S-1/A
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As filed with the Securities and Exchange Commission on July 8, 2020

 

Registration No. 333-239301

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Nkarta, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   47-4515206
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Nkarta, Inc.

6000 Shoreline Court, Suite 102

South San Francisco, CA 94080

415-582-4923

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Paul J. Hastings

Nkarta, Inc.

6000 Shoreline Court, Suite 102

South San Francisco, CA 94080

415-582-4923

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

C. Brophy Christensen, Jr., Esq.

Eric C. Sibbitt, Esq.

O’Melveny & Myers LLP

Two Embarcadero Center, 28th Floor

San Francisco, California 94111-3823

(415) 984-8700

 

Christopher M. Forrester

Ilir Mujalovic

Shearman & Sterling LLP

1460 El Camino Real, 2nd Floor

Menlo Park, CA 94025-4110

(650) 838-3600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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

 

Large accelerated filer       Accelerated filer  
Non-accelerated filer       Smaller reporting company  
      Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be
Registered
 

Amount

to be Registered(1)

 

Proposed

Maximum Offering Price
Per Share

   Proposed
Maximum Aggregate
Offering Price(1)(2)
   Amount of
Registration Fee(3)

Common stock, $0.0001 par value per share

 

14,950,000 shares

 

$17.00

   $254,150,000    $32,988.67

 

 

(1) 

Includes 1,950,000 shares of common stock that the underwriters have the option to purchase.

 

(2) 

Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

 

(3) 

$23,883.20 of this registration fee was previously paid by the Registrant.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion)

Dated July 8, 2020

 

 

13,000,000 Shares

 

LOGO

Nkarta, Inc.

Common Stock

This is the initial public offering of shares of our common stock. We are offering 13,000,000 shares of our common stock. Prior to this offering, there has not been a public market for our common stock. We have applied for listing of our common stock on the Nasdaq Global Select Market under the symbol “NKTX.” We expect that the public offering price will be between $16.00 and $17.00 per share.

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”

Our business and an investment in our common stock involve significant risks. These risks are described under the caption “Risk Factors” beginning on page 13 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

    Per Share      Total  

Public offering price

  $                    $                

Underwriting discount(1)

  $        $    

Proceeds, before expenses, to us

  $        $    

 

(1) 

See “Underwriting” beginning on page 172 for a description of the compensation payable to the underwriters.

The underwriters may also purchase up to an additional 1,950,000 shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

The underwriters expect to deliver the shares against payment in New York, New York on                    , 2020.

 

 

 

 

Cowen    Evercore ISI   Stifel    Mizuho Securities

 

 

 

                    , 2020


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TABLE OF CONTENTS

 

Prospectus Summary

    1  

Risk Factors

    13  

Special Note Regarding Forward-Looking Statements

    63  

Market and Industry Data

    65  

Use of Proceeds

    66  

Dividend Policy

    68  

Capitalization

    69  

Dilution

    72  

Selected Financial Data

    74  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    77  

Business

    96  

Management

    134  

Executive Compensation

    143  

Principal Stockholders

    150  

Certain Relationships and Related Party Transactions

    154  

Description of Capital Stock

    158  

Shares Eligible for Future Sale

    165  

Material U.S. Federal Income Tax Considerations to Non-U.S. Holders of Our Common Stock

    168  

Underwriting

    172  

Legal Matters

    178  

Experts

    178  

Where You Can Find Additional Information

    179  

Index to the Financial Statements

    F-1  

 

 

Through and including                     , 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.


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IMPORTANT INFORMATION ABOUT THIS PROSPECTUS

We and the underwriters have not authorized anyone to provide you with information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and growth prospects may have changed since that date.

For investors outside the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.


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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including the matters set forth under the sections of this prospectus captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

Unless the context otherwise requires, the terms “Company,” “Nkarta, Inc.,” “we,” “us” or “our” in this prospectus refer to Nkarta, Inc. We do not have any subsidiaries.

NKARTA, INC.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of allogeneic, off-the-shelf engineered natural killer, or NK, cell therapies to treat cancer. Our approach for cellular immunotherapy involves chimeric antigen receptors, or CARs, on the surface of an NK cell that enable the cell to recognize specific proteins or antigens that are present on the surface of tumor cells. The concept of a CAR builds upon and enhances the normal biology of T cells and NK cells, whereby naturally occurring receptors serve to activate these cells when a foreign pathogen or cancerous cell is detected. Our NK cell engineering platform builds on prior experience and success with engineering T cells and includes proprietary technologies that enable us to generate an abundant supply of NK cells, improve the persistence of these cells for sustained activity in the body, engineer enhanced NK cell recognition of tumor targets and to freeze, store and thaw our engineered NK cells for off-the-shelf use for the treatment of cancer. All of our product candidates are designed to be allogeneic, meaning they are produced using cells from a different person than the patient treated, as well as off-the-shelf, meaning they are produced in quantity, then frozen and therefore available for treating patients without delay, unlike existing autologous cell therapies. Based on published data from a number of clinical trials of NK cell therapies, we believe that engineered NK cells can be well tolerated and avoid some of the toxicities observed with other cell therapies.

Our two co-lead product candidates are NKX101 and NKX019. NKX101 is designed to enhance the power of innate NK biology to detect and kill cancerous cells. The primary activating receptor for NK cells is known as NKG2D, which works through the detection of stress ligands displayed by cancerous cells. We have engineered NKX101 to increase the cancer cell killing ability of our engineered NK cells by raising levels of NKG2D at least ten-fold as compared to non-engineered NK cells and by adding a costimulatory domain, which is an additional signaling element for white blood cells. Our IND for NKX101 for the treatment of relapsed or refractory AML and higher-risk MDS was accepted by the FDA in July 2020. We are planning to initiate a broad clinical program for NKX101 for blood cancers and solid tumors in 2020. Our initial indications include acute myeloid leukemia, or AML, myelodysplastic syndromes, or MDS, liver cancer, a bile duct cancer known as cholangiocarcinoma, as well as surgically removed colon cancer cases where only liver metastases remain. NKX019 is based on the ability to treat a variety of B cell malignancies by targeting the CD19 antigen that is found on these types of cancerous cells, where both engineered NK cells and T cells as well as monoclonal antibodies have demonstrated clinical activity. The two approved CAR-T therapies target CD19 and have achieved complete remission rates ranging from 32% to 63% in three pivotal clinical trials. A recent academic publication described a cohort of patients treated with a CAR-NK therapy targeting CD19 where seven of 11 (64%) of these patients achieved a complete remission. We are planning to initiate clinical trials for NKX019 in 3Q2021.



 

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We have an intensive focus on manufacturing capabilities and technology, and we are building a 2,700-square foot clinical current good manufacturing practice, or cGMP, facility on-site at our primary corporate location in South San Francisco, California. We recently completed the construction of the first phase of this facility and estimate this expense, including laboratory and manufacturing equipment, will be approximately $6.0 million. Starting in 2H2020, after qualification including several test manufacturing runs, we expect to manufacture NKX019 at this cGMP facility. In 2021, we intend to complete a smaller, final phase of this buildout as well as transfer the NKX101 manufacturing process to us. The process transfer involves demonstrating NKX101 produced at our cGMP facility meets the same release specifications as NKX101 produced at our contract manufacturer. Following this second buildout and process transfer, we plan to manufacture the proprietary, engineered K562 cells and g-retrovirus as well as NKX101 at our cGMP facility. We believe this clinical cGMP facility will be capable of manufacturing approximately 24 batches per year and supply our anticipated non-pivotal clinical trial needs. We are also in the early stages of designing a separate, larger commercial cGMP facility for manufacturing engineered NK cells for pivotal clinical trials as well as for eventual commercial supply. We believe that we can achieve a cost of manufacturing for commercial NKX101 and NKX019 at peak capacity of approximately $2,000 per dose, based on achieving 500 doses per manufacturing run at our highest planned Phase 1 dose of one billion CAR-NK cells per dose and our current estimates for the costs of raw materials, consumables, rent, construction, equipment, labor and overhead.

Our NK Cell Engineering Platform

Our NK cell engineering platform is designed to address the limitations and challenges of current technologies for engineering T cells and NK cells and is a result of our internal expertise and deep understanding of NK cell biology. Our platform includes proprietary technologies for NK cell expansion, persistence, targeting and cryopreservation. This enables us to generate an abundant supply of NK cells, engineer enhanced NK cell recognition of tumor targets, improve the persistence of these cells for sustained activity in the body, and to freeze, transport and store our engineered NK cells for off-the-shelf use for the treatment of cancer.

We have chosen to use healthy adult donors as our source for NK cells. We believe this offers a number of advantages, including a large number of NK cells to begin each manufacturing run, as compared to other potential sources of NK cells, the ability to select donors with consistent and favorable NK cell characteristics, thereby avoiding challenges with patient-derived or other cell sources, and a diverse repertoire of NK cells. Different NK sub-populations have different characteristics, and by utilizing the entire natural gamut of NK cells as our cell source, we can capitalize on the inherent diversity of the innate immune system.

Below are the four core technologies that comprise our proprietary platform:

Our Proprietary NK Cell Engineering Platform

 

 

LOGO   LOGO   LOGO   LOGO


 

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Our engineered CAR-NK cells generally consist of an NK cell engineered with a targeting receptor, OX40 costimulatory domain, CD3z signaling moiety, and mbIL-15. This platform is modular, which enables extensive optimization of different ways to enhance the natural signaling of engineered cells, as well as the ability to attach and optimize new targeting receptors. We believe these attributes will allow us to bring several novel NK cell therapies into clinical development for potential treatment of a variety of cancers in the coming years.

Key Components of our Engineered CAR-NK cells

 

LOGO

Our Product Candidates and Discovery Programs

All of our product candidates and discovery programs incorporate each of the four components of our technology platform, which we believe provides the best opportunity for achieving clinically meaningful results in our development program. Our current pipeline of product candidates and discovery programs is shown below.

 

LOGO

i.v.: intravenous administration. i.a.: intraarterial administration through the hepatic artery. IND: Investigational New Drug application.

Manufacturing

Our process for the generation of an allogeneic, off-the-shelf NK cell therapy requires a number of steps. To achieve a commercially viable product, we believe that each of these steps must be scalable, reproducible and cost-effective and must provide consistent cancer cell killing potency of our CAR-NK



 

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cells once these cells are frozen and then thawed. Therefore, we have focused on developing a manufacturing process that incorporates the following elements:

 

   

a cell source which provides high numbers of easily characterized NK cells;

 

   

expansion technology which increases the number of NK cells by orders of magnitude, without creating exhaustion;

 

   

techniques for genetic engineering of NK cells which are cost-effective and which introduce a controlled and specified range of the number of copies of the gene into each cell;

 

   

cryopreservation techniques that permit bulk CAR-NK cells to be frozen in individual doses; and

 

   

techniques for thawing the frozen NK cell product that are easy to adopt in different clinical settings, and that provide consistent CAR-NK cell recovery, viability and potency.

Our overall manufacturing scheme is shown in the diagram below.

 

LOGO

Our Strategy

Key elements of our strategy include:

 

   

Develop NKX101 for blood cancers and solid tumors.

 

   

Develop NKX019 for B cell malignancies.

 

   

Apply our NK cell engineering platform to build a broad pipeline of product candidates and discovery programs incorporating engineered NK cells.

 

   

Continue to build proprietary manufacturing capabilities to enable speed, control, flexibility, scalability, and cost efficiency.

 

   

Continue to opportunistically evaluate enabling, adjacent or potential competing technologies to advance our platform.

Recent Developments

On March 11, 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus, COVID-19, as a global pandemic, which continues to spread throughout the United States and around the world. Our headquarters are located in the San Francisco Bay Area, which is subject to executive orders directing that all individuals living in the State of California and the County of San Mateo stay at home or their place of residence for an indefinite period of time (subject to certain exceptions to facilitate authorized necessary activities) to mitigate the impact of the COVID-19 pandemic. As we continue to actively advance all of our discovery and clinical programs, we are in



 

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close contact with our principal investigators and clinical sites, which are primarily located in Colorado, Ohio, and Ontario, and are assessing the impact of COVID-19 on our clinical trials, expected timelines and costs on an ongoing basis. In light of recent developments relating to the COVID-19 pandemic, the primary focus of healthcare providers and hospitals is currently on fighting the virus. In addition, in response to these executive orders, we have implemented work-from-home policies for employees and temporarily scaled back our operations. This partial disruption, even if temporary, may severely impact our operations and overall business by delaying the progress of our research and development programs, including our planned preclinical studies and clinical trials, or by limiting our ability to recruit physicians or clinicians to run our clinical trials, enroll patients or conduct follow-up assessments in our clinical trials. See “Risk Factors—Our business and the business or operations of our research partners and other third parties with whom we conduct business could be adversely affected by the effects of health epidemics, including the recent COVID-19 pandemic, in regions where we or third parties on which we rely have business operations.” for more information regarding the potential impact of COVID-19 on our business and operations. We will continue to evaluate the impact of the COVID-19 pandemic on our business and expect to reevaluate the timing of our anticipated preclinical and clinical milestones as we learn more and the impact of COVID-19 on our industry becomes more clear.

Financial Update

As of July 1, 2020, our cash, cash equivalents, short-term investments and restricted cash totaled $76 million.

Risks Associated with Our Business

Our business and our ability to execute our strategy are subject to many risks. Before making a decision to invest in our common stock, you should carefully consider all of the risks and uncertainties described in the section of this prospectus captioned “Risk Factors” immediately following this Prospectus Summary and all of the other information in this prospectus. These risks include, but are not limited to the following:

 

   

We have a limited operating history and do not have any product approved for sale.

 

   

We have incurred significant losses since our inception and we expect to incur significant losses for the foreseeable future, which raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient additional funding to finance our operations.

 

   

We will require additional capital, which, if available, may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our product candidates.

 

   

Our business and the business or operations of our research partners and other third parties with whom we conduct business could be adversely affected by the effects of health epidemics, including the recent COVID-19 pandemic, in regions where we or third parties on which we rely have business operations.

 

   

Our business depends upon the success of our CAR-NK cell technology platform.

 

   

Utilizing CAR-NK cells represents a novel approach to immuno-oncology treatment of cancer, and we must overcome significant challenges in order to successfully develop, manufacture, and commercialize our product candidates.

 

   

Clinical development involves a lengthy and expensive process with an uncertain outcome, and we may encounter substantial delays due to a variety of reasons outside our control.

 

   

Our manufacturing process is complex and we may encounter difficulties in production, which would delay or prevent our ability to provide a sufficient supply of our product candidates for clinical trials or our products for patients, if approved.



 

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If our license agreement with National University of Singapore and St. Jude’s Children’s Research Hospital, Inc. is terminated, we could lose our rights to key components enabling our NK cell engineering platform.

 

   

If any patent protection we obtain is not sufficiently robust, our competitors could develop and commercialize products and technology similar or identical to ours.

 

   

If any of our product candidates are approved for marketing and commercialization and we have not developed or secured third-party marketing, sales and distribution capabilities, we will be unable to successfully commercialize any such products and may not be able to generate product revenue.

Our independent registered public accounting firm included an explanatory paragraph in their audit report on the financial statements as of and for the years ended December 31, 2018 and 2019 stating that our recurring losses from operations and negative cash flows since inception and our need to raise additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. We closed the second tranche of our Series B convertible preferred stock financing on July 1, 2020, and issued 27,066,206 shares of Series B convertible preferred stock for gross proceeds of $64.4 million, pursuant to a milestone waiver by the holders of our Series B convertible preferred stock. At March 31, 2020, we had cash, cash equivalents, restricted cash and short term investments of $26.0 million. Assuming we had received the proceeds from this second tranche financing as of March 31, 2020, our total cash, cash equivalents, restricted cash and short term investments on that date would have been $90.4 million. Our cash equivalents are held in money market funds. We believe that the cash on hand will be sufficient to fund our operations for at least the next 12 months from the date of this prospectus. Since inception, we have incurred net losses and negative cash flows from operations. At March 31, 2020, we had an accumulated deficit of $33.7 million.

Corporate Information and History

We were incorporated in Delaware in July 2015. Our principal executive offices are located at 6000 Shoreline Court, Suite 102, South San Francisco, CA 94080, and our telephone number at this address is 415-582-4923. Our website is www.nkartatx.com. Information contained in, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.

“NKARTA” is a trademark of Nkarta, Inc. in the United States and certain other countries. All trademarks or trade names referred to in this prospectus are the property of their respective owners.

Implications of Being an Emerging Growth Company and a Smaller Reporting Company

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we are eligible and may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including:

 

   

a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

an exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act;

 

   

exemption from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements;



 

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reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

   

an extended transition period for complying with new or revised accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

However, we are choosing to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Following this offering, we will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year during which we had total annual gross revenues of at least $1.07 billion (as indexed for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under this registration statement, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer,” as defined under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue is less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. Even after we no longer qualify as an emerging growth company, we may still qualify as a smaller reporting company, which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and in our periodic reports and proxy statements.

Because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. See the section entitled “Risk Factors—Risks Related to Our Common Stock and This Offering—We are an “emerging growth company” under the JOBS Act and a “smaller reporting company,” and we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. As a result of the reduced disclosure and governance requirements applicable to emerging growth companies or smaller reporting companies, our common stock may be less attractive to investors” for certain risks related to our status as an emerging growth company and a smaller reporting company.



 

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THE OFFERING

 

Common stock offered by us

13,000,000 shares.

 

Common stock to be outstanding after this offering

29,427,537 shares (or 31,377,537 shares, if the underwriters exercise their over-allotment option in full).

 

Over-allotment option offered by us

1,950,000 shares.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $195.5 million (or $225.4 million if the underwriters exercise their over-allotment option in full), based on the assumed initial public offering price of $16.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

  Based on our planned use of the net proceeds from this offering and our existing cash and cash equivalents, we anticipate that such funds will be sufficient to enable us to fund our operating expenses and capital expenditure requirements for at least the next two years. We currently expect to use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

   

Approximately $65 million to fund our internal discovery research, process development, manufacturing and clinical activities during this time;

 

   

Approximately $15 million to fund the external costs for the development of NKX101 through the completion of dose finding for NKX101 in hematological malignancies;

 

   

Approximately $10 million to fund the external costs for the development of NKX019 through the completion of dose finding for NKX019 in B-cell malignancies;

 

   

Approximately $5 million to fund the external costs for the development of Program 3 to the filing of an IND with the FDA;

 

   

Approximately $10 million to fund the initial buildout and qualification of our commercial cGMP facility; and



 

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The remainder for our other pipeline candidates and general corporate purposes.

 

  Pending the specific use of net proceeds as described in this prospectus, we intend to invest the net proceeds to us from this offering in short- and intermediate-term investment grade instruments, certificates of deposit or guaranteed obligations of the U.S. government. See “Use of Proceeds.”

 

Proposed Nasdaq Global Select Market symbol

“NKTX”

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

The number of shares of common stock that will be outstanding after this offering is based on 16,427,537 shares of our common stock (including all outstanding shares of our convertible preferred stock as of March 31, 2020 and shares issued in the second tranche of our Series B convertible preferred stock financing on July 1, 2020 on an as-converted basis and unvested shares issued pursuant to the early exercise of stock options which are subject to potential forfeiture) outstanding as of March 31, 2020, and excludes:

 

   

2,487,763 shares of common stock issuable upon the exercise of outstanding stock options under our 2015 Equity Incentive Plan, at a weighted-average exercise price of $3.63 per share, as of March 31, 2020;

 

   

252,170 shares of our common stock reserved for future issuance pursuant to our 2015 Equity Incentive Plan, as of March 31, 2020 (no new awards will be granted under the 2015 Equity Incentive Plan after this offering);

 

   

76,483 shares of our common stock issuable upon the exercise of stock options granted after March 31, 2020, with an exercise price of $4.33 per share, and approximately 1.2 million shares of our common stock issuable upon the exercise of stock options granted after March 31, 2020, with an exercise price equal to the public offering price set forth on the cover page of this prospectus;

 

   

2,660,371 shares of our common stock reserved for future issuance under our 2020 Performance Incentive Plan, which will become effective prior to the completion of this offering; and

 

   

295,599 shares of common stock reserved for future issuance under our 2020 Employee Stock Purchase Plan, or ESPP, which will become effective prior to the completion of this offering.

Our 2020 Performance Incentive Plan and ESPP each provide for annual automatic increases in the number of shares reserved thereunder, as more fully described in the section titled “Executive Compensation—Equity Incentive Plans.”

Unless we specifically state otherwise or the context otherwise requires, all information in this prospectus assumes:

 

   

a 1-for-3.7 reverse stock split of our common stock and a proportional adjustment to the conversion ratio of our convertible preferred stock, which became effective on July 1, 2020;



 

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the conversion of all outstanding shares of our convertible preferred stock as of March 31, 2020 and shares issued in the second tranche of our Series B convertible preferred stock financing on July 1, 2020, into an aggregate of 14,689,215 shares of our common stock, the conversion of which will occur immediately prior to the completion of this offering;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation, as amended and restated, our Certificate of Incorporation, in Delaware and the effectiveness of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

   

no exercise of outstanding stock options subsequent to March 31, 2020;

 

   

no exercise by the underwriters of their over-allotment option; and

 

   

no forfeiture of unvested shares of common stock issued pursuant to the early exercise of stock options.

Certain of our existing stockholders, including entities affiliated with certain of our directors, have indicated an interest in purchasing a substantial percentage of the shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering.



 

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SUMMARY FINANCIAL DATA

Summary Financial Data

The summary statements of operations data for the years ended December 31, 2018 and 2019 and the selected balance sheet data as of December 31, 2018 and 2019 presented below are derived from our audited financial statements included elsewhere in this prospectus. The summary statements of operations data for the three months ended March 31, 2019 and 2020 and the selected balance sheet data as of March 31, 2020 are derived from our unaudited financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on a basis consistent with our audited financial statements and, in the opinion of management, such unaudited interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of our unaudited interim financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year or any other period. The following summary financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

Statements of Operations Data

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2018     2019     2019     2020  
                (Unaudited)  

Statement of Operations Data:

       

Collaboration revenue

  $ 6,550,000     $ 115,385     $ 113,077     $  

Operating expenses:

       

Research and development

    4,252,210       17,216,955       2,294,117       7,259,838  

General and administrative

    2,654,239       5,246,960       939,838       2,148,421  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    6,906,449       22,463,915       3,233,955       9,408,259  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (356,449     (22,348,530     (3,120,878     (9,408,259

Other income (expense):

       

Change in fair value of preferred stock purchase right liability

          1,317,582             577,645  

Change in fair value of derivative liability

          858,331              

Loss from extinguishment of debt

          (752,167            

Interest expense

          (472,819            

Interest income

    81,946       304,106       37,899       124,611  

Other income, net

          17,662              
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    81,946       1,272,695       37,899       702,256  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (274,503   $ (21,075,835   $ (3,082,979   $ (8,706,003
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss:

       

Net loss

  $ (274,503   $ (21,075,835   $ (3,082,979   $ (8,706,003

Other comprehensive loss

          (2,139           (1,403
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  $ (274,503   $ (21,077,974   $ (3,082,979   $ (8,707,406
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

  $ (0.26   $ (14.41   $ 2.36     $ (5.41
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted(1)(2)

    1,064,967       1,462,511       1,307,735       1,609,184  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(1)(2)

    $ (1.30     $ (0.53
   

 

 

     

 

 

 

Pro forma weighted average shares outstanding, basic and diluted (unaudited)(1)(2)

      16,151,726         16,298,399  
   

 

 

     

 

 

 


 

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(1) 

See Notes 2 and 16 to our audited financial statements for an explanation of the method used to calculate historical and pro forma basic and diluted net loss per share for the year ended December 31, 2019 and Note 3 to our unaudited interim financial statements for an explanation of the method used to calculate historical and pro forma basic and diluted net loss per share for the three-month period ended March 31, 2020. Pro forma basic and diluted net loss per share for purposes of these calculations also includes the effect of the sale and issuance of 27,066,206 shares of Series B convertible preferred stock and the conversion of such shares into 7,315,181 shares of common stock as if such issuance and conversion occurred on January 1, 2019.

 

(2) 

Reflects a 1-for-3.7 reverse stock split of our common stock, which became effective on July 1, 2020.

 

    As of March 31, 2020  
    Actual     Pro Forma
Giving Effect to
the Series B 2nd
Tranche
Closing(1)
    Pro Forma Giving
Effect to the
Conversion of All
Preferred Stock(1)(2)
    Pro Forma
As Adjusted(3)(4)(5)
 

Balance Sheet Data:

       

Cash, cash equivalents, short-term investments and restricted cash

  $ 25,964,681     $ 90,364,658     $ 90,364,658     $ 285,849,658  

Working capital(6)

    17,095,932       82,395,909       82,395,909       277,889,909  

Total assets

    41,122,966       105,522,943       105,522,943       301,007,943  

Preferred stock purchase right liability

    900,000       —         —         —    

Total liabilities

    15,001,950       14,101,950       14,101,950       14,101,950  

Convertible preferred stock

    59,814,882       125,114,859       —         —    

Accumulated deficit

    (35,365,745     (35,365,745     (35,365,745     (35,365,745

Total stockholders’ (deficit) equity

  $ (33,693,866     (33,693,866     91,420,993       286,905,993  

 

(1) 

The pro forma information in this column gives effect to the sale and issuance of 27,066,206 shares in the second tranche of our Series B convertible preferred stock financing on July 1, 2020 with gross proceeds of $64.4 million and the reclassification of the tranche liability to preferred stock.

 

(2) 

The pro forma information in this column gives effect to (i) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 14,689,215 shares of common stock upon the completion of this initial public offering, and (ii) the filing and effectiveness of our Certificate of Incorporation in Delaware, as if such conversion, reclassification and effectiveness had occurred on March 31, 2020.

 

(3) 

The pro forma as adjusted information in the table gives further effect to the pro forma adjustments set forth above and the sale and issuance by us of shares of our common stock in this offering, based upon the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(4) 

Each $1.00 increase or decrease in the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, working capital, total assets, and total stockholders’ equity (deficit) by $12.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, working capital, total assets, and total stockholders’ equity (deficit) by $15.3 million, assuming an initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(5) 

As of July 1, 2020, our cash, cash equivalents, short-term investments and restricted cash totaled $76 million.

 

(6) 

We define working capital as current assets less current liabilities.



 

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RISK FACTORS

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as all of the other information contained in this prospectus, before making an investment decision. The risks described below are not the only ones facing us. The occurrence of any of the following risks, or of additional risks and uncertainties not presently known to us or that we currently believe to be immaterial, could significantly harm our business, financial condition, results of operations and growth prospects. In such case, the trading price of shares of our common stock could decline, and you may lose part or all of your investment.

RISKS RELATED TO OUR FINANCIAL POSITION

We have a limited operating history and do not have any product approved for sale.

We are a development-stage biopharmaceutical company without any products approved for commercial sale, and have not generated any revenue from product sales. We are focused on developing genetically-engineered human cells as therapeutics and our technologies are new and largely unproven. Since our inception in 2015, we have invested most of our resources in developing our product candidates, building our intellectual property portfolio, developing our supply chain, conducting business planning, raising capital and providing general and administrative support for these operations. Consequently, we have no meaningful operations upon which to evaluate our business, and predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing drug products. We have not yet demonstrated an ability to overcome many of the risks and uncertainties frequently encountered by companies in the rapidly evolving biotechnology industry. If we do not address these risks, our business, financial condition, results of operations and growth prospects will be materially adversely affected.

We have incurred significant losses since our inception and we expect to incur significant losses for the foreseeable future, which raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient additional funding to finance our operations.

Since our inception in 2015, we have incurred significant operating losses. Our net losses were $0.3 million, $21.1 million, $3.1 million, and $8.7 million for the years ended December 31, 2018 and 2019 and for the three months ended March 31, 2019 and 2020, respectively. Our accumulated deficit was $35.4 million as of March 31, 2020. We expect to continue to incur increasing operating losses for the foreseeable future as we continue to develop our product candidates. In addition, we anticipate that our expenses will increase substantially if, and as, we:

 

   

initiate clinical development of NKX101;

 

   

advance additional product candidates to clinical trials, including NKX019;

 

   

seek to discover and develop additional product candidates;

 

   

establish and validate our own clinical- and commercial-scale current good manufacturing practices, or cGMP, facilities;

 

   

submit a biologics license application, or BLA, or marketing authorization application, or MAA, for NKX101 and/or NKX019 and/or seek marketing approvals for any of our other product candidates that successfully complete clinical trials;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

acquire or in-license other product candidates and technologies;

 

   

incur additional costs associated with operating as a public company; and

 

   

increase our employee headcount and related expenses to support these activities.

We may never succeed in any or all of these activities and, even if we do, we may never generate revenues that are significant or large enough to achieve profitability. Our independent registered public

 

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accounting firm included an explanatory paragraph in their audit report on the financial statements as of and for the years ended December 31, 2018 and 2019 stating that our recurring losses from operations and negative cash flows since inception and our need to raise additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern depends on our ability to raise additional capital. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all. Further, if we cannot continue as a going concern, we may be forced to discontinue operations and liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, which would cause our shareholders to lose all or a part of their investment.

We have never generated revenue from product sales and may never achieve or maintain profitability.

We continue to incur significant research and development and other expenses related to ongoing operations and the development of our co-lead product candidates, NKX101 and NKX019. All of our product candidates will require substantial additional development time and resources before we would be able to apply for or receive regulatory approvals and begin generating revenue from product sales. We do not anticipate generating revenues from product sales unless and until such time as NKX101 or NKX019 may be approved by the U.S. Food and Drug Administration, or the FDA, or other regulatory authorities, and we are able to successfully market and sell a product candidate. Our ability to generate revenues from product sales depends on our, or potential future collaborators’, success in:

 

   

completing clinical development of our product candidates;

 

   

seeking and obtaining regulatory approvals for product candidates for which we successfully complete clinical trials, if any;

 

   

launching and commercializing product candidates, by establishing a sales force, marketing and distribution infrastructure or, alternatively, collaborating with a commercialization partner;

 

   

qualifying for adequate coverage and reimbursement by government and third-party payors for our product candidates;

 

   

establishing, maintaining and enhancing a sustainable, scalable, reproducible and transferable manufacturing process for our cell therapy product candidates;

 

   

establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate products and services, in both amount and quality, to support clinical development and the market demand for our product candidates, if approved;

 

   

obtaining market acceptance of our product candidates as a viable treatment option;

 

   

addressing any competing technological and market developments;

 

   

implementing additional internal systems and infrastructure, as needed;

 

   

negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations in such collaborations;

 

   

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

 

   

avoiding and defending against third-party interference or infringement claims; and

 

   

attracting, hiring and retaining qualified personnel.

We anticipate incurring significant costs associated with commercializing any approved product candidate. Our expenses could increase beyond our current expectations if we are required by the FDA or other global regulatory authorities to perform clinical trials and other preclinical studies in addition to those that we currently anticipate.

Even if we are able to generate revenues from the sale of any approved products, we may not become profitable or be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could decrease the value of our company and impair our ability to raise capital, thereby limiting our research and development programs and efforts to expand our business or continue our operations.

 

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We will require additional capital, which, if available, may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our product candidates.

We have financed our operations primarily through private placements of our preferred stock and with proceeds from our previous collaboration with GlaxoSmithKline, or GSK. We intend to use the proceeds from this offering to, among other uses, advance NKX101 and NKX019 through clinical development. Developing pharmaceutical products and conducting preclinical studies and clinical trials is expensive. As of March 31, 2020, we had cash, cash equivalents, restricted cash and investments of $26.0 million. As of July 1, 2020, our cash, cash equivalents, short-term investments and restricted cash totaled $76 million. Our research and development expenses increased from $4.3 million for the year ended December 31, 2018 to $17.2 million for the year ended December 31, 2019 and from $2.3 million in the three months ended March 31, 2019 to $7.3 million in the three months ended March 31, 2020. We will require additional cash funding to continue to execute our strategic plan and fund operations beyond October 2020.

Until and unless we can generate substantial product revenue, we expect to finance our cash needs through the proceeds from this offering, a combination of equity offerings and debt financings, and potentially through additional license and development agreements or strategic partnerships with third parties. Financing may not be available in sufficient amounts or on reasonable terms. In addition, market volatility resulting from the COVID-19 pandemic or other factors could adversely impact our ability to access capital as and when needed. We have no commitments for any additional financing, and will likely be required to raise such financing through the sale of additional securities, which, in the case of equity securities, may occur at prices lower than the offering price of our common stock in this offering. If we sell equity or equity-linked securities, our current stockholders, including investors in this offering, may be diluted, and the terms may include liquidation or other preferences that are senior to or otherwise adversely affect the rights of our stockholders. Moreover, if we issue debt, we may need to dedicate a substantial portion of our operating cash flow to paying principal and interest on such debt and we may need to comply with operating restrictions, such as limitations on incurring additional debt, which could impair our ability to acquire, sell or license intellectual property rights which could impede our ability to conduct our business. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline.

If we raise additional funds through licensing or collaboration arrangements with third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable to us. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

Attempting to secure additional financing may also divert our management from our day-to-day activities, which may impair or delay our ability to develop our product candidates. In addition, demands on our cash resources may change as a result of many factors currently unknown to us including, but not limited to, any unforeseen costs we may incur as a result of preclinical study or clinical trial delays due to the COVID-19 pandemic or other causes, and we may need to seek additional funds sooner than planned. If we are unable to obtain funding on a timely basis or at all, we may be required to significantly curtail or stop one or more of our research or development programs.

Any acquisitions or strategic collaborations may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities or subject us to other risks.

From time to time, we may evaluate various acquisitions and strategic collaborations, including licensing or acquiring complementary drugs, intellectual property rights, technologies or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including, but not limited to:

 

   

increased operating expenses and cash requirements;

 

   

the assumption of indebtedness or contingent or unknown liabilities;

 

   

assimilation of operations, intellectual property and drugs of an acquired company, including difficulties associated with integrating new personnel;

 

   

the diversion of our management’s attention from our existing drug programs and initiatives in pursuing such a strategic partnership, merger or acquisition;

 

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retention of key employees, the loss of key personnel, and uncertainties about our ability to maintain key business relationships;

 

   

risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing drugs or product candidates and regulatory approvals; and

 

   

our inability to generate revenue from acquired drugs, intellectual property rights, technologies, and/or businesses sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

In addition, if we engage in acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses or acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities, and this inability could impair our growth or limit access to technology or drugs that may be important to the development of our business.

Our business and the business or operations of our research partners and other third parties with whom we conduct business could be adversely affected by the effects of health epidemics, including the recent COVID-19 pandemic, in regions where we or third parties on which we rely have business operations.

The COVID-19 pandemic has disrupted economic activity and business operations worldwide. Our headquarters are located in the San Francisco Bay Area, which is subject to executive orders directing that all individuals living in the State of California and the County of San Mateo stay at home or their place of residence for an indefinite period of time (subject to certain exceptions to facilitate essential services) to mitigate the impact of the COVID-19 pandemic.

In response to these executive orders, we have implemented work-from-home policies for employees and temporarily scaled back our operations. The effects of quarantines, stay-at-home, executive and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, in the United States and other countries, could negatively impact our operations and the operations of third parties we rely on, such as our contract manufacturing sites in Colorado, Ohio, and Ontario, disrupt or delay the enrollment of patients in these sites. Furthermore, these restrictions may delay any regulatory reviews by the FDA or other health authorities, including related to the IND submission for our NKX101 and NKX019 product candidates, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. Even if the current restrictions are lifted in the State of California or the County of San Mateo, similar or additional restrictions could be imposed again later.

In addition, the COVID-19 pandemic has significantly disrupted global financial markets and could continue to restrict the level of economic activity, and may limit our ability to access capital, which could in the future negatively affect our liquidity now or in the future. A recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.

As a result of the COVID-19 pandemic or other pandemic, epidemic or outbreak of an infectious disease, we may experience disruptions that could severely impact our business, preclinical studies and clinical trials, including:

 

   

delays or difficulties in enrolling patients in our clinical trials;

 

   

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

   

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

 

   

interruption of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;

 

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interruption or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines;

 

   

interruption of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

 

   

interruptions in preclinical studies due to restricted or limited operations at our laboratory facility;

 

   

limitations on employee resources that would otherwise be focused on the conduct of our preclinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people; and

 

   

interruption or delays to our discovery and clinical activities.

The ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole, but these delays could have a material impact on our operations.

Risks Related to Our Business and Industry

Our business depends upon the success of our CAR-NK cell technology platform.

Our success depends on our ability to utilize our CAR-NK technology platform to generate product candidates, to obtain regulatory approval for product candidates derived from it, and to then commercialize our product candidates addressing one or more indications. Our CAR-NK platform and our product candidates have not yet been evaluated in humans and may never become commercialized. All of our product candidates developed from our technology platform will require significant additional clinical and non-clinical development, review and approval by the FDA or other regulatory authorities in one or more jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before they can be successfully commercialized. If any of our product candidates encounter safety or efficacy problems, developmental delays or regulatory issues or other problems, such problems could impact the development plans for our other product candidates because all of our product candidates are based on the same core CAR-NK engineering technology.

Utilizing CAR-NK cells represents a novel approach to immuno-oncology treatment of cancer, and we must overcome significant challenges in order to develop, commercialize and manufacture our product candidates.

We have concentrated our research and development efforts on utilizing CAR-NK cells as an immuno-oncology therapy. To date, the FDA has approved only a few cell-based therapies for commercialization and no NK-based cell therapy has been approved for commercial use by any regulatory authority. The processes and requirements imposed by the FDA or other applicable regulatory authorities may cause delays and additional costs in obtaining approvals for marketing authorization for our product candidates. Because our CAR-NK platform product is novel, and cell-based therapies are relatively new, regulatory agencies may lack experience in evaluating product candidates like our CAR-NK product candidates. This novelty may lengthen the regulatory review process, including the time it takes for the FDA to review our IND applications if and when submitted, increase our development costs and delay or prevent commercialization of our CAR-NK platform products. Additionally, advancing novel immuno-oncology therapies creates significant challenges for us, including:

 

   

educating medical personnel regarding the potential side-effect profile of our cells and, as the clinical program progresses, on observed side effects with the therapy;

 

   

training a sufficient number of medical personnel on how to properly thaw and administer our cells, especially in our planned solid tumor trial wherein the cells are given through a procedure by trained medical doctors;

 

   

enrolling sufficient numbers of patients in clinical trials;

 

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developing a reliable and safe and an effective means of genetically modifying our cells;

 

   

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

 

   

sourcing starting material suitable for clinical and commercial manufacturing; and

 

   

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

We must be able to overcome these challenges in order for us to develop, commercialize and manufacture our product candidates utilizing CAR-NK cells.

Certain aspects of the function and production of CAR-NK cells are currently unknown or poorly understood, and may only become known through further preclinical testing and clinical trials. Any potential re-engineering required may result in delays and additional expenses.

Current clinical experience with NK cell therapy is predominantly based on cells from haplomatched, which are related donors with at least half of the major human leukoycte antigen, or HLA, types matched and obtained from a relative of the patient. Our clinical development plan for NKX101 will seek to establish what degree of HLA matching, if any, is required for NKX101 to exhibit necessary levels of clinical activity and duration of response. While we believe that a high degree of HLA matching will not be required for clinically meaningful activity and durability of response, if it becomes apparent through preclinical testing or clinical trials that such matching is required, the production of NKX101 as standardized product for all patients will not be achievable. Instead, we would need to establish a bank of engineered CAR-NK cells for each of our product candidates where dozens of different donors will be required to achieve coverage of a large fraction of the addressable patient population.

Furthermore, the killer immunoglobulin-like receptor, or KIR, is found on the surface of NK cells and recognizes certain HLA types. If there is a match between KIR and the HLA type, KIR acts as a natural inhibitor of NK activity, thereby serving to prevent immune reactions against an individual’s own cells. If we discover that a KIR mismatch is required to achieve clinically meaningful activity and durability of response, we will need to develop a more complex set of donor selection criteria and a clinical development plan that allows us to ensure the product derived from a KIR mismatched donor for patients enrolled in our clinical trials.

In addition, tumors are sometimes able to evade detection by naturally occurring NK cells by shedding the NKG2D ligands found on malignant cells. While NKX101 has been engineered to overcome this shedding mechanism, there can be no guarantee that tumor cells will not retain or regain the ability to shed NKG2D ligand completely despite the presence of NKX101, which would give such tumors a degree of resistance against NKX101. If we discover that tumors develop a resistance to NKX101 as a result of such NKG2D ligand shedding, we will need to reengineer NKX101 to counteract this effect, or we may need to change or abandon our development efforts for NKX101.

The foregoing processes would require us to redesign the clinical protocols and clinical trials for our product candidates, and could require significant additional time and resources to complete and the participation of a significant number of additional clinical trial participants and donors, any of which would delay the clinical development of our product candidates and their eventual commercialization.

Clinical development involves a lengthy and expensive process with an uncertain outcome, and we may encounter substantial delays due to a variety of reasons outside our control.

Clinical trials are expensive, time consuming and subject to substantial uncertainty. Failure can occur at any time during the clinical trial process, due to scientific feasibility, safety, efficacy, changing standards of medical care and other variables. The results from preclinical testing or early clinical trials of a product candidate may not predict the results that will be obtained in later phase clinical trials of the

 

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product candidate. We, the FDA, or other applicable regulatory authorities may suspend or terminate clinical trials of a product candidate at any time for various reasons, including, but not limited to, a belief that subjects participating in such trials are being exposed to unacceptable health risks or adverse side effects, or other adverse initial experiences or findings. The FDA, or other applicable regulatory authorities may also require us to conduct additional preclinical studies or clinical trials due to negative or inconclusive results or other reasons, fail to approve the raw materials, manufacturing processes or facilities of third-party manufacturers upon which we rely, find deficiencies in the manufacturing processes or facilities upon which we rely, and change their approval policies or regulations or their prior guidance to us during clinical development in a manner rendering our clinical data insufficient for approval. In addition, data collected from clinical trials may not be sufficient to support the submission of a BLA or other applicable regulatory filing. We cannot guarantee that any clinical trials that we may plan or initiate will be conducted as planned or completed on schedule, if at all.

A failure of one or more of our clinical trials could occur at any stage. Events that may prevent successful initiation, timely completion, or positive outcomes of our clinical development include, but are not limited to:

 

   

delays in obtaining regulatory approval to commence a clinical trial;

 

   

delays in reaching agreement on acceptable terms with prospective clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different trial sites;

 

   

our ability to recruit sufficient patients for our clinical trials in a timely manner or at all;

 

   

delays in achieving a sufficient number of clinical trial sites or obtaining the required institutional review board, or IRB, approval at each clinical trial site;

 

   

imposition of a temporary or permanent clinical hold by us or by the FDA or other regulatory agencies based on emerging data;

 

   

clinical sites deviating from trial protocol or dropping out of a trial;

 

   

suspension or termination of a clinical trial by the IRBs of the institutions in which such trials are being conducted or by the Data Safety Monitoring Board, or DSMB (where applicable);

 

   

delays in sufficiently developing, characterizing or controlling a manufacturing process suitable for advanced clinical trials;

 

   

delays in reaching a consensus with regulatory agencies on the design or implementation of our clinical trials;

 

   

changes in regulatory requirements or guidance that may require us to amend or submit new clinical protocols, or such requirements may not be as we anticipate;

 

   

changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;

 

   

insufficient or inadequate quality of our product candidates or other materials necessary to conduct preclinical studies or clinical trials of our product candidates;

 

   

clinical trials of our product candidates producing negative or inconclusive results, which may result in our deciding, or regulators requiring us, to conduct additional clinical trials or abandon product development programs;

 

   

failure of enrolled patients in foreign countries to adhere to clinical protocol as a result of differences in healthcare services or cultural customs, or additional administrative burdens associated with foreign regulatory schemes; or

 

   

failure of ourselves or any third-party manufacturers, contractors or suppliers to comply with regulatory requirements, maintain adequate quality controls, or be able to provide sufficient product supply to conduct and complete preclinical studies or clinical trials of our product candidates.

In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or completing our planned and

 

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ongoing preclinical studies and clinical trials, as applicable. For example, on March 18, 2020, the FDA announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities in response to the COVID-19 pandemic. If global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions. If we experience delays in the initiation, enrollment or completion of any preclinical study or clinical trial of our product candidates, or if any preclinical studies or clinical trials of our product candidates are canceled, the commercial prospects of our product candidates may be materially adversely affected, and our ability to generate product revenues from any of these product candidates will be delayed or not realized at all. In addition, any delays in completing our clinical trials may increase our costs and slow down our product candidate development and approval process.

Our business is highly dependent on the success of our product candidates, in particular NKX101 and NKX019, and we may fail to develop NKX101 and NKX019 successfully or be able to obtain regulatory approval for them.

We cannot guarantee that NKX101 and NKX019 will be safe and effective, or will be approved for commercialization, on a timely basis or at all. Although certain of our employees have prior experience with clinical trials, regulatory approvals and cGMP manufacturing, we have not previously completed any clinical trials or submitted a BLA to the FDA, or similar regulatory approval filings to comparable foreign authorities, for any product candidate, and we cannot be certain that NKX101 and NKX019 will be successful in clinical trials or receive regulatory approval. The FDA, and other comparable global regulatory authorities can delay, limit or deny approval of a product candidate for many reasons. For further details about such reasons, see “—Clinical development involves a lengthy and expensive process with an uncertain outcome, and we may encounter substantial delays due to a variety of reasons outside our control.” Any delay in obtaining, or inability to obtain, applicable regulatory approval will delay or harm our ability to successfully commercialize NKX101 and NKX019 and materially adversely affect our business, financial condition, results of operations and growth prospects.

Furthermore, because NKX101 is our most advanced product candidate, and because our other product candidates are based on similar technology, if our clinical trials of NKX101 encounter safety, efficacy or manufacturing problems, development delays, regulatory issues or other problems, our development plans for NKX019 and our other product candidates in our pipeline could be significantly impaired, which could materially adversely affect our business, financial condition, results of operations and growth prospects.

We also plan to develop NKX101 for additional indications if we are able to obtain clinical proof-of-concept from our NKX101 Phase 1 trials for blood cancers including acute myeloid leukemia, or AML and myelodysplastic syndromes, or MDS, as well as hepatocellular carcinomas and other cancers localized to the liver. We may not be able to advance any of these indications through the development process. Even if we receive regulatory approval to market NKX101 for the treatment of any of these additional indications, any such additional indications may not be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize NKX101 for these additional indications, our commercial opportunity will be limited.

Furthermore, the development of NKX101 for treating solid tumors is subject to a number of risks related to liver delivery using a catheter through the hepatic artery generally, including potential damage to arteries from the catheter placement itself, from use of imaging contrast, radiation exposure and use of material to occlude the hepatic artery to cut blood supply off to the tumor, and differences between catheter models potentially introducing variability into the observed clinical effects. The

 

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development of treatments to treat solid tumors often requires larger and more expensive clinical trials than for treating blood cancers.

We intend to develop our product candidates both as monotherapy and potentially as combination therapy, a common form of cancer treatment, with one or more currently approved cancer therapies. Even if any product candidate we develop were to receive marketing approval or be commercialized for use in combination with other existing therapies, we would continue to be subject to the risks that the FDA or similar regulatory authorities outside of the United States could revoke approval of the combination therapy used with our product candidate or that safety, efficacy, manufacturing or supply issues could arise with these existing therapies. This could result in our own products being removed from the market or being less successful commercially.

We may also evaluate our product candidates in combination with one or more other cancer therapies that have not yet been approved for marketing by the FDA or similar regulatory authorities outside of the United States. If the FDA or similar regulatory authorities outside of the United States do not approve these other drugs or revoke their approval of, or if safety, efficacy, manufacturing, or supply issues arise with, the drugs we choose to evaluate in combination with any product candidate we develop or combination therapy, we may be unable to obtain approval of or market our product candidates.

Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be delayed, made more difficult or rendered impossible by multiple factors outside our control.

Identifying and qualifying patients to participate in our clinical trials is critical to our success. Clinical trials of a new product candidate require the enrollment of a sufficient number of patients, including patients who are suffering from the disease that the product candidate is intended to treat and who meet other eligibility criteria. The rates of patient enrollment, a significant component in the timing of clinical trials, are affected by many factors, including:

 

   

our ability to open clinical trial sites;

 

   

the size and nature of the patient population;

 

   

the design and eligibility criteria of the clinical trial;

 

   

the proximity of subjects to clinical sites;

 

   

the patient referral practices of physicians;

 

   

changing medical practice patterns or guidelines related to the indications we are investigating;

 

   

competing clinical trials or approved therapies which present an attractive alternative to patients and their physicians;

 

   

perceived risks and benefits of the product candidate under study, including as a result of adverse effects observed in similar or competing therapies;

 

   

our ability to obtain and maintain patient consents due to various reasons, including but not limited to, patients’ unwillingness to participate due to the ongoing COVID-19 pandemic;

 

   

the risk that enrolled subjects will drop out or die before completion of the trial;

 

   

patients failing to complete a clinical trial or returning for post-treatment follow-up; and

 

   

our ability to manufacture the requisite materials for a patient and clinical trial.

In addition, we need to compete with many ongoing clinical trials to recruit patients into our expected clinical trials. Our clinical trials may also compete with other clinical trials for product candidates that are in a similar cellular immunotherapy area as our product candidates, and this competition could reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we may conduct some of our clinical trials at the same clinical

 

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trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at such clinical trial site. If we are unable to enroll a sufficient number of patients in our clinical trials in a timely manner, our completion clinical trials may be delayed or may not be achieved, which would prevent us from commercializing our product candidates.

Our preclinical programs may experience delays or may never advance to clinical trials, which would adversely affect our ability to obtain regulatory approvals or commercialize these programs on a timely basis or at all.

In order to obtain FDA or other regulatory authority approval to market a new biological product we must demonstrate proof of safety, purity and potency or efficacy in humans. To meet these requirements we will have to conduct adequate and well-controlled clinical trials. Before we can commence clinical trials for a product candidate, we must complete extensive preclinical testing and studies that support our planned INDs in the United States. We only have one product candidate that we expect to enter clinical development in 2020, and the rest of our programs are in preclinical development. We cannot be certain of the timely completion or outcome of our preclinical testing and studies and cannot predict if the FDA will accept our proposed clinical programs or if the outcome of our preclinical testing and studies will ultimately support the further development of our programs. As a result, we cannot be sure that we will be able to submit INDs or similar applications for our preclinical programs on the timelines we expect, if at all, and we cannot be sure that submission of INDs or similar applications will result in the FDA or other regulatory authorities allowing clinical trials to begin.

Conducting preclinical testing is a lengthy, time-consuming and expensive process. The length of time may vary substantially according to the type, complexity and novelty of the program, and often can be several years or more per program. Any delays in preclinical testing and studies conducted by us or potential future partners may cause us to incur additional operating expenses. The commencement and rate of completion of preclinical studies and clinical trials for a product candidate may be delayed by many factors, including, for example:

 

   

inability to generate sufficient preclinical or other in vivo or in vitro data to support the initiation of clinical trials;

 

   

delays in reaching a consensus with regulatory agencies on study design; and

 

   

the FDA not allowing us to rely on previous findings of safety and efficacy for other similar but approved products and published scientific literature.

Moreover, because standards for pre-clinical assessment are evolving and may change rapidly, even if we reach an agreement with the FDA on a pre-IND proposal, the FDA may not accept the IND submission as presented, in which case patient enrollment would be placed on partial or complete hold and treatment of enrolled patients could be discontinued while the product candidate is re-evaluated. Even if clinical trials do begin for our preclinical programs, our clinical trials or development efforts may not be successful.

The results of preclinical studies and early stage clinical trials may not be predictive of future results. Initial success in any clinical trials may not be indicative of results obtained when these trials are completed or in later stage trials.

The results of preclinical studies may not be predictive of the results of clinical trials, and the results of any early stage clinical trials we commence may not be predictive of the results of the later-stage clinical trials. For example, preclinical models as applied to cell therapy in oncology do not adequately represent the clinical setting, and thus cannot predict clinical activity nor all potential risks, and may not provide adequate guidance as to appropriate dose or administration regimen of a given therapy. In addition, initial success in clinical trials may not be indicative of results obtained when such trials are completed. Interim data from clinical trials that we may conduct are subject to the risk that one or more of

 

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the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously announced. Negative differences between preliminary or interim data and final data could materially adversely affect the prospects of any product candidate that is impacted by such data updates.

If any of our product candidates, or any competing product candidates, demonstrate serious adverse events, including the development of severe or fatal cytokine release syndrome, neurotoxicity or graft-versus-host disease, we may be required to halt or delay further clinical development.

Undesirable side effects that may be caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label than anticipated or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.

To date, we have only evaluated our product candidate in preclinical mouse models and have observed fatalities as a result of lung toxicity when administered in extremely high doses, and we therefore do not know the side effect profile of our products in humans, which we would expect would use significantly lower doses. As such, there can be no guarantee that any toxicity, or other adverse events, will not occur in human subjects during clinical trials. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.

While studies indicate that NK cell-based therapies may be better-tolerated as compared to T cell-based therapies due to biologic differences between these cell types, there can be no assurance that patients will not experience cytokine release syndrome, or CRS, neurotoxicity, graft-versus-host disease, or GVHD or other serious adverse events. Severe adverse events associated with our product candidate NKX101 may also develop, since targeting NKG2D ligands is not yet a well-characterized modality. NKG2D targets multiple ligands, and the landscape of ligand expression is currently not fully understood. For example, there are risks that ligands may be expressed on either known or an as-yet-underappreciated population of healthy cells. Therefore, such cells may also be targeted by NKX101 and lead to adverse events of unknown frequency and severity. Such adverse events may cause delays in completion of our clinical programs. If unacceptable side effects arise in the development of our product candidates such that there is no longer a positive benefit risk, we, the FDA, the IRBs at the institutions in which our trials are conducted or the DSMB could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff, and inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury or death.

We may seek special designations by the regulatory authorities to expedite regulatory approvals, but may not be successful in receiving such designations, and even if received, they may not benefit the development and regulatory approval process.

We may seek various designations by the regulatory authorities such as Regenerative Medicine Advanced Therapy Designation, or RMAT, Breakthrough Therapy Designation, Fast Track Designation, or PRIority MEdicine, or PRIME, from regulatory authorities, for any product candidate that we develop. A product candidate may receive RMAT designation from the FDA if it is a regenerative medicine therapy that is intended to treat, modify, reverse or cure a serious or life-

 

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threatening condition, and preliminary clinical evidence indicates that the product candidate has the potential to address an unmet medical need for such condition. A breakthrough therapy is defined by the FDA as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over currently approved therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. If a product is intended for the treatment of a serious or life-threatening condition and preclinical or clinical data demonstrate the potential to address an unmet medical need for this condition, the product sponsor may apply for Fast Track Designation by the FDA. PRIME is a voluntary scheme launched by the EMA to strengthen support for the development of medicines that target an unmet medical need through enhanced interaction and early dialogue with developers of promising medicines in order to optimize development plans and speed up evaluation to help such medicines reach patients earlier.

Seeking and obtaining these designations is dependent upon results of our clinical program, and we cannot guarantee whether and when we may have the data from our clinical programs to support an application to obtain any such designation. The FDA and the EMA, as applicable, have broad discretion whether or not to grant any of these designations, so even if we believe a particular product candidate is eligible for one or more of these designations, we cannot assure you that the applicable regulatory authority would decide to grant it. Even if we do receive the designations we may apply for, we may not experience a faster development process, review or approval compared to conventional FDA or EMA procedures, as applicable. The FDA or EMA, as applicable, may rescind any granted designations if it believes that the designation is no longer supported by data from our clinical development program.

We may seek Orphan Drug Designation for our product candidates, and we may be unsuccessful or may be unable to maintain the benefits associated with Orphan Drug Designation, including the potential for market exclusivity.

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the United States, Orphan Drug Designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.

Similarly, in Europe, the European Commission grants Orphan Drug Designation after receiving the opinion of the EMA Committee for Orphan Medicinal Products on an Orphan Drug Designation application. Orphan Drug Designation is intended to promote the development of drugs that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5 in 10,000 persons in Europe and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit to those affected). Additionally, designation is granted for drugs intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in Europe would be sufficient to justify the necessary investment in developing the drug. In Europe, Orphan Drug Designation entitles a party to a number of incentives, such as protocol assistance and scientific advice specifically for designated orphan medicines, and potential fee reductions depending on the status of the sponsor.

Generally, if a drug with an Orphan Drug Designation subsequently receives the first marketing approval for the indication for which it has such designation, the drug is entitled to a period of

 

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marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same drug and indication for that time period, except in limited circumstances. The applicable period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for Orphan Drug Designation or if the drug is sufficiently profitable such that market exclusivity is no longer justified.

Even if we obtain orphan drug exclusivity for our product candidates, that exclusivity may not effectively protect those product candidates from competition because different therapies can be approved for the same condition and the same therapies can be approved for different conditions but used off-label. Even after an orphan drug is approved, the FDA can subsequently approve another drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. Orphan Drug Designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process. While we may seek Orphan Drug Designation for applicable indications for our product candidates, we may never receive such designations. Even if we do receive such designations, there is no guarantee that we will enjoy the benefits of those designations.

Public opinion and scrutiny of cell-based immuno-oncology therapies for treating cancer may impact public perception of our company and product candidates, or impair our ability to conduct our business.

Our platform utilizes a relatively novel technology involving the genetic modification of human NK cells and utilization of those modified cells in other individuals, and no NK cell-based immunotherapy has been approved to date. Public perception may be influenced by claims, such as claims that cell-based immunotherapy is unsafe, unethical, or immoral and, consequently, our approach may not gain the acceptance of the public or the medical community. Negative public reaction to cell-based immunotherapy in general could result in greater government regulation and stricter labeling requirements of cell-based immunotherapy products, including any of our product candidates, and could cause a decrease in the demand for any products we may develop. Adverse public attitudes may adversely impact our ability to enroll clinical trials. More restrictive government regulations or negative public opinion could have an adverse effect on our business or financial condition and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop.

We may not identify or discover other product candidates and may fail to capitalize on programs or product candidates that may present a greater commercial opportunity or for which there is a greater likelihood of success.

Our business depends upon our ability to identify, develop and commercialize product candidates. A key element of our strategy is to discover and develop additional product candidates based upon our NK cell engineering platform. We are seeking to do so through our internal research programs, and may also explore strategic collaborations for the discovery of new product candidates. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. In addition, targets for different cancers may require changes to our NK manufacturing platform, which may slow down development or make it impossible to manufacture our product candidates. Our research programs may initially show promise

 

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in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

 

   

the research methodology or technology platform used may not be successful in identifying potential product candidates;

 

   

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

 

   

we may choose to cease development if we determine that clinical results do not show promise;

 

   

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

 

   

a product candidate may be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria; and

 

   

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

Because we have limited resources, we must choose to pursue and fund the development of specific types of treatment, or treatment for a specific type of cancer, and we may forego or delay pursuit of opportunities with certain programs or product candidates or for indications that later prove to have greater commercial potential. Our estimates regarding the potential market for our product candidates could be inaccurate, and if we do not accurately evaluate the commercial potential for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing or other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. Alternatively, we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

If any of these events occur, we may be forced to abandon or delay our development efforts with respect to a particular product candidate or fail to develop a potentially successful product candidate.

If third parties that we rely on to conduct clinical trials do not successfully carry out their contractual duties, comply with regulatory requirements or meet expected deadlines, we may not be able to obtain marketing approval for or commercialize our product candidates.

We do not have the ability to independently conduct clinical trials. We rely on medical institutions, clinical investigators, contract laboratories, and other third parties, such as contract research organization, or CROs, to conduct or otherwise support clinical trials for our product candidates. We rely heavily on these parties for execution of clinical trials for our product candidates and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and our reliance on CROs and other third parties will not relieve us of our regulatory responsibilities. For any violations of laws and regulations during the conduct of our clinical trials, we could be subject to untitled letters, warning letters or enforcement action that may include civil penalties up to and including criminal prosecution.

We and the third parties on which we rely for clinical trials are required to comply with regulations and requirements, including Good Clinical Practice, or GCP, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials and their rights are protected. These regulations are enforced by the FDA, the competent authorities of the European Union member states, and comparable foreign regulatory authorities for

 

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any drugs in clinical development. The FDA enforces GCP requirements through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or these third parties fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our future clinical trials will comply with GCP. In addition, our clinical trials must be conducted with product candidates produced under cGMP regulations. Our failure or the failure of these third parties to comply with these regulations may require us to repeat clinical trials, which would delay the marketing approval process and could also subject us to enforcement action. The COVID-19 pandemic and government measures taken in response have also had a significant impact on our CROs, and we expect that they will face further disruption, which may affect our ability to initiate and complete our preclinical studies and clinical trials. We also are required to register certain ongoing clinical trials and provide certain information, including information relating to the trial’s protocol, on a government-sponsored database, ClinicalTrials.gov, within specific timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

Although we intend to design the clinical trials for our product candidates, we plan to rely on third parties to conduct our clinical trials. As a result, many important aspects of our clinical development, including their conduct and timing, will be outside of our direct control. Our reliance on third parties to conduct future clinical trials will also result in less direct control over the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:

 

   

have staffing difficulties;

 

   

fail to comply with contractual obligations;

 

   

experience regulatory compliance issues;

 

   

undergo changes in priorities or become financially distressed; or

 

   

form relationships with other entities, some of which may be our competitors.

If third parties do not perform our clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, we would be unable to rely on clinical data collected by these third parties and may be required to repeat, extend the duration of, or increase the size of any clinical trials we conduct, which could significantly delay commercialization and require significantly greater expenditures.

If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third parties on commercially reasonable terms, or at all. If third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain are compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any clinical trials such third parties are associated with may be extended, delayed or terminated, and we may not be able to obtain marketing approval for or successfully commercialize our product candidates. As a result, we believe that our financial results and the commercial prospects for our product candidates in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.

If we fail to compete effectively with academic institutions and other biotechnology companies that are developing similar or alternatives to cellular immunotherapy product candidates, our business will be materially adversely affected.

The development and commercialization of new cellular immunotherapy products is highly competitive. We face competition from existing and future competitors with respect to each of our

 

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product candidates currently in development, and will face competition with respect to other product candidates that we may seek to develop or commercialize in the future. For example, Kymriah and Yescarta are direct competitors to our product candidate NKX019, which have been commercially approved. Our known biopharmaceutical competitors working on allogeneic CAR-NK or CAR-T therapies currently include Allogene, Astellas, Bristol-Myers Squibb, Celyad, Fate Therapeutics, Gilead, NantKwest, Novartis, Surface Oncology, Takeda and numerous other biopharmaceutical companies. Furthermore, many companies are seeking to harness NK biology through engagers that seek to direct a patient’s own NK cells to the site of a tumor. Such competitors include Affimed, Amgen, Dragonfly Therapeutics, Innate Pharma, and Servier. In addition, numerous academic institutions are conducting preclinical and clinical research in these areas, as well as with other white blood cell types including NK-T cells and gamma-delta T cells. It is also possible that new competitors, including those developing similar or alternatives to cellular immunotherapy product candidates, may emerge and acquire significant market share. Such competitors may have an advantage over us due to their greater size, resources or institutional experience, or may develop product candidates that are safer, more effective, more widely accepted, more cost-effective or enable higher patient quality of life than ours. More established biopharmaceutical companies may also develop and commercialize their product candidates at a faster rate, which could render our product candidates obsolete or non-competitive before they are fully developed or commercialized. If we are not able to compete effectively against our existing and potential competitors, our business, financial condition, results of operations and growth prospects may be materially adversely affected.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

As of June 30, 2020, we had 70 full-time employees. We will need to continue to expand our managerial, operational, quality, manufacturing, finance, sales and other resources in order to manage our operations and clinical trials, continue our development activities and eventually commercialize our product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

   

discover new product candidates, develop the process and analytical methods for IND-enabling studies and FDA submissions, complete the required IND-enabling studies for each, and receive approval from the FDA and other regulatory authorities to initiate clinical trials for such product candidates;

 

   

manage our clinical trials effectively;

 

   

identify, recruit, retain, incentivize and integrate additional employees;

 

   

complete the buildout and qualification of our in-house clinical GMP manufacturing facility; and

 

   

continue to improve our operational, financial and management controls, reports systems and procedures.

If we are unable to attract skilled employees, increase the size of our organization or manage our future growth effectively, it will impair our ability to execute our business strategy and our business, financial condition, results of operations and growth prospects will be materially adversely affected.

If we fail to attract and retain senior management, clinical, and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, particularly our chief executive officer, as well as other members of our senior management team. The loss of services of any of these individuals could delay or prevent the successful development of our

 

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product pipeline, initiation or completion of our planned clinical trials or the commercialization of our future product candidates. We do not have employment agreements with our senior management team.

Competition for qualified personnel in the biotechnology and pharmaceuticals field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical development and if we initiate commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. If we are unable to hire and retain the qualified personnel we need to operate our business, our business, financial condition, results of operations and growth prospects would be materially adversely affected. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any product candidate that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidates in clinical trials and may face an even greater risk if we commercialize any product candidate that we may develop. If we cannot successfully defend ourselves against claims that any such product candidates caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for any product candidate that we may develop;

 

   

loss of revenue;

 

   

substantial monetary awards to trial participants or patients;

 

   

significant time and costs to defend the related litigation;

 

   

withdrawal of clinical trial participants;

 

   

increased insurance costs;

 

   

the inability to commercialize any product candidate that we may develop; and

 

   

injury to our reputation and significant negative media attention.

Any such outcomes could materially adversely affect our business, financial condition, results of operations and growth prospects.

Our insurance policies may be inadequate, may not cover all of our potential liabilities and may potentially expose us to unrecoverable risks.

We do not carry insurance for all categories of risk that our business may encounter. Although we maintain product liability insurance coverage that also covers our clinical trials, such insurance may not be adequate to cover all liabilities that we may incur, and we may be required to increase our product liability insurance coverage. We anticipate that we will need to increase our insurance coverage each time we commence a clinical trial and if we successfully commercialize any product candidate. Insurance availability, coverage terms and pricing continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage for insurable risks that we identify. However, we may fail to correctly anticipate or quantify insurable risks, we may not be able to obtain appropriate insurance coverage and insurers may not respond as we intend to cover insurable events that may occur. Any significant uninsured liability may require us to pay substantial amounts, which would materially adversely affect our business, financial condition, results of operations and growth.

In addition, although we are dependent on certain key personnel, we do not have any key man life insurance policies on any such individuals. Therefore, if any of our chief executive officer or other

 

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executive officers die or become disabled, we will not receive any compensation to assist with such individual’s absence. The loss of such person could materially adversely affect our business, financial condition, results of operations and growth prospects.

Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our manufacturers’ facilities pending their use and disposal.

We cannot eliminate the risk of contamination, which could cause an interruption of our research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers and suppliers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage. Any contamination by such hazardous materials could therefore materially adversely affect our business, financial condition, results of operations and growth prospects.

Computer system interruptions or security breaches could significantly disrupt our product development programs and our ability to operate our business.

Our internal computer systems, cloud-based computing services and those of our current and any future collaborators and other contractors or consultants are vulnerable to damage or interruption from computer viruses, data corruption, cyber-based attacks, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any significant system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information, the disclosure of protected personally identifiable patient information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Furthermore, federal, state and international laws and regulations, such as the European Union’s General Data Protection Regulation, or the GDPR, which took effect in May 2018, and the California Consumer Protection Act, which took effect on January 1, 2020, can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if our information technology security efforts fail or if our privacy practices do not meet the requirements of such laws. Other states are considering similar laws that could impact our use of research data with respect to individuals in those states. There are extensive documentation obligations and transparency requirements, which may impose significant costs on us. In addition, our software systems include cloud-based applications that are hosted by third-party service providers with

 

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security and information technology systems subject to similar risks. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further development and commercialization of our product candidates could be delayed, any of which could materially adversely affect our business, financial condition, results of operations and growth prospects.

Risks Related to Manufacturing

Our manufacturing process is complex and we may encounter difficulties in production, which would delay or prevent our ability to provide a sufficient supply of our product candidates for clinical trials or our products for patients, if approved.

Our product candidates are genetically engineered human cells, and the process of manufacturing such product candidates, as well as engineered K562 cells and viral vectors, is complex, highly regulated and subject to numerous risks. Manufacturing our product candidates involves harvesting white blood cells from a donor, isolating the NK cells, activating and expanding the NK cells, introducing a g-retrovirus with genes encoding the proteins we wish to express, cryopreservation, storage and eventually shipment and infusing the cell product into the patient’s body. As a result of these complexities, the cost to manufacture our cellular product candidates, engineered K562 cells and viral vector is generally higher than traditional small-molecule chemical compounds or biologics, and the manufacturing process is less reliable and more difficult to reproduce.

Our manufacturing process will be susceptible to product loss or failure, or product variation that may negatively impact patient outcomes, due to logistical issues associated with the collection of starting material from the donor, shipping such material to the manufacturing site, shipping the final product back to the clinical trial recipient, preparing the product for administration, infusing the patient with the product, manufacturing issues or different product characteristics resulting from the differences in donor starting materials, variations between reagent lots, interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, inconsistency in cell growth and variability in product characteristics.

Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If, for any reason in our NKX101 study, we lose the starting material for a manufactured product for one of our clinical trial patients at any point in the process, the manufacturing process for that patient would need to be restarted and the resulting delay could require restarting the manufacturing process, or could result in such patient no longer participating in our clinical trial. If microbial, viral or other contaminations are discovered in our product candidates or in any of the manufacturing facilities in which products or other materials are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We will be required to maintain a chain of identity with respect to materials as they move from the donor to the manufacturing facility, through the manufacturing process and back to the clinical trial recipient. Maintaining a chain of identity is difficult and complex, and failure to do so could result in adverse patient outcomes, loss of product or regulatory action, including withdrawal of our products from the market, if licensed. Any failure in the foregoing processes could render a batch of product unusable, could affect the regulatory approval of such product candidate, could cause us to incur fines or penalties or could harm our reputation and that of our product candidates.

We may make changes to our manufacturing process for various reasons, such as to control costs, achieve scale, decrease processing time, increase manufacturing success rate or for other reasons. Changes to our process made during the course of clinical development could require us to show the comparability of the product used in earlier clinical phases or at earlier portions of a trial to the product used in later clinical phases or later portions of the trial. Other changes to our manufacturing process

 

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made before or after commercialization could require us to show the comparability of the resulting product to the product candidate used in the clinical trials using earlier processes. Such showings could require us to collect additional nonclinical or clinical data from any modified process prior to obtaining marketing approval for the product candidate produced with such modified process. If such data are not ultimately comparable to that seen in the earlier trials or earlier in the same trial in terms of safety or efficacy, we may be required to make further changes to our process and/or undertake additional clinical testing, either of which could significantly delay the clinical development or commercialization of the associated product candidate, which would materially adversely affect our business, financial condition, results of operations and growth prospects.

We rely on third parties to manufacture our product candidates, which increases the risk that we will not have sufficient quantities of such product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We do not own or operate cGMP facilities for the production of clinical or commercial supplies of the product candidates that we are developing or evaluating in our development programs. We have limited personnel with experience in drug manufacturing and lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. We outsource all manufacturing of our product candidates and products to third parties until we can complete a cGMP facility in South San Francisco, California that will allow us to supply the product candidates needed for our early-stage clinical trials. We compete with other companies for access to cGMP facilities and cannot assure continued access.

In order to conduct clinical trials of product candidates, we will need to have them manufactured in potentially large quantities. Our third-party manufacturers may be unable to increase the manufacturing capacity for any of our product candidates in a timely or cost-effective manner, or at all. In addition, quality issues may arise during scale-up activities and at any other time. If these third-party manufacturers are unable to, or do not, scale up the manufacture of our product candidates in sufficient quality and quantity, the development, testing and clinical trials of that product candidate may be delayed or infeasible, and regulatory approval or commercial launch of that product candidate may be delayed or not obtained, which could significantly harm our business.

We do not currently have any agreements with third-party manufacturers for the long-term commercial supply. We may be unable to enter into agreements with third-party manufacturers for commercial supplies of any product candidate that we develop, or may be unable to do so on acceptable terms. Even if we are able to establish and maintain arrangements with third-party manufacturers, reliance on third-party manufacturers entails risks, including:

 

   

reliance on the third-party for regulatory compliance and quality assurance;

 

   

the possible breach of the manufacturing agreement by the third-party;

 

   

the possible misappropriation of our proprietary information, including our trade secrets and know-how; and

 

   

the possible termination or nonrenewal of the agreement by the third-party at a time that is costly or inconvenient for us.

Third-party manufacturers may not be able to comply with cGMP requirements or similar regulatory requirements outside the United States. The failure of our third-party manufacturers to comply with applicable requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and/or criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates.

 

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If the third parties that we engage to supply any materials or to manufacture any products for our preclinical tests and clinical trials should cease to continue to do so for any reason, including due to the effects of the COVID-19 pandemic and the actions undertaken by governments and private enterprises to contain COVID-19, we likely would experience delays in advancing these tests and trials while we identify and qualify replacement suppliers or manufacturers and we may be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate supplies of our product candidates or the substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.

Our current and anticipated dependence upon others for the manufacture of our product candidates may adversely affect our profit margins and our ability to develop product candidates and commercialize any products that receive marketing approval on a timely and competitive basis.

We are reliant on a sole supplier for certain steps of our manufacturing process.

Our manufacturing process for NKX101 and for NKX019 depends on the use of the Miltenyi CliniMACS Plus system, and related reagents, all of which are only available from Miltenyi as the sole supplier. In addition, some of these reagents, at the time of procurement, typically expire after approximately four to six months. This short expiration period means that stocking the reagents in large quantities for future needs would not be an effective strategy to mitigate against the risk of shortage due to disruption of the supply chain.

Furthermore, while many of the reagents and consumables used in our manufacturing process are available from more than one commercial supplier, we have not confirmed the suitability of the use of all such reagents and consumables in our manufacturing process. Even if we are able to replace any raw materials or consumables with an alternative, such alternatives may cost more, result in lower yields or not be as suitable for our purposes. In addition, some of the raw materials that we use are complex materials, which may be more difficult to substitute. Therefore, supply disruptions could result in delays and additional regulatory submissions and prevent us from being able to manufacture our product candidates due to the unsuitability of the substituted reagent or consumable that we are able to procure.

Any disruption in supply of these instruments and reagents could result in delays in our clinical trials, which would materially adversely affect our business, financial condition, results of operations and growth prospects.

Delays in commissioning and receiving regulatory approvals for our manufacturing facilities could delay our development plans and thereby limit our ability to generate revenues.

We believe that internal cGMP manufacturing is important to facilitate clinical product supply, lower the risk of manufacturing disruptions and enable more cost-effective manufacturing. We are building a cGMP facility in South San Francisco, California that will allow us to supply the product candidates needed for our early-stage clinical trials. We also plan to build a facility for the commercial-scale manufacture of our product candidates in the future. The design, construction, qualification and regulatory approvals for such facilities require substantial capital and technical expertise and any delay would limit our development activities and our opportunities for growth.

Furthermore, our manufacturing facility will be subject to ongoing, periodic inspection by the FDA and other comparable regulatory agencies to ensure compliance with cGMP. Our failure to follow and document our adherence to these regulations or other regulatory requirements may lead to significant delays in the availability of products for clinical use or may result in the termination of or a hold on a clinical study. Failure to comply with applicable regulations could also result in sanctions being imposed on us, including fines, injunctions, civil penalties, a requirement to suspend or put on hold one

 

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or more of our clinical trials, failure of regulatory authorities to grant marketing approval of our drug candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of drug candidates, operating restrictions and criminal prosecutions, any of which could materially adversely affect our business, financial condition, results of operations and growth prospects.

We also may encounter problems with the following:

 

   

complying with regulations regarding donor traceability, manufacturing, release of product candidates and other requirements from regulatory authorities outside the United States;

 

   

achieving adequate or clinical-grade materials that meet regulatory agency standards or specifications with consistent and acceptable production yield and costs;

 

   

bacterial, fungal or viral contamination in our manufacturing facility; and

 

   

shortages of qualified personnel, raw materials or key contractors.

Our product candidates, if approved by applicable regulatory authorities, may require significant commercial supply to meet market demand. In these cases, we may need to increase, or “scale up,” the production process by a significant factor over the initial level of production. If we fail to develop sufficient manufacturing capacity and experience, whether internally or with a third party, are delayed in doing so, or fail to manufacture our product candidates economically or on reasonable scale or volumes, or in accordance with cGMP, or if the cost of this scale-up is not economically feasible, our development programs and commercialization of any approved products will be materially adversely affected and we may not be able to produce our product candidates in a sufficient quantity to meet future demand and our business, financial condition, results of operations and growth prospects may be materially adversely affected.

The optimal donor and manufacturing parameters for our product candidates have not been definitively established, which may hinder our ability to optimize our product candidates or to address any safety or efficacy issues that may arise.

If any of our clinical trials reveal issues with the safety or efficacy of any of our product candidates, modification of the donor selection criteria or the manufacturing process may be necessary to address such issues. However, we have not fully characterized or identified how donor characteristics and manufacturing process parameters affect the optimal cancer cell killing ability for our engineered NK cell product candidates for in vitro and animal efficacy studies or how such potency differences may translate into efficacy to be seen in human clinical trials, including both the proportion of patients who achieve a meaningful clinical response, and the duration of any such clinical responses. As a result, our ability to improve our manufacturing process or product potency, safety, or efficacy according to such parameters is limited and may require significant trial and error, which may cause us to incur significant costs or could result in significant delays to the clinical development and eventual commercialization of our product candidates.

We are dependent on third parties to store our CAR-NK cells, viral vector, master and working cell banks of the engineered K562 cells, and any damage or loss would cause delays in replacement, and our business could suffer.

The CAR-NK cells, the viral vector, and the master and working cell banks of the engineered K562 cells are stored in freezers at third-party biorepositories and will also be stored in our freezers at our production facility. If these materials are damaged at these facilities, including by the loss or malfunction of these freezers or our back-up power systems, as well as by damage from fire, power loss or other natural disasters, we would need to establish replacement CAR-NK cells, viral vector, and master and working cell banks of the engineered K562 cells, which would impact clinical supply and delay our patients’ treatments. If we are unable to establish replacement materials, we could incur significant additional expenses and liability to patients whose treatment is delayed, and our business could suffer.

 

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

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

Furthermore, we have not yet demonstrated long-term stability of cryopreserved CAR-NK cells and therefore do not know if we will be able to store the cryopreserved cells for extended periods of time. If we are unable to demonstrate long-term stability, we will need to reduce the manufacturing batch size to ensure that the material we produce will be used before it expires. In that case, the scaling of our production processes will not deliver the efficiencies we expect, and the cost per dose of our product candidates will be substantially higher.

For these and other reasons, we have not yet established the long-term stability of our cryopreserved CAR-NK Cells and we may not be able to commercialize CAR-NK cells on a large scale or in a cost-effective manner. If such product is found to be instable, we would be required to conduct more frequent manufacturing runs, which could cause us to incur significant additional expenses.

Risks Related to Our Intellectual Property

If our license agreement with National University of Singapore and St. Jude’s Children’s Research Hospital, Inc. is terminated, we could lose our rights to key components enabling our NK cell engineering platform.

In August 2016, we entered into a license agreement with the National University of Singapore and St. Jude Children’s Research Hospital, Inc., or the Licensors. Pursuant to this license, the Licensors granted to us an exclusive, worldwide, royalty-bearing, sublicensable license under specified patents and patent applications related to NK cell technology in the field of therapeutics. We make single-digit royalty payments, patent expenses, license maintenance fees and milestone payments to the Licensors. The term of the license agreement extends until expiration of the last of the patent rights licensed to us by the Licensors, which is currently expected to occur in approximately 2039. The Licensors may terminate the license agreement upon the occurrence of certain events, such as an uncured material breach by us, the cessation of our business or our insolvency, liquidation or receivership. If the Licensors terminate or narrow the license agreement, we could lose the use of intellectual property rights that may be material or necessary to the development or production of our product candidates, which could impede or prevent our successful commercialization of such product candidates and materially adversely affect our business, financial condition, results of operations and growth prospects.

Furthermore, our patent license agreement with the Licensors is field-specific and has been granted to us in the field of therapeutics. This license agreement permits to Licensors to practice the licensed rights, and to allow non-profit academic third parties to practice the licensed rights for certain academic purposes. As such, certain patents in a patent family that is licensed to us by the Licensors

 

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have been licensed to at least one other third party. Although these patents should not be overlapping with our licensed patents, there is a risk that inadvertent overlap may occur, and thus resources may have to be expended to resolve any such overlap and to prevent other licensees from practicing under our licensed patents rights. If any of the foregoing were to occur, it could delay our development and commercialization of our product candidates, which in turn could materially adversely affect our business, financial condition, results of operations and growth prospects.

Our development and commercialization rights to our current and future product candidates and technology are subject, in part, to the terms and conditions of licenses granted to us by others.

Our patent portfolio consists of a combination of issued patents and pending patent applications licensed from third parties, jointly owned with third parties and assigned solely to us based on our ongoing development activities. We are reliant upon certain of these rights and proprietary technology from third parties for the engineering and development of our current and future product candidates. However, these and other licenses may not provide exclusive rights to use such intellectual property and technology in all relevant fields of use and in all territories in which we choose to develop or commercialize our technology and products in the future. As a result, we may not be able to prevent competitors from developing and commercializing competitive products in territories included in all of our licenses.

We also engage in collaborations with scientists at academic and non-profit institutions to access technologies and materials that are not otherwise available to us. Although the agreements that govern these collaborations may include an option to negotiate an exclusive license to the institution’s rights in any inventions that are created in the course of these collaborations, we may not be able to come to a final agreement for an exclusive license with an institution.

Such licenses and other contracts may be the subject of disagreements with the grantors and/or various third parties regarding the interpretation of such licenses and contracts. The resolution of any such disagreements that may arise could affect the scope of our rights to the relevant technology, or affect financial or other obligations under the relevant agreement, either of which could inhibit our ability to utilize the underlying technology in a cost-effective manner to develop and commercialize our product candidates, which in turn could have materially adversely affect our business, financial condition, results of operations and growth prospects.

Under certain circumstances such as a material breach of terms, our licensors could terminate our license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products identical to ours. In addition, we may seek to obtain additional licenses from our licensors and, in connection with obtaining such licenses, we may agree to amend our existing licenses in a manner that may be more favorable to the licensors, including by agreeing to terms that could enable third parties (potentially including our competitors) to receive licenses to a portion of the intellectual property that is subject to our existing licenses.

In addition, we may not have the right to control the preparation, filing, prosecution, maintenance, enforcement and defense of patents and patent applications directed to the technology that we license from third parties. Therefore, we cannot be certain that these patents and patent applications will be prepared, filed, prosecuted, maintained, enforced and defended in a manner consistent with our best interests. If our licensors fail to prosecute, maintain, enforce and defend such patents, or lose rights to those patents or patent applications, the rights we have licensed may be reduced or eliminated, and our right to develop and commercialize any of our products that are the subject of such licensed rights could be impaired. Additionally, we may be required to reimburse our licensors for all of their expenses

 

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related to the prosecution, maintenance, enforcement and defense of patents and patent applications that we in-license from them.

Furthermore, our licensors may have relied on third-party consultants or collaborators or on funds from third parties such that our licensors are not the sole and exclusive owners of the patents we in-licensed. If other third parties have ownership rights to our in-licensed patents, they may be able to license such patents to our competitors, and our competitors could market competing products and technology. This could harm our competitive position, and our business.

Duration of patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time, and the expiration of our patents may subject us to increased competition.

As of June 30, 2020, the patent portfolio that is assigned to us, jointly owned with others or licensed to us includes five issued U.S. patents, one issued Japanese patent, 16 pending U.S. patent applications and 44 pending international patent applications, across our Platform, NKX101 and NKX019 families. Our portfolio of issued patents, excluding pending patent applications, has expiration dates between 2024 and 2035. Our portfolio, including issued patents, and including pending applications if they issue, has expiration dates between 2024 and 2041. At least 45 of our issued patents and pending patent applications relate to supporting commercialization of our current product candidates, while the remaining issued patents and pending patent applications relate to future product candidates and alternative technologies. We plan to file additional patent applications that could potentially allow for further increase of the exclusive market protection for use of NKX101 and NKX019. However, we can provide no assurance that we will be able to file or receive additional patent protection for these or other product candidates.

Patent expiration dates may be shortened or lengthened by a number of factors, including terminal disclaimers, patent term adjustments, supplemental protection certificates and patent term extensions. Patent term extensions and supplemental protection certificates, and the like, may be impacted by the regulatory process and may not significantly lengthen patent term. Our patent protection could also be reduced or eliminated for noncompliance with various procedural, document submission, fee payment and other requirements imposed by government patent agencies. In addition, if we fail to apply for applicable patent term extensions or adjustments, we will have a more limited time during which we can enforce our granted patent rights.

Given the amount of time required for the development, testing and regulatory review of product candidates, patents protecting such candidates might expire before or shortly after such product candidates are commercialized. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we have or will obtain patent rights. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the normal expiration of the patent; provided that the patent is not enforceable for more than 14 years from the date of drug approval, which is limited to the approved indication (or any additional indications approved during the period of extension). Furthermore, only one patent per approved product can be extended and only those claims directed to the approved product, a method for using it or a method for manufacturing it may be extended. However, the applicable authorities, including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If we are responsible for patent prosecution and maintenance of patent rights in-licensed to us, we could be exposed to liability to the applicable patent owner. If we or our licensors fail to maintain the patents and patent applications covering our product candidates and technologies, we may not be able to prevent a competitor from marketing products that are the same as or similar to our product candidates. Further, others commercializing products similar or identical to ours, and our competitors

 

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may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case, which could increase competition for our product candidates and materially adversely affect our business, financial condition, results of operations and growth prospects.

If any patent protection we obtain is not sufficiently robust, our competitors could develop and commercialize products and technology similar or identical to ours.

The market for cell therapy is highly competitive and subject to rapid technological change. Our success depends, in large part, on our ability to maintain a competitive position in the development and protection of technologies and products for use in these fields and to obtain and maintain patent protection in the United States and other countries with respect to our product candidates and our technology. We have sought, and intend to seek, to protect our proprietary position by filing patent applications in the United States and abroad related to our product candidates and our technology that are important to our business. If we are unable to protect our intellectual property, our competitive position could be materially adversely affected, as third parties may be able to make, use or sell products and technologies that are substantially the same as ours without incurring the sizeable development and licensing costs that we have incurred. This, in turn, would materially adversely affect our ability to compete in the market.

The patent position of biotechnology and pharmaceutical companies generally is uncertain, involves complex legal and factual questions and has, in recent years, been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued that protect our technology or product candidates or effectively prevent others from commercializing competitive technologies and product candidates.

The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may also fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection.

Claim scope in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if the patent applications we license or own do issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us or otherwise provide us with any competitive advantage. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative products in a non-infringing manner.

Even after issuance, our owned and in-licensed patents may be subject to challenge, which if successful could require us to obtain licenses from third parties, which may not be available on commercially reasonable terms or at all, or to cease the use of the underlying technology, which could materially adversely affect our business.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents, even after issuance, may be challenged in the courts or patent offices in the United States and abroad. Third-party challenges may result in a loss of exclusivity or in our patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to prevent others from using or commercializing similar or identical technology and products, or could limit the duration of the patent protection of our technology and product candidates.

 

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Even if our patents are determined to be valid and enforceable, they may not be interpreted sufficiently broadly to prevent others from marketing products similar to ours or designing around our patents.

We are currently involved in two patent re-examination proceedings. On August 1, 2018, a third party requested ex-parte re-examination of certain claims of U.S. Patent No. 9,511,092 and this re-examination is currently pending with the USPTO. On August 2, 2019, a third party requested an ex-parte re-examination on the remaining claims of U.S. Patent No. 9,511,092, with the USPTO subsequently issuing a Notice of Intent to Issue Inter Partes Reexamination Certificate confirming patentability of the claims in an amended form. U.S. Patent No. 9,511,092 relates generally to chimeric receptor complexes that bind certain specific natural killer cell ligands and methods of using natural killer cells. U.S. Patent No. 9,511,092 does not relate to our current product candidates but may relate to future product candidates or alternative technologies. Although we plan to vigorously protect our intellectual property rights, as with all legal proceedings, there can be no guarantee as to the outcome, and, regardless of the merits of third-party challenges, such proceedings are time-consuming and costly. As a result of such re-examinations, our rights under the relevant patents could be narrowed or lost, and in the course of such proceedings, we may incur substantial costs, and the time and attention of our management may be diverted from the development and commercialization of our product candidates.

We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent, which could materially adversely affect our ability to develop, manufacture and market our product candidates.

There are many patents issued or applied for in the biotechnology industry, and we may not be aware of patents or patent applications held by others that relate to our business. We cannot guarantee that any of our or our licensors’ patent searches or analyses, including but not limited to the identification of relevant patents, analysis of the scope of relevant patent claims or determination of the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending application in the United States and elsewhere that is relevant to or necessary for the development and commercialization of our product candidates in any jurisdiction.

For example, patent applications in the United States and many international jurisdictions are typically not published until 18 months after the filing of certain priority documents (or, in some cases, are not published until they issue as patents) and publications in the scientific literature often lag behind actual discoveries. Thus, we cannot be certain that others have not filed patent applications or made public disclosures relating to our technology or our contemplated technology. A third party may have filed, and may in the future file, patent applications directed to our products or technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights to patents directed to such technologies. If third parties have filed such patent applications, an interference proceeding in the United States can be initiated by such third party, or by the USPTO itself, to determine who was the first to invent any of the subject matter recited by the patent claims of our applications.

Furthermore, after issuance, the scope of patent claims remains subject to construction as determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, and we may incorrectly determine that our product candidates are not covered by a third party patent or may incorrectly predict whether a third party’s pending application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or elsewhere that we consider relevant may also be incorrect, which. If we fail to correctly identify or interpret relevant patents, we may be subject to infringement claims. We cannot

 

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guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we fail in any such dispute, in addition to being forced to pay monetary damages, we may be temporarily or permanently prohibited from commercializing our product candidates. We may also be forced to attempt to redesign our product candidates in a manner that no longer infringes third-party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to the development and commercialization of our product candidates.

Claims brought against us for infringing, misappropriating or otherwise violating intellectual property rights of third parties or engaging in unfair competition, would be costly and time-consuming and could prevent or delay us from successfully developing or commercializing our product candidates.

Our success depends in part on our ability to develop, manufacture and market our technology and use our technology without infringing the proprietary rights of third parties. As the relevant product industries expand and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we may need to challenge to continue our operations as currently contemplated. As a result, our technology and any future products that we commercialize could be alleged to infringe patent rights and other proprietary rights of third parties, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages and/or limit our ability to commercialize our product candidates.

We may face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties. We employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Accordingly, we may be subject to claims that these employees, or we, have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may make it necessary to defend ourselves by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. Regardless of whether any such claims that we are infringing patents or other intellectual property rights have merit, such claims can be time consuming, divert management attention and financial resources and are costly to evaluate and defend.

Results of any such litigation are difficult to predict and may require us to stop treating certain conditions, obtain licenses or modify our product candidates while we develop non-infringing substitutes, or may result in significant settlement costs. Litigation can involve substantial damages for infringement (and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees), and the court could prohibit us from selling or require us to take a license from a third party, which the third party is not required to do at a commercially reasonable price or at all. If a license is available from a third party, we may have to pay substantial royalties, upfront fees, milestone fees, or grant cross-licenses to intellectual property rights for our products. We may also have to redesign our products so they do not infringe third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our products may not be available for manufacture, use, or sale.

We may not be able to effectively monitor unauthorized use of our intellectual property and enforce our intellectual property rights against infringement, and may incur substantial costs as a result of bringing litigation or other proceedings relating to our intellectual property rights.

Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we review our competitors’ products for potential infringement of our rights. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully monitor unauthorized use of our intellectual property could result in competitors offering products that incorporate our product or service features, which could in turn reduce demand for our products.

 

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We may also, from time to time, seek to enforce our intellectual property rights against infringers when we determine that a successful outcome is probable and may lead to an increase in the value of the intellectual property.

If we choose to enforce our patent rights against a party, that party could counterclaim that our patent is invalid and/or unenforceable. The defendant may challenge our patents through proceedings before the Patent Trial and Appeal Board, or PTAB, including inter partes and post-grant review. Proceedings to challenge patents are also available internationally, including, for example, opposition proceedings and nullity actions. In patent litigation in the United States, counterclaims alleging invalidity and/or unenforceability and PTAB challenges are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before the PTAB, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we may lose at least part, and perhaps all, of the patent protection on our product candidates.

In addition, such lawsuits and proceedings are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. Litigation is inherently unpredictable, and there is a risk that the court will decide that such patents are not valid and that we do not have the right to stop the other party from using the inventions. Furthermore, some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. There is also the risk that, even if the validity of such patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe our intellectual property rights.

There could also be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could materially adversely affect the price of our common stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could materially adversely affect our ability to raise the funds necessary to continue our operations.

We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

We have a number of international patents and patent applications, and expect to continue to pursue patent protection in many of the significant markets in which we intend to do business. However, filing, prosecuting and defending patents relating to our product candidates, including all of our in-licensed patent rights, in all countries throughout the world would be prohibitively expensive. We must ultimately seek patent protection on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Furthermore, the protection offered by intellectual property rights in certain countries outside of the United States may be less extensive than those in the United States. Consequently, we may not be able to prevent third parties from utilizing proprietary technology in all countries outside of the United States, even if we pursue and obtain issued patents in particular foreign jurisdictions, or from selling or

 

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importing products made using our proprietary technology in and into the United States or other jurisdictions. Such products may compete with our products, and our patent rights or other intellectual property rights may not be effective or sufficient to prevent them from competing. If such competing products arise in jurisdictions where we are unable to exercise intellectual property rights to combat them, our business, financial condition, results of operations and growth prospects could be materially adversely affected.

Changes in U.S. patent law or the patent law of other jurisdictions could decrease the certainty of our ability to obtain patents and diminish the value of patents in general, thereby impairing our ability to protect our current and any future product candidates.

The U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. For example, in recent years the U.S. Supreme Court modified some tests used by the USPTO in granting patents over the past 20 years, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of a challenge of any patents we obtain or license. Similarly, international courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. Those changes may materially adversely affect our patent rights and our ability to obtain issued patents.

Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Under the Leahy-Smith America Invents Act, or the America Invents Act, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. The America Invents Act also includes a number of significant changes that affect the way patent applications are prosecuted and also may affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO-administered post-grant proceedings, including post-grant review, inter partes review and derivation proceedings. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could materially adversely affect our business, financial condition, results of operations and growth prospects.

In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce patents that we own, have licensed or might obtain in the future. Similarly, changes in patent law and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we own or have licensed or that we may obtain in the future, which in turn could materially adversely affect our business, financial condition, results of operations and growth prospects.

We may fail to obtain or enforce assignments of intellectual property rights from our employees and contractors.

While it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual

 

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property to us, we may be unsuccessful in executing an enforceable agreement with each party who in fact conceives or develops intellectual property that we regard as our own. Furthermore, our assignment agreements may not be self-executing or may be breached, and we may be forced to bring or defend claims to determine the ownership of what we regard as our intellectual property, and we may not be successful in such claims. If we fail in bringing or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Such an outcome could materially adversely affect our business, financial condition, results of operations and growth prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and distraction to management and other employees.

If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could be materially diminished.

Trade secrets are difficult to protect. We rely on trade secrets to protect our proprietary information and technologies, especially where we do not believe patent protection is appropriate or obtainable, or where such patents would be difficult to enforce. We rely in part on confidentiality agreements with our employees, consultants, contractors, outside scientific collaborators and other advisors to protect our trade secrets and other proprietary information. We cannot guarantee that we have entered into such agreements with each party that may have had access to our proprietary information or technologies, or that such agreements, even if in place, will not be circumvented. These agreements may not effectively prevent disclosure of proprietary information or technology and may not provide an adequate remedy in the event of unauthorized disclosure of such information or technology. In addition, others may independently discover our trade secrets and proprietary information, in which case we may have no right to prevent them from using such trade secrets or proprietary information to compete with us. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could materially adversely affect our business, financial condition, results of operations and growth prospects.

The U.S. government could choose to exercise certain rights in technology developed under government-funded research, which could eliminate our exclusive use of such technology or require us to commercialize our product candidates in a way we consider sub-optimal.

The U.S. government has certain rights in some of our licensed patents (including U.S. Patent Nos. 7,435,596, 8,026,097 and certain related U.S. patent applications) in accordance with the Bayh-Dole Act of 1980. These rights in certain technology developed under government-funded research include, for example, a nonexclusive, nontransferable, irrevocable, paid-up license to use those inventions for governmental purposes. In addition, the U.S. government has the right to require us to grant exclusive licenses to such inventions to a third party if the U.S. government determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations.

The U.S. government also has the right to take title to such technology if we fail to disclose the invention of such technology to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to patent rights in any country in which a patent application is not filed within specified time limits. To the extent any of our owned or future in-licensed intellectual property is generated through the use of U.S. government funding, these provisions of the Bayh-Dole Act may apply.

Intellectual property generated under a government-funded program is also subject to certain reporting requirements. In addition, the U.S. government requires that any products embodying any of these inventions or produced through the use of any of these inventions be manufactured substantially

 

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in the United States. If we are unable to obtain a waiver from the government agency that provided the underlying research funding, we may be limited in our ability to contract with non-U.S. product manufacturers for products related to such intellectual property.

The exercise of any of the foregoing rights of the U.S. government over technology that we own or use in the development and commercialization of our product candidates could prevent us from enjoying the exclusive use of such technology, or could cause us to incur additional expenses in the commercialization of our product candidates. Any of the foregoing could materially adversely affect our business, financial condition, results of operations and growth prospects.

Risks Related to Commercialization

If any of our product candidates are approved for marketing and commercialization and we have not developed or secured third-party marketing, sales and distribution capabilities, we will be unable to successfully commercialize such products and may not be able to generate product revenue.

We currently have no sales, marketing or distribution organizational experience or capabilities. We will need to develop internal sales, marketing and distribution capabilities to commercialize any product candidate that gains FDA or other regulatory authority approval, which would be expensive and time-consuming, or enter into partnerships with third parties to perform these services. If we decide to market any approved products directly, we will need to commit significant financial and managerial resources to develop a marketing and sales force with technical expertise and supporting distribution, administration and compliance capabilities. If we rely on third parties to market products or decide to co-promote products with partners, we will need to establish and maintain marketing and distribution arrangements with third parties, and there can be no assurance that we will be able to enter into such arrangements on acceptable terms or at all. In entering into third-party marketing or distribution arrangements, any product revenue we receive will depend upon the efforts of the third parties and we cannot assure you that such third parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance for any approved product. If we are not successful in commercializing any product approved in the future, if any, either on our own or through third parties, our business, financial condition, results of operations and growth prospects could be materially adversely affected.

If we are not able to establish pharmaceutical or biotechnology collaborations on commercially reasonable terms, or at all, we may have to alter our development and commercialization plans.

The advancement of our product candidates and development programs and the potential commercialization of our current and future product candidates will require substantial additional cash to fund expenses. For some of our programs, we may seek to collaborate with pharmaceutical and biotechnology companies to develop and commercialize such product candidates. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders, or disrupt our management and business.

We face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Whether we reach a definitive agreement for other collaborations will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the progress of our clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of

 

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competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. Further, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for future product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view them as having the requisite potential to demonstrate safety and efficacy. Any delays in entering into new collaborations or strategic partnership agreements related to any product candidate we develop could delay the development and commercialization of our product candidates, which would harm our business prospects, financial condition, and results of operations.

If we enter into collaborations with third parties to develop or commercialize our product candidates, our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.

If we enter into future collaboration with third parties, we could face the following risks:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates;

 

   

collaborators may not properly enforce, maintain or defend our intellectual property rights or may use our proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation, or other intellectual property proceedings;

 

   

disputes may arise between a collaborator and us that cause the delay or termination of the research, development or commercialization of the product candidate, or that result in costly litigation or arbitration that diverts management attention and resources;

 

   

if a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program under such collaboration could be delayed, diminished or terminated; and

 

   

collaboration agreements may restrict our right to independently pursue new product candidates.

If conflicts arise between our collaborators and us, our collaborators may act in a manner adverse to us and could limit our ability to implement our strategies. Future collaborators may develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of these collaborations. Competing products, either developed by the collaborators or to which the collaborators have rights, may result in the withdrawal of support for our product candidates. Our collaborators may preclude us from entering into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to the development and commercialization of products. Any of these developments could harm our product development efforts.

As a result, if we enter into additional collaboration agreements and strategic partnerships or license our intellectual property, products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations, which could delay our timelines or otherwise adversely affect our business. We also cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction.

 

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Our product candidates, including NKX101 and NKX019, could be subject to regulatory limitations following approval, if and when such approval is granted.

Following approval of a product candidate, if any, we must comply with comprehensive government regulations regarding the manufacture, labeling, marketing, distribution and promotion of biologic products. We must comply with the FDA’s labeling protocols, which prohibits promoting “off-label uses.” We may not be able to obtain the labeling claims necessary or desirable to successfully commercialize our products, including NKX101 and NKX019 or other product candidates in development.

The FDA and foreign regulatory authorities could impose significant restrictions on use of an approved product including potentially restricting its use to limited clinical centers as well as through the product label, as well as on advertising, promotional and distribution activities associated with such approved product. The FDA or a foreign regulatory authority could also condition their approval on the performance of post-approval clinical trials, patient monitoring or testing, which could be time-consuming and expensive. If the results of such post-marketing trials are not satisfactory, the FDA or such foreign regulatory authority could withdraw marketing authorization or may condition continued marketing on commitments from us or our partners that may be expensive and/or time-consuming to fulfill.

In addition, if we or others identify side-effects after any of our products are on the market, if manufacturing problems occur subsequent to regulatory approval, or if we, our manufacturers or our partners fail to comply with regulatory requirements, including those mentioned above, we or our partners could be subject to the following:

 

   

restrictions on our ability to conduct clinical trials, including full or partial clinical holds on ongoing or planned clinical trials;

 

   

restrictions on such products’ manufacturing processes;

 

   

changes to the product label;

 

   

restrictions on the marketing of a product;

 

   

restrictions on product distribution;

 

   

requirements to conduct post-marketing clinical trials;

 

   

Untitled or Warning Letters from the FDA;

 

   

withdrawal of the product from the market;

 

   

refusal to approve pending applications or supplements to approved applications that we submit;

 

   

recall of products;

 

   

fines, restitution or disgorgement of profits or revenue;

 

   

suspension or withdrawal of regulatory approvals;

 

   

refusal to permit the import or export of our products;

 

   

product seizure;

 

   

injunctions; or

 

   

imposition of civil or criminal penalties.

Any one or a combination of these penalties could prevent us from achieving or maintaining market acceptance of the affected product, or could substantially increase the costs and expenses of commercializing such product, which in turn could delay or prevent us from generating any revenue or profit from the sale of such product and could materially adversely affect our business, financial condition, results of operations and growth prospects. In addition, third-party payors may impose limitations on centers and personnel that may administer our products, including but not limited to

 

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requiring third-party accreditation to be obtained before the use of our products is reimbursed in such a center, which could materially adversely affect our potential commercial success and lead to slower market acceptance.

The market opportunities for our product candidates, if and when approved, may be limited, and if such market opportunities are smaller than we expect, our revenues could be materially adversely affected and our business could suffer.

Cancer therapies are sometimes characterized as first-line, second-line, or third-line, and the FDA often approves new therapies initially only for third-line use. When cancer is detected early enough, first-line therapy, usually chemotherapy, hormone therapy, surgery, radiation therapy or a combination of these, is sometimes adequate to cure the cancer or prolong life without a cure. Second- and third-line therapies are administered to patients when prior therapy is not effective. Our initial planned clinical trials are expected to enroll patients who have received other available therapies in order to first evaluate whether the product is safe and whether there is any activity. We do not know at this time whether either NKX101 or NKX019 will be safe for use in humans or whether they will demonstrate any anti-cancer activity. Subsequently, we plan to conduct additional clinical trials depending on the activity we note in the initial clinical trials. If the activity is sufficient, we may initially seek approval of any product candidates we develop as a therapy for patients who have received one or more prior treatments. Subsequently, for those products that prove to be sufficiently beneficial, if any, we would expect to seek approval potentially in earlier lines of therapy, but there is no guarantee that product candidates we develop, even if approved for later lines of therapy, would be approved for earlier lines of therapy, and, prior to any such approvals, we may have to conduct additional clinical trials.

The number of patients who have the cancers we are targeting may turn out to be lower than expected. Additionally, the potentially addressable patient population for our current programs or future product candidates may be limited. Potentially addressable patient populations for of our product candidates are only estimates. These estimates could prove to be incorrect, and the estimated number of potential patients in the United States and elsewhere could be lower than expected. It may also be that such patients may not be otherwise amenable to treatment with our product candidates, or patients could become increasingly difficult to identify and access, any of which could materially adversely affect our business, financial condition, results of operations and growth prospects.

The commercial success of any of our product candidates will depend upon such product candidate’s degree of market acceptance by physicians, patients, third-party payors and others in the medical community.

Our product candidates may not be commercially successful. Even if requisite approvals are obtained from the FDA in the United States and other regulatory authorities internationally, the commercial success of our product candidates will depend, in part, on the acceptance by physicians, patients and healthcare payors of cell therapy products in general, and our product candidates in particular, as medically necessary, cost-effective and safe. Physicians, patients, healthcare payors and others in the medical community may not accept any product that we commercialize. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of cell therapy products and, in particular, our product candidates, if approved for commercial sale, will depend on several factors, including:

 

   

the efficacy and safety of such product candidates as demonstrated in clinical trials;

 

   

the potential and perceived advantages of product candidates over alternative treatments;

 

   

the cost of treatment relative to alternative treatments;

 

   

the clinical indications for which the product candidate is approved by the FDA;

 

   

the willingness of physicians to prescribe new therapies;

 

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the willingness of the target patient population to try new therapies;

 

   

the prevalence and severity of any side effects;

 

   

product labeling or product insert requirements imposed by the FDA or other regulatory authorities, including any limitations or warnings contained in a product’s approved labeling;

 

   

relative convenience and ease of administration;

 

   

the timing of market introduction of competitive products;

 

   

adverse publicity concerning our product candidates or favorable publicity about competing products and treatments;

 

   

sufficient third-party payor coverage, any limitations in terms of center or personnel training requirement imposed by third parties and adequate reimbursement;

 

   

limitations or warnings contained in the FDA-approved labeling for our product candidates;

 

   

any FDA requirement to undertake a Risk Evaluation and Mitigation Strategy, or REMS;

 

   

the effectiveness of our sales, marketing and distribution efforts; and

 

   

potential product liability claims.

Even if a product candidate displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully known until after such product is launched. Our product candidates may not achieve broad market acceptance.

Furthermore, the FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay marketing approval of a product. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.

The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for our product candidates, if approved, could limit our ability to market such products and to generate product revenue.

We expect the cost of a single administration of one of our cell therapy product candidates to be substantial, when and if they achieve regulatory approval. We expect that coverage and reimbursement by government and private payors will be essential for most patients to be able to afford these treatments. Accordingly, sales of our products, if approved, will depend substantially, both domestically and internationally, on the extent to which the costs of our product candidates will be reimbursed by government authorities, private health coverage insurers and other third- party payors. Coverage and reimbursement by a third-party payor could depend upon several factors, including the third-party payor’s determination that use of a product is (i) a covered benefit under its health plan, (ii) safe, effective and medically necessary, (iii) appropriate for the specific patient, (iv) cost-effective and (v) neither experimental nor investigational.

Obtaining coverage and reimbursement for a product from third-party payors is a time-consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If coverage and reimbursement are not available, or are available only at limited levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be adequate to realize a sufficient return on our investment.

 

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There is significant uncertainty related to third-party coverage and reimbursement of newly approved drug products. In the United States, third-party payors, including government payors such as Medicare and Medicaid, play an important role in determining the extent to which new drugs and biologics will be covered and reimbursed. Medicare and Medicaid are increasingly used as models for the development of private payors’ and government payors’ coverage and reimbursement policies. Currently, few cell therapy products have been approved for coverage and reimbursement by the Centers for Medicare & Medicaid Services, or CMS, the agency responsible for administering Medicare. It is difficult to predict what CMS will decide with respect to coverage and reimbursement for fundamentally novel products such as ours, since there is no body of established protocols and precedents for these types of drug products. Moreover, reimbursement agencies in the European Union may be more conservative than CMS. For example, several cancer drugs have been approved for reimbursement in the United States, whereas they have not been approved for reimbursement in certain European Union member states. It is difficult to predict what third-party payors will decide with respect to the coverage and reimbursement for our product candidates.

Outside the United States, international operations vary significantly by country and are subject to extensive government price controls and other market regulations, and increasing emphasis on cost-containment initiatives in the European Union, Canada and other countries could place pricing pressure on us. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. It can also take a significant amount of time after approval of a product to secure pricing and reimbursement for such product in many counties outside the United States. In general, the prices of medicines under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for medical products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our products may be reduced compared with the United States and may be insufficient to generate commercially reasonable product revenues.

Moreover, increasing efforts by government and third-party payors in the United States and abroad to cap or reduce healthcare costs could limit coverage and the level of reimbursement for our product candidates. Payors are increasingly considering new metrics as the basis for reimbursement rates, such as average sales price, or ASP, average manufacturer price, or AMP, and Actual Acquisition Cost. The existing data for reimbursement based on some of these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates, and CMS has begun making pharmacy National Average Drug Acquisition Cost and National Average Retail Price data publicly available on at least a monthly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement metrics on the willingness of payors to cover candidate products that we or our partners are able to commercialize. Furthermore, most third-party payors currently require additional accreditation for approved cell therapy drugs, which limits the centers that can administer the drugs, and similar limitations may also be imposed on the product candidates that we are developing. We expect to experience pricing pressures in connection with the sale of our product candidates, if any, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, and on prescription drugs and surgical procedures in particular, has become intense. As a result, increasingly high barriers to entry are developing for new drug products such as ours.

Healthcare reform initiatives and other administrative and legislative proposals may harm our business.

In the United States, the European Union and other jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes to the healthcare system that could affect our results of operations. In particular, there have been and

 

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continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs and improve the quality of healthcare. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, was enacted, which substantially changed the way healthcare is financed by both governmental and private payors. Among the provisions of the ACA, those of greatest importance to the pharmaceutical and biotechnology industries include the following:

 

   

an annual, non-deductible fee payable by any entity that manufactures or imports certain branded prescription drugs and biologic agents (other than those designated as orphan drugs), which is apportioned among these entities according to their market share in certain government healthcare programs;

 

   

new requirements to report certain financial arrangements with physicians and teaching hospitals, including reporting “transfers of value” made or distributed to prescribers and other healthcare providers and reporting investment interests held by physicians and their immediate family members;

 

   

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

 

   

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;

 

   

a licensure framework for follow-on biologic products;

 

   

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

 

   

establishment of the CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA. For example, the Tax Cuts and Jobs Act of 2017 was enacted, which includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. It is uncertain the extent to which any such changes may impact our business or financial condition.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, led to aggregate reductions of Medicare payments to providers of 2% per fiscal year. These reductions went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional action is taken by Congress. However, the Medicare sequester reductions under the Budget Control Act of 2011 will be suspended from May 1, 2020 through December 31, 2020 due to the COVID-19 pandemic. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws or any other similar laws introduced in the future may result in additional reductions in Medicare and other health care funding, which could negatively affect our customers and accordingly, our financial operations.

There have also been a number of proposals in the United States to control the escalating cost of healthcare, including the cost of drug treatments, patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and

 

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we expect that coverage and reimbursement for new therapies will be increasingly restricted. Recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drugs. Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. On May 11, 2018, the Trump administration issued a plan to lower drug prices.

We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action in the United States, the European Union or any other jurisdiction. If we or any third parties we may engage are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or such third parties are not able to maintain regulatory compliance, our product candidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability. Furthermore, future price controls or other changes in pricing regulation or negative publicity related to the pricing of pharmaceutical drugs could restrict the amount that we are able to charge for our drug products, which could render our product candidates, if approved, commercially unviable and materially adversely affect our ability to raise additional capital on acceptable terms.

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

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 trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

If we market approved products outside the United States, we expect that we will be subject to additional risks in commercialization, including:

 

   

different regulatory requirements for approval of therapies in foreign countries;

 

   

reduced protection for intellectual property rights;

 

   

unexpected changes in tariffs, trade barriers and 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 currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

   

foreign reimbursement, pricing and insurance regimes;

 

   

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

 

   

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

 

   

business interruptions resulting from geopolitical actions, including war and terrorism, natural disasters including earthquakes, typhoons, floods and fires, and other public health crises, illnesses, epidemics or pandemics, such as the potential impact of the COVID-19 outbreak.

 

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We have no prior experience in these areas. In addition, there are complex regulatory, tax, labor and other legal requirements imposed by many of the individual countries in which we may operate, with which we will need to comply. Any of the foregoing difficulties, if encountered, could materially adversely affect our business, financial condition, results of operations and growth prospects.

Our business operations and relationships with investigators, healthcare professionals, consultants, third-party payors, patient organizations and customers will be subject to applicable fraud and abuse and other healthcare laws and regulations, which could expose us to penalties.

These laws may constrain the business or financial arrangements and relationships through which we conduct our operations, including how we research, market, sell and distribute our product candidates, if approved. Such laws include, the U.S. federal Anti-Kickback Statute, the U.S. federal civil and criminal false claims and civil monetary penalties laws, including the civil False Claims Act, the Health Insurance Portability and Accountability Act, or HIPAA, the Health Information Technology for Economic and Clinical Health Act, or HITECH, the U.S. Physician Payments Sunshine Act and its implementing regulations, U.S. state laws and regulations, including, state anti-kickback and false claims laws, laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources, laws and regulations that require drug manufacturers to file reports relating to pricing and marketing information, laws requiring the registration of pharmaceutical sales representatives, laws governing the privacy and security of health information in certain circumstances, and similar healthcare laws and regulations in other jurisdictions, including reporting requirements detailing interactions with and payments to healthcare providers.

It is not always possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. Ensuring that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations will also involve substantial costs. If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, such as Medicare and Medicaid or similar programs in other countries or jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, disgorgement, individual imprisonment, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs and imprisonment, which could affect our ability to operate our business. Further, defending against any such actions can be costly, time-consuming and may require significant personnel resources. Any of the foregoing could significantly harm our business, financial condition, results of operations and growth prospects.

We may fail to comply with evolving European and other privacy laws.

If we conduct clinical trials in the European Economic Area, or EEA, we may be subject to additional privacy laws. The General Data Protection Regulation, (EU) 2016/679, or GDPR, imposes a broad range of strict requirements on companies subject to the GDPR, including requirements relating to having legal bases for processing personal information relating to identifiable individuals and transferring such information outside the EEA, including to the United States, providing details to those individuals regarding the processing of their personal information, keeping personal information secure,

 

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having data processing agreements with third parties who process personal information, responding to individuals’ requests to exercise their rights in respect of their personal information, reporting security breaches involving personal data to the competent national data protection authority and affected individuals, appointing privacy and data protection officers, conducting data protection impact assessments, and record-keeping. The GDPR increases substantially the penalties to which we could be subject in the event of any non-compliance, including fines of up to 10,000,000 Euros or up to 2% of our total worldwide annual turnover for certain comparatively minor offenses, or up to 20,000,000 Euros or up to 4% of our total worldwide annual turnover for more serious offenses. Given the limited enforcement of the GDPR to date, we face uncertainty as to the exact interpretation of the new requirements on our trials and we may be unsuccessful in implementing all measures required by data protection authorities or courts in interpretation of the new law.

In particular, national laws of member states of the European Union are in the process of being adapted to the requirements under the GDPR, thereby implementing national laws which may partially deviate from the GDPR and impose different obligations from country to country, so we do not expect to operate in a uniform legal landscape in the EU. Also, as it relates to processing and transfer of genetic data, the GDPR specifically allows national laws to impose additional and more specific requirements or restrictions, and European laws have historically differed quite substantially in this field, leading to additional uncertainty.

In the event we conduct clinical trials in the EEA, we must also ensure that we implement and maintain adequate safeguards to enable the transfer of personal data outside of the EEA, in particular to the United States, in compliance with European data protection laws. We expect that we will continue to face uncertainty as to whether our efforts to comply with our obligations under European privacy laws will be sufficient. If we are investigated by a European data protection authority, we may face fines and other penalties. Any such investigation or charges by European data protection authorities could have a negative effect on our existing business and on our ability to attract and retain new clients or pharmaceutical partners. We may also experience hesitancy, reluctance, or refusal by European or multi-national clients or pharmaceutical partners to continue to use our products and solutions due to the potential risk exposure as a result of the current and, in particular, future data protection obligations imposed on them by certain data protection authorities in interpretation of current law, including the GDPR. Such clients or pharmaceutical partners may also view any alternative approaches to compliance as being too costly, too burdensome, too legally uncertain, or otherwise objectionable and therefore decide not to do business with us. Any of the foregoing could materially harm our business, prospects, financial condition and results of operations.

Risks Related to Our Common Stock and This Offering

There has been no public market for our common stock prior to this offering, and you may not be able to resell our shares at or above the price you paid, or at all.

We have applied to list our common stock on the Nasdaq Global Select Market, or Nasdaq, but an active trading market for our common stock may never develop following this offering. If an active trading market for our common stock does not develop after this offering, the market price and liquidity of our common stock will be materially and adversely affected. You may not be able to sell your shares quickly or at the market price if trading in our common shares is not active. Negotiations between us and the underwriters will determine the offering price for our common stock and the offering price may bear no relationship to the market price for our common stock after this offering. In addition, the market price of our common stock may decline below the offering price. Furthermore, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

 

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Certain of our existing principal stockholders and entities affiliated with our directors have indicated an interest in purchasing a substantial percentage of the shares of our common stock in this offering at the initial public offering price per share. To the extent that such entities purchase shares in this offering, it would reduce the available public float for our shares because these entities may be restricted under the volume limitations of Rule 144 from selling the shares. As a result, any purchase of shares by such entities in this offering may reduce the liquidity of our common shares compared to what it would have been had these shares been purchased by investors that were not affiliated with us.

The market price for our common stock may be volatile, which could contribute to the loss of all or part of your investment.

Prior to this offering, there has not been a public market for our common stock. Accordingly, the initial public offering price for the shares of our common stock may not be indicative of the price that will prevail in the trading market, if any, that develops following this offering. If an active market for our common stock develops and continues, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.

Factors affecting the trading price of our common stock may include, but are not limited to:

 

   

our decision to initiate a clinical study, not to initiate a clinical study or to terminate an existing clinical study;

 

   

adverse regulatory decisions, including failure to receive regulatory approval for our products;

 

   

success or failure of competitive products, immunotherapy drugs or cellular therapies more generally;

 

   

adverse developments concerning our manufacturers or our strategic partnerships;

 

   

adverse safety or other clinical results, such as those that have occurred in the past or that may occur in the future, related to cellular therapies being developed by other companies that are or may be perceived to be similar to our cellular therapies;

 

   

operating and stock price performance of other companies that investors deem comparable to us;

 

   

sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur;

 

   

general economic and political conditions such as recessions, interest rates, fuel prices, elections, drug pricing policies, international currency fluctuations, acts of war or terrorism, and other public health crises, illnesses, epidemics or pandemics, such as the potential impact of the COVID-19 outbreak; and

 

   

other factors discussed in these risk factors.

Any of the factors listed above could materially adversely affect your investment in our common stock, and our common stock may trade at prices significantly below the initial public offering price, which could contribute to a loss of all or part of your investment. In such circumstances the trading price of our common stock may not recover and may experience a further decline.

In addition, broad market and industry factors could materially adversely affect the market price of our common stock, irrespective of our operating performance. The stock market in general, and Nasdaq and the market for biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of ours, may not be predictable. For example, the trading prices for common stock of other biopharmaceutical and biotechnology companies have been highly volatile as a result of the COVID-19 pandemic. The COVID-19 outbreak continues to rapidly evolve. The extent to which the outbreak may impact our

 

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business, preclinical studies and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence. A loss of investor confidence in the market for biotechnology or pharmaceutical stocks or the stocks of other companies which investors perceive to be similar to us, the opportunities in the biotechnology and pharmaceutical market or the stock market in general, could depress our stock price regardless of our business, financial condition, results of operations or growth prospects.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a period of volatility or decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could materially adversely affect our business, financial condition, results of operation and growth prospects.

If securities analysts do not publish research or reports about our business or if they publish negative reports or downgrade our stock, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us, our business, our markets and our competitors. We do not control these analysts. If securities analysts do not cover our common stock after the completion of this offering, the lack of research coverage may materially adversely affect the market price of our common stock. Furthermore, if one or more of the analysts who do cover us downgrade our stock or if those analysts issue other unfavorable commentary about us or our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fails to regularly publish reports on us, we could lose visibility in the market and interest in our stock could decrease, which in turn could cause our stock price or trading volume to decline and may also impair our ability to expand our business with existing customers and attract new customers.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution, as the initial public offering price of our common stock will be substantially greater than the net tangible book value per share of our common stock.

Assuming (i) an initial public offering price of $16.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, (ii) that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and (iii) no exercise of the underwriters’ option to purchase additional shares, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $6.75 per share. Further, giving effect to the same assumptions, investors purchasing common stock in this offering will contribute approximately 64% of the total amount invested by stockholders since our inception, but will own only approximately 44% of the shares of common stock outstanding after giving effect to this offering but without giving effect to any purchases by such persons or entities in the offering. If the underwriters exercise their option to purchase additional shares, or if outstanding options to purchase our common stock are exercised, you will experience additional dilution. For a further description of the dilution that you will experience immediately after this offering, see the section entitled “Dilution.”

Participation in this offering by our existing stockholders and/or their affiliated entities may reduce the public float for our common stock.

To the extent certain of our existing stockholders and their affiliated entities participate in this offering, such purchases would reduce the non-affiliate public float of our shares, meaning the number of shares of our common stock that are not held by officers, directors and principal stockholders. A

 

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reduction in the public float could reduce the number of shares that are available to be traded at any given time, thereby adversely impacting the liquidity of our common stock and depressing the price at which you may be able to sell shares of common stock purchased in this offering.

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our common stock to drop significantly.

Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of stockholders intend to sell shares of our common stock, could reduce the market price of our common stock. After this offering, we will have 29,427,537 shares of common stock outstanding, based on the number of shares of our common stock outstanding as of March 31, 2020 and conversion of all outstanding convertible preferred stock, including shares of our Series B convertible preferred stock we issued in the second tranche of our Series B convertible preferred stock financing on July 1, 2020, into shares of our common stock. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Substantially all of the remaining 16,427,537 shares of common stock initially will be restricted as a result of securities laws, market standoff provisions or lock-up agreements, but will become eligible to be sold after this offering as described in the section titled “Shares Eligible for Future Sale.”

After this offering, holders of an aggregate of 14,689,215 shares of common stock, including with respect to shares of our Series B convertible preferred stock issued in the second tranche of our Series B convertible preferred stock financing on July 1, 2020 and converted into 7,315,181 shares of our common stock upon the completion of this offering, will have rights, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders, until such shares can otherwise be sold without restriction under Rule 144 under the Securities Act, or until the rights terminate pursuant to the terms of the stockholders agreement between us and such holders. We also intend to register all shares of common stock subject to equity awards issued or reserved for future issuance under our equity compensation plans on a registration statement on Form S-8. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates under Rule 144 under the Securities Act and the market standoff provisions and lock-up agreements described above. Any sales of securities by these stockholders could have a negative impact on the trading price of our common stock.

Concentration of ownership of our shares of common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Following this offering, our directors and executive officers, and entities affiliated with them, as well as holders of more than 5% of our outstanding shares of common stock, in the aggregate will beneficially own 58% of our common stock, after giving effect to the issuance of shares in this offering but without giving effect to any purchases by such persons or entities in the offering. These stockholders, acting together, will be able to control or significantly influence all matters requiring stockholder approval, including the election and removal of directors and approval of any merger, consolidation or sale of all or substantially all of our assets.

Certain of our existing stockholders, including entities affiliated with certain of our directors, have indicated an interest in purchasing a substantial percentage of the shares of our common stock in this offering at the initial public offering price, which would increase their ownership percentage. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares

 

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in this offering. The foregoing discussion does not give effect to any potential purchases by these stockholders in this offering.

Some of these persons or entities may have interests different from yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.

We are an “emerging growth company” under the Jumpstart Our Business Startups Act, or JOBS Act, and a “smaller reporting company” and we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. As a result of the reduced disclosure and governance requirements applicable to emerging growth companies and smaller reporting companies, our common stock may be less attractive to investors.

We intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including: not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a “large accelerated filer” under the rules of the U.S. Securities and Exchange Commission, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. In addition, 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 new or revised accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have an irrevocable election not to take advantage of the benefits of this extended transition period.

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue is less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. Even after we no longer qualify as an emerging growth company, we may still qualify as a smaller reporting company, which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive if we rely on emerging growth company or smaller reporting company exemptions. If some

 

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investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules of the SEC and those of Nasdaq have imposed various requirements on public companies including that we establish and maintain effective disclosure and financial controls. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must evaluate our systems and procedures, and test our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting the later of our second annual report on Form 10-K or the first annual report on Form 10-K following the date on which we are no longer an emerging growth company unless we are a smaller reporting company. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If we do not comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources.

To successfully implement our business plan and comply with Section 404, we must prepare timely and accurate financial statements. We expect that we will need to continue to improve existing procedures and controls, and implement new operational and financial systems, to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer, and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. This, in turn, could materially adversely affect the trading prices for our common stock and our ability to access the capital markets.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would materially adversely affect our business and the trading price of our common stock.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. Pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to report upon the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ending December 31, 2021. When we lose our status both as an emerging

 

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growth company and a smaller reporting company, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could materially adversely affect the trading price of our common stock.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon the completion of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. For example, our directors or executive officers could inadvertently fail to disclose a new relationship or arrangement causing us to fail to make any related party transaction disclosures. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

Changes to, or interpretations of, financial accounting standards may affect our results of operations and could cause us to change our business practices.

We prepare our financial statements in accordance with GAAP. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to interpret and create accounting rules and regulations. Changes in accounting rules can have a significant effect on our reported financial results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may materially adversely affect our financial results, including those contained in this filing, or the way we conduct our business.

Our employment agreements with our executive officers may require us to pay severance benefits to any of those persons who are terminated in connection with a change in control of us, which could materially adversely affect our financial condition or results of operations.

Certain of our executive officers are parties to employment agreements that contain change in control and severance provisions providing for aggregate cash payments for severance and other benefits and acceleration of stock options vesting in the event of a termination of employment in connection with a change in control of us. The accelerated vesting of options could result in dilution to our existing stockholders and could materially adversely affect the market price of our common stock. The payment of these severance benefits could materially adversely affect our financial condition and results of operations. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.

 

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Our ability to use our net operating loss carryovers and certain other tax attributes may be limited.

As described above under “—We have incurred significant losses since our inception and we expect to continue to incur significant losses for the foreseeable future, which raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient additional funding to finance our operations,” we have incurred net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. Under the Internal Revenue Code of 1986, or the Code, a corporation is generally allowed a deduction for net operating losses, or NOLs, carried over from a prior taxable year. Under that provision, we can carry forward our NOLs to offset our future taxable income, if any, until such NOLs are used or expire, in the case of NOLs generated prior to 2018. The same is true of other unused tax attributes, such as tax credits. The amounts of our unused carryovers of NOLs and tax credits as of December 31, 2017, and a description of the valuation allowance we have recorded with respect to those items, are set forth below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, under the Tax Cuts and Jobs Act of 2017, or the Tax Act, the amount of post-2017 NOLs that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. The Tax Act generally eliminates the ability to carry back any NOL to prior taxable years, while allowing post-2017 unused NOLs to be carried forward indefinitely. Recently enacted legislation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, temporarily reverses the limitations imposed by the Tax Act by suspending the 80% taxable income limitation to permit a corporation to offset without limitation its taxable income in 2019 or 2020 with NOL carryforwards generated in prior years.

Furthermore, 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, Sections 382 and 383 of the Code limit the corporation’s ability to use carryovers of its pre-change NOLs, credits and certain other tax attributes to reduce its tax liability for periods after the ownership change. Our issuance of common stock pursuant to this offering may result in a limitation under Sections 382 and 383 of the Code, either separately or in combination with certain prior or subsequent shifts in the ownership of our common stock. As a result, our ability to use carryovers of our pre-change NOLs and credits to reduce our future U.S. federal income tax liability may be subject to limitations. This could result in increased U.S. federal income tax liability for us if we generate taxable income in a future period. Limitations on the use of NOLs and other tax attributes could also increase our state tax liability. The use of our tax attributes will also be limited to the extent that we do not generate positive taxable income in future tax periods. To the extent our ability to utilize our NOLs and other tax assets going forward is limited, in part or altogether, our tax liability for future periods may be greater than expected, and our business, financial condition, results of operations and growth prospects may be materially adversely affected.

We have broad discretion in the use of net proceeds from this offering and may not use them effectively.

We currently intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include further funding for the costs of operating as a public company. We may also use the proceeds to acquire and develop other companies or product candidates. For a further description of our use of proceeds from this offering and the concurrent private placement, see the section entitled “Use of Proceeds.” Although we currently intend to use the net proceeds in such a manner, we will have broad discretion in the application of the net proceeds. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

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We do not expect to pay any cash dividends to the holders of our common stock for the foreseeable future.

We currently intend to invest our future earnings, if any, to fund our growth. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. There is no guarantee that our common stock will appreciate in value or even maintain the price at which our stockholders have purchased our common stock. Investors seeking cash dividends should not purchase our common stock.

Provisions in our Certificate of Incorporation, our bylaws and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Our Certificate of Incorporation, bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our Certificate of Incorporation and bylaws include provisions that:

 

   

authorize “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

   

establish a classified board of directors such that not all members of the board are elected at one time, which may delay the ability of our stockholders to change the membership of a majority of our board of directors;

 

   

specify that only our board of directors, the Chairperson of our board of directors, our Chief Executive Officer or the President, or holders of greater than 10% of our common stock can call special meetings of our stockholders;

 

   

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

 

   

provide that a majority of directors then in office, even though less than a quorum, may fill vacancies on our board of directors;

 

   

specify that no stockholder is permitted to cumulate votes at any election of directors;

 

   

expressly authorize our board of directors to modify, alter or repeal our bylaws; and

 

   

require supermajority votes of the holders of our common stock to amend specified provisions of our Certificate of Incorporation and bylaws.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in the State of Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.

Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit your opportunity to receive a premium for your shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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Our Certificate of Incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) will be the exclusive forum for any:

 

   

derivative action or proceeding brought on our behalf;

 

   

action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

   

action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our Certificate of Incorporation or our bylaws; or

 

   

other action asserting a claim against us that is governed by the internal affairs doctrine.

This exclusive forum provision is intended to apply to claims arising under Delaware state law and is not intended to apply to claims brought pursuant to the Exchange Act or the Securities Act, or any other claim for which the federal courts have exclusive jurisdiction. This exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.

Our Certificate of Incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. The Delaware Supreme Court recently determined that the exclusive forum provision of federal district courts of the United States of America for resolving any complaint asserting a cause of action arising under the Securities Act is permissible and enforceable under Delaware law, reversing an earlier decision from the Court of Chancery of the State of Delaware that had ruled that such provisions were not enforceable. Nevertheless, there is uncertainty as to whether a federal district court would enforce any exclusive forum provision with respect to claims under the Securities Act.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our bylaws described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely affect our business, financial condition, results of operation and growth prospects.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements, including in the sections captioned “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These forward-looking statements include, without limitation, statements regarding our industry, business strategy, our future financial condition and plans and objectives of management for future operations. Terminology such as “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,” “continues,” “could,” “will,” “future,” “goal,” “potential,” “likely,” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this prospectus.

Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will be proven correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:

 

   

the success, cost, timing and potential indications of our product candidate development activities and clinical trials, including our currently planned and potential future clinical trials of NKX101 and NKX019;

 

   

our ability to achieve our milestones for development of our product candidates;

 

   

our ability to obtain and maintain regulatory approval of our product candidates, including NKX101 and NKX019, in any of the indications for which we plan to develop them, and any related restrictions, limitations and/or warnings in the label of an approved product;

 

   

the future results of ongoing or later clinical trials, including of NKX101 and NKX019;

 

   

our ability to maintain our license agreement with National University Singapore and St. Jude with respect to certain rights to NKX101 and NKX019;

 

   

our ability to obtain funding for our operations, including funding necessary to complete the clinical trials of any of our product candidates;

 

   

risks associated with the COVID-19 pandemic, which may adversely impact our business, preclinical studies and clinical trials;

 

   

our plans to research, develop and commercialize our product candidates;

 

   

the size and growth potential of the markets for our products, and our ability to identify target patient populations and serve those markets, especially for diseases with small patient populations;

 

   

our ability to successfully commercialize our products, including obtaining reimbursement on favorable terms;

 

   

our ability to develop and maintain sales and marketing capabilities;

 

   

the rate and degree of market acceptance of our products;

 

   

our ability to obtain and maintain insurance coverage and reimbursement for our product candidates;

 

   

our ability to grow our organization and increase the size of our facilities to meet our anticipated growth;

 

   

our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;

 

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our ability to attract and retain strategic partners with development, regulatory and commercialization expertise;

 

   

the success of competing therapies that are or become available;

 

   

our ability to attract and retain key scientific, commercial or management personnel;

 

   

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act or a smaller reporting company;

 

   

our use of the proceeds from this offering;

 

   

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

   

our ability to continue as a going concern;

 

   

our expectations regarding our ability to obtain and maintain intellectual property protection for our products and our ability to operate our business without infringing on the intellectual property rights of others;

 

   

regulatory developments in the United States and foreign countries; and

 

   

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

These risks are not exhaustive. Other sections of this prospectus may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

In light of these risks, uncertainties and other factors, the forward-looking statements contained in this prospectus might not prove to be accurate and you should not place undue reliance upon them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this prospectus and the documents that we reference in this prospectus, and have filed as exhibits to the registration statement of which this prospectus is a part, with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. You should also read carefully the factors described in the section of this prospectus captioned “Risk Factors” and elsewhere to better understand the risks and uncertainties inherent in our business and underlying and forward-looking statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

Unless otherwise indicated, information contained in this prospectus concerning our industry, our business and the markets for treatments of certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions is based on information from various third-party sources. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and our experience to date in our industry. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us.

 

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MARKET AND INDUSTRY DATA

We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections captioned “Prospectus Summary” and “Business.” We have obtained the market data from third-party sources of information, including publicly available industry publications and subscription-based publications. Industry forecasts are based on industry surveys and the preparer’s expertise in the industry and there can be no assurance that any of the industry forecasts will be achieved. Any industry forecasts are based on data (including third-party data), models and experience of various professionals and are based on various assumptions, all of which are subject to change without notice. We believe these data are reliable, but we have not independently verified the accuracy of this information. While we are not aware of any misstatements regarding the market data presented herein, industry forecasts and projections involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

Certain information in this prospectus regarding the activity of non-engineered allogeneic NK cells in relapsed or refractory AML is sourced from independent industry publications. These independent industry publications are listed below:

 

   

Bachanova, Veronkia, et al. Clearance of acute myeloid leukemia by haploidentical natural killer cells is improved using IL-2 diphtheria toxin fusion protein. Blood 2014; 123(25): 3855-63.

 

   

Curti, Antonio, et al. Successful transfer of alloreactive haploidentical KIR ligand-mismatched natural killer cells after infusion in elderly high risk acute myeloid leukemia patients. Blood 2011; 118(12): 3273-9.

 

   

Kottaridis PD, North J, Tsirogianni M, Marden C, Samuel ER, Jide-Banwo S, et al. Two-Stage Priming of Allogeneic Natural Killer Cells for the Treatment of Patients with Acute Myeloid Leukemia: A Phase I Trial. PLoS ONE 2015; 10(6): e0123416.

 

   

Miller, Jeffery S., et al. Successful adoptive transfer and in vivo expansion of human haploidentical NK cells in patients with cancer. Blood 2005; 105(8): 3051-7.

 

   

Romee, Rizman, et al. Cytokine-induced memory-like natural killer cells exhibit enhanced responses against myeloid leukemia. Science Translation Medicine 2016; 357(8): 357ra123.

 

   

Rubnitz, Jeffrey E., et al. Natural Killer Cell Therapy in Children with Relapsed Leukemia. Pediatr. Blood Cancer 2015; 62(8): 1468-72.

Overall information regarding the activity of non-engineered allogeneic NK cells in cancer is based upon our systematic literature review by searching the online counterpart to the Medical Literature Analysis and Retrieval System Online of the U.S. National Library of Medicine, or MEDLINE, a bibliographic database of life sciences and biomedical information that includes articles from academic journals covering medicine, nursing, pharmacy, dentistry, veterinary medicine, and other health care disciplines. We searched the MEDLINE database between February and March 2019 for publication of clinical trials held between 2005 and 2019 with reprints available in the English language. We identified a total of 32 academic trials of non-engineered allergeneic NK cells in cancer treatments with a combined 586 subjects enrolled.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $195.5 million (or $225.4 million if the underwriters exercise their over-allotment option in full), based on the assumed initial public offering price of $16.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

Each $1.00 increase or decrease in such assumed initial public offering price of $16.50 per share, would increase or decrease, respectively, the net proceeds to us from this offering by approximately $12.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million in the number of shares we are offering would increase or decrease, respectively, the net proceeds to us from this offering by approximately $15.3 million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets.

Based on our planned use of the net proceeds from this offering and our existing cash and cash equivalents, we anticipate that such funds will be sufficient to enable us to fund our operating expenses and capital expenditure requirements for at least the next two years. We currently expect to use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

   

Approximately $65 million to fund our internal discovery research, process development, manufacturing and clinical activities during this time;

 

   

Approximately $15 million to fund the external costs for the development of NKX101 through the completion of dose finding for NKX101 in hematological malignancies;

 

   

Approximately $10 million to fund the external costs for the development of NKX019 through the completion of dose finding for NKX019 in B-cell malignancies;

 

   

Approximately $5 million to fund the external costs for the development of Program 3 to the filing of an IND with the FDA;

 

   

Approximately $10 million to fund the initial buildout and qualification of our commercial cGMP facility; and

 

   

The remainder for our other pipeline candidates and general corporate purposes.

Pending the specific use of net proceeds as described in this prospectus, we intend to invest the net proceeds to us from this offering in short- and intermediate-term investment grade instruments, certificates of deposit or guaranteed obligations of the U.S. government.

This expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. For example, we may use a portion of the net proceeds for the acquisition of businesses or technologies to continue to build our pipeline, our research and development capabilities and our intellectual property portfolio, although we currently have no agreements, commitments or understandings with respect to any such transactions.

 

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The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the status of and results from pre-clinical and clinical trials and any unforeseen cash needs. Moreover, our estimates of the costs to fund our development programs are based on current assumptions and business conditions. If these assumptions or business conditions were to change, our costs to fund our operations could increase. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

We believe that our existing cash and cash equivalents, together with the net proceeds from this offering, will be sufficient to fund our planned operations for at least the next 12 months. After this offering, we will require substantial capital in order to advance our current and future product candidates through clinical trials, regulatory approval and commercialization. For additional information regarding our potential capital requirements, see “Risk Factors—Risks Related to Our Financial Position—We will require additional capital, which, if available, may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our product candidates.”

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and organizational documents, after taking into account our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2020 as follows:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to the issuance of 27,066,206 shares of our Series B convertible preferred stock in the second tranche of our Series B convertible preferred stock financing on July 1, 2020 and the reclassification of the tranche liability to preferred stock;

 

   

on a pro forma basis, giving effect to (i) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 14,689,215 shares of common stock upon the completion of this initial public offering, and (ii) the filing and effectiveness of our Certificate of Incorporation in Delaware; and

 

   

on a pro forma as adjusted basis, giving effect to the pro forma adjustments set forth above and the sale and issuance by us of shares of our common stock in this offering, based upon the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with the sections of this prospectus captioned “Selected Financial and Other Data,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our financial statements and related notes included elsewhere in this prospectus.

 

    As of March 31, 2020  
          Actual           Pro Forma (i)
Giving Effect to
the Series B 2nd
  Tranche Closing  
    Pro Forma (ii)

Giving Effect to

the Conversion of
All Preferred Stock
    Pro Forma
  as Adjusted(1)  
 
    (in thousands, except share and per share amounts)  

Cash, cash equivalents, short-term investments and restricted cash

  $ 25,965     $ 90,365     $ 90,365     $ 285,850  
 

 

 

   

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.0001 par value per share: 54,350,179 shares authorized, 27,283,973 shares issued and outstanding, actual; 54,350,179 shares authorized, 54,350,179 shares issued and outstanding, pro forma (i), and no shares authorized, issued and outstanding, pro forma (ii) and pro forma as adjusted

  $ 59,815     $ 125,115     $     $  

 

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    As of March 31, 2020  
          Actual           Pro Forma (i)
Giving Effect to
the Series B 2nd
  Tranche Closing  
    Pro Forma (ii)

Giving Effect to

the Conversion of
All Preferred Stock
    Pro Forma
  as Adjusted(1)  
 
    (in thousands, except share and per share amounts)  

Stockholders’ (deficit) equity:

       

Preferred stock, $0.0001 par value per share: no shares authorized, issued and outstanding, actual; 54,350,179 shares authorized, no shares issued and outstanding, pro forma (i), pro forma (ii) and pro forma as adjusted

                       

Common stock, $0.0001 par value per share: 71,919,982 shares authorized, 1,620,966 shares issued and 1,738,322 shares outstanding, actual; 100,000,000 shares authorized, 1,620,966 shares issued and 1,738,322 shares outstanding, pro forma (i); 100,000,000 shares authorized, 16,310,181 shares issued and 16,427,537 shares outstanding, pro forma (ii); 100,000,000 shares authorized, 29,310,181 shares issued and 29,427,537 outstanding, pro forma as adjusted

    1       1       2       3  

Additional paid-in capital

    1,675       1,675       126,789       322,272  

Accumulated other comprehensive loss

    (4)       (4     (4     (4

Accumulated deficit

    (35,366)       (35,366     (35,366     (35,366
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (33,694)       33,694       91,421       286,905  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

    $26,121     $ 91,421     $ 91,421     $ 286,905  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Each $1.00 increase or decrease in the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, working capital, total assets, and total stockholders’ equity (deficit) by $12.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, working capital, total assets, and total stockholders’ equity (deficit) by $15.3 million, assuming an initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Unless otherwise indicated, the pro forma and pro forma as adjusted columns in the table above are based on 16,427,537 shares of our common stock (including all outstanding shares of our convertible preferred stock as of March 31, 2020 and shares issued in the second tranche of our

 

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Series B convertible preferred stock financing on July 1, 2020 and the reclassification of the tranche liability to preferred stock, on an as-converted basis, and unvested shares issued pursuant to the early exercise of stock options which are subject to potential forfeiture) outstanding as of March 31, 2020, and exclude the following:

 

   

2,487,763 shares of common stock issuable upon the exercise of outstanding stock options under our 2015 Equity Incentive Plan, at a weighted-average exercise price of $3.63 per share;

 

   

252,170 shares of our common stock reserved for future issuance pursuant to our 2015 Equity Incentive Plan;

 

   

76,483 shares of our common stock issuable upon the exercise of stock options granted after March 31, 2020, with an exercise price of $4.33 per share, and approximately 1.2 million shares of our common stock issuable upon the exercise of stock options granted after March 31, 2020, with an exercise price equal to the public offering price set forth on the cover page of this prospectus;

 

   

2,660,371 shares of our common stock reserved for future issuance under our 2020 Performance Incentive Plan, which will become effective prior to the completion of this offering; and

 

   

295,599 shares of common stock reserved for future issuance under our ESPP, which will become effective prior to the completion of this offering.

 

Our 2020 Performance Incentive Plan and ESPP each provide for annual automatic increases in the number of shares reserved thereunder, as more fully described in the section titled “Executive Compensation—Equity Incentive Plans.”

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Our pro forma net tangible book value as of March 31, 2020 was $91.4 million, or $5.57 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the total number of shares of our common stock outstanding as of March 31, 2020, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock as of March 31, 2020 and shares issued in the second tranche of our Series B convertible preferred stock financing on July 1, 2020 into an aggregate of 14,689,215 shares of common stock upon the completion of this offering, the reclassification of the tranche liability to preferred stock, and a 1-for-3.7 reverse stock split of our common stock.

Net tangible book value dilution per share to new investors represents the amount per share paid by purchasers of common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately following the completion of this offering. After giving effect to (i) the pro forma transactions described in the preceding paragraph, and (ii) the sale of 13,000,000 shares of common stock in this offering at the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price as set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2020 would have been $286.9 million, or $9.75 per share. This represents an immediate increase in pro forma net tangible book value of $4.18 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $6.75 per share to investors purchasing shares of common stock in this offering at the initial public offering price.

The following table illustrates this dilution on a per share basis to new investors.

 

Assumed initial public offering price per share

    $ 16.50  

Historical net tangible book value per share as of March 31, 2020

  $ (19.38  

Increase in net tangible book value per share attributable to pro forma transactions

  $ 24.95    
 

 

 

   

Pro forma net tangible book value per share as of March 31, 2020

  $ 5.57    

Increase in net tangible book value per share attributable to investors participating in this offering

    4.18    
 

 

 

   

Pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering

      9.75  
   

 

 

 

Dilution per share to new investors participating in this offering

    $ 6.75  
   

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share by approximately $0.41 per share, and would increase or decrease, as applicable, dilution per share to investors purchasing shares of our common stock in this offering by approximately $0.59 per share, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase or decrease of 1.0 million shares in the number of shares of common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by

 

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approximately $0.18 per share and increase or decrease, as applicable, the dilution to investors purchasing shares of our common stock in this offering by approximately $0.18 per share, assuming the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

To the extent that any outstanding options to purchase shares of our common stock are exercised, new options are issued under our compensatory stock plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

The following table presents on a pro forma as adjusted basis as described above, as of March 31, 2020, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common stock and redeemable convertible preferred stock and cash received from the exercise of stock options, and the average price per share paid or to be paid to us at the initial public offering price, before deducting underwriting discounts and commissions and estimated offering expenses:

 

    Shares Purchased     Total Consideration     Average
Price Per
Share
 
    Number      Percent     Amount      Percent  
    (in thousands, except share amounts, per share and
percentages)
 

Existing stockholders

    16,427,537        56   $ 121,993        36   $ 7.43  

New investors

    13,000,000        44   $ 214,500        64   $ 16.50  
 

 

 

    

 

 

   

 

 

    

 

 

   

Total

    29,427,537        100   $ 336,493        100   $ 11.43  
 

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase or decrease in the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $13.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ over-allotment option. If the underwriters exercise their over-allotment option in full, our existing stockholders would own 52% and our new investors would own 48% of the total number of shares of our common stock outstanding upon completion of this offering.

 

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SELECTED FINANCIAL DATA

The summary statements of operations data for the years ended December 31, 2018 and 2019 and the selected balance sheet data as of December 31, 2018 and 2019 presented below are derived from our audited financial statements included elsewhere in this prospectus. The summary statements of operations data for the three months ended March 31, 2019 and 2020 and the selected balance sheet data as of March 31, 2020 are derived from our unaudited financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on a basis consistent with our audited financial statements and, in the opinion of management, such unaudited interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of our unaudited interim financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year or any other period. The following summary financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended December 31,     Three Months Ended March 31,  
    2018     2019               2019                         2020            
                (Unaudited)  

Statement of Operations Data:

       

Collaboration revenue

  $ 6,550,000     $ 115,385     $ 113,077     $  

Operating expenses:

       

Research and development

    4,252,210       17,216,955       2,294,117       7,259,838  

General and administrative

    2,654,239       5,246,960       939,838       2,148,421  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    6,906,449       22,463,915       3,233,955       9,408,259  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (356,449     (22,348,530     (3,120,878     (9,408,259

Other income (expense):

       

Change in fair value of preferred stock purchase right liability

          1,317,582             577,645  

Change in fair value of derivative liability

          858,331              

Loss from extinguishment of debt

          (752,167            

Interest expense

          (472,819            

Interest income

    81,946       304,106       37,899       124,611  

Other income, net

          17,662              
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    81,946       1,272,695       37,899       702,256  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (274,503   $ (21,075,835   $ (3,082,979   $ (8,706,003
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss:

       

Net loss

  $ (274,503   $ (21,075,835   $ (3,082,979   $ (8,706,003

Other comprehensive loss

          (2,139           (1,403
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  $ (274,503   $ (21,077,974   $ (3,082,979   $ (8,707,406
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

  $ (0.26   $ (14.41   $ 2.36     $ (5.41
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted(1)(2)

    1,064,967       1,462,511       1,307,735       1,609,184  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(1)(2)

    $ (1.30     $ (0.53
   

 

 

     

 

 

 

Pro forma weighted average shares outstanding, basic and diluted (unaudited)(1)(2)

      16,151,726         16,298,399  
   

 

 

     

 

 

 

 

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(1) 

See Notes 2 and 16 to our audited financial statements for an explanation of the method used to calculate historical and pro forma basic and diluted net loss per share for the year ended December 31, 2019 and Note 3 to our unaudited interim financial statements for an explanation of the method used to calculate historical and pro forma basic and diluted net loss per share for the three-month period ended March 31, 2020. Pro forma basic and diluted net loss per share for purposes of these calculations also includes the effect of the sale and issuance of 27,066,206 shares of Series B convertible preferred stock and the conversion of such shares into 7,315,181 shares of common stock as if such issuance and conversion occurred on January 1, 2019.

 

(2) 

Reflects a 1-for-3.7 reverse stock split of our common stock, which became effective on July 1, 2020.

 

    As of March 31, 2020  
    Actual      Pro Forma
Giving
Effect to the
Series B 2nd
Tranche
Closing(1)
     Pro Forma
Giving
Effect to
the Conversion
of All Preferred
Stock(1)(2)
     Pro Forma
As Adjusted(3)(4)(5)
 

Balance Sheet Data:

          

Cash, cash equivalents, short-term investments and restricted cash

  $ 25,964,681      $ 90,364,658      $ 90,364,658        285,849,658  

Working capital(6)

    17,095,932        82,395,909        82,395,909        277,880,909  

Total assets

    41,122,966        105,522,943        105,522,943        301,007,943  

Preferred stock purchase right liability

    900,000        —          —          —    

Total liabilities

    15,001,950        14,101,950        14,101,950        14,101,950  

Convertible preferred stock

    59,814,882        125,114,859        —          —    

Accumulated deficit

    (35,365,745      (35,365,745      (35,365,745      (35,365,745

Total stockholders’ (deficit) equity

  $ (33,693,866      (33,693,866      91,420,993        286,905,993  

 

(1) 

The pro forma information in this column gives effect to the sale and issuance of 27,066,206 shares of our Series B convertible preferred stock in the second tranche of our Series B convertible preferred stock financing on July 1, 2020 with gross proceeds of $64.4 million and the reclassification of the tranche liability to preferred stock.

 

(2) 

The pro forma information in this column gives effect to (i) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 14,689,215 shares of common stock upon the completion of this initial public offering, and (ii) the filing and effectiveness of our Certificate of Incorporation in Delaware, as if such conversion, reclassification and effectiveness had occurred on March 31, 2020.

 

(3) 

The pro forma as adjusted information in the table gives further effect to the pro forma adjustments set forth above and the sale and issuance by us of shares of our common stock in this offering, based upon the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(4) 

Each $1.00 increase or decrease in the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, working capital, total assets, and total stockholders’ equity (deficit) by

 

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  $12.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, working capital, total assets, and total stockholders’ equity (deficit) by $15.3 million, assuming an initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(5) 

As of July 1, 2020, our cash, cash equivalents, short-term investments and restricted cash totaled $76 million.

 

(6) 

We define working capital as current assets less current liabilities.

 

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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 financial statements and related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis are set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, and includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section of this prospectus titled “Risk Factors,” our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of allogeneic, off-the-shelf engineered natural killer, or NK, cell therapies to treat cancer. Our NK cell engineering platform builds on prior experience and success with engineering T cells and includes proprietary technologies that enable us to generate an abundant supply of NK cells, improve the persistence of these cells for sustained activity in the body, engineer enhanced NK cell recognition of tumor targets and to freeze, store and thaw our engineered NK cells for off-the-shelf use for the treatment of cancer. All of our product candidates are designed to be allogeneic, meaning they are produced using cells from a different person than the patient treated, as well as off-the-shelf, meaning they are produced in quantity, then frozen and therefore available for treating patients without delay, unlike existing autologous cell therapies. Based on published data from a number of clinical trials of certain NK cell therapies, we believe that engineered NK cells can be well tolerated and avoid some of the toxicities observed with other cell therapies. Our two co-lead product candidates are NKX101 and NKX019.

Our NK cell engineering platform is designed to address the limitations and challenges of current technologies for engineering T cells and NK cells and is a result of our internal expertise and deep understanding of NK cell biology. Our platform includes proprietary technologies for NK cell expansion, persistence, targeting and cryopreservation. All of our product candidates incorporate each of the four components of our technology platform, which we believe provides the best opportunity for achieving clinically meaningful results in our development program.

Since the commencement of our operations in 2015, we have devoted substantially all of our resources in support of our product development efforts, hiring personnel, raising capital to support and expand such activities and providing general and administrative support for these operations. We have not generated any revenue from product sales and have funded our operations primarily from the issuance of convertible promissory notes, private placements of our preferred stock and with proceeds from our previous collaboration with GlaxoSmithKline, or GSK. We have incurred a net loss of $0.3 million and $21.1 million during the years ended December 31, 2018 and 2019, and $3.1 million and $8.7 million for the three months ended March 31, 2019 and 2020, respectively, and we expect to continue to incur significant losses for the foreseeable future. As of March 31, 2020, we had an accumulated deficit of $35.4 million.

We expect our operating expenses to significantly increase as we continue to develop and seek regulatory approvals for our product candidates, engage in other research and development activities to expand our pipeline of product candidates, maintain and expand our intellectual property portfolio, and ultimately establish a sales organization and operate as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, and our expenditures on other research and development activities.

 

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We will need substantial additional funding, in addition to the net proceeds of this offering, to support our continuing operations and pursue our long-term development strategy. We may seek additional funding through the issuance of our common stock, other equity or debt financings or collaborations or partnerships with other companies. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts for our product candidates and other research, development and manufacturing activities. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital as and when needed would compromise our ability to execute on our business plan and may cause us to significantly delay, scale back or discontinue the development of some of our programs or curtail any efforts to expand our product pipeline. We currently do not generate any revenue and our independent registered public accounting firm has included in its opinion for the year ended December 31, 2019 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern within one year from the date of this filing.

We issued shares of our Series B convertible preferred stock for aggregate gross proceeds of $64.4 million in the second tranche of our Series B convertible preferred stock financing on July 1, 2020. At March 31, 2020, we had cash, cash equivalents, restricted cash and short term investments of $26.0 million. Assuming we had received the gross proceeds from this second tranche financing as of March 31, 2020, our total cash, cash equivalents, restricted cash and short term investments on that date would have been $90.4 million. We believe that the cash on hand, together with the gross proceeds of the $64.4 million in the second tranche financing will be sufficient to fund our operations for at least the next 12 months from the date of this prospectus. Our cash equivalents are held in money market funds. Since inception, we have incurred net losses and negative cash flows from operations. At March 31, 2020, we had an accumulated deficit of $33.7 million.

Financial Operations Overview

Collaboration Revenue

We currently have no therapeutic products approved for sale, and we have never generated any revenue from the sale of any therapeutic products. Our ability to generate product revenues will depend on the successful development and eventual commercialization of our product candidates. We may look to generate revenue from collaboration and license agreements in the future, as well as from product sales, which approval we do not expect for several years, if ever. Prior to the year ended December 31, 2019, we also generated revenue from a collaboration and license agreement with GSK, which terminated in December 2018. Revenue recorded in 2019 represented the wind down efforts associated with this agreement. Costs incurred in performing the research services under this agreement were recorded as research and development expense in our financial statements.

Operating Expenses

Research and Development

Research and development costs consist primarily of costs incurred for the discovery and clinical development of our drug candidates, which include:

 

   

employee-related expenses, including salaries, related benefits, travel and share-based compensation expenses for employees engaged in research and development functions;

 

   

expenses incurred in connection with research, laboratory consumables and preclinical studies;

 

   

expenses incurred in connection with conducting clinical trials including investigator grants and site payments for time and pass-through expenses and expenses incurred under agreements with contract research organizations, or CROs, other vendors or central laboratories and service providers engaged to conduct our trials;

 

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the cost of consultants engaged in research and development related services and the cost to manufacture drug products for use in our preclinical studies and clinical trials;

 

   

facilities, depreciation and other expenses, which include allocated expenses for rent and maintenance of facilities, insurance and supplies;

 

   

costs related to regulatory compliance; and

 

   

the cost of annual license fees.

Our research and development expenses through the years ended December 31, 2018 and 2019 and for the three months ended March 31, 2019 and 2020 were primarily incurred in connection with the preclinical development of our most advanced program, NKX101. However, we have not historically tracked research and development expenses by program. We typically have various early stage research and drug discovery projects as well as potentially various products undergoing clinical trials. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for these early stage research and drug discovery programs on a project-specific basis.

We expense research and development costs as they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

The following table summarizes our research and development expenses for the years ended December 31, 2018 and 2019 and the three months ended March 31, 2019 and 2020. The direct external development program expenses reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development. Such expenses include third-party contract costs relating to manufacturing, clinical trial activities, translational medicine and toxicology activities. The unallocated internal research and development costs include personnel, facility costs, laboratory consumables and discovery and research related activities associated with our pipeline.

 

    Year Ended December 31,     Three Months Ended March 31,  
    2018      2019                 2019                         2020              
                 (Unaudited)  

Direct external development program expenses:

        

NKX101

  $ 314,128      $ 4,154,459     $ 402,610     $ 2,104,239  

NKX019

           26,137             9,885  

Program 3

                       20,833  

Unallocated internal research and development costs:

        

Personnel related (including share-based compensation)

    2,094,252        7,603,575       1,197,838       3,166,117  

Others

    1,843,830        5,432,784       693,669       1,958,764  
 

 

 

    

 

 

   

 

 

   

 

 

 

Total research and development costs

  $ 4,252,210      $ 17,216,955     $ 2,294,117     $ 7,259,838  
 

 

 

    

 

 

   

 

 

   

 

 

 

Research and development activities are central to our business model. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future regulatory factors beyond our control

 

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may impact our clinical development programs. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our drug candidates. However, we expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the near term and in the future.

The successful development of our drug candidates is highly uncertain. This is due to numerous risks and uncertainties, including the following:

 

   

successful completion of preclinical studies and clinical trials;

 

   

delays in regulators or institutional review boards authorizing us or our investigators to commence our clinical trials or in our ability to negotiate agreements with clinical trial sites or contract research organizations;

 

   

the number of clinical sites included in the trials;

 

   

raising additional funds necessary to complete clinical development of our drug candidates;

 

   

obtaining and maintaining patent, trade secret and other intellectual property protection and regulatory exclusivity for our drug candidates;

 

   

establishing manufacturing capabilities, for clinical supplies of our drug candidates;

 

   

the results of our clinical trials;

 

   

protecting and enforcing our rights in our intellectual property portfolio; and

 

   

maintaining a continued acceptable safety profile of the products following approval.

A change in the outcome of any of these variables with respect to the development of our drug candidates may significantly impact the costs and timing associated with the development of our drug candidates. We may never succeed in obtaining regulatory approval for any of our drug candidates.

General and Administrative

General and administrative expenses consist primarily of salaries and employee-related costs, including share-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and facility-related costs.

We expect our general and administrative expenses will increase for the foreseeable future to support our increased research and development activities and to reflect increased costs associated with operating as a public company. These increased costs will likely include increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs.

Other Income (Expense)

Change in Fair Value of Preferred Stock Purchase Right Liability

In August 2019, we entered into a Series B Preferred Stock Purchase Agreement that contains future purchase rights that are required to be accounted for as liabilities and remeasured to fair value at each reporting date, with any change in the fair value reported as a component of other income (expense). We will continue to record adjustments to the estimated fair value of the preferred stock purchase rights until they are exercised or expire. At that time, the convertible preferred stock purchase right liability will be reclassified to additional paid-in capital and we will no longer record any related periodic fair value adjustments.

 

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Change in Fair Value of Derivative Liability

In May 2019, we issued convertible promissory notes that contained certain conversion options that were required to be accounted for as liabilities and remeasured to fair value at each reporting date, with changes in the fair value reported as a component of other income (expense). In August 2019, our convertible promissory notes and related accrued interest converted into Series B convertible preferred stock and a final remeasurement adjustment was recorded.

Loss from Extinguishment of Debt

The loss from extinguishment of debt represented the write-off of the unamortized debt issuance costs, slightly offset by the remaining unamortized debt discount, on the date the convertible promissory notes converted into Series B convertible preferred stock.

Interest Expense

Interest expense consisted of interest on our convertible promissory notes that were outstanding during 2019.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents, and short-term investments.

Income Taxes

We are subject to corporate U.S. federal and state income taxation. As of December 31, 2019, we had federal and state net operating loss carryforwards of approximately $24.7 million and $24.5 million, respectively. Of the $24.7 million federal net operating loss carryforwards, $3.2 million will begin expiring in 2035, if not utilized, while $21.5 million can be carried forward indefinitely. The state tax loss carryforwards will begin expiring in 2036, if not utilized. As of December 31, 2019, we had federal and state research and development tax credits of approximately $1.0 million and $0.7 million, respectively. If not utilized, the federal research tax credit will begin to expire in 2035. The California research tax credit can be carried forward indefinitely.

Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of net operating losses and credits before utilization. We have not performed an analysis to determine the limitation of our net operating loss carryforwards.

We estimate our income tax provision, including deferred tax assets and liabilities, based on management’s judgment. We record a valuation allowance to reduce our deferred tax assets to the amounts that are more likely than not to be realized. We consider future taxable income, ongoing tax planning strategies and our historical financial performance in assessing the need for a valuation allowance. If we expect to realize deferred tax assets for which we have previously recorded a valuation allowance, we will reduce the valuation allowance in the period in which such determination is first made.

We record liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

As of December 31, 2019, we had gross unrecognized tax benefits of $0.3 million, all of which would affect our income tax expense if recognized, before consideration of our valuation allowance. As of December 31, 2019 and March 31, 2020, we do not expect our unrecognized tax benefits will significantly change over the next 12 months.

 

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Results of Operations

The following table summarizes our statement of operations data for the periods indicated (in thousands except share and per share data):

 

    Year Ended December 31,     Three Months Ended March 31,  
    2018     2019               2019                         2020            
                (Unaudited)  

Statement of Operations Data:

       

Collaboration revenue

  $ 6,550     $ 115     $ 113     $  

Operating expenses:

       

Research and development

    4,252       17,217       2,294       7,260  

General and administrative

    2,654       5,247       940       2,148  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    6,906       22,464       3,234       9,408  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (356     (22,349     (3,121     (9,408

Other income (expense):

       

Change in fair value of preferred stock purchase right liability

          1,318             578  

Change in fair value of derivative liability

          858              

Loss from extinguishment of debt

          (752            

Interest expense

          (473            

Interest income

    82       304       38       124  

Other income, net

          18              
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    82       1,273       38       702  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (275   $ (21,076   $ (3,083   $ (8,706
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss:

       

Net loss

  $ (275   $ (21,076   $ (3,083   $ (8,706

Other comprehensive loss

          (2           (1
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  $ (275   $ (21,078   $ (3,083   $ (8,707
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

  $ (0.26   $ (14.41   $ 2.36     $ (5.41
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted

    1,064,967       1,462,511       1,307,735       1,609,184  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)

    $ (1.30     $ (0.53
   

 

 

     

 

 

 

Pro forma weighted average shares outstanding, basic and diluted (unaudited)

      16,151,726         16,298,399  
   

 

 

     

 

 

 

 

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Comparison of the Three Months Ended March 31, 2019 and 2020 (Unaudited)

The following table summarizes our results of operations for the three months ended March 31, 2019 and 2020 (in thousands):

 

    Three Months Ended March 31,        
        2019             2020             Change      
    (Unaudited)        

Collaboration revenue

  $ 113     $     $ (113

Operating expenses:

     

Research and development

    2,294       7,260       4,966  

General and administrative

    940       2,148       1,208  
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,234       9,408       6,174  
 

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,121     (9,408     (6,287

Other income:

     

Change in fair value of preferred stock purchase right liability

          578       578  

Interest income

    38       124       86  
 

 

 

   

 

 

   

 

 

 

Total other income

    38       702       664  
 

 

 

   

 

 

   

 

 

 

Net loss

  $ (3,083   $ (8,706   $ (5,623
 

 

 

   

 

 

   

 

 

 

Collaboration revenue.    Revenue earned under our collaboration and license agreement with GSK was $0.1 million and nil for the three months ended March 31, 2019 and 2020, respectively. As the collaboration agreement with GSK was terminated in December 2018, collaboration revenue recognized during the three months ended March 31, 2019 was nominal in amount and was related to wind-down activities.

Research and development expenses.    Research and development expenses were $2.3 million and $7.3 million for the three months ended March 31, 2019 and 2020, respectively. The increase of $5.0 million was primarily due to an increase in personnel cost of $2.0 million, including an increase in share-based compensation expense of $0.2 million as a result of continued growth in headcount, and increases of $1.7 million in third-party research costs as a result of the increase in our research activity and $1.3 million in other internal research and development costs, primarily consisting of research and laboratory supplies and facilities expenses.

General and administrative expenses.    General and administrative expenses were $0.9 million and $2.1 million for the three months ended March 31, 2019 and 2020, respectively. The increase of $1.2 million was primarily due to an increase in personnel cost of $0.8 million, including an increase of $0.2 million in share-based compensation expense as a result of continued growth in headcount, a $0.2 million increase in outside consulting, legal and accounting fees and a $0.2 million increase in facilities expenses that included rent and depreciation expense.

Change in fair value of preferred stock purchase right liability.    We recognized $0.6 million in other income related to the decrease in the fair value of our preferred stock purchase right liability for the three months ended March 31, 2020. There was no equivalent liability outstanding during the three months ended March 31, 2019.

Interest income.    Interest income was $38,000 and $0.1 million for the three months ended March 31, 2019 and 2020, respectively, primarily due to interest earned on cash, cash equivalents and short-term investments during the period. There were no investments for the three months ended March 31, 2019.

 

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Comparison of the Years Ended December 31, 2018 and 2019

The following table summarizes our results of operations for the years ended December 31, 2018 and 2019 (in thousands):

 

    Year Ended December 31,        
    2018     2019     Change  

Collaboration revenue

  $ 6,550     $ 115     $ (6,435
 

 

 

   

 

 

   

 

 

 

Operating expenses:

     

Research and development

    4,252       17,217       12,965  

General and administrative

    2,655       5,247       2,592  
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    6,907       22,464       15,557  
 

 

 

   

 

 

   

 

 

 

Loss from operations

    (357     (22,349     (21,992
 

 

 

   

 

 

   

 

 

 

Other income (expense):

     

Change in fair value of preferred stock purchase right liability

          1,318       1,318  

Change in fair value of derivative liability

          858       858  

Loss from extinguishment of debt

          (752     (752

Interest expense

          (473     (473

Interest income

    82       304       222  

Other income, net

          18       18  
 

 

 

   

 

 

   

 

 

 

Total other income

    82       1,273       1,191  
 

 

 

   

 

 

   

 

 

 

Net loss

  $ (275   $ (21,076   $ (20,801
 

 

 

   

 

 

   

 

 

 

Collaboration revenue.    Revenue earned under our collaboration and license agreement with GSK was $6.6 million and $0.1 million for the years ended December 31, 2018 and 2019, respectively. As the collaboration agreement with GSK was terminated in December 2018, collaboration revenue recognized during 2019 was nominal in amount and was related to wind-down activities.

Research and development expenses.    Research and development expenses were $4.3 million and $17.2 million for the years ended December 31, 2018 and 2019, respectively. The increase of $12.9 million was primarily due to increases of $5.8 million of third-party research expenses related to our development programs, $5.0 million in personnel-related expenses, $0.8 million in facility costs, and $0.3 million in share-based compensation expense.

General and administrative expenses.    General and administrative expenses were $2.7 million and $5.2 million for the years ended December 31, 2018 and 2019, respectively. The increase of $2.5 million was primarily due to increases of $1.1 million in personnel-related expenses, $1.0 million in professional services related to accounting services, corporate legal fees, other consulting and patent legal fees, and $0.5 million in share-based compensation expense.

Change in fair value of preferred stock purchase right liability.    We recognized $1.3 million in other income related to the decrease in the fair value of our preferred stock purchase right liability in the year ended December 31, 2019, as compared to nil in the year ended December 31, 2018. This was due to the issuance of our Series B convertible preferred stock in August of 2019, which included a provision that potentially obligates us to sell, outside of our control, an additional 27,066,206 shares of our Series B convertible preferred stock at $2.37935 per share, for gross proceeds of $64.4 million. There was no equivalent liability outstanding during the year ended December 31, 2018.

Change in fair value of derivative liability.    Change in fair value of derivative liability resulted in a remeasurement benefit of $0.9 million for the year ended December 31, 2019, as compared to nil in

 

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the year ended December 31, 2018. This was due to the issuance of our convertible promissory notes in May 2019. The conversion option related to our convertible promissory notes was subject to remeasurement at each reporting period, with changes in fair value recorded in the statement of operations. In August 2019, our convertible promissory notes and related accrued interest converted into Series B convertible preferred stock upon the sale of the Series B convertible preferred stock and, accordingly, we no longer remeasure the fair value of the derivative liability.

Loss from extinguishment of debt.    Loss from extinguishment of debt was $0.8 million for the year ended December 31, 2019, as compared to nil in the year ended December 31, 2018. This was due to fact that our convertible promissory notes converted into our Series B convertible preferred stock in August 2019 and all related unamortized debt issuance costs, slightly offset by the remaining unamortized debt discount, were written off in that period.

Interest expense.    Interest expense was nil and $0.5 million for the years ended December 31, 2018 and 2019, respectively. This increase was due to the non-cash interest expense related to a debt discount feature on our convertible promissory notes issued in May 2019.

Interest income.    Interest income was $0.1 million and $0.3 million for the years ended December 31, 2018 and 2019, respectively. Interest income increased by $0.2 million primarily due to the interest earned in 2019 from the purchase of short-term investments starting in October 2019.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred net losses and negative cash flows from operations since our inception and anticipate that we will continue to incur net losses for the foreseeable future. We expect to incur substantial expenditures as we develop our product pipeline and advance our drug candidates through clinical development, undergo the regulatory approval process and, if approved, launch commercial activities. Specifically, in the near term we expect to incur substantial expenses relating to initiating and completing our clinical trials, the development and validation of our manufacturing processes, and other development activities. Furthermore, upon the completion of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time as we can generate significant revenue from sales of our drug candidates, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our drug candidates or delay our efforts to expand our product pipeline. We may also be required to sell or license to other parties’ rights to develop or commercialize our drug candidates that we would prefer to retain.

These factors raise substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming that we will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

To date, we have funded our operations primarily through the issuance of convertible promissory notes, the private placements of our convertible preferred stock and with proceeds from our previous collaboration with GSK which was terminated in December 2018. To date, we have raised gross proceeds of approximately $126.0 million from the issuance of our convertible preferred stock and

 

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convertible promissory notes and $7.9 million under our collaboration agreement with GSK. The gross proceeds of $64.4 million from the issuance of shares in the second tranche of our Series B convertible preferred stock financing on July 1, 2020 would increase our total cash and cash equivalents, restricted cash and short-term investments to $90.4 million as of March 31, 2020. Our cash equivalents are held in money market funds. Since inception, we have incurred net losses and negative cash flows from operations. At March 31, 2020, we had an accumulated deficit of $33.7 million.

In December 2017, we raised aggregate gross cash proceeds of $8.0 million from the sale of 3,866,602 shares of our convertible Series A convertible preferred stock at $2.069 per share. In addition, the convertible promissory notes that we issued in August 2015, November 2016 and June 2017 for aggregate gross cash proceeds of $3.6 million, including accrued interest, were converted into 2,303,747 Series A convertible preferred stock in December 2017.

In May 2019, we issued $6.0 million in convertible promissory notes to our existing Series A convertible preferred stock investors and in August 2019, we entered into the Series B Preferred Stock Purchase Agreement. The closing of the first tranche of the Series B convertible preferred stock financing resulted in net cash proceeds of $40.8 million, net of $0.5 million in issuance costs and $2.8 million attributed to the Series B convertible preferred stock purchase right, from the sale of 18,492,443 shares of Series B convertible preferred stock at a price of $2.37935 per share. In addition, the convertible promissory notes that we issued in May 2019, including accrued interest of $0.1 million, were converted into 2,621,181 shares of Series B convertible preferred stock in August 2019. The Series B Preferred Stock Purchase Agreement provides for a second tranche closing of $64.4 million aggregate gross proceeds upon the achievement of a specific milestone or by election of the holders of at least one-third of our Series B convertible preferred stock. On July 1, 2020, we completed the second tranche of our Series B convertible preferred stock financing, pursuant to a milestone waiver by the holders of our Series B convertible preferred stock, for an aggregate gross proceeds of $64.4 million.

At March 31, 2020, we had cash and cash equivalents, restricted cash and short-term investments of $26.0 million. As of July 1, 2020, our cash, cash equivalents, short-term investments and restricted cash totaled $76 million.

Cash Flows

The following table sets forth a summary of our cash flows for the period indicated (in thousands):

 

       Year Ended December 31,      Three Months Ended March 31,  
           2018              2019              2019              2020      
              (Unaudited)  

Net cash used in operating activities

     $ (5,184    $ (18,367    $ (3,817    $ (8,287

Net cash (used in) provided by investing activities

       (757      (18,295      (429      4,897  

Net cash provided by (used in) financing activities

       87        49,581        (13      (709
    

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     $ (5,854    $ 12,919      $ (4,259    $ (4,099
    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Activities

Net cash used in operating activities was $5.2 million and $18.4 million for the years ended December 31, 2018 and 2019, respectively. The net cash used in operating activities for the year ended December 31, 2018 was primarily due to our net loss of $0.3 million and a decrease in deferred revenue of $6.0 million, partially offset by $0.4 million of non-cash charges for depreciation and amortization and share-based compensation, and a $0.7 million net change in accounts payable and

 

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accrued and other liabilities. The net cash used in operating activities for the year ended December 31, 2019 was primarily due to our net loss of $21.1 million, adjusted for $0.5 million of non-cash charges such as share-based compensation, depreciation and amortization, the change in fair value of our preferred stock purchase right liability and derivative liability, loss from extinguishment of debt, and interest expense and a $2.2 million change in operating assets and liabilities.

Net cash used in operating activities was $3.8 million and $8.3 million for the three months ended March 31, 2019 and 2020, respectively. The net cash used in operating activities for the three months ended March 31, 2019 was primarily due to our net loss of $3.1 million, adjusted for $0.1 million of non-cash charges for depreciation and amortization and share-based compensation, and a $0.9 million net change in operating assets and liabilities. The net cash used in operating activities for the three months ended March 31, 2020 was primarily due to our net loss of $8.7 million, adjusted for $0.2 million of net non-cash charges for share-based compensation of $0.5 million, depreciation and amortization of $0.1 million, change in fair value of our preferred stock purchase right liability of $0.6 million, and a $0.3 million net change in operating assets and liabilities.

Investing Activities

Net cash used in investing activities was $0.8 million and $18.3 million for the years ended December 31, 2018 and 2019, respectively. The net cash used in investing activities for the year ended December 31, 2018 was primarily due to purchases of property and equipment to support our research activities. The net cash used in investing activities for the year ended December 31, 2019 was primarily due to purchases of $16.4 million in short-term investments, using the proceeds received from our Series B convertible preferred stock financing in 2019, and purchases of property and equipment of $1.9 million to support our research activities.

Net cash used in investing activities was $0.4 million and net cash provided by investing activities was $4.9 million for the three months ended March 31, 2019 and 2020, respectively. The net cash used in investing activities for the three months ended March 31, 2019 was due to a $0.4 million purchase of property and equipment related to laboratory facilities construction. The net cash provided by investing activities for the three months ended March 31, 2020 was primarily due to proceeds from maturities of short-term investments of $10.8 million partially offset by purchases of property and equipment of $2.3 million and purchases of short-term investments of $3.6 million.

Financing Activities

Net cash provided by financing activities was $0.1 million for the year ended December 31, 2018 and was due to proceeds received from the early exercise of stock options. Net cash provided by financing activities was $49.6 million for the year ended December 31, 2019, primarily due to the proceeds of $6.0 million received from the issuance of our convertible promissory notes and the proceeds of $40.8 million received from the issuance of our Series B convertible preferred stock, net of issuance costs of $0.5 million and Series B preferred stock purchase right liability of $2.8 million.

Net cash used in financing activities was $13,000 and $0.7 million for the three months ended March 31, 2019 and 2020, respectively, primarily due to payments of deferred public offering costs.

Funding Requirements

Based upon our current operating plans, we believe that the estimated net proceeds from this offering, together with our existing cash and cash equivalents and short-term investments and including the gross proceeds from the issuance and sale of shares in the second tranche of our Series B convertible preferred stock financing on July 1, 2020, will be sufficient to fund our operations for at least the next 12 months from the date of this prospectus. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking

 

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statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of testing therapeutic product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

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

 

   

the type, number, scope, progress, expansions, results, costs and timing of, our clinical trials and preclinical studies for our product candidates or other potential product candidates or indications which we are pursuing or may choose to pursue in the future;

 

   

the outcome, timing and costs of regulatory review of our product candidates;

 

   

the costs and timing of manufacturing for our product candidates, including commercial manufacturing and the costs associated with building our manufacturing facility;

 

   

our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;

 

   

the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;

 

   

the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved;

 

   

our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third- party payors and adequate market share and revenue for any approved products;

 

   

patients’ willingness to pay out-of-pocket for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors;

 

   

the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements, including payments required for meeting regulatory and commercial milestones or sales based royalties;

 

   

the costs of obtaining, maintaining and enforcing our patent and other intellectual property rights; and

 

   

costs associated with any product candidates, products or technologies that we may in-license or acquire.

We currently do not generate any revenue and our independent registered public accounting firm has included in its opinion for the year ended December 31, 2019 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern within one year from the date of this filing. The financial statements have been prepared assuming that we will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Until such time as we can generate significant revenue from sales of our therapeutic product candidates, if ever, we expect to finance our cash needs through public or private equity or debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. We may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish

 

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valuable rights to our product candidates, future revenue streams or research programs or may have to grant licenses on terms that may not be favorable to us and may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments at March 31, 2020 (in thousands):

 

    Payments Due by Period  
    Total      Less Than
1 Year
     1 to 3
Years
     4 to 5
Years
     More Than
5 Years
 
    (Unaudited)  

Operating lease commitments(1)

  $ 9,412      $ 1,286      $ 2,914      $ 3,059      $ 2,153  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Payments due for our leases of the office, laboratory and vivarium space in South San Francisco, California that expire in 2026, in the case of the corporate office and laboratory space, and 2021 in the case of the vivarium.

In May 2018, we entered into a lease agreement for our corporate office and laboratory space located in South San Francisco, California with an expiration date in May 2025. In April 2019, the first amendment to the lease agreement was executed for additional corporate space and manufacturing capabilities and an extension to the lease term through April 2026. The terms of the lease contain a rent abatement for the first month and rent escalation provisions. In addition to the base rent payments, we will be obligated to pay certain customary amounts for our share of operating expenses and tax obligations related to the facilities.

In May 2020, the second amendment to the lease agreement was executed for an eight-year non-cancelable lease for additional office and laboratory space in the same building. The lease for the additional space provided for abatement of rent during the first three months of the lease and contained rent escalations during the term of the lease. The lease for this additional space is expected to commence in the first quarter of 2021 and expires in 2029. The lease also includes an extension of the lease term of our existing office and laboratory space beginning May 1, 2020 through the first quarter of 2029, with an option to extend the lease for an additional seven-year term. As the second lease amendment was signed subsequent to March 31, 2020, we had additional total minimum lease payments of $9.4 million through the first quarter of 2029 that were excluded from the operating lease commitments as of March 31, 2020 as follows (in thousands):

 

    Payments Due by Period  
    Total      Less Than
1 Year
     1 to 3
Years
     4 to 5
Years
     More Than
5 Years
 
    (Unadited)  

Operating lease commitments

  $ 9,364      $     —      $ 876      $ 1,120        7,368  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We also have an operating lease for a dedicated space in a vivarium that will expire in early 2021.

We enter into contracts in the normal course of business with clinical supply manufacturers and with vendors for preclinical studies and other services and products for operating purposes. These contracts generally provide for termination after a short notice period, and, therefore, are cancelable contracts and not included in the table above.

 

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Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, preferred stock purchase right liability, and share-based compensation. We base our estimates and assumptions on historical experience, known trends and events, and various other factors that are believed to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this prospectus, we believe the following accounting policies and estimates to be most critical to the preparation of our financial statements.

Research and Development Costs

We are required to estimate certain of our expenses resulting from our obligations under contracts with vendors, consultants and CROs, in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress of the research and development study as measured by the timing of various aspects of the study or related activities.

We estimate our preclinical studies based on the services performed pursuant to contracts with research institutions and CROs that conduct these activities on our behalf. In recording service fees, we estimate the time period over which the related services will be performed and compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust our accrual or deferred advance payment accordingly. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical studies.

Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

 

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Preferred Stock Purchase Right Liability

We entered into a convertible preferred stock financing where, in addition to the initial closing, investors agreed to buy, and we agreed to sell, additional shares of that convertible preferred stock at a fixed price in the event that certain agreed upon milestones were achieved or at the election of the investors. We evaluated these purchase rights and assessed whether they met the definition of a freestanding instrument and, as such, determined the fair value of the purchase right liability and recorded it on the balance sheet with the remainder of the proceeds raised being allocated to convertible preferred stock. The preferred stock purchase right liability is revalued at each reporting period with changes in the fair value of the liability recorded as a component of other income (expense) in the statements of operations and comprehensive loss. The preferred stock purchase right liability will be revalued at settlement and the resultant fair value will then be reclassified to convertible preferred stock at that time. We determine the estimated fair value of the preferred stock purchase right liability using valuation models that consider the probability of achieving the requisite milestones, the investors electing to purchase the shares, our cost of capital, the estimated time period the preferred stock right would be outstanding, consideration received for the convertible preferred stock, the number of shares to be issued to satisfy the preferred stock purchase right and at what price, and probability of the consummation of an initial public offering, as applicable.

There are significant judgments and estimates inherent in the determination of the fair value of our preferred stock purchase right liability. If we had made different assumptions, the carrying value of our preferred stock, net loss and net loss per share could have been significantly different.

Share-based compensation expense

We recognize compensation costs related to stock options granted to employees and non-employees based on the estimated fair value of the awards on the date of grant, net of forfeitures. We generally recognize grant-date fair value of stock options granted to employees and non-employee service providers on a straight-line basis over the requisite service period, which is generally the vesting term of the respective awards. We determine the fair value of stock options with a service and performance condition, or performance-based options, based on the fair value of our common stock on the date of grant. We account for the impact of forfeitures as they occur.

For purposes of calculating share-based compensation, we estimate the fair value of stock options issued using a Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards utilizing the Black-Scholes option-pricing model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.

Expected term.    We have opted to use the “simplified method” for estimating the expected term of employee options, whereby the expected term equals the average of the vesting term and the original contractual term of the option (generally 10 years).

Expected volatility.    Due to our limited operating history and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the share-based awards.

Risk-free interest rate.    The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of our stock options.

 

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Expected dividend yield.    We have not issued any dividends and do not expect to issue dividends over the life of the options. As a result, we have estimated the dividend yield to be zero.

The fair values of the employee stock options granted during the years ended December 31, 2018 and 2019 and for the three months ended March 31, 2020 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

    Year Ended December 31,   Three Months
Ended

March 31, 2020
    2018   2019
            (Unaudited)

Common stock fair value

  $3.00   $3.40 - $4.77   $4.29

Risk-free interest rate

  2.2% - 3.0%   1.5% - 2.3%   0.51%

Expected volatility

  81.2% - 83.5%   80.2% - 81.9%   87.78%

Expected term (in years)

  4.7 - 6.1   5.6 - 6.1   6.0

Expected dividend yield

  —%   —%   —%

There were no employee stock option grants during the three months ended March 31, 2019.

Share-based compensation expense, net of forfeitures, is reflected in our Statements of Operations and Comprehensive Loss as follows (in thousands):

 

    Year Ended December 31,     Three Months Ended March 31,  
            2018                     2019                         2019                         2020            
                (Unaudited)  

Research and development

  $ 58     $ 384     $ 21     $ 192  

General and administrative

    125       563       46       290  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 183     $ 947     $ 67     $ 482  
 

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2020, the total unamortized share-based compensation was $5.8 million.

We will continue to use our judgment in evaluating the assumptions related to our share-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future share-based compensation expense. For valuations after the consummation of this offering, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock on the date of grant or other relevant determination data. The intrinsic value of all outstanding stock options as of March 31, 2020 was approximately $32.0 million based on a hypothetical common stock fair value of $16.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus.

 

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Options Granted

The following table sets forth by grant date the number of shares subject to stock options granted from January 1, 2019 through March 31, 2020, the per share exercise price of options, the fair value of common stock per share on each grant date, and the per share estimated fair value of options:

 

Grant Date

  Number of
Shares Subject
to Options
Granted
     Per Share
Exercise
Price of
Options(1)
     Fair Value
per
Common
Share on
Grant
Date(1)
     Per Share
Estimated Fair
Value of Options(2)
 

May 10, 2019

    67,831      $ 4.77      $ 4.77      $ 3.37  

September 5, 2019

    1,878,177      $ 3.89      $ 3.89      $ 2.70  

September 15, 2019

    23,782      $ 3.89      $ 3.89      $ 2.74  

November 21, 2019

    192,158      $ 3.40      $ 3.40      $ 2.37  

December 27, 2019

    3,513      $ 3.40      $ 3.40      $ 2.37  

March 23, 2020

    134,050      $ 4.29      $ 4.29      $ 2.92  

March 27, 2020

    29,729      $ 4.29      $ 4.29      $ 2.92  

 

(1) 

The per share exercise price of options represents the fair value of our common stock on the date of grant, as determined by our board of directors, after taking into account our most recently available contemporaneous valuation of our common stock as well as additional factors that may have changed since the date of such contemporaneous valuation through the date of grant.

(2) 

The per share estimated fair value of options reflects the weighted average fair value of options granted on each grant date, determined using the Black-Scholes option pricing model.

Determination of the Fair Value of Common Stock

We are required to estimate the fair value of our common stock underlying our share-based awards when performing the fair value calculations using the Black-Scholes option pricing model. Because our common stock is not currently publicly traded, the fair value of our common stock underlying our share-based awards has been determined on each grant date by our board of directors, with input from management, considering our most recently available third-party valuation of our common stock. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant.

In the absence of a public trading market for our common stock, on each grant date, our board of directors has made a reasonable determination of the fair value of our common stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock, and timely valuations from an independent third-party valuation in accordance with guidance provided by the American Institute of Certified Public Accountants Guide: Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Guide. In addition, our board of directors considered various objective and subjective factors to determine the fair value of our common stock, including:

 

   

the estimated value of each security both outstanding and anticipated;

 

   

the anticipated capital structure that will directly impact the value of the currently outstanding securities;

 

   

our results of operations and financial position;

 

   

the status of our research and development efforts;

 

   

the composition of, and changes to, our management team and board of directors;

 

   

the lack of liquidity of our common stock as a private company;

 

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our stage of development and business strategy and the material risks related to our business and industry;

 

   

external market conditions affecting the life sciences and biotechnology industry sectors;

 

   

U.S. and global economic conditions;

 

   

the likelihood of achieving a liquidity event for the holders of our common stock, such as an initial public offering or a sale of our company, given prevailing market conditions; and

 

   

the market value and volatility of comparable companies.

The Guide identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Guide, we considered the following methods:

 

   

Option Pricing Method.     Under the option pricing method, or OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The estimated fair values of the preferred and common stock are inferred by analyzing these options.

 

   

Probability-Weighted Expected Return Method.     The probability-weighted expected return method, or PWERM, is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

Based on our early stage of development and other relevant factors, we determined that an OPM was the most appropriate method for allocating our enterprise value to determine the estimated fair value of our common stock for valuations performed prior to April 30, 2019. For valuations performed after this date, we used either a hybrid of PWERM and OPM or the PWERM methods to determine the estimated fair value of our common stock. In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.

In April and May 2020, we awarded option grants to certain of our employees. Our board of directors determined the fair value of those options at the time of issuance based on available information at that time. We plan to reconsider the fair value of such shares for purposes of determining stock based compensation for those shares based on subsequent information, including subsequent discussions as part of considering a potential public offering, which were not known as of the third-party valuation report or the grant dates. The reconsideration of the fair value for those shares pursuant to option grants after March 31, 2020 may result in additional stock option value and additional stock based compensation expense recorded in the quarter ended June 30, 2020. Following the completion of this offering, the fair value of our common stock will be the closing price of our common stock on the Nasdaq Global Select Market as reported on the date of the grant.

Recently Issued Accounting Pronouncements

See Note 2 to our financial statements included elsewhere in this prospectus for recently issued accounting pronouncements.

Segment Information

We have one business activity and operate in one reportable segment.

 

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Quantitative and Qualitative Disclosures About Market Risk

We hold certain financial instruments for which a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. We invest our excess cash primarily in money market funds, commercial paper and debt instruments of financial institutions, corporations, U.S. government-sponsored agencies and the U.S. Treasury. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Additionally, we established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity. For marketable investment securities with short-term maturities, we do not believe that an increase or decrease in market rates would have a significant impact on the realized values or the statements of operations and comprehensive loss. As such, we believe that if a 10.0% change in interest rates were to have occurred on March 31, 2020, this change would not have had a material effect on the fair value of our investment portfolio as of that date.

We are exposed to market risk related to changes in foreign currency exchange rates. We contract with vendors that are located outside the United States and certain invoices are denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with such arrangements. We do not currently hedge our foreign currency exchange risk.

Inflation generally affects us by increasing our cost of labor and research and development contract costs. We do not believe inflation has had a material effect on our results of operations during the periods presented.

We do not believe that inflation, interest rate changes, or exchange rate fluctuations had a significant impact on our results of operations for any periods presented herein.

JOBS Act

We are an “emerging growth company” as described under the JOBS Act, and we could have taken advantage of an extended transition period for complying with new or revised accounting standards. This would have allowed us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing irrevocably to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of this offering, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. Even after we no longer qualify as an emerging growth company, we may still qualify as a smaller reporting company, which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and in our periodic reports and proxy statements.

 

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BUSINESS

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of allogeneic, off-the-shelf engineered natural killer, or NK, cell therapies to treat cancer. Our approach for cellular immunotherapy involves chimeric antigen receptors, or CARs, on the surface of an NK cell that enable the cell to recognize specific proteins or antigens that are present on the surface of tumor cells. The concept of a CAR builds upon and enhances the normal biology of T cells and NK cells, whereby naturally occurring receptors serve to activate these cells when a foreign pathogen or cancerous cell is detected. Our NK cell engineering platform builds on prior experience and success with engineering T cells and includes proprietary technologies that enable us to generate an abundant supply of NK cells, improve the persistence of these cells for sustained activity in the body, engineer enhanced NK cell recognition of tumor targets and to freeze, store and thaw our engineered NK cells for off-the-shelf use for the treatment of cancer. All of our product candidates are designed to be allogeneic, meaning they are produced using cells from a different person than the patient treated, as well as off-the-shelf, meaning they are produced in quantity, then frozen and therefore available for treating patients without delay, unlike existing autologous cell therapies. Based on published data from a number of clinical trials of NK cell therapies, we believe that engineered NK cells can be well tolerated and avoid some of the toxicities observed with other cell therapies.

Our modular NK cell engineering platform allows us to generate new product candidates in a rapid and cost-efficient manner. Our engineered CAR-NK cells generally consist of an NK cell engineered with a targeting receptor, OX40 costimulatory domain, CD3z signaling moiety, and mbIL-15. This platform is modular, which enables extensive optimization of different ways to enhance the natural signaling of engineered cells, as well as the ability to attach and optimize new targeting receptors. We believe that this will allow us to continue to generate new Investigational New Drugs, or IND, every 9 to 12 months.

Our two co-lead product candidates are NKX101 and NKX019. NKX101 is designed to enhance the power of innate NK biology to detect and kill cancerous cells. The primary activating receptor for NK cells is known as NKG2D, which works through the detection of stress ligands displayed by cancerous cells. We have engineered NKX101 to increase the cancer cell killing ability of our engineered NK cells by raising levels of NKG2D at least ten-fold as compared to non-engineered NK cells and by adding a costimulatory domain, which is an additional signaling element for white blood cells. Our IND for NKX101 for the treatment of relapsed or refractory AML and higher-risk MDS was accepted by the FDA in July 2020. We are planning to initiate a broad clinical program for NKX101 for blood cancers and for solid tumors in 2020. Our initial indications include acute myeloid leukemia, or AML, myelodysplastic syndromes, or MDS, liver cancer, a bile duct cancer known as cholangiocarcinoma, as well as surgically removed colon cancer cases where only liver metastases remain. NKX019 is based on the ability to treat a variety of B cell malignancies by targeting the CD19 antigen that is found on these types of cancerous cells, where both engineered NK cells and T cells as well as monoclonal antibodies have demonstrated clinical activity. The two approved CAR-T therapies target CD19 and have achieved complete remission rates ranging from 32% to 63% in three pivotal clinical trials. A recent academic publication in the New England Journal of Medicine from Dr. Katayoun Rezvani and colleagues described a cohort of patients treated with a CAR-NK therapy targeting CD19 where seven of 11 (64%) of these patients achieved a complete remission. We are planning to initiate clinical trials for NKX019 in 3Q2021.

Beyond our two lead product candidates, we are engaged in preclinical discovery for another allogeneic CAR-NK product candidate for which we expect to submit an IND in 1Q2022 and to begin clinical trials thereafter. We are also conducting discovery efforts for an allogeneic, off-the-shelf product candidate that will combine engineered NK cells with engineered T cells, to take advantage of both the innate and adaptive immune systems. This NK+T program is designed to harness multiple aspects of human immunology to treat a variety of cancers.

 

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We have an intensive focus on manufacturing capabilities and technology, and we are building a 2,700-square foot clinical current good manufacturing practice, or cGMP, facility on-site at our primary corporate location in South San Francisco, California. We recently completed the construction of the first phase of this facility and estimate this expense, including laboratory and manufacturing equipment, will be approximately $6.0 million. Starting in 2H2020, after qualification including several test manufacturing runs, we expect to manufacture NKX019 at this cGMP facility. In 2021, we intend to complete a smaller, final phase of this buildout as well as transfer the NKX101 manufacturing process to us. The process transfer involves demonstrating NKX101 produced at our cGMP facility meets the same release specifications as NKX101 produced at our contract manufacturer. Following this second buildout and process transfer, we plan to manufacture the proprietary, engineered K562 cells and g-retrovirus as well as NKX101 at our cGMP facility. We believe this clinical cGMP facility will be capable of manufacturing approximately 24 batches per year and supply our anticipated non-pivotal clinical trial needs. We are also in the early stages of designing a separate, larger commercial cGMP facility for manufacturing engineered NK cells for pivotal clinical trials as well as for eventual commercial supply. We may choose to begin construction of such a cGMP facility as early as 2021 based on early clinical results from the NKX101 and NKX019 clinical programs. We believe that we can achieve a cost of manufacturing for commercial NKX101 and NKX019 at peak capacity of approximately $2,000 per dose, based on achieving 500 doses per manufacturing run at our highest planned Phase 1 dose of one billion CAR-NK cells per dose and our current estimates for the costs of raw materials, consumables, rent, construction, equipment, labor and overhead.

We were founded in 2015 based upon a deep understanding of NK cell biology as well as robust expansion and persistence technologies developed by Dario Campana, M.D., Ph.D., who remains actively involved in our company. Dr. Campana demonstrated the primary importance of the NKG2D receptor amongst other NK receptors in the activation of NK cells by tumor cells. He also demonstrated proof of concept for enhancing tumor recognition by NK cells through increasing NKG2D levels and activity. Our expansion technology is based upon our proprietary, engineered K562 cell line developed by Dr. Campana, which enables the robust growth of NK cells. Dr. Campana also discovered that engineering NK cells with membrane bound IL-15, or mbIL-15, a proprietary version of a cytokine for activating NK cell growth, enhances the proliferation and persistence of these cells.

Our Product Candidates and Discovery Programs

Our current pipeline of product candidates and discovery programs is shown below.

 

LOGO

i.v.: intravenous administration. i.a.: intraarterial administration through the hepatic artery. IND: Investigational New Drug application.

 

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Our Strategy

We are developing novel engineered, allogeneic and off-the-shelf cell therapies to improve the lives of cancer patients and their overall survival by leveraging our NK cell engineering platform. Key elements of our strategy to achieve this include:

Develop NKX101 for blood cancers and solid tumors.

Because NKG2D is the primary activating receptor responsible for innate immune surveillance for cancerous cells, we believe that NKX101 presents a broad opportunity to treat a variety of blood cancers and the larger category of solid tumors, which collectively represent approximately 90% of all cancer incidence in the United States. Therefore, upon clinical proof-of-concept from our NKX101 Phase 1 trials for AML, MDS, and cancers in the liver, we plan to pursue a broad clinical development plan for multiple tumor types. Our IND for NKX101 for the treatment of relapsed or refractory AML and higher-risk MDS was accepted by the FDA in July 2020. Based upon clinical data, we may seek Regenerative Medicine Advanced Therapy, or RMAT, and PRIority MEdicine, or PRIME, designations for NKX101, which provide an expedited developmental and approval pathway, in the United States and the European Union, respectively.

Develop NKX019 for B cell malignancies.

NKX019 is designed to treat a variety of B cell malignancies by targeting the clinically- and commercially validated CD19 antigen that is found in diffuse large B cell lymphoma, or DLBCL, chronic lymphocytic leukemia, or CLL, acute lymphocytic leukemia, or ALL, follicular lymphoma and several other B cell malignancies. Because targeting CD19 has demonstrated clinical activity with both CAR-T and CAR-NK cell therapies as well as monoclonal antibodies, we believe that NKX019 presents an opportunity to treat a variety of B cell malignancies while addressing the limitations of existing autologous CAR-T therapies. We are conducting preclinical studies for NKX019 and expect to submit an IND in 1Q2021, with the first clinical trial subjects treated in 3Q2021. Based upon clinical data, we may seek RMAT and PRIME designations for NKX019.

Apply our NK cell engineering platform to build a broad pipeline of product candidates incorporating engineered NK cells.

Our proprietary NK cell engineering platform is based on a modular and generalizable approach that we believe enables us to generate new product candidates in a rapid and cost-efficient manner. Our engineered CAR-NK cells generally consist of an NK cell engineered with a targeting receptor, OX40 costimulatory domain, CD3z signaling moiety, and mbIL-15. We believe our modular platform will allow us to continue to generate new INDs every 9 to 12 months. With these attributes, we plan to continue to build out a pipeline with product candidates focused on novel targets as well as clinically and commercially validated targets. We are engaged in preclinical research for an allogeneic, off-the-shelf product candidate combining engineered NK and T cells, or our NK+T discovery program, which may provide advantages of both the innate and adaptive immune responses.

Continue to build proprietary manufacturing capabilities to enable speed, control, flexibility, scalability, and cost efficiency.

We believe that internal cGMP manufacturing capabilities will facilitate clinical product supply, lower the risk of manufacturing disruptions, and enable more cost-effective manufacturing for clinical and commercial supply of our product candidates. We are building a 2,700-square foot clinical cGMP facility on-site at our primary corporate location in South San Francisco, California. We recently completed the construction of the first phase of this facility and estimate this expense, including laboratory and manufacturing equipment, will be approximately $6.0 million. Starting in 2H2020, after qualification including several test manufacturing runs, we expect to manufacture NKX019 at this cGMP facility. In 2021 we intend to complete a smaller, final phase of this buildout as well as transfer the NKX101 manufacturing process to us. The process transfer involves demonstrating NKX101

 

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produced at our cGMP facility meets the same release specifications as NKX101 produced at our contract manufacturer. Following this second buildout and process transfer, we plan to manufacture the proprietary, engineered K562 cells and g-retrovirus as well as NKX101 at our cGMP facility. We believe this clinical cGMP facility will be capable of manufacturing approximately 24 batches per year and supply our anticipated non-pivotal clinical trial needs. Furthermore, we are in the early stages of planning a larger commercial cGMP facility to supply engineered cells, g-retrovirus and potentially K562 cells for all of our pivotal clinical trials as well as for eventual commercial supply.

Continue to opportunistically evaluate enabling, adjacent or potential competing technologies to advance our platform.

We will continue to evaluate technologies that may enable or enhance our various product candidates, as well as maintain awareness of those that may provide a broader cell therapy engineering or manufacturing platform for us. For example, we will continue to evaluate various gene editing technologies to enhance certain immunological functions of engineered NK cells, as well as generate allogeneic, off-the-shelf engineered T cells, thereby enabling our NK+T discovery program. We are also evaluating technologies that will allow us to better target cancers through the development of unique or proprietary antibodies or other binders.

The Immune System and Cancer

Recent decades have seen significant innovation and improvements in the treatment of different cancers. Despite the introduction of new therapeutic approaches and many new drug approvals, substantial unmet medical need remains for many of the most common cancers. Researchers have continued to focus on the development of new therapeutic approaches, including those that take advantage of normal human biology to attack cancer. Immuno-oncology therapies seek to stimulate or supplement a person’s own immune system to attack cancer cells selectively without affecting normal cells, or deliver certain immune system components in order to inhibit the spread of cancer. Immuno-oncology therapy has emerged as an important mode of cancer treatment, alongside more established options such as surgery, chemotherapy, targeted therapy and radiation therapy.

The ability of the immune system to recognize and destroy tumors has been known for over 100 years. More recently, a growing understanding of molecular mechanisms underlying recognition of cancer cells by the immune system and their evasion of detection has allowed scientists to develop new classes of immuno-oncology therapies. These therapies either undermine the tumor’s ability to resist immune attack or enhance immune targeting and killing of cancer cells.

Cellular Immunotherapies

Cellular immunotherapy is a type of immuno-oncology therapy whereby human cells are genetically engineered to recognize and destroy cancer cells in a more targeted manner. Most cellular immunotherapies are focused on modulating or enhancing the activity of different lymphocytes, a subtype of white blood cell that are responsible for defending the body against infectious pathogens and other foreign material, as well as killing cancerous cells within the body. There are several different classes of lymphocytes which differ in their natural function. T cells are a type of lymphocyte that primarily serves to protect from infectious invaders such as bacteria, viruses, fungi and parasites. Every individual T cell recognizes a different specific antigen, or proteins found on the surface of infectious pathogens or foreign tissue. This type of lymphocyte is activated and divides rapidly only when it detects its specific antigen. Accordingly, T cells are the foundation of the adaptive immune system, because they selectively respond to different threats when they occur.

NK cells are the foundation of the innate immune system. While T cells are activated by unique antigens specific to each individual T cell, the activity of NK cells is tightly regulated by a common set of activating receptors that serve to recognize and kill cancerous or virally infected cells, as well as a set of inhibitory receptors that identify healthy cells from the same individual. This balance of inhibition and activation spares healthy cells from the surveillance and killing effects of the innate immune

 

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system. The primary activating receptor for NK cells is known as NKG2D and functions by detecting eight known stress ligands, or signals that cancerous or virally infected cells produce. The detection of these stress ligands by NKG2D is the primary basis for tumor surveillance by NK cells and is the basis of the mechanism of action for our product candidate NKX101.

A frequently used approach for cellular immunotherapy involves chimeric antigen receptors, or CARs, on the surface of a lymphocyte that enable the cell to recognize specific proteins or antigens that are present on the surface of tumor cells. The concept of a CAR builds upon and enhances the normal biology of T cells and NK cells, whereby naturally occurring receptors serve to activate these cells when a foreign pathogen or cancerous cell is detected. The key components of CARs used today often include the following elements:

 

   

Target binding domain. At one end of the CAR is a binding domain that is specific to a target antigen or protein. This domain extends out from the surface of the engineered lymphocyte, where it can recognize the target antigen or antigens. The target binding domain can be based upon a naturally occurring receptor, such as the NKG2D receptor for NKX101, or a binder derived from a monoclonal antibody against a target antigen, such as the CD19 binder for NKX019.

 

   

Transmembrane domain and hinge. This middle portion of the CAR links the target binding domain to the activating elements inside the cell. This transmembrane domain anchors the CAR in the cell’s membrane. In addition, the transmembrane domain may also interact with other transmembrane proteins that enhance CAR function. The hinge domain, which extends to the exterior of the cell, connects the transmembrane domain to the binder and provides structural flexibility to facilitate binding to the target antigen on the surface of the cancer cell.

 

   

Activating domains. The other end of the CAR, inside the lymphocyte, includes domains responsible for activating the lymphocyte when the CAR binds to its target antigen. The first, found in almost all CAR constructs, is called CD3z and is the natural basis for lymphocyte activation. The second is called a costimulatory domain, is found in most CARs under development today and provides an additional activating signal. Together, these signals trigger lymphocyte activation, resulting in proliferation of the CAR cells and killing of the cancer cell. In addition, activated CAR cells stimulate the secretion of cytokines and other molecules that can thereby recruit and activate additional immune cells to increase killing of the cancer cells.

In 2017, the FDA approved the first two CAR-based cell therapies for the treatment of certain types of cancer affecting B cells. Each of these therapies is an autologous therapy, or derived from a patient’s own cells, which necessitates a complex, individualized manufacturing process for every patient treated. The approvals of these patient-specific cell therapies were a landmark event for many reasons, including the ability to treat and provide long-term remission for otherwise deadly disease; achieving the run-to-run product consistency required by the FDA despite the complex manufacturing required; and achieving successful reimbursement in the U.S. and other countries of several hundred thousand dollars per treatment.

Limitations of Current CAR-T Therapies

The commercial adoption of the approved autologous CAR-T therapies has been limited to date. According to industry sources, approximately 1,300 patients worldwide were treated with commercial CAR-T cell therapies in the first three quarters of 2019, representing less than 20% of the eligible population for the approved CAR-T therapies. We believe this is due to a number of factors including:

 

   

Adverse events. According to the product labels for the two approved CAR-T therapies, severe or life-threatening cytokine release syndrome, or CRS, was observed in 13% to 49% of patients treated in the respective pivotal clinical trials. In addition, severe or life threatening neurotoxicity was seen in 18% to 31% of patients treated in such trials. Because of the frequency and severity of these adverse events, patients treated with the approved CAR-T therapies can require a lengthy stay in an intensive care unit and costly ancillary care.

 

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Limited availability. As a condition of FDA approval, treatment with approved CAR-T therapies is currently limited to select centers due to safety, logistical and regulatory reasons under a Risk Evaluation and Mitigation Strategy, or REMS, Program.

 

   

Lengthy manufacturing time. Due to the individualized manufacturing process, patients must wait approximately two to four weeks to be treated with their engineered cells. As a result, in the registrational trials for the two approved CAR-T therapies, from 9% to 34% of enrolled patients did not receive CAR-T cells, for reasons including manufacturing failure as well as patient progression or death while waiting for manufacturing.

 

   

Variable potency. In many cases, patients have T cells that have been damaged or weakened due to prior chemotherapy or hematopoietic stem-cell transplant or HSCT. Compromised T cells may not proliferate well during manufacturing or may produce engineered T cells with insufficient potency that cannot be used for patient treatment. This can result in outright manufacturing failures as well as cells with poor expansion and activity in a patient. The individualized nature of autologous manufacturing, together with the inconsistency in patients’ T cells, can cause variable and unpredictable treatment outcomes.

 

   

High manufacturing complexity and cost. The delivery of autologous T cell therapy is complicated due to the individualized and labor-intensive nature of manufacturing, which allows only one patient to be treated from each manufacturing run and requires dedicated infrastructure to maintain a strict chain of custody and chain of identity of patient-by-patient material collection, manufacturing and delivery. These complex logistics add significant cost to the process and limit the ability to scale. Additionally, the collection of T cells through leukapheresis from each individual patient is a time consuming and costly step in the autologous manufacturing process.

Many of these limitations are related to fundamental aspects of T cell biology, such as exponential expansion upon detection of a target antigen which is believed to be the cause of CRS. While a patient could theoretically receive allogeneic T cells, the donor’s T cells would likely recognize the recipient as “non-self” and cause graft-versus-host disease, or GVHD, a serious or life threatening condition where the donor’s T cells attack the recipient’s body. The need to avoid GVHD risk is the reason the approved CAR-T therapies are patient-specific. In addition, achieving significant efficacy against solid tumors has been challenging for CAR-T therapy because many solid tumors create an immunosuppressive environment around cancerous cells, significantly reducing the activity of unmodified, endogenous immune cells as well as CAR-T cells. However, in preclinical models, NK cells can reduce this immune suppression, demonstrating the potential for CAR-NK cells as a therapy in solid tumors. Therefore, despite the approvals of CAR-T therapy and substantial subsequent progress by researchers in the biopharmaceutical industry and academia, we believe there is a substantial opportunity for improved cell therapies that address these limitations.

Allogeneic Cell Therapies

One opportunity to address certain limitations of autologous CAR-T cells involves the development of allogeneic, off-the-shelf cell therapies, which offers these potential advantages:

 

   

Availability. Because they are produced in quantity with cells from a healthy donor and then frozen, such allogeneic therapies are available for patient treatment without delay.

 

   

Consistency. By using cells from a healthy donor as starting material, and producing large numbers of doses per manufacturing run, an allogeneic cell therapy provides the opportunity for more rigorous quality control and release of consistent engineered cells.

 

   

Cost of manufacturing. An allogeneic cell therapy provides an opportunity to spread manufacturing costs across a large number of doses, thereby significantly lowing the cost per dose produced.

 

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The Opportunity for Engineered NK Cells in Treating Cancer

The development of CAR-NK therapies can capitalize on the knowledge and experience gained from decades of CAR-T research. Furthermore, the inherent biology of NK cells offers a number of potential advantages as the starting cell type for allogeneic, off-the-shelf engineered cell therapy. These advantages include:

 

   

Inherent anticancer activity. We conducted a systematic literature review of published clinical trial results of allogeneic NK cells in cancer, which identified a 34% complete response rate amongst 103 patients with relapsed or refractory AML that were treated with non-engineered NK cells across six academic clinical studies. These data demonstrate the inherent anticancer activity of endogenous NK cells, and support the opportunity for increasing the activity of NK cells through engineering.

 

   

Allogeneic and off-the-shelf without gene editing or other modifications. Because NK cells are not generally activated by “non-self” cells, further modification of NK cells is not necessary to avoid the risk of GVHD and thereby produce an allogeneic, off-the-shelf engineered NK cell therapy.

 

   

Modest clonal expansion and therefore potential reduced CRS risk. While T cells experience exponential growth when activated by a matching target antigen, NK cells expand only modestly. The explosive growth of T cells is believed to be the basis of the risk of CRS when CAR-T cells are administered to patients. However, a significant incidence of CRS has not been reported in medical literature for NK cell therapy.

 

   

Balance of activation and inhibition. The activity of NK cells is tightly regulated by a common set of activating receptors that serve to recognize and kill cancerous or virally infected cells, as well as a set of inhibitory receptors that identify healthy cells from the same individual. This balance of inhibition and activation spares healthy cells from the surveillance and killing effects of the innate immune system. Therefore, the fundamental biology of CAR-NK cells enhances their ability to discriminate between healthy and tumor cells.

 

   

Ability to overcome tumor evasion of the immune system. Many solid tumors are able to evade the immune system by creating an immunosuppressive environment around the cancerous cells, which can dramatically reduce the normal tumor-killing ability of the immune system. This tumor microenvironment involves down-regulators of immune response, including regulatory T cells and myeloid-derived suppressor cells, which significantly reduce the activity of unmodified immune cells as well as CAR-T cells in preclinical models. However, these cell types also display NKG2D ligands, and preclinical models demonstrate that clearance of these cells can reduce immune suppression from the tumor microenvironment. Therefore, by acting through NKG2D, CAR-NK cells may be able to reduce the immune suppression of the tumor microenvironment, and therefore uncover a broader opportunity for immuno-oncology cell therapy development for the treatment of solid tumors.

We believe that epidemiological and clinical data support the opportunity for using engineered NK cells to treat cancer. In the 1980s several academic studies reported a higher incidence of cancers in individuals with defective NK cell function. Subsequent studies found decreased NK cell function in cancer patients or their families, including a long-term epidemiology study where subjects with low NK cell activity had a higher risk of developing various types of cancer. This and other academic research on the role of NK cells in surveillance for cancer was the inspiration for a number of academic studies evaluating the administration of allogeneic, non-engineered NK cells to cancer patients.

Clinical Activity and Tolerability of Non-Engineered NK Cells

In early 2019, we conducted a systematic literature review of clinical trial results published in English from 2005 onwards that described the effect of allogeneic NK cell transfusions from donors in

 

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the treatment of cancer patients. We identified a total of 32 academic clinical trials that enrolled a combined total of 586 patients. Key findings from this systematic literature review include:

 

   

The most common indications were AML and a related disease, MDS, with a combined 57% of subjects having one of these diseases. In addition, 20% had solid tumors, most commonly neuroblastoma (6% overall) and sarcoma (3% overall).

 

   

Most patients (57% overall) received non-engineered allogeneic NK cells after hematopoietic stem cell transplant, or HSCT, which is a potentially curative procedure for certain blood cancers. Of the remaining patients in the non-transplant setting, the majority of the subjects (60%) received NK cells after lymphodepleting chemotherapy by treatment with two cancer drugs, cyclophosphamide and fludarabine. This lymphodepleting chemotherapy temporarily prevents the clearance of the transfused NK cells by the recipient’s immune system, providing an opportunity for the transfused cells to kill cancerous cells.

 

   

The most common source of NK cells was haploidentical related donors, those from a close relative with at least 50% matching for a set of proteins known as human leukocyte antigen, or HLA. These haplomatched donor/recipient pairs comprised 95% of the patients we identified.

 

   

In general, systemic NK cell transfusions were well tolerated. Commonly reported adverse events included low-grade systemic symptoms such as fever and chills. Higher-grade events reported were low numbers of various blood cells, or cytopenias, and infections which most often arose after HSCT. In the non-HCT setting, no GVHD and minimal CRS events or neurotoxicities were reported.

 

   

Although there was inconsistency in sampling for donor NK cell persistence, peak levels of allogeneic NK cells occurred at a median of 10 to 11 days post-infusion across the various trials. Another academic study demonstrated that the transfused allogeneic NK cells were cleared commensurate with recovery of the patient’s immune system after lymphodepleting chemotherapy, generally within 14 to 21 days.

 

   

Among the 103 patients with relapsed or refractory AML treated in the non-transplant setting across seven published studies, 35 patients (34%) achieved a complete response to NK cell therapy alone.

Clinical Activity and Tolerability of CAR-NK Cells

Early clinical data with CAR-NK cells also support the opportunity for using engineered NK cells to treat cancer. A team of researchers at M.D. Anderson Cancer Center in Houston, Texas recently reported in the New England Journal of Medicine on a cohort of patients in a single-site study with various B-cell malignancies, including DLBCL, CLL and follicular lymphoma, who were treated with freshly prepared CAR-NK cells targeting CD19. These CAR-NK cells were derived from umbilical cord blood and engineered to express a secreted form of IL-15 as well as a CAR construct containing a CD19-targeting binder and a CD28 costimulatory domain. Of the 11 patients treated, eight achieved responses within 30 days of single infusion, with seven achieving a complete response and five receiving post-remission therapy. The patients had already received a median of four prior rounds of therapy, and four patients had relapsed after stem cell transplant, which is considered the only curative therapy after the failure of front-line treatment for these diseases. Notably, no GVHD, CRS or neurotoxicity was reported. We believe that the clinical activity and tolerability profile of these allogeneic CAR-NK cells further validate the opportunity for engineering NK cells to treat cancer.

 

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Challenges with Developing NK Cell Therapies

We believe that data from this prior academic experience with NK cells, including both clinical activity and tolerability, validates the opportunity for NK cells for the treatment of different cancers. However, to achieve a commercially viable engineered NK cell therapy, we believe that a number of challenges inherent with NK cells must be addressed. These include the following:

 

   

Expansion. One of the historical challenges in treating patients with NK cells has been the lack of robust techniques to grow these cells in large numbers without causing exhaustion, or the inability of the expanded NK cells to kill tumor cells with the same potency as native NK cells.

 

   

Persistence. Non-engineered human NK cells turn over rapidly, with a half-life of seven to 10 days in the body. This short lifetime limits the cancer-killing ability of these NK cells.

 

   

Cryopreservation. Without cryopreservation, a truly off-the-shelf engineered NK cell therapy would be challenging to commercialize. However, freezing then thawing NK cells while maintaining cancer cell killing potency is difficult to achieve using standard techniques for T cell cryopreservation.

Our NK Cell Engineering Platform

Our NK cell engineering platform is designed to address the limitations and challenges of current technologies for engineering T cells and NK cells and is a result of our internal expertise and deep understanding of NK cell biology. Our platform includes proprietary technologies for NK cell expansion, persistence, targeting and cryopreservation. This enables us to generate an abundant supply of NK cells, engineer enhanced NK cell recognition of tumor targets, improve the persistence of these cells for sustained activity in the body, and to freeze, transport and store our engineered NK cells for off-the-shelf use for the treatment of cancer.

We have chosen to use healthy adult donors as our source for NK cells. We believe this offers a number of advantages including:

 

   

A large number of NK cells to begin each manufacturing run, as compared to other potential sources of NK cells;

 

   

The ability to select donors with consistent and favorable NK cell characteristics, thereby avoiding challenges with patient-derived or other cell sources; and

 

   

A diverse repertoire of NK cells. Different NK cell sub-populations have different characteristics, and by utilizing the entire natural gamut of NK cells as our cell source, we can capitalize on the inherent diversity of the innate immune system.

Below are the four core technologies that comprise our proprietary platform:

Our Proprietary NK Cell Engineering Platform

 

 

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Expansion.    The first pillar of our technology platform enables NK cell expansion without causing exhaustion. Our academic founder, Dario Campana, M.D., Ph.D., developed a proprietary cell line based on engineering of a publicly available cancer cell line called K562. Our proprietary, engineered K562 stimulatory cell line has been engineered with mbIL15 as well as a protein named 4-1BB ligand, or 4-1BBL. IL-15 is a naturally occurring growth protein that induces cell proliferation in NK cells. 4-1BBL binds to 4-1BB, a receptor normally found on NK cells that stimulates NK cell division and expansion. Therefore, our proprietary, engineered K562 cell line is selectively able to stimulate the expansion of NK cells as compared to other leukocytes, and thereby provide large numbers of NK cells. Based on our pilot scale experiments, we believe that we can produce many hundreds of doses from a single manufacturing run. We also believe that we can achieve a cost of manufacturing for commercial NKX101 and NKX019 at peak capacity of approximately $2,000 per dose, based on achieving 500 doses per manufacturing run at our highest planned Phase 1 dose of one billion CAR-NK cells per dose and on our current estimates for the costs of raw materials, consumables, rent, construction, equipment, labor and overhead.

Persistence.    The second component of our technology platform is engineering NK cells with mbIL-15 to enhance persistence. We believe increased persistence could result in improved clinical activity. Because IL-15 is a selective driver of NK activation and expansion, tethering IL-15 to the surface of our engineered NK cells serves to stimulate the naturally occurring IL-15 receptor on these NKs, and thereby provide weeks of persistence in animal models without exhaustion. Because mbIL-15 selectively stimulates NK cells without systemic circulation, we believe that mbIL-15 provides meaningful advantages as compared to secreted IL-15 or the systemic administration of other cytokines such as IL-2 or IL-21. The first graph below shows data from a cell culture experiment which demonstrates the increase of the number and persistence of NK cells engineered with mbIL-15, as compared to unmodified NK cells or NK cells expressing soluble IL-15. The second graph below shows the increased number and persistence in mice of NK cells engineered with mbIL-15, as compared to unmodified NK cells, as a percentage of total peripheral blood mononuclear cells, or PBMCs.

In vitro Persistence of Engineered NK cells Expressing mbIL-15

 

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Evaluation of the effect of soluble IL-15 and mbIL-15 on the numbers of NK cells in cell culture.

 

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In vivo Persistence of Engineered NK cells Expressing mbIL-15

 

 

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Effect of the addition of mbIL-15 to the longevity of circulating NK cells in a mouse model. At day 0, comparable numbers of NK cells were introduced to all mice in both experimental arms.

Targeting and Signaling.    The third element of our technology platform is CARs optimized for NK cells, based on extensive preclinical evaluation of different possible constructs. We have performed extensive optimization of the CARs that serve to target our engineered NK cells to cancer cells as well as provide signals that engage the cancer cell killing activity found naturally in NK cells. For both NKX101 and NKX019, we have found that using the OX40 costimulatory domain enhances the ability of the engineered NK cells to kill cancerous cells repeatedly in several in vitro models, as compared to CAR-NK cells that include other costimulatory domains commonly used for CAR-T cells. We confirmed these findings in animal models for both product candidates.

Cryopreservation.    The fourth constituent of our technology platform is cryopreservation of our engineered NK cells, the ability to freeze and store these cells for an extended time. The development of robust cryopreservation techniques is a result of our insight into the biology of engineered NK cells as well as extensive experimental optimization. Based on our preclinical data, we are able to freeze and subsequently thaw individual doses of engineered NK cells without significant loss of cancer cell killing potency of our engineered NK cells as shown in the graph below. Cryopreservation of our allogeneic CAR-NK cells will enable their off-the-shelf use in medical centers around the world, for administration to a patient at any time. In contrast, the approved autologous cell therapies require custom manufacturing for every patient, thereby limiting their commercial adoption. Therefore, we believe that our cryopreservation of CAR-NK cells will enable us to achieve the attractive commercial profile of an off-the-shelf, allogeneic cell therapy.

 

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Cytotoxicity of Cryopreserved NKX101 versus Fresh NKX101

 

 

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Cryopreserved NKX101 retains cytotoxicity similar to fresh NKX101 in a long-term assay.

We believe that the collective elements of our technology platform have the potential to comprise a key competitive advantage for us if our product candidates are approved. As illustrated in the image below, our engineered CAR-NK cells generally consist of an NK cell engineered with a swappable targeting receptor, OX40 costimulatory domain, CD3z signaling moiety, and mbIL-15.

Key Components of our Engineered CAR-NK cells

 

 

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We demonstrated the potential power of combining the different elements of our technology platform in the discovery and preclinical development of NKX101. In a model of osteosarcoma, the treatment of mice with NK cells engineered to express mbIL-15 and an early version of the NKG2D ligand targeting CAR resulted in durable suppression of tumor cell growth for 63 days whereas

 

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treatment of mice with NK cells engineered to express the CAR alone, or with NK cells lacking a CAR, resulted in a significant reduction in the control of tumor growth. The effect on tumor growth when we combine an NKG2D-CAR with mbIL-15 is shown visually and graphically in the two figures below.

In vivo Suppression of Tumor Growth with NKG2D-CAR NK cells and NKG2D-CAR + mbIL-15 NK cells (imaging)

 

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Highest tumor burden is shown by the red color in the mice images above and lowest is purple.

 

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In vivo Suppression of Tumor Growth with NKG2D-CAR NK cells and NKG2D-CAR + mbIL-15 NK cells (graphical)

 

 

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The graphical data above are an average of the mice studied in the osteosarcoma mouse model shown above.

Our Pipeline of Product Candidates and Discovery Programs

All of our product candidates and discovery programs incorporate each of the four components of our technology platform, which we believe provides the best opportunity for achieving clinically meaningful results in our development program. Our current pipeline of product candidates and discovery programs is shown below.

 

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i.v.: intravenous administration. i.a.: intraarterial administration through the hepatic artery. IND: Investigational New Drug application.

 

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NKX101

Our product candidate NKX101 consists of allogeneic, donor-derived and expanded NK cells that have been genetically engineered to express mbIL-15 along with a CAR containing an NKG2D activating receptor, an OX40 costimulatory domain and a CD3z signaling moiety. We have designed NKX101 to increase longevity, potency and activity as compared to non-engineered NK cells. NKG2D is the primary activating receptor for NK cells and functions by detecting eight known stress ligands, signals produced by cancerous or virally infected cells. The detection of these stress ligands by NKG2D is the primary basis for tumor surveillance by NK cells and is the basis of the mechanism of action for NKX101. We believe the activity of non-engineered NKs in treating cancer validates targeting NKG2D ligands through the NKG2D receptor as the mechanism of action for NKX101. Our IND for NKX101 for the treatment of relapsed or refractory AML and higher-risk MDS was accepted by the FDA in July 2020. We are planning to initiate a broad clinical program for NKX101 for blood cancers and for solid tumors in 2020. Our initial indications include AML, MDS, liver cancer, a bile duct cancer known as cholangiocarcinoma, as well as surgically removed colon cancer cases where only liver metastases remain.

Schematic of NKX101

 

 

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We created NKX101 based on our understanding of NK cell biology, including extensive comparison and optimization of different ways to enhance natural NKG2D signaling and targeting of cells which display NKG2D ligands. Based on our preclinical studies, levels of NKG2D are increased at least ten-fold in NKX101 as compared to non-engineered NK cells. Because NKG2D is the primary activating receptor for NK cells, through its detection of stress ligands displayed by cancerous cells, NKX101 is thereby designed to increase the natural cancer cell killing ability of NK cells. Although some cancer cells are able to evade detection and killing by NK cells through reducing the number or shedding of NKG2D ligands, thereby creating decoys, NKX101 maintains its ability to recognize tumor cells through increased numbers of NKG2D receptors and more potent signaling from those engineered receptors. Furthermore, we found in preclinical studies that the addition of mbIL-15 and the OX40 costimulatory domain each increase the activity of engineered NK cells. Because NKG2D is the

 

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primary activating receptor responsible for innate immune surveillance of cancerous cells, we believe that NKX101 presents a broad opportunity to treat a variety of blood cancers and the larger category of solid tumors, which collectively represent approximately 90% of all cancer incidences in the United States.

NKX101 for Blood Cancers

Our IND for NKX101 for the treatment of relapsed or refractory AML and higher-risk MDS was accepted by the FDA in July 2020. Following this acceptance, we intend to initiate a clinical trial of NKX101 with the first patient treated in 4Q2020. According to the federal Surveillance, Epidemiology, and End Results, or SEER, Program database, the incidence of AML in the United States is approximately 21,000 cases per year, and newly-diagnosed patients have a five-year survival rate of only 28%. We believe there is a substantial unmet medical need for patients with relapsed or refractory AML and higher-risk MDS and that these diseases represent a significant market opportunity.

We are planning a Phase 1 clinical trial with standard dose-finding and dose expansion phases. Patients will receive lymphodepleting chemotherapy prior to administering NKX101 in order to allow our engineered NK cells the opportunity to kill cancerous cells without first being cleared by the patient’s immune system. Our lymphodepleting chemotherapy is based upon the most commonly used regimen found in our systematic literature review of allogeneic cells, and is also similar to the lymphodepleting chemotherapy used for the two approved CAR-T therapies. The relationship between the degree of HLA matching and the clearance of donor NK cells by the patient’s immune system has not been conclusively demonstrated. Therefore, for the subjects in the dose-finding phase, we are planning to manufacture patient-specific NKX101 from haploidentical donors. In July 2020, the FDA cleared our IND for NKX101, allowing us to initiate clinical trials. We intend to approach the FDA with safety data from the first several patients to allow us to seek to accelerate the pace of enrollment in this trial.

Following the dose-finding phase, we intend to open a dose expansion phase of this trial. We will first confirm the tolerability of the dose for further development by treating additional subjects with patient-specific NKX101 from haploidentical donors to achieve at least six subjects at that dose. Subsequently, we plan to treat six subjects in the dose expansion phase with off-the-shelf NKX101. This will allow us to compare the clinical activity for the two different groups, and we expect to be able to establish that haploidentical cells are not necessary for clinical activity. The dosing schema is shown in the graphic below. Our starting dose of 100 million cells is based upon the established tolerability of non-engineered NK cells from academic literature.

 

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Schematic of our Phase 1 trial for NKX101 in Blood Cancers

 

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While we expect that the initial subjects treated with NKX101 in clinical studies will be hospitalized for a minimum of 24 hours observation after infusion, a favorable tolerability profile would allow administration of NKX101 in an outpatient setting. This could represent a significant competitive advantage for NKX101 and our engineered NK product candidates more generally, as compared to the approved CAR-T therapies.

NKX101 for Solid Tumors

We are also planning to evaluate NKX101 in patients with solid tumors. We expect our initial clinical trial to include patients with liver cancer, a bile duct cancer known as intrahepatic cholangiocarcinoma, as well as patients with surgically removed colon cancer where only liver metastases remain. These tumors represent an attractive opportunity for the initial solid tumor indication for NKX101 for several reasons, including the overexpression of NKG2D ligands in many liver cancers, the opportunity to deliver NKX101 directly to the liver and the substantial unmet medical need for the treatment of these cancers. According to the federal SEER database, the incidence of liver and intrahepatic cholangiocarcinoma in the U.S. is approximately 42,000 cases per year, and the five-year survival rate is only 18%.

We plan to deliver our engineered NK cells directly to the site of the tumor by injection into the hepatic artery, a standard technique for delivering anticancer drugs to the liver which has also been used for the delivery of CAR-T cells and unmodified NK cells to the liver. This method takes advantage of the differential blood supply in the liver, where tumor tissue is predominantly supplied by the hepatic artery and healthy liver is predominantly supplied by the portal vein. Therefore, this technique allows us to concentrate cells specifically to the tumor area. Because the liver to some degree naturally excludes the immune cells that can clear allogeneic NK cells, we are not currently planning for lymphodepleting chemotherapy prior to administration. However, we may choose to add this element based on data from this clinical trial.

We are planning to file an IND amendment for this clinical program in 2022, with the first patient receiving NKX101 thereafter. The NKX101 Phase 1 trial in solid tumors may also incorporate a dose-finding and dose-expansion component.

 

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If this program is successful, we believe that it would establish proof of concept for treating solid tumors with engineered NK cells, and enable us to evaluate a broader solid tumor clinical development program.

NKX019

Our product candidate NKX019 is for the treatment of various B cell malignancies, including DLBCL, ALL, and several other B cell malignancies. NKX019 consists of allogeneic, donor-derived and expanded NK cells that have been genetically engineered to express mbIL-15 along with a CAR containing a CD19 binder, an OX40 costimulatory domain and a CD3z signaling moiety. We chose to target CD19 based on the clinical validation provided by Kymriah and Yescarta, which have both shown to improve remission rates and overall survival in patients with various B-cell malignancies, as well as the significant unmet medical need that remains for treating B cell malignancies despite these recent approvals. Furthermore, a recent publication by researchers at M.D. Anderson Cancer Center of a cohort of patients treated with a CAR-NK therapy targeting CD19 achieved a complete remission in seven of 11 of these patients.

Schematic of NKX019

 

 

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We are currently conducting preclinical studies for NKX019. We have demonstrated activity of NKX019 in a mouse model of leukemia, and have also shown that cryopreserved NKX019 administered after thawing maintains the anti-cancer activity of freshly-prepared NKX019.

 

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In vivo Anti-Cancer Activity of Cryopreserved and Freshly-Prepared NKX019

 

 

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We expect to submit an IND for this product candidate in 1Q2021, with the first clinical trial subjects treated in 3Q2021. We will be evaluating different B cell malignancies in separate expansion cohorts of our Phase 1 trials. The dosing schema for each of our NKX019 Phase 1 trials is shown below.

Schematic of our Phase 1 trial for NKX019 in B cell malignancies

 

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We are currently planning to treat all clinical trial subjects with off-the-shelf NKX019 manufactured from healthy donors, and also explore opening ex-U.S. clinical sites, which we expect will facilitate the pace of early enrollment in this clinical trial.

Additional Pipeline Candidates

Like NKX101 and NKX019, our third product candidate is a CAR-NK that incorporates all of the core elements of our NK cell engineering platform, along with certain new technologies we are currently developing. This product candidate targets a tumor antigen that is found on certain solid tumor cells as well as blood cancers. We expect to submit an IND for this product candidate in 1Q2022.

We are also developing a product candidate containing both CAR-NK cells and CAR-T cells to provide an allogeneic, off-the-shelf product candidate that combines the advantages of the innate and adaptive immune systems. We expect that our NK+T product candidates will also incorporate all of the core elements of our NK cell engineering platform. We are currently evaluating gene editing technologies to enable the production of allogeneic CAR-T cells with reduced risk of GVHD and enhanced resistance to immunosuppression. We are also evaluating a number of potential antigens and other targets for this product candidate. Our first NK+T product candidate could incorporate two different targets into the CAR-NK and CAR-T cells, based on the differing pharmacokinetic and pharmacodynamic profile of these two cell types. We expect to submit an IND for this product candidate in 2023.

Manufacturing

Our process for the generation of an allogeneic, off-the-shelf NK cell therapy requires a number of steps. To achieve a commercially viable product, we believe that each of these steps must be scalable, reproducible and cost-effective and must provide consistent cancer cell killing potency of our CAR-NK cells once these cells are frozen and then thawed. Therefore, we have focused on developing a manufacturing process that incorporates the following elements:

 

   

a cell source which provides high numbers of easily characterized NK cells;

 

   

expansion technology which increases the number of NK cells by orders of magnitude, without creating exhaustion;

 

   

techniques for genetic engineering of NK cells which are cost-effective and which introduce a controlled and specified range of the number of copies of the gene into each cell;

 

   

cryopreservation techniques that permit bulk CAR-NK cells to be frozen in individual doses; and

 

   

techniques for thawing the frozen NK cell product that are easy to adopt in different clinical settings, and that provide consistent CAR-NK cell recovery, viability and potency.

Our overall manufacturing scheme is shown in the diagram below.

 

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The source material for production of our off-the-shelf NK cell therapy product is NK cells collected from healthy donors by leukapheresis, the selective collection of white blood cells from plasma. We then isolate the NK cells from the other cells in the leukapheresis product. Next, we selectively activate the NK cells by co-culture with our proprietary, engineered K562 stimulatory cell line. After initial expansion, we engineer the expanded NK cells using a g-retrovirus to express mbIL-15 and the CAR. We further expand the NK cells, followed by harvesting and cryopreservation to form the final cell product. For off-the-shelf administration, clinical sites will thaw the CAR-NK product candidate for administration to patients at the clinical site.

For the clinical supply of NKX101, we currently manufacture NKX101, the proprietary, engineered K562 stimulatory cell line, and the g-retrovirus at third-party contract manufacturing sites. We believe that establishing our own internal cGMP manufacturing capabilities will facilitate clinical product supply, lower the risk of manufacturing disruptions, and enable more cost-effective manufacturing for clinical and commercial supply of our product candidates. We are constructing a 2,700-square foot clinical cGMP facility within our primary corporate location in South San Francisco, California. We recently completed the construction of the first phase of this facility and estimate the total expense to complete the construction, including laboratory and manufacturing equipment, will be approximately $6.0 million. Starting in 2H2020, after qualification including several test manufacturing runs, we expect to manufacture NKX019 at this cGMP facility. In 2021, we intend to complete a smaller, final phase of this buildout as well as transfer the NKX101 manufacturing process to us. The process transfer involves demonstrating NKX101 produced at our cGMP facility meets the same release specifications as NKX101 produced at our contract manufacturer. Following this second buildout and process transfer, we plan to manufacture the proprietary, engineered K562 cells and g-retrovirus as well as NKX101 at our cGMP facility. We believe that this clinical cGMP facility will be capable of manufacturing approximately 24 batches per year and could supply our needs for our non-pivotal clinical trials.

We are also in the early stages of designing a separate, larger commercial cGMP facility for manufacturing engineered NK cells, K562 cells and potentially g-retrovirus, for pivotal clinical trials as well as for eventual commercial supply. We may choose to begin construction of such a cGMP facility as early as 2021 based on early clinical results from the NKX101 and NKX019 clinical programs.

During our process development of NKX019 for cGMP manufacturing, we have performed five manufacturing runs with NK cells from four different donors. Over a 15-day period, on average we have produced NKX019 with greater than 3,000-fold expansion of the NK cell starting material. We believe that we can achieve comparable expansion efficiency for commercial production.

We believe that we can achieve a cost of manufacturing for commercial NKX101 and NKX019 at peak capacity of approximately $2,000 per dose, based on achieving 500 doses per manufacturing run at our highest planned Phase 1 dose of one billion CAR-NK cells per dose and on our current estimates for the costs of raw materials, consumables, rent, construction, equipment, labor and overhead.

Patents, Trademarks and Proprietary Technology

We protect our intellectual property rights and proprietary technology with a combination of patent rights that we own or license in certain fields of use, trademark rights, confidentiality procedures and contractual provisions. We seek not only to protect our intellectual property rights and proprietary technology in select key global markets, but also to supplement our intellectual property portfolio with new filings and applications to enhance such protection and support commercialization of current and future product candidates. To that end, we continue to seek protection for our technological innovations and branding efforts by filing new patent and trademark applications when and where appropriate.

Our patent portfolio consists of a combination of issued patents and pending patent applications licensed from third parties, jointly owned with third parties, and assigned solely to us based on our

 

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