15.8 million before commissions. Allrepurchases were at the then current market price. For additional information regarding the stock repurchase, see Note 10 of our “Notes to ConsolidatedFinancial Statements.” No shares were repurchased under this program during the year ended December 31, 2015.From June 10, 2015 through July 8, 2015, we raised aggregate net proceeds of approximately $78.0 million from the sale of common stock in a seriesof private placement transactions to third parties. On June 18, 2015, we repurchased 249,952 shares of common stock from an employee at $19.20 per sharefor approximately $4.8 million.On July 31, 2015, we closed the initial public offering, or IPO, of 9,531,200 shares of common stock in which we raised proceeds of $221.5 millionafter underwriters’ discounts and commissions and offering expenses. Concurrently with our IPO, we completed a separate private offering of 680,000 sharesof common stock in which we raised net proceeds of $17.0 million.Cash FlowsThe following table sets forth our primary sources and uses of cash for the years ended December 31, 2016, 2015 and 2014 (in thousands): Years Ended December 31, 2016 2015 2014 Cash provided by/(used in): Operating activities $(38,593) $(25,305) $(5,418)Investing activities (113,672) (175,224) (235)Financing activities (15,560) 317,333 64,407 Net increase/(decrease) in cash and cash equivalents $(167,825) $116,804 $58,754 Operating ActivitiesFor the year ended December 31, 2016, our net cash used in operating activities of $38.6 million consisted of a net loss of $120.8 million, primarilyattributable to $73.9 million in stock compensation expense as well as research and development and selling, general and administrative expenses, partiallyoffset by $78.4 million in adjustments for non-cash items and $3.8 million of cash provided by changes in working capital. Adjustments for non-cash itemsprimarily consisted of the $73.9 million in stock-based compensation expense, $3.6 million in depreciation and amortization and $2.2 million inamortization of premiums on marketable securities, reduced by $0.6 million in non-cash interest related to our investment in marketable securities, $0.6million of deferred income tax benefit, and $0.1 million in gain on the sale of marketable securities. Changes in working capital consisted primarily ofincreases in accrued expenses and other liabilities of $2.1 million, $1.8 million of deferred rent, accounts payable of $0.9 million, due to related parties of$0.4 million, and other assets of $0.2 million, partially offset by an increase of $1.5 million in prepaid expenses and other current assets. The increase in cashused in operating activities is primarily due to costs incurred in ongoing preclinical studies and clinical trials, increased personnel, and research anddevelopment activities, as well as increased general and administrative expenses due to added personnel and incremental costs to operate as a publiccompany.For the year ended December 31, 2015, our net cash used in operating activities of $25.3 million consisted of a net loss of $236.9 million, primarilyattributable to $211.2 million in stock compensation expense, $5.4 million cash compensation expense to our CEO and a former director in association withthe acquisition of Inex Bio, as well as increases in legal expenses primarily to protect and maintain our patents and spending on research and developmentefforts. This was partially adjusted by $211.3 million for non-cash items and $0.3 million of cash provided in changes in working capital. Adjustments fornon-cash items primarily consisted of the $211.2 million in stock-based compensation, $1.5 million in depreciation and amortization, and $1.4 millionchange in fair value of our derivative warrant liability, partially offset by $2.5 million gain on sales of marketable securities and $0.3 million in a deferred taxbenefit. Changes in working capital consisted primarily of increases in accounts payable and accrued expenses of $2.6 million, due to related parties of $1.4million and $0.9 million of deferred rent partially offset by an increase of $4.5 million of other current and non-current assets and $0.1 million decrease indeferred revenue.98For the year ended December 31, 2014, our net cash used in operating activities of $5.4 million consisted of a net loss of $6.2 million, primarilyattributable to an increase in spending on research and development efforts and selling, general and administrative expenses, and $0.8 million of cash used tofund changes in working capital, partially adjusted by $1.6 million for non-cash items. Changes in working capital consisted primarily of a decrease inaccounts payable and accrued expenses of $0.7 million. Adjustments for non-cash items primarily consisted of $0.8 million of stock-based compensationexpense, $0.4 million of amortization of the debt discount, and a change in fair value of our derivative warrant liability of $0.2 million.Investing ActivitiesFor the year ended December 31, 2016, net cash used in investing activities was $113.7 million, which was primarily attributable to $273.0 million inpurchases of marketable securities as we invested the remainder of our excess cash and reinvested proceeds throughout 2016 as securities matured that werenot needed for operating activities, and $6.6 million in purchases of property and equipment mainly related to our laboratory and GMP build out in CulverCity, California, and equipment purchases for the San Diego, California facility, partially offset by $165.9 million in sales or maturities of marketablesecurities.For the year ended December 31, 2015, net cash used in investing activities was $175.2 million, which was primarily attributable to $198.1 million ofpurchases of marketable securities, $2.2 million purchase of property, plant and equipment, primarily related to our laboratory and GMP build outs and a $1.8million purchase of the remaining equity interest from unrelated third parties in Inex Bio. This was partially offset by $26.9 million in sales of equityinvestments.For the year ended December 31, 2014, net cash used in investing activities was $0.2 million, which was attributable to the purchase of property andequipment.Financing ActivitiesFor the year ended December 31, 2016, net cash used in financing activities was $15.6 million, which consisted of $15.8 million used for stockrepurchases and $1.1 million in net share settlement of option exercises and vesting of RSUs for payment of employee payroll taxes, partially offset by $1.4million in proceeds from the exercise of stock options and warrants.For the year ended December 31, 2015, net cash provided by financing activities was $317.3 million, which consisted mainly of $316.5 million in netproceeds from our equity offerings, consisting of $221.5 million from our IPO, $78.0 million from a pre-IPO stock issuance, and $17.0 million from a privatestock placement concurrent with the IPO. Additionally, $7.3 million in cash was provided from the exercise of warrants ($5.2 million of which were issued inconjunction with the acquisition of Inex Bio), and $0.9 million from the exercise of stock options. This was partially offset by a $4.8 million payment torepurchase shares of our common stock from an employee and $2.4 million of payroll taxes related to net share settlement in the vesting of RSUs. For the year ended December 31, 2014, net cash provided by financing activities was $64.4 million and consisted of $63.1 million of net proceedsfrom our debt and equity offerings, $1.2 million in payments received for prior issuance of Class B common stock and $0.2 million from the exercise of stockoptions, partially offset by $0.1 million related to payments on the notes payable.Future Funding RequirementsTo date, we have generated minimal revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companiesgranting the right to use our cell lines and intellectual property for non-clinical use for laboratory testing that were spun out to Brink Biologics on June 9,2015. We have not generated any revenue from product sales. We do not expect to generate significant revenue unless and until we obtain regulatoryapproval of and commercialize any of our product candidates and we do not know when, or if, this will occur. In addition, we expect our expenses tosignificantly increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of,and seek regulatory approval for, our product candidates. Moreover, since the completion of our IPO in July 2015, we have incurred and expect that we willcontinue to incur in the future additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of ourproduct candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipatethat we will need substantial additional funding in connection with our continuing operations. We expect that our expenses will increase substantially if andas we: •continue research and development, including preclinical and clinical development of our existing product candidates; •potentially seek regulatory approval for our product candidates; •seek to discover and develop additional product candidates;99 •establish a commercialization infrastructure and scale up our manufacturing and distribution capabilities to commercialize any of our productcandidates for which we may obtain regulatory approval; •seek to comply with regulatory standards and laws; •maintain, leverage and expand our intellectual property portfolio; •hire clinical, manufacturing, scientific and other personnel to support our product candidates development and future commercializationefforts; •add operational, financial and management information systems and personnel; and •incur additional legal, accounting and other expenses in operating as a public company.Based upon our current operating plan, we expect that the net proceeds from our IPO and the concurrent private placement, together with our existingcash and cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements for the foreseeablefuture. We have based this estimate on assumptions that may prove to be incorrect, and we may use our available capital resources sooner than we currentlyexpect. The successful development of any product candidate is highly uncertain. Due to the numerous risks and uncertainties associated with thedevelopment and commercialization of our product candidates, if approved, we are unable to estimate the amounts of increased capital outlays and operatingexpenses associated with completing the development of our product candidates.Our future capital requirements will depend on many factors, including: •the timing of, and the costs involved in, preclinical and clinical development and obtaining any regulatory approvals for our productcandidates; •the costs of manufacturing, distributing and processing our product candidates; •the number and characteristics of any other product candidates we develop or acquire; •our relative responsibility for developing and commercializing taNK product candidates covered by our joint development and licenseagreement with Sorrento Therapeutics; •our ability to establish and maintain strategic collaborations, licensing or other commercialization arrangements and the terms and timing ofsuch arrangements; •the degree and rate of market acceptance of any approved products; •the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments; •the expenses needed to attract and retain skilled personnel; •the costs associated with being a public company; •the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing intellectual property claims, including litigationcosts and the outcome of such litigation; •the timing, receipt and amount of sales of, or royalties on, any approved products; and •any product liability or other lawsuits related to our product candidates.Because all of our product candidates are in the early stages of preclinical and clinical development and the outcome of these efforts is uncertain, wecannot estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates or whether,or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs througha combination of equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements. We do not have any committed externalsource of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of ourstockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a commonstockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such asincurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances orlicensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, researchprograms or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debtfinancings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rightsto develop and market our product candidates that we would otherwise prefer to develop and market ourselves.100Contractual Obligations, Commitments and ContingenciesContingenciesSecurities LitigationIn March 2016, a putative securities class action complaint captioned Sudunagunta v. NantKwest, Inc., et al., No. 16-cv-01947 was filed in federaldistrict court for the Central District of California related to our restatement of certain interim financial statements for the periods ending June 30, 2015 andSeptember 30, 2015 and asserting claims for violation of federal securities laws. Other putative class action complaints containing similar allegations werefiled in federal court and in California Superior Court. The state court actions were removed to federal court and all of the actions have been consolidated. The consolidated complaint names as defendants the Company, certain of its current and former officers and directors, and various investment banks whichserved as underwriters for our IPO. The consolidated complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaints seek unspecified damages, costs and attorneys’ fees,and equitable/injunctive or other relief on behalf of putative classes of persons who purchased or acquired our securities in the IPO and from July 28, 2015through March 11, 2016. Defendants have filed a motion to dismiss the consolidated complaint. Management intends to vigorously defend theseproceedings. At this time, we cannot predict how the Court will rule on the merits of the claims and/or the scope of the potential loss in the event of anadverse outcome. Therefore, based on the information available at present, we cannot reasonably estimate a range of loss for this action. Should weultimately be found liable, our liability could have a material adverse effect on our results of operations for the period or periods in which it is incurred.On September 6, 2016, a shareholder derivative complaint captioned Bushansky v. Soon-Shiong, et al., No. 37-2016-00030867-CU-SL-CTL was filed inCalifornia Superior Court, San Diego County also related to our restatement of certain interim financial statements. The complaint names as defendants ourcurrent and former directors and our outside auditor at the time of the IPO. The complaint alleges the directors breached their fiduciary duties to ourshareholders and wasted corporate assets, and that the outside auditors committed malpractice. No causes of action are asserted against the Company, whichis named solely as a nominal defendant. The complaint seeks, on behalf of the Company, unspecified damages, the return of directors’ salaries forunspecified periods, and injunctive relief. Defendants have demurred to the complaint and we have filed a motion to dismiss the complaint based on acorporate charter provision specifying a Delaware forum.Appeal of USPTO DecisionIn March 2009, we received a final rejection in one of our original patent applications pertaining to certain limited methods of use claims for NK-92from the U.S. Patent and Trademark Office (the USPTO) (but the USPTO allowed claims on all of the other proposed claims, including other methods of use).We filed a Notice of Appeal to the USPTO Board of Appeals and Interferences, or the USPTO Board, and a Decision on Appeal was rendered in the fall of2013. That decision reversed the Examiner’s rejection of the claim to those certain limited methods of use. In December 2013, we brought an action in theU.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as we disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment. On September 24, 2015, we filed a noticeof appeal to the United States Court of Appeals for the Federal Circuit. On February 9, 2017, a three-judge panel of the Federal Circuit heard oral argumentson our appeal and took the matter under submission. LeasesIn September 2016, we entered into a lease agreement with 605 Doug St, LLC, an entity owned by our Chairman and CEO, for approximately 24,250square feet in El Segundo, California, which is to be converted to a research and development laboratory and a GMP laboratory. We are responsible for thecosts to build out the laboratory and have incurred costs of approximately $1.8 million as of December 31, 2016. The lease runs from July 2016 through July2023. We have the option to extend the lease for an additional three-year term through July 2026. The monthly rent is $0.1 million with annual increases of3% beginning in July 2017. We lease a total of approximately 2,550 square feet of office space at 2533 South Coast Highway 101, Cardiff-by-the-Sea, California, for general officeuse, pursuant to an operating lease. We amended this lease to extend the term of the lease through August 31, 2018. Our total monthly lease payment iscurrently $12,800 per month, and increases to $13,200 on September 1, 2017.In March 2016, we entered into a lease agreement for approximately 7,893 square feet of laboratory and office space in Woburn, Massachusetts. Theterm of the lease is 48 months commencing on April 29, 2016. In June 2016, the lease was amended to add 260 square feet, for a total of 8,153 squarefeet. The base rent, including the amendment, is $19,000 per month with a $1 per square foot annual increase on each anniversary date.101In November 2015, we entered into a facility license agreement with NantWorks, effective in May 2015, for approximately 9,500 square feet of officespace in Culver City, California that was converted to a research and development laboratory and a GMP facility. We were responsible for the costs to buildout the laboratory and incurred costs of approximately $3.5 million to complete the conversion. The term of the license extends through December 2020. Wehave the option to extend the license through December 2023. The monthly rent is $47,000 with annual increases of three percent (3%) beginning in January2017.In July 2015, we entered into a lease agreement for approximately 3,067 square feet of office space in Cary, North Carolina. The term of the lease is 26months commencing on July 1, 2015. The monthly base rent is $6,000 with three percent (3%) annual increases on each anniversary date. In June 2015, we entered into a lease agreement for an approximate 44,681 square foot facility in San Diego, California for research and developmentlaboratory, related office and other related uses. The term of the lease extends for seven years commencing on August 1, 2016. The base rent is $0.2 millionper month with 3% annual increase each anniversary date. In July 2015, we entered into a sublease for the building with the then existing lessee for a term ofone year commencing August 1, 2015. There was no fixed rent or operating expenses due by us during the sublease term other than utilities. Our contractual obligations as of December 31, 2016 were as follows (in thousands): Payments Due by Period Total Less than1 Year 1-3Years 3-5Years More than5 Years Contractual Obligations Minimum lease obligations (1) $25,363 $4,076 $8,202 $7,491 $5,594 (1)Represents future minimum lease payments under all our leases as of December 31, 2016. The minimum lease payments above do not include anyrelated common area maintenance charges or real estate taxes.Off-Balance Sheet ArrangementsDuring the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.Critical Accounting Policies, Significant Judgements and Use of EstimatesManagement’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,which are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments thataffect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements,and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical ofwhich are those related to valuation of warrants, stock-based compensation, income taxes, preclinical and clinical trial accruals and valuation of build-to-suitlease assets. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances.Materially different results can occur as circumstances change and additional information becomes known.Revenue Recognition and Deferred RevenueWe derive substantially all of our revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companiesgranting them the right to use our cell lines and intellectual property for non-clinical use. These license agreements generally include nonrefundable upfrontfees and annual research license fees for such use, as well as commercial fees for sales of the licensees’ products developed or manufactured using ourintellectual property and cell lines. Our license agreements also may include milestone payments, although to date, we have not generated any revenue frommilestone payments. We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery of the products and/or services has occurred;(iii) the fees are fixed or determinable; and (iv) collectability is reasonably assured.When entering into an agreement, we first determine whether the agreement includes multiple deliverables and is subject to accounting guidance inAccounting Standards Codification, or ASC, Subtopic 605-25, Multiple-Element Arrangements. If we determine that an agreement includes multipleelements, we determine whether the agreement should be divided into separate units of accounting and how the agreement consideration should be measuredand allocated among the separate units of accounting.102An element qualifies as a separate unit of accounting when the delivered element has standalone value to the customer. Our agreements do not includea general right of return relative to delivered elements. Any delivered elements that do not qualify as separate units of accounting are combined with otherundelivered elements within the agreement as a single unit of accounting. If the agreement constitutes a single combined unit of accounting, we determinethe revenue recognition method for the combined unit of accounting and recognize the revenue over the period from inception through the date the lastdeliverable within the single unit of accounting is delivered.License rights and non-contingent deliverables, such as knowledge transfer, do not have standalone value as they are not sold separately and theycannot be resold and, consequently are considered a single unit of accounting. Therefore, license revenue in the form of upfront fees is deferred andrecognized over the applicable relationship period, which historically has been the estimated period of our substantive performance obligations or the periodthe rights granted are in effect.We recognize a milestone payment when earned if it is substantive and we have no ongoing performance obligations related to the milestone. Amilestone payment is considered substantive if it: (1) is commensurate with either the performance to achieve the milestone or the enhanced value of thedelivered item as a result of a specific outcome resulting from the performance to achieve the milestone; (2) relates solely to past performance; and (3) isreasonable relative to all of the deliverables and payment terms, including other potential milestone consideration, within the agreement.We record any amounts received prior to satisfying the revenue recognition criteria as deferred revenue in the accompanying consolidated balancesheets.Cash and Cash EquivalentsThe Company invests its excess funds in investment grade short- to intermediate-term corporate debt securities, commercial paper, governmentsponsored securities and foreign government bonds and classifies these investments as available-for-sale. The Company considers all highly liquidinvestments purchased with original maturities of three months or less to be cash equivalents and all investments purchased with original maturities of greaterthan three months as marketable securities. The Company has funded a certificate of deposit (CD) as a substitute letter of credit for one of the leased properties. This CD is reported as long-termrestricted cash and is included in other assets on the consolidated balance sheet as the landlord is the beneficiary of the account and the Company is not ableto access the funds during the term of the lease.Fair Value of Financial InstrumentsWe record our available-for-sale investments at fair value. At December 31, 2016, our cash equivalents and investments in marketable securitiestotaled $280.4 million. FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, establishes three levels of inputs that may be used tomeasure fair value (see Note 5 of our “Notes to Consolidated Financial Statements”). Each level of input represents varying degrees of subjectivity anddifficulty involved in determining fair value. Valuations using Level 1 and 2 inputs are generally based on price quotations and other observable inputs inactive markets and do not require significant management judgment or estimation. We utilize a third-party pricing service to assist us in obtaining fair valuepricing for these investments. While pricing for these securities is based on proprietary models, the inputs used are based on observable market information;therefore, we have classified our inputs as Level 1 and Level 2.Until the second quarter of 2015, we had common stock warrants that met the definition of derivative financial instruments and were accounted for asa derivative liability. The fair value of this warrant derivative liability was based on a Monte Carlo simulation model at each reporting period. Estimating thefair value of the underlying shares was highly complex and subjective because our stock was not publicly traded at the time. The derivative warrant liabilitywas settled upon the exercise of the underlying warrants in the second quarter of 2015.Marketable SecuritiesWe utilize a third party investment manager to handle our excess cash with the following objectives in order of priority: preservation of capital,liquidity, prudent diversification to minimize credit and market risk exposure, optimal safekeeping, control and reporting and maximization of totalreturn. Specific guidelines regarding permitted investments, credit quality and diversification are provided to help clarify our intent.103We record impairment charges through the statement of operations when we believe an investment has experienced a decline that is other thantemporary. The determination that a decline is other than temporary is subjective and influenced by many factors. Adverse changes in market conditions orpoor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby requiring recognition ofimpairment losses. When assessing these investments for an other-than-temporary decline in value, we consider such factors as, among other things, thesignificance of the decline in value as compared to the cost basis; underlying factors contributing to a decline in the prices of securities in a single asset class;how long the market value of the security has been less than its cost basis; the security’s relative performance versus its peers, sector or asset class; expectedmarket volatility; the market and economy in general; analyst recommendations and price targets; views of external investment managers; news or financialinformation that has been released specific to the investee; and the outlook for the overall industry in which the investee operates, as applicable. If wedetermine that a security price decline is other than temporary, we record an impairment loss, which could have an adverse impact on our results ofoperations.We have not recorded impairment losses to date on our investments in marketable securities based on our analysis of losses on individual securities ona quarterly basis. Long-Lived AssetsWe recorded long-lived assets that include property, plant, equipment and intangible assets. Furthermore, we are deemed to be the owner, foraccounting purposes, during the construction phase of certain long-lived assets under build-to-suit lease arrangements because of our involvement with theconstruction, our exposure to any potential cost overruns and our other commitments under the arrangements. In these cases, we recognize a build-to-suitlease asset under construction and a corresponding build-to-suit lease liability on the consolidated balance sheets. Upon completion of construction, weevaluate the de-recognition of the asset and liability under the provisions of ASC 840-40 Leases – Sale-Leaseback Transactions.We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows that the assets are expected to generate. If suchassets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds theprojected undiscounted future cash flows arising from the asset using a discount rate determined by management to be commensurate with the risk inherent tothe Company’s current business model.Lease ObligationsWe categorize leases at their inception as either operating or capital leases. On certain of our lease agreements, we may receive rentholidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidaysthat defer the commencement date of required payments. Additionally, incentives we receive for leases categorized as operating leases aretreated as a reduction of our costs over the term of the agreement.We established assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent weare involved in the construction of structural improvements or take construction risk prior to commencement of a lease. Upon occupancy offacilities under build-to-suit leases, we assess whether these arrangements qualify for sales recognition under the sale-leaseback accountingguidance. If we continue to be the deemed owner, the facilities are accounted for as financing leases.Preclinical and Clinical Trial AccrualsAs part of the process of preparing the financial statements, we are required to estimate expenses resulting from our obligations under contracts withvendors, clinical research organizations and consultants. The financial terms of these contracts vary and may result in payment flows that do not match theperiods over which materials or services are provided under such contracts.We estimate clinical trial and research agreement related expenses based on the services performed, pursuant to contracts with research institutions andclinical research organizations and other vendors that conduct clinical trials and research on our behalf. In accruing clinical and research related fees, weestimate the time period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or thelevel of effort varies from the estimate, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of thereceipt of the related services are recorded as prepaid expenses until the services are rendered.104Stock-based CompensationWe account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or ASC 718, whichrequires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fairvalues on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model, orBlack-Scholes model. The value of the award is recognized as expense over the requisite service periods using the straight-line method. See Note 11 of our“Notes to Consolidated Financial Statements” for a complete discussion of our equity compensation programs and the fair value assumptions used todetermine our stock-based compensation expense.We account for stock-based compensation awards and warrants granted to non-employees in accordance with FASB ASC Topic 505-50, Equity-BasedPayments to Non-Employees, or ASC 505-50. Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted aseither the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value ofequity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at whichcommitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance iscomplete.The Financial Accounting Standards Board, or FASB, issued Accounting Standard Update 2016-09, or ASU 2016-09, Stock Compensation (Topic718): Improvements to Employee Share-Based Payment Accounting, as part of its initiative to reduce complexity in accounting standards, and we adoptedthis update in the second quarter of 2016. As a result of the adoption, we made a policy election to record forfeitures of stock-based compensation awards asthey occur rather than estimate the number of awards that we expect to vest. We will reflect excess tax benefits as an operating activity in our statement ofcash flows. We elected to apply this provision of ASU 2016-09 under the modified-retrospective transition method. Consistent with requirements in thestandard, we present the cash paid when we withhold shares for tax-withholding purposes as a financing activity in the statement of cash flows.Stock RepurchasesIn November 2015, the board of directors approved a share repurchase program (2015 Share Repurchase Program) allowing the CEO or CFO, on behalfof the Company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50.0 million of the Company’soutstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases will be based on marketconditions and other factors, including price, regulatory requirements and other corporate considerations. The 2015 Share Repurchase Program does notrequire the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. We expect tofinance the purchases with existing cash balances. As it is the intent for the repurchased shares to be retired, we have elected to account for the sharesrepurchased under the constructive retirement method. For shares repurchased in excess of par, we will allocate the excess value to accumulated deficit.Utilization of Net Operating Loss Carryforwards (NOLs) and Research and Development CreditsAs of December 31, 2016, we had federal, state and foreign income tax NOLs of approximately $100.0 million, $60.0 million and $0.2 million,respectively, which will begin to expire at various dates starting with 2023. As of December 31, 2016 we also had federal and state research and developmenttax credit carryforwards of $1.7 million and $0.7 million, respectively, to offset future income taxes.Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change”(generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change netoperating loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. We have completed a study to determinethe impact of ownership changes on our NOLs and we have recently undergone a significant ownership change. Accordingly, some of our NOLs and researchand development credits have been derecognized.Recent Accounting PronouncementsApplication of New or Revised Accounting Standards – Not Yet AdoptedIn November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This guidance requires restricted cash andrestricted cash equivalents to be included with the cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amountsshown on the consolidated statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periodswithin those fiscal years. Early adoption is permitted. Adoption of ASU 2016-18 is not expected to have a significant impact on our consolidated financialstatements and disclosures.105In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments. This new guidance is intended to present credit losses on available for sale debt securities as an allowance rather than as a write-down. ASU2016-13 is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2019, with earlyadoption permitted for those fiscal years beginning after December 15, 2018. Adoption of ASU 2016-13 is not expected to have a significant impact on ourconsolidated financial statements and disclosures.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to recognize assets and liabilities foroperating leases with lease terms greater than twelve months in the balance sheet. The update also requires improved disclosures to help users of financialstatements better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning afterDecember 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of theadoption of ASU 2016-02 on our financial statements and disclosures.In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of FinancialAssets and Financial Liabilities. This new guidance changes the recognition of the periodic revaluation of financial assets for fair value purposes fromunrealized gains and losses in the equity section of the consolidated balance sheet to realized gains and losses in the consolidated statement of operationsfrom the time of purchase through the final conversion back to cash. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, includinginterim periods within those fiscal years. Early adoption is not permitted. Adoption of ASU 2016-01 is not expected to have a significant impact on ourconsolidated financial statements and disclosures.In May 2014, the FASB issued guidance codified in ASC Topic 606, ASU 2014-09, Revenue Recognition—Revenue from Contracts with Customers,which amends the guidance in former ASC Topic 605, Revenue Recognition, and was initially to be effective beginning January 1, 2017. This guidancerequires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to whichthe entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doingso, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, includingidentifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price and allocating thetransaction price to each separate performance obligation. The new standard allows for two methods of adoption: (1) full retrospective adoption, meaning thestandard is applied to all periods presented, or (2) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognizedas an adjustment to the opening retained earnings balance. While adoption of ASU 2014-09 is not expected to have a significant impact, we are currentlyevaluating the impact of adoption on our consolidated financial statements and disclosures. On August 12, 2015, the FASB issued guidance which defers theeffective date of ASC Topic 606 by one year to January 1, 2018 for public companies.JOBS ActOn April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with newor revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standardswould otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we adoptnew or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Subject to certainconditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain exemptions and reduced reporting requirementsprovided by the JOBS Act, including those relating to (i) providing an auditor’s attestation report on our system of internal control over financial reportingpursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company AccountingOversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and thefinancial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of ourfirst fiscal year in which we have total annual gross revenues of $1 billion or more, (ii) the date on which we are deemed to be a “large accelerated filer” underthe rules of the SEC with at least $700 million of outstanding equity securities held by non-affiliates, (iii) the date on which we have issued more than $1billion in non-convertible debt during the previous three years, or (iv) the last day of our fiscal year following the fifth anniversary of the date of thecompletion of our IPO. 106Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Our exposure to market risk for changes in interest rates relates primarily to interest earned on our cash equivalents and investments. The primaryobjective of our investment activities is to preserve our capital to fund operations. A secondary objective is to maximize income from our investmentswithout assuming significant risk. Our investment policy provides for investments in low-risk, investment-grade debt instruments. As of December 31, 2016,we had $8.1 million in cash and cash equivalents and $278.4 million in our investment portfolio. Our cash equivalents are short term investments withmaturities of 90 days or less at the time of purchase. We maintain cash deposits in FDIC insured financial institutions in excess of federally insuredlimits. However, we believe that we are not exposed to significant credit risk due to the financial position of the depository institutions in which thosedeposits are held. As of December 31, 2016, we did not hold or issue financial instruments for trading purposes. To date, we have not realized any significantloss of principal on our investments.Interest rate risk – cashWith the cash discussed above, our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level ofU.S interest rates. However, we do not believe a sudden change in the interest rates would have a material impact on our financial condition or results ofoperations due to the short-term maturities on our cash equivalents. A hypothetical 100 basis point change in interest rates during any of the periodspresented would not have had a material impact on our consolidated financial statements.Interest rate risk – cash equivalents and investment portfolioWe invest a portion of our cash in a number of diversified fixed and floating rate securities, consisting of marketable debt securities and debt fundsthat are subject to interest rate risk. Changes in the general level of interest rates can affect the fair value of our investment portfolio. If interest rates in thegeneral economy were to rise, our holdings could lose value. At December 31, 2016, a hypothetical increase in interest rates of 100 basis points across theentire yield curve on our holdings would have resulted in fair value decreases of $0.8 million.Foreign currency exchange riskWe contract with clinical research organizations, or CROs, investigational sites and suppliers in foreign countries and we have a bank account inKorea. We are, therefore, subject to fluctuations in foreign currency rates in connection with these agreements. We have not entered into any material foreigncurrency hedging contracts although we may do so in the future. To date we have not incurred any material effects from foreign currency changes on thesecontracts. The effect of a 10% adverse change in exchange rates on foreign currency denominated cash and payables as of December 31, 2016 would not havebeen material. However, fluctuations in currency exchange rates could harm our business in the future.Inflation riskInflation may affect us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our business,financial condition or results of operations for any period presented herein. 107Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firms109 Consolidated Balance Sheets as of December 31, 2016 and 2015111 Consolidated Statements of Operations for the Years ended December 31, 2016, 2015 and 2014112 Consolidated Statements of Comprehensive Loss for the Years ended December 31, 2016, 2015 and 2014113 Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2016, 2015 and 2014114 Consolidated Statements of Cash Flows for the Years ended December 31, 2016, 2015 and 2014115 Notes to Consolidated Financial Statements116 108 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of NantKwest, Inc. We have audited the accompanying consolidated balance sheet of NantKwest, Inc. as of December 31, 2016, and the related consolidated statements ofoperations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NantKwest, Inc. at December 31,2016, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Los Angeles, CaliforniaMarch 15, 2017 109 Report of Independent Registered Public Accounting FirmTo the Board of Directors and StockholdersNantKwest, Inc. We have audited the accompanying consolidated balance sheets of NantKwest, Inc. as of December 31, 2015, and the related consolidated statements ofoperations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the years ended December 31, 2015 and 2014. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements basedon our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinionon the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NantKwest, Inc. as ofDecember 31, 2015, and the results of their operations and their cash flows for each of the years ended December 31, 2015 and 2014, in conformity withaccounting principles generally accepted in the United States of America. /s/ Mayer Hoffman McCann P.C.San Diego, CaliforniaMarch 30, 2016 110NantKwest, Inc.Consolidated Balance Sheets(in thousands, except share and per share amounts) As of December 31, 2016 2015 ASSETS Current assets: Cash and cash equivalents $8,083 $175,908 Due from related parties 1,089 217 Prepaid expenses and other current assets 5,135 3,105 Marketable securities 190,838 118,310 Total current assets 205,145 297,540 Marketable securities, noncurrent 87,571 55,135 Property, plant and equipment, net 18,906 5,523 Intangible assets, net 5,086 7,292 Other assets 788 1,359 Total assets $317,496 $366,849 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $4,045 $2,085 Accrued expenses 5,864 2,575 Due to related parties 1,753 1,352 Other current liabilities 891 136 Total current liabilities 12,553 6,148 Build-to-suit liability, less current portion 5,651 2,468 Financing obligation, less current portion 2,025 — Deferred rent 2,426 845 Deferred revenue 187 228 Deferred tax liability 996 1,165 Other liabilities 240 — Total liabilities 24,078 10,854 Commitments and contingencies (Note 7) Stockholders’ equity Common stock, $0.0001 par value; 500,000,000 shares authorized; 81,983,937 and 81,311,686 issued and outstanding as of December 31, 2016 and 2015, respectively 8 8 Additional paid-in capital 680,757 606,555 Accumulated other comprehensive loss (284) (192)Accumulated deficit (387,063) (250,376)Total stockholders’ equity 293,418 355,995 Total liabilities and stockholders’ equity $317,496 $366,849 The accompanying notes are an integral part of these consolidated financial statements. 111NantKwest, Inc.Consolidated Statements of Operations(in thousands, except share and per share amounts) For the Year Ended December 31, 2016 2015 2014 Revenue $44 $236 $641 Operating expenses: Research and development 29,153 11,434 1,595 Selling, general and administrative 95,391 227,678 4,621 Total operating expenses 124,544 239,112 6,216 Loss from operations (124,500) (238,876) (5,575)Other income (expense): Investment income, net 3,097 2,988 20 Change in fair value of warrant liability — (1,366) (158)Interest expense (66) — (471)Other income, net 88 77 — Total other income (expense) 3,119 1,699 (609)Loss before income taxes (121,381) (237,177) (6,184)Income tax (benefit) expense, net (572) (301) 1 Net loss $(120,809) $(236,876) $(6,185) Net loss per share: Basic and diluted $(1.47) $(3.31) $(0.75) Weighted average number of shares during the period: Basic and diluted 81,979,005 71,519,609 8,246,028 The accompanying notes are an integral part of these consolidated financial statements. 112NantKwest, Inc.Consolidated Statements of Comprehensive Loss(in thousands) For the Year Ended December 31, 2016 2015 2014 Net loss $(120,809) $(236,876) $(6,185)Other comprehensive loss, net of income taxes: Net unrealized gain (loss) on available-for-sale securities 5 (192) — Reclassification of net realized gains on available-for-sale securities included in net loss (97) — — Total other comprehensive loss (92) (192) — Comprehensive loss $(120,901) $(237,068) $(6,185) The accompanying notes are an integral part of these consolidated financial statements. 113NantKwest, Inc.Consolidated Statements of Stockholders’ Equity (Deficit)(in thousands, except share and per share amounts) Series B Series C Accumulated convertible convertible Common Stock Additional Other preferred stock preferred stock Class A Class B Common Paid-in Comprehensive Accumulated Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Income (Loss) Deficit Total Balance at December 31,2013 1,851 $— — $— 1,158,382 $1 1,681,099 $1 — $— $3,631 $— $(7,388) $(3,755)Exercise of Class Bcommon stock — — — — — — 5,851,152 — — — 1,185 — — 1,185 Stock-basedcompensationexpense — — — — — — — — — — 562 — — 562 Issuance of Series Cconvertible preferredstock less issuance costsof $0.8 million — — 5,754,984 — — — — — — — 6,701 — — 6,701 Conversion of debtand payables toClass A common stock — — — — 1,522,799 — — — — — 1,339 — — 1,339 Issuance of restrictedstock — — — — 129,605 — — — — — 227 — — 227 Issuance of stock toplacement agent — — — — 3,087,324 — 763,151 — — — — — — — Issuance of Class Acommon stock lessissuance costs of $0.2million — — — — 30,809,800 $3 — — — — 57,334 — — 57,337 Conversion ofPreferred B and Cconvertible preferred stock andClass B commonstock to Class A commonstock (1,851) — (5,754,984) — 23,553,284 2 (8,295,402) (1) — — (1) — — — Exercise of stockoptions — — — — 833,173 — — — — — 180 — — 180 Net loss — — — — — — — — — — — — (6,185) (6,185)Balance at December 31,2014 — $— — $— 61,094,367 $6 — $— — $— $71,158 $— $(13,573) $57,591 Exercise of stockoptions — — — — 949,396 1 — — 177,703 — 877 — — 878 Stock-basedcompensationexpense — — — — — — — — — — 211,221 — — 211,221 Vesting of restrictedstock units — — — — — — — — 485,150 — — — — — Net share settlementfor RSU vesting andoption exercises — — — — — — — — (96,612) — (2,415) — — (2,415)Warrants issued inconjunction withInex Bio purchase — — — — — — — — — — 5,170 5,170 Exercise of warrants — — — — 4,106,492 — — — 570,609 — 7,348 — — 7,348 Repurchase ofcommon stock — — — — (249,952) — — — — — (4,798) — — (4,798)Reclassification ofwarrant liability dueto exercise — — — — — — — — — — 1,543 — — 1,543 Conversion of ClassA common stock tocommon stock — — — — (65,900,303) (7) — — 65,900,303 7 — — — — Issuance of commonstock less issuancecosts of $28,000 — — — — — — — — 4,063,333 — 77,977 — — 77,977 Spinout of BrinkBiologics, Inc. — — — — — — — — — — — — 73 73 Issuance of stock ininitial publicoffering, net of $16.8 million inoffering costs — — — — — — — — 9,531,200 1 221,474 — — 221,475 Issuance of commonstock in a privateplacement concurrent withinitial publicoffering — — — — — — — — 680,000 — 17,000 — — 17,000 Othercomprehensive loss — — — — — — — — — — — (192) — (192)Net loss — — — — — — — — — — — — (236,876) (236,876)Balance at December 31,2015 — $— — $— — $— — $— 81,311,686 $8 $606,555 $(192) $(250,376) $355,995 Exercise of stockoptions — — — — — — — — 2,398,883 — 1,373 — — 1,373 Stock-basedcompensationexpense — — — — — — — — — — 73,852 — — 73,852 Vesting of restrictedstock units — — — — — — — — 537,982 — — — — — Net share settlementfor RSU vesting andoption exercises — — — — — — — — (154,127) — (1,106) — — (1,106)Exercise of warrants — — — — — — — — 47,457 — 52 — — 52 Change inaccounting principle- ASU 2016-09 forfeitureadjustment — — — — — — — — — — 31 — (31) — Repurchase ofcommon stock — — — — — — — — (2,157,944) — — — (15,847) (15,847)Othercomprehensive loss — — — — — — — — — — — (92) — (92)Net loss — — — — — — — — — — — — (120,809) (120,809)Balance at December 31,2016 — $— — $— — $— — $— 81,983,937 $8 $680,757 $(284) $(387,063) $293,418The accompanying notes are an integral part of these consolidated financial statements.114NantKwest, Inc.Consolidated Statements of Cash Flows(in thousands) For the Year Ended December 31, 2016 2015 2014 Operating activities: Net loss $(120,809) $(236,876) $(6,185)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,607 1,472 36 Amortization of finance issuance costs — — 60 Stock-based compensation expense 73,852 211,221 789 Deferred income tax benefit (575) (302) — Change in value of warrant liability — 1,366 158 Amortization of debt discount — — 377 Forgiveness of note receivable from related party — — 115 Bad debt expense — — 25 Non-cash interest items, net (573) 72 — Loss incurred by Inex Bio — 56 — Loss on disposal of assets 18 — — Amortization of net premiums on marketable securities 2,182 38 — Gain on sales of marketable securities (137) (2,501) — Gain on settlement of note payable — (133) — Changes in operating assets and liabilities: Accounts receivable, prepaid and other current assets (1,458) (3,231) 80 Other assets 153 (1,194) (160)Accounts payable 888 627 (347)Accrued expenses and other liabilities 2,127 1,991 (314)Due to related parties 378 1,352 — Deferred rent and revenue 1,754 737 (52)Net cash used in operating activities (38,593) (25,305) (5,418)Investing activities: Purchases of property, plant and equipment (6,560) (2,241) (235)Purchase of Inex Bio Inc., net of cash acquired — (1,818) — Purchases of marketable securities (272,999) (198,068) — Sales/maturities of marketable securities 165,887 26,903 — Net cash used in investing activities (113,672) (175,224) (235)Financing activities: Proceeds from equity offerings, net of issuance costs — 316,452 63,118 Repayments of notes payable — (132) (53)Proceeds from exercise of Class B common stock — — 1,162 Principal payments of financing obligations (32) — — Proceeds from exercise of stock options 1,373 878 180 Proceeds from exercise of warrants 52 7,348 — Repurchase of common stock (15,847) (4,798) — Net share settlement for RSU vesting and option exercises (1,106) (2,415) — Net cash (used in) provided by financing activities (15,560) 317,333 64,407 Net increase (decrease) in cash and cash equivalents (167,825) 116,804 58,754 Cash and cash equivalents, beginning of period 175,908 59,104 350 Cash and cash equivalents, end of period $8,083 $175,908 $59,104 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $66 $— $52 Income taxes $2 $1 $1 Supplemental disclosure of non-cash investing and financing activities: Conversion of debt and payables into common stock $— $— $1,339 Conversion of debt into Series C preferred stock $— $— $1,000 Issuance of warrants in Inex Bio, Inc. acquisition $— $5,170 $— Change in par value from $0.001 to $0.0001 $— $— $1 Conversion of accounts payable against note receivable related party $— $— $23 Cashless exercise of stock options and warrants $456 $1,543 $— Lease incentive with a related party $849 $— $— Estimated fair value of buildings under build-to-suit leases $5,139 $2,740 $— Property, plant and equipment purchases included in accounts payable and accrued expenses $2,753 $457 $— Unrealized gain (loss) on marketable securities $(102) $(182) $— The accompanying notes are an integral part of these consolidated financial statements.115NantKwest, Inc.Notes to Consolidated Financial Statements 1. Description of Business and Basis of PresentationOrganizationNantKwest, Inc. (the Company) was incorporated in Illinois on October 7, 2002 under the name ZelleRx Corporation. On January 22, 2010, theCompany changed its name to Conkwest, Inc., and on July 10, 2015, the Company changed its name to NantKwest, Inc. In March 2014, the Companyredomesticated from the State of Illinois to the State of Delaware and the Illinois Company ceased to exist. The Company is a pioneering clinical-stageimmunotherapy biotechnology company headquartered in San Diego, California with certain operations in Culver City and El Segundo, California andWoburn, Massachusetts.The Company is focused on harnessing the power of the innate immune system by using the natural killer cell to treat cancer, infectious diseases andinflammatory diseases. A critical aspect of our strategy is to invest significantly in expanding our aNK platform and the development of our productcandidates.The Company holds the exclusive right to commercialize activated natural killer (aNK) cells, a commercially viable natural killer cell-line, and avariety of genetically modified derivatives capable of killing cancer and virally infected cells. The Company owns corresponding U.S. and foreigncomposition and methods-of-use patents and applications covering the clinical use of aNK cells as a therapeutic to treat a spectrum of clinical conditions.The Company also licensed exclusive commercial rights to a portfolio of CD16 bearing aNK cells along with the corresponding U.S. and foreigncomposition and methods-of-use patents and applications covering the non-clinical use in laboratory testing of monoclonal antibodies, as well as clinical useas a therapeutic to treat cancers in combination with antibody products. The Company has licensed or sub-licensed its cell lines and intellectual property tonumerous pharmaceutical and biotechnology companies for such non-clinical uses.The Company retains exclusive worldwide rights to clinical and research data, intellectual property and know-how developed with the Company’saNK cells, as well as the only clinical grade master cell bank.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Inex Bio, Inc., and have been preparedin accordance with accounting principles generally accepted in the United States of America (GAAP). All intercompany amounts have been eliminated.The Company applies the variable interest model under Accounting Standards Codification (ASC) Topic 810, Consolidation, to any entity in whichthe Company holds an equity investment or to which the Company has the power to direct the entity's most significant economic activities and the ability toparticipate in the entity's economics. If the entity is within the scope of the model, and meets the definition of a variable interest entity (VIE), the Companyconsiders whether it must consolidate the VIE or provide additional disclosures regarding the Company's involvement with the VIE. If the Companydetermines that it is the primary beneficiary of the VIE, the Company will consolidate the VIE. This analysis is performed at the initial investment in theentity or upon any reconsideration event. Domicile ChangeIn March 2014, the Company entered into a definitive merger and share exchange agreement pursuant to which the Company redomesticated from theState of Illinois to the State of Delaware and the Illinois Company ceased to exist (the Redomestication). In connection with the Redomestication, the holdersof Class A and Class B common stock received one share of Class A and Class B common stock of the Delaware Company, respectively, in exchange forfifteen shares of the Illinois Company. The holders of Series B preferred stock received one share of Series B preferred stock of the Delaware Company inexchange for one share of the Illinois Company. The holders of any options, warrants or other securities are subject to adjustment based on the ratio of 1 for15. All share numbers and per share prices in the accompanying consolidated financial statements have been adjusted to reflect the 1 for 15 exchange.116Initial Public OfferingIn July 2015, the Company completed an initial public offering (IPO) of its common stock. In connection with its IPO, the Company issued and sold9,531,200 shares of its common stock, at a price to the public of $25 per share. The Company’s shares of common stock began trading on the NASDAQGlobal Market on July 28, 2015. As a result of the IPO, the Company received approximately $221.5 million in net proceeds, after deducting underwritingdiscounts, commissions and offering expenses of $16.8 million.LiquidityAs of December 31, 2016, the Company had an accumulated deficit of approximately $387.1 million. The Company also had negative cash flow fromoperations of approximately $38.6 million during the year ended December 31, 2016. The Company expects that it will likely need additional capital tofurther fund development of, and seek regulatory approvals for, its product candidates, and begin to commercialize any approved products.The Company is currently focused primarily on the development of immunotherapeutic treatments for cancers and debilitating viral infections usingtargeted cancer killing cell lines, and believes such activities will result in the Company’s continued incurrence of significant research and development andother expenses related to those programs. If the clinical trials for any of the Company’s product candidates fail or produce unsuccessful results and thoseproduct candidates do not gain regulatory approval, or if any of the Company’s product candidates, if approved, fails to achieve market acceptance, theCompany may never become profitable. Even if the Company achieves profitability in the future, it may not be able to sustain profitability in subsequentperiods. The Company intends to cover its future operating expenses through cash and cash equivalents, marketable securities, and through a combination ofequity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategicalliances and licensing arrangements. Additional financing may not be available to the Company when needed and, if available, financing may not beobtained on terms favorable to the Company or its stockholders.While the Company expects its existing cash and cash equivalents and marketable securities will enable it to fund operations and capital expenditurerequirements for at least the next twelve months, it may not have sufficient funds to reach commercialization. Failure to obtain adequate financing whenneeded may require the Company to delay, reduce, limit or terminate some or all of its development programs or future commercialization efforts or grantrights to develop and market product candidates that the Company might otherwise prefer to develop and market itself, which could adversely affect theCompany’s ability to operate as a going concern. If the Company raises additional funds from the issuance of equity securities, substantial dilution toexisting stockholders may result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cashpayment obligations, as well as covenants and specific financial ratios that may restrict the Company’s ability to operate its business.Forward Stock SplitOn July 10, 2015, the Company effected a 1.8515-for-1 forward stock split of its outstanding common stock. All applicable share data, per shareamounts and related information in the consolidated financial statements and notes thereto have been adjusted retroactively to give effect to the 1.8515-for-1forward stock split.2. Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of Americarequires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On anongoing basis, the Company evaluates its estimates, including those related to the valuation of warrants, stock-based compensation, the valuation allowancefor deferred tax assets, preclinical and clinical trial accruals, and the valuation of build-to-suit lease assets. The Company bases its estimates on historicalexperience and on various other market-specific and relevant assumptions that it believes to be reasonable under the circumstances. Actual results coulddiffer from those estimates.117Risks and UncertaintiesContingenciesThe Company records accruals for loss contingencies to the extent that the Company concludes it is probable that a liability has been incurred and theamount of the related loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings and other mattersthat could cause a change in the potential amount of the liability recorded or of the range of potential losses disclosed.Cash, Cash Equivalents and Marketable SecuritiesThe Company invests its excess funds in investment grade short- to intermediate-term corporate debt securities, commercial paper, governmentsponsored securities and foreign government bonds and classifies these investments as available-for-sale. The Company considers all highly liquidinvestments purchased with original maturities of three months or less to be cash equivalents and all investments purchased with original maturities of greaterthan three months as marketable securities. Marketable securities with original maturities of 12 months or less are classified as short-term and marketablesecurities with original maturities greater than 12 months are classified as long-term. All marketable securities are reported at fair value and any unrealizedgains and losses are reported as a component of accumulated other comprehensive income (loss), net of tax, in the consolidated statement of stockholders’equity (deficit), with the exception of unrealized losses believed to be other-than-temporary, which are recorded within other income (expense) in the currentperiod. Realized gains and losses are included in other income (expense) in the consolidated statements of operations. Realized gains and losses from thesale of the securities and the amounts, net of tax, reclassified out of accumulated other comprehensive income, if any, are determined on a specificidentification basis.The Company periodically evaluates whether declines in fair values of its investments below their book value are other-than-temporary. Thisevaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as the Company’s abilityand intent to hold the investment until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is morelikely than not it will be required to sell any investment before recovery of its amortized cost basis. Factors considered include quoted market prices, recentfinancial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers,other publicly available information that may affect the value of our investments, duration and severity of the decline in value and the Company’s strategyand intentions for holding the investment. There were no other than temporary impairments recorded in 2016 or 2015. The Company had no investments in2014.The Company minimizes its credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of its primary financialinstitutions. While the Company maintains cash deposits in FDIC insured financial institutions in excess of federally insured limits, management believesthe Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. TheCompany has not experienced any losses on such accounts.The Company has funded a certificate of deposit (CD) as a substitute letter of credit for one of the leased properties. This CD is reported as long-termrestricted cash and is included in other assets on the consolidated balance sheet as the landlord is the beneficiary of the account and the Company is not ableto access the funds during the term of the lease.Property and EquipmentProperty and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditures that are directly attributable tothe acquisition of the items. All repairs and maintenance are charged to net loss during the financial period in which they are incurred. Depreciation ofproperty and equipment is calculated using the straight-line method over the estimated useful lives of the assets, as follows: Buildings 39 yearsSoftware 3 yearsLaboratory equipment 5 yearsFurniture & fixtures 5 yearsIT equipment 3 yearsLeasehold improvements The lesser of the lease term or the life of the asset On disposal or impairment of property and equipment, the cost and related accumulated depreciation is removed from the consolidated financialstatements and the net amount, less any proceeds, is included in other income / (loss) in the consolidated statement of operations.118The Company is deemed to be the owner, for accounting purposes, during the construction phase of certain long-lived assets under build-to-suit leasearrangements because of its involvement with the construction, its exposure to any potential cost overruns and its other commitments under thearrangements. In these cases, the Company recognizes a build-to-suit lease asset under construction and a corresponding build-to-suit lease liability on theconsolidated balance sheets. Upon completion of construction, the Company evaluates the de-recognition of the asset and liability under the provisions ofASC 840-40 Leases – Sales-Leaseback Transactions.Intangible AssetsIntangible assets consist of the cost of reacquiring a technology license in the asset purchase of Inex Bio. The Company calculates amortizationexpense for acquired technology licenses using the straight-line method over the estimated useful lives, which is 4 years.PatentsThe Company expenses patent costs, including related legal costs, as incurred and records such costs within general and administrative expenses inthe consolidated statements of operations.ImpairmentsThe Company’s long-lived assets include property, plant and equipment and intangible assets. The Company reviews long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured bycomparison of the carrying amount to the future net cash flows that the assets are expected to generate. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected undiscounted future cash flowsarising from the asset using a discount rate determined by management to be commensurate with the risk inherent to the Company’s current business model.There were no impairment losses recognized during the years ended December 31, 2016, 2015 and 2014.Transactions with Related PartiesAs outlined in Note 8, the Company has various agreements with different related parties. Some are billed and settled in cash monthly. Others arebilled quarterly and settled in cash the following month. Monthly accruals are made for all quarterly billing arrangements.Fair Value of Financial InstrumentsThe accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair valuemeasurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset orliability.The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as wellas assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires theCompany to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.The three tiers are defined as follows: •Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets at the measurementdate. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products doesnot entail a significant degree of judgment. The Company’s Level 1 assets consist of bank deposits and money market funds. •Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace foridentical or similar assets and liabilities. The Company’s Level 2 assets consist of corporate debt securities including commercial paper,government sponsored securities and corporate bonds, as well as foreign municipal securities. •Level 3— Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The Company’s Level 3liability includes a warrant derivative liability.119During the years ended December 31, 2016 and 2015, no transfers were made into or out of the Level 1, 2 or 3 categories. The Companywill continue to review the fair value inputs on a quarterly basis.The Company utilizes a third-party pricing service to assist in obtaining fair value pricing for investments. Inputs are documented in accordance withthe fair value disclosure hierarchy.Preclinical and Clinical Trial AccrualsAs part of the process of preparing the financial statements, the Company is required to estimate expenses resulting from obligations under contractswith vendors, clinical research organizations and consultants. The financial terms of these contracts vary and may result in payment flows that do not matchthe periods over which materials or services are provided under such contracts.The Company estimates clinical trial and research agreement related expenses based on the services performed, pursuant to contracts with researchinstitutions and clinical research organizations and other vendors that conduct clinical trials and research on the Company’s behalf. In accruing clinical andresearch related fees, the Company estimates the time period over which services will be performed and activity expended in each period. If the actual timingof the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third partiesunder these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.Lease ObligationsThe Company categorizes leases at their inception as either operating or capital leases. On certain lease agreements, the Company mayreceive rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis without regard to deferred payment terms,such as rent holidays that defer the commencement date of required payments. Additionally, incentives the Company receives for leasescategorized as operating leases are treated as a reduction of cost over the term of the agreement.The Company establishes assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extentthe Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease. Uponoccupancy of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, the facilities are accounted for as financing leases.Stock RepurchasesIn November 2015, the board of directors approved a share repurchase program (2015 Share Repurchase Program) allowing the CEO or CFO, on behalfof the Company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50.0 million of the Company’soutstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases will be based on marketconditions and other factors, including price, regulatory requirements and other corporate considerations. The 2015 Share Repurchase Program does notrequire the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The Companyexpects to finance the purchases with existing cash balances. As it is the intent for the repurchased shares to be retired, the Company has elected to accountfor the shares repurchased under the constructive retirement method. For shares repurchased in excess of par, the Company will allocate the excess value toaccumulated deficit.Revenue Recognition and Deferred RevenueThe Company derives substantially all of its revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnologycompanies granting them the right to use the Company’s cell lines and intellectual property for non-clinical use. These license agreements generally includenonrefundable upfront fees and annual research license fees for such use, as well as commercial fees for sales of the licensees’ products developed ormanufactured using the Company’s intellectual property and cell lines. The Company’s license agreements also may include milestone payments, althoughto date, the Company has not generated any revenue from milestone payments. The Company recognizes revenue when (i) persuasive evidence of anarrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the fees are fixed or determinable; and (iv) collectability is reasonablyassured.When entering into an arrangement, the Company first determines whether the arrangement includes multiple deliverables and is subject toaccounting guidance in Accounting Standards Codification (ASC) Subtopic 605-25, Multiple-Element Arrangements. If the Company determines that anarrangement includes multiple elements, it determines whether the arrangement should be divided into separate units of accounting and how the arrangementconsideration should be measured and allocated among the separate units of accounting.120An element qualifies as a separate unit of accounting when the delivered element has standalone value to the customer. The Company’s agreements donot include a general right of return relative to delivered elements. Any delivered elements that do not qualify as separate units of accounting are combinedwith other undelivered elements within the arrangement as a single unit of accounting. If the arrangement constitutes a single combined unit of accounting,the Company determines the revenue recognition method for the combined unit of accounting and recognizes the revenue over the period from inceptionthrough the date the last deliverable within the single unit of accounting is delivered.License rights and non-contingent deliverables, such as knowledge transfer, do not have standalone value as they are not sold separately and theycannot be resold and, consequently are considered a single unit of accounting. Therefore, license revenue in the form of upfront payments is deferred andrecognized over the applicable period of the Company’s substantive performance obligations or the period the rights granted are in effect.The Company recognizes a milestone payment when earned if it is substantive and the Company has no ongoing performance obligations related tothe milestone. A milestone payment is considered substantive if it 1) is commensurate with either the Company’s performance to achieve the milestone or theenhanced value of the delivered item as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; 2) relates solely topast performance; and 3) is reasonable relative to all of the deliverables and payment terms, including other potential milestone consideration within thearrangement.The Company records any amounts received prior to satisfying the revenue recognition criteria as deferred revenue in the accompanying consolidatedbalance sheets.Research and Development CostsMajor components of research and development costs include cash compensation, stock-based compensation, depreciation and amortization expenseon research and development property and equipment and intangible assets, costs of preclinical studies, clinical trials and related clinical manufacturing,costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants andother entities that conduct certain research and development activities on the Company’s behalf. Costs incurred in research and development are expensed asincurred.Stock-Based CompensationThe Company accounts for stock-based compensation expense related to stock options granted to employees and members of its board of directors byestimating the fair value of each stock option on the date of grant using the Black-Scholes options-pricing model. For awards subject to service-based vestingconditions, stock-based compensation expense is recognized over the vesting period using the straight-line method. The fair value of restricted stock units isdetermined by the closing market price of the Company’s common stock on the date of grant and is also recognized over the vesting period using thestraight-line method.For performance-based awards to employees (i) the fair value of the award is determined on the grant date, (ii) the Company assesses the probability ofthe individual milestones under the award being achieved, and (iii) the fair value of the shares subject to the milestone is expensed over the service periodcommencing once management believes the performance criteria is probable of being met.The Company also accounts for equity instruments issued to non-employees using a fair value approach under ASC Subtopic 505-50, Equity-BasedPayments to Non-Employees. The Company adjusts the values of the restricted stock units and stock options granted based on the underlying Company stockprice at the end of each quarter. Stock options adjustments are made via the Black-Scholes option-pricing model. The adjusted value of non-employee stock-based compensation is recognized as an expense over the period over which services are received.In the second quarter of 2016, the Company implemented Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Therefore, the Company is accounting for share-basedaward forfeitures only as they occur rather than applying an estimated forfeiture rate.Income TaxesThe Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financialreporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured usingthe tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. TheCompany records valuation allowances to reduce deferred tax assets to the amount the Company believes is more likely than not to be realized.121The Company recognizes uncertain tax positions when the positions will be more likely than not upheld on examination by the taxing authoritiesbased solely upon the technical merits of the positions. The Company recognizes interest and penalties, if any, related to unrecognized income taxuncertainties in income tax expense. The Company did not have any accrued interest or penalties associated with uncertain tax positions as of December 31,2016 and 2015.The Company is subject to U.S. federal income tax, as well as income tax in California and other states. The federal returns for tax years 2013 through2016 remain open to examination; the California returns remain subject to examination for tax years 2012 through 2016. Carryforward attributes that weregenerated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective taxauthority. All other state jurisdictions remain open to examination. No income tax returns are currently under examination by taxing authorities.Comprehensive LossComprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstancesfrom non-owner sources. Comprehensive loss is composed of net loss and other comprehensive loss. The Company's other comprehensive loss consists ofunrealized gains and losses on marketable securities classified as available-for-sale.Basic and Diluted Net Loss per Share of Common StockBasic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Dilutedloss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional shares that wouldhave been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive.The following table details those securities that have been excluded from the computation of potentially dilutive securities: As of December 31, 2016 2015 2014 Outstanding options 6,307,384 8,777,893 5,138,410 Outstanding restricted stock units 814,456 1,129,638 — Outstanding warrants 17,768,314 17,819,616 1,850,937 Total 24,890,154 27,727,147 6,989,347 Amounts in the table above reflect the common stock equivalents of the noted instruments.Segment and Geographic InformationOperating segments are defined as components of an enterprise (business activity from which it earns revenue and incurs expenses) for which discretefinancial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessingperformance. The Company’s chief operating decision maker (CODM) is its Chief Executive Officer (CEO). The Company views its operations and managesits business as a single operating and reporting segment. All assets of the Company were held in the United States as of December 31, 2016 and 2015.Although all operations are based in the United States, the Company generated a portion of its revenue in prior years from customers outside of theUnited States. Information about the Company’s revenue from the different geographic regions for the years ended December 31, 2016, 2015 and 2014 is asfollows (in thousands): Year Ended December 31, 2016 2015 2014 United States $44 $191 $371 Europe — 21 220 Other non-U.S. — 24 50 Total $44 $236 $641 122Recent Accounting PronouncementsApplication of New or Revised Accounting Standards – Not Yet AdoptedIn November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This guidance requires restricted cash andrestricted cash equivalents to be included with the cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amountsshown on the consolidated statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periodswithin those fiscal years. Early adoption is permitted. Adoption of ASU 2016-18 is not expected to have a significant impact on the Company’s consolidatedfinancial statements and disclosures.In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments. This new guidance is intended to present credit losses on available for sale debt securities as an allowance rather than as a write-down. ASU2016-13 is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2019, with earlyadoption permitted for those fiscal years beginning after December 15, 2018. Adoption of ASU 2016-13 is not expected to have a significant impact on theCompany’s consolidated financial statements and disclosures.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to recognize assets and liabilities foroperating leases with lease terms greater than twelve months in the balance sheet. The update also requires improved disclosures to help users of financialstatements better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning afterDecember 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact ofthe adoption of ASU 2016-02 on its financial statements and disclosures.In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of FinancialAssets and Financial Liabilities. This new guidance changes the recognition of the periodic revaluation of financial assets for fair value purposes fromunrealized gains and losses in the equity section of the consolidated balance sheet to realized gains and losses in the consolidated statement of operationsfrom the time of purchase through the final conversion back to cash. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, includinginterim periods within those fiscal years. Early adoption is not permitted. Adoption of ASU 2016-01 is not expected to have a significant impact on theCompany’s consolidated financial statements and disclosures.In May 2014, the FASB issued guidance codified in ASC Topic 606, ASU 2014-09, Revenue Recognition—Revenue from Contracts with Customers,which amends the guidance in former ASC Topic 605, Revenue Recognition, and was initially to be effective beginning January 1, 2017. This guidancerequires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to whichthe entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doingso, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, includingidentifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price and allocating thetransaction price to each separate performance obligation. The new standard allows for two methods of adoption: (1) full retrospective adoption, meaning thestandard is applied to all periods presented, or (2) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognizedas an adjustment to the opening retained earnings balance. While adoption of ASU 2014-09 is not expected to have a significant impact, the Company iscurrently evaluating the impact of the adoption on the Company’s consolidated financial statements and disclosures. On August 12, 2015, the FASB issuedguidance which defers the effective date of ASC Topic 606 by one year to January 1, 2018 for public companies. 1233. Financial Statement DetailsPrepaid expenses and other current assetsAs of December 31, 2016 and 2015, prepaid expenses and other current assets were made up of (in thousands): As of December 31, 2016 2015 Interest receivable - marketable securities $1,484 $911 Prepaid services 1,191 631 Prepaid insurance 531 466 Equipment deposits 482 — Prepaid license fees 462 101 Prepaid rent 360 — Prepaid legal fees 350 350 Tax refund receivable 95 646 Other 180 — $5,135 $3,105 Property, plant and equipment, netAs of December 31, 2016 and 2015, property, plant and equipment was made up of (in thousands): As of December 31, 2016 2015 Construction in progress $6,939 $5,136 Equipment 5,458 241 Building under build-to-suit lease 4,348 — Leasehold improvements 2,367 182 Software 769 6 Furniture & fixtures 203 125 20,084 5,690 Accumulated depreciation (1,178) (167) $18,906 $5,523 Depreciation expense related to property, plant and equipment was $1.0 million, $0.1 million and $36,000 for the years ended December 31, 2016,2015 and 2014, respectively.Building value of $4.3 million under a build-to-suit lease represents the estimated fair market value of the building in Culver City, California,for which the Company is the “deemed owner” for accounting purposes only and related non-normal tenant improvements. See Note 7 sectionFinancing Lease Obligation. Construction in progress as of December 31, 2016 includes the estimated fair value of $ 5.1 million for the Company’s build-to-suit leaserelated to its facility in El Segundo, California, for which the Company is the “deemed owner” for accounting purposes only. See Note 7 sectionBuild-to-suit Lease.Intangible assets, netAs of December 31, 2016 and 2015, intangible assets were made up of (in thousands): As of December 31, 2016 2015 Technology license $9,042 $8,636 Less accumulated amortization (3,956) (1,344) $5,086 $7,292 Intangible valuation and related accumulated amortization were adjusted to correct a net immaterial amount related to the deferred tax liabilityrecorded at acquisition. The deferred tax liability recorded is decreased proportionately as the underlying intangible asset is being amortized.124Amortization expense was $2.6 million, $1.3 million and $0 for the years ended December 31, 2016, 2015 and 2014, respectively. Amortization forthe Company’s technology license is included in research and development expense on the consolidated statement of operations.Future estimated amortization expense related to the Company’s technology license for the next five years and thereafter is as follows (in thousands): Years ending December 31: 2017 $2,260 2018 2,260 2019 566 2020 — 2021 — Thereafter — $5,086 The remaining amortization period for the technology license is 2.25 years.Other assetsAs of December 31, 2016 and 2015, other assets were made up of (in thousands): As of December 31, 2016 2015 Equipment not placed in service $362 $624 Restricted cash 179 — Security deposit 137 344 Software license and implementation costs 110 391 $788 $1,359 Accrued expensesAs of December 31, 2016 and 2015, accrued expenses were made up of (in thousands): As of December 31, 2016 2015 Accrued bonus $1,732 $1,359 Accrued construction costs 1,243 132 Accrued professional and service fees 1,008 367 Accrued compensation 898 348 Accrued preclinical and clinical trial costs 662 — Accrued software license fees 121 — Accrued franchise and property taxes 62 225 Other 138 144 $5,864 $2,575 Other current liabilitiesAs of December 31, 2016 and 2015, other current liabilities were made up of (in thousands): As of December 31, 2016 2015 Build-to-suit lease liability - current portion $281 $131 Financing obligation - current portion 253 — Deferred rent - current portion 197 5 Other 160 — $891 $136125 Investment income, netNet investment income includes interest income from all bank accounts as well as marketable securities, dividend income, net realized gains or losseson sales of investments and the amortization of the premiums and discounts of the investments and is as follows for the years ended December 31, 2016, 2015and 2014 (in thousands). Year Ended December 31, 2016 2015 2014 Interest income $5,168 $312 $20 Investment amortization accretion expense, net (2,182) (38) — Dividend income — 213 — Net realized gains on investments 111 2,501 — $3,097 $2,988 $20 The interest income includes interest from our bank deposits. No impairment losses were recognized on our investments during the years endedDecember 31, 2016, 2015 and 2014.4. Cash Equivalents and Marketable SecuritiesAs of December 31, 2016, all of the Company’s marketable securities are classified as available-for-sale and are scheduled to mature within 4.7years. At December 31, 2016 and 2015, the Company’s cash equivalents and marketable securities are detailed below (in thousands). There were noinvestments at December 31, 2014. December 31, 2016 Amortized Cost UnrealizedGains UnrealizedLosses Fair Value Current: Government sponsored securities $22,252 $21 $(1) $22,272 Corporate debt securities 165,605 40 (76) 165,569 Foreign government bonds 5,004 — (2) 5,002 Subtotal current 192,861 61 (79) 192,843 Noncurrent: Government sponsored securities 17,018 2 (38) 16,982 Corporate debt securities 69,414 71 (290) 69,195 Foreign government bonds 1,405 — (11) 1,394 Subtotal noncurrent 87,837 73 (339) 87,571 Total $280,698 $134 $(418) $280,414 Included in corporate debt securities is $2.0 million of cash equivalents at December 31, 2016. December 31, 2015 Amortized Cost UnrealizedGains UnrealizedLosses Fair Value Current: Commercial paper $29,899 $13 $— $29,912 Corporate debt securities 99,600 2 (109) 99,493 Foreign government bonds 6,951 — (7) 6,944 Subtotal current 136,450 15 (116) 136,349 Noncurrent: Corporate debt securities 51,215 1 (85) 51,131 Foreign government bonds 4,011 — (7) 4,004 Subtotal noncurrent 55,226 1 (92) 55,135 Total $191,676 $16 $(208) $191,484 Included in commercial paper and corporate debt securities are $5.0 million and $13.0 million, respectively, of cash equivalents at December 31,2015.126Available-for-sale investments that had been in an unrealized loss position for less than 12 months and for more than 12 months at December 31, 2016and 2015 are as follows (in thousands): December 31, 2016 Less than 12 months More than 12 months Estimated FairValue Gross UnrealizedLosses Estimated FairValue Gross UnrealizedLosses Government sponsored securities $17,204 $(39) $— $— Corporate debt securities 150,320 (366) — — Foreign government bonds 6,396 (13) — — Total $173,920 $(418) $— $— December 31, 2015 Less than 12 months More than 12 months Estimated FairValue Gross UnrealizedLosses Estimated FairValue Gross UnrealizedLosses Corporate debt securities $141,320 $(194) $— $— Foreign government bonds 10,947 (14) — — Total $152,267 $(208) $— $—At December 31, 2016, 80 of the securities and bonds are in an unrealized loss position. All securities have been in an unrealized loss position for lessthan 12 months. The Company evaluated its securities for other-than-temporary impairment and concluded that the decline in value was primarily caused bycurrent economic and market conditions. The Company does not intend to sell the investments and it is not more likely than not that the Company will berequired to sell the investments before recovery of their amortized cost bases. Therefore, the Company did not recognize any other-than-temporaryimpairment loss during the years ended December 31, 2016 and 2015.The Company recorded realized gains and losses on sales or maturities of available-for-sale securities as follows (in thousands): GrossRealizedGains GrossRealizedLosses Net RealizedGains 2016 $190 $(79) $111 2015 2,501 — 2,501 2014 — — — 5. Fair Value MeasurementsFair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageousmarket for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.127Financial assets and liabilities measured at fair value on a recurring basis are summarized below at December 31, 2016 and 2015 (in thousands): December 31, 2016 Total Level 1 Level 2 Level 3 Assets: Current: Cash and cash equivalents* $2,005 $— $2,005 $— Government sponsored securities 22,272 — 22,272 — Corporate debt securities 163,564 — 163,564 — Foreign government bonds 5,002 — 5,002 — Noncurrent: Government sponsored securities 16,982 — 16,982 — Corporate debt securities 69,195 — 69,195 — Foreign government bonds 1,394 — 1,394 — Total assets measured at fair value $280,414 $— $280,414 $— *This amount excludes $6.1 million in depository institutions that are classified as Level 1 assets. December 31, 2015 Total Level 1 Level 2 Level 3 Assets: Current: Cash and cash equivalents* $18,039 $— $18,039 $— Commercial paper 24,917 — 24,917 — Corporate debt securities 86,450 — 86,450 — Foreign government bonds 6,943 — 6,943 — Noncurrent: Corporate debt securities 51,131 — 51,131 — Foreign government bonds 4,004 — 4,004 — Total assets measured at fair value $191,484 $— $191,484 $— *This amount excludes $157.9 million in depository institutions that are classified as Level 1 assets.Activity for the financial instrument using significant unobservable inputs (Level 3) measured at fair value is presented in the table below (inthousands): WarrantDerivativeLiability Balance December 31, 2013 $19 Adjustment to estimated fair value 158 Balance at December 31, 2014 177 Adjustment to estimated fair value 1,366 Warrant exercised (1,543)Balance at December 31, 2015 $— 6. Collaboration and License AgreementsCollaborative ArrangementA collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two or more parties whoare (i) active participants in the activity, and (ii) exposed to significant risks and rewards dependent on the commercial success of the activity.128Exclusive Co-Development Agreement—In August 2016, the Company entered into an exclusive Co-Development Agreement (the Co-DevelopmentAgreement) with Altor Bio Science Corporation (Altor), a related party (Note 8). Under the Co-Development Agreement, the Company and Altor agreed toexclusively collaborate on the development of therapeutic applications combining the Company’s proprietary natural killer cells with Altor's ALT-801and/or ALT-803 products with respect to certain technologies and intellectual property rights as may be agreed between the parties for the purpose of jointlydeveloping therapeutic applications of certain effector cell lines.The Company will be the lead developer for each product developed by the parties pursuant to the Co-Development Agreement unless otherwiseagreed to under a given project plan. Under the terms of the Co-Development Agreement, both parties grant a co-exclusive, royalty free, fully paid-up,worldwide license, with the right to sublicense (only to a third-party contractor assisting with research and development activities under this Co-Development Agreement and subject to prior consent, not to be unreasonably withheld), under the intellectual property (IP), including the parties interest inthe joint IP, solely to conduct any development activities agreed to by the steering committee as set forth in any development plan. Unless otherwisemutually agreed by the parties in the development plan for a project, the Company shall be responsible for all costs and expenses incurred by either partyrelated to conducting clinical trials and other activities under each development program, including costs associated with patient enrollment, materials andsupplies, third-party staffing and regulatory filings.Altor and the Company each will own an undivided interest in and to all rights, title and interest in and to the joint product rights. The Co-Development Agreement expires upon the fifth anniversary of the effective date. There was no joint research activity under the Co-Development Agreementduring year ended December 31, 2016.Joint Development and License Agreement—In December 2014, the Company entered into a Joint Development and License Agreement (the JointDevelopment and License Agreement) with Sorrento Therapeutics, Inc. (Sorrento). Under the Joint Development and License Agreement, the Company andSorrento agreed to exclusively collaborate on research, development and commercialization with respect to certain technologies and intellectual propertyrights as may be agreed between the parties for the purpose of jointly developing therapeutic applications of certain effector cell lines.To fund the Company’s joint research and development efforts, Sorrento agreed to make research credit payments to the Company of up to$2.0 million in 2015 and 2016, reduced by certain expenses for which the Company is responsible under the agreements. The research credit payments, duein December of each year, will be paid in the form of full-time employee expense credits by Sorrento to work on behalf of the Company and for theCompany’s portion of any development costs and a laboratory credit towards maintaining a laboratory on Sorrento’s premises.For each cell line or product to be developed by the parties pursuant to the Joint Development and License Agreement, one party (the Primary Party),as mutually agreed upon by a designated steering committee comprised of three representatives from each party when a statement of work is agreed to by theparties, will have the right and authority to initiate and control the development, testing, regulatory approval or commercialization of such cell line or jointproduct, including the right to license and sublicense all applicable intellectual property rights (including joint product rights) with respect thereto. ThePrimary Party will also bear all costs associated with the development of the applicable cell line or product unless the other party shares in such costs. Theratio of such split between the parties is conditioned on the stage of development of the cell line or product and each party’s contribution towardsdevelopment costs.Sorrento and the Company each will own an undivided interest in and to all rights, title and interest in and to the joint product rights. The JointDevelopment and License Agreement expires upon the later of three years or completion of the series of collaborative research and development efforts.In connection with the Joint Development and License Agreement, Sorrento entered into a subscription and investment agreement with the Companyunder which the Company sold to Sorrento 4,557,537 shares of the Company’s Class A common stock for gross proceeds of $8.0 million. Subsequently,Sorrento purchased 1,060,789 shares of the Company’s Class A common stock for an additional $2.0 million in gross proceeds.There was no joint research activity under the Joint Development and License Agreement during the years ended December 31, 2016, 2015 and 2014and as a result, no payment was received during the years ended December 31, 2016 and 2015. As of the date hereof, the Company and Sorrento have not yetagreed upon any projects under the Joint Development and License Agreement; therefore, Sorrento has no rights to use the Company’s NK cells or othertechnologies or intellectual property rights or to begin related research, development or commercialization activities and the Company is free to pursue, andis actively pursuing, research, development and commercialization activities with antibodies that may bind to various targets, including PDL1, ROR-1, CD33and CD123.129Royalties and In-licensing AgreementsFounder License Agreement—In 2003, the Company entered into a licensing agreement with a founding shareholder of the Company for theexclusive license to the NK-92 cell line and related know-how for payment of certain royalties related to the sales of licensed products (the Founder LicenseAgreement). In 2009 and 2010, the Founder License Agreement was amended for the sale and assignment of the licensed patents to the Company. Asconsideration for the sale and assignment of the licensed patents and technical information to the Company, the founding shareholder was to receive a one-time cash payment of $0.1 million, which was converted to a non-interest bearing note (the Founder Note) (Note 13). In addition, the Company is obligatedto (i) pay low single digit percentage royalties of net sales of licensed products for therapeutic and diagnostic use; (ii) issue additional shares of commonstock of the Company in conjunction with the closing of a financing of at least $1.0 million after the 2013 Securities Purchase Agreement to ensure thefounder retains no less than a 7% ownership interest of the total outstanding common shares of the Company on a fully diluted basis; (iii) pay the BritishColumbia Cancer Agency a low single digit percentage royalty on net sales on aNK cell-based products, a responsibility assumed by the Company for thefounding shareholder; and (iv) issue a warrant (Founder Warrant) to purchase up to 123,433 additional shares of Class A common stock at a purchase price of$2.44 per share with a 10 year exercise term subject to the completion of five milestones pertaining to granting of a patent, completion of clinical trials andissuance of a commercial biologic license. In 2013, the first milestone, a claim granted for a certain patent application in the United States, was achieved andas a result 37,030 shares underlying the Founder Warrant became exercisable.In March 2014, the Founder License Agreement was amended to (i) provide for payment to the founder of low single digit percentage royalties on netsales of licensed products for therapeutic and diagnostic use and mid-single digit percentage royalties from sublicenses for net sales of licensed products;(ii) exchange warrants held by the founder to purchase up to 156,109 shares of Class A common stock for a fully-vested incentive stock option to purchase upto 740,600 shares of Class A common stock at fair market value on the date of issuance upon the Company closing a private placement of stock or othersecurities of at least $3.0 million (the Mandatory Exchange Financing); and (iii) remove the requirement for the founder to retain not less than a 7%ownership interest of the total outstanding common shares of the Company on a fully diluted basis. Through December 31, 2016, no royalties have beenearned or paid.Fox Chase Cancer Center License Agreement—In 2004 and amended in 2008, the Company entered into an exclusive license agreement with FoxChase Cancer Center (Fox Chase) for the exclusive, worldwide rights to certain patents and know-how pertaining to CD16 receptors bearing NK-92 cell lines.In consideration for this exclusive license, the Company agreed to pay Fox Chase (i) low single-digit percentage royalties on net sales of licensed productsfor therapeutic and diagnostic use; and (ii) mid-twenties percentage royalties on any compensation the Company receives from sublicensees.The Fox Chase license was assigned to Brink Biologics as a part of the Spin-out (Note 9). As a result, the Company recorded no royalty expense forthe year ended December 31, 2016. The Company recorded royalty expense of $0.1 million and $0.2 million for the years ended December 31, 2015 and2014, respectively, related to the Fox Chase Cancer Center License Agreement for the period of time before the Spin-out. Royalty expense is included inselling, general and administrative in the consolidated statements of operations.Rush University Medical Center License Agreement—In 2004, the Company entered into a 12-year licensing agreement with Rush University MedicalCenter for the exclusive rights to license and grant sublicenses of certain intellectual property related to clinical use of NK-92. The Company is required topay low to mid-single digit percentage royalties on net sales depending upon the various fields of studies and other factors. The Company is required to pay aminimum annual royalty of $25,000. The Rush University Medical Center License Agreement also provides for payments in the aggregate amount of $2.5million upon the Company achieving various milestones, including upon (i) the completion of Phase II clinical trial associated with the licensed intellectualproperty; (ii) the approval by the Food and Drug Administration (the FDA) of a new drug application for a licensed product; and (iii) the first year that sales ofthe licensed product equals or exceeds $0.3 million. The Rush University Medical Center License Agreement terminates on the 12th anniversary of the firstpayment of royalties, which occurred in 2006, at which point the license is deemed a perpetual, irrevocable, fully-paid royalty-free, exclusive license, andmay be terminated earlier by either party for material breach.During the years ended December 31, 2016, 2015 and 2014, the Company recorded royalty expense of $25,000, $25,000 and $0.1 million,respectively, related to the Rush University Medical Center License Agreement. Royalty expense is included in selling, general and administrative in theconsolidated statements of operations. No milestones were met during the years ended December 31, 2016, 2015 and 2014.130Chemotherapeutisches Forschungsinstitut Georg-Speyer-Haus (GSH) and DRK-Blutspendedienst Baden-Wurttemberg-Hessen gGmbH (BSD) LicenseAgreement—In August 2015, the Company entered into a license agreement with GSH and BSD under which the Company was granted an exclusive licenseto certain GSH-BSD patents, materials and know-how that specifically targets ErbB2 expressing cancers. In addition, GSH granted the Company an exclusivelicense to certain GSH only technology and materials. In consideration for the licenses, the Company agreed to pay initial and annual licensing fees,regulatory and commercial milestones and low single-digit percentage royalties on net sales of licensed products. The royalty term shall continue in aparticular country until the later of (i) the expiration of the valid patent claims in such country, or (ii) a specified period of time after the first commercial saleof licensed product in such country. The license agreement shall continue until no further payments are due at which time the licenses and rights willcontinue on a non-exclusive, royalty-free basis. The license agreement can be terminated earlier: (i) for material breach by either party after 60 days cureperiod, (ii) if the Company declares bankruptcy or insolvency, (iii) by the Company in its sole discretion upon 60 days prior written notice. The Companypaid and expensed $1.1 million for the initial license fees in 2015 under the license, which was included in research and development expenses in theconsolidated statements of operations for the year ended December 31, 2015. Annual license fees under the agreement begin in 2018.Out-Licensing AgreementIntrexon License Agreement—In February 2010, the Company entered into a 17-year license agreement with Intrexon Corporation (Intrexon) pursuantto which the Company granted to Intrexon a non-exclusive, worldwide, sublicensable license to research and sell products under certain patents relating tomodified NK-92 cells that express Intrexon’s proprietary gene sequences for use as a therapeutic and prophylactic agent in humans in specified therapeuticareas. In consideration for the license agreement, Intrexon paid the Company a one-time fee of $0.4 million, which was recorded in deferred revenue and isamortized over the term of the license agreement. Intrexon will pay the following milestone payments: $0.1 million upon the first IND filing; $0.1 millionupon the commencement of the first Phase II clinical trial; $0.4 million upon the commencement of the first Phase III clinical trial; and $0.5 million upon thefirst commercial sale relating to the licensed products. Intrexon is obligated to pay the Company a low single digit percentage royalty based on net sales ofthe licensed products by Intrexon and a mid-teen percentage royalty based on revenues received by Intrexon in connection with sublicenses of the licensedproducts. No milestone payments were due or received in the years ended December 31, 2016, 2015 and 2014. For the years ended December 31, 2016, 2015and 2014, the Company recorded revenue of $20,000 each year, related to the agreement in the consolidated statements of operations.7. Commitments and ContingenciesContingenciesThe Company records accruals for loss contingencies to the extent that the Company concludes it is probable that a liability has been incurred and theamount of the related loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings and other mattersthat could cause a change in the potential amount of the liability recorded or of the range of potential losses disclosed.Securities LitigationIn March 2016, a putative securities class action complaint captioned Sudunagunta v. NantKwest, Inc., et al., No. 16-cv-01947 was filed in federaldistrict court for the Central District of California related to the Company’s restatement of certain interim financial statements for the periods ended June 30,2015 and September 30, 2015 and asserting claims for violation of federal securities laws. Other putative class action complaints containing similarallegations were filed in federal court and in California Superior Court. The state court actions were removed to federal court and all of the actions have beenconsolidated. The consolidated complaint names as defendants the Company, certain of its current and former officers and directors, and various investmentbanks which served as underwriters for the Company’s IPO. The consolidated complaint alleges violations of Sections 11 and 15 of the Securities Act of1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks unspecifieddamages, costs and attorneys’ fees, and equitable/injunctive or other relief on behalf of putative classes of persons who purchased or acquired the Company’ssecurities in the IPO and from July 28, 2015 through March 11, 2016. Defendants have filed a motion to dismiss the consolidated complaint. Managementintends to vigorously defend these proceedings. At this time, the Company cannot predict how the Court will rule on the merits of the claims and/or the scopeof the potential loss in the event of an adverse outcome. Therefore, based on the information available at present, the Company cannot reasonably estimate arange of loss for this action. Should the Company ultimately be found liable, the liability could have a material adverse effect on the Company’s results ofoperations for the period or periods in which it is incurred.131On September 6, 2016, a shareholder derivative complaint captioned Bushansky v. Soon-Shiong, et al., No. 37-2016-00030867-CU-SL-CTL was filedin California Superior Court, San Diego County also related to the Company’s restatement of certain interim financial statements. The complaint names asdefendants the Company’s current and former directors and the Company’s outside auditor at the time of the IPO. The complaint alleges the directorsbreached their fiduciary duties to the Company’s shareholders and wasted corporate assets, and that the outside auditors committed malpractice. No causes ofaction are asserted against the Company, which is named solely as a nominal defendant. The complaint seeks, on behalf of the Company, unspecifieddamages, the return of directors’ salaries for unspecified periods, and injunctive relief. At this time, the Company cannot predict how the Court will rule onthe merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Defendants have demurred to the complaint and theCompany has filed a motion to dismiss the complaint based on a corporate charter provision specifying a Delaware forum. Should the Company ultimatelybe found liable, the liability could have a material adverse effect on the Company’s results of operations for the period or periods in which it is incurred.Appeal of USPTO DecisionIn March 2009, the Company received a final rejection in one of the Company’s original patent applications pertaining to certain limited methods ofuse claims for NK-92 from the U.S. Patent and Trademark Office (the USPTO) (but the USPTO allowed claims on all of the other proposed claims, includingother methods of use). The Company appealed this decision with the USPTO Board of Appeals and, in the fall of 2013, the Board of Appeals reversed theExaminer’s rejection of the claim to certain limited methods of use with NK-92, but affirmed the Examiner’s rejection of the remaining patent claims. InDecember 2013, the Company brought an action in the U.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as theCompany disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’smotion for summary judgment. On September 24, 2015, the Company filed a notice of appeal to the United States Court of Appeals for the FederalCircuit. On February 9, 2017, a three-judge panel of the Federal Circuit heard oral arguments on our appeal and took the matter under submission. Based onthe information available at present, the Company cannot reasonably estimate a range of loss for this action. Accordingly, no liability associated with thisaction has been accrued. The Company is expensing legal costs associated with defending this litigation as the costs are incurred.Contractual Obligations - LeasesThe Company leases: (i) office space in Cardiff-by-the-Sea, California; (ii) a research and office facility in Woburn, Massachusetts; (iii) office space inCary, North Carolina; (iv) a research and office facility in San Diego, California; (v) research and manufacturing space in Culver City, California from arelated party (Note 8) and; (vi) a research and manufacturing facility in El Segundo, California, also from a related party (Note 8).Build-to-suit LeaseIn September 2016, the Company entered into a lease agreement with 605 Doug St, LLC, a related party (Note 8), for approximately 24,250 square feetin El Segundo, California, which is to be converted to a research and development laboratory and a Good Manufacturing Practices (GMP) laboratory. Thelease runs from July 2016 through July 2023. The Company has the option to extend the lease for an additional three year term through July 2026. Themonthly rent is $0.1 million with annual increases of 3% beginning in July 2017. For the year ended December 31, 2016, the Company recorded rentexpense of $0.1 million, which is reflected in research and development expense on the consolidated statement of operations.The Company is responsible for costs to build out the laboratory and has incurred costs of approximately $1.8 million as of December 31, 2016, whichis reflected in construction in progress on the consolidated balance sheet. Additionally, in order for the facility to meet the Company's research anddevelopment and GMP laboratory specifications, the Company started to make certain structural changes to the facility as part of the conversion tolaboratory space. As a result of these changes, the Company concluded that it is the “deemed owner” of the building (for accounting purposes only) duringthe construction period. Accordingly, the Company recorded a non-cash build-to-suit lease asset of $5.1 million, representing its estimate of the fair marketvalue of the building, and a corresponding construction build-to-suit lease liability, recorded as a component of other current and non-current liabilities onthe consolidated balance sheet as of December 31, 2016.Upon completion of construction of this facility, the Company evaluates the de-recognition of the asset and liability under the provisions of ASC 840-40, Leases - Sale-Leaseback Transactions. However, if the Company does not comply with the provisions needed for sale-leaseback accounting, the leasewill be accounted for as a financing obligation and lease payments will be attributed to (1) a reduction of the principal financing obligation; (2) imputedinterest expense; and (3) land lease expense (which is considered an operating lease and a component of research and development expenses) representing animputed cost to lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over the building's estimated usefullife, which is estimated at 39 years. At the conclusion of the lease term, the Company would de-recognize both the net book values of the asset and financingobligation.132Financing Lease ObligationIn November 2015, the Company entered into a facility license agreement with NantWorks (Note 8) for approximately 9,500 square feet of officespace in Culver City, California, which has been converted to a research and development laboratory and a GMP laboratory. The license was effective in May2015 and extends through December 2020. The Company has the option to extend the license through December 2023. The monthly license fee is $47,000with annual increases of 3% beginning in January 2017. For the years ended December 31, 2016 and 2015, the Company recorded rent expense of $0.2million and $0.2 million, respectively, which is reflected in research and development expense on the consolidated statement of operation.Under the facility license agreement, the Company was responsible for costs to build out the laboratory and incurred costs of approximately $3.5million. The Company concluded that it was the “deemed owner” of the building (for accounting purposes only) during the construction period. TheCompany recorded the build out costs as an asset with a corresponding build-to-suit liability, which was recorded as a component of other current and non-current liabilities on the consolidated balance sheet while the building was under construction.Upon completion of construction of this building in August 2016, the Company evaluated the de-recognition of the asset and liability under theprovisions of ASC 840-40, Leases – Sale-Leaseback Transactions. The Company determined that the lease does not meet the criteria for sale-leasebackaccounting treatment, due to the continuing involvement in the project resulting from the significant collateral the Company provided to the landlord in theform of building improvements. As a result, the building is being accounted for as a financing obligation. The underlying assets of $4.3 million will bedepreciated over the building’s estimated useful life, which is 39 years. At the conclusion of the lease term, the Company will de-recognize both the netbook values of the assets and financing obligation. Operating LeasesIn March 2016, the Company entered into a lease agreement for an approximately 7,893 square foot facility in Woburn, Massachusetts for a researchand development laboratory, related office and other related uses. The term of the lease is 48 months commencing on April 29, 2016. In June 2016, the leasewas amended to add 260 square feet, for a total of 8,153 square feet. The base rent, including the amendment, is $19,000 per month with a $1 per square footannual increase on each anniversary date. In July 2015, the Company entered into an agreement for approximately 3,067 square feet of office space in Cary, North Carolina. The term of thelease is 26 months commencing on July 1, 2015. The base rent is $6,000 per month with 3% annual increases on each anniversary date.In June 2015, the Company entered into a lease agreement for an approximately 44,681 square foot facility in San Diego, California for a research anddevelopment laboratory, related office and other related uses. The term of the lease extends for seven years commencing on August 1, 2016. The base rent is$0.2 million per month with 3% annual increases on each anniversary date. In July 2015 the Company entered into a sublease for the building with the thenexisting lessee for a term of one year commencing August 1, 2015. There is no fixed rent or operating expenses during the sublease term other than utilities.The Company leases a total of approximately 2,550 square feet of office space at 2533 South Coast Highway 101, Cardiff-by-the-Sea, California92007, for general office use, pursuant to an operating lease. The lease term was extended through August 31, 2018. Our total monthly lease payment iscurrently $12,800 per month, and will increase to $13,200 on September 1, 2017.The Company recognizes rent expense under operating leases on a straight-line basis. Rent expense for the years ended December 31, 2016, 2015 and2014 was $2.7 million, $1.5 million, $0.2 million, respectively.The following table summarizes our future minimum lease payments at December 31, 2016 (in thousands). Common area maintenance costs and taxesare not included in these payments. Years ending December 31: 2017 $4,076 2018 4,094 2019 4,108 2020 4,056 2021 3,435 Thereafter 5,594 Total minimum lease payments $25,363 1338. Related Party AgreementsThe Company had related party agreements with Inex Bio, Inc. (Inex Bio) until the Company acquired a majority of Inex Bio shares. See Note 14 –Investment in Inex Bio, Inc. for further details.In June 2015, the Company spun out Brink Biologics, Inc. (Brink Biologics) and Coneksis, Inc. (Coneksis) (Note 9). The Company’s Chairman andCEO has a controlling interest in Brink Biologics and Coneksis.The Company’s Chairman and CEO founded and has a controlling interest in NantWorks, Inc. (NantWorks), which is a collection of multiplecompanies in the healthcare and technology space. The Company has entered into arrangements with NantWorks and certain affiliates of NantWorks, asdescribed below, to facilitate the development of new genetically modified NK cells for the Company’s product pipeline.In September 2016, the Company entered into a lease agreement with 605 Doug St, LLC, an entity owned by the Company’s Chairman and CEO, forapproximately 24,250 square feet in El Segundo, California, which is to be converted to a research and development laboratory and a GMP laboratory. Thelease runs from July 2016 through July 2023. The Company has the option to extend the lease for an additional three year term through July 2026. Themonthly rent is $0.1 million with annual increases of 3% beginning in July 2017. See Note 7 section Build-to-Suit Lease for further details on this lease. Forthe year ended December 31, 2016, the Company recorded rent expense of $0.1 million, which is reflected in research and development expense on theconsolidated statement of operations. At December 31, 2016, 605 Doug St, LLC, owed $0.8 million to the Company related to reimbursable tenantimprovements, which is included in due from related parties on the consolidated balance sheet. In August 2016, the Company entered into a Co-Development Agreement with Altor as described in Note 6. The Company’s Chairman and CEO isalso the Chairman of Altor and holds a greater than 20% ownership interest in Altor. Through December 31, 2016, the Company has not conducted any jointoperating activities or incurred any costs under this Co-Development Agreement.In March 2016, NantBioScience, Inc. (NantBioScience), a NantWorks company, and the National Cancer Institute entered into a cooperative researchand development agreement. The agreement covers NantBioScience and its affiliates, including the Company. Under the agreement, the parties willcollaborate on the preclinical and clinical development of proprietary recombinant NK cells and monoclonal antibodies in monotherapy and in combinationimmunotherapies. The Company expects to benefit from the preclinical and clinical research conducted during the first year under this agreement and isproviding the first year of funding under the five-year agreement. In April 2016, the Company paid $0.6 million to the National Cancer Institute as aprepayment for this first year of funding. The Company recognizes research and development expense ratably over a 12-month period and recorded $0.5million of expense for the year ended December 31, 2016.Under the NantWorks shared services agreement executed in November 2015, but effective August 2015, NantWorks provides corporate, general andadministrative, manufacturing strategy, research and development, regulatory and clinical trial strategy and other support services, and the Company ischarged for the services at cost plus reasonable allocations for indirect costs that relate to the employees providing the services. For the years endedDecember 31, 2016 and 2015, the Company recorded $3.0 million and $1.0 million, respectively, to selling, general and administrative expense and $2.1million and $0.3 million, respectively, in research and development expense under this arrangement on the consolidated statement of operations. In June2016, the Company amended the existing shared services agreement with NantWorks whereby the Company can provide support services to NantWorksand/or any of its affiliates. For the year ended December 31, 2016, the Company recorded expense reimbursements of $0.1 million to selling, general andadministrative expense and $0.2 million to research and development expense. The Company owed NantWorks a net amount of $1.7 million for allagreements between the two affiliates at December 31, 2016, which is included in due to related parties on the consolidated balance sheet.Under the November 2015 facility license agreement with NantWorks for office and laboratory space, which was effective May 22, 2015, theCompany recorded rent expense of $0.2 million and $0.2 million for the years ended December 31, 2016 and 2015, respectively, which is included inresearch and development expense on the consolidated statement of operations. The Company was responsible for costs to build out the laboratory andincurred costs of approximately $3.5 million, which is reflected in property, plant and equipment, net, on the consolidated balance sheet. See Note 7 sectionFinancing Lease Obligation for details relating to the accounting upon construction completion.134In June 2015, the Company entered into an agreement with NantOmics, LLC (NantOmics) to obtain genomic sequencing and proteomic analysisservices, as well as related data management and bioinformatics services, exclusively from NantOmics. The Company is obligated to pay NantOmics a fixed,per sample fee, determined based on the type of services being provided. The agreement has an initial term of five years and renews automatically forsuccessive one year periods, unless terminated earlier. For the years ended December 31, 2016 and 2015, the Company recorded operating expense of $0.2million and $0.1 million, respectively, to research and development under this arrangement in the consolidated statement of operations. The Company owedNantOmics $0 at December 31, 2016.In June 2015, the Company entered into an agreement with NanoCav, LLC (NanoCav), a related party, pursuant to which the Company obtainedaccess to NanoCav’s virus-free cell transfection technologies on a non-exclusive basis. Under the agreement, NanoCav will conduct certain, mutually-agreedfeasibility studies, on a fee for service basis, to evaluate the use of its cell transfection technologies with the Company’s aNK cells. The agreement has aninitial term of five years and renews automatically for successive one year periods, unless terminated earlier. In September 2015, the Company made a$45,000 feasibility study retainer payment as required by the agreement, which is recorded in prepaid expenses on the consolidated balance sheet atDecember 31, 2015. For the years ended December 31, 2016 and 2015, the Company recorded operating expense of $0.1 million and $0, respectively, toresearch and development under this arrangement in the consolidated statement of operations. At December 31, 2016, the Company owed NanoCav $15,000,which is included in due to related parties on the consolidated balance sheet.In June 2015, the Company also entered into a supply agreement with NantCell, Inc. (NantCell) pursuant to which the Company has the right topurchase NantCell’s proprietary bioreactors, made according to specifications mutually agreed to with NantCell. The Company also has the right to purchasereagents and consumables associated with such equipment from NantCell. In September 2015, the Company made a $0.5 million nonrefundable, upfrontpayment to NantCell as required by the agreement, which upfront payment is creditable against the Company’s future development activities and equipmentpurchases under the agreement. The agreement has an initial term of five years and renews automatically for successive one year periods unless terminatedearlier. The upfront payment is included in prepaid expenses on the consolidated balance sheets. The Company consumed $0.2 million of the $0.5 millionprepayment through December 31, 2016. In December 2013, the Company entered into restricted stock purchase agreements with certain officers to sell 7,532,251 shares of the Company’sClass B common stock (Note 10). As consideration for the shares, the officers executed secured promissory notes totaling $1.5 million (the Secured Notes).The Secured Notes accrued interest at 1.64% per annum, and all principal and interest was due and payable on the earlier of (i) the sale of all or substantiallyall of the Company’s stock by the officer and (ii) December 2022. The Secured Notes were collateralized by the underlying Class B common stock. Since theSecured Notes were non-recourse, they were treated similar to stock options for accounting purposes with the fair value recognized through a charge tocompensation expense. The shares of Class B common stock were not considered issued and outstanding in the consolidated financial statements until theCompany received payment against the Secured Notes.In 2013 and 2014, the Company received principal payments under the Secured Notes of $0.2 million and $1.2 million, respectively. Additionally, in2013 and 2014, an officer agreed to offset against his outstanding principal and interest $0.1 million and $23,000, respectively, of amounts the Companyowed to him. Upon receipt of these payments, the Company issued to the officers 1,681,099 and 5,851,152 shares of Class B common stock in 2013 and2014, respectively. As of December 31, 2014, the Secured Notes were settled in full.1359. Spin-out of Brink Biologics and ConeksisOn June 9, 2015, the Company spun out its business related to testing and diagnostic products and services into the entity, Brink Biologics inexchange for all of the issued and outstanding shares of Brink Biologics, which were subsequently distributed by a dividend to our stockholders. Under thespin-out arrangement, the Company transferred to Brink Biologics all of the Company’s existing revenue-earning, non-exclusive license agreements thatallow third parties to use the Company’s cell lines and intellectual property for non-clinical laboratory testing. In addition, the Company transferred orlicensed to Brink Biologics the Company’s other assets associated with testing and diagnostics products and services. The Company granted to BrinkBiologics worldwide, exclusive licenses to the use of certain cell lines limited to the field of in vitro and in vivo testing and diagnostic products and services,trademarks, intellectual property, and patents, including the Company’s rights under its license agreement with Fox Chase Cancer Center. As part of theagreement, the Company also has a non-exclusive license to any results and data arising from Brink Biologics’ use of the Company’s cell lines andintellectual property for the Company’s use for internal research purposes and outside of Brink Biologics’ field. In consideration for the license grants, BrinkBiologics is obligated to pay the Company a low single-digit royalty on amounts received for the sale of licensed products and services, as well as a lowsingle-digit percentage share of other revenue received by Brink Biologics from the grant of sublicenses under the Company’s rights. For the years endedDecember 31, 2016 and 2015, the Company recorded $21,000 and $11,000, respectively, in revenue for royalties on the consolidated statement ofoperations. Brink Biologics and the Company have the right to terminate the license agreement under certain conditions. Also, as part of the spin-outarrangement, the Company has agreed to provide certain services to Brink Biologics for a transitional period on a fee-for-service basis. Invoices for servicesare to be issued monthly and payments are due 30 days from the date invoiced. In the years ended December 31, 2016 and 2015, the Company invoiced $0.1million and $22,000, respectively, for services to Brink Biologics, which are recorded in other income on the consolidated statement of operations. AtDecember 31, 2016, Brink Biologics owes the Company $0.1 million which is included in due from related parties on the consolidated balance sheet.On June 9, 2015, the Company spun out its business related to veterinary oncology into the entity, Coneksis in exchange for all of the issued andoutstanding shares of Coneksis, which were subsequently distributed by a dividend to our stockholders. In connection with the spin-out arrangement, theCompany granted to Coneksis worldwide, exclusive licenses for use of certain cell lines in the field of veterinary medical research and therapeutics,trademarks, intellectual property, and patents, including the Company’s rights under its license agreement with Fox Chase Cancer Center. As part of theagreement, the Company also has a non-exclusive license to any results and data arising from Coneksis’ use of the Company’s cell lines and intellectualproperty for the Company’s use for internal research purposes and outside of Coneksis’ field. In consideration for the license grants, Coneksis is obligated topay the Company a single-digit royalty on amounts received for the sale of licensed products and services, as well as a single-digit percentage share of otherrevenue received by Coneksis from the grant of sublicenses under the Company’s rights. Coneksis and the Company have the right to terminate the licenseagreement under certain conditions. Also, as part of the spin-out arrangement, the Company agreed to provide certain services to Coneksis for a transitionalperiod on a fee-for-service basis. Invoices for services are to be issued monthly and payments are due 30 days from the date invoiced. For the years endedDecember 31, 2016 and 2015, the Company invoiced Coneksis for service fees in the amount of $19,000 and $6,000, which are recorded in other income onthe consolidated statement of operations. At December 31, 2016, Coneksis owes the Company $25,000, which has been fully reserved.The Company determined it has a variable interest in both Brink Biologics and Coneksis through its royalty agreements. Based upon the level ofequity investment at risk, Brink Biologics and Coneksis are considered variable interest entities (VIEs). The Company considered whether it is the primarybeneficiary of the Brink Biologics and Coneksis VIEs and required to consolidate the entities. As the Company does not control the research anddevelopment or the sales of the potential licensed or commercialized products, the Company does not direct the activities of Brink Biologics and Coneksisthat most significantly impact their economic performance. Therefore, the Company determined that it is not the primary beneficiary of the entities and doesnot consolidate the Brink Biologics VIE and the Coneksis VIE.ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, amended the definition of adiscontinued operation, and requires additional disclosures about discontinued operations, as well as disposal transactions that do not meet the discontinuedoperations criteria. Under the new guidance, only disposals of a component representing a strategic shift in operations, that has or will have a major impact onthe Company’s operations or financial results, should be classified as discontinued operations. The spin-out of Banks Biologics and Coneksis did not have amajor impact on the Company’s operations or financial results, and accordingly, are not being reported as discontinued operations.13610. Stockholders’ EquityStock Repurchase—In November 2015, the board of directors approved a share repurchase program (the 2015 Share Repurchase Program) allowing theCEO or CFO, on behalf of the Company, to repurchase from time to time, in the open market or in privately negotiated transactions, up to $50.0 million of theCompany’s outstanding shares of common stock, exclusive of any commissions, markups or expenses. The timing and amounts of any purchases will bebased on market conditions and other factors, including price, regulatory requirements and other corporate considerations. The program does not require thepurchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The Company expects tofinance the purchases with existing cash balances. No shares were repurchased under the program for the year ended December 31, 2015.During the year ended December 31, 2016, the Company repurchased 2,157,944 shares of its common stock, respectively, at prices ranging between$6.05 per share and $8.50 per share for a total of $15.8 million. The shares are formally retired through board approval upon repurchase. The Companyincurred approximately $36,000 of broker commissions on the repurchases. The Company accounted for the repurchases under the constructive retirementmethod and allocated the excess of the repurchase price over par value to accumulated deficit. At December 31, 2016, $34.2 million remained authorized forrepurchase under the Company’s 2015 Share Repurchase Program.A summary of common stock repurchases for the year ended December 31, 2016 is as follows: Total number ofshares purchased Average pricepaid per share Total number ofshares purchasedas part of publiclyannounced plansor programs Maximumapproximatedollar value ofshares that mayyet be purchasedunder the plansor programsFebruary 300,000 $8.50 300,000 $47.5 millionMay 346,200 $6.77 646,200 $45.1 millionJune 582,400 $7.56 1,228,600 $40.7 millionAugust 335,440 $7.01 1,564,040 $38.4 millionSeptember 30,000 $7.40 1,594,040 $38.1 millionNovember 439,618 $7.14 2,033,658 $35.0 millionDecember 124,286 $6.45 2,157,944 $34.2 millionTotal 2,157,944 $7.33 Conversion—In June 2015, the board of directors and the requisite shareholders approved the conversion of Class A common stock to common stock.Each share of Class A common stock (the 2015 Conversion) converted into 1.00 share of common stock. Additionally, the number of authorized shares ofcommon stock was increased from 80,000,000 to 100,000,000.In December 2014, the board of directors and the requisite shareholders of each class of stock approved the conversion of 8,295,402 shares of Class Bcommon stock, 9,502,898 shares of Series B preferred stock and 5,754,984 shares of Series C preferred stock into Class A common stock (the 2014Conversion). Each share of Series B common stock and Series C preferred stock converted into 1.00 share of Class A common stock and each share of Series Bpreferred stock converted into 5,132,548 shares of Class A common stock.Forward Stock Split—On July 10, 2015, the Company amended its amended and restated certificate of incorporation effecting a 1.8515-for-1 forwardstock split of its common stock. The forward stock split did not cause an adjustment to the par value or the authorized shares of the common stock orpreferred stock. As a result of the forward stock split, the Company also adjusted the share and per-share amounts under its 2014 Equity Incentive Stock Planand common stock warrant agreements with third parties. No fractional shares were issued in connection with the forward stock split. All disclosure ofcommon shares and per common share data in the accompanying consolidated financial statements and related notes have been adjusted retroactively toreflect the forward stock split for all periods presented.Amended and Restated Certificate of Incorporation—On July 31, 2015 the Company amended its Certificate of Incorporation to increase the numberof authorized shares of common stock from 100,000,000 to 500,000,000.137Common Stock—In June 2015, the Company sold 3,698,695 shares of common stock in a private placement offering for net proceeds of $71.0 millionafter $28,000 of issuance costs. On July 8, 2015, the Company sold 364,638 shares of common stock in a private placement offering for gross proceeds of$7.0 million. On July 31, 2015, the Company closed its IPO and sold 9,531,200 shares of common stock for net proceeds of $221.5 million after underwriters’discounts and commissions and offering expenses of $16.8 million. In addition, the Company completed a separate private placement concurrent with thecompletion of the IPO and sold 680,000 shares of common stock for proceeds of $17.0 million.Redomestication—In March 2014, the Company entered into a definitive merger and share exchange agreement pursuant to which the Companyredomesticated from the State of Illinois to the State of Delaware and the Illinois Company ceased to exist (the Redomestication). In connection with theRedomestication, the holders of Class A and Class B common stock received one share of Class A and Class B common stock of the Delaware Company,respectively, in exchange for fifteen shares of the Illinois Company. The holders of Series B preferred stock received one share of Series B preferred stock ofthe Delaware Company in exchange for one share of the Illinois Company. The holders of any options, warrants or other securities are subject to adjustmentbased on the ratio of 1 for 15. All share numbers and per share prices in the accompanying consolidated financial statements have been adjusted to reflect the1 for 15 exchange.Class A Common Stock—On June 18, 2015, the Company repurchased 249,952 shares of Class A common stock from an employee at $19.20 per sharefor $4.8 million. This was not part of the November 2015 share repurchase program described above.In December 2014, the Company issued 4,557,537 shares of Class A common stock at $1.76 per share for gross proceeds of $8.0 million in a privateplacement transaction with Sorrento (Note 6). Subsequently in December 2014, the Company entered into a private placement offering and sold26,252,262 shares of Class A common stock at $1.89 per share for gross proceeds of $49.5 million, of which Sorrento purchased 1,060,789 shares for $2.0million. Related stock issuance costs totaled $0.2 million. In conjunction with the offering, the Company amended its Bylaws to increase the size of theboard of directors to nine.In 2014, the Company issued a restricted stock award for 129,605 shares of Class A common stock that vested upon achieving certain performancemilestones. The holder met those milestones during 2014. In conjunction with the 2014 Securities Purchase Agreement (2014 Securities PurchaseAgreement), the Company converted the 2009 Convertible Notes, the Other Creditor debt, and Side Agreement Notes into a total of 1,522,799 shares of ClassA Common stock. Also in conjunction with the 2014 Securities Purchase Agreement, the placement agent agreed to exchange the CA Warrant and PAWarrant and $45,000 of its cash commission (Note 13) for a total of 3,087,324 shares of Class A Common stock. Refer to the table below for further details ofthe 2014 Securities Purchase Agreement.In conjunction with the 2013 Securities Purchase Agreement (2013 Securities Purchase Agreement), 389,437 shares of Class A common stock wereissued for conversion of certain debt and payables totaling $1.0 million, and 406,048 shares were issued in exchange for all outstanding shares of Series Apreferred stock.Class B Common Stock—In March 2014, the Company issued 763,151 shares of Class B common stock to a placement agent in exchange for anoutstanding warrant. In December 2013, the Company sold 7,532,251 shares of Class B common stock to officers (Note 8).In 2014 and 2013, the Company issued 5,851,152 and 1,681,099 shares of Class B common stock, respectively, to an officer of the Company as anoffset against his outstanding principal and interest owed to the Company under a secured note (Note 8).Series B Preferred Stock—In December 2014, all outstanding shares of Series B preferred stock were converted into 9,502,898 shares of Class Acommon stock during the 2014 Conversion.Series C Preferred Stock—In December 2014, all outstanding shares of Series C preferred stock were converted into 5,754,984 shares of Class Acommon stock during the 2014 Conversion. In April 2014, the Company sold 4,983,526 Units in a private placement offering for gross proceeds of $6.5million under the 2014 Securities Purchase Agreement. In addition, 771,458 Units were issued in conjunction with conversion of the 2013 Promissory Note(Note 13). Each Unit consists of one share of the Company’s Series C preferred stock and a warrant to purchase 0.25 share of Class A common stock at aninitial exercise price of $1.62 per share (the Unit). The warrant expires three years following the date the Company becomes required to file reports under theExchange Act.The 2014 Securities Purchase Agreement qualified as a Mandatory Exchange Financing (Note 13).138The following summarizes changes in securities in conjunction with the 2014 Securities Purchase Agreement: Class Acommon stock Class Bcommon stock Series Cpreferred stock Warrantsto purchaseClass Acommon stock Optionsto purchaseClass Acommon stock Share Balance in April 2014 prior to 2014 Securities Purchase Agreement 1,158,394 1,763,609 — 763,841 3,056,702 Exchange of Founder Warrant (Note 6) — — — (156,109) 740,600 Conversion of 2013 Promissory Note (Note 13) — — 771,458 192,865 — Conversion of 2009 Convertible Notes (Note 13) 985,229 — — — — Exchange the CA Warrant and the PA Warrant associated with 2009 Convertible notes (Note 13) 3,052,608 — — — — Exchange of Other Creditor debt (Note 13) 345,228 — — — — Exchange of Side Agreement Notes (Note 13) 192,341 — — — — Sale of Units in 2014 Securities Purchase Agreement (see above) — — 4,983,526 1,245,881 — Cash commission to placement agent paid in Class A common stock (Note 13) 34,715 — — — — Exchange of placement agent warrant for stock (see above) — 763,151 — (193,413) — Issuance of placement agent warrant associated with 2014 Securities Purchase Agreement (see below) — — — 199,341 — Share balance after closing of 2014 Securities Purchase Agreement 5,768,515 2,526,760 5,754,984 2,052,406 3,797,302 Common Stock Warrants—In March 2015, the board of directors approved the issuance of a stock option and a warrant to purchase Class A commonstock to an officer of the Company (Note 11). In connection with its acquisition of Inex Bio in March 2015, the Company issued warrants to purchase3,202,592 shares of Class A common stock with an exercise price of $2.00 per share (Note 14). In April 2015, the Company received $6.4 million for the fullexercise of the warrants.In April 2015, a warrant to purchase 114,822 shares of Class A common stock was exercised. The warrant, issued in 2010 in conjunction with atermination and release agreement, was initially exercisable at $2.44 per share, and was ultimately exercised at $1.76 per share. The warrant was exercisablethrough February 2020. The warrant included a provision that for a period through two years after a reverse merger, the exercise price of the warrant wasprotected against down-round financing unless 66.67% of shareholders consent to the new transaction. Pursuant to ASC Subtopic 815-15 and ASCSubtopic 815-40, the fair value of the warrant of $0.4 million was recorded as a derivative liability on the issuance date. The fair value of the warrant wasestimated at the issuance date and was revalued at each reporting period and the exercise date using a Monte Carlo simulation. At April 30, 2015, the date ofexercise, and December 31, 2014, the Company recorded a derivative liability of approximately $1.5 million and $0.2 million, respectively. The change infair value of the derivative liability is included in other income (expense) on the consolidated statements of operations.In March 2014, in conjunction with the amendment to the Founder License Agreement, the warrant held by the founder to purchase 156,109 shares ofClass A common stock was exchanged for a fully-vested stock option to purchase up to 740,600 shares of Class A common stock (Note 6).In June 2013, the Company engaged a placement agent in connection with the 2013 Securities Purchase Agreement (Note 13). The placement agentreceived a warrant to purchase 193,413 shares of Class A common stock (the Initial Warrant). On the date of a Mandatory Exchange Financing, the InitialWarrant would automatically be exchanged into shares of common stock equal to 2.5% of the fully-diluted number of shares of Class B common stockoutstanding upon the closing of the Private Placement. In March 2014, the placement agent agreement was amended to exchange the Initial Warrant for763,151 shares of Class B common stock and a new warrant for 199,341 shares of Class A common stock based on 4% of the number of shares of stock issuedto investors introduced to the Company by the placement agent in the 2014 Securities Purchase Agreement (the New Warrant). The New Warrant has the sameterms as the 2014 Warrant issued as part of the 2014 Securities Purchase Agreement.Common Stock Reserved for Future IssuanceThe Company is authorized to issue up to a total of 500,000,000 shares of common stock, par value $0.0001 per share at December 31, 2016 and2015. As of December 31, 2016, there were 81,983,937 shares of common stock issued and outstanding.139The following table summarizes the common shares reserved for issuance on exercise or vesting of various awards at December 31, 2016: Issued and outstanding stock options 6,307,384 Issued and outstanding restricted stock units 814,456 Outstanding financing warrants 179,064 Outstanding officer warrants 17,589,250 Total shares reserved for future issuance 24,890,154 11. Stock-Based Compensation2004 Equity Incentive Plan—In April 2004, the Company adopted the 2004 Stock Option Plan (the 2004 Plan) under which 81,695 shares of commonstock were reserved for issuance. The 2004 Plan provides for the granting of stock options to employees, directors and consultants of the Company. Optionsgranted under the 2004 Plan may be either incentive stock options (ISOs) or nonqualified stock options (NSOs). NSOs may be granted to the Companyemployees and consultants. No further shares are available for grant under the 2004 Plan.2014 Equity Incentive Plan—In March 2014, the Company’s board of directors and stockholders approved the 2014 Equity Incentive Plan (2014Plan) under which 11,109,000 shares of Class A common stock were reserved for the granting of ISOs, non-statutory stock options, stock appreciation rights,restricted stock awards, restricted stock units and performance awards to employees, directors and consultants. Recipients of stock awards are eligible topurchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant.The maximum term of awards granted under the 2014 Plan is ten years. Stock awards are generally not exercisable prior to the applicable vesting date, unlessotherwise accelerated under the terms of the applicable stock plan agreement. Unvested shares of the Company’s common stock issued in connection with anearly exercise allowed by the Company may be repurchased by the Company upon termination of the optionee’s service with the Company.2015 Equity Incentive Plan—In July 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (2015 Plan). The 2015 Planpermits the grant of incentive stock options, within the meaning of Section 422 of the Code, to the Company’s employees and for the grant of non-statutorystock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees,directors and consultants. A total of 2,745,028 shares are reserved for future grants pursuant to the 2015 Plan as of December 31, 2016. In addition, the sharesreserved for future grants under the 2015 Plan will include shares subject to stock options or similar awards granted under the 2014 Plan that expire orterminate without having been exercised in full and shares issued pursuant to awards granted under the 2014 Plan that are forfeited to or repurchased by theCompany (provided that the maximum number of shares that may be added to the 2015 Plan pursuant to this provision is 6,914,754 shares as ofDecember 31, 2016).Modification of Stock-based Awards to an Officer—On March 24, 2015, the Company granted a non-qualified stock option (the Option) and awarrant (the Warrant) to purchase 1,851,500 shares and 17,589,250 shares of the Company’s common stock, respectively, to an officer of the Company. TheOption had an exercise price of $2.00 per share, a ten-year term and vests monthly over 40 months from the grant date. The Warrant had an exercise price of$2.00 per share, a three-year term and included performance-based vesting conditions.Subsequent to the original grant date, the Company modified the terms and conditions of the Option and the Warrant, and on May 8, 2015, theCompany and the officer reached a mutual agreement on the revised terms of the Option and the Warrant. By mutual agreement, the Company increased theexercise price of the Option from $2.00 per share to $2.20 per share and reduced the term of the Option from ten to four years. The Warrant’s vestingconditions changed from performance based to a combination of performance based for 10,183,250 shares, including modified performance milestones fromthe original grant, and service based for 7,406,000 shares. In addition, the Company revised the term of the Warrant from three to four years.The Company treated these changes to the Option and the Warrant as modifications of the terms and conditions of an equity award. The change in theterm and exercise price of the Option did not result in incremental stock compensation expense as the higher exercise price and shorter term reduced theoverall value of the modified Option.The change in the terms for the Warrant resulted in incremental compensation expense of $91.5 million, of which $53.0 million is recognized uponachievement of performance milestones and $38.5 million is recognized over the service period, since the fair value of the modified Warrant is higher thanthe original fair value. Incremental compensation expense of $19.0 million and $53.8 million was recognized during the years ended December 31, 2016 and2015, respectively, and the remaining $18.7 million is expected to be recognized over the remaining vesting period of 1.6 years. 140Issuance of options and restricted stock units to Officers—In accordance with their employment agreements, the Company granted to its CEO andChief Administrative Officer upon the IPO a total of 1,455,450 options to purchase common stock with an exercise price of $25.00 per share and 970,300restricted stock units representing the right to receive one share of the Company’s common stock for each restricted stock unit that becomes vested. Theoptions and restricted stock units vested 50% at grant and the remaining 50% vested upon the first anniversary of the IPO.Stock-Based CompensationThe following table presents all stock-based compensation as included on the Company’s consolidated statements of operations (in thousands): For the Year Ended December 31, 2016 2015 2014 Stock-based compensation expense: Warrants for common stock to an officer $50,502 $141,901 $— Warrants for common stock to an officer and a director related to Inex Bio, Inc. acquisition — 22,747 — Employee stock options 14,720 25,498 485 Non-employee stock options — 3,300 76 Employee restricted stock units 8,166 17,505 228 Non-employee restricted stock units 464 270 — $73,852 $211,221 $789 Stock-based compensation expense in operating expenses: Research and development $852 $1,221 $222 Selling, general and administrative 73,000 210,000 567 $73,852 $211,221 $789 In the second quarter of 2016, the Company adopted ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting. ASU 2016-09 requires that certain other amendments relevant to the Company be applied using a modified-retrospective transitionmethod by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the period in which the guidance is adopted. As a result ofadopting ASU 2016-09 during the three months ended June 30, 2016, the Company adjusted accumulated deficit for amendments related to an entity-wideaccounting policy election to recognize share-based award forfeitures only as they occur rather than an estimate by applying a forfeiture rate. The Companyrecorded a $31,000 charge to accumulated deficit as of January 1, 2016 and an associated charge to additional paid-in capital for previously unrecognizedstock compensation expense as a result of applying this policy election. The Company also recorded $27,000 in additional stock compensation expense forthe three months ended March 31, 2016 as a result of applying this policy election. That is, the Company’s consolidated statement of operations for the yearended December 31, 2016 reflects this additional expense. ASU 2016-09 also requires the recognition of the income tax effects of awards in the consolidated statement of operations when the awards vest or aresettled, thus eliminating addition paid-in capital pools. The Company elected to adopt the amendments related to the presentation of excess tax benefits onthe consolidated statement of cash flows using a prospective transition method.141Stock OptionsThe following table summarizes stock option activity under all equity incentive plans for the years ended December 31, 2016, 2015 and 2014: Number ofShares Weighted-AverageExercise Price AggregateIntrinsicValue(in 000) Weighted-AverageRemainingContractual Life(in years) Outstanding at December 31, 2013 1,727 $0.41 $— 1.3 Options granted 5,971,087 $0.77 Options exercised (833,173) $0.22 Options forfeited/canceled (1,231) $0.41 Outstanding at December 31, 2014 5,138,410 $0.85 $5,298 9.7 Options granted 5,713,899 $7.92 Options exercised (1,127,105) $0.86 Options forfeited/canceled (947,311) $1.87 Outstanding at December 31, 2015 8,777,893 $5.36 $116,273 7.2 Options exercised (2,398,882) $0.76 Options forfeited/canceled (71,627) $2.00 Outstanding at December 31, 2016 6,307,384 $7.14 $19,100 6.4 Vested and Exercisable at December 31, 2016 5,210,756 $8.18 $15,227 7.3 The vested and exercisable shares at December 31, 2015 and 2014 were 4,844,857 and 1,705,035, respectively. The following table provides a summary of options outstanding and vested as of December 31, 2016: Exercise Prices NumberOutstanding Weighted-Average Life(in years) NumberExercisable Weighted-Average Life(in years) $0.22 134,807 7.2 134,807 7.2 $0.42 589,660 7.9 589,660 7.9 $1.76 999,682 8.0 999,682 8.0 $2.00 1,276,285 8.1 1,221,126 8.1 $2.20 1,851,500 2.2 810,031 2.2 $25.00 1,455,450 8.6 1,455,450 8.6 6,307,384 6.4 5,210,756 7.3The aggregate intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $17.0 million, $2.4 millionand $0.2 million, respectively. The cash received from exercised options was $1.4 million, $0.9 million and $0.2 million for the years ended December 31,2016, 2015 and 2014, respectively. Total stock option expense was $14.7 million, $28.8 million and $0.6 million for the years ended December 31, 2016,2015 and 2014, respectively.The Company records equity instruments issued to non-employees as expense at the fair value over the related service period as determined inaccordance with the authoritative guidance and periodically revalues the equity instruments as they vest. The Company granted to non-employees stockoptions for 231,437 shares during each of the years ended December 31, 2015 and 2014. No options were granted to non-employees in 2016. As ofDecember 31, 2016, there were no non-employee options that were vested and outstanding. In the years ended December 31, 2016, 2015 and 2014, theCompany recorded stock-based compensation expense related to non-employee consultants of $0, $3.3 million and $0.1 million, respectively, in selling,general and administrative expense.The total unrecognized compensation cost related to non-vested stock options as of December 31, 2016 is $9.1 million, which is expected to berecognized over a weighted-average period of 2.1 years. 142The Company uses a Black-Scholes option-pricing model to determine the fair value of stock-based compensation under ASC Topic 718, StockCompensation. The assumptions used for employee and non-employee stock options are presented in the table below: Years Ended December 31, 2015 2014 EmployeeGrants Non-EmployeeGrants EmployeeGrants Non-EmployeeGrants Expected term (years) 4.0 - 5.5 8.4 - 9.9 5.0 - 5.6 9.3 - 9.9 Risk-free interest rate 1.5% - 1.8% 0% - 2.4% 1.6% - 1.9% 2.20% Expected volatility 80% 80% 81% - 91% 81% Dividend yield 0% 0% 0% 0% Weighted-average measurement date fair value $12.08 $15.25 $0.53 $0.18 The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The estimated volatility isbased on a weighted-average calculation of a peer group of comparable companies whose share prices are publicly available. The risk-free interest rateassumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the awardbeing valued. The weighted-average expected life of options was estimated using the average of the contractual term and the weighted-average vesting termof the options.Restricted Stock UnitsThe following table summarizes the restricted stock units (RSUs) activity under the 2015 Plan: Number ofRestrictedStock UnitsOutstanding Weighted-AverageGrant DateFair Value Unvested balance at December 31, 2014 — $— Granted 1,614,788 $21.86 Vested (485,150) $25.00 Unvested balance at December 31, 2015 1,129,638 $20.51 Granted 407,800 $7.76 Vested (537,982) $23.75 Forfeited/canceled (185,000) $11.75 Unvested balance at December 31, 2016 814,456 $13.98 There was no RSU activity in 2014.During the years ended December 31, 2016 and 2015, 67,500 and 353,188 of restricted stock units, respectively, were granted to employees of relatedcompanies (referred to as non-employees above) under the Company’s shared services agreement with NantWorks (Note 8). As of December 31, 2016, there was $5.5 million of unrecognized stock-based compensation expense related to restricted stock units granted that isexpected to be recognized over a weighted-average period of 3.0 years. Of that amount, $3.8 million of unrecognized expense is related to employee grantswith a weighted-average period of 3.0 years and $1.7 million expense is related to non-employee grants with a weighted-average period of 2.9 years that isimpacted by periodic mark-to-marked adjustments.Restricted Stock AwardsIn 2014, the Company issued a restricted stock award for 129,605 shares of Class A common stock that vested based on the holder achieving certainperformance milestones. The holder met those performance milestones during the year ended December 31, 2014 and the Company recognized stockcompensation expense of $0.2 million related to the award.143WarrantsThe following table summarizes the Company’s warrant activity: Outstanding at December 31, 2014 1,850,937 Warrants granted 20,791,842 Warrants exercised (4,677,101)Warrants forfeited (146,062)Outstanding at December 31, 2015 17,819,616 Warrants exercised (51,302)Outstanding at December 31, 2016 17,768,314 Vested and exercisable at December 31, 2016 12,769,264 The total unrecognized compensation cost related to non-vested warrants as of December 31, 2016 is $49.4 million, which is expected to berecognized over a weighted-average period of 1.6 years.Common Stock Reserved for Future Grants under the 2015 Equity Incentive PlanAt December 31, 2016, the Company has reserved authorized shares of common stock for future grants of equity awards as follows: Shares approved for 2015 Equity Incentive Plan 3,500,000 Shares remaining from 2014 Equity Incentive Plan 749,857 Total shares authorized under the 2015 Plan 4,249,857 Grants (3,070,238)Forfeitures added back to available pool 947,063 Shares reserved for future grants as of December 31, 2015 2,126,682 Grants (407,800)Add backs approved under the Plan: Forfeitures 185,000 Net share settlement 225,754 Shares repurchased 615,392 Shares reserved for future grants as of December 31, 2016 2,745,028 12. Income TaxesThe amount of loss before taxes is (in thousands): Year Ended December 31, 2016 2015 2014 U.S. loss before taxes $(118,743) $(235,750) $(6,184)Foreign loss before taxes (2,638) (1,427) — Loss before income taxes $(121,381) $(237,177) $(6,184) 144Income tax (benefit) expense for the years ended December 31, 2016, 2015 and 2014 consists of the following (in thousands): Year Ended December 31, 2016 2015 2014 Current: Federal $— $— $— State 3 1 1 Foreign — — — Total Current 3 1 1 Deferred: Federal — — — State — — — Foreign (575) (302) — Total Deferred (575) (302) — Income tax (benefit) expense $(572) $(301) $1 The components that comprise the Company’s net deferred tax assets at December 31, 2016 and 2015 consist of the following (in thousands): Year Ended December 31, 2016 2015 Deferred tax assets: Stock compensation $87,239 $67,559 Net operating loss carryforwards 37,507 — Leases and other accrued liabilities 2,096 389 Accrued compensation 808 572 Depreciation and amortization — 624 Total deferred tax assets 127,650 69,144 Deferred tax liabilities: Foreign intangibles (996) (1,165)Depreciation and amortization (309) — Total deferred tax liabilities (1,305) (1,165)Net deferred tax assets 126,345 67,979 Valuation allowance (127,341) (69,144)Net deferred tax liability $(996) $(1,165) A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year Ended December 31, 2016 2015 2014 Tax computed at federal statutory rate 34.0 % 34.0 % 34.0 %Section 382/383 NOL 8.6 (3.5) (40.0) State income taxes, net of federal tax benefit 3.6 2.6 4.8 Tax rate adjustment 1.5 — 0.5 Research and development credits 1.3 0.1 0.7 Stock-based compensation (0.3) (0.4) (1.1) Other (0.5) (3.8) (7.3) Valuation Allowance (47.7) (28.9) 8.4 Effective income tax rate 0.5 % 0.1 % — % 145Pursuant of Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company's net operating loss and research and development creditcarryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period . The Company completedan IRC Section 382/383 analysis in 2016 regarding the limitation of net operating loss and research and development credit carryforwards. As a result of theanalysis, the Company recognized deferred tax assets for net operating losses of $11.1 million and federal and state research and development credits of $0.4million. The Company has derecognized the deferred tax assets for net operating losses and federal and state research and development credits of $1.2million from its deferred tax asset schedule as of December 31, 2016. The Company had previously derecognized $12.7 million deferred tax assets for netoperating losses and federal and state research and development credits as of December 31, 2015. The Company also recorded a corresponding increase to itsvaluation allowance as a result of recognizing the additional deferred tax assets upon completion of the Section 382/383 analysis. The Company does notexpect that the unrecognized tax benefits will change within 12 months of this reporting date. Due to the existence of the valuation allowance, futurechanges in the Company's unrecognized tax benefits will not impact the Company's effective tax rate.The Company has removed the deferred tax assets for foreign net operating losses in the amount of $28,000.In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxableincome and tax planning strategies in making this assessment. Based on the level of historical operating results and the uncertainty of the economicconditions, the Company has recorded a full valuation allowance of $127.3 million at December 31, 2016. The change in the valuation allowance for theyear end December 31, 2016 was an increase of $58.2 million.The Company has not incurred any material interest or penalties as of the current reporting date with respect to income tax matters. The Company doesnot expect that there will be unrecognized tax benefits of a significant nature that will increase or decrease within 12 months of the reporting date. TheCompany is subject to U.S. federal income tax, as well as income tax in California and other states. The federal returns for tax years 2013 through 2016remain open to examination; the California returns remain subject to examination for tax years 2012 through 2016. Carryforward attributes that weregenerated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective taxauthority. All other state jurisdictions remain open to examination.At December 31, 2016, the Company has federal net operating losses (NOLs) of approximately $100.0 million, state NOLs of $60.0 million, andforeign NOLs of $0.2 million. The federal NOL carryforwards begin to expire in 2024, the state NOL carryforwards begin to expire in 2030 and the foreignNOL carryforwards begin to expire in 2023. At December 31, 2016, the Company also had federal research tax credit carryforwards of approximately $1.7million and California research tax credits of $0.7 million. The federal research tax credit carryforwards begin to expire in 2026 and the state research taxcredit carryforwards begin to expire in 2029.The following table summarizes the changes to the amount of unrecognized tax benefits (in thousands): Unrecognized tax benefits at December 31, 2014 $— Increase for prior year tax positions 120 Increase for current year tax positions 1,083 Unrecognized tax benefits at December 31, 2015 1,203 Decrease for prior year tax positions (1,203)Increase for prior year tax positions 2,578 Increase for current year tax positions 2,056 Unrecognized tax benefits at December 31, 2016 $4,634 Included in the balance of unrecognized tax benefits at December 31, 2016, is $4.3 million that, if recognized, would not impact the Company’sincome tax benefit or effective tax rate as long as the deferred tax asset remains subject to a full valuation allowance. The Company does not expect anysignificant increases or decreases to our unrecognized tax benefits within the next 12 months.14613. Notes Payable2013 Promissory Note—In June 2013, the Company entered into a securities purchase agreement (the 2013 Securities Purchase Agreement) wherebythe Company issued to an institutional investor a $1.0 million note payable (the 2013 Promissory Note) plus 1,851 shares of Series B preferred stock at a pershare price of $0.05 for aggregate proceeds of $1.0 million. The 2013 Promissory Note accrued interest at 5% per annum and was scheduled to mature onJune 20, 2014. The 2013 Promissory Note was secured by all of the assets of the Company.The Company allocated the proceeds under the 2013 Securities Purchase Agreement to the 2013 Promissory Note and Series B preferred stock basedon their relative fair values, which resulted in $0.4 million and $0.6 million being allocated to the 2013 Promissory Note and Series B preferred stock,respectively. The Company recorded a debt discount of $0.6 million, which was being amortized to interest expense over the term of the 2013 PromissoryNote using the effective interest method.In April 2014, the Company entered into the 2014 Securities Purchase Agreement (Note 10) at which time the holder of the 2013 Promissory Noteagreed to convert the $1.0 million principal into 771,458 shares of Series C preferred stock plus a warrant to purchase 192,865 shares of Class A commonstock having the same terms as the warrants issued in the 2014 Securities Purchase Agreement (the 2014 Warrant, Note 10). The Company paid accruedinterest of $39,000 in cash upon conversion of the 2013 Promissory Note. The 2014 Warrant was outstanding at December 31, 2014 and was exercised in2015.2009 Convertible Notes—In 2009, the Company entered into a bridge loan agreement (the 2009 Bridge Loan Agreement) whereby the Companyagreed to sell and issue $0.4 million of convertible promissory notes (the 2009 Convertible Notes). The 2009 Convertible Notes accrued interest at 15% perannum until maturity on September 30, 2010 (the Maturity Date). After the Maturity Date, the 2009 Convertible Notes accrued interest at 24% per annum.The 2009 Convertible Notes were convertible at the option of the holders into securities issued in the Company’s next financing. The 2009 ConvertibleNotes were secured by all assets of the Company. As discussed below, the 2009 Convertible Notes were exchanged for shares of Class A common stock, andthere was no balance outstanding on the 2009 Convertible Notes at December 31, 2014.Each holder of the 2009 Convertible Notes also received a warrant to purchase shares of Class A common stock (the 2009 Warrants). The 2009Warrants were exercisable only if and to the extent that the holder subscribed to the next financing for a number of shares equal to 300% of the number ofshares issued to the holder in the next financing.The exercise price of the 2009 Warrants initially was the purchase price for the shares in the next financing. However, for up to two years after the datethat the Company becomes a public company, the exercise price is adjusted to a price equal to the price of the new equity securities should the Companyenter into any new equity transaction whereby the price of the equity in the new transaction is lower than the exercise price of the 2009 Warrants.In conjunction with the 2013 Securities Purchase Agreement in June 2013, each holder of the 2009 Convertible Notes entered into a consent,amendment and exchange agreement (the Exchange Agreement). The Exchange Agreement (i) modified the Maturity Date to June 20, 2014; (ii) caused eachholder to execute a subordination and shareholder lock-up agreement, and; (iii) upon a Mandatory Exchange Financing (Company closing a privateplacement of stock or other securities of at least $3.0 million, Note 10), automatically exchanged the outstanding principal and accrued interest under the2009 Convertible Notes and the 2009 Warrants for shares of Class A common stock at an exchange rate of three times the principal amount of the 2009Convertible Notes divided by the per share price of the Mandatory Exchange Financing.In April 2014, the 2014 Securities Purchase Agreement qualified as a Mandatory Exchange Financing and the $0.4 million outstanding principalbalance plus $0.4 million accrued interest on the 2009 Convertible Notes and the 2009 Warrants were exchanged for 985,229 shares of the Company’s ClassA common stock. The 2009 Convertible Notes and the 2009 Warrants were no longer outstanding at December 31, 2014.In connection with the sale of the 2009 Convertible Notes, the Company used a placement agent. The placement agent received a corporate advisorywarrant (the CA Warrant) for common stock equal to 20% of the issued and outstanding common stock of the Company on a fully diluted basis immediatelyfollowing the final closing of the Bridge Loan Agreement financing. The CA Warrant had an exercise price of $2.44 per share and was to expire onSeptember 30, 2019. The placement agent also received a warrant for common stock for the number of shares equal to 9% of the number of warrant sharesissued to the holders who subscribe to the next financing (the PA Warrant). The initial exercise price of the PA Warrant is equal to the price of the nextfinancing.In conjunction with the 2013 Securities Purchase Agreement in June 2013, the placement agent agreed to exchange the CA Warrant and PA Warrantinto shares of Class A common stock equal to 10% of the shares of fully-diluted stock outstanding immediately following the closing of a MandatoryExchange Financing less certain exempted issuances.147At the 2014 Securities Purchase Agreement closing in April 2014, the CA Warrant and PA Warrant were exchanged for 3,052,608 shares of theCompany’s Class A common stock.The Company also issued to the placement agent 34,715 shares of Class A common stock in exchange for a cash commission in conjunction with the2014 Securities Purchase Agreement.Settlement Agreement Note—In 2007, the Company entered into a settlement agreement with a former officer of the Company (the SettlementAgreement Note). The Settlement Agreement Note included a cash payment to the former officer of $0.3 million payable upon the Company’s receipt of anydebt or equity financing. As part of the 2009 Convertible Notes financing, the Settlement Agreement Note was amended so that the Note will convert intoClass A common stock at a conversion price of $2.44 per share on the second anniversary of Company being a publicly traded company. The $0.3 millionoutstanding Settlement Agreement Note balance is reflected in other current liabilities on the consolidated balance sheets as of December 31, 2014.In March 2015, the Company entered into a Supplemental Agreement and General Release (the Supplemental Agreement) with the former officerrelated to the Settlement Agreement. As a result, (i) the Company agreed to pay $0.13 million in exchange for retiring the note and (ii) the former officeragreed to exercise a warrant from 2008 to purchase 32,675 shares of Class A common stock at an exercise price of $2.44 per share. The Settlement AgreementNote is no longer outstanding as of December 31, 2015 and the $0.13 million difference between the carrying value of the Settlement Agreement Note andthe amount paid to retire the Settlement Agreement Note is reflected in other income on the consolidated statement of operations for the year endedDecember 31, 2015. Founder Note— As consideration for the sale and assignment of the license and technical information to the NK-92 cell line to the Company in 2009and 2010 in connection with the amendment to the Founder License Agreement (Note 6), the Company issued a non-interest bearing note (the Founder Note)to a founder for $23,000. In April 2014, the outstanding balance was paid in full.Other Notes and Creditors—As part of the 2009 Convertible Notes financing, certain other note holders and creditors with obligations totaling $0.2million (Other Creditors) executed agreements either to defer payment for three years or convert the obligations into Class A common stock upon theCompany closing a financing of at least $1.2 million at a conversion price of $2.44 per share. In conjunction with the 2013 Securities Purchase Agreement,Other Creditors holding $20,000 of principal plus $29,000 of accrued interest elected to convert their obligations into 20,205 shares of Class A commonstock.Other Creditors holding $0.1 million of principal entered into exchange agreements whereby, upon the Company completing a Mandatory ExchangeFinancing, the balance plus any accrued interest is automatically exchanged for shares of Class A common stock at an exchange rate of three times theamount owed divided by the per share price of the Mandatory Exchange Financing. At the close of the 2014 Securities Purchase Agreement in April 2014,the $50,000 principal plus accrued interest of $0.1 million were exchanged for 230,859 shares of Class A common stock. In April 2014, an Other Creditorwith $0.1 million of outstanding principal and interest agreed to sell its note to a third party who agreed to exchange the note for 114,369 shares of Class Acommon stock. Other Creditors with $29,000 of outstanding principal plus $13,000 of accrued interest were repaid in cash in April 2014.Side Agreement Notes—Payables and debt totaling $0.2 million were sold by certain creditors to existing investors (the Side Agreements). Inconjunction with the Side Agreements, the Company issued to the investors convertible notes (the Side Agreement Notes) pursuant to an exchangeagreement whereby upon the Company completing a Mandatory Exchange Financing, the outstanding balance under the (the Side Agreement Notes) areautomatically exchanged for shares of Class A common stock at an exchange rate of the amount divided by the per share price of the Mandatory ExchangeFinancing. At the close of the 2014 Securities Purchase Agreement in April 2014, the $0.2 million balance of the (the Side Agreement Notes) was exchangedfor 192,341 shares of Class A common stock. 14. Investment in Inex Bio, Inc.In April 2012, the Company made a strategic decision to enter into a License Agreement with Inex Bio, Inc. (Inex Bio), a Republic of Koreacorporation (the Inex License Agreement). Under the Inex License Agreement, the Company provided Inex Bio with an exclusive license to the Company’stechnology to be used in products only in certain Asian countries. In exchange for the Inex License Agreement, the Company received a $0.3 million up-front license fee. In addition, the Company was eligible to receive milestone payments of up to $0.8 million based upon completion of clinical trials and a5% royalty on net sales of applicable products using the aNK cells. No milestone payments were due or received for the years ended December 31, 2015,2014 or 2013.In May 2012, the Company acquired 57,000 shares of Inex Bio for $0.2 million, which represented 22.2% of the outstanding shares and 17.4% of thefully-diluted shares of Inex Bio. The Company accounted for its investment under the equity method. The Company reviewed its investment for impairmentin accordance with ASC Topic 320, Investments—Debt and Equity Securities.148In February and March 2015, InexBio Holdings (Holdings), an entity owned fifty percent (50%) by Cambridge Equities, L.P., an entity in which Dr.Soon-Shiong, the Company’s CEO and one of the Company’s directors, is the sole member of its general partner, and fifty percent (50%) by Eragon Ventures,LLC, an entity of which Dr. Ji, one of our former directors, is managing member, acquired 220,000 shares or 67.3% of Inex Bio from third party owners for$1.1 million.On March 30, 2015, the Company entered into a Stock Purchase Agreement with Holdings and the third party owners, pursuant to which the Companyacquired all the remaining outstanding shares of Inex Bio not previously held by the Company.The Company paid to the other owners of Inex Bio cash of $1.5 million and issued warrants to acquire 593,072 shares of the Company’s Class Acommon stock at an exercise price of $2.00 per share. The Company valued the warrants using the Black-Sholes option-pricing model with a stock price of$10.72 per share as of March 30, 2015, an expected term of 0.04 years, and a volatility of 80%. This resulted in a total fair value of the warrants of $5.2million. In April 2015, the Company received $1.2 million for the full exercise of the warrants.The Company recorded the transaction as an asset purchase because Inex Bio was a shell corporation without any employees or other significant assetsand did not meet the definition of a business under ASC Topic 805, Business Combinations.The purchase price paid to acquire Inex Bio from the other owners is as follows (in thousands): Consideration Total Cash paid by InexBio Holdings, LLC $1,100 Cash paid by Company 1,482 Fair value of warrants 5,170 Aggregate purchase price $7,752 The following table summarizes the assets acquired and liabilities assumed (in thousands): Cash $763 Intangible assets—reacquired rights of Company technology 8,636 Other assets 42 Investment in Inex Bio (221)Deferred tax liability (1,467)Accounts payable (1)Total assets acquired and liabilities assumed $7,752 The license solely covers pending patent applications at this time. The Company will amortize the intangible assets related to the reacquired rights ofthe Company technology over 4 years, which represents the period until the next action date of the pending patent application in the territory of the licenseissued to Inex Bio.The Company paid Holdings cash of $6.5 million and issued warrants to acquire 2,609,520 shares of the Company’s Class A common stock at anexercise price of $2.00 per share for its assistance in negotiating the acquisition of Inex Bio from the other owners. The Company valued the warrants usingthe Black-Sholes option-pricing model with a stock price of $10.72 per share as of March 30, 2015, an expected term of 0.04 years, and a volatility of 80%.This resulted in a fair value of total warrants of $22.7 million. In April 2015, the Company received $5.2 million for the full exercise of the warrants.The following summarizes the net consideration paid to Holdings (in thousands): Consideration Total Cash $6,518 Fair value of warrants 22,747 Less cash paid to acquire shares in Inex Bio (1,100)Net consideration $28,165 The Company recorded compensation expense for the portion of the cash and warrants issued to Holdings that exceeded the fair value of the sharesacquired consistent with ASC Topic 718. The Company recorded $22.7 million of stock-based compensation and $5.4 million of cash compensation to theCompany’s CEO and the former director as a result of acquiring their interest in Inex Bio. 14915. Summarized Quarterly Data (Unaudited)The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement ofthe results of the interim periods.The table below presents unaudited quarterly data for fiscal 2016 and 2015 (in thousands, except for share and per share amounts): 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2016 Revenue $6 $12 $12 $14 Operating expenses 31,622 34,977 32,787 25,157 Operating loss (31,616) (34,965) (32,775) (25,143)Net loss (30,677) (33,997) (31,897) (24,238)Net loss per share - basic and diluted $(0.38) $(0.41) $(0.39) $(0.29)Shares used in calculating net loss per share - basic and diluted 81,574,709 81,959,248 82,154,219 82,235,571 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2015 Revenue $120 $91 $10 $15 Operating expenses 32,221 130,486 46,467 29,938 Operating loss (32,101) (130,395) (46,457) (29,923)Net loss (32,849) (130,893) (46,312) (26,822)Net loss per share - basic and diluted $(0.54) $(1.99) $(0.60) $(0.33)Shares used in calculating net loss per share - basic and diluted 61,137,625 65,789,041 77,837,586 81,247,430 16. Employee BenefitsBenefit Plan - In December 2015, the Company adopted a 401(k) retirement and savings plan (the 401(k) Plan) covering all employees. The 401(k)Plan allows employees to make pre- and post-tax contributions up to the maximum allowable amount set by the IRS. The Company, at its discretion, maymake certain contributions to the 401(k) Plan. The Company made contributions of $0.2 million and $4,000 during the years ended December 31, 2016 and2015, respectively.Compensated Absences – Under the Company’s vacation policy, certain salaried employees are provided unlimited vacation leave. Therefore, theCompany does not record an accrual for paid leave related to these employees since the Company is unable to reasonably estimate the compensated absencesthat these employees will take.17. Subsequent EventRelated Party AgreementIn February 2017, the Company entered into a research grant agreement with VivaBioCell, S.p.A. (VBC), an affiliated company of NantWorks, underwhich VBC will conduct research and development activities related to the Company’s NK cell lines using VBC’s proprietary technology. Within 60 daysafter the one year anniversary of the agreement, VBC will provide the Company a final report summarizing the progress and results of the research anddevelopment activities including a description of any inventions and intellectual property rights derived from the work performed. The Company has thefirst right of refusal in the event any third party offers to purchase such derived inventions and intellectual properties from VBC. The Company paid $0.6million to VBC and expects to benefit from the research and development activities over a one year timeframe. 150Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.As previously reported on our Current Report on Form 8-K, dated August 24, 2016, the Audit Committee of our Board of Directors approved thedismissal of Mayer Hoffman McCann, P.C. (“Mayer Hoffman”), as our independent registered public accounting firm and approved the engagement of Ernst& Young LLP (“E&Y”), effective August 24, 2016. During the fiscal years ended December 31, 2014 and 2015, and during the subsequent interim periodthrough August 24, 2016, there were no disagreements with Mayer Hoffman on any matter of accounting principles or practices, financial statementdisclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Mayer Hoffman, would have caused Mayer Hoffman tomake reference to the subject matter of the disagreements. Additionally, there were no reportable events (as that term is described in Item 304(a)(1)(v) ofRegulation S-K) during the fiscal years ended December 31, 2014 and 2015, or during the subsequent interim period through August 24, 2016, except for theexistence of a material weakness in internal control over financial reporting as previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2015.Item 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresManagement, with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of ourdisclosure controls and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) of the SecuritiesExchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance thatinformation required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated toour management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that anycontrols and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired control objectives, andmanagement necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on theevaluation of our disclosure controls and procedures as of December 31, 2016, our CEO and CFO have concluded that, as of December 31, 2016, ourdisclosure controls and procedures were effective at the reasonable assurance level.Management's Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of ourmanagement, including our CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionsof our assets; (ii) provide reasonable assurance (a) transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, (b) our receipts and expenditures are being made only in accordance with authorizations of our management anddirectors; and (c) regarding the prevention or timely detection of the unauthorized acquisition, use or disposition of assets that could have a material effect onour financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.As of December 31, 2016, our management conducted an evaluation of the effectiveness of our internal control over financial reporting using thecriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based onthis evaluation, our management concluded that, as of December 31, 2016, our internal control over financial reporting was effective.This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commissionthat permit us to provide only management’s report in this annual report.151Changes in Internal Control over Financial ReportingDuring the year ended December 31, 2016, we implemented internal control procedures to address previously identified material weaknesses related to(1) our chief financial officer having almost complete responsibility for the processing of financial information; (2) our finance department not havingadequate staff to process in a timely manner complex, non-routine transactions, including accounting for our investment in and asset purchase of Inex Bio, aswell as transactions such as stock-based awards and build-to-suit leases; and (3) a lack of adequate staffing levels, resulting in insufficient time spent onreview and approval of certain information used to prepare our condensed consolidated financial statements and the maintenance of effective controls toadequately monitor and review significant transactions for financial statement completeness and accuracy. In order to address these material weaknesses, wehired experienced personnel and have increased staffing levels by adding a Chief Accounting Officer, Assistant Controller, and Sr. Director of FinancialReporting for oversight and review and financial consultants to assist in the accounting and financial reporting, as well as hiring additional accountingpersonnel. In addition, we have implemented processes to ensure that non-routine judgmental and technical accounting transactions are documented andreviewed by multiple levels of internal management prior to the filing of our financial statements with the SEC. After completing our testing of the designand operating effectiveness of these new procedures, we concluded that we have remediated the previously identified material weaknesses as of December 31,2016.Except for the items described above, there have been no changes in our internal control over financial reporting identified in connection with theevaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2016 that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of ControlsManagement recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance thatthe objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments indecision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by theindividual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliancewith policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected.Item 9B. Other Information.None. 152PART IIIItem 10. Directors, Executive Officers and Corporate Governance.The information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission onSchedule 14A in connection with our 2017 Annual Meeting of Stockholders or the Proxy Statement, which is expected to be filed not later than 120 daysafter the end of our fiscal year ended December 31, 2016, and is incorporated herein by reference.Item 11. Executive Compensation.The information required by this item will be contained in the Proxy Statement under the headings “Executive Compensation” and “DirectorCompensation,” and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this item will be contained in the Proxy Statement under the headings “Security Ownership of Certain Beneficial Ownersand Management” and “Equity Compensation Plan Information,” and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director Independence.The information required by this item will be contained in the Proxy Statement under the headings “Certain Relationships and Related PartyTransactions” and “Corporate Governance,” and is incorporated herein by reference.Item 14. Principal Accounting Fees and Services.The information required by this item will be contained in the Proxy Statement under the heading “Ratification of Independent Registered PublicAccounting Firm—Principal Accounting Fees and Services” and is incorporated herein by reference. 153PART IVItem 15. Exhibits, Financial Statement Schedules.(a) The consolidated financial statements schedules and exhibits filed as part of this Annual Report on Form 10-K, or Annual Report, are as follows:(1) Consolidated financial statementsReference is made to the consolidated financial statements identified in the “Index to Financial Statements” under Part II, Item 8 of this AnnualReport.(2) Financial Statement SchedulesAll other schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is otherwise in theconsolidated financial statements or notes thereto.(3) ExhibitsThe documents listed in the Exhibit Index of this Annual Report are incorporated by reference or are filed with this Annual Report, in each case asindicated therein (numbered in accordance with Item 601 of Regulation S-K). 154SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this AnnualReport on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. NantKwest, Inc. Date: March 15, 2017 By:/s/ Patrick Soon-Shiong Patrick Soon-Shiong Chairman and Chief Executive Officer POWER OF ATTORNEYEach person whose signature appears below constitutes and appoints Patrick Soon-Shiong and Richard J. Tajak, and each of them, as his or her trueand lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power andauthority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as heor she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, maylawfully do or cause to be done by virtue thereof.Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by thefollowing persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Patrick Soon-Shiong Chairman of the Board of Directors and Chief ExecutiveOfficer(Principal Executive Officer) March 15, 2017Patrick Soon-Shiong /s/ Barry J. Simon President, Chief Administrative Officer and Director March 15, 2017Barry J. Simon /s/ Richard J. Tajak Interim Chief Financial Officer(Principal Financial Officer) March 15, 2017Richard J. Tajak /s/ Sonja Nelson Chief Accounting Officer(Principal Accounting Officer) March 15, 2017Sonja Nelson /s/ Steve Gorlin Vice Chairman of the Board of Directors March 15, 2017Steve Gorlin /s/ Michael D. Blaszyk Director March 15, 2017Michael D. Blaszyk /s/ Richard Kusserow Director March 15, 2017Richard Kusserow /s/ John T. Potts, Jr. Director March 15, 2017John T Potts, Jr. /s/ John C. Thomas, Jr. Director March 15, 2017John C. Thomas, Jr. 155Exhibit Index ExhibitNumber Incorporated by Reference Herein Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of NantKwest, Inc. 8-K 001-37507 3.1 August 4, 2015 3.2 Amended and Restated Bylaws of NantKwest, Inc. 8-K 001-37507 3.2 August 4, 2015 4.1 Nominating Agreement by and between the Registrant and CambridgeEquities, LP, dated June 18, 2015. S-1 333-205124 4.1 June 19, 2015 4.2 Form of Registration Rights Agreement by and between the Company andthe Purchasers of Common Stock, dated June 2015. S-1 333-205124 4.2 June 19, 2015 4.3 Registration Rights Agreement by and between the Company andCambridge Equities LP, dated December 23, 2014. S-1 333-205124 4.3 June 19, 2015 4.4 Registration Rights Agreement by and between the Company andSorrento Therapeutics, Inc., dated December 13, 2014. S-1 333-205124 4.4 June 19, 2015 4.5 Form of Subscription and Securities Purchase Agreement among theCompany and the Subscribers of Series C Preferred Stock, dated as of April1, 2014. S-1 333-205124 4.5 June 19, 2015 4.6 Registration Rights Agreement, among the Company and the purchasersof Series B Preferred Stock, dated as of June 20, 2013. S-1 333-205124 4.6 June 19, 2015 4.7 Specimen common stock certificate S-1/A 333-205124 4.7 July 15, 2015 10.1 Form of Indemnification Agreement between the Company and each of itsdirectors and executive officers. S-1 333-205124 10.1 June 19, 2015 10.2+ 2014 Equity Incentive Plan and forms of agreements thereunder. S-1 333-205124 10.2 June 19, 2015 10.3+ 2015 Equity Incentive Plan and forms of agreements thereunder. S-1/A 333-205124 10.3 July 15, 2015 10.4+ Executive Incentive Compensation Plan. S-1/A 333-205124 10.4 July 15, 2015 10.5+ Amended and Restated Executive Employment Agreement between theCompany and Patrick Soon-Shiong, effective March 24, 2015. S-1/A 333-205124 10.5 July 15, 2015 10.6+ Executive Employment Agreement between the Company and Barry J.Simon, M.D., dated January 1, 2015. S-1 333-205124 10.6 June 19, 2015 10.7 License Agreement between the Company and Brink Biologics, Inc.,dated June 9, 2015. S-1 333-205124 10.7 June 19, 2015 10.8 License Agreement between the Company and Coneksis, Inc., dated June9, 2015. S-1 333-205124 10.8 June 19, 2015 10.9 Joint Development and License Agreement between the Company andSorrento Therapeutics, Inc. dated December 18, 2014. S-1 333-205124 10.9 June 19, 2015 10.10 License Agreement between the Company and Intrexon Corporation,dated February 23, 2010. S-1 333-205124 10.10 June 19, 2015 10.11 UHN-ZelleRx License Agreement between University Health Network andthe Company, dated May 9, 2005. S-1 333-205124 10.11 June 19, 2015 10.12 License Agreement, as amended, between Fox Chase Cancer Center andthe Company, dated as of July 10, 2004. S-1 333-205124 10.12 June 19, 2015 10.13 Rush-ZelleRx License Agreement, between Rush University MedicalCenter and the Registrant, dated as of March 24, 2004. S-1 333-205124 10.13 June 19, 2015156ExhibitNumber Incorporated by Reference Herein Description Form File No. Exhibit Filing Date 10.14 License Agreement, as amended, between Hans G. Klingemann and theCompany, dated February 10, 2003. S-1/A 333-205124 10.14 July 27, 2015 10.15 Form of Warrant to Purchase Common Stock issued pursuant to theSecurities Purchase Agreement dated April 1, 2014. S-1 333-205124 10.15 June 19, 2015 10.16 Common Stock Purchase Warrant issued March 24, 2015 to Patrick Soon-Shiong, M.D. S-1 333-205124 10.16 June 19, 2015 10.17 Form of Warrant to Purchase Common Stock issued March 14, 2008. S-1 333-205124 10.17 June 19, 2015 10.18 Genomic and Proteomic Services Agreement by and between theCompany and NantOmics, LLC, dated June 18, 2015. S-1 333-205124 10.18 June 19, 2015 10.19 Lease Agreement by and between ARE - John Hopkins Court, LLC andthe Company, dated June 19, 2015. S-1/A 333-205124 10.19 July 27, 2015 10.20 Sublease Agreement between Novartis Institute for Functional Genomics,Inc. and the Company, dated July 24, 2015. S-1/A 333-205124 10.20 July 27, 2015 10.21 Shared Services Agreement by and between the Company and NantWorks,LLC, dated November 10, 2015. 10-K 001-37507 10.22 March 30, 2016 10.22 Facility License Agreement by and between the Company andNantWorks, LLC, dated November 10, 2015. 10-K 001-37507 10.23 March 30, 2016 10.23+ Offer Letter between Sonja Nelson and the Company, dated April 7, 2016 10-Q 001-37507 10.1 May 16, 2016 10.24 Amended and Restated Shared Services Agreement by and between theCompany and NantWorks LLC, dated June 28, 2016 10-Q 001-37507 10.1 August 15, 2016 10.25 Lease agreement by and between the Company and 605 Doug Street, LLC,dated June 28, 2016 10-Q 001-37507 10.1 November 10, 2016 21.1* Subsidiaries. 23.1* Consent of Ernst & Young LLP, Independent Registered PublicAccounting Firm. 23.2* Consent of Mayer Hoffman McCann P.C., Independent Registered PublicAccounting Firm. 24.1* Power of Attorney (Contained on Signature Page to this Annual Report onForm 10-K). 31.1* Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer 31.2* Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer 32.1** Section 1350 Certification of Chief Executive Officer. 32.2** Section 1350 Certification of Chief Financial Officer. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 157ExhibitNumber Incorporated by Reference Herein Description Form File No. Exhibit Filing Date 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document *Filed herewith.**The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report, are deemed furnished and not filed with the Securities andExchange Commission and are not to be incorporated by reference into any filing of NantKwest, Inc. under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report, irrespective of any generalincorporation language contained in such filing.+Indicates a management contract or compensatory plan. †Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment. 158 Exhibit 21.1SUBSIDIARIES OF NANTKWEST, INC. Name of Subsidiary Jurisdiction of OrganizationInex Bio, Inc. Republic of KoreaInfacell, Therapeutics, Inc. Delaware EXHIBIT 23.1 Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-205942) pertaining to the 2015Equity Incentive Plan and 2014 Equity Incentive Plan, and in the Registration Statement on Form S-3 (No. 333-213174) for theregistration of common stock, preferred stock, warrants, debt securities and units of our report dated March 15, 2017, with respect tothe consolidated financial statements of NantKwest, Inc., included in this Annual Report (Form 10-K) for the year ended December31, 2016./s/ Ernst & Young LLPLos Angeles, CaliforniaMarch 15, 2017 EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in Registration Statement No. 333-205942 on Form S-8 and No. 333-213174 onForm S-3 of NantKwest, Inc., of our report dated March 30, 2016 relating to the consolidated financial statements, which appears inthis Form 10-K. /s/ Mayer Hoffman McCann P.C.San Diego, CaliforniaMarch 15, 2017 EXHIBIT 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Patrick Soon-Shiong, certify that:1.I have reviewed this Form 10-K of NantKwest, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. Date:March 15, 2017/s/ Patrick Soon-Shiong Patrick Soon-Shiong Chief Executive Officer (Principal Executive Officer) EXHIBIT 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Richard Tajak, certify that:1.I have reviewed this Form 10-K NantKwest, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. Date:March 15, 2017/s/ Richard Tajak Richard Tajak Chief Financial Officer (Principal Financial Officer) EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Patrick Soon-Shiong, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport on Form 10-K of NantKwest, Inc. for the fiscal year ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financialcondition and results of operations of NantKwest, Inc. Date: March 15, 2017By:/s/ Patrick Soon-Shiong Name: Patrick Soon-Shiong Title: Chief Executive Officer EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Richard Tajak, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Reporton Form 10-K of NantKwest, Inc. for the fiscal year ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial conditionand results of operations of NantKwest, Inc. Date: March 15, 2017By:/s/ Richard Tajak Name: Richard Tajak Title: Chief Financial Officer 

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