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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

For the fiscal year ended December 31, 2019

For the transition period from                to                .

Commission file number 001-36076

 

FATE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

(858) 875-1800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    or    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐    or    No  ☒

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

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

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.

 

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

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

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1,055,849,000 as of June 28, 2019 based upon the closing sale price on The Nasdaq Global Market reported for such date. Shares of common stock held by each executive officer and director and certain holders of more than 10% of the outstanding shares of the registrant’s common stock have been excluded in that such persons may be deemed to be affiliates. Shares of common stock held by other persons, including certain other holders of more than 10% of the outstanding shares of common stock, have not been excluded in that such persons are not deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of February 28, 2020 was 75,931,385.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission, or SEC, on or before the date 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2019 pursuant to Regulation 14A in connection with the registrant’s 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report on Form 10-K.

 

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FATE THERAPEUTICS, INC.

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2019

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PART I

 

FORWARD–LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, even if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

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Any forward-looking statements in this Annual Report on Form 10-K reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

In this Annual Report on Form 10-K, unless the context requires otherwise, “Fate Therapeutics,” “Company,” “we,” “our,” and “us” means Fate Therapeutics, Inc. and its subsidiaries.

ITEM 1. Business

Overview

We are a clinical-stage biopharmaceutical company dedicated to the development of programmed cellular immunotherapies for cancer and immune disorders. We are developing first-in-class cell therapy product candidates based on a simple notion: we believe that better cell therapies start with better cells.

To create better cell therapies, we use a therapeutic approach that we generally refer to as cell programming. For certain of our product candidates, we use pharmacologic modulators, such as small molecules, to enhance the biological properties and therapeutic function of allogeneic, or healthy donor-sourced, cells ex vivo before our product candidates are administered to a patient. In other cases, we use human induced pluripotent stem cells (iPSCs) to generate a clonal master iPSC line having preferred biological properties and direct the fate of the clonal master iPSC line to create our cell therapy product candidate. Analogous to master cell lines used to manufacture biopharmaceutical drug products such as monoclonal antibodies, we believe clonal master iPSC lines can be used as a renewable source for manufacturing cell therapy products which are well-defined and uniform in composition, can be repeatedly mass produced at significant scale in a cost-effective manner, and can be delivered off-the-shelf to treat many patients.

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Utilizing these therapeutic approaches, we program cells of the blood and immune system and are advancing a pipeline of programmed cellular immunotherapies. The following table summarizes our programmed cellular immunotherapies currently under development:

 

 

Notes:

[1] Subject to Collaboration and Option Agreement with Ono Pharmaceutical Co. Ltd.

[2] Clinical trials in AML and recurrent ovarian cancer are being conducted as investigator-initiated studies at the Masonic Cancer Center, University of Minnesota. We do not intend to continue development of FATE-NK100.

Our Approach

The use of human cells as therapeutic entities has disease-transforming potential, and compelling evidence of medical benefit for cell therapy exists across a broad spectrum of severe, life-threatening diseases. One of the most successful and widespread applications of cell therapy is hematopoietic cell transplantation (HCT), with over 60,000 procedures performed worldwide on an annual basis. HCT holds curative potential for patients afflicted with hematologic malignancies, such as leukemia and lymphoma, and with rare genetic disorders, such as hemoglobinopathies, inherited metabolic disorders and immune deficiencies.

Building upon the success of HCT, the clinical investigation of cell-based cancer immunotherapy is rapidly expanding. One particular form of cell-based cancer immunotherapy, chimeric antigen receptor (CAR) T-cell therapy, has recently emerged as a revolutionary and potentially curative therapy for patients with certain hematologic malignancies, including refractory cancers. In fact, in 2017, two CAR T-cell therapies were approved by the United States Food and Drug Administration (FDA) for the treatment of relapsed / refractory B-cell precursor acute lymphoblastic leukemia (ALL) and relapsed / refractory diffuse large B-cell lymphoma (DLBCL).

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Cell-based cancer immunotherapies undergoing clinical investigation today most often rely on the use of autologous, or a patient’s own, cells. The requirement to source, engineer, expand and deliver cells patient-by-patient is logistically complex, resource intensive and expensive, and can result in significant batch-to-batch variability in product identity, purity and potency as well as in manufacturing failures. Significant hurdles remain to ensure that cell-based cancer immunotherapies can be consistently manufactured and reliably delivered, in a cost-effective manner and at the scale necessary, to support broad patient access and wide-spread commercialization.

Rather than rely on the use of a patient’s own cells, we seek to use allogeneic, or healthy donor-sourced, cells and clonal master iPSC lines to manufacture, develop and commercialize first-in-class cellular immunotherapies. We believe our approach has the potential to improve cell product consistency and potency, reduce manufacturing costs, shorten time to treatment and reach more patients.

Our Strategy

The key pillars of our strategy are to:

We are applying our expertise in iPSC biology to genetically engineer, isolate and select single-cell iPSCs for clonal expansion, characterization and cryopreservation as clonal master iPSC lines. Analogous to master cell lines used to manufacture biopharmaceutical drug products such as monoclonal antibodies, we believe clonal master iPSC lines can be made and used as a renewable source for manufacturing cell therapy products which are well-defined and uniform in composition, can be repeatedly mass produced at significant scale in a cost-effective manner, and can be delivered off-the-shelf to treat many patients.

We have amassed significant expertise in the manufacture of natural killer (NK) cells and T cells from clonal master iPSC lines. Our expertise includes: generating, engineering, isolating and characterizing single-cell iPSC clones; creating and cryopreserving clonal master iPSC lines; differentiating these clonal master cell lines to produce NK cells and T cells; and regulatory affairs to enable clinical investigation of iPSC-derived cell products. We believe our iPSC-derived NK cell and T-cell product candidates have the potential to be administered in multi-dose, multi-cycle treatment regimens, including in combination with cycles of other cancer treatments, to drive deeper and more durable responses.

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Our Off-the-shelf, iPSC-derived Cellular Immunotherapy Pipeline

NK cells have an innate ability to rapidly seek and destroy abnormal cells, such as cancer or virally-infected cells, and represent one of the body’s first lines of immunological defense. NK cells have the unique ability to selectively identify and destroy abnormal cells through multiple mechanisms while leaving normal healthy cells unharmed. These cytotoxic mechanisms include: direct innate killing by binding to stress ligands expressed by abnormal cells and releasing toxic granules; indirect killing by producing and releasing proinflammatory and chemotactic cytokines that play a pivotal role in orchestrating the adaptive immune response; and antibody-mediated targeted killing by binding to and enhancing the cancer-killing effect of endogenous and therapeutic antibodies through a process known as antibody-dependent cellular cytotoxicity (ADCC).

T cells, or T-lymphocytes, play a critical role in adaptive immunity and are distinguished from other cells of the immune system by the presence of a T-cell receptor (TCR) on their surface. TCRs are generated by DNA rearrangement and positively selected for their capacity to engage host major histocompatibility complex (MHC) molecules. The majority of T cells, termed alpha beta T cells (αβ T cells), rearrange their alpha and beta chains on the TCR, which confers specificity and enables T cells to recognize non-self molecules, known as non-self antigens, expressed on the surface of transformed or foreign cells. Antigens inside a cell are bound to, and are routinely brought to the surface of a cell, by MHC class I molecules. Upon antigen recognition, T cells bind to the MHC-antigen complex, become activated and destroy the targeted cell. Unlike NK cells, T cells are limited by antigen-specific binding of their TCR in order to induce cellular cytotoxicity.

We are developing off-the-shelf, iPSC-derived NK- and T-cell cancer immunotherapies, including cell product candidates intended to synergize with checkpoint inhibitor and monoclonal antibody therapies and to target tumor-associated antigens.

FT500: iPSC-derived NK Cell Product Candidate for Advanced Solid Tumors

Therapies that block inhibitory immunological signaling pathways have transformed the oncology landscape. For example, the use of monoclonal antibody-based therapies commonly referred to as checkpoint inhibitors, which target the PD1 receptor upregulated on activated T cells or its ligands expressed on tumor cells (programmed death ligands 1 and 2 (PD-L1 and PD-L2)), has resulted in long term remissions in multiple tumor indications. Unfortunately, more than 60% of patients treated with checkpoint inhibitors will not respond or will relapse. As a result, there is significant unmet need for novel therapeutic approaches to overcome resistance to checkpoint inhibitors.

One common mechanism of intrinsic and acquired resistance to checkpoint inhibitors is deletions or loss of heterozygosity in beta-2-microglobulin (B2M) an essential component of major histocompatibility complex (MHC) class I molecules which play a critical role in tumor-antigen presentation. A recent longitudinal analysis in a cohort of patients treated with several checkpoint inhibitors identified B2M expression defects in approximately 30% of patients with progressing disease. In fact, loss of heterozygosity in B2M was found to be enriched three-fold in non-responders (~30%) vs. responders (~10%) and was associated with poor overall survival. Additionally, complete loss of B2M expression was found only in non-responders. These findings suggest that defects in B2M expression can contribute to tumor evasion of T-cell responses and disease progression.

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One potential strategy to overcome resistance to checkpoint inhibitors, especially in patients whose heterogenous tumor burden includes B2M expression defects, is through the administration of allogeneic NK cells, which have the inherent capability to recognize and directly kill cells with MHC class I down-regulation. The mechanism of killing is through the release of perforins and granzymes, which can lyse tumor cells exposing large amounts of tumor antigens, and the secretion of a number of cytokines and chemokines, both of which can activate and facilitate an adaptive immune response. In addition to direct cytotoxicity, NK cells can also secrete proinflammatory cytokines, which can induce tumor-resident T cells to re-engage and elicit an anti-tumor response, and chemotactic cytokines, which can recruit T cells to the tumor site. As such, allogeneic donor NK cells may have the potential to overcome resistance to checkpoint inhibitors in certain patients by directly killing tumor cells and by potentiating an adaptive immune response.

FT500 is an investigational off-the-shelf NK cell cancer immunotherapy derived from a clonal master iPSC line. To our knowledge, FT500 is the first-ever iPSC-derived cell therapy cleared for clinical investigation in the United States. We are developing FT500 for the treatment of advanced solid tumors.

FT500 is being studied in an ongoing open-label, multi-center, dose-escalation Phase 1 clinical trial. The trial is designed to assess the safety and determine the maximum dose of FT500 in adult patients with advanced solid tumors. The trial includes two treatment regimens: FT500 as a monotherapy in patients that are candidates for salvage therapy (Regimen A); and, in patients who have previously failed or progressed on checkpoint inhibitor therapy, FT500 in combination with the checkpoint inhibitor on which the patient failed or progressed (Regimen B). FT500 is administered in three once-weekly doses (Day 1, Day 8, Day 15) following outpatient lympho-conditioning. For those patients that are clinically stable at Day 29, a second treatment cycle of three once-weekly doses may be administered.

In December 2019, we reported interim results from 12 patients (n=8 in Regimen A; n=4 in Regimen B) as of a November 28, 2019 data cutoff. In Regimen A, three patients were treated at the first dose level of 100 million cells per dose and five patients were treated at the second dose level of 300 million cells per dose; in Regimen B, three patients were treated at the first dose level of 100 million cells per dose, and one patient was treated at the second dose level of 300 million cells per dose, in combination with checkpoint inhibitor therapy. Patient characteristics are presented below:

As of a November 28, 2019 data cutoff, the key clinical findings include:

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Regimen A

Regimen B

In addition to our clinical assessment, we also evaluated patients’ immune response to FT500 to assess the potential for both T-cell and B-cell mediated immunogenicity. The T-cell compartment of nine patients was evaluated for T-cell mediated host-versus-product (FT500) allo-reactivity. A TCR repertoire analysis conducted at multiple time points following treatment with FT500 was not indicative of a robust allo-reactive T-cell response against FT500. In addition, the antibody repertoire of 11 patients was analyzed for targeting of the six HLA class I types expressed by FT500 to assess B-cell mediated host-versus-product (FT500) allo-reactivity. Among the 11 patients, a single FT500 anti-HLA antibody with a mean fluorescence intensity (MFI) level of ≥ 5,000 was detected in a single patient, suggesting that a robust B-cell response against FT500 was not evident. As a point of reference, in patients undergoing haplo-identical hematopoietic stem cell transplant, an MFI level ≥ 5,000 has been correlated with a 5-fold increase in risk of graft rejection.

Upon successful completion of the 300 million cells per dose cohort in Regimen B, we plan to initiate the dose-expansion stage of the FT500 Phase 1 study under an amended clinical protocol, where we intend to administer IL-2 with each dose of FT500 to support the product candidate’s activity and to enroll patients with certain cancers that we believe are most amenable to NK cell anti-tumor activity. We expect the dose-expansion stage to enroll up to 15 patients, each of which will be administered FT500 at 300 million cells per dose in combination with checkpoint inhibitor therapy.

FT516: iPSC-derived, hnCD16 Engineered NK Cell Product Candidate

NK cells play a major role in the anti-tumor efficacy of certain tumor-antigen targeting antibodies. NK cells express CD16, an activating receptor that binds to the Fc portion of IgG antibodies. Once activated through CD16, NK cells are able to destroy antibody-coated target cells and secrete cytokines, such as interferon gamma, to recruit and potentiate adaptive immune cells, including T cells. This mechanism of action, referred to as antibody-dependent cellular cytotoxicity (ADCC), is believed to be important for the treatment of a wide range of human tumor types.

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CD16 consists of two genomic variants, 158V and 158F, that elicit high or low binding affinity, respectively, to the Fc domain of IgG antibodies. Numerous clinical studies with FDA-approved tumor-targeting antibodies, including rituximab (FDA-approved for certain cancers of the blood and lymph system), trastuzumab (FDA-approved for certain breast and gastric cancers) and cetuximab (FDA-approved for certain head and neck, non-small cell lung and colorectal cancers), have demonstrated that patients homozygous for the 158V variant, which is present in only about 15% of patients, have improved clinical outcomes. In addition, the expression of CD16 on NK cells has been shown to undergo considerable down-regulation in cancer patients, which can significantly limit anti-tumor activity.

FT516 is an investigational off-the-shelf NK cell cancer immunotherapy derived from a clonal master iPSC line engineered to express a novel CD16 (hnCD16) Fc receptor. Our novel CD16 Fc receptor incorporates two unique features designed to augment the anti-tumor activity of FT516: a high-affinity homozygous 158V variant to promote high binding affinity and a modification to block its cleavage and down-regulation upon NK cell activation. In preclinical studies, we have shown that FT516 exhibits potent and persistent anti-tumor activity in vitro and in vivo in multiple tumor cell recognition and killing assays:

FT516 is being studied in an ongoing open-label, multi-center, dose-escalation Phase 1 clinical trial. The trial is designed to assess the safety and determine the maximum dose of FT516 in adult patients with certain hematologic malignancies. The trial includes two treatment regimens: FT516 as a monotherapy in patients with relapsed / refractory acute myeloid leukemia (AML) with three separate dose cohorts (90 million cells per dose; 300 million cells per dose; 900 million cells per dose) (Regimen A); and FT516 in combination with CD20-directed monoclonal antibody therapy in patients with advanced B-cell lymphoma who have previously failed or progressed on CD20-directed monoclonal antibody therapy with four separate dose cohorts (30 million cells per dose; 90 million cells per dose; 300 million cells per dose; 900 million cells per dose) (Regimen B). FT516 is administered in three once-weekly doses (Day 1, Day 8, Day 15), with IL-2 to support the product candidate’s activity, following outpatient lympho-conditioning. For those patients that are clinically stable at Day 29, a second treatment cycle of three once-weekly doses may be administered. To our knowledge, FT516 is the first-ever engineered iPSC-derived cell therapy cleared for clinical investigation in the United States.

We are also developing FT516 for the treatment of advanced solid tumors. In November 2019, we submitted an IND application to the FDA for the clinical investigation of FT516 in combination with monoclonal antibody therapy, including PDL1-, EGFR- and HER2-targeting therapeutic antibodies, across a broad range of solid tumors. In December 2019, the FDA issued a letter informing us that our FT516 IND application for the treatment of advanced solid tumors was allowed and that we can proceed with human clinical investigation. In 2020, we intend to initiate clinical investigation of FT516 in combination with tumor-target antibody therapy in an open-label, multi-center, dose-escalation Phase 1 clinical trial for the treatment of advanced solid tumors.

FT596: iPSC-derived, hnCD16, CAR19, IL15-RF Engineered NK Cell Product Candidate

CAR T-cell therapy has shown exceptional promise as a potentially curative therapy for patients with certain hematologic malignancies. While most researchers and clinical investigators continue to focus on the development of autologous or allogeneic CAR T-cell therapies, we are developing CAR NK cell product candidates created from clonal master engineered iPSC lines as off-the-shelf cancer immunotherapies for the treatment of hematologic malignancies and solid tumors.

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In 2017, we entered into a multi-year research collaboration with the University of California, San Diego, led by Dan S. Kaufman, M.D., Ph.D., Professor of Medicine in the Division of Regenerative Medicine and Director of Cell Therapy, to develop off-the-shelf, iPSC-derived CAR NK cell cancer immunotherapies. Dr. Kaufman identified a novel CAR construct specifically designed to augment NK cell signaling that contains the transmembrane domain of NKG2D, the 2B4 co-stimulatory domain, and the CD3ζ signaling domain. In preclinical studies using an ovarian cancer xenograft model, Dr. Kaufman has shown that a single dose of CAR NK cells derived from iPSCs engineered with this specific CAR construct targeting mesothelin markedly inhibited tumor growth and significantly enhanced survival as compared to NK cells derived from iPSCs engineered with a CAR construct commonly used for CAR T-cell cancer immunotherapy.

We are developing FT596, an off-the-shelf CAR NK cell cancer immunotherapy derived from a clonal engineered master iPSC line. FT596 incorporates three anti-tumor functional modalities: a proprietary CAR optimized for NK cell biology, which contains a NKG2D transmembrane domain, a 2B4 co-stimulatory domain and a CD3-zeta signaling domain, that targets B-cell antigen CD19; a novel high-affinity, non-cleavable CD16 (hnCD16) Fc receptor that has been modified to augment antibody-dependent cellular cytotoxicity, enabling targeting of tumor-associated antigens such as CD20; and an IL-15/IL-15 receptor fusion (IL-15RF), a potent cytokine complex that promotes survival, proliferation and trans-activation of NK cells and CD8 T cells without the need for systemic cytokine support. Together, these features are intended to enable multi-antigen targeting, maximize potency and minimize toxicity in treated patients. In preclinical studies, we have shown that FT596 exhibits potent and persistent anti-tumor activity in vitro and in vivo in multiple tumor cell recognition and killing assays:

We believe this preclinical data demonstrate the anti-tumor potency and the unique multi-antigen targeting functionality of FT596, and the product candidate’s potential to effectively overcome CD19 antigen escape.

In September 2019, the FDA issued a letter informing us that our FT596 IND application was allowed, and that we can proceed with human clinical investigation of FT596. To our knowledge, FT596 is the first cellular immunotherapy engineered with three active anti-tumor components to be cleared for clinical investigation by the FDA.

We plan to study FT596 in an open-label, multi-center, dose-escalation Phase 1 clinical trial. The trial is designed to assess the safety and determine the maximum dose of FT596 in adult patients with certain hematologic malignancies. The trial includes three treatment regimens: FT596 as a monotherapy in patients with advanced B-cell lymphoma (Regimen A); FT596 in combination with rituximab in patients with advanced B-cell lymphoma who have previously failed or progressed on rituximab (Regimen B); and FT596 in combination with obinutuzumab in patients with chronic lymphocytic leukemia who have previously failed or progressed on obinutuzumab (Regimen C). FT596 will be administered as a single dose following outpatient lympho-conditioning.

We plan to initiate enrollment of the Phase 1 study of FT596 in the first quarter of 2020. The planned dose-escalation of FT596 to determine the maximum tolerated dose in the three Regimens (A, B, and C), based on a standard 3+3 dose escalation scheme, is as follows: (i) initial treatment in Regimen A at 30 million cells per dose; (ii) dose escalation in Regimen B at 30 million cells per dose, 90 million cells per dose, 300 million cells per dose and 900 million cells per dose; and (iii) treatment in Regimen A and Regimen C at the maximum tolerated dose of FT596 determined during Regimen B dose escalation.  In the dose-expansion stage of the Phase 1 study of FT596, indication-specific expansion cohorts with Regimen A, B and C will be enrolled independently.

FT538: iPSC-derived, hnCD16, IL15-RF, CD38KO Engineered NK Cell Product Candidate

Multiple myeloma is a hematologic malignancy characterized by the proliferation of malignant plasma cells. In multiple myeloma, malignant plasma cells accumulate in the bone marrow and produce abnormal antibodies called M proteins, which can cause kidney damage, bone destruction, and impaired immune function. While multiple approved drugs with novel mechanisms have improved disease management over the past decade, multiple myeloma is rarely curable and a significant number of patients are expected to relapse.

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Daratumumab is an IgG1 monoclonal antibody approved by the FDA in November 2015 for treatment of multiple myeloma. Daratumumab effectively targets CD38, which is overexpressed in multiple myeloma cells, and induces cell death through multiple mechanisms, including ADCC. However, because CD38 is also expressed on the surface of activated NK cells, daratumumab treatment can induce NK cell fratricide, which may impair the effectiveness of ADCC-mediated targeting and the destruction of multiple myeloma cells. In addition, NK cell function is often suppressed or absent in patients with multiple myeloma as a result of the cancer itself and/or from cancer therapy, further reducing the effectiveness of daratumumab. Collectively, preclinical and clinical observations suggest a potential therapeutic benefit of maintaining NK cell numbers and function in patients to support daratumumab-mediated ADCC.

We are developing FT538, an off-the-shelf NK cell cancer immunotherapy derived from a clonal engineered master iPSC line. FT538 incorporates three functional modifications: a novel high-affinity, non-cleavable CD16 (hnCD16) Fc receptor that has been modified to augment ADCC; an IL-15/IL-15 receptor fusion (IL-15RF), a potent cytokine complex that promotes survival, proliferation and trans-activation of NK cells and CD8 T cells without the need for systemic cytokine support; and a complete elimination of CD38 expression to mitigate the potential for NK cell fratricide. Together, these features are intended to augment ADCC, enhance cell persistence and prevent anti-CD38 monoclonal antibody-induced fratricide.

In preclinical studies, we have shown that FT538 cells are entirely resistant to daratumumab-induced fratricide. Additionally, in a cytotoxic re-stimulation assays, FT538 plus daratumumab resulted in 86% cytotoxicity against multiple myeloma target cells upon first exposure and 92% cytotoxicity upon re-stimulation, as compared to peripheral blood NK cells plus daratumumab which resulted in a loss of cytotoxic capacity from 74% upon first exposure to 58% upon re-stimulation.

We plan to submit an IND application during the first half of 2020 to initiate an open-label, multi-center, dose-escalation Phase 1 clinical trial of FT538 in combination with daratumumab for the treatment of multiple myeloma.

FT576: iPSC-derived, hnCD16, IL15-RF, CD38-KO, CAR-BCMA Engineered NK Cell Product Candidate

In addition to CD38 targeting in multiple myeloma, targeting of other tumor-associated cell-surface proteins has been explored. Of these antigens, the TNF-superfamily member B-cell Maturation Antigen (BCMA) is among the most researched and is under development by multiple groups as a CAR target. Several clinical trials in multiple myeloma have shown promising initial results targeting BCMA with CAR T cells; however, there remains significant opportunity to improve both rates of relapse and treatment of relapsed patients.

In August 2019, we entered into a license agreement with the Max Delbrück Center for Molecular Medicine (MDC) under which we were granted certain exclusive rights to intellectual property covering novel humanized CAR constructs that uniquely and specifically bind BCMA. In data published by MDC scientists, anti-BCMA CAR T cells equipped with its unique humanized extracellular antigen-binding domains show higher affinity and greater specificity than other anti-BCMA antigen-binding domains. These differentiated properties conveyed both greater selectivity in recognizing target B cells and more robust killing of target B cells in vitro, including malignant B cells with low expression levels of BCMA. Additionally, in in vivo proof-of-concept studies, MDC scientists demonstrated that anti-BCMA CAR T cells mediated anti-tumor activity in xenotransplant mouse models of multiple myeloma and of mature B-cell non-Hodgkin lymphoma, where BCMA surface expression is up to 4-fold lower as compared to mouse models of multiple myeloma.

We are developing FT576, an off-the-shelf NK cell cancer immunotherapy derived from a clonal engineered master iPSC line. FT576 incorporates four functional modifications: a proprietary CAR that targets BCMA; a novel high-affinity, non-cleavable CD16 (hnCD16) Fc receptor that has been modified to augment ADCC; an IL-15/IL-15 receptor fusion (IL-15RF), a potent cytokine complex that promotes survival, proliferation and trans-activation of NK cells and CD8 T cells without the need for systemic cytokine support; and a complete elimination of CD38 expression to mitigate the potential for NK cell fratricide. Together, these features are intended to enable multi-antigen targeting of myeloma cells, augment ADCC, enhance cell persistence and prevent anti-CD38 monoclonal antibody-induced fratricide.

We plan to submit an IND application during the second half of 2020 to initiate an open-label, multi-center, dose-escalation Phase 1 clinical trial of FT576 as a monotherapy and in combination with daratumumab for the treatment of multiple myeloma.

FT819: iPSC-derived, TCR-KO, TRAC-targeted CAR19 Engineered T-Cell Product Candidate

CAR T-cell therapy, has recently emerged as a revolutionary and potentially curative therapy for patients with certain hematologic malignancies, including refractory cancers. In 2017, two CAR T-cell therapies were approved by the FDA for the treatment of relapsed / refractory B-cell precursor acute lymphoblastic leukemia (ALL) and relapsed / refractory diffuse large B-cell lymphoma (DLBCL). While most researchers and clinical investigators continue to focus on the development of autologous or allogeneic CAR T-cell therapies, we are developing CAR T-cell product candidates created from clonal master engineered iPSC lines as off-the-shelf cancer immunotherapies for the treatment of hematologic malignancies and solid tumors.

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In September 2016, we announced a multi-year partnership with Memorial Sloan Kettering Cancer Center for the development of off-the-shelf engineered T-cell product candidates using clonal master iPSC lines and, in July 2019, we extended the partnership for an additional three years. Research and development activities under the collaboration are being led by Dr. Michel Sadelain, Director of the Center for Cell Engineering and the Stephen and Barbara Friedman Chair at Memorial Sloan Kettering Cancer Center.

In connection with the formation of our partnership with Memorial Sloan Kettering Cancer Center, we exclusively licensed from Memorial Sloan Kettering foundational intellectual property covering iPSC-derived cellular immunotherapy, including T cells and NK cells derived from iPSCs engineered with CARs, for human therapeutic use. We also secured an exclusive option to exclusively license intellectual property arising from all research and development activities under the partnership. In May 2018, we licensed from Memorial Sloan Kettering Cancer Center additional intellectual property covering compositions of novel CAR constructs, including the 1XX CAR construct, and of genetically-engineered CAR T cells, including methods of making these cells using CRISPR for certain targeted gene modifications. Embodiments of this additional intellectual property include preclinical data published by Dr. Sadelain demonstrating that directing a CD19-specific CAR to the T-cell receptor (TCR) alpha constant (TRAC) locus results in uniform CAR expression in human peripheral blood T cells, enhances T-cell potency, and delays effector T-cell differentiation and exhaustion, and that CAR T cells utilizing a novel 1XX CAR signaling domain exhibited enhanced antitumor efficacy, persistence and long-term cytotoxicity as well as a decrease in T-cell exhaustion.

We are developing FT819, an off-the-shelf CAR T-cell cancer immunotherapy derived from a clonal engineered master iPSC line with complete elimination of TCR expression and the novel 1XX CAR targeting CD19 inserted into the TRAC locus, under our collaboration with Memorial Sloan Kettering Cancer Center. Together, these features are intended to induce antigen-specific cytotoxicity, enhance CAR activity through TRAC-regulated expression and completely eliminate TCR expression to mitigate GvHD.

As proof-of-principle for the unique advantages arising from selecting a single engineered iPSC clone for the production of CAR T-cell therapy, we assessed approximately 750 clones after engineering a pool of cells using CRISPR, and found that only about 2% of clones met our standards for overall quality including containing both bi-allelic disruption of the TCR, proper insertion of the CAR into the TRAC locus without random transgene integrations, and no evidence of off-target genomic modifications or translocations. We selected the top-performing clone for generation of the master engineered iPSC line for FT819.

In preclinical studies, we have shown that FT819 cells:

Over the past twelve months, we have further optimized our processes for making T cells from iPSCs, and have now shown the production of pure T-lymphocytes consisting of both CD8+ and CD4+ T cells having a global gene expression profile that is highly-similar to primary T cells based on a principal component analysis. In December 2019, we presented new in vivo preclinical data demonstrating that FT819 exhibits durable tumor control and extended survival. In a xenograft model of disseminated lymphoblastic leukemia, FT819 demonstrated enhanced tumor clearance and control of leukemia as compared to primary CAR19 T cells. At Day 35 following administration, a bone marrow assessment showed that FT819 persisted and continued to demonstrate tumor clearance, whereas primary CAR T cells, while persisting, were not able to control tumor growth.

We plan to submit an IND application in mid-2020 to initiate an open-label, multi-center, dose-escalation Phase 1 clinical trial of FT819 for the treatment of certain hematologic malignancies.

Other iPSC-derived Cell Product Candidates

Autoimmune diseases arise from abnormal immune responses in which the body’s immune system attacks and damages its own tissues. Some of the most common autoimmune diseases include rheumatoid arthritis, type-1 diabetes, systemic lupus erythematosus (SLE or lupus), multiple sclerosis, inflammatory bowel disease, celiac disease and asthma. It is estimated that more than 23 million people in the U.S. suffer from autoimmunity, which makes it the third most common category of illness in the U.S. after cancer and heart disease.

Auto-reactive T-lymphocytes are key players in aberrant autoimmune responses. We believe that certain biological mechanisms, which have been demonstrated to suppress T-cell activity against cancer cells, can be exploited to suppress auto-reactive T-cell destruction of normal tissues. For example, myeloid-derived suppressor cells (MDSCs) are a naturally occurring population of cells that are often found in the tumor microenvironment, where these cells function to inhibit antigen-specific and non-specific T-cell activation and proliferation through a diverse set of mechanisms. While MDSCs can impede T-cell responses against cancer, the cells’ potent immuno-suppressive properties may serve to immunologically check auto-reactive T-lymphocytes that are directly responsible for the destruction of healthy tissue in certain autoimmune and inflammatory disorders.

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MDSCs are rare in healthy donors and, although abundant in tumor-bearing patients, repurposing tumor-derived MDSCs for therapeutic use may pose undesirable risks. As a result, a need exists to generate MDSCs in large quantities, particularly from healthy donor sources, in order to explore the therapeutic potential of MDSCs. Using a proprietary, efficient and reproducible differentiation process, we have shown the potential to create a substantially pure population of iPSC-derived MDSCs that is well-defined. Preclinical studies of iPSC-derived MDSCs have shown that the cells suppress T-cell activity and proliferation in vitro and attenuate GvHD in vivo in a xenogeneic mouse model. Importantly, these immuno-regulatory properties were demonstrated using immunologically-mismatched cells.

We are developing FT301, an off-the-shelf, immuno-regulatory cell product candidate derived from a clonal master iPSC line. We believe FT301 has broad therapeutic potential across multiple disease indications, including graft-versus-host disease, multiple sclerosis, ulcerative colitis and others

Our Allogeneic Cellular Immunotherapy Pipeline

ProTmune™

Allogeneic HCT has been performed globally for decades with curative intent in patients with a wide range of hematologic malignancies and rare genetic disorders. The procedure involves transferring hematopoietic cells sourced from a healthy donor to a patient following the administration of chemotherapy and/or radiation therapy. The biological properties of the various cell populations present in the allogeneic hematopoietic cell graft play an essential role in determining outcomes of HCT. Donor-sourced CD34⁺ cells have the unique ability to engraft and reconstitute a new blood and immune system, and donor-sourced immune cells, such as T cells, have an important protective role following HCT in eradicating residual cancer cells and providing protection against life-threatening infections. The engraftment of donor-sourced CD34⁺ cells is essential for successful reconstitution, and any delay in, or failure of, engraftment leaves a patient severely immuno-compromised and exposed to exceedingly high risk of early morbidity and mortality. Additionally, while the donor-sourced immune cells impart a critical immunotherapeutic effect, allo-reactive T cells can cause GvHD, a serious complication where donor-sourced T cells recognize antigens on a patient’s cells as foreign and attack the patient’s cells.

According to the Center for International Blood and Marrow Transplant Research, approximately 30,000 allogeneic HCT procedures are performed globally each year. Hematopoietic cells for use in allogeneic HCT can be obtained from multiple donor sources including umbilical cord blood, bone marrow and mobilized peripheral blood (mPB). Approximately 65% of allogeneic HCT procedures utilize mPB as the donor hematopoietic cell source. While the use of mPB is associated with faster rates of neutrophil engraftment compared to other cell sources like bone marrow and umbilical cord blood, approximately 35-60% of patients undergoing mPB HCT develop acute GvHD and 70-80% of patients undergoing mPB HCT experience at least one severe infection within the first 180 days following HCT. Additionally, approximately 50% of patients undergoing HCT experience cancer relapse or die within the first two years following HCT. We believe our cell programming approach has the potential to reduce the three leading causes of morbidity and mortality associated with allogeneic HCT – namely, graft-versus-host disease, severe infections and disease relapse – and to improve outcomes in patients undergoing allogeneic HCT.

We are developing ProTmune as an investigational programmed cellular immunotherapy for use as a next-generation allogeneic HCT cell graft. ProTmune is produced by modulating donor-sourced mPB ex vivo with two small molecules, 16,16-dimethyl prostaglandin E2 (FT1050) and dexamethasone (FT4145), to enhance the biological properties and therapeutic function of the graft’s cells. The programmed mPB graft is administered to a patient as a one-time intravenous therapy. Based on preclinical data, we believe ProTmune has the potential to suppress the GvHD response and maintain the anti-tumor, or graft-versus-leukemia (GvL), activity of donor T cells. We have demonstrated that FT1050-FT4145 programmed CD4⁺ and CD8⁺ T cells of mPB are functionally less allo-reactive in vitro, exhibiting a decrease both in the expression levels of T-cell activation markers, including ICOS and 41BB, and in the production of pro-inflammatory cytokines, and an increase in the production of potent anti-inflammatory cytokines including IL-10.

We are conducting a multi-center Phase 1/2 clinical trial of ProTmune in adult subjects with hematologic malignancies undergoing mPB HCT following myeloablative conditioning, a clinical trial which we refer to as the PROTECT study. The primary objectives of the PROTECT study are to evaluate safety and tolerability, and to assess the potential of ProTmune to prevent acute GvHD, which is a leading cause of morbidity and mortality in patients undergoing HCT. There are currently no FDA-approved therapies for the prevention of GvHD in patients undergoing allogeneic HCT, giving rise to a significant unmet medical need. All subjects in the PROTECT study are being followed for a period of two years following HCT.

In December 2018, we reported clinical data from the Phase 1 stage of PROTECT. The Phase 1 stage of PROTECT included seven subjects. Underlying hematologic diseases included three subjects with acute lymphoblastic leukemia (ALL), three with acute myeloid leukemia (AML) and one with myelodysplastic syndrome (MDS). As of a November 26, 2018 data cut-off, five of seven subjects remained on study with median time on study of 516 days [Day 151 – 616], and the following key safety and efficacy data were reported:

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A tabular summary of the reported clinical data from the Phase 1 stage of PROTECT is presented below:

 

 

The ongoing Phase 2 stage of PROTECT is a randomized, controlled and double-blinded clinical trial assessing the safety and efficacy of ProTmune in up to 80 adult subjects with hematologic malignancies undergoing matched unrelated donor HCT following myeloablative conditioning. In November 2019, we reported that the Phase 2 stage of PROTECT was fully enrolled. Subjects were randomized, in a 1:1 ratio, to receive either ProTmune or a conventional matched unrelated donor mobilized peripheral blood cell graft. The primary efficacy endpoint of PROTECT is cumulative incidence of Grades 2-4 acute GvHD by Day 100 following HCT, where prospective clinical studies have shown that 40% to 80% of patients undergoing matched unrelated donor transplant experience Grades 2-4 acute GvHD. The secondary efficacy endpoint of PROTECT is the proportion of subject alive without relapse and without moderate or severe chronic GvHD by Day 365 following HCT. Additional endpoints, such as rates of cancer relapse, chronic GvHD, non-relapse mortality, and overall survival, are also being assessed.

In June 2016, the FDA granted Fast Track designation for ProTmune for the reduction of incidence and severity of acute GvHD in patients undergoing allogeneic HCT. In September 2016, the FDA granted Orphan Drug Designation and, in October 2016, the European Commission granted Orphan Medicinal Product Designation, for ProTmune. The orphan designation granted in each jurisdiction broadly covers subjects undergoing allogeneic HCT across diseases for which the procedure is performed, including blood cancers and genetic disorders.

FATE-NK100

Adaptive memory NK cells are a highly specialized and functionally distinct subset of NK cells. In July 2015, we entered into a research collaboration with the University of Minnesota led by Dr. Jeffrey S. Miller, Professor of Medicine at the University of Minnesota and Deputy Director of the University of Minnesota Masonic Comprehensive Cancer Center, to develop an allogeneic adaptive memory NK cell product candidate for cancer, which we refer to as FATE-NK100.

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Through the application of our cell programming expertise and our specific knowledge of modulators involved in the persistence, proliferation and anti-tumor activity of immune cells, we identified a combination of pharmacological modulators consisting of a cytokine and a small molecule (FT1238) that induces the robust formation of adaptive memory NK cells in therapeutically-relevant quantities. Using peripheral blood cells sourced from a healthy donor, FATE-NK100 is produced in a feeder-free, seven-day manufacturing process during which donor-sourced NK cells are programmed ex vivo with our combination of pharmacological modulators. In August 2017, preclinical data describing the unique properties and anti-tumor activity of FATE-NK100 were published in Cancer Research (doi:10.1158/0008-5472.CAN-17-0799), a peer-reviewed journal of the American Association of Cancer Research.

FATE-NK100 was evaluated in three separate clinical studies: (1) an open-label, accelerated dose-escalation, Phase 1 clinical trial of FATE-NK100 as a monotherapy in subjects with refractory or relapsed acute myelogenous lymphoma (AML), which was conducted at the Masonic Cancer Center, University of Minnesota as an investigator-sponsored study; (2) an open-label, accelerated dose-escalation, Phase 1 clinical trial of FATE-NK100 as a monotherapy in women with ovarian, fallopian tube or primary peritoneal cancer resistant to, or recurrent on, platinum-based treatment, which was conducted at the Masonic Cancer Center, University of Minnesota as an investigator-sponsored study; and (3) an open-label, accelerated dose-escalation, Phase 1 clinical trial of FATE-NK100 as a monotherapy and in combination with monoclonal antibody therapy in subjects with advanced solid tumors who have failed approved therapies.

In 2019, we elected to discontinue further development of FATE-NK100 with the advancement of our off-the-shelf, engineered iPSC-derived NK cell product candidates into clinical development.

Our Partnerships

Ono Pharmaceutical

In September 2018, we entered into a collaboration and option agreement with Ono Pharmaceutical Co. Ltd. (Ono) for the joint development and commercialization of two off-the-shelf, iPSC-derived CAR T-cell product candidates. The first off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 1) targets an antigen expressed on certain lymphoblastic leukemias, and the second off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 2) targets a novel antigen identified by Ono expressed on certain solid tumors (each a Candidate and, collectively, the Candidates). Pursuant to the agreement, we are jointly conducting research and development activities under a joint development plan with Ono, with the goal of advancing each Candidate to a pre-defined preclinical milestone. 

We have granted to Ono, during a specified period of time, an option to obtain an exclusive license under certain intellectual property rights to develop and commercialize (a) Candidate 1 in Asia, where we retain rights for development and commercialization in all other territories of the world and (b) Candidate 2 in all territories of the world, where we retain rights to co-develop and co-commercialize Candidate 2 in the United States and Europe under a joint arrangement with Ono under which we are eligible to share at least 50% of the profits and losses. For each Candidate, the option will expire upon the earliest of: (a) the achievement of the pre-defined preclinical milestone, (b) termination by Ono of research and development activities for the Candidate and (c) the date that is the later of (i) four years after the Effective Date and (ii) completion of all applicable activities contemplated under the joint development plan. We maintain worldwide rights of manufacture for both Candidates.

Under the terms of the agreement, Ono paid us an upfront, non-refundable and non-creditable payment of $10.0 million in connection with entering into the agreement. Additionally, as consideration for our conduct of research and preclinical development under a joint development plan, Ono pays us annual research and development fees set forth in the annual budget included in the joint development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan. Further, Ono has agreed to pay us up to an additional $40.0 million, subject to the achievement of a preclinical milestone and the exercise by Ono of its options to develop and commercialize Candidate 1 and Candidate 2. Such fees are in addition to the upfront payment and research and development fees.

Subject to Ono’s exercise of the options and to the achievement of certain clinical, regulatory and commercial milestones with respect to each Candidate in specified territories, we are entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subject to reduction by 50% if we elect to co-develop and co-commercialize Candidate 2 as described above. We are also eligible to receive tiered royalties ranging from the mid-single digits to the low-double digits based on annual net sales by Ono of each Candidate in specified territories, with such royalties subject to certain reductions.

The agreement will terminate with respect to a Candidate if Ono does not exercise its option for a Candidate within the option period, or in its entirety if Ono does not exercise any of its options for the Candidates within their respective option periods. In addition, either party may terminate the agreement in the event of breach, insolvency or patent challenges by the other party; provided, that Ono may terminate the agreement in its sole discretion (x) on a Candidate-by-Candidate basis at any time after the second anniversary of the effective date of the agreement or (y) on a Candidate-by-Candidate or country-by-country basis at any time after the expiration of the option period, subject to certain limitations. The agreement will expire on a Candidate-by-Candidate and country-by-country basis upon the expiration of the applicable royalty term, or in its entirety upon the expiration of all applicable payment obligations under the agreement.

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California Institute of Regenerative Medicine (CIRM)

In April 2018, we executed an award agreement with the California Institute of Regenerative Medicine (CIRM) pursuant to which CIRM awarded us up to $4.0 million to advance our FT516 product candidate into a first-in-human clinical trial for the treatment of subjects with advanced solid tumors, including in combination with monoclonal antibody therapy (the Award). Pursuant to the terms of the Award, we are eligible to receive five disbursements in varying amounts totaling $4.0 million throughout the project period of the Award. In November 2019, we submitted an IND application to the FDA for our FT516 product candidate for the treatment of advanced solid tumors, and the IND application was allowed by the FDA in December 2019.

The Award is subject to certain co-funding requirements by us, and we are required to provide progress and financial update reports to CIRM. We, in our sole discretion, have the option to treat the Award either as a loan or as a grant. In the event we elect to treat the Award as a loan, we will be obligated to repay i) 60%, ii) 80%, iii) 100% or iv) 100% plus interest at 7% plus LIBOR, of the total Award to CIRM, where such repayment rate is dependent upon the phase of clinical development of FT516 at the time of our election. If we do not elect to treat the Award as a loan within 10 years of the date of the Award, the Award will be considered a grant and we will be obligated to pay to CIRM a royalty on commercial sales of FT516 until such royalty payments equal nine times the total amount awarded to us under the Award.

Our Intellectual Property

Overview

We seek to protect our product candidates and our cell programming technology through a variety of methods, including seeking and maintaining patents intended to cover our products and compositions, their methods of use and processes for their manufacture, our platform technologies and any other inventions that are commercially important to the development of our business. We seek to obtain domestic and international patent protection and, in addition to filing and prosecuting patent applications in the United States, we typically file counterpart patent applications in additional countries where we believe such foreign filing is likely to be beneficial, including Europe, Japan, Canada, Australia and China. We continually assess and refine our intellectual property strategy in order to best fortify our position, and file additional patent applications when our intellectual property strategy warrants such filings. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We have entered into exclusive license agreements with various academic and research institutions to obtain the rights to use certain patents for the development and commercialization of our product candidates.

As of February 25, 2020, our intellectual property portfolio is composed of over 300 issued patents and 150 patent applications that we license from academic and research institutions, and over 200 issued patents or pending patent applications that we own. These patents and patent applications generally provide us with the rights to develop our product candidates in the United States and worldwide. This portfolio covers compositions of programmed cellular immunotherapies, our cell programming approach for enhancing the therapeutic function of cells ex vivo, and our platform for industrial-scale iPSC generation and engineering. We believe that we have a significant intellectual property position and substantial know-how relating to the programming of hematopoietic and immune cells and to the derivation, genetic engineering, and differentiation of iPSCs.

We cannot be sure that patents will be granted with respect to any of our owned or licensed pending patent applications or with respect to any patent applications we may own or license in the future, nor can we be sure that any of our existing patents or any patents we may own or license in the future will be useful in protecting our technology. Please see “Risk Factors—Risks Related to Our Intellectual Property” for additional information on the risks associated with our intellectual property strategy and portfolio.

Intellectual Property Relating to iPSC Technology

As of February 25, 2020, we own over 15 patent families directed to programming the fate of somatic cells ex vivo, including patent applications pending in the U.S. and internationally related to our platform for industrial-scale iPSC generation and applications related to differentiation of iPSCs into specialized cells with therapeutic potential. These patent applications cover our proprietary small molecule-enhanced iPSC platform, including novel reprogramming factors and methods of reprogramming to obtain iPSCs. Our intellectual property portfolio also includes gene editing compositions and methods of genetic engineering, as well as methods of directing the fate of cells to obtain homogenous cell populations in the hematopoietic lineage, including CD34⁺ cells, T cells and NK cells. Our proprietary intellectual property enables highly-efficient iPSC derivation, selection, engineering, and clonal expansion while maintaining genomic stability. Any patents issued from these patent applications will expire on dates ranging from 2031 to 2040.

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Additionally, we have licensed from the Whitehead Institute for Biomedical Research a portfolio of four patent families including issued patents and pending applications broadly applicable to the reprogramming of somatic cells. Our license is exclusive in commercial fields, including for drug discovery and therapeutic purposes. This portfolio covers the generation of human iPSCs from somatic cells and, as of February 25, 2020, includes 16 issued U.S. patents (including U.S. Patents 8,071,369, 7,682,828 and 9,497,943) claiming compositions used in the reprogramming of mammalian somatic cells to a less differentiated state (including to a pluripotent state), and methods of making a cell more susceptible to reprogramming. Specifically, the portfolio includes a composition of matter patent issued in the United States covering a cellular composition comprising a somatic cell having an exogenous nucleic acid that encodes an OCT4 protein. OCT4 is the key pluripotency gene most commonly required for the generation of iPSCs. These issued patents and any patents that may issue from these pending patent applications will expire on dates ranging from 2024 to 2029.

We also have exclusive licenses from The Scripps Research Institute to a portfolio of seven patent families relating to compositions and methods for reprogramming mammalian somatic cells, which covers non-genetic and viral-free reprogramming mechanisms, including the use of various small molecule classes and compounds and the introduction of cell-penetrating proteins to reprogram mammalian somatic cells. This portfolio includes issued U.S. patents (including U.S. Patents 8,044,201 and 8,691,573) that provide composition of matter protection for a class of small molecules, including thiazovivin, that is critical for inducing the generation, and maintaining the pluripotency, of iPSCs, and compositions and methods of using the small molecule. Any issued U.S. patents and any patents that may issue from patent applications pending in the U.S. and internationally in this portfolio will have statutory expiration dates ranging from 2026 to 2032.

We also have exclusively licensed from the J. David Gladstone Institutes (Gladstone) intellectual property covering the generation of iPSCs using CRISPR-mediated gene activation. This approach for inducing pluripotency uses CRISPR to directly target a specific location of the genome and activate endogenous gene expression, and does not rely on established methods of cellular reprogramming that require the transduction of multiple transcription factors. Any patents that may issue from patent applications pending in the U.S. and internationally in this portfolio will have expiration dates between 2038 and 2039.

We also have licensed exclusive rights to three families of patent applications from the University of Minnesota. This portfolio includes over 20 issued patents or pending patent applications in the United States and foreign jurisdictions directed to compositions of NK cells, including adaptive memory NK cells and genetically-engineered NK cells, and therapeutic strategies for the treatment of cancer using these NK cells. These applications also describe methods of enhancing NK cell cytotoxicity by genetically engineering the CD16 Fc receptor in immune cells, including iPSC-derived NK cells, and describe methods of increasing NK cell tumor specificity and cytotoxicity by incorporating CARs on NK cells. Any patents that may issue from patent applications pending in this portfolio will expire in 2035 or 2036.

We also have exclusively licensed from The Memorial Sloan-Kettering Cancer Center (MSK) intellectual property covering the production and composition of iPSC-derived T cells and their use in cellular immunotherapy, and have a license from MSK to two patent families covering novel CAR constructs as well as off-the-shelf CAR T cells, including the use of CRISPR and other innovative technologies for their production. Collectively, this portfolio covers compositions of CAR constructs, compositions of T cells and NK cells derived from pluripotent cells which are engineered with CARs, methods of engineering pluripotent cell lines, methods of deriving CAR-T cells from CAR expressing pluripotent stem cells, and methods of using CRISPR for producing off-the-shelf T-cell immunotherapies. Any patents that may issue from patent applications pending in the U.S. and internationally in this portfolio will have expiration dates between 2034 and 2038.  

Intellectual Property Relating to CRISPR Engineering

In August 2019, we entered into a license agreement with Inscripta, Inc. Under the license agreement, we obtained a royalty-free, irrevocable license to a patent portfolio covering the composition, production and use of MAD7, a novel gene-editing CRISPR endonuclease from the Eubacterium rectale genome. The intellectual property includes issued patents and pending applications broadly applicable to MAD7 and the editing of mammalian cells. Our license covers the making and using of MAD7 for editing iPSCs, making master engineered iPSC lines and using master engineered iPSC lines to manufacture human therapeutic products. These issued patents and any patents that may issue from these pending patent applications will expire around 2037.

Intellectual Property Relating to the Programming of Hematopoietic Cells

As of February 25, 2020, we own 12 families of U.S. and foreign patents and pending patent applications covering our cell programming technology and compositions of programmed cellular immunotherapies. This portfolio includes 90 issued patents or pending patent applications relating to methods of programming the biological properties and therapeutic function of cells ex vivo, and the resulting therapeutic compositions of hematopoietic and immune cells. Patents and patent applications in this portfolio include claims covering (i) therapeutic compositions of hematopoietic and immune cells, including T cells, NK cells, and CD34⁺ cells, that have been programmed ex vivo with one or more agents to optimize their therapeutic function for application in oncology and immune disorders and (ii) methods of programming cells including by the activation or inhibition of therapeutically-relevant genes and cell-surface proteins, such as those involved in the homing, proliferation and survival of hematopoietic cells or those involved in the persistence, proliferation and reactivity of immune cells. Any U.S. patents within this portfolio that have issued or may yet issue from pending patent applications will have statutory expiration dates between 2030 and 2039.

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Additionally, we have an exclusive license to an intellectual property portfolio consisting of two families of issued patents and pending patent applications co-owned by the Children’s Medical Center Corporation and The General Hospital Corporation. As of February 25, 2020, we currently have exclusive rights to over 50 issued patents or patent applications in the United States and worldwide relating to methods for programming hematopoietic stem cells ex vivo using modulators that up-regulate the prostaglandin signaling pathway or its downstream mediators. These patent rights consist of issued patents (including U.S. Patents 8,168,428 and 8,563,310) claiming methods for the ex vivo programming of hematopoietic stem cells using FT1050, including hematopoietic stem cells obtained from mobilized peripheral blood, cord blood, and bone marrow. Pending patent applications in the United States and foreign jurisdictions are directed to therapeutic compositions of hematopoietic stem cells in which the cells have been modulated by increasing prostaglandin activity, methods of preparing these compositions, and methods of promoting hematopoietic reconstitution, expansion and self-renewal using modulators that increase prostaglandin signaling activity. Any U.S. patents within this portfolio that have issued or may yet issue will have a statutory expiration date in 2027.

We have also licensed exclusive rights to two families of issued patents and patent applications from the Indiana University Research and Technology Corporation. This portfolio includes patent applications claiming methods of enhancing HCT procedures by altering prostaglandin activity in hematopoietic stem cells as well as an issued U.S. patent and patent applications claiming methods of enhancing viral transduction efficiency in the genetic engineering of stem cells, including hematopoietic stem cells. These applications describe methods of increasing mobilization of stem cells from a stem cell donor, and methods for increasing hematopoietic stem cells homing and engraftment in a stem cell transplant recipient. One family of applications is directed to preferentially modulating certain receptors present on hematopoietic stem cells to increase the therapeutic potential of such cells for homing and engraftment. Claims in these applications specifically cover the modulation of mobilized peripheral blood by altering prostaglandin activity and methods for increasing viral transduction efficiency for gene therapy. Any patents that have issued or that may issue from patent applications in this portfolio will expire in 2029 or 2030.

Our Material Technology License Agreements

The University of Minnesota

In December 2016, we entered into a license agreement with the Regents of the University of Minnesota for rights relating to compositions and methods relating to NK cells, to modifications of cytotoxic receptors naturally expressed on NK cells including the CD16 Fc receptor, and to CARs for expression on NK cells. Under our agreement with the University of Minnesota, we acquired an exclusive royalty-bearing, sublicensable, worldwide license to make, use and sell licensed products in all fields for commercial purposes. The licensed patent rights are described in more detail above under “Intellectual Property Relating to the Programming of Hematopoietic Cells.” The University of Minnesota retains the right to practice the patent rights for research, teaching and educational purposes, including in corporate-sponsored research subject to certain limitations during the initial three years of the license agreement. The University of Minnesota also retains the right to license other academic and non-profit research institutes to practice the patent rights for research, teaching and educational purposes, but not for corporate-sponsored research. Our license is also subject to pre-existing rights of the U.S. government.

Under the terms of the license agreement, we are required to pay the University of Minnesota an annual license maintenance fee during the term of the agreement, and are also required to make payments of up to $4.6 million for development, regulatory and commercial milestones achieved with respect to each of the first three licensed products. If commercial sales of a licensed product commence, we will also be required to pay royalties at percentage rates in the low-single digits on net sales of licensed products. Our royalty payments are subject to reduction for any third-party payments required to be made until a minimum royalty percentage has been reached. In the event that we sublicense the patent rights, the University of Minnesota is also entitled to receive a percentage of the sublicensing income received by us.

Under the license agreement with the University of Minnesota, we are obligated to use commercially reasonable efforts to develop and make commercially available licensed products. In particular, we are required to conduct activities toward specific development milestones of licensed products on an annual basis.

The agreement will continue until the abandonment of all patent rights or expiration of the last to expire licensed patent. The University of Minnesota may terminate the agreement if we default in the performance of any of our obligations and fail to cure the default within a specified grace period. The University of Minnesota may also terminate the agreement if we cease to carry out our business or become bankrupt or insolvent. We may terminate the agreement for any reason upon prior written notice to the University of Minnesota and payment of all amounts due to the University of Minnesota through the date of termination.

Memorial Sloan Kettering Cancer Center

In May 2018, we entered into an amended and restated license agreement with Memorial Sloan Kettering Cancer Center. The agreement amends and restates the exclusive license agreement we entered into with Memorial Sloan Kettering Cancer Center in August 2016, under which we obtained rights relating to compositions and methods covering iPSC-derived cellular immunotherapy, including T cells and NK cells derived from iPSCs engineered with CARs. Pursuant to the amended and restated license agreement, we continue to hold exclusive rights to the foregoing patents and patent applications, and obtained additional licenses to certain patents and patent applications relating to compositions and methods covering novel CAR constructs as well as off-the-shelf CAR T cells, including the use of CRISPR and other innovative technologies for their production.

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Under our amended and restated agreement with Memorial Sloan Kettering Cancer Center, we have royalty-bearing worldwide licenses to make, use and sell licensed products in all fields for human therapeutic uses. The licensed patent rights are described in more detail above under “Intellectual Property Relating to iPSC Technology.” For those patent families where our rights are exclusive, Memorial Sloan Kettering Cancer Center retains the right to practice the patent rights for research, teaching and non-clinical research purposes, and to license other academic and non-profit research institutes to practice the patent rights for research, teaching and non-clinical research purposes. Our licenses are also subject to pre-existing rights of the U.S. government.

Under the terms of the amended and restated agreement, we are required to pay Memorial Sloan Kettering Cancer Center an annual license maintenance fee during the term of the agreement, and are also required to make payments of up to $12.5 million for development, regulatory and commercial milestones achieved with respect to each licensed products. If commercial sales of a licensed product commence, we will also be required to pay royalties at percentage rates up to the high-single digits on net sales of licensed products. Our royalty payments are subject to reduction for any third-party payments required to be made until a minimum royalty percentage has been reached. In the event that we sublicense the patent rights, Memorial Sloan Kettering Cancer Center is also entitled to receive a percentage of the sublicensing income received by us. Additionally, in the event a licensed product achieves a specified clinical milestone, Memorial Sloan Kettering Cancer Center is then eligible to receive additional milestone payments, where the amount of such payments owed to Memorial Sloan Kettering Cancer Center are contingent upon certain increases in the price of our common stock following the date of achievement of such clinical milestone.

Under the amended and restated agreement with Memorial Sloan Kettering Cancer Center, we are obligated to use commercially reasonable efforts to develop and make commercially available licensed products. In particular, we are required to conduct activities and commit a minimum amount of funding toward specific development milestones of licensed products on an annual basis.

The agreement will continue until the abandonment of all patent rights or expiration of the last to expire licensed patent. Memorial Sloan Kettering Cancer Center may terminate the agreement if we default in the performance of any of our obligations and fail to cure the default within a specified grace period, if we cease to carry out our business or become bankrupt or insolvent, or if we institute a proceeding to challenge the patent rights. We may terminate the agreement for any reason upon prior written notice to Memorial Sloan Kettering Cancer Center.

Whitehead Institute for Biomedical Research

In February 2009, we entered into a license agreement with the Whitehead Institute for Biomedical Research, as amended in October 2009 and September 2010, for rights relating to compositions and methods for reprogramming somatic cells to a less differentiated or pluripotent state. Under our agreement with the Whitehead Institute, we acquired an exclusive royalty-bearing, sublicensable, worldwide license to make, use and sell licensed products in all fields for commercial purposes, excluding the sale or distribution of reagents for basic research use. The licensed patent rights are described in more detail above under “Intellectual Property Relating to iPSC Technology.” The Whitehead Institute retains the right to practice the patent rights for research, teaching and educational purposes, including in corporate-sponsored research under limited circumstances and in some cases only after obtaining our consent. The Whitehead Institute also retains the right to license other academic and non-profit research institutes to practice the patent rights for research, teaching and educational purposes, but not for corporate-sponsored research. Our license is also subject to pre-existing rights of the U.S. government.

Under the terms of the license agreement, we are required to pay the Whitehead Institute an annual license maintenance fee during the term of the agreement, and are also required to make payments of up to $2.3 million for development and regulatory milestones achieved with respect to licensed products. If commercial sales of a licensed product commence, we will also be required to pay royalties at percentage rates in the low-single digits on net sales of licensed products. Our royalty payments are subject to reduction for any third-party payments required to be made until a minimum royalty percentage has been reached. In the event that we sublicense the patent rights, the Whitehead Institute is also entitled to receive a percentage of the sublicensing income received by us.

Under the license agreement with the Whitehead Institute, we are obligated to use commercially reasonable efforts to develop and commercialize licensed products, and to make licensed products or processes reasonably available to the public. In particular, we are required to commit a minimum amount of funding toward the development of a licensed product on an annual basis or conduct activities toward specific development milestones.

The agreement will continue until the abandonment of all patent rights or expiration of the last to expire licensed patent. The Whitehead Institute may terminate the agreement if we default in the performance of any of our obligations and fail to cure the default within a specified grace period, or if we institute a proceeding to challenge the patent rights. The Whitehead Institute may also terminate the agreement if we cease to carry out our business or become bankrupt or insolvent. We may terminate the agreement for any reason upon prior written notice to the Whitehead Institute and payment of all amounts due to the Whitehead Institute through the date of termination.

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The Scripps Research Institute

We have entered into various license agreements with The Scripps Research Institute (TSRI) for rights relating to compositions and methods for reprogramming somatic cells, including the use of various small molecule classes and compounds in the reprogramming and maintenance of iPSCs. Under our agreements with TSRI (the TSRI License Agreements), we acquired exclusive royalty-bearing, sublicensable, worldwide licenses to make, use and sell products covered by the licensed patent rights, and to perform licensed processes, in each case, in all fields. The licensed patent rights are described in more detail above under “Intellectual Property Relating to iPSC Technology.” TSRI retains a non-exclusive right to practice and use the patent rights for non-commercial educational and research purposes, and to license other academic and non-profit research institutions to practice the patent rights for internal basic research and education purposes. Under certain of our TSRI License Agreements, other third parties maintain a right to practice the patent rights for their internal use only. Our license is also subject to pre-existing rights of the U.S. government.

Under the terms of the TSRI License Agreements, we are required to pay to TSRI annual minimum fees during the term of each agreement. Additionally, upon the achievement of specific regulatory and commercial milestones, we are required to make payments to TSRI of up to approximately $1.8 million under each of the TSRI License Agreements. We will also be required to pay TSRI royalties at percentage rates ranging in the low- to mid-single digits on net sales of licensed products. In the event that we sublicense the patent rights, TSRI is also entitled to receive a percentage of the sublicensing income received by us.

Under the TSRI License Agreements, we are obligated to use commercially reasonable efforts to meet the development benchmarks set out in development plans under each of the TSRI License Agreements, or otherwise expend a minimum specified amount per year for product development. TSRI has the right to terminate any TSRI License Agreement if we fail to perform our obligations under the applicable agreement, including failure to meet any development benchmark or to use commercially reasonable efforts and due diligence to develop a licensed product, or if we otherwise breach the agreement, challenge the licensed patent rights, are convicted of a felony involving the development or commercialization of a licensed product or process, or become insolvent. We may terminate any of our TSRI License Agreements by providing ninety days’ written notice to TSRI. Each TSRI License Agreement otherwise terminates upon the termination of royalty obligations under such agreement.

Children’s Medical Center Corporation

In May 2009, we entered into a license agreement with Children’s Medical Center Corporation (CMCC) for rights relating to therapeutic compositions of modulated HSCs and methods for promoting reconstitution of the hematopoietic system using modulators of the prostaglandin pathway, as described in more detail above under “Intellectual Property Relating to the Programming of Hematopoietic Cells.” Under our agreement with CMCC, we acquired an exclusive royalty-bearing, sublicensable, worldwide license to make, use and sell products covered by the licensed patent rights, and to perform licensed processes, in each case, in all fields. CMCC retains a non-exclusive right to practice and use the patent rights for research, educational, clinical or charitable purposes, and also to license other academic and nonprofit organizations to practice the patent rights for research, educational, and charitable purposes (but excluding any clinical use and commercialization of the patent rights to the extent granted to us under the license agreement). Our license is also subject to pre-existing rights of the U.S. government and rights retained by the Howard Hughes Medical Institute and the General Hospital Corporation to use the patent rights for research purposes. Additionally, if we make any discovery or invention that is described in a patent application and is not within the scope of the licensed patent rights but would not have been made but for the licensed patent rights, we are required to disclose the invention to CMCC and enter into a non-exclusive license agreement with CMCC, for no more than a nominal fee, for CMCC to practice the invention solely for internal research purposes or clinical purposes and not for commercial purposes.

Under the terms of the license agreement, we are required to pay to CMCC an annual license maintenance fee during the term of the agreement. We also are required to make payments to CMCC of up to $5.0 million per product in development, regulatory and sales milestones. If commercial sales of a licensed product commence, we will pay CMCC royalties at percentage rates ranging in the low- to mid-single digits on net sales of licensed products in countries where such product is protected by patent rights. Our obligation to pay royalties continues on a country by country basis until the expiration of all licensed patent rights covering licensed products in such country, and our royalty payments will be reduced by other payments we are required to make to third parties until a minimum royalty percentage has been reached. In the event that we sublicense the patent rights, CMCC is also entitled to receive a percentage of the sublicensing income received by us.

Under the license with CMCC, we are obligated to use commercially reasonable efforts to bring a licensed product to market as soon as practicable, and also to use good faith and diligent efforts to manufacture and distribute a licensed product, and make licensed products reasonably available to the public during the term of the agreement. We are also required to use good faith and diligent efforts to meet the milestones set forth in development plans as part of the agreement, subject to any revisions to the development plans that may be permitted under certain circumstances. Additionally, if a third party expresses interest in an area under the license that we are not pursuing, under the terms of our agreement with CMCC, we may be required to sublicense rights in that area to the third party.

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The agreement will continue until the last to expire of the patent rights. We may terminate the agreement by providing prior written notice to CMCC, and CMCC has the right to terminate the agreement if we fail to pay royalties or otherwise materially breach the agreement and fail to cure such breach within a specified grace period. CMCC may also terminate the agreement should we cease operations or in the event of our bankruptcy or insolvency.

Manufacturing

Off-the-shelf, iPSC-derived Cellular Immunotherapies

The manufacture of our off-the-shelf, iPSC-derived cellular immunotherapy product candidates involves a three-stage process:

As part of our manufacturing process, we endeavor to utilize current Good Manufacturing Process (cGMP) grade materials and reagents, if commercially available; however, certain critical materials and reagents are currently qualified for research use only. Additionally, we obtain key components required for the manufacture of our iPSC-derived cell product candidates from third-party manufacturers and suppliers, which include, in some instances, sole source manufacturers and suppliers. We do not currently have long-term commitments or supply agreements in place to obtain certain key components used in the manufacture of our iPSC-derived cell product candidates.

We are manufacturing our iPSC-derived cell product candidates for use in research, preclinical development, and clinical development. In September 2019, we opened our cGMP compliant manufacturing facility for the clinical production of our iPSC-derived cell product candidates. Our cGMP facility, located in San Diego, California, is custom designed for the manufacture of off-the-shelf cell product candidates using clonal master iPSC lines as the starting cell source. The new state-of-the-art facility has been commissioned and qualified, and we have been issued a drug manufacturing license by the State of California, Department of Health Services, Food and Drug Branch. In January 2020, we entered into a new lease agreement for a future headquarters facility, which is designed to include cGMP manufacturing. The lease is expected to commence, subject to certain conditions, in May 2021, and once complete, we intend to manufacture our iPSC-derived cell product candidates at this facility.

We also contract with third parties, including medical center cell therapy facilities and contract manufacturing organizations (CMOs), for the conduct of some or all of the activities required for manufacturing our iPSC-derived cell product candidates for use in clinical investigation. We expect that we will continue to contract with third parties, including medical center cell therapy facilities and CMOs, for the conduct of some or all of the activities required for manufacturing our iPSC-derived cell product candidates.

ProTmune™

ProTmune is a composition of ex vivo programmed human mobilized peripheral blood cells. ProTmune is produced by treating qualified human mobilized peripheral blood with two small molecules, FT1050 and FT4145, in a multi-step process that is performed on the day of HCT. Currently, the manufacture of ProTmune is performed at clinical cell processing facilities operated by or affiliated with our clinical sites. The manufacturing process consists of functionally closed unit operations. We aim to continue to develop manufacturing processes to further standardize the manufacture of ProTmune across clinical cell processing facilities.

Human peripheral blood cells sourced from a healthy donor, whose tissue type closely matches the patient’s, are used as the starting cellular source material for the manufacture of ProTmune. HCT centers can electronically access a worldwide network of donor registries, which collect and transfer human peripheral blood cells sourced from healthy donors, to source these cells on behalf of patients. We expect donor registries to continue to collect and transfer, and HCT centers to continue to source, human peripheral blood cells for our manufacture of ProTmune. Other components used in the manufacture of ProTmune include programming media as well as disposable materials, such as bags and tubing sets. To date, we have obtained all components required for the manufacture of ProTmune, including FT1050, FT4145 and programming media, from third-party manufacturers and suppliers, which include, in some instances, sole source manufacturers and suppliers. We do not currently have long-term commitments or supply agreements in place to obtain human peripheral blood cells and certain components used in the manufacture of ProTmune.

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For the conduct of our Phase 1/2 clinical trial of ProTmune, the clinical cell processing facility at each participating site is qualified and trained by our technical staff to manufacture ProTmune. Our technical representative(s) are on-site at the clinical cell processing facility for each of the first two subjects administered ProTmune at a participating site. ProTmune is released immediately by the clinical cell processing facility staff after final processing, including filtration, final packaging, rapid release testing, and labeling. In the future, we may manufacture ProTmune at facilities operated by us, by transplant centers, or by third parties.

Marketing & Sales

We currently intend to commercialize any products that we may successfully develop. We currently have no experience in marketing or selling therapeutic products. To market any of our products independently would require us to develop a sales force with technical expertise along with establishing commercial infrastructure and capabilities. Our commercial strategy for marketing our product candidates also may include the use of strategic partners, distributors, a contract sales force or the establishment of our own commercial infrastructure. We plan to further evaluate these alternatives as we approach approval for the first of our product candidates.

Government Regulation

In the United States, the FDA regulates biological products under the Federal Food, Drug, and Cosmetic Act (the FDCA) and the Public Health Service Act (the PHS Act) and related regulations, and drugs under the FDCA and related regulations. Biological products and drugs are also subject to other federal, state, local, and foreign statutes and regulations. The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of biological products and drugs. These agencies and other federal, state, local, and foreign entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, packaging, labeling, storage, distribution, record keeping, reporting, approval or licensing, advertising and promotion, and import and export of our products. Failure to comply with the applicable U.S. regulatory requirements at any time during the product development process or after approval may subject an applicant to administrative or judicial sanctions. FDA sanctions include refusal to approve pending applications, withdrawal of an approval or suspension or revocation of a license, clinical hold, warning or untitled letters, voluntary or mandatory product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, mandated corrective advertising or communications with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties. In addition, government regulation may delay or prevent marketing of product candidates for a considerable period of time and impose costly procedures upon our activities.

Marketing Approval

The process required by the FDA before biological products and drugs may be marketed in the United States generally involves the following:

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U.S. Biological Products and Drug Development Process

Before testing any biological product or drug candidate in humans, nonclinical tests, including laboratory evaluations and animal studies to assess the potential safety and activity of the product candidate, are conducted. The conduct of the nonclinical tests must comply with federal regulations and requirements including GLPs.

Prior to commencing the first clinical trial, the trial sponsor must submit the results of the nonclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of an initial IND application. Some nonclinical testing may continue even after the IND application is submitted. The IND application automatically becomes effective 30 days after receipt by the FDA unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial and places the trial on a clinical hold. In such case, the sponsor of the IND application must resolve any outstanding concerns with the FDA before the clinical trial may begin. The FDA also may impose a clinical hold on ongoing clinical trials due to safety concerns or non-compliance. If a clinical hold is imposed, a trial may not recommence without FDA authorization and then only under terms authorized by the FDA. Further, an independent institutional review board (IRB) for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that site. An IRB is charged with protecting the welfare and rights of study subjects and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.

Clinical trials involve the administration of the product candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety, including rules that assure a clinical trial will be stopped if certain adverse events occur. Each protocol and any amendments to the protocol must be submitted to the FDA and to the IRB. Information about certain clinical studies must be submitted with specific timeframes to the National Institutes of Health for public dissemination at www.clinicaltrials.gov.

For purposes of BLA or NDA approval, human clinical trials are typically conducted in three sequential phases that may overlap:

Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials may be required by the FDA as a condition of approval and are used to gain additional experience from the treatment of patients in the intended indication, particularly for long-term safety follow-up. The FDA has statutory authority to require post-market clinical trials to address safety issues. All of these trials must be conducted in accordance with GCP requirements in order for the data to be considered reliable for regulatory purposes.

During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Within 15 calendar days after the sponsor determines that the information qualifies for reporting, written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events; any findings from other studies, tests in laboratory animals or in vitro testing that suggest a significant risk for human subjects; or any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days after the sponsor’s initial receipt of the information.

Regulatory authorities, a data safety monitoring board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the participants are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the trial is not being conducted in accordance with the IRB’s requirements or if the investigated product has been associated with unexpected serious harm to patients, and the trial may not recommence without the IRB’s authorization.

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Typically, if a product is intended to treat a chronic disease, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more.

Concurrently with clinical trials, companies usually complete additional animal studies and must also develop additional information about the physical characteristics of the investigational product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. To help reduce the risk of the introduction of adventitious agents with the use of biological products, the PHS Act emphasizes the importance of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality, potency, and purity of the final biological product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the biological product candidate does not undergo unacceptable deterioration over its shelf life.

A drug being studied in clinical trials may be made available to individual patients in certain circumstances. Pursuant to the 21st Century Cures Act (the Cures Act), as amended, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug. This requirement applies on the earlier of the first initiation of a Phase 2 or Phase 3 trial of the investigational drug, or as applicable, 15 days after the drug receives a designation as a breakthrough therapy, fast track product, or regenerative advanced therapy.

U.S. Review and Approval Processes

In order to obtain approval to market a biological product in the United States, a BLA must be submitted to the FDA that provides data establishing to the FDA’s satisfaction the safety, purity and potency of the investigational product for the proposed indication. Similarly, for a drug, an NDA must be submitted to the FDA that provides data demonstrating the drug is safe and effective. Both a BLA and an NDA include all data available from nonclinical studies and clinical trials, together with detailed information relating to the product’s manufacture and composition, and proposed labeling.

Under the Prescription Drug User Fee Act (PDUFA), as amended, each BLA and NDA must be accompanied by a user fee. The FDA adjusts the PDUFA user fees on an annual basis. According to the FDA’s fee schedule, effective through September 30, 2020, the user fee for an application requiring clinical data, such as a BLA and an NDA, is $2,942,965. PDUFA also imposes an annual prescription drug product program fee for biologics and drugs ($325,424). Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business having fewer than 500 employees. Additionally, no user fees are assessed on BLAs or NDAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.

The FDA has 60 days from its receipt of a BLA or NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that the application is sufficiently complete to permit substantive review. The FDA may refuse to file any BLA or NDA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the BLA or NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. After the BLA or NDA submission is accepted for filing, the FDA reviews the BLA or NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and has an acceptable purity profile, and whether the product is being manufactured in accordance with cGMPs to assure and preserve the product’s identity, safety, strength, quality, potency, and purity, and for a biological product, whether it meets the biological product standards. The FDA may refer applications for novel products or products that present difficult questions of safety or efficacy to an advisory committee, typically comprised of clinicians and other experts, for evaluation and a recommendation as to whether the application should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving a BLA or NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. For a human cellular or tissue product, the FDA also will not approve the product if the manufacturer is not in compliance with cGTPs. FDA regulations also require tissue establishments to register and list their human cells, tissues, and cellular and tissue based products (HCT/Ps) with the FDA and, when applicable, to evaluate donors through screening and testing. Additionally, before approving a BLA or NDA, the FDA may inspect clinical sites to assure that the clinical trials were conducted in compliance with IND study requirements and GCPs. If the FDA determines the manufacturing process or manufacturing facilities are not acceptable, it typically will outline the deficiencies and often will require the facility to take corrective action and provide documentation evidencing the implementation of such corrective action, which may delay further review of the application. If the FDA finds that a clinical site did not conduct the clinical trial in accordance with GCPs, the FDA may determine the data generated by the site should be excluded from the primary efficacy analyses provided in the BLA or NDA, and request additional testing or data. Additionally, the FDA ultimately may still decide that the application does not satisfy the regulatory criteria for approval.

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The FDA also has authority to require a Risk Evaluation and Mitigation Strategy (REMS) from manufacturers to ensure that the benefits of a biological product or drug outweigh its risks. A sponsor may also voluntarily propose a REMS as part of the BLA or NDA submission. The need for a REMS is determined as part of the review of the BLA or NDA. Based on statutory standards, elements of a REMS may include “dear doctor letters,” a medication guide, more elaborate targeted educational programs, and in some cases restrictions on distribution. These elements are negotiated as part of the BLA or NDA approval, and in some cases may delay the approval date. Once adopted, REMS are subject to periodic assessment and modification.

After the FDA completes its initial review of a BLA or NDA, it will communicate to the sponsor that the biological product will either be approved, or it will issue a complete response letter to communicate that the BLA or NDA will not be approved in its current form. The complete response letter usually describes all of the specific deficiencies in the BLA or NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the applicant in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the BLA or NDA to address all of the deficiencies identified in the letter, or withdraw the application, or request a hearing.

One of the performance goals of the FDA under PDUFA is to review 90% of standard BLAs and NDAs in 10 months and 90% of priority BLAs and NDAs in six months, whereupon a review decision is to be made. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs and NDAs and its review goals are subject to change from time to time. The review process and the PDUFA goal data may be extended by three months if the FDA requests or the BLA or NDA applicant otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date.

Even if a product candidate receives regulatory approval, the approval may be limited to specific disease states, patient populations and dosages, or the indications for use may otherwise be limited. Further, the FDA may require that certain contraindications, warnings, or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require Phase 4 post-marketing clinical trials and testing and surveillance programs to monitor the safety of approved products that have been commercialized. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in the imposition of new restrictions on the product or complete withdrawal of the product from the market.

Expedited Development and Review Programs

The FDA has a Fast Track program intended to facilitate the development and expedite the review of new drugs and biological products that are intended to treat a serious or life-threatening condition or disease and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a biological product or drug may request the FDA to designate the biologic or drug as a Fast Track product at any time during clinical development. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.

Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a biological product or drug designated for priority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug or biological products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a biological product or drug receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials.

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The FDCA also requires FDA to expedite the development and review of a breakthrough therapy. A biological product or drug can be designated as a breakthrough therapy if it is intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. A sponsor may request that a biological product or drug be designated as a breakthrough therapy at any time during the clinical development of the product. If so designated, FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with, and providing advice to, the sponsor throughout the product’s development, and taking steps to facilitate an efficient review of the development program and to ensure that the design of the clinical trials is as efficient as practicable.

Fast Track designation, priority review, accelerated approval, and breakthrough therapy designation do not change the standards for approval but may expedite the development or approval process.

Accelerated Approval for Regenerative Advanced Therapies

As part of the Cures Act, Congress amended the FDCA to create an accelerated approval program for regenerative advanced therapies, which include cell therapies, therapeutic tissue engineering products, human cell and tissue products, and combination products using any such therapies or products. Regenerative advanced therapies do not include those human cells, tissues, and cellular and tissue based products regulated solely under section 361 of the PHS Act and 21 CFR Part 1271. The new program is intended to facilitate efficient development and expedite review of regenerative advanced therapies, which are intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition. A drug sponsor may request that FDA designate a drug as a regenerative advanced therapy concurrently with or at any time after submission of an IND. FDA has 60 calendar days to determine whether the drug meets the criteria, including whether there is preliminary clinical evidence indicating that the drug has the potential to address unmet medical needs for a serious or life-threatening disease or condition. A BLA or NDA for a regenerative advanced therapy may be eligible for priority review or accelerated approval through (1) surrogate or intermediate endpoints reasonably likely to predict long-term clinical benefit or (2) reliance upon data obtained from a meaningful number of sites. Benefits of such designation also include early interactions with FDA to discuss any potential surrogate or intermediate endpoint to be used to support accelerated approval. A regenerative advanced therapy that is granted accelerated approval and is subject to post approval requirements may fulfill such requirements through the submission of clinical evidence, clinical studies, patient registries, or other sources of real world evidence, such as electronic health records; the collection of larger confirmatory data sets; or post approval monitoring of all patients treated with such therapy prior to its approval.

U.S. Patent Term Restoration and Marketing Exclusivity

Under certain circumstances, U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. Patent term restoration can compensate for time lost during product development and the regulatory review process by returning up to five years of patent life for a patent that covers a new product or its use. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The period of patent term restoration is generally one-half the time between the effective date of an IND application (falling after issuance of the patent) and the submission date of a BLA or NDA, plus the time between the submission date of the BLA or NDA and the approval of that application, provided the sponsor acted with diligence. Only one patent applicable to an approved product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The application for patent term extension is subject to approval by the U.S. Patent and Trademark Office in consultation with the FDA. A patent term extension is only available when the FDA approves a biological product or drug for the first time.

With the Hatch-Waxman Amendments, Congress authorized the FDA to approve generic drugs that are the same as drugs previously approved by the FDA under the NDA provisions of the FDCA. To obtain approval of a generic drug, an applicant must submit to the agency an abbreviated new drug application (ANDA) which relies on the preclinical and clinical testing previously conducted for a drug approved under an NDA, known as the reference listed drug (RLD). For the ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the active ingredients, the route of administration, the dosage form, and the strength of the drug. The FDA must also determine that the generic drug is bioequivalent to the innovator drug.

An abbreviated approval pathway for biological products shown to be biosimilar to, or interchangeable with, a FDA-licensed reference biological product was created by the Biologics Price Competition and Innovation Act of 2009, which was part of the Patient Protection and Affordable Care Act of 2010 (PPACA). This amendment to the PHS Act attempts to minimize duplicative testing. Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or trials. Interchangeability requires that a biological product is biosimilar to the reference biological product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product and, for products administered multiple times, the product and the reference product may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biological product.

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A reference biological product is granted twelve years of exclusivity from the time of first licensure of the reference product. The first biological product submitted under the abbreviated approval pathway that is determined to be interchangeable with the reference product has exclusivity against other biologics submitting under the abbreviated approval pathway for the lesser of (i) one year after the first commercial marketing, (ii) 18 months after approval if there is no legal challenge, (iii) 18 months after the resolution in the applicant’s favor of a lawsuit challenging the biologic’s patents if an application has been submitted, or (iv) 42 months after the application has been approved if a lawsuit is ongoing within the 42-month period.

A biological product or drug can obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.

Orphan Designation

Under the Orphan Drug Act, the FDA may grant orphan designation to biological products and drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a biological product or drug in the United States for this type of disease or condition will be recovered from sales of the product. Orphan designation must be requested before submitting a BLA or NDA. After the FDA grants orphan designation, the identity of the applicant, the name of the therapeutic agent and its designated orphan use are disclosed publicly by the FDA. Orphan designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

If a biological product or drug that receives orphan designation is the first such product approved by FDA for the orphan indication, it receives orphan product exclusivity, which for seven years prohibits the FDA from approving another application to market the same product for the same indication. Orphan product exclusivity will not bar approval of another product under certain circumstances, including if the new product is shown to be clinically superior to the approved product on the basis of greater efficacy or safety or a demonstration that the new product otherwise makes a major contribution to patient care. More than one product may also be approved by the FDA for the same orphan indication or disease as long as the products are different. If a biological product or drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity. Orphan drug status in the European Union has similar, but not identical, benefits.

Pediatric Research Equity Act

Under the Pediatric Research Equity Act (PREA), as amended, a BLA or NDA or supplement must contain data to assess the safety and effectiveness of the biological product or drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The intent of PREA is to compel sponsors whose products have pediatric applicability to study those products in pediatric populations. The FDCA requires manufacturers of biological products and drugs that include a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration to submit a pediatric study plan to the FDA as part of the IND application. The plan must be submitted not later than 60 days after the end-of-Phase 2 meeting with the FDA; or if there is no such meeting, before the initiation of any Phase 3 trials or a combined Phase 2 and Phase 3 trial; or if no such trial will be conducted, no later than 210 days before submitting a marketing application or supplement. The FDA may grant deferrals for submission of data or full or partial waivers. Generally, PREA does not apply to any biological product or drug for an indication for which orphan designation has been granted.

Healthcare Reform and Other Regulatory Changes

In the United States and some foreign jurisdictions, there have been, and likely will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system directed at broadening the availability of healthcare, improving the quality of healthcare, and containing or lowering the cost of healthcare.

For example, in March 2010, the ACA was enacted in the United States. The ACA includes measures that have significantly changed, and are expected to continue to significantly change, the way healthcare is financed by both governmental and private insurers. Among the provisions of the ACA of greatest importance to the pharmaceutical industry are that the ACA:

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Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or Tax Act, includes a provision that decreased 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, commonly referred to as the “individual mandate,” to $0 effective January 1, 2019. On December 14, 2018, a federal district court in Texas ruled the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional, and remanded the case to the lower court to reconsider its earlier invalidation of the full ACA. Pending review, the ACA remains in effect, but it is unclear at this time what effect the latest ruling will have on the status of the ACA.

Since January 2017, the Trump administration has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA.  On January 20, 2017, the Trump administration signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On October 13, 2017, the Trump administration signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the ACA. The Trump administration has concluded that cost-sharing reduction, or CSR, payments to insurance companies required under the ACA have not received necessary appropriations from Congress and announced that it will discontinue these payments immediately until those appropriations are made. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. The Bipartisan Health Care Stabilization Act of 2017, as well as the follow-on Bipartisan Health Care Stabilization Act of 2018 were introduced to appropriate funds to stabilize CSR payments; however, the future of this effort is unclear. On June 14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap in reimbursement on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known. In December 2018, CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of the federal district court litigation regarding the method CMS uses to determine this risk adjustment. In addition, CMS has recently finalized regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces.

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On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices; however, on December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act (H.R. 1865), which repeals the Cadillac tax, the health insurance provider tax, and the medical device excise tax.  It is impossible to determine whether similar taxes could be instated in the future. Moreover, the Bipartisan Budget Act of 2018, among other things, amends the ACA, effective January 1, 2019, by increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and  closing the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.”

Congress also could consider additional legislation to repeal, replace, or further modify elements of the ACA. Thus, the full impact of the ACA, or any law repealing, replacing or modifying elements of it, and the political uncertainty regarding any repeal, replacement or modification of the ACA, on our business remains unclear. We expect that additional federal healthcare reform measures may be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare drugs, biologics and services.

There has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to product pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposal for fiscal years 2019 and 2020 contain further drug price control measures that could be enacted during the budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the Trump administration released a “Blueprint,” or plan, aimed at improving the availability, competitiveness, and adoption of biosimilars as affordable alternatives to branded biologics. Under the plan, the FDA is directed to issue guidance to address certain practices that aim to delay or block generic competition, while also issuing new policies to bring more biosimilars to market as alternatives to brand-name biologics. More recently, the Trump administration announced a complex proposal to reduce Medicare spending by substantially reducing the price of physician-administered drugs, including biologics such as cellular therapeutics, under Medicare Part B. Under this proposal, pharmacy-benefit managers would have an increased role in managing drugs and pricing in the Part B program, and the price paid by Medicare for drugs under Part B would be linked to the prices paid for such drugs in other industrialized countries as reflected in an International Pricing Index, and in most cases these prices are lower than in the U.S. However, if the International Pricing Index model were adopted as proposed, it would not take effect until 2020 at the earliest and would phase in over five years, and it is therefore difficult to predict the impact it will have on our business. The proposal also includes a new payment model for reimbursing physicians for administering drugs under Part B, and the consequences of this payment model on the prescribing practices of physicians are uncertain. The U.S. Department of Health and Human Services (HHS) has started the process of soliciting feedback on some of these measures and, at the same time, is immediately implementing others under its existing authority. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of using step therapy, a type of prior authorization, for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective January 1, 2019. Although a number of these, and other proposed measures may require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Further, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 (Right to Try Act) was signed into law. The law, among other things, provides a federal framework for certain patients to request access to certain investigational new drug products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. There is no obligation for a pharmaceutical manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.

Other Regulations

We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.

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Competition

The biotechnology and pharmaceutical industries are characterized by rapid innovation, intense and dynamic competition and a strong emphasis on proprietary products. While we believe that our technology, scientific knowledge and experience in the field of cellular immunotherapy provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions, as well as standard-of-care treatments, new products undergoing development and combinations of existing and new therapies. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies, including combinations thereof, that may become available in the future.

Cellular immunotherapies for the treatment of cancer have recently been an area of significant research and development by academic institutions and biopharmaceutical companies. Novartis and Kite were the first to achieve FDA approval for autologous CAR T-cell therapies for the treatment of certain cancers. Novartis obtained FDA approval to commercialize Kymriah in August 2017 for the treatment of children and young adults with relapsed / refractory B-cell acute lymphoblastic leukemia and, in May 2018, for the treatment of adults with relapsed / refractory diffuse large B-cell lymphoma. In October 2017, Kite obtained FDA approval to commercialize Yescarta for the treatment of adults with relapsed / refractory diffuse large B-cell lymphoma.

We are developing our off-the-shelf NK- and T-cell product candidates for the treatment of cancer. While we believe our use of clonal master iPSC lines for the production of our off-the-shelf NK- and T-cell product candidates is highly differentiated, a number of companies are currently focused on the development of cellular immunotherapies for the treatment of cancer including Adaptimmune Limited, Allogene Therapeutics, Inc., Atara Biotherapeutics, Inc., Autolus Therapeutics plc, bluebird bio, Inc., Celgene Corporation (acquired by Bristol-Myers Squibb Company), Cellectis SA, Celyad SA, CRISPR Therapeutics AG, Editas Medicine, Inc., Gilead Sciences, Inc., Green Cross Corporation, Intrexon Corporation, Juno Therapeutics, Inc. (acquired by Celgene Corporation), Kite Pharma, Inc. (acquired by Gilead Sciences, Inc.), NantKwest, Inc., Novartis AG, Precision BioSciences, Inc., Sorrento Therapeutics, Inc. and ZIOPHARM Oncology, Inc.. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

We are developing ProTmune as a next-generation mobilized peripheral blood graft for patients undergoing allogeneic HCT. ProTmune is designed to prevent GvHD and other life-threatening complications that compromise the procedure’s curative potential. There are currently no FDA-approved therapies for the prevention of acute GvHD. Corticosteroids, or steroids, remain the first-line of treatment for GvHD, and second-line therapy consists of off-label use of immunosuppressive agents. We are aware of other companies and medical centers that are developing prophylaxes for GvHD and treatments for GvHD and other life-threatening complications of HCT, including AbbVie Inc., Bristol-Myers Squibb Company, Incyte Corporation, Jazz Pharmaceuticals plc, Kamada Ltd., and Mesoblast Limited.

We compete against our competitors in recruiting and retaining qualified scientific and management personnel and establishing clinical study sites and subject enrollment for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs. Many of our competitors, either alone or with their collaboration partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of treatments and commercializing those treatments. Accordingly, our competitors may be more successful than us in obtaining approval for treatments and achieving widespread market acceptance.

We anticipate that we will face intense and increasing competition as new products enter the market and advanced technologies become available. We expect any treatments that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and delivery, price, the level of generic competition and the availability of reimbursement from government and other third-party payers. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.

Insurance

We maintain product liability insurance for our clinical trials. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for products in development. However, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. In addition, we may not be able to obtain commercially reasonable product liability insurance for any products approved for marketing.

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Employees

As of December 31, 2019, we employed 178 employees, all of whom are full-time employees, including 86 in research and development, 69 in clinical development, manufacturing and regulatory affairs and 23 in general and administrative. We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective bargaining arrangements. We consider our employee relations to be good.

Corporate Information

We were incorporated in Delaware in 2007, and are headquartered in San Diego, CA. Our principal executive office is located at 3535 General Atomics Court, Suite 200, San Diego, CA 92121, and our telephone number is (858) 875-1800. Our website address is www.fatetherapeutics.com. We do not incorporate the information on or accessible through our website into this Annual Report on Form 10-K, and you should not consider any information on, or that can be accessed through, our website a part of this Annual Report on Form 10-K.

We own various U.S. federal trademark registrations and applications, and unregistered trademarks, including Fate Therapeutics^®, our corporate logo. All other trademarks or trade names referred to in this document are the property of their respective owners. Solely for convenience, the trademarks and trade names in this document are referred to without the symbols^® and ™, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Available Information

We post our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on the Investors and Media section of our public website (www.fatetherapeutics.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, you can read our SEC filings over the Internet at the SEC’s website at www.sec.gov. The contents of these websites are not incorporated into this Annual Report on Form 10-K. Further, our references to the URLs for these websites are intended to be inactive textual references only.

 

 

Item 1A.  Risk Factors

You should carefully consider the following risk factors, as well as the other information in this Annual Report on Form 10-K, and in our other public filings. The occurrence of any of these risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described in our public filings when evaluating our business.

Risks Related to the Discovery, Development and Regulation of Our Product Candidates

We may face delays in initiating, conducting or completing our clinical trials, and we may not be able to initiate, conduct or complete them at all.

We are heavily dependent on our ability to complete the clinical development of, and obtain regulatory approval for, our product candidates. We have not completed the clinical trials necessary to support an application for approval to market any of our product candidates, including ProTmune, FT500, or FT516. Furthermore, we have not initiated or conducted any clinical trials necessary to support an application for approval to market FT596, FT819 or any other product candidates that we may identify. We, or any investigators who initiate or conduct clinical trials of our product candidates, may experience delays in our current or future clinical trials, and we do not know whether we or our investigators will be able to initiate, enroll patients in, or complete, clinical trials of our product candidates on time, if at all. Current and future clinical trials of our product candidates may be delayed, unsuccessful or terminated, or not initiated at all, as a result of many factors, including factors related to:

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If there are delays in initiating or conducting any clinical trials of our product candidates or any of these clinical trials are terminated before completion, the commercial prospects of our product candidates will be harmed. In addition, any delays in initiating, conducting or completing our clinical trials will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Furthermore, many of the factors that cause, or lead to, a delay in the initiation, conduct or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. Any of these occurrences would significantly harm our business, prospects, financial condition, results of operations, and market price of shares of our common stock.

If we fail to complete the preclinical or clinical development of, or to obtain regulatory approval for, our product candidates, our business would be significantly harmed.

All of our product candidates are currently in research or early clinical development. We have not completed clinical development of or obtained regulatory approval for any of our product candidates. Only a small percentage of research and development programs ultimately result in commercially successful products, and we cannot assure you that any of our product candidates will demonstrate the safety, purity and potency, or efficacy profiles necessary to support further preclinical study, clinical development or regulatory approval.

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We may delay or cancel our ongoing research and development activities and our current or planned clinical development for any of our product candidates for a variety of reasons, including:

 

Additionally, we will only be able to obtain regulatory approval to market a product candidate if we can demonstrate, to the satisfaction of the FDA or comparable foreign regulatory authorities, in well-designed and conducted clinical trials that such product candidate is manufactured in accordance with applicable regulatory requirements, is safe, pure and potent, or effective, and otherwise meets the appropriate standards required for approval for a particular indication. Our ability to obtain regulatory approval of our product candidates depends on, among other things, completion of additional preclinical studies, process development and manufacturing activities, and clinical trials, whether our clinical trials demonstrate statistically significant efficacy with safety profiles that do not potentially outweigh the therapeutic benefit, and whether regulatory agencies agree that the data from our clinical trials and our manufacturing operations are sufficient to support approval. Securing regulatory approval also requires the submission of information about product manufacturing operations to, and inspection of manufacturing facilities by, the relevant regulatory authority. The final results of our current and future clinical trials may not meet the FDA’s or other regulatory agencies’ requirements to approve a product candidate for marketing, and the regulatory agencies may otherwise determine that our manufacturing operations are insufficient to support approval. We may need to conduct preclinical studies and clinical trials that we currently do not anticipate. If we fail to complete preclinical or clinical development of, or obtain regulatory approval for, our product candidates, we will not be able to generate any revenues from product sales and our ability to receive milestone or other payments under any collaboration agreements may be impaired, which will harm our business, prospects, financial condition and results of operations.

The manufacture and distribution of our cell product candidates, particularly our iPSC-derived cell product candidates, is complex and subject to a multitude of risks. These risks could substantially increase our costs and limit the clinical and commercial supply of our product candidates, and the development and commercialization of our product candidates could be substantially delayed or restricted if the FDA or other regulatory authorities impose additional requirements on our manufacturing operations or if we are required to change our manufacturing operations to comply with regulatory requirements.

The manufacture and supply of our cell product candidates involve novel processes that are more complex than those required for most small molecule drugs and other cellular immunotherapies, and accordingly present significant challenges and are subject to multiple risks. For our iPSC-derived product candidates, including FT500, FT516, and FT596, these complex processes include reprogramming human fibroblasts to obtain iPSCs, in some cases genetically engineering these iPSCs, and differentiating the iPSCs to obtain the desired cell product candidate. As a result of the complexities in manufacturing biologics and distributing cell therapies, the cost to manufacture and distribute biologics and cell therapies in general, and our cell product candidates in particular, is generally higher than traditional small molecule chemical compounds. In addition, our cost of goods development is at an early stage. The actual cost to manufacture and process our product candidates could be greater than we expect and could materially and adversely affect the commercial viability of our product candidates.

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We have limited experience in the manufacture of cell-based therapies. We are still developing optimized and reproducible manufacturing processes for clinical and commercial-scale manufacturing of our product candidates, and none of our manufacturing processes have been validated for commercial production of our product candidates. In addition, we are still optimizing our protocols for the supply and transport of our product candidates for distribution to clinical trial sites. Although we are working to develop reproducible and commercially viable manufacturing processes for our product candidates, and effective protocols for the supply and transport of our product candidates, doing so is a difficult and uncertain task.

We may make changes as we continue to develop and refine the manufacturing and distribution processes for our product candidates for advanced clinical trials and commercialization, and we cannot be sure that even minor changes in these processes will not cause our product candidates to perform differently and affect the results of our ongoing and planned clinical trials or the performance of the product once commercialized. In some circumstances, changes in our manufacturing operations, including to our protocols, processes, materials or facilities used, may require us to perform additional preclinical or comparability studies, or to collect additional clinical data from patients prior to undertaking additional clinical studies or filing for regulatory approval for a product candidate. These requirements may lead to delays in our clinical development and commercialization plans for our product candidates, and may increase our development costs substantially.

 

The manufacturing processes for any products that we may develop are subject to FDA and foreign regulatory authority approval requirements, and we will need to meet, and our CMOs or other third party manufacturers will need to meet, all applicable FDA and foreign regulatory authority requirements on an ongoing basis. The requirements to manufacture ProTmune in close proximity to transplant centers within a short period of time before transplantation present unprecedented complexities associated with ensuring consistent manufacture in compliance with regulatory requirements as necessary for marketing approval. Our existing product candidates are currently manufactured by us or by third-party cell processing facilities or CMOs, including facilities operated by or affiliated with our clinical sites, and we may be required to identify alternative protocols, processes, materials or facilities for the manufacture of any of these product candidates in compliance with applicable regulatory requirements. In addition, we may be required to make changes to our protocols for the supply and transport of our product candidates to enable effective distribution of our product candidates.  Any modifications to our manufacturing and supply protocols, processes, materials or facilities, and any delays in, or inability to, establish acceptable manufacturing and supply operations for our product candidates could require us to incur additional development costs or result in delays to our clinical development. If we or our CMOs or other third-party manufacturers are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the regulatory approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our CMOs or other third-party manufacturers will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay initiation or completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations and prospects.

Our inability to manufacture sufficient quantities of our product candidates, or the loss of our third-party contract manufacturers, or our or their failure to supply sufficient quantities of our product candidates at acceptable quality levels or prices, or at all, would materially and adversely affect our business.

Developing manufacturing processes to support clinical studies and commercialization requirements is a difficult and uncertain task, and there are risks associated with scaling to the level required for clinical trials or commercialization, including, among others, cost overruns, potential problems with process scale-out, process reproducibility, stability and purity issues, lot consistency, and timely availability of acceptable reagents and raw materials. If we are unable to scale to the level required for the conduct of clinical trials or commercialization, we may not be able to produce our product candidates in a sufficient quantity to meet demand.

While certain components required for the production of our product candidates are currently manufactured internally at our facilities, we rely, and expect to continue to rely, on third parties for the manufacture of other components and also to manufacture our product candidates for use in conducting clinical trials. As such, we are required to transfer certain manufacturing process know-how and certain intermediates to third parties, including clinical cell processing facilities operated by our clinical trial sites, and larger-scale facilities operated by either a CMO, or by us, to facilitate manufacture of our product candidates for clinical trials and commercialization. Transferring manufacturing testing and processes and know-how is complex and involves review and incorporation of both documented and undocumented processes that may have evolved over time. In addition, transferring production to different facilities may require utilization of new or different processes to meet the specific requirements of a given facility. We and any CMOs or third parties that we engage for manufacturing our product candidates will need to conduct significant development work to transfer these processes and manufacture each of our product candidates for clinical trials and commercialization. In addition, we may be required to demonstrate the comparability of material generated by any CMO or third parties that we engage for manufacturing our product candidates with material previously produced and used in testing. Any inability to manufacture comparable drug product by us or our CMOs could delay the continued development of our product candidates.

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In addition to relying on third parties for the manufacture of our product candidates, we also manufacture certain of our product candidates ourselves, and intend to manufacture some or all of the clinical supply of FT500, FT516, and FT596 for our ongoing and planned clinical trials. To do so, we will need to scale up our own manufacturing operations, as we do not currently have the infrastructure or capability internally to manufacture sufficient quantities of each of our product candidates to support the conduct of each of our clinical trials or commercialization of each of our product candidates, if approved. Accordingly, we will be required to make significant investments to expand our existing GMP manufacturing capabilities and facilities, establish additional GMP manufacturing facilities, conduct GMP production, and process and scale up development and technology transfer activities for the manufacture of our product candidates, and our efforts to scale our own manufacturing operations may not succeed. For example, we may encounter problems with shortages of qualified personnel, key contractors, laboratory equipment, and materials and supplies for the manufacture of our product candidates. Further, delays in commissioning and receiving regulatory approvals for our manufacturing capabilities or facilities, including new facilities, could delay our development plans, including the initiation and conduct of our ongoing and planned clinical trials, and thereby limit our opportunities for growth. In addition, we and our third-party manufacturers may have limited manufacturing capacity for certain product candidates or components, and we may not be able to locate additional or replacement manufacturing capacity on a reasonable basis or at all.

Even if we are successful in developing manufacturing capabilities sufficient for clinical and commercial supply, problems with manufacturing operations, including difficulties with production costs and yields, quality control, stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient supplies of our product candidates for our ongoing and planned clinical trials or eventual commercialization. Furthermore, certain of the components currently used in manufacturing our product candidates are research-grade only, and we may encounter problems obtaining or achieving adequate quantities and quality of clinical grade materials that meet FDA, European Medicines Agency, or other applicable standards or specifications with consistent and acceptable production yields and costs. In addition, if contaminants are discovered in our supply of product candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Any such events could delay or prevent our ability to obtain regulatory approval for or commercialize our product candidates, which would adversely affect our business, financial condition and results of operations.

Because our approach to the development of product candidates is based on novel and unproven technologies, it is subject to a substantial degree of technological uncertainty and we may not succeed in developing any of our product candidates.

All of our product candidates are currently in research, preclinical or clinical development. Only a small number of research and development programs ultimately result in commercially successful drugs. The development of cell therapies is a relatively new and emerging field, and the scientific research that forms the basis of our efforts to discover and develop programmed cellular immunotherapies is ongoing. We may determine to incorporate information learned from this research into the design of our ongoing Phase 2 clinical trial of ProTmune and our ongoing Phase 1 clinical trials of our iPSC product candidates, as well as our planned future clinical trials, which could delay or impair our clinical development activities. We may ultimately discover that our product candidates do not possess certain properties required for therapeutic effectiveness or protection from toxicity in our target patient populations. In addition, our product candidates may demonstrate different chemical and pharmacological properties in patients than they do in laboratory studies. It may take many years before we develop a full understanding of the pharmacological properties of our product candidates, and we may never know precisely how they function in vivo. As with any new biologic or product developed using novel technologies, our product candidates have an unknown immunogenicity profile.  As a result, our product candidates may trigger immune responses that inhibit their therapeutic effects or cause adverse side effects. In addition, one or more of our product candidates may: 

 

 

 

 

Any such problems that affect one of our product candidates may have an unfavorable impact on all of our product candidates. As a result, we may never succeed in developing a marketable product and we may never become profitable, which would have an adverse effect on our business, prospects, financial condition, results of operations, and market price of shares of our common stock.

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If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

We are required to identify and enroll a sufficient number of patients with the disease under investigation for each of our ongoing and planned clinical trials of our product candidates, and we may not be able to identify and enroll a sufficient number of patients, or those with required or desired characteristics and who meet certain criteria, in a timely manner. In addition, we will be competing with other clinical trials of product candidates being developed by our competitors in the same therapeutic areas, and potential patients who might be eligible for enrollment in one of our clinical trials may instead choose to enroll in a trial being conducted by one of our competitors.

Our ability, and the ability of investigators, to enroll patients in our ongoing and planned clinical trials of our product candidates is affected by factors including:

If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have an adverse effect on our business, prospects, financial condition, results of operations, and market price of shares of our common stock.

Development of our product candidates will require substantial additional funding, without which we will be unable to complete preclinical or clinical development of, or obtain regulatory approval for, our product candidates.

We are currently advancing multiple product candidates through clinical development, and conducting preclinical research and development activities in our other programs. Drug development is expensive, and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance our current product candidates in clinical trials and seek to initiate clinical development for additional product candidates.

As of December 31, 2019, our cash and cash equivalents and investments were $260.9 million. We intend to use our cash and cash equivalents and investments primarily to fund the advancement and clinical development of our current product candidates and our ongoing preclinical, discovery and research programs, and for working capital and general corporate purposes. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic and licensing arrangements or a combination of these approaches. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize our existing product candidates and any other product candidates we may identify and develop. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations. Our future capital requirements will depend on many factors, including, but not limited to:

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Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at a different stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

If we cannot raise additional capital or obtain adequate funds, we may be required to curtail significantly our research and clinical programs or may not be able to continue our research or clinical development of our product candidates. Our failure to raise additional capital, or obtain adequate funds, will have a material adverse effect on our business, prospects, financial condition, results of operations, and market price of shares of our common stock.

The clinical development of our product candidates could be substantially delayed if we are required to conduct unanticipated studies, including preclinical studies or clinical trials, or if the FDA imposes other requirements or restrictions including on the manufacture, of our product candidates.

The FDA may require us to generate additional preclinical, product, manufacturing, or clinical data as a condition to continuing our current clinical trials, or initiating and conducting any future clinical trials of our current product candidates or other cell product candidates that we may identify. Additionally, the FDA may in the future have comments, or impose requirements, on the conduct of our clinical trials of ProTmune, FT500, or FT516, or the initiation of clinical trials for FT596 or any of our other iPSC-derived cell product candidates, including the protocols, processes, materials and facilities we use to manufacture our product candidates and potential future product candidates in support of clinical trials. Any requirements to generate additional data, or redesign or modify our protocols, processes, materials or facilities, or other additional comments, requirements or impositions by the FDA, may cause delays in the initiation or conduct of the current or future clinical trials for our product candidates and subsequent development activities for our product candidates, and could require us to incur additional development or manufacturing costs and resources, seek funding for these increased costs or resources or delay our timeline for, or cease, our preclinical or clinical development activities for our product candidates, or could create uncertainty and additional complexity in our ability to obtain regulatory approval for our product candidates.

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Further, if the results of our clinical trials are inconclusive, or if there are safety concerns or adverse events associated with our existing product candidates or any other product candidates we may identify, we may:

Even if our current and planned clinical trials are successful, we will need to conduct additional clinical trials, which may include registrational trials, trials in additional patient populations or under different treatment conditions, and trials using different manufacturing protocols, processes, materials or facilities or under different manufacturing conditions, before we are able to seek approvals for our product candidates from the FDA and regulatory authorities outside the United States to market and sell these product candidates. If we fail to meet the requirements to support continued clinical development, our clinical development activities for any of our product candidates are delayed or suspended, or we fail to obtain or maintain regulatory approvals with an acceptable scope, our business, prospects, financial condition and results of operations will be harmed.

We are pursuing multiple programs and product candidates in our novel cell therapy development pipeline using an approach that is designed to enable rapid incorporation of new product features. If we elect to incorporate these new features into next-generation product candidates, this may render our existing product candidates obsolete, and we may devote our limited resources in pursuit of a particular program for which there is a greater potential for success and fail to capitalize on development opportunities or product candidates including those which may be more advanced in development.

We focus on the development of programmed cellular immunotherapies for cancer and immune disorders, including NK- and T-cell immuno-oncology programs that encompass off-the-shelf engineered product candidates derived from clonal master iPSC lines, and immuno-regulatory programs. Because our iPSC product platform is designed to enable rapid incorporation of novel functional product features in an evolving clinical setting, we may elect to incorporate these discoveries into next-generation product candidates that render our existing product candidates, including product candidates under clinical development, obsolete. Additionally, because we have limited financial and personnel resources, we may elect or be required to abandon or delay the pursuit of opportunities with existing or future product candidates, including those that may be more advanced in development than those we ultimately elect to pursue. Due to these factors, our spending on current and future research and development programs and product candidates and the scientific innovation arising from these expenditures, may not yield commercially viable product candidates.

We study our product candidates in patient populations with significant comorbidities that may result in deaths or serious adverse or unacceptable side effects and require us to abandon or limit our clinical development activities.

Patients treated with our current product candidates in our ongoing clinical trials, as well as patients who may undergo treatment with FT596 and other product candidates that we may develop, may also receive chemotherapy, radiation, and/or other high dose or myeloablative treatments in the course of treatment of their disease, and may therefore experience side effects or adverse events, including death, that are unrelated to our product candidates. While these side effects or adverse events may be unrelated to our product candidates, they may still affect the success of our clinical studies. The inclusion of critically ill patients in our clinical studies may result in deaths or other adverse medical events due to underlying disease or to other therapies or medications that such patients may receive. Any of these events could prevent us from advancing our product candidates through clinical development, and from obtaining regulatory approval, and would impair our ability to commercialize our product candidates. Any inability to advance our existing product candidates or any other product candidate through clinical development would have a material adverse effect on our business, and the value of our common stock would decline.

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Because our product candidates are based on novel technologies, it is difficult to predict the regulatory approval process and the time, the cost and our ability to successfully initiate, conduct and complete clinical development, and obtain the necessary regulatory and reimbursement approvals, required for commercialization of our product candidates.

Our cell programming technology and platform for generating cell therapy products using iPSCs represent novel therapeutic approaches, and to our knowledge there are currently no iPSC-derived cell products approved anywhere in the world for commercial sale. As such, it is difficult to accurately predict the type and scope of challenges we may incur during development of our product candidates, and we face uncertainties associated with the preclinical and clinical development, manufacture and regulatory requirements for the initiation and conduct of clinical trials, regulatory approval, and reimbursement required for successful commercialization of these product candidates. In addition, because our iPSC-derived cell product candidates are all in the early clinical or preclinical stage, we are currently assessing safety in humans and have not yet been able to assess the long-term effects of treatment. Animal models and assays may not accurately predict the safety and efficacy of our product candidates in our target patient populations, and appropriate models and assays may not exist for demonstrating the safety and purity of our product candidates, particularly FT500, FT516, FT596, and any other iPSC-derived cell product candidates we may develop, as required by the FDA and other regulatory authorities for ongoing clinical development and regulatory approval.

The preclinical and clinical development, manufacture, and regulatory requirements for approval of novel product candidates such as ours can be more expensive and take longer than for other more well-known or extensively studied pharmaceutical or biopharmaceutical product candidates due to a lack of prior experiences on the side of both developers and regulatory agencies. Additionally, due to the uncertainties associated with the preclinical and clinical development, manufacture, and regulatory requirements for approval of our product candidates, we may be required to modify or change our preclinical and clinical development plans or our manufacturing activities and plans, or be required to meet stricter regulatory requirements for approval. Any such modifications or changes could delay or prevent our ability to develop, manufacture, obtain regulatory approval or commercialize our product candidates, which would adversely affect our business, financial condition and results of operations.

Cellular immunotherapies, and stem cell therapies and iPSC-derived cell therapies in particular, represent relatively new therapeutic areas, and the FDA has cautioned consumers about potential safety risks associated with cell therapies. To date, there are relatively few approved cell therapies. As a result, the regulatory approval process for product candidates such as ours is uncertain and may be more expensive and take longer than the approval process for product candidates based on other, better known or more extensively studied technologies and therapeutic approaches. For example, there are currently no FDA approved products with a label designation that supports the use of a product to prevent acute graft-versus-host disease in patients undergoing allogeneic HSCT, which makes it difficult to determine the clinical endpoints and data required to support an application or regulatory approval, and the time and cost required to obtain regulatory approval in the United States for ProTmune.

Regulatory requirements in the United States and in other countries governing cell therapy products have changed frequently and the FDA or other regulatory bodies may change the requirements, or identify different regulatory pathways, for approval for any of our product candidates. For example, within the FDA, the Center for Biologics Evaluation and Research, or CBER, restructured and created a new Office of Tissues and Advanced Therapies to better align its oversight activities with FDA Centers for Drugs and Medical Devices. It is possible that over time new or different divisions may be established or be granted the responsibility for regulating cell and/or gene therapy products, including iPSC-derived cell products, such as ours. As a result, we may be required to change our regulatory strategy or to modify our applications for regulatory approval, which could delay and impair our ability to complete the preclinical and clinical development and manufacture of, and obtain regulatory approval for, our product candidates. Changes in regulatory authorities and advisory groups, or any new requirements or guidelines they promulgate, may lengthen the regulatory review process, require us to perform additional studies, increase our development and manufacturing costs, lead to changes in regulatory pathways, positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we will be required to consult with the FDA and other regulatory authorities, and our product candidates will likely be reviewed by an FDA advisory committee. We also must comply with applicable requirements, and if we fail to do so, we may be required to delay or discontinue development of our product candidates. Delays or unexpected costs in obtaining, or the failure to obtain, the regulatory approval necessary to bring a potential product to market could impair our ability to generate sufficient product revenues to maintain our business.

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Preliminary data and interim results we disclose, and results from earlier studies, may not be predictive of the final results, or of later studies or future clinical trials.

All of our product candidates are still in an early stage of development, and we cannot be assured that the development of any of our product candidates will ultimately be successful. Although we may from time to time disclose results from preclinical testing or preliminary data or interim results from clinical studies of our product candidates, such results from preclinical testing, process development and manufacturing activities, and clinical studies, including interim clinical trial results as of specified data cutoff dates and results of earlier clinical studies with similar product candidates, are not necessarily predictive of future results, including later clinical trial results. While we have demonstrated in preclinical models that a single administration of ProTmune resulted in a statistically-significant reduction in GvHD score and improvement in survival, as compared to vehicle-treated cells, we may not observe similar results in future preclinical or clinical studies of ProTmune, including our Phase 1/2 PROTECT study. Additionally, the data reported from the Phase 1 stage of PROTECT as of the November 26, 2018 data cut-off date may not continue for these subjects or be repeated or observed in ongoing or future studies involving ProTmune, including in the Phase 2 stage of the PROTECT study. It is possible that subjects for whom events of acute GvHD have been reduced or eliminated may experience acute GvHD in the future, as there is limited data concerning long-term safety and efficacy following treatment with ProTmune. Accordingly, ProTmune may not demonstrate in the Phase 2 stage of PROTECT, or in subsequent trials, an adequate safety or efficacy profile to support further development or commercialization.

The results of our current and future clinical trials may differ from results achieved in earlier preclinical and clinical studies for a variety of reasons, including:

From time to time, we also publish interim, “top-line,” or preliminary data from our clinical studies. Interim data from clinical trials that we are conducting are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues, the duration of treatment increases and more patient data become available. Preliminary or “top-line” 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 published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Material adverse changes between preliminary, “top-line,” or interim data and final data could significantly harm our business prospects.

Even if we obtain regulatory approval for a product candidate, our products will remain subject to regulatory scrutiny.

Any product candidate for which we obtain marketing approval, along with the manufacturing protocols, processes, materials and facilities, qualification testing, post-approval clinical data, labeling and promotional activities for such product, will be subject to continual and additional requirements of the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information, reports, registration and listing requirements, requirements relating to current cGMP, quality control, quality assurance and corresponding maintenance of records and documents, and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of pharmaceutical and biological products to ensure such products are marketed only for the approved indications and in accordance with the provisions of the approved labeling. Later discovery of previously unknown problems with our product candidates, manufacturing operations, or failure to comply with regulatory requirements, may lead to various adverse conditions, including significant delays in bringing our product candidates to market and or being precluded from manufacturing or selling our product candidates, any of which could significantly harm our business.

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We expect to rely on orphan drug status to develop and commercialize certain of our product candidates, but our existing orphan drug designations may not confer marketing exclusivity or other expected commercial benefits and we may not be able to obtain orphan drug designations for our other product candidates.

We expect to rely on orphan drug exclusivity for ProTmune and may rely on orphan drug exclusivity for other product candidates that we may develop. Orphan drug status confers seven years of marketing exclusivity in the United States under the Federal Food, Drug, and Cosmetic Act, and up to ten years of marketing exclusivity in Europe for a particular product in a specified indication, subject to certain conditions. We have been granted orphan drug designation in the United States for ex vivo programmed mobilized peripheral blood for the prevention of GvHD in patients undergoing allogeneic hematopoietic cell transplantation, and in the European Union for ProTmune for treatment in hematopoietic stem cell transplantation. While we have been granted these orphan designations, even if we are the first to obtain marketing approval of our product candidates for the applicable indications, we will not be able to rely on these designations to exclude other companies from manufacturing or selling biological products using the same principal molecular structural features for the same indication beyond these timeframes. Furthermore, any marketing exclusivity in Europe can be reduced from ten years to six years if the initial designation criteria have significantly changed since the market authorization of the orphan product. In addition, we may be unable to obtain orphan drug designations for any other product candidates that we are currently developing or may pursue.

For any product candidate for which we are granted orphan drug designation in a particular indication, it is possible that another company also holding orphan drug designation for the same product candidate will receive marketing approval for the same indication before we do. If that were to happen, our applications for that indication may not be approved until the competing company’s period of exclusivity expires. Even if we are the first to obtain marketing authorization for an orphan drug indication in the United States, there are circumstances under which a competing product may be approved for the same indication during the seven-year period of marketing exclusivity, such as if the later product is shown to be clinically superior to our orphan product, or if the later product is deemed a different product than ours. Further, the seven-year marketing exclusivity would not prevent competitors from obtaining approval of the same product candidate as ours for indications other than those in which we have been granted orphan drug designation, or for the use of other types of products in the same indications as our orphan product.

We may be subject to certain regulations, including federal and state healthcare fraud and abuse laws and health information privacy and security laws. Any failure to comply with these regulations could have a material adverse effect on our business and financial condition.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be subject to various federal and state healthcare laws, including, without limitation, fraud and abuse laws, false claims laws, data privacy and security laws, as well as transparency laws regarding payments or other items of value provided to healthcare providers. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. It is possible that some of our business activities could be subject to challenge under one or more of these laws. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Risks Related to Our Reliance on Third Parties

We have limited experience manufacturing our product candidates on a clinical scale, and no experience manufacturing on a commercial scale. We are, and expect to continue to be, dependent on third parties to conduct some or all aspects of manufacturing of our product candidates for use in clinical trials and for commercial sale, if approved. Our business could be harmed if those third parties fail to perform satisfactorily.

We currently rely, and expect to continue to rely, on third parties, including cell processing facilities associated with clinical trial sites, to manufacture our product candidates, or certain components required for the manufacture of our product candidates, for use in conducting clinical trials and for commercial sale upon approval of any of our product candidates In addition, we have not yet caused our product candidates to be manufactured or processed on a commercial scale and may not be able to do so for any of our product candidates.

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The facilities used to manufacture our product candidates, including our own facilities, must be evaluated by the FDA or other foreign regulatory agencies pursuant to inspections that will be conducted after we submit an application to the FDA or other foreign regulatory agencies. If the FDA or a comparable foreign regulatory authority finds deficiencies with or does not approve these facilities for the manufacture of our product candidates or if it later finds deficiencies or withdraws any such approval in the future, or in the event of problems with any of the manufacturing facilities that we rely on to manufacture our product candidates or materials, we may not be able to locate additional or replacement facilities for such product candidates or materials in a timely manner and on commercially reasonable terms, or at all. This would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

Reliance on third parties for manufacture of our product candidates and components utilized in manufacturing our product candidates entails certain risks, including reliance on the third party for regulatory compliance and quality assurance, the possibility that the third-party manufacturer does not maintain the financial, personnel or other resources to meet its obligations, the possibility that the third party fails to manufacture such components, or our product candidates or any products we may eventually commercialize, in accordance with our specifications, misappropriation of our proprietary information, including our trade secrets and know-how, and the possibility of termination of our manufacturing relationship by the third party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our product candidates and any products that we may eventually commercialize be manufactured according to cGMP, cGTP and similar jurisdictional standards. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. The FDA or similar foreign regulatory agencies may also implement new standards at any time, or change their interpretations and enforcement of existing standards for manufacture, packaging or testing of products. We have little control over our manufacturers’ compliance with these regulations and standards. Any failure by third parties that are manufacturing our product candidates or components for such product candidates to comply with cGMP or cGTP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of such components or product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates. In addition, such failure could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure of outside supplies of the product candidate, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention of product, refusal to permit the import or export of products, injunction or imposing civil and criminal penalties.

We currently depend on third-party cell processing facilities for the manufacture of ProTmune under specific conditions. Any failure by these facilities to manufacture our product candidates consistently and under the proper conditions may result in delays to our clinical development plans and impair our ability to obtain approval for, or commercialize, these product candidates.

Clinical cell processing facilities operated by or affiliated with our clinical sites currently manufacture ProTmune for use in our clinical trials of these product candidates. We will be required by the FDA to standardize the manufacture of ProTmune, and any other product candidates we may develop, including our oversight for facility and raw material and vendor qualification through to final product analytical testing and release. The manufacture of ProTmune for use in registrational clinical trials and commercialization will be subject to the requirements of applicable regulatory authorities, including the FDA, and the anticipated manufacture of these product candidates for commercialization may require each of the clinical cell processing facilities at which ProTmune are manufactured to comply with cGMP and other regulatory requirements, and be subject to inspections by the FDA or other applicable regulatory authorities that would be conducted after the submission of a BLA or other marketing application. Although we are responsible for ensuring compliance with applicable regulatory requirements and for overseeing all aspects of product manufacture and release prior to applying for marketing approval, we do not control the activities of these third-party cell processing facilities and are completely dependent on their ability to comply with regulatory requirements and to properly execute the protocol for the manufacture of any of our product candidates. In particular, if the FDA requires each of the clinical cell processing facilities to comply with cGMP, there can be no guarantee that they will be able to do so. Because of these manufacturing requirements, if the applicable clinical cell processing facilities are unable to manufacture any of our product candidates, including ProTmune, in a manner that conforms to our specifications and the FDA’s strict regulatory requirements, we may be required to identify alternative processes or facilities for the manufacture of such product candidate, which may require us to spend significant additional time and resources, and would impair our ability to manufacture, complete the clinical development of, and to commercialize, such product candidate. To comply with applicable regulatory and manufacturing requirements, the clinical cell processing facility may be required to possess or obtain certain equipment, including but not limited to biosafety cabinets, warming devices, cell washing devices, freezers or other materials, or to modify aspects of its operations, including its physical facility or layout, environmental systems, monitoring systems, quality systems or training procedures. If a clinical cell processing facility is unwilling or unable to comply with these regulatory or manufacturing requirements, it will be restricted or prohibited from manufacturing such product candidate and making it available for administration to patients. Any failure by these clinical cell processing facilities to properly manufacture ProTmune may adversely affect the safety and efficacy profile of such product candidate or cause the FDA or other regulatory authorities to impose restrictions or prohibitions on the manufacture and use of ProTmune in both the clinical and the commercial setting, which would have an adverse effect on our business.

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We expect to depend on strategic partnerships and collaboration arrangements, such as our collaboration arrangement with Ono under the Ono Agreement, for the development and commercialization of certain of our product candidates in certain indications or geographic territories, and if these arrangements are unsuccessful, this could result in delays and other obstacles in the development, manufacture or commercialization of any of our product candidates and materially harm our results of operations.

For some programs, we currently depend, and expect to continue to depend, on third-party collaborators and strategic partners to design and conduct our clinical trials. As a result, we may not be able to conduct these programs in the manner or on the time schedule we currently contemplate, which may negatively impact our business operations. In addition, if any of these collaborators or strategic partners withdraw support for our programs or proposed products, or otherwise impair their development, our business could be negatively affected.

In addition, we currently depend, and expect to continue to depend, upon strategic collaboration partners for the financial resources and conduct of activities for the development and commercialization of certain of our product candidates. For example, under the Ono Agreement we have agreed to jointly develop and commercialize with Ono two iPSC-derived CAR T cell product candidates, and additionally we are relying on Ono for the conduct of certain activities relating to the development and commercialization of these products. As such, we will not have sole control over the course of development of these product candidates arising under the Ono Agreement, or any other product candidates that we may develop under a future strategic partnership or collaboration arrangement. This lack of control over the development and commercialization of certain of our product candidates could cause delays or other difficulties in the development and commercialization of such product candidates, which may prevent completion of research and development activities and intended IND filings in a timely fashion, if at all. Our reliance on strategic collaboration partners, including Ono, for the development and commercialization of our product candidates entails risks to which we may not otherwise be subject, including:

In addition, the termination of the Ono Agreement or any future strategic partnership or collaboration arrangement that we enter into may prevent us from receiving any milestone, royalty payments, sharing of profits, and other benefits under such agreement. Any of these events could have a material adverse effect on our ability to develop and commercialize our product candidates, including the two iPSC-derived CAR T cell product candidates being developed under the Ono Agreement, and may adversely impact our results of operations and financial condition.

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Cell-based therapies depend on the availability of reagents and specialized materials and equipment which in each case are required to be acceptable to the FDA and foreign regulatory agencies, and such reagents, materials, and equipment may not be available to us on acceptable terms or at all. We rely on third-party suppliers for various components, materials and equipment required for the manufacture of our product candidates and do not have supply arrangements for certain of these components.

Manufacturing our product candidates requires many reagents and other specialty materials and equipment, some of which are manufactured or supplied by small companies with limited resources and experience to support commercial biologics production. To date, we and our clinical cell processing facilities and CMOs have purchased equipment, materials and disposables, such as automated cell washing devices, automated cell warming units, commercially available media and cell transfer and wash sets, used for the manufacture of our existing product candidates from third-party suppliers. Some of these suppliers may not have the capacity to support commercial products manufactured under cGMP by biopharmaceutical firms or may otherwise be ill-equipped to support our needs. Reagents and other key materials from these suppliers may have inconsistent attributes and introduce variability into our manufactured product candidates, which may contribute to variable patient outcomes and possible adverse events. We rely on the general commercial availability of materials required for the manufacture of our product candidates, and do not have supply contracts with many of these suppliers and may not be able to obtain supply contracts with them on acceptable terms or at all. Even if we are able to enter into such contracts, we may be limited to a sole third-party for the supply of certain required components, including our pharmacologic modulators and components for our cell processing media. An inability to continue to source product from any of these suppliers, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands, or quality issues, could adversely affect our ability to satisfy demand for our product candidates, which could adversely and materially affect our product sales and operating results or our ability to conduct clinical trials, either of which could significantly harm our business.

If we are required to change suppliers, or modify the components, equipment, materials or disposables used for the manufacture of our product candidates, we may be required to change our manufacturing operations or clinical trial protocols or to provide additional data to regulatory authorities in order to use any alternative components, equipment, materials or disposables, any of which could set back, delay, or increase the costs required to complete our clinical development and commercialization of our product candidates. Additionally, any such change or modification may adversely affect the safety, efficacy, stability, or potency of our product candidates, and could adversely affect our clinical development of our product candidates and harm our business.

We face a variety of challenges and uncertainties associated with our dependence on human donor material for the manufacture of ProTmune.

ProTmune is manufactured from the blood of third-party donors, and therefore, the manufacture of ProTmune is subject to the availability and quality of the third-party donor material. The selection of the appropriate donor material for manufacture of ProTmune requires close coordination between clinical and manufacturing personnel.

ProTmune is manufactured using mobilized peripheral blood (mPB), which is currently procured directly by the clinical cell processing facilities from the National Marrow Donor Program (NMDP) for our ongoing Phase 1/2 PROTECT clinical study. The availability of mPB for the manufacture of ProTmune depends on a number of regulatory, political, economic and technical factors outside of our control, including:

Additionally, we do not have control over the supply, availability, price or types of mPB that these clinical cell processing facilities use in the manufacture of ProTmune. We rely heavily, and expect to continue to rely heavily, on these third parties to procure mPB that is collected in compliance with government regulations and within the current standard of care. In addition, we may identify specific characteristics of specific units of mPB, such as the volume and red blood cell content, which may limit the ability to use such units in the manufacture of ProTmune even though this mPB may otherwise be suitable for use in allogeneic transplant. As a result, the requirement for mPB to meet our specifications may limit the potential inventory of mPB eligible for use in the manufacture of ProTmune for our ongoing and any future clinical trials and for commercial supplies of ProTmune, if approved.

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In the United States, the banking and use of mPB does not require a BLA, and mPB is not an FDA licensed product. However, the FDA does require that units of mPB adhere to and meet the standards set forth by the Foundation for Accreditation for Cell Therapy (FACT), the NMDP, and the American Association of Blood Banks (AABB), as applicable. In our current Phase 1/2 PROTECT clinical trial of ProTmune, ProTmune is manufactured using unlicensed mPB units. It may be possible that in the future, regulatory policy could change, and the FDA may later require that mPB units be licensed, and that ProTmune be manufactured using only licensed mPB units. Any inability to procure sufficient supplies of mPB will adversely affect our ability to develop and commercialize ProTmune.

Further, manufacture of ProTmune from donor material involves complex processes, with specialized equipment and highly skilled and trained personnel. The processes for manufacturing ProTmune are susceptible to additional risks, given the need to maintain aseptic conditions throughout the manufacturing process. Contamination with viruses or other pathogens in either the donor material or materials utilized in the manufacturing process or ingress of microbiological material at any point in the process may result in contaminated or unusable product. Such contaminations increase the risk of adverse side effects and result in delays in the development of ProTmune.

We currently rely on third parties to conduct certain research and development activities and clinical trials of our product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to timely develop, manufacture, obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We rely upon third parties, including medical institutions, clinical investigators, cell processing laboratories, and clinical research organizations (CROs), for the conduct of certain research and preclinical development activities, process development and manufacturing activities, and for the conduct, management, and supervision of clinical trials of our product candidates. We do not have direct control over the activities of these third parties, and may have limited influence over their actual performance. Our reliance on these third parties and CROs does not relieve us of our responsibilities to ensure that our clinical studies are conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards.

We are responsible for complying, and we are responsible for ensuring that our third-party service providers and CROs comply, with applicable GCP for conducting activities for all of our product candidates in clinical development, including conducting our clinical trials, and recording and reporting data from these trials. Regulatory authorities enforce these regulations through periodic inspections of trial sponsors, principal investigators and trial sites. We cannot assure that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with applicable GCP requirements. In addition, our registrational clinical trials must be conducted with product produced under applicable regulatory requirements.

If these third parties and CROs do not successfully carry out their contractual duties or obligations, meet expected deadlines or successfully complete activities as planned, or if the quality or accuracy of the research, preclinical development, process development, manufacturing, or clinical data they obtain is compromised due to the failure to adhere to applicable regulatory and manufacturing requirements or for other reasons, our research, preclinical development, process development and manufacturing activities, and clinical trials, and the development of our product candidates, may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. Further, if our agreements with third parties or CROs are terminated for any reason, the development of our product candidates may be delayed or impaired, and we may be unable to advance our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

If conflicts arise between us and our collaborators or strategic partners, these parties may act in a manner adverse to us and could limit our ability to implement our strategies.

If conflicts arise between our corporate or academic collaborators or strategic partners and us, the other party may act in a manner adverse to us and could limit our ability to implement our strategies. Some of our academic collaborators and strategic partners are conducting multiple product development efforts within each area that is the subject of the collaboration with us. Our collaborators or strategic partners, however, 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 strategic partners or to which the collaborators or strategic partners have rights, may result in the withdrawal of our collaborator’s or partner’s support for our product candidates.

Some of our collaborators or strategic partners could also become our competitors in the future. Our collaborators or strategic partners could develop competing products, 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 our product candidates. Any of these developments could harm our product development efforts.

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Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property, or obtain and maintain patent protection for our technology and product candidates, other companies could develop products based on our discoveries, which may reduce demand for our products and harm our business.

Our commercial success will depend in part on our ability to obtain and maintain intellectual property protection for our product candidates, the operations used to manufacture them and the methods for using them, and also for our cell programming technology in order to prevent third parties from making, using, selling, offering to sell or importing our product candidates or otherwise exploiting our cell programming approach. The scope of patent protection in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are uncertain. We own and have exclusive licenses to patent portfolios for our product candidates and cell programming technology, although we cannot be certain that our existing patents and patent applications provide adequate protection or that any additional patents will issue to us with claims that provide adequate protection of our other product candidates. Further, we cannot predict the breadth of claims that may be enforced in our patents if we attempt to enforce them or if they are challenged in court or in other proceedings. If we are unable to secure and maintain protection for our product candidates and cell programming technology, or if any patents we obtain or license are deemed invalid and unenforceable, our ability to commercialize or license our technology could be adversely affected.

Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours or important to our business. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition, reexamination, review, reissue, post grant review or invalidity proceedings before U.S. or non-U.S. patent offices. The scope, validity or enforceability of our patents or the patents of our licensors may be challenged in such proceedings in either the courts or patent offices in the United States and abroad, and our business may be harmed if the coverage of our patents or the patents of our licensors is narrowed, or if a patent of ours or our licensors is judged invalid or unenforceable, in any such proceedings.

We depend on our licensors to prosecute and maintain patents and patent applications that are material to our business. Any failure by our licensors to effectively protect these intellectual property rights could adversely affect our business and operations.

Certain rights to our key technologies and product candidates, including intellectual property relating to ProTmune and our iPSC technology are licensed from third parties. As a licensee of third-party intellectual property, we rely on our licensors to file and prosecute patent applications and maintain patents, and otherwise protect the licensed intellectual property under some of our license agreements. We have not had and do not have primary control over these activities for certain of our licensed patents, patent applications and other intellectual property rights, and we cannot be certain that such activities will result in valid and enforceable patents and other intellectual property rights. Additionally, our licensors may have the right to control enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents and we cannot be certain that our licensors will allocate sufficient resources or prioritize enforcement of such patents or defense of such claims to protect our interests in the licensed patents. Even if we are not a party to these legal actions, an adverse outcome could harm our business because it might prevent us from continuing to license intellectual property that we may need to operate our business.

If we fail to comply with our obligations under our license agreements, we could lose rights to our product candidates or key technologies.

We have obtained rights to develop, market and sell some of our product candidates, including ProTmune, FT596 and FT819 through intellectual property license agreements with third parties. These license agreements impose various diligence, milestone payment, royalty and other obligations on us. If we fail to comply with our obligations under our license agreements, we could lose some or all of our rights to develop, market and sell products covered by these licenses, and our ability to form collaborations or partnerships may be impaired. In addition, disputes may arise under our license agreements with third parties, which could prevent or impair our ability to maintain our current licensing arrangements on acceptable terms and to develop and commercialize the affected product candidates.

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We may be involved in litigation or other proceedings relating to the enforcement or defense of patent and other intellectual property rights, which could cause us to divert our resources and could put our intellectual property at risk.

If we choose to go to court to stop another party from using the inventions claimed in any patents we obtain, that individual or company has the right to ask the court to rule that such patents are invalid or should not be enforced against that third party. In addition to patent infringement lawsuits, we may be required to file interferences, oppositions, ex parte reexaminations, post-grant review, or inter partes review proceedings before the U.S. Patent and Trademark Office (the USPTO) and corresponding foreign patent offices. Litigation and other proceedings relating to intellectual property are unpredictable and expensive, and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in any such proceeding. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for research, development, and other activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating or successfully challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

There also is a risk that a court or patent office in such proceeding will decide that our patents or the patents of our licensors are not valid or are not enforceable, and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of such patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to such patents. If we were not successful in defending our intellectual property, our competitors could develop and market products based on our discoveries, which may reduce demand for our products.

We or our strategic partners may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing, or increase the costs of commercializing, our product candidates.

Our success will depend, in part, on our ability to operate without infringing the proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, ex parte reexaminations, post-grant review, and inter partes review proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

We cannot guarantee that the manufacture, use or marketing of our existing product candidates or any other product candidates that we develop, or the use of our cell programming technology, will not infringe third-party patents. There may be third-party patents or patent applications with claims to materials, cell compositions, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Our competitors may have filed, and may in the future file, patent applications covering products and technologies similar to ours. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover aspects of the manufacture of any of our product candidates, any compositions formed during the manufacture, or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire. Such a license may not be available on commercially reasonable terms or at all.

If a patent infringement suit were brought against us, we may be forced to stop or delay developing, manufacturing, or selling potential products that are claimed to infringe a third party’s intellectual property rights, unless that third-party grants us rights to use its intellectual property. If we are unable to obtain a license or develop or obtain non-infringing technology, or if we fail to defend an infringement action successfully, or if we are found to have infringed a valid patent, we may incur substantial monetary damages, encounter significant delays in bringing our product candidates to market and be precluded from manufacturing or selling our product candidates, any of which could harm our business significantly.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed alleged trade secrets.

In conducting our business operations, we have obtained confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or other parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we could lose valuable intellectual property rights or personnel, which could adversely affect our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

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We may be subject to claims challenging the inventorship of our patents and other intellectual property.

We may be subject to claims that former employees, collaborators, or other third parties have an interest in our patents or other intellectual property as an inventor or co-inventor. If we fail in defending any such claims, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. We may also be subject to monetary damages, and any of these outcomes could have a material adverse impact on our business.

Proprietary information and invention assignment agreements with our employees and third parties may not prevent unauthorized disclosure of our trade secrets and other proprietary information.

In addition to the protection afforded by patents, we also rely upon unpatented trade secrets and improvements, proprietary know-how, and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, through confidentiality agreements with our collaborators, employees and consultants. We also have invention or patent assignment agreements with our employees and some, but not all, of our collaborators and consultants. Trade secrets, however, may be difficult to protect, and if our employees, collaborators or consultants breach these agreements, we may not have adequate remedies for any such breach, and our trade secrets may otherwise become known or independently discovered by our competitors, which would adversely affect our business position.

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

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with any products that we may develop and commercialize, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology and pharmaceutical products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Changes in the patent law in the United States could diminish the value of patents in general, thereby impairing our ability to protect our product candidates and technology.

As is the case with other biotechnology companies, our success is heavily dependent on intellectual property rights, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore obtaining and enforcing biotechnology patents is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in 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 decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

The term of our patents may not be sufficient to effectively protect our market position and products.

Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Even if we obtain patents covering our product candidates, once the patent life has expired for a product, we may be open to competition from other products. If the lives of our patents are not sufficient to effectively protect our products and business, our business and results of operations will be adversely affected.

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Risks Related to the Commercialization of Our Product Candidates

We do not have experience marketing any product candidates and do not have a sales force or distribution capabilities, and if our products are approved we may be unable to commercialize them successfully.

We currently have no experience in marketing and selling therapeutic products. If any of our product candidates are approved for marketing, we intend to establish marketing and sales capabilities internally or we may selectively seek to enter into partnerships with other entities to utilize their marketing and distribution capabilities. If we are unable to develop adequate marketing and sales capabilities on our own or effectively partner with third parties, our product revenues will suffer.

The commercial success of our product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payers and others in the medical community.

The commercial success of our products, if approved for marketing, will depend in part on the medical community, patients and third-party payers accepting our product candidates as effective and safe. 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 our products, if approved for marketing, will depend on a number of factors, including:

Even if a potential product displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be known until after it is launched. Any failure to achieve market acceptance for our product candidates will harm our business, results and financial condition.

We expect to face uncertainty regarding the pricing of our existing product candidates and any other product candidates that we may develop. If pricing policies for our product candidates are unfavorable, our commercial success will be impaired.

Due to the novel nature of our product candidates, and the targeted indication of HSCT procedures in general and our cellular immunotherapy product candidates in particular, we face significant uncertainty as to the pricing of any such products for which we may receive marketing approval. While we anticipate that pricing for any cellular immunotherapy product candidates that we develop will be relatively high due to their anticipated use in the prevention or treatment of life-threatening diseases where therapeutic options are limited, the biopharmaceutical industry has recently experienced significant pricing pressures, including in the area of orphan drug products. In particular, drug pricing and other healthcare costs continue to be subject to intense political and societal pressures, which we anticipate will continue and escalate on a global basis. These pressures may result in harm to our business and reputation, cause our stock price to decline or experience periods of volatility and adversely affect results of operations and our ability to raise funds.

The insurance coverage and reimbursement status of newly-approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new products could limit our product revenues.

Our ability to commercialize any of our product candidates successfully will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers, and other organizations. The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford expensive treatments, such as HSCT or cellular immunotherapy. There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products by government and third-party payers. In particular, there is no body of established practices and precedents for reimbursement of cellular immunotherapies, and it is difficult to predict what the regulatory authority or private payer will decide with respect to reimbursement levels for novel products such as ours. Our products may not qualify for coverage or direct reimbursement, or may be subject to limited reimbursement. If reimbursement or insurance coverage is not available, or is available only to 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 sufficient to allow us to establish or maintain pricing to generate income.

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In addition, reimbursement agencies in foreign jurisdictions may be more conservative than those in the United States. 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 revenues and profits. Moreover, increasing efforts by governmental and third-party payers, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for our product candidates. Failure to obtain or maintain adequate reimbursement for any products for which we receive marketing approval will adversely affect our ability to achieve commercial success, and could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products, and our overall financial condition.

If the market opportunities for our product candidates are smaller than we believe they are, our revenues may be adversely affected and our business may suffer. Because the target patient populations of our product candidates are small, we must be able to successfully identify patients and capture a significant market share to achieve and maintain profitability.

We focus our research and development on product candidates for orphan indications and other rare diseases. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. These estimates may prove to be incorrect, and new studies may change the estimated incidence or prevalence of these diseases. The number of patients in the United States, Europe and elsewhere may turn out to be lower than expected or may not be otherwise amenable to treatment with our products, or new patients may become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operations and our business. Additionally, because our target patient populations are small, we will be required to capture a significant market share to achieve and maintain profitability.

Healthcare legislative or regulatory reform measures may have a negative impact on our business and results of operations.

In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. In March 2010, the ACA was passed, which substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. Since its enactment, there have been many judicial, President, and Congressional challenges to numerous aspects of the ACA. As a result, the full impact on our business of the ACA, the potential impacts of any challenges including any laws repealing and/or replacing elements of it, as well as the political uncertainty surrounding any repeal or replacement legislation, remain unclear.

Additionally, at the federal level, statutes and regulations routinely impact a variety of parameters relating to federal programs and Medicare. In July 2018, the Centers for Medicare and Medicaid Services (CMS) published a final rule permitting further collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. The full impact of these federal and state laws and regulations, as well as other new laws and reform measures that may be proposed and adopted in the future, remains uncertain, but may result in additional reductions in Medicare and other healthcare funding, which could have an adverse effect on customers for our product candidates, if approved, and, accordingly, our financial operations.

Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical and biologics pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in various congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products.

We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved drug. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our drugs.

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In addition, FDA regulations and guidance may be revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. The Trump administration has also taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these requirements will be interpreted and implemented and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. Any new regulations or guidance, or revisions or reinterpretations of existing regulations or guidance, may impose additional costs or lengthen FDA review times for our existing product candidates or any future product candidates we may develop. We cannot determine how changes in regulations, statutes, policies, or interpretations when and if issued, enacted or adopted, may affect our business in the future. Such changes could, among other things, require:

Such changes would likely require substantial time and impose significant costs, or could reduce the potential commercial value of our existing product candidates or other product candidates we may develop, and could materially harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any other products would harm our business, financial condition, and results of operations.

Risks Related to Our Business and Industry

The success of our existing product candidates is substantially dependent on developments within the field of HSCT and cellular immunotherapy, some of which are beyond our control.

Our product candidates are designed and are being developed as therapeutic entities for use as cellular immunotherapies. Any adverse developments in the field of cellular immunotherapy generally, and in the practice of HSCT in particular, will negatively affect our ability to develop and commercialize our product candidates. If the market for HSCT procedures declines or fails to grow at anticipated levels for any reason, or if the need for patients to undergo HSCT procedures is obviated due to the development and commercialization of therapeutics targeting the underlying cause of diseases addressed by HSCT, our business prospects will be significantly harmed.

We face competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We face competition from biotechnology and pharmaceutical companies, universities, and other research institutions, and many of our competitors have greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing organizations and facilities. In particular, there are several companies and institutions developing products that may obviate the need for HSCT, may be competitive to product candidates in our research and development pipeline, or may render our product candidates obsolete or noncompetitive. Should one or more of these products be successful, the market for our products may be reduced or eliminated, and we may not achieve commercial success.

We may not be able to manage our business effectively if we are unable to attract and retain key personnel and consultants.

We may not be able to retain or attract qualified management, finance, scientific and clinical personnel and consultants due to the intense competition for qualified personnel and consultants among biotechnology, pharmaceutical and other businesses. If we are not able to retain and attract necessary personnel and consultants to perform the requisite operational roles and accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

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If we fail to maintain an effective system of disclosure controls and procedures and internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are required to comply with the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act), and the related rules and regulations of the SEC, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing and maintaining corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.

We cannot assure that we will not have material weaknesses or significant deficiencies in our internal control over financial reporting. If we are unable to successfully remediate any material weakness or significant deficiency in our internal control over financial reporting, or identify any material weaknesses or significant deficiencies that may exist, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, and our stock price may decline materially as a result.

If we engage in an acquisition, reorganization or business combination, we will incur a variety of risks that could adversely affect our business operations or our stockholders.

From time to time, we have considered, and we will consider in the future, strategic business initiatives intended to further the expansion and development of our business. These initiatives may include acquiring businesses, technologies or products or entering into business combinations with other companies. If we pursue such a strategy, we could, among other things:

Although we intend to evaluate and consider acquisitions, reorganizations and business combinations in the future, we have no agreements or understandings with respect to any acquisition, reorganization or business combination at this time.

We face potential product liability exposure far in excess of our limited insurance coverage.

The use of our product candidates in clinical trials, and the sale of any products for which we obtain marketing approval, exposes us to the risk of product liability claims. Product liability claims might be brought against us by participants in clinical trials, hospitals, medical centers, healthcare providers, pharmaceutical companies, and consumers, or by others selling, manufacturing or otherwise coming into contact with our product candidates. We carry product liability insurance and we believe our product liability insurance coverage is sufficient in light of our current clinical programs. In addition, if and when we obtain marketing approval for product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain insurance coverage for any approved products on commercially reasonable terms or in sufficient amounts to protect us against losses due to liability.

On occasion, large judgments have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. In addition, under some of our agreements with clinical trial sites, we are required to indemnify the sites and their personnel against product liability and other claims. A successful product liability claim, or a series of claims, brought against us or any third parties whom we are required to indemnify could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.

Patients with the diseases targeted by our product candidates are often already in severe and advanced stages of disease and have both known and unknown significant pre-existing and potentially life-threatening health risks. During the course of treatment, patients may suffer adverse events, including death, for a variety of reasons. Such events, whether or not resulting from our product candidates, could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively affect or end our opportunity to receive or maintain regulatory approval to market our products, or require us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not believe that an adverse event is related to our products, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt our development and commercialization efforts, delay our regulatory approval process, or impact and limit the type of regulatory approvals our product candidates receive or maintain. As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial condition or results of operations.

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If we fail to comply with environmental, health, and safety laws and regulations, including regulations governing the handling, storage or disposal of hazardous materials, we could become subject to fines or penalties or incur costs that could harm our business.

We are subject to numerous environmental, health, and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment, and disposal of hazardous materials and wastes. Our operations involve the use of hazardous materials, including chemicals, biological materials and infectious agents. Our operations also may produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We will not be able to eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from any use by us of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological or hazardous materials.

In addition, we may incur substantial costs in order to comply with current or future environmental, health, and safety laws and regulations. These current or future laws and regulations may impair our research, development, or production efforts. Our failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA or foreign regulators, to provide accurate information to the FDA or foreign regulators, to comply with healthcare fraud and abuse laws and regulations in the United States and abroad, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. Employee and independent contractor misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. If any actions alleging such conduct are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant effect on our business, including the imposition of significant fines or other sanctions.

Our business activities may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, physician payment transparency laws, health information privacy and security laws, and anti-bribery and anti-corruption laws. Our actual or perceived failure to comply with such laws or their relevant foreign counterparts could adversely affect our business.

Our business activities may be subject to the Foreign Corrupt Practices Act (FCPA) and various federal and state fraud and abuse laws, including, without limitation, physician sunshine laws and regulations, and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate. The FCPA generally prohibits improper payments or offers of payments, either directly or indirectly, to foreign governments and their officials and political parties by U.S. persons in order to influence official action, or otherwise obtain or retain business. Additionally, the U.S. federal physician payment transparency requirements, sometimes referred to as the “Physician Payments Sunshine Act,” created under the Affordable Care Act, and their implementing regulations, require manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the Centers for Medicare and Medicaid Services, information related to payments or other transfers of value made to physicians, other healthcare providers, and teaching hospitals, as well as ownership and investment interests held by physicians, other healthcare providers, and their immediate family members. The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes criminal and civil liability for knowingly and willfully defrauding any healthcare benefit program or knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services.

We and any potential collaborators may be subject to federal, state, and foreign data protection laws and regulations (i.e., laws and regulations that address privacy and data security). In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. In addition, we may obtain health information from third parties (including research institutions from which we obtain clinical trial data) that are subject to privacy and security requirements under HIPAA, as amended by Health Information Technology

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for Economic and Clinical Health Act of 2009 (HITECH). Depending on the facts and circumstances, we could be subject to civil, criminal, and administrative penalties if we knowingly obtain, use, or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. There is no certainty that all of our employees, agents, suppliers, manufacturers, contractors, or collaborators, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws.

In addition, as of May 25, 2018, the General Data Protection Regulation (GDPR) regulates the collection and use of personal data in the EU. The GDPR covers any business, regardless of its location, that provides goods or services to residents in the EU and, thus, could incorporate our activities in EU member states. The GDPR imposes strict requirements on controllers and processors of personal data, including special protections for “sensitive information,” which includes health and genetic information of individuals residing in the EU. GDPR grants individuals the opportunity to object to the processing of their personal information, allows them to request deletion of personal information in certain circumstances, and provides the individual with an express right to seek legal remedies in the event the individual believes his or her rights have been violated. Further, the GDPR imposes strict rules on the transfer of personal data out of the EU to regions that have not been deemed to offer “adequate” privacy protections, such as the U.S. currently. Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU member states, which may deviate slightly from the GDPR, may result in warning letters, mandatory audits and financial penalties, including fines of up to 4% of global revenues, or €20,000,000, whichever is greater. As a result of the implementation of the GDPR, we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules.

There is significant uncertainty related to the manner in which data protection authorities will seek to enforce compliance with GDPR. For example, it is unclear whether the authorities will conduct random audits of companies doing business in the EU, or act solely after complaints are filed claiming a violation of the GDPR. The lack of compliance standards and precedent, enforcement uncertainty and the costs associated with ensuring GDPR compliance may be onerous and adversely affect our business, financial condition, results of operations and prospects.

Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, the closing down of facilities, including those of our suppliers and manufacturers, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries as well as difficulties in manufacturing or continuing to develop our products, and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.

 

We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our manufacturing facilities or those of our CMOs, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.

Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Our ability to invest in and expand our business and meet our financial obligations, to attract and retain third-party contractors and collaboration partners and to raise additional capital depends on our operating and financial performance, which, in turn, is subject to numerous factors, including the prevailing economic and political conditions and financial, business, regulatory and other factors beyond our control, such as the rate of unemployment, the number of uninsured persons in the United States, political influences and inflationary pressures. For example, an overall decrease in or loss of insurance coverage among individuals in the United States as a result of unemployment, underemployment or the repeal of certain provisions of the PPACA may decrease the demand for healthcare services and pharmaceuticals. If fewer patients are seeking medical care because they do not have insurance coverage, we may experience difficulties in any eventual commercialization of our product candidates and our business, results of operations, financial condition and cash flows could be adversely affected.

 

In addition, our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets upon which pharmaceutical and biopharmaceutical companies such as us are dependent for sources of capital. In the past, global financial crises have caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including a reduced ability to raise additional capital when needed on acceptable terms, if at all, and weakened demand for our product candidates. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

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Our internal computer systems, or those used by our third-party research institution collaborators, CROs or other contractors or consultants, may fail or suffer security breaches.

Despite the implementation of security measures, our internal computer systems and those of our future CROs and other contractors and consultants may be vulnerable to damage from computer viruses and unauthorized access. In the past, we have experienced a cybersecurity breach. Although this incident was resolved without any material costs or disruptions to our business, if a similar event were to occur in the future and cause interruptions in our operations, it could result in a material disruption of development programs and business operations. For example, the loss of clinical trial data from completed, ongoing or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties for research and development, the manufacture and supply of drug product and drug substance and to conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or systems, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.

Certain data breaches must also be reported to affected individuals and the government, and in some cases to the media, under provisions of HIPAA, as amended by HITECH, other U.S. federal and state law, and requirements of non-U.S. jurisdictions, including the European Union Data Protection Directive, and financial penalties may also apply.

Our insurance policies may not be adequate to compensate us for the potential losses arising from breaches, failures or disruptions of our infrastructure, catastrophic events and disasters or otherwise. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention.

Furthermore, 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.

Risks Related to Our Financial Condition and the Ownership of Our Common Stock

We have a limited operating history, have incurred significant losses since our inception, and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a clinical-stage biopharmaceutical company formed in 2007 with a limited operating history. We have not yet obtained regulatory approval for any of our product candidates or generated any revenues from therapeutic product sales. Since inception, we have incurred significant net losses in each year and, as of December 31, 2019, we had an accumulated deficit of $383.5 million. We expect to continue to incur losses for the foreseeable future as we continue to fund our ongoing and planned clinical trials of our product candidates, and our other ongoing and planned research and development activities. We also expect to incur significant operating and capital expenditures as we continue our research and development of, and seek regulatory approval for, our product candidates, in-license or acquire new product candidates for development, implement additional infrastructure and internal systems, and hire additional scientific, clinical, and administrative personnel. We anticipate that our net losses for the next several years could be significant as we conduct our planned operations.

Because of the numerous risks and uncertainties associated with pharmaceutical, biological, and cell therapy product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. In addition, our expenses could increase if we are required by the FDA, or comparable foreign regulatory authorities, to perform studies or trials in addition to those currently expected, or if there are any delays in completing our clinical trials, preclinical studies, process development, manufacturing activities, or the research and development of any of our product candidates. The amount of our future net losses will depend, in part, on the rate of increase in our expenses, our ability to generate revenues and our ability to raise additional capital. These net losses have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

Our stock price is subject to fluctuation based on a variety of factors.

The market price of shares of our common stock could be subject to wide fluctuations as a result of many risks listed in this section, and other risks beyond our control, including:

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These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and the Nasdaq Global Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit and this could divert the time and attention of our management.

Our principal stockholders and management own a significant percentage of our stock and may be able to exercise significant control over our company.

As of February 28, 2020, our executive officers, directors and entities affiliated with our five percent stockholders beneficially own, in the aggregate, shares representing approximately 42.8% of our outstanding voting stock. If, in accordance with the CoD (as such term is defined in Note 8 of the notes to the consolidated financial statements herewith) relating to the Class A Convertible Preferred Stock, Redmile (as such term is defined in Note 8 of the notes to the consolidated financial statements herewith) elects to remove certain limitations on the percentage of the our outstanding common stock that it may own such that the 2,794,549 shares of Class A Convertible Preferred Stock currently held by Redmile become fully convertible at Redmile’s option into 13,972,745 shares of common stock, the beneficial ownership of our executive officers, directors and entities affiliated with our five percent stockholders would increase to 51.4%. Although we are not aware of any voting arrangements in place among these stockholders, if these stockholders were to choose to act together, as a result of their stock ownership, they would be able to influence our management and affairs and control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company that our other stockholders may believe are in their best interests, or adversely affecting the liquidity, volatility, and market price of our common stock. For example, if any of our directors, executive officers or other entities affiliated with our five percent stockholders elect to sell, transfer or otherwise dispose of a significant amount of shares of our common stock, this could result in a decrease in our stock price. Furthermore, any transferees or successors of all or a significant portion of our existing stockholders’ ownership in us will be able to exert a similar amount of control over us through their ownership position.

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We may sell additional equity or debt securities or enter into other arrangements to fund our operations, which may result in dilution to our stockholders and impose restrictions or limitations on our business.

We expect that significant additional capital will be needed in the future to continue our planned operations, and we may seek additional funding through a combination of equity offerings, debt financings, state or government grants, strategic alliances, licensing and collaboration arrangements, or other third-party business arrangements. These financing activities may have an adverse effect on our stockholders’ rights, the market price of our common stock and on our operations and may require us to relinquish rights to some of our technologies, intellectual property or product candidates, issue additional equity or debt securities, or otherwise agree to terms unfavorable to us. For example, we registered all of the 5,250,000 shares of common stock issued by us in our August 2016 private placement transaction for resale on a Form S-3, which was declared effective by the SEC in September 2016. We also registered all of the 6,766,915 shares of common stock issued by us and all 14,097,745 shares of common stock issuable upon the conversion of an aggregate of 2,819,549 shares of Class A Convertible Preferred Stock issued by us in our November 2016 private placement transaction for resale on a Form S-3, which was declared effective by the SEC in January 2017. As a result, all of these shares are currently available for resale to the public, which may result in dilution to our stockholders. During 2019, 25,000 shares of the Class A Convertible Preferred Stock were converted into 125,000 shares of common stock. In addition, pursuant to a shelf registration statement declared effective by the SEC in May 2018, we may sell up to a remaining $6.2 million in shares of our common stock, preferred stock, debt securities, warrants and/or units, and pursuant to a shelf registration statement declared effective by the SEC in August 2017, we may sell up to a remaining $54.0 million in the aggregate of shares of our common stock, preferred stock, debt securities, warrants and/or units. The August 2017 registration statement also provides for the resale by Juno of up to one million shares of common stock held by Juno pursuant to the Stock Purchase Agreement entered into in May 2015. Further, in November 2018 we filed a Form S-3 pursuant to which we may issue up to $50.0 million in common stock in sales deemed to be an “at the market offering” as defined by the Securities Act of 1933, as amended (the Securities Act) and, so long as we qualify as a “well-known seasoned issuer” as defined in Rule 405 of the Securities Act, an unlimited amount of shares of our common stock, preferred stock, debt securities, warrants and/or units. Any sale or issuance of securities pursuant to a registration statement or otherwise may result in dilution to our stockholders and may cause the market price of our stock to decline, and new investors could gain rights superior to our existing stockholders. In addition, any debt financings that we may enter into in the future may impose restrictive covenants or otherwise adversely affect the holdings or the rights of our stockholders, and any additional equity financings will be dilutive to our stockholders. Furthermore, additional equity or debt financing might not be available to us on reasonable terms, if at all.

We have broad discretion over the use of our cash, cash equivalents, and investments and may not use them effectively.

Our management has broad discretion to use our cash, cash equivalents, investments and any additional funds that we may raise to fund our operations and could spend these funds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline or delay the development of our product candidates. We may invest our cash and cash equivalents in a manner that does not produce income or that loses value.

Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, and could make it more difficult for you to change management.

Provisions of Delaware law, our amended and restated certificate of incorporation, and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

In addition, because we are incorporated in 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 amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or discouraging a potential acquisition proposal or tender offer could limit the opportunity for our stockholders to achieve liquidity for their shares of our common stock, even if the acquisition proposal or tender offer is at a premium over the then-current market price for our common stock, and could also affect the price that some investors are willing to pay for our common stock.

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Comprehensive tax reform legislation could adversely affect our business and financial condition.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the Tax Act), that includes significant changes to the taxation of business entities. These changes include, among others, a permanent reduction to the corporate income tax rate, limiting interest deductions, limiting the deduction for net operating losses and eliminating net operating loss carrybacks (though any such tax losses may be carried forward indefinitely), in each case, for losses arising in our taxable years beginning after December 31, 2017, allowing for the expensing of capital expenditures and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). We continue to examine the impact this tax reform legislation may have on our business. However, the effect of the Tax Act on our business, whether adverse or favorable, is uncertain, and may not become evident for some period of time. We urge you to consult with your own legal and tax advisors with respect to applicable tax laws, including this legislation, and the potential tax consequences of investing in our common stock.

Our ability to use our net operating loss carryforwards and certain other tax benefits may be limited and, as a result, our future tax liability may increase.

 

As of December 31, 2019, we had federal and California net operating loss carryforwards of $168.2 million and $168.2 million, respectively, which begin to expire in various amounts in 2027. As of December 31, 2019, we also had federal and California research and development tax credit carryforwards of $13.4 million and $8.5 million, respectively. The federal research and development tax credit carryforwards will begin to expire in 2035 unless previously utilized, while the California carryforwards will carry forward indefinitely. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities. In addition, in general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses or tax credits, or NOLs or credits, to offset future taxable income or taxes. Generally, a change of more than 50 percentage points in the ownership of a corporation’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. We have determined that we triggered an ownership change limitation in November 2009 and again in May 2015. We have determined that we do not believe there were any ownership changes from May 2015 through December 2019. We have not analyzed periods subsequent to December 2019. We may experience additional ownership changes as a result of shifts in our stock ownership in the future. Limits on our ability to use our pre-change NOLs or credits to offset U.S. federal taxable income could potentially result in increased future tax liability to us if we earn net taxable income in the future. In addition, under the Tax Act the amount of NOLs generated in taxable periods beginning after December 31, 2017, 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.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

Facilities

As of December 31, 2019, we occupied approximately 72,000 square feet of office and laboratory space in San Diego, California under a non-cancelable operating lease through December 2028. In addition, we have additional operating leases for office and laboratory space in New York, New York and San Diego, California that had not commenced as of December 31, 2019. We believe that these facilities are adequate for our current needs.

ITEM 3. Legal Proceedings

We are not a party to any material legal proceedings at this time. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse effect on us because of defense and settlement costs, diversion of management resources and other factors.

ITEM 4. Mine Safety Disclosures

Not applicable.

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PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our ticker symbol is “FATE”, as traded and reported by The NASDAQ Global Market.

Holders of Common Stock

As of February 27, 2020, there were approximately 35 stockholders of record of our common stock. The approximate number of holders is based upon the actual number of holders registered in our records at such date and excludes holders in “street name” or persons, partnerships, associations, corporations, or other entities identified in security positions listings maintained by depository trust companies.

Performance Graph

Set forth below is a graph comparing the cumulative total return on our common stock, the NASDAQ Composite^® (US) Index and the NASDAQ Biotechnology Index over the five-year period ending December 31, 2019. The graph assumes that $100 was invested in our common stock and in each of the comparative indices as of the market close on December 31, 2014. The past performance of our common stock is no indication of future performance.

 

 

 

Dividends

We have never declared or paid any dividends on our capital or common stock. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors.

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Securities Authorized for Issuance under Equity Compensation Plans

Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report.

Recent Sales of Unregistered Securities

During the year ended December 31, 2019, we did not issue or sell any unregistered securities not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Issuer Purchases of Equity Securities

We did not repurchase any securities during the year ended December 31, 2019.

 

 

ITEM 6. Selected Financial Data

The following selected data should be read in conjunction with our financial statements located elsewhere in this Annual Report on Form 10-K and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Item 1A. Risk Factors.”

This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission on March 5, 2019.

Overview

We are a clinical-stage biopharmaceutical company dedicated to the development of programmed cellular immunotherapies for cancer and immune disorders. We are developing first-in-class cell therapy product candidates based on a simple notion: we believe that better cell therapies start with better cells.

To create better cell therapies, we use a therapeutic approach that we generally refer to as cell programming. For certain of our product candidates, we use pharmacologic modulators, such as small molecules, to enhance the biological properties and therapeutic function of healthy donor-sourced cells ex vivo before our product candidates are administered to a patient. In other cases, we use human induced pluripotent stem cells (iPSCs) to generate a clonal master iPSC line having preferred biological properties and direct the fate of the clonal master iPSC line to create our cell therapy product candidate. Analogous to master cell lines used to manufacture biopharmaceutical drug products such as monoclonal antibodies, we believe clonal master iPSC lines can be used as a renewable source for manufacturing cell therapy products which are well-defined and uniform in composition, can be repeatedly mass produced at significant scale in a cost-effective manner, and can be delivered off-the-shelf to treat many patients. Utilizing these therapeutic approaches, we program cells of the blood and immune system, including natural killer (NK) cells, T cells and CD34⁺ cells, and are advancing a pipeline of programmed cellular immunotherapies.

We have entered into a research collaboration and license agreement with the Regents of the University of Minnesota to develop off-the-shelf, engineered NK cell cancer immunotherapies derived from clonal master iPSC lines. Additionally, we have entered into a research collaboration and license agreement with Memorial Sloan Kettering Cancer Center (Memorial Sloan Kettering) to develop off-the-shelf, engineered T-cell cancer immunotherapies derived from clonal master iPSC lines.

We have entered into a collaboration and option agreement with Ono Pharmaceutical Co. Ltd. (Ono) for the joint development and commercialization of two off-the-shelf iPSC-derived chimeric antigen receptor (CAR) T-cell product candidates.

We were incorporated in Delaware in 2007, and are headquartered in San Diego, CA. Since our inception in 2007, we have devoted substantially all of our resources to our cell programming approach and the research and development of our product candidates, the creation, licensing and protection of related intellectual property, and the provision of general and administrative support for these activities. To date, we have funded our operations primarily through the public and private sale of common stock, the private placement of preferred stock and convertible notes, commercial bank debt and revenues from collaboration activities and grants.

We have never been profitable and have incurred net losses in each year since inception. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur operating losses for at least the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses will increase substantially in connection with our ongoing and planned activities as we:

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We do not expect to generate any revenues from sales of any therapeutic products unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will seek to fund our operations through public or private equity or debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative effect on our financial condition and ability to develop our product candidates.

Financial Operations Overview

We conduct substantially all of our activities through Fate Therapeutics, Inc., a Delaware corporation, at our facilities in San Diego, California. Fate Therapeutics, Inc. owns 100% of the voting shares of Tfinity Therapeutics, Inc. (Tfinity), 100% of the voting shares of Fate Therapeutics Ltd. (Fate Ltd.), incorporated in the United Kingdom, and 100% of the voting shares of Fate Therapeutics B.V. (Fate B.V.), incorporated in the Netherlands. The following information is presented on a consolidated basis to include the accounts of Fate Therapeutics, Inc., Tfinity, Fate B.V., and Fate Ltd. To date, the aggregate operations of our subsidiaries have not been significant and all intercompany transactions and balances have been eliminated in consolidation.

Collaboration Revenue

To date, we have not generated any revenues from therapeutic product sales. Our revenues have been derived from collaboration agreements and government grants.

Agreement with Ono Pharmaceutical Co., Ltd.

On September 14, 2018, we entered into a Collaboration and Option Agreement (the Ono Agreement) with Ono for the joint development and commercialization of two off-the-shelf iPSC-derived CAR T-cell product candidates. Pursuant to the terms of the Ono Agreement, we received an upfront, non-refundable and non-creditable payment of $10.0 million. Additionally, we are entitled to receive fees for the conduct of research and development under a joint development plan, which fees are estimated to be $20.0 million in aggregate, of which $6.5 million has been received as of December 31, 2019.

We concluded that Ono represented a customer and in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, we determined that the initial transaction price under the Ono Agreement equals $30.0 million, consisting of the upfront, non-refundable and non-creditable payment of $10.0 million and the aggregate estimated research and development fees of $20.0 million. In addition, we identified our performance obligations under the Ono Agreement, including our grant to Ono of a license to certain of our intellectual property subject to certain conditions, our conduct of research services, and our participation in a joint steering committee. We determined that all performance obligations should be accounted for as one combined performance obligation since no individual performance obligation is distinct, and that the combined performance obligation is transferred over the expected term of the conduct of the research services, which is estimated to be four years.

During the years ended December 31, 2019 and 2018, we recognized $9.3 million and $0.6 million, respectively, of collaboration revenue under the Ono Agreement. As of December 31, 2019, aggregate deferred revenue related to the Ono Agreement was $6.6 million.

Agreement with Juno Therapeutics, Inc.

On May 4, 2015, we entered into a strategic research collaboration and license agreement (the Juno Agreement) with Juno Therapeutics, Inc. (Juno) to screen for and identify small molecule modulators that enhance the therapeutic properties of Juno’s genetically-engineered T-cell immunotherapies.

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In connection with the Juno Agreement, during the years ended December 31, 2019 and 2018, we recognized $1.4 million and $4.1 million, respectively, as collaboration revenue in the consolidated statements of operations and comprehensive loss.

On May 4, 2019, the four-year initial research term under the Juno Agreement concluded as scheduled. The final quarterly research payment of $0.2 million was received during May 2019 and no additional payments are expected.

Research and Development Expenses

Research and development expenses consist of costs associated with the research, preclinical development, process and scale-up development, manufacture and clinical development of our product candidates, the research and development of our cell programming technology including our iPSC product platform, and the performance of research and development activities under our collaboration agreements. These costs are expensed as incurred and include:

We plan to increase our current level of research and development expenses for the foreseeable future as we continue the clinical and preclinical development of our product candidates, research and develop our cell programming technology including our iPSC product platform, and perform our obligations under collaboration agreements including under our agreements with Ono, University of Minnesota and Memorial Sloan Kettering. Our current planned research and development activities over the next twelve months consist primarily of the following:

Due to the inherently unpredictable nature of preclinical and clinical development, and given our novel therapeutic approach and the current stage of development of our product candidates, we cannot determine and are unable to estimate with certainty the timelines we will require and the costs we will incur for the development of our product candidates. Clinical and preclinical development timelines and costs, and the potential of development success, can differ materially from expectations. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for our employees in executive, operational, finance and human resource functions; professional fees for accounting, legal and tax services; costs for obtaining, prosecuting and maintaining our intellectual property; and other costs and fees, including director and officer insurance premiums, to support our operations as a public company. We anticipate that our general and administrative expenses will increase in the future as we increase our research and development activities, maintain compliance with exchange listing and SEC requirements and continue to operate as a public company.

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Other Income (Expense)

Other income (expense) consists primarily of interest income earned on cash and cash equivalents, interest income from investments (including the amortization of discounts and premiums), and interest expense.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable 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 the notes to our financial statements appearing elsewhere in this Annual Report, we believe that the following critical accounting policies reflect the more significant procedures, estimates and assumptions used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration we are entitled to receive in exchange for such product or service. In doing so, we follow a five-step approach: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the customer obtains control of the product or service. We consider the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. We apply the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.

A customer is a party that has entered into a contract with us, where the purpose of the contract is to obtain a product or a service that is an output of our ordinary activities in exchange for consideration. To be considered a contract, (i) the contract must be approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights regarding the product or the service to be transferred can be identified, (iii) the payment terms for the product or the service to be transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of future cash flows is expected to change as a result of the contract), and (v) it is probable that we will collect substantially all of the consideration to which we are entitled to receive in exchange for the transfer of the product or the service.

A performance obligation is defined as a promise to transfer a product or a service to a customer. We identify each promise to transfer a product or a service (or a bundle of products or services, or a series of products and services that are substantially the same and have the same pattern of transfer) that is distinct. A product or a service is distinct if both (i) the customer can benefit from the product or the service either on its own or together with other resources that are readily available to the customer and (ii) our promise to transfer the product or the service to the customer is separately identifiable from other promises in the contract. Each distinct promise to transfer a product or a service is a unit of accounting for revenue recognition. If a promise to transfer a product or a service is not separately identifiable from other promises in the contract, such promises should be combined into a single performance obligation.

The transaction price is the amount of consideration we are entitled to receive in exchange for the transfer of control of a product or a service to a customer. To determine the transaction price, we consider the existence of any significant financing component, the effects of any variable elements, noncash considerations and consideration payable to the customer. If a significant financing component exists, the transaction price is adjusted for the time value of money. If an element of variability exists, we must estimate the consideration we expect to receive and use that amount as the basis for recognizing revenue as the product or the service is transferred to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range of possible consideration amounts.

If a contract has multiple performance obligations, we allocate the transaction price to each distinct performance obligation in an amount that reflects the consideration we are entitled to receive in exchange for satisfying each distinct performance obligation. For each distinct performance obligation, revenue is recognized when (or as) we transfer control of the product or the service applicable to such performance obligation. To date, for collaboration arrangements that represent a single performance obligation, the revenues are recognized over time based on costs incurred compared to total estimated costs.

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In those instances where we first receive consideration in advance of satisfying its performance obligation, we classify such consideration as deferred revenue until (or as) we satisfy such performance obligation. In those instances where we first satisfy our performance obligation prior to our receipt of consideration, the consideration is recorded as accounts receivable.

We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of accrued research and development expenses include amounts owed to clinical research organizations, to investigative sites in connection with clinical trials, to sponsored research organizations, to service providers in connection with preclinical development activities and to service providers related to product manufacturing, development and distribution of clinical supplies.

We base our accrued expenses related to clinical trials on our estimates of the services performed and efforts expended pursuant to our contractual arrangements, including those with clinical research organizations. The financial terms of these agreements are sometimes subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our service providers will exceed the level of services performed and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly.

Although we do not expect our estimates to be materially different from expenses actually incurred, if our estimates of the status and timing of services performed differs from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.

Stock-Based Compensation

Stock-based compensation expense represents the grant date fair value of employee stock option and restricted stock unit grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. For stock option grants with performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable or the performance condition has been achieved. For stock option grants with both performance-based milestones and market conditions, expense is recorded over the derived service period after the point when the achievement of the performance-based milestone is probable or the performance condition has been achieved.

We estimate the fair value of stock option grants using the Black-Scholes option pricing model, with the exception of option grants with both performance-based milestones and market conditions, which are valued using a lattice-based model. These models require the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, (a) the risk-free interest rate, (b) the expected volatility of our stock, (c) the expected term of the award and (d) the expected dividend yield. Due to the lack of an adequate history of a public market for the trading of our common stock and a lack of adequate 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. For these analyses, we have selected companies with comparable characteristics to ours including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We have estimated the expected life of our employee stock options using the “simplified” method, whereby, the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option are based on the yields of zero-coupon U.S. Treasury securities. See Note 8 of the notes to the consolidated financial statements for additional information.

The fair value of restricted stock units is based on the closing price of our common stock as reported on The NASDAQ Global Market on the date of grant.

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Total stock-based compensation expense for the years ended December 31, 2019, 2018, and 2017, was $17.4 million, $6.3 million, and $3.6 million, respectively. Expense related to unvested stock option grants not yet recognized as of December 31, 2019 was $40.4 million and the weighted-average period over which these grants are expected to vest is 2.9 years. As of December 31, 2019, the unrecognized compensation cost related to outstanding restricted stock units was $6.2 million, which is expected to be recognized as expense over approximately 2.7 years.

Recent Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, please see Note 1 of the notes to the consolidated financial statements.

Results of Operations

Comparison of Years Ended December 31, 2019 and 2018

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

 

 

Revenue.  During the years ended December 31, 2019 and 2018, we recognized revenue of $10.7 million and $4.7 million, respectively, under our collaboration agreements with Ono and Juno.

Research and development expenses.  Research and development expenses were $87.8 million for the year ended December 31, 2019, compared to $56.0 million for the year ended December 31, 2018. The increase in research and development expenses was attributable primarily to the following:

These increases were partially offset by an aggregate decrease of $6.7 million in licensing expense resulting from the Amended and Restated Exclusive License with MSK that occurred in May 2018 and the Exclusive License Agreement with the J. David Gladstone Institutes that occurred in September 2018. No such expense was present in fiscal year 2019. See Note 2 of the consolidated financial statements for additional detail.

General and administrative expenses.  General and administrative expenses were $23.6 million for the year ended December 31, 2019, compared to $15.8 million for the year ended December 31, 2018. The increase in general and administrative expenses was attributable primarily to a $6.5 million increase in employee compensation and benefits expense, including employee stock-based compensation expense and an increase of $0.5 million in facility lease and related expense.

Other income, net.  Other income, net was $2.6 million and $0.5 million for the years ended December 31, 2019 and 2018, respectively. Other income, net for each period consisted primarily of interest income earned on cash and cash equivalents, interest income from investments (including the amortization of discounts and premiums) and interest expense relating to our term loan with Silicon Valley Bank.

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Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations since inception. As of December 31, 2019, we had an accumulated deficit of $383.5 million and anticipate that we will continue to incur net losses for the foreseeable future.

The following table sets forth a summary of the net cash flow activity for each of the years ended December 31:

 

 

Operating Activities

Cash used in operating activities increased from $38.7 million for the year ended December 31, 2018 to $83.2 million for the year ended December 31, 2019. The change in cash used in operating activities was attributable primarily to our increase in net loss and a decrease in the deferred revenue balance from 2018 to 2019, partially offset by an increase in stock-based compensation expense.

Agreement with Ono Pharmaceutical Co., Ltd.

On September 14, 2018, we entered into the Ono Agreement with Ono for the joint development and commercialization of two off-the-shelf, iPSC-derived CAR T-cell product candidates (each a Candidate and collectively the Candidates). Under the terms of the Ono Agreement, Ono paid to us an upfront, non-refundable and non-creditable payment of $10.0 million. Additionally, as consideration for our conduct of research and preclinical development under a joint development plan, Ono pays us annual research and development fees set forth in the annual budget included in the joint development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan. Further, under the terms of the Ono Agreement, Ono has agreed to pay us an additional $40.0 million, subject to the achievement of a preclinical milestone and the exercise by Ono of its options to obtain exclusive licenses to develop and commercialize the Candidates. Such fees are in addition to the upfront payment and research and development fees.

Pursuant to the Ono Agreement, we and Ono are jointly conducting research and development activities under a joint development plan, with the goal of advancing each Candidate to a pre-defined preclinical milestone. We have granted to Ono, during a specified period of time, an option to obtain an exclusive license under certain intellectual property rights to develop and commercialize (a) Candidate 1 in Asia, with us retaining rights for development and commercialization in all other territories of the world and (b) Candidate 2 in all territories of the world, with us retaining the right to co-develop and co-commercialize Candidate 2 in the United States and Europe under a joint arrangement whereby it is eligible to share at least 50% of the profits and losses.

Subject to Ono’s exercise of its options to obtain exclusive licenses to develop and commercialize the Candidates and to the achievement of certain clinical, regulatory and commercial milestones with respect to each Candidate in specified territories, we are entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subject to reduction by 50% if we elect to co-develop and co-commercialize Candidate 2 as described above. As of December 31, 2019, we have not received any such payments. We are also eligible to receive tiered royalties ranging from the mid-single digits to the low-double digits based on annual net sales by Ono of each Candidate in specified territories, with such royalties subject to certain reductions. As of December 31, 2019, no royalties have been paid to us.

As a direct result of our entry into the Ono Agreement, we incurred an aggregate of $2.0 million in sublicense consideration to certain of our existing licensors. The $2.0 million in sublicense consideration represents an asset under ASC 340, Other Assets and Deferred Costs. As of December 31, 2019, all such consideration has been paid, with $1.0 million paid during the year ended December 31, 2019.

Agreement with Juno Therapeutics, Inc.

On May 4, 2015, we entered into a strategic research collaboration and license agreement with Juno Therapeutics, Inc. (the Juno Agreement) to screen for and identify small molecule modulators that enhance the therapeutic properties of Juno’s genetically-engineered T-cell immunotherapies. During the year ended December 31, 2019, we received $1.2 million in research payments related to the Juno Agreement.

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On May 4, 2019, the four-year initial research term under the Juno Agreement concluded as scheduled and the overall agreement terminated upon our receipt of the final quarterly research payment of $0.2 million.

Memorial Sloan Kettering Cancer Center License Agreement

On May 15, 2018, we entered into an Amended and Restated Exclusive License Agreement with Memorial Sloan Kettering Cancer Center (MSK). The agreement amends and restates the license agreement entered into between us and MSK on August 19, 2016. In consideration for the additional rights granted under the May 2018 agreement, we issued 500,000 shares of our common stock to MSK, which shares were valued at $4.8 million on the date of agreement. We also paid an upfront cash fee of $0.5 million, and we are obligated to pay milestone payments upon the achievement of specified clinical, regulatory and commercial milestones and royalty payments to MSK on net sales of licensed products. We are also obligated to pay MSK a percentage of certain sublicense income received by us. Furthermore, in the event a licensed product achieves a specified clinical milestone, MSK is then eligible to receive additional milestone payments, where the amount of such payments owed to MSK are contingent upon certain increases in the price of our common stock following the date of achievement of such clinical milestone.

J. David Gladstone Institutes License Agreement

On September 11, 2018, we entered into an exclusive license agreement with the J. David Gladstone Institutes (Gladstone). Pursuant to the license agreement with Gladstone, we issued 100,000 shares of our common stock to Gladstone, which shares were valued at $1.3 million on the date of the agreement. We also paid an upfront cash fee of $0.1 million, and we are obligated to pay milestone payments in an aggregate amount of up to approximately $1.9 million upon the achievement of specified clinical, regulatory and commercial milestones and as well as royalties to Gladstone in the low single digits on net sales of licensed products. We are also obligated to pay Gladstone a tiered percentage in the low to mid-single digits of certain sublicense income received by us.

Investing Activities

During the years ended December 31, 2019 and 2018, investing activities used cash of $157.5 million and $0.5 million, respectively. During the year ended December 31, 2019 we purchased $248.9 million of investments, which were partially offset by $98.8 million in maturities of investments. During the year ended December 31, 2018, we purchased $55.7 million of investments, offset by $57.5 million in maturities of investments. The remaining investing activities for the periods presented were primarily attributable to the purchase of property and equipment.

Financing Activities

Financing activities provided cash of $149.9 million for the year ended December 31, 2019, which primarily consisted of $162.4 million of net proceeds from our September 2019 public offering of common stock and $2.5 million in proceeds from the issuance of common stock from equity incentive plans pursuant to the exercise of employee stock options net of issuance costs. These proceeds were partially offset by $15.0 million in repayments on our long-term debt facility.

Financing activities provided cash of $140.8 million for the year ended December 31, 2018, which primarily consisted of the $134.6 million of net proceeds from our September 2018 public offering of common stock and $3.5 million of proceeds from the California Institute for Regenerative Medicine (CIRM) award.

From our inception through December 31, 2019 we have funded our consolidated operations primarily through the public and private sale of common stock, the private placement of preferred stock and convertible notes, commercial bank debt and revenues from collaboration activities and grants. As of December 31, 2019, we had aggregate cash and cash equivalents and investments of $260.9 million.

Public Offering of Common Stock

In September 2019, we completed a public offering of common stock in which investors, certain of which are affiliated with our directors, purchased 9,890,000 shares of our common stock at a price of $17.50 per share under our shelf registration statement. Gross proceeds from the offering were $173.1 million. After giving effect to $10.7 million in underwriting discounts, commissions and expenses related to the offering, net proceeds were $162.4 million.

In September 2018, we completed a public offering of common stock in which investors, certain of which are affiliated with our directors, purchased 10,648,149 shares of our common stock at a price of $13.50 per share under our shelf registration statement. Gross proceeds from the offering were $143.8 million. After giving effect to $8.9 million in underwriting discounts, commissions and expenses related to the offering, net proceeds were $134.9 million.

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In December 2017, we completed a public offering of common stock in which investors purchased 10,953,750 shares of our common stock at a price of $4.20 per share under a shelf registration statement. Gross proceeds from the offering were $46.0 million. After giving effect to an estimated $3.0 million in underwriting discounts, commissions and expenses related to the offering (of which $0.3 million was paid during 2018), net proceeds were $43.0 million.  

California Institute for Regenerative Medicine Award

On April 5, 2018, we executed an award agreement with the CIRM pursuant to which CIRM awarded us $4.0 million to advance our FT516 product candidate into a first-in-human clinical trial (the Award). Pursuant to the terms of the Award, we are eligible to receive five disbursements in varying amounts totaling $4.0 million throughout the project period of the Award. In December 2018, we discussed with CIRM our intent to pursue the clinical development of FT516 in relapsed / refractory hematologic malignancies in addition to advanced solid tumors, and our preference to first submit an IND application for FT516 in relapsed / refractory hematologic malignancies rather than in advanced solid tumors. In January 2019, we submitted our IND application for FT516 in relapsed / refractory hematologic malignancies, which IND submission was allowed by the FDA in February 2019. We agreed with CIRM to suspend the Award until such time as we elected to proceed with our submission of an IND application for FT516 in advanced solid tumors. In November 2019, we submitted an IND application for FT516 in advanced solid tumors and the Award was taken off of suspension by CIRM in January 2020. In February 2020, we received a $0.4 million disbursement based on a milestone achievement.

The Award is subject to certain co-funding requirements by us. We, in our sole discretion, have the option to treat the Award either as a loan or as a grant. In the event we elect to treat the Award as a loan, we will be obligated to repay i) 60%, ii) 80%, iii) 100% or iv) 100% plus interest at 7% plus LIBOR, of the total Award to CIRM, where such repayment rate is dependent upon the phase of clinical development of FT516 at the time of our election. If we do not elect to treat the Award as a loan within 10 years of the date of the Award, the Award will be considered a grant and we will be obligated to pay to CIRM a royalty on commercial sales of FT516 until such royalty payments equal nine times the total amount awarded to us under the Award.

Silicon Valley Bank Debt Facility

On July 30, 2014, we entered into an Amended and Restated Loan and Security Agreement (Restated LSA) with Silicon Valley Bank (Bank), collateralized by substantially all of our assets, excluding certain intellectual property. The Restated LSA amends and restates the Loan and Security Agreement, dated as of January 5, 2009, as amended, by and between us and the Bank (Loan Agreement). Pursuant to the Restated LSA, the Bank agreed to make loans to us in an aggregate principal amount of up to $20.0 million, comprised of (i) a $10.0 million term loan, funded at the closing date (Term A Loan) and (ii) subject to the achievement of a specified clinical milestone, additional term loans totaling up to $10.0 million in the aggregate, which were available until December 31, 2014 (each, Term B Loan). On December 24, 2014, we elected to draw $10.0 million under the Term B Loan.

On July 14, 2017, we entered into an amendment (SVB Loan Amendment) of the Restated LSA with the Bank where the Bank extended an additional term loan to us in the principal amount of $15.0 million (2017 Term Loan), a portion of which was applied to repay in full all amounts previously outstanding under the Restated LSA. Following such repayment in full of our existing outstanding debt with the Bank under the Restated LSA, cash proceeds from the remaining portion of the 2017 Term Loan were $7.5 million.

On November 13, 2019 we used cash on hand in the amount of $14.2 million to repay in full all outstanding obligations related to the Restated LSA and SVB Loan Amendment. Accordingly, all of our obligations under the Restated LSA and SVB Loan Amendment have been paid and discharged in full, and all security interests and other liens granted by us to the Bank to secure our obligations have been terminated and released.

In connection with the SVB Loan Amendment, we issued to the Bank on the First Amendment Effective Date a warrant to purchase up to an aggregate of 91,463 shares of our common stock, subject to adjustment, at an exercise price equal to $3.28 per share. All such warrants have been exercised as of December 31, 2019.

Registration Statements on Form S-3

In November 2018, we filed an automatic shelf registration statement (File No. 333-228513), which became effective upon filing. The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time. The specific terms of any offering, if any, under the automatic shelf registration statement would be established at the time of such offering. Additionally, we entered into a sales agreement with Leerink Partners LLC (Leerink) with respect to an at-the-market offering program, under which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million through Leerink as its sales agent.

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In May 2018, the SEC declared effective a shelf registration statement filed by us in May 2018 (File No. 333-224680). The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time. The specific terms of any offering, if any, under the shelf registration statement would be established at the time of such offering. As of December 31, 2019, after giving effect to our September 2018 public offering, we are eligible to issue an aggregate of $6.2 million in securities under this shelf registration statement.

In August 2017, the SEC declared effective a shelf registration statement filed by us in August 2017 (File No. 333-219987). The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time. The specific terms of any offering, if any, under the shelf registration statement would be established at the time of such offering. As of December 31, 2019, after giving effect to our December 2017 public offering, we are eligible to issue an aggregate of $54.0 million in securities under the shelf registration statement. In addition, this registration statement registered for resale one million shares of common stock held by Juno, which were issued in May 2015 in conjunction with the Juno Agreement.

Operating Capital Requirements

We anticipate that we will continue to incur losses for the foreseeable future, and we expect the losses to increase as we continue the research and development of, and seek regulatory approvals for, our product candidates and conduct additional research and development activities pursuant to our collaboration agreement with Ono. Our product candidates have not yet achieved regulatory approval and we may not be successful in achieving commercialization of our product candidates.

We believe our existing cash and cash equivalents and investments as of December 31, 2019 will be sufficient to fund our projected operating requirements for at least the next twelve months. However, we are subject to all the risks and uncertainties incident in the research and development of therapeutic products. For example, the FDA or other regulatory authorities may require us to generate additional data or conduct additional preclinical studies or clinical trials, or may impose other requirements beyond those that we currently anticipate. Additionally, it is possible for a product candidate to show promising results in preclinical studies or in clinical trials, but fail to establish sufficient safety and efficacy data necessary to obtain regulatory approvals. As a result of these and other risks and uncertainties and the probability of success, the duration and the cost of our research and development activities required to advance a product candidate cannot be accurately estimated and are subject to considerable variation. We may encounter difficulties, complications, delays and other unknown factors and unforeseen expenses in the course of our research and development activities, any of which may significantly increase our capital requirements and could adversely affect our liquidity.

We will require additional capital for the research and development of our product candidates and to perform our research and development obligations under our collaboration agreement with Ono, and we may be forced to seek additional funds sooner than expected to pursue our research and development activities. We expect to finance our capital requirements in the foreseeable future through the sale of public or private equity or debt securities. However, additional capital may not be available to us on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the research or development of one or more of our product candidates. If we do raise additional funds through the issuance of additional equity or debt securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. Additionally, if we incur indebtedness, we may become subject to financial or other covenants that could adversely restrict, impair or affect our ability to conduct our business, such as requiring us to relinquish rights to certain of our product candidates or technologies or limiting our ability to acquire, sell or license intellectual property rights or incur additional debt. Any of these events could significantly harm our business, operations, financial condition and prospects.

Our forecast of the period of time through which our existing cash and cash equivalents and investments will be adequate to support our operations is a forward-looking statement and involves significant risks and uncertainties. We have based this forecast on assumptions that may prove to be wrong, and actual results could vary materially from our expectations, which may adversely affect our capital resources and liquidity. We could utilize our available capital resources sooner than we currently expect. The amount and timing of future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

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If we cannot continue or expand our research and development operations, or otherwise capitalize on our business opportunities, because we lack sufficient capital, our business, operations, financial condition and prospects could be materially adversely affected.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2019 that are expected to affect our liquidity and cash flows in future periods:

 

We lease our headquarters office and laboratory space under a non-cancelable operating lease. In May 2018, we amended the operating lease, extending the term of the lease through approximately 2028 and agreeing to lease additional space comprising approximately 24,000 square feet in the same building as our existing space for a total occupancy of approximately 72,000 square feet under the lease. In addition to rent, the lease is subject to certain fixed amenities fees. The above table includes all such fixed fees. The lease is subject to additional variable charges for common area maintenance and other costs. We maintain the right to terminate the lease after October 2025, subject to our delivery to the landlord of twelve months’ prior written notice and an early termination payment of $2.5 million. See Note 7 of the consolidated financial statements for additional detail.

During January 2020, we entered into a new lease agreement for a future headquarters facility. The lease shall commence, subject to certain conditions, in May 2021 and has a term of 15 years from the commencement date, with the option to extend the lease for two successive five-year terms. Total future minimum lease payments under the lease are $157.6 million, payable in monthly installments beginning on the lease commencement date. These obligations are not included in the above contractual obligations table as of December 31, 2019. We have a one-time option to terminate the lease after 10 years from the commencement date, subject to a payment of a $30.0 million early termination fee.

We have no material contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to the financial statements.

We have obligations under various license agreements to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones (such as the start of a clinical trial, filing for product approval with the FDA or other regulatory agencies, product approval by the FDA or other regulatory agencies, product launch or product sales) or on the sublicense of our rights to another party. We have not included these commitments on our balance sheet or in the table above because the achievement and timing of these events is not fixed and determinable. Certain milestones are in advance of receipt of revenue from the sale of products and, therefore, we may require additional debt or equity capital to make such payments. These commitments include:

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We enter into contracts in the normal course of business, including with clinical sites and professional service providers for the conduct of clinical trials, contract manufacturers for the production of our product candidates, contract research service providers for preclinical research studies, professional consultants for expert advice and vendors for the sourcing of clinical and laboratory supplies and materials. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.  

Off-Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

 

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk primarily related to changes in interest rates. As of December 31, 2019, our cash and cash equivalents consisted of cash and money market mutual funds, and our investments consisted of United States treasuries and corporate debt securities with maturities up to eighteen months from the date of acquisition. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the relatively short-term nature and low risk profile of the instruments in our portfolio, a 10% change in market interest rates would not have a material impact on our financial condition and/or results of operations.

 

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ITEM 8.  Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders of Fate Therapeutics, Inc

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Fate Therapeutics, Inc. as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 2, 2020, expressed an unqualified opinion thereon

Adoption of ASU No. 2016-02

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that is communicated or required to be communicated to the audit committee and that: (1) relates to an account or disclosure that is material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of acritical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the account or disclosure to which it relates.

 

 

/s/ Ernst & Young, LLP

We have served as the Company's auditor since 2009.

San Diego, California

March 2, 2020

 

 

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Fate Therapeutics, Inc.

Consolidated Balance Sheets

(In thousands, except par value and share data)

 

See accompanying notes.

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Fate Therapeutics, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

 

 

 

See accompanying notes.

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Fate Therapeutics, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(In thousands, except share data)

 

 

See accompanying notes

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Fate Therapeutics, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

See accompanying notes.

 

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Fate Therapeutics, Inc.

Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies

Organization

Fate Therapeutics, Inc. (the Company) was incorporated in the state of Delaware on April 27, 2007 and has its principal operations in San Diego, California. The Company is a clinical-stage biopharmaceutical company dedicated to the development of programmed cellular immunotherapies for cancer and immune disorders. The Company’s therapeutic pipeline is comprised of immuno-oncology programs, including off-the-shelf engineered NK- and T-cell product candidates derived from clonal master induced pluripotent stem cell (iPSC) lines, and immuno-regulatory programs, including product candidates to prevent life-threatening complications in patients undergoing hematopoietic cell transplantation. The Company’s product candidates are based on its proprietary cell programming approach, which it applies to modulate the therapeutic function and direct the fate of immune cells.

As of December 31, 2019, the Company has devoted substantially all of its efforts to product development, raising capital and building infrastructure and has not generated any revenues from any sales of its therapeutic products. To date, the Company’s revenues have been derived from collaboration agreements and government grants.

Public Equity Offerings

In September 2019, the Company completed a public offering of common stock in which investors, certain of which are affiliated with the directors of the Company, purchased 9,890,000 shares of its common stock at a price of $17.50 per share under a shelf registration statement. Gross proceeds from the offering were $173.1 million, and, after giving effect to $10.7 million of costs related to the offering, net proceeds were $162.4 million.

In September 2018, the Company completed a public offering of common stock in which investors, including investors affiliated with the directors of the Company, purchased 10,648,149 shares of its common stock at a price of $13.50 per share under a shelf registration statement. Gross proceeds from the offering were $143.8 million, and, after giving effect to $8.9 million of costs related to the offering, net proceeds were $134.9 million.

In December 2017, the Company completed a public offering of common stock in which investors purchased 10,953,750 shares of its common stock at a price of $4.20 per share under a shelf registration statement. Gross proceeds from the offering were $46.0 million, and after giving effect to $3.0 million of costs related to the offering (of which $0.3 million was paid during the year ended December 31, 2018), net proceeds were $43.0 million.

Use of Estimates

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP). The preparation of the Company’s consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. The most significant estimates in the Company’s consolidated financial statements relate to accrued expenses. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, Fate Therapeutics Ltd., incorporated in the United Kingdom, Fate Therapeutics, B.V., incorporated in the Netherlands and Tfinity Therapeutics, Inc., incorporated in the United States. To date, the aggregate operations of these subsidiaries have not been significant and all intercompany transactions and balances have been eliminated in consolidation.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating and reportable segment.

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Fair Value of Financial Instruments

The carrying amounts of accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the relatively short-term nature of those instruments. Based on the borrowing rates available to the Company for loans with similar terms, which is considered a Level 2 input as described below, the Company believes that the fair value of long-term debt approximates its carrying value.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three- tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial assets measured at fair value on a recurring basis consist of the Company’s cash equivalents and investments. Cash equivalents consisted of money market funds and investments consisted of U.S. treasuries and corporate debt securities. The following table presents the Company’s assets which were measured at fair value on a recurring basis as of December 31, 2019 and 2018 (in thousands):

 

 

The Company obtains pricing information from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, and bid and/or offers.

None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

As of December 31, 2019 and 2018, the Company had no material liabilities measured at fair value on a recurring basis.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash in readily available checking and savings accounts, money market accounts and money market funds. The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents.

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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows as of December 31, 2019, 2018 and 2017 (in thousands):

 

 

Amounts included in restricted cash represent security deposits required to secure the Company’s credit card limit and its facilities lease.

Investments

Investments are accounted for as available-for-sale securities and are carried at fair value, with the unrealized gains and losses reported in other comprehensive income (loss). The amortized cost of investments classified as available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on investments classified as available-for-sale securities are included in other income or expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to a significant concentration of credit risk, consist primarily of cash and cash equivalents and investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits and investments are held.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally two to five years) and generally consist of furniture and fixtures, computers, scientific and office equipment, and in-process costs related to facilities construction. Repairs and maintenance costs are charged to expense as incurred.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. If the carrying amount is not recoverable, the Company measures the amount of any impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. While the Company’s current and historical operating losses and negative cash flows are indicators of impairment, management believes that future cash flows to be received support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses since inception.

Leases

Effective January 1, 2019, the Company determines if a contract contains a lease at the inception of the contract. The Company currently has leases related to its facilities leased for office and laboratory space, which are classified as operating leases. These leases result in operating right-of-use (ROU) assets, current operating lease liabilities, and non-current operating lease liabilities in the condensed consolidated balance sheets. The Company does not have any financing leases. Leases with a term of 12 months or less are considered short-term and a ROU asset and lease obligation are not recognized. Payments associated with short-term leases are expensed on a straight-line basis over the lease term.

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Lease liabilities represent an obligation to make lease payments arising from the lease and ROU assets represent the right to use the underlying asset identified in the lease for the lease term. Lease liabilities are measured at the present value of the lease payments not yet paid discounted using the discount rate for the lease established at the lease commencement date. To determine the present value, the implicit rate is used when readily determinable. For those leases where the implicit rate is not provided, the Company determines an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. ROU assets are measured as the present value of the lease payments and also include any prepaid lease payments made and any other indirect costs, and exclude any lease incentives received. Lease terms may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The Company aggregates all lease and non-lease components for each class of underlying assets into a single lease component.

Revenue Recognition

The Company recognizes revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration the Company is entitled to receive in exchange for such product or service. In doing so, the Company follows a five-step approach: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the customer obtains control of the product or service. The Company considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. The Company applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.

A customer is a party that has entered into a contract with the Company, where the purpose of the contract is to obtain a product or a service that is an output of the Company’s ordinary activities in exchange for consideration. To be considered a contract, (i) the contract must be approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights regarding the product or the service to be transferred can be identified, (iii) the payment terms for the product or the service to be transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of future cash flows is expected to change as a result of the contract), and (v) it is probable that the Company will collect substantially all of the consideration to which it is entitled to receive in exchange for the transfer of the product or the service.

A performance obligation is defined as a promise to transfer a product or a service to a customer. The Company identifies each promise to transfer a product or a service (or a bundle of products or services, or a series of products and services that are substantially the same and have the same pattern of transfer) that is distinct. A product or a service is distinct if both (i) the customer can benefit from the product or the service either on its own or together with other resources that are readily available to the customer and (ii) the Company’s promise to transfer the product or the service to the customer is separately identifiable from other promises in the contract. Each distinct promise to transfer a product or a service is a unit of accounting for revenue recognition. If a promise to transfer a product or a service is not separately identifiable from other promises in the contract, such promises should be combined into a single performance obligation.

The transaction price is the amount of consideration the Company is entitled to receive in exchange for the transfer of control of a product or a service to a customer. To determine the transaction price, the Company considers the existence of any significant financing component, the effects of any variable elements, noncash considerations and consideration payable to the customer. If a significant financing component exists, the transaction price is adjusted for the time value of money. If an element of variability exists, the Company must estimate the consideration it expects to receive and uses that amount as the basis for recognizing revenue as the product or the service is transferred to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range of possible consideration amounts.

If a contract has multiple performance obligations, the Company allocates the transaction price to each distinct performance obligation in an amount that reflects the consideration the Company is entitled to receive in exchange for satisfying each distinct performance obligation. For each distinct performance obligation, revenue is recognized when (or as) the Company transfers control of the product or the service applicable to such performance obligation.

In those instances where the Company first receives consideration in advance of satisfying its performance obligation, the Company classifies such consideration as deferred revenue until (or as) the Company satisfies such performance obligation. In those instances where the Company first satisfies its performance obligation prior to its receipt of consideration, the consideration is recorded as accounts receivable.

The Company expenses incremental costs of obtaining and fulfilling a contract as and when incurred if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial. Otherwise, such costs are capitalized as contract assets if they are incremental to the contract and amortized to expense proportionate to revenue recognition of the underlying contract.

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Research and Development Costs

All research and development costs are expensed as incurred.

Patent Costs

Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of employee stock option and restricted stock unit grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. For stock option grants for which vesting is subject to performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable or the performance condition has been achieved. For stock option grants for which vesting is subject to both performance-based milestones and market conditions, expense is recorded over the derived service period after the point when the achievement of the performance-based milestone is probable or the performance condition has been achieved. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, with the exception of option grants for which vesting is subject to both performance-based milestones and market conditions, which are valued using a lattice-based model. The fair value of restricted stock units is based on the closing price of the Company’s common stock as reported on The Nasdaq Global Market on the date of grant. The Company recognizes forfeitures for all awards as such forfeitures occur.

Convertible Preferred Stock

The Company applies the relevant accounting standards to distinguish liabilities from equity when assessing the classification and measurement of preferred stock. Preferred shares subject to mandatory redemptions are considered liabilities and measured at fair value. Conditionally redeemable preferred shares are considered temporary equity. All other preferred shares are considered as stockholders’ equity.

The Company applies the relevant accounting standards for derivatives and hedging (in addition to distinguishing liabilities from equity) when accounting for hybrid contracts that contain conversion options. Conversion options must be bifurcated from the host instruments and accounted for as free-standing financial instruments according to certain criteria. These criteria include circumstances when (i) the economic characteristics and risks of the embedded derivative instruments are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable accounting principles with changes in fair value reported in earnings as they occurred, and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently measured at fair value at each reporting date, with the changes in fair value reported in earnings.  

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more- likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.

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Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive loss included unrealized gains and losses on investments classified as available-for-sale securities, which was the only difference between net loss and comprehensive loss for the applicable periods.

Net Loss Per Common Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Dilutive common stock equivalents comprised convertible preferred stock, warrants for the purchase of common stock, and common stock options and restricted stock units outstanding under the Company’s stock option plans. For all periods presented, there is no difference in the number of common shares used to calculate basic and diluted common shares outstanding due to the Company’s net loss position.

Potentially dilutive securities not included in the calculation of diluted net loss per common share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

 

Going Concern Assessment

Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Company determined that there are no conditions or events that raise substantial doubt about its ability to continue as a going concern as of the date of the issuance of these financial statements.

Recently Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07. ASU 2018-07 expands the scope of Accounting Standards Codification (ASC) 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of ASC 718 will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018. The Company adopted the update in the first quarter of fiscal year 2019 using the modified retrospective method. The adoption did not have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASC 842), which requires a lessee to recognize a lease liability and a right-of-use asset for all leases with lease terms of more than 12 months. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted. Companies may adopt this guidance using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. In July 2018, the FASB issued ASU 2018-11, which provides the option of an additional transition method that allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company adopted the standard effective January 1, 2019 using the optional transition method as detailed in ASU 2018-11, which resulted in an increase in operating right-of-use assets of $16.6 million and an increase in total liabilities of $18.2 million on the consolidated balance sheet as of the effective date. There was no material impact on the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2019 as a result of the adoption of ASU 2016-02. There was no impact to the consolidated financial statements for the prior periods presented due to the transition method elected. The Company elected the package of practical expedients permitted under the transition guidance, which among other things, allowed the Company to carry forward the historical lease classification. Additionally, the Company elected the hindsight provision for determining the lease term and elected to aggregate all lease and non-lease components for each class of underlying assets into a single lease component.

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Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU 2018-18, which clarifies the interaction between ASC Topic 808, Collaborative Arrangements, and ASC Topic 606, Revenue from Contracts with Customers. The guidance, among other items, clarifies that certain transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the expected impact of the guidance, but does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13 (ASU 2018-13). ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the expected impact of the guidance, but does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements. 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the expected impact of the guidance, but does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

2. Collaboration and License Agreements

Ono Collaboration and Option Agreement

On September 14, 2018, the Company entered into a Collaboration and Option Agreement (the Ono Agreement) with Ono Pharmaceutical Co. Ltd. (Ono) for the joint development and commercialization of two off-the-shelf iPSC-derived chimeric antigen receptor (CAR) T-cell product candidates. The first off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 1) targets an antigen expressed on certain lymphoblastic leukemias, and the second off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 2) targets a novel antigen identified by Ono expressed on certain solid tumors (each a Candidate and collectively the Candidates).

Pursuant to the Ono Agreement, the Company and Ono are jointly conducting research and development activities under a joint development plan, with the goal of advancing each Candidate to a pre-defined preclinical milestone. The Company has granted to Ono, during a specified period of time, an option to obtain an exclusive license under certain intellectual property rights to develop and commercialize (a) Candidate 1 in Asia, with the Company retaining rights for development and commercialization in all other territories of the world and (b) Candidate 2 in all territories of the world, with the Company retaining the right to co-develop and co-commercialize Candidate 2 in the United States and Europe under a joint arrangement whereby it is eligible to share at least 50% of the profits and losses (each, an Option).  

For each Candidate, the Option will expire upon the earliest of: (a) the achievement of the pre-defined preclinical milestone, (b) termination by Ono of research and development activities for the Candidate and (c) the date that is the later of (i) four years after the Effective Date and (ii) completion of all applicable activities contemplated under the joint development plan (the Option Period). The Company has maintained worldwide rights of manufacture for both Candidates.

Under the terms of the Ono Agreement, Ono paid the Company an upfront, non-refundable and non-creditable payment of $10.0 million in connection with entering into the Ono Agreement. Additionally, as consideration for the Company’s conduct of research and preclinical development under a joint development plan, Ono pays the Company annual research and development fees set forth in the annual budget included in the joint development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan. The Company received $5.0 million in October 2018 as a prepayment for the first year of research and development.

Further, under the terms of the Ono Agreement, Ono has agreed to pay the Company up to an additional $40.0 million, subject to the achievement of a preclinical milestone (Option Milestone) and the exercise by Ono of the Options (Option Exercise Fees) during the Option Period. Such fees are in addition to the upfront payment and research and development fees.

Subject to Ono’s exercise of the Options and to the achievement of certain clinical, regulatory and commercial milestones (Milestones) with respect to each Candidate in specified territories, the Company is entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subject to reduction by 50% if the Company elects to co-develop and co-commercialize Candidate 2 as described above. The Company is also eligible to receive tiered royalties (Royalties) ranging from the mid-single digits to the low-double digits based on annual net sales by Ono of each Candidate in specified territories, with such royalties subject to certain reductions.

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The Ono Agreement will terminate with respect to a Candidate if Ono does not exercise its Option for a Candidate within the Option Period, or in its entirety if Ono does not exercise any of its Options for the Candidates within their respective Option Periods. In addition, either party may terminate the Ono Agreement in the event of breach, insolvency or patent challenges by the other party; provided, that Ono may terminate the Ono Agreement in its sole discretion (x) on a Candidate-by-Candidate basis at any time after the second anniversary of the effective date of the Ono Agreement or (y) on a Candidate-by-Candidate or country-by-country basis at any time after the expiration of the Option Period, subject to certain limitations. The Ono Agreement will expire on a Candidate-by-Candidate and country-by-country basis upon the expiration of the applicable royalty term, or in its entirety upon the expiration of all applicable payment obligations under the Ono Agreement.

The Company applied ASC 808, Collaborative Arrangements and determined that the Ono Agreement is applicable to such guidance. The Company concluded that Ono represented a customer and applied relevant guidance from ASC 606, Revenue from Contracts with Customers (ASC 606) to evaluate the appropriate accounting for the Ono Agreement. In accordance with this guidance, the Company identified its performance obligations, including its grant of a license to Ono to certain of its intellectual property subject to certain conditions, its conduct of research services, and its participation in a joint steering committee. The Company determined that its grant of a license to Ono to certain of its intellectual property subject to certain conditions was not distinct from other performance obligations because such grant is dependent on the conduct and results of the research services. As a result, the license is classified as symbolic intellectual property under ASC 606. Additionally, the Company determined that its conduct of research services was not distinct from other performance obligations since such conduct is dependent on the guidance of the joint steering committee. Accordingly, the Company determined that all performance obligations should be accounted for as one combined performance obligation, and that the combined performance obligation is transferred over the expected term of the conduct of the research services, which is estimated to be four years.

The Company also assessed, in connection with the upfront, non-refundable and non-creditable payment of $10.0 million received in September 2018 and the $5.0 million prepayment of the first-year research and development fees in October 2018, whether a significant financing component exists under the Ono Agreement. Such assessment evaluated whether: (i) a substantial amount of the consideration is variable, (ii) the amount, or timing of payment, of the consideration would have varied based on the occurrence or non-occurrence of future events that are not substantially within the control of the Company or Ono, and (iii) the timing of the transfer of the performance obligations is at the discretion of Ono. Based on its assessment, the Company concluded that there was not a significant financing component.

The Company also assessed the effects of any variable elements under the Ono Agreement. Such assessment evaluated, among other things, the likelihood of receiving (i) preclinical milestone and option fees, (ii) various clinical, regulatory and commercial milestone payments, and (iii) royalties on net sales of either product Candidate. Based on its assessment, the Company concluded that, based on the likelihood of these variable components occurring, there was not a significant variable element included in the transaction price.

In accordance with ASC 606, the Company determined that the initial transaction price under the Ono Agreement equals $30.0 million, consisting of the upfront, non-refundable and non-creditable payment of $10.0 million and the aggregate estimated research and development fees of $20.0 million. The upfront payment of $10.0 million was recorded as deferred revenue and will be recognized as revenue over time in conjunction with the Company’s conduct of research services over the estimated four-year period based on actual costs incurred compared to estimated total costs expected to be incurred under the Ono Agreement, as the research and development activities are the primary component of the combined performance obligation. The Company recorded the $5.0 million prepayment of the first-year research and development fees as deferred revenue, and such fees were recognized as revenue as the research services were delivered. To date, the Company has received $6.5 million of research and development fees.

The Company has not assigned a transaction price to any Option Milestone, Milestones or Option Exercise Fees given the substantial uncertainty related to their achievement and has not assigned a transaction price to any Royalties.

As a direct result of the Company’s entry into the Ono Agreement, the Company incurred an aggregate of $2.0 million in sublicense consideration to existing licensors of the Company. The $2.0 million in sublicense consideration represents an asset under ASC 340, Other Assets and Deferred Costs and is amortized to research and development expense in conjunction with the Company’s revenue recognition under the Ono Agreement. During the year ended December 31, 2019, the Company recognized $0.6 million of such expense. As of December 31, 2019, the contract asset had a balance of $1.3 million.

The Company recognized revenue of $9.3 million under the Ono Agreement during the year ended December 31, 2019. Such revenue comprised $6.2 million associated with research services and $3.1 million associated with the upfront payment. During the year ended December 31, 2018, the Company recognized revenue of $0.6 million under the Ono Agreement. Such revenue comprised $0.4 million associated with research services and $0.2 million associated with the upfront payment. As of December 31, 2019, aggregate deferred revenue related to the Ono Agreement was $6.6 million, of which $2.8 million is classified as current.

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Juno Collaboration and License Agreement

On May 4, 2015, the Company entered into a strategic research collaboration and license agreement (the Juno Agreement) with Juno Therapeutics, Inc. (Juno) to screen for and identify small molecules that enhance the therapeutic properties of Juno’s genetically-engineered T-cell immunotherapies. The four-year initial research term under the Juno Agreement concluded as scheduled on May 4, 2019, and the overall agreement was terminated upon the receipt of the last quarterly research payment of $0.2 million, which occurred in May 2019. No additional funding is expected from Juno.

The Company applied ASC 606 to evaluate the appropriate accounting for the Juno Agreement. In accordance with this guidance, the Company identified its performance obligations, including its grant of an exclusive worldwide license to certain of its intellectual property subject to certain conditions, its conduct of research services and its participation in a joint research committee.

Total revenue recognized under the Juno Agreement during the year ended December 31, 2019 was $1.4 million, which comprised $0.7 million associated with the upfront fee and equity premium, and $0.7 million associated with research services. Total revenue recognized under the Juno Agreement for the year ended December 31, 2018 was $4.1 million, which comprised $2.1 million associated with the upfront fee and the equity premium and $2.0 million associated with research services. Total revenue recognized under the Juno Agreement for the year ended December 31, 2017 was $4.1 million, which comprised $2.1 million associated with the upfront fee and the equity premium and $2.0 million associated with research services. No additional revenue is expected to be recognized under the Juno Agreement in future periods. 

Memorial Sloan Kettering Cancer Center License Agreement

On May 15, 2018, the Company entered into an Amended and Restated Exclusive License Agreement (the Amended MSK License) with Memorial Sloan Kettering Cancer Center (MSK). The Amended MSK License amends and restates the Exclusive License Agreement entered into between the Company and MSK on August 19, 2016 (the Original MSK License), pursuant to which the Company entered into an exclusive license agreement with MSK for rights relating to compositions and methods covering iPSC-derived cellular immunotherapy, including T-cells and NK-cells derived from iPSCs engineered with CARs.  

Pursuant to the Amended MSK License, MSK granted to the Company additional licenses to certain patents and patent applications relating to new CAR constructs and off-the-shelf CAR T cells, including the use of clustered regularly interspaced short palindromic repeat (CRISPR) and other innovative technologies for their production, in each case to research, develop, and commercialize licensed products in the field of all human therapeutic uses worldwide. The Company has the right to grant sublicenses to certain licensed rights in accordance with the terms of the Amended MSK License, in which case it is obligated to pay MSK a percentage of certain sublicense income received by the Company.

The Company issued 500,000 shares of the Company’s common stock to MSK (the MSK Shares) and, in return, MSK returned its entire interest in Tfinity Therapeutics, Inc. (Tfinity) to the Company. As a result, as of the effective date of the Amended MSK License, Tfinity is a wholly-owned subsidiary of the Company. The MSK Shares were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the Securities Act), in reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a public offering.

Additionally, the Company paid an upfront fee of $0.5 million. The Company is also obligated to pay to MSK an annual license maintenance fee during the term of the agreement, and milestone payments upon the achievement of specified clinical, regulatory and commercial milestones for licensed products as well as royalty payments on net sales of licensed products.

Furthermore, in the event a licensed product achieves a specified clinical milestone, MSK is then eligible to receive additional milestone payments, where the amount of such payments owed to MSK are contingent upon certain increases in the price of the Company’s common stock following the date of achievement of such clinical milestone.

Given the high degree of uncertainty surrounding the achievement of clinical milestones and the requisite increase in the price of the Company’s common stock, the Company has not recorded a liability for such payments.

During the year ended December 31, 2018, the Company recognized an aggregate of $5.3 million of research and development expenses, consisting of the $0.5 million upfront cash payment to MSK and the issuance of the MSK Shares, valued at $4.8 million, associated with the Amended MSK License.

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Gladstone License Agreement

On September 11, 2018, the Company entered into an exclusive license agreement (the Gladstone License Agreement) with the J. David Gladstone Institutes (Gladstone).

Pursuant to the Gladstone License Agreement, Gladstone granted to the Company exclusive licenses to certain patents and patent applications (the Patent Rights) for the research, development, manufacturing, and commercialization of human therapeutics derived from iPSCs. The Patent Rights cover the use of the CRISPR and engineered nuclease-deactivated CRISPR-associated protein-9 (dCas9) system, known as the CRISPR activation (CRISPRa) system, for cellular reprogramming and iPSC generation.

In consideration for the rights granted under the Gladstone License Agreement, the Company issued to Gladstone 100,000 shares of the Company’s common stock (the Gladstone Shares). The Gladstone Shares were issued pursuant to an exemption from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a public offering.

Additionally, the Company paid Gladstone an upfront fee of $0.1 million and is obligated to pay Gladstone milestone payments in an aggregate amount of up to approximately $1.9 million upon the achievement of specified clinical, regulatory and commercial milestones as well as tiered royalties in the low single digits on net sales of human therapeutic products covered by the Patent Rights. The Company is also obligated to pay Gladstone a tiered percentage in the low- to mid-single digits of certain income received by the Company in connection with the sublicense of the Patent Rights.

During the year ended December 31, 2018, the Company recognized an aggregate of $1.4 million of research and development expenses, consisting of the $0.1 million upfront cash payment to Gladstone and the issuance of the Gladstone Shares, valued at $1.3 million, associated with the Gladstone License Agreement.

On April 5, 2018, the Company executed an award agreement with the California Institute for Regenerative Medicine (CIRM) pursuant to which CIRM awarded the Company $4.0 million to advance the Company’s FT516 product candidate into a first-in-human clinical trial for the treatment of subjects with advanced solid tumors, including in combination with monoclonal antibody therapy (the Award). Pursuant to the terms of the Award, the Company is eligible to receive five disbursements in varying amounts totaling $4.0 million, with one disbursement receivable upon the execution of the Award, and four disbursements receivable upon the completion of certain milestones throughout the project period. The Award is subject to certain co-funding requirements by the Company, and the Company is required to provide CIRM progress and financial update reports under the Award. In December 2018, the Company discussed with CIRM its intent to pursue the clinical development of FT516 in relapsed / refractory hematologic malignancies in addition to advanced solid tumors, and the Company’s preference to first submit an IND application for FT516 in relapsed / refractory hematologic malignancies rather than in advanced solid tumors. In January 2019, the Company submitted its IND application for FT516 in relapsed / refractory hematologic malignancies, which IND submission was allowed by the FDA in February 2019. The Company and CIRM agreed to suspend the Award until such time as the Company elected to proceed with its submission of an IND application for FT516 in advanced solid tumors. In November 2019, the Company filed an IND application for FT516 in advanced solid tumors and the Award was taken off of suspension by CIRM in January 2020. In February 2020, the Company received a $0.4 million disbursement based on a milestone achievement. 

Pursuant to the terms of the Award, the Company, in its sole discretion, has the option to treat the Award either as a loan or as a grant. In the event the Company elects to treat the Award as a loan, the Company will be obligated to repay i) 60%, ii) 80%, iii) 100% or iv) 100% plus interest at 7% plus LIBOR, of the total Award to CIRM, where such repayment rate is dependent upon the phase of clinical development of FT516 at the time of the Company’s election. If the Company does not elect to treat the Award as a loan within 10 years of the date of the Award, the Award will be considered a grant and the Company will be obligated to pay to CIRM a royalty on commercial sales of FT516 until such royalty payments equal nine times the total amount awarded to the Company under the Award.

Since the Company may, at its election, repay some or all of the Award, the Company accounts for the Award as a liability until the time of election. As of December 31, 2019, the Company has received aggregate disbursements under the Award in the amount of $3.5 million. The aggregate amount received is recorded as a CIRM Liability on the accompanying consolidated balance sheets and classified as current or non-current based on the potential amount payable within twelve months of the current balance sheet date.

 

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4. Investments

The Company invests portions of excess cash in United States treasuries and corporate debt securities with maturities ranging from three to eighteen months from the purchase date. These securities are classified as short-term and long-term investments in the accompanying consolidated balance sheets based on each security’s contractual maturity date and are accounted for as available-for-sale securities.

The following table summarizes the Company’s investments accounted for as available-for-sale securities as of December 31, 2019 and 2018 (in thousands):

 

 

The Company reviews its investment holdings at the end of each reporting period and determines if any unrealized losses are other-than-temporary using a variety of factors including the Company’s intent to sell the underlying securities prior to maturity and whether it is more likely than not that the Company would be required to sell the securities before the recovery of their amortized basis. During the years ended December 31, 2019, 2018 and 2017 the Company did not recognize any impairment or realized gains or losses on sales of investments and the Company does not consider any of its investments as other-than-temporarily impaired.  

 

5. Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

Depreciation expense related to property and equipment was $2.2 million, $1.2 million, and $1.0 million, for the years ended December 31, 2019, 2018, and 2017, respectively. No material gains or losses on the disposal of property and equipment have been recorded for the years ended December 31, 2019, 2018, and 2017. As of December 31, 2019, $0.6 million of fixed assets had not been paid.

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6. Accrued Expenses and Long-Term Debt

Accrued Expenses

Current accrued expenses consist of the following (in thousands):

 

 

Long-term accrued expenses represented the accrual for the final payment fee associated with our long-term debt.

Long-Term Debt

Long-term debt and unamortized discount balances are as follows (in thousands):

 

 

Silicon Valley Bank Debt Facilities

On July 30, 2014, the Company entered into the Amended and Restated Loan and Security Agreement (the Restated LSA) with Silicon Valley Bank (the Bank), collateralized by substantially all of the Company’s assets, excluding certain intellectual property. The Restated LSA amends and restates the Loan and Security Agreement, dated as of January 5, 2009, as amended, by and between the Company and the Bank (Loan Agreement). Pursuant to the Restated LSA, the Bank agreed to make loans to the Company in an aggregate principal amount of up to $20.0 million, comprised of (i) a $10.0 million term loan, funded at the closing date (the Term A Loan) and (ii) subject to the achievement of a specified clinical milestone, additional term loans totaling up to $10.0 million in the aggregate, which were available until December 31, 2014 (each, a Term B Loan). On December 24, 2014, the Company elected to draw on the full $10.0 million under a Term B Loan.

On July 14, 2017 (the First Amendment Effective Date), the Company and the Bank entered into the First Amendment (the SVB Loan Amendment) to the Restated LSA between the Company and the Bank dated July 30, 2014. Pursuant to the SVB Loan Amendment, the Bank extended an additional term loan to the Company on July 14, 2017 in the principal amount of $15.0 million (the 2017 Term Loan), a portion of which was applied to repay in full the Company’s existing outstanding debt with the Bank under the Restated LSA, which included outstanding principal, accrued interest, and final payment fees. Following such repayment in full of the Company’s existing outstanding debt with the Bank under the Restated LSA, cash proceeds to the Company from the remaining portion of the 2017 Term Loan were $7.5 million. The Company determined the repayment of the Restated LSA and issuance of the 2017 Term Loan was a debt extinguishment and accounted for the 2017 Term Loan at fair value as of the First Amendment Effective Date accordingly.

On November 13, 2019, the Company repaid in full all outstanding obligations under the 2017 Term Loan. The Company used cash on hand in the amount of $14.2 million for the repayment of such obligations associated with the 2017 Term Loan, including the repayment of $13.0 million in principal and $1.2 million associated with the final fee and outstanding interest. The Company expensed the remaining debt issuance cost capitalized of $0.1 million to interest expense upon the repayment of the 2017 Term Loan.

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The 2017 Term Loan was scheduled to mature on January 1, 2022 (the Term Loan Maturity Date) and beared interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%; provided, however, that in no event would such interest rate exceed 8.25%. Interest was payable on a monthly basis on the first day of each month.

From August 1, 2017 through January 1, 2019 (the Interest-only Period), the Company was required to make monthly payments of interest only. In January 2019, after achievement of a product development milestone, the Company elected to extend the Interest-only Period from January 1, 2019 through and including to July 31, 2019. The Company was required to repay the principal, plus monthly payments of accrued interest, in 30 equal monthly installments based on a 30-month amortization schedule.

The Company’s final payment in November 2019 included all outstanding principal and accrued and unpaid interest under the 2017 Term Loan, plus a 7.5%, or $1.1 million, final payment fee. This final payment fee was accrued as interest expense over the term of the 2017 Term Loan and recorded in accrued expenses. As a result of the Company’s early repayment of the 2017 Term Loan during November 2019, the unaccrued balance of the final payment fee of $0.3 million was recorded in interest expense during the year ended December 31, 2019.

For the years ended December 31, 2019, 2018, and 2017, the Company recorded $1.8 million, $1.7 million, and $0.8 million respectively, in aggregate interest expense related to the 2017 Term Loan.

Warrants

In connection with the funding of the Term B Loan under the Restated LSA, the Company issued the Bank and one of its affiliates fully-exercisable warrants to purchase an aggregate of 98,039 shares of the Company’s common stock (the 2014 Warrants) at an exercise price of $4.08 per share. In March 2018, a portion of the 2014 Warrants were exercised in exchange for 34,149 shares of the Company’s common stock in a cashless transaction. During July 2019, the remaining balance of the 2014 Warrants outstanding was exercised for 39,263 shares of the Company’s common stock in a cashless transaction. As a result, none of the 2014 Warrants remain outstanding as of December 31, 2019.

In connection with the SVB Loan Amendment, the Company issued to the Bank on the First Amendment Effective Date a fully exercisable warrant (the 2017 Warrant), expiring in July 2024, to purchase up to an aggregate of 91,463 shares of the Company’s common stock, subject to adjustment, at an exercise price equal to $3.28 per share. The aggregate fair value of the 2017 Warrant was determined to be $0.2 million using the Black-Scholes option pricing model and was recorded as a debt discount on the 2017 Term Loan. This debt discount is amortized to interest expense over the term of the 2017 Term Loan using the effective interest method. The Company determined the effective interest rate of the 2017 Term Loan to be 10.2% as of the First Amendment Effective Date. During September 2018, the 2017 Warrant was fully exercised in exchange for 67,952 shares of the Company’s common stock in a cashless transaction.

In connection with a prior debt agreement between the Company and the Bank in 2009, the Company issued the Bank fully exercisable warrants to purchase an aggregate of 36,074 shares of the Company’s common stock at a weighted-average exercise price of $7.21 per share. During January 2019, a portion of the warrants were exercised in exchange for 1,245 shares of the Company’s common stock in a cashless transaction. During July 2019, the remaining balance of the warrants outstanding was exercised for 21,012 shares of the Company’s common stock in a cashless transaction. No warrants related to the prior debt agreement remain outstanding as of December 31, 2019. 

7. Leases

The Company leases its headquarters office and laboratory space under a non-cancelable operating lease. In May 2018, the Company amended this lease, extending the term of the lease through the end of 2028 and agreeing to lease additional space in the same building as its existing space beginning in January 2019. The additional space leased as a result of the amendment was considered a separate lease under ASC 842 and was recorded on the consolidated balance sheets as of the lease inception date during January 2019, resulting in an increase in operating right-of-use assets of $7.7 million and an increase in the aggregate lease liability of $9.6 million. The Company can extend the term of each lease for five years after the end of 2028 at the then prevalent market rate, subject to the Company's delivery to the landlord of twelve months' prior written notice. Additionally, the Company maintains the right to terminate each lease after October 2025, subject to the Company's delivery to the landlord of twelve month's prior written notice and an early termination payment of $2.5 million. As of the date of adoption of ASC 842 and upon the lease inception date, the Company was not reasonably certain that it would exercise the extension option or the termination option, and as such, did not include these options in the determination of the total lease terms. The leases are subject to additional variable charges for common area maintenance and other variable costs. Given the variable nature of such costs, they are recognized as expense as incurred. Further, the leases are subject to certain fixed amenities fees for the duration of the lease. These costs are considered non-lease components, which have been aggregated with the lease components into a single lease component for purposes of determining the total future lease payments. In connection with the leases, the Company has a cash-collateralized irrevocable standby letter of credit in the amount of $0.2 million.

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As of December 31, 2019, future minimum payments under the Company’s operating leases were $38.2 million, which will be paid over a remaining weighted-average lease term of 9.0 years. The weighted-average discount rate for the operating lease liabilities was 8.0%, which was the Company's incremental borrowing rate at the date of adopting ASC 842 and upon lease inception.  

For the year ended December 31, 2019, total operating lease expense was $6.1 million, which consisted of $3.8 million associated with the straight-line recognition of fixed payments, and $2.3 million associated with variable costs associated with the leases. For both the years ended December 31, 2018 and 2017, aggregate contractual rent expense was $2.3 million.

Total short-term lease expense associated with short-term leases for the year ended December 31, 2019 was $1.1 million.

Future minimum payments under the Company’s operating leases as of December 31, 2019 are as follows (in thousands):

 

 

The Company has an additional operating lease for office and laboratory space in New York that had not yet commenced as of December 31, 2019. The lease commenced in January 2020 and has a lease term of two years. Total future minimum payments under the operating lease are $0.3 million.

In January 2020, the Company entered into a lease agreement for office, laboratory, and GMP manufacturing space (the Premises). The Premises are located in San Diego, California and the Company intends to move its corporate headquarters to the Premises in the middle of 2021. See Note 13 of the notes to the consolidated financial statements for additional information on this lease.

8. Convertible Preferred Stock and Stockholders’ Equity

Convertible Preferred Stock

In November 2016, the Company completed a private placement of stock in which investors, including investors affiliated with the directors and officers of the Company, purchased convertible preferred stock and common stock of the Company (the November 2016 Placement). The Company issued 2,819,549 shares of non-voting Class A Convertible Preferred Stock (the Class A Preferred) at $13.30 per share, each of which is convertible into five shares of common stock upon certain conditions defined in the Certificate of Designation of Preferences, Rights and Limitations of the Class A Preferred filed with the Delaware Secretary of State on November 22, 2016 (the CoD). The Class A Preferred were purchased exclusively by entities affiliated with Redmile Group, LLC (collectively, Redmile). The terms of the CoD prohibited Redmile from converting the Class A Preferred into shares of the Company’s common stock if, as a result of conversion, Redmile, together with its affiliates, would own more than 9.99% of the Company’s common stock then issued and outstanding (the Redmile Percentage Limitation), which percentage could change at Redmile’s election upon 61 days’ notice to the Company to (i) any other number less than or equal to 19.99% or (ii) subject to approval of the Company’s stockholders to the extent required in accordance with the NASDAQ Global Market rules, any number in excess of 19.99%. On May 2, 2017, the Company’s stockholders approved the issuance of up to an aggregate of 14,097,745 shares of common stock upon the conversion of the outstanding shares of Class A Preferred. As a result, Redmile has the right to increase the Redmile Percentage Limitation to any percentage in excess of 19.99% at its election. The Company also issued 7,236,837 shares of common stock at $2.66 per share as part of the November 2016 Placement.

The Class A Preferred are non-voting shares and have a stated par value of $0.001 per share and are convertible into five shares of the Company’s common stock at a conversion price of $2.66 per share, which was the fair value of the Company’s common stock on the date of issuance. Holders of the Class A Preferred have the same dividend rights as holders of the Company’s common stock. Additionally, the liquidation preferences of the Class A Preferred are pari passu among holders of the Company’s common stock and holders of the Class A Preferred, pro rata based on the number of shares held by each such holder (treated for this purpose as if the Class A Preferred had been converted to common stock).

During the year ended December 31, 2019, 25,000 shares of the Company’s Class A Preferred were converted into 125,000 shares of the Company’s common stock.

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Description of Securities

Dividends

As of December 31, 2019, the Board of Directors of the Company has not declared any dividends.

2013 Stock Option and Incentive Plan, and Inducement Equity Plan

2013 Stock Option and Incentive Plan

On August 28, 2013, the Company’s board of directors and stockholders approved and adopted the 2013 Stock Option and Incentive Plan (the 2013 Plan). The 2013 Plan became effective immediately prior to the Company’s IPO. The 2013 Plan was subsequently amended in May 2017. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then employees, officers, directors or consultants of the Company or its subsidiaries. A total of 1,020,000 shares of common stock were initially reserved for issuance under the 2013 Plan, and in May 2017, stockholders approved an additional 2,500,000 shares of common stock for issuance under the 2013 Plan. The shares issuable pursuant to awards granted under the 2013 Plan will be authorized, but unissued shares. The shares of common stock underlying any awards from the 2013 Plan and a previously existing equity plan from 2007 that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of common stock, expire or are otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2013 Plan.

In addition, the number of shares of stock available for issuance under the 2013 Plan will be automatically increased each January 1 by 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or such lesser number as determined by the compensation committee of the Company’s board of directors.

Recipients of stock options under the 2013 Plan shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair value of such stock on the date of grant. Under the 2013 Plan, stock options generally vest 25% on the first anniversary of the original vesting date, with the balance vesting monthly over the remaining three years, or vest monthly over four years, unless they contain specific performance and/or market-based vesting provisions. The maximum term of stock options granted under the 2013 Plan is ten years. Under the 2013 Plan, restricted stock units generally vest annually over four years.

Inducement Plan

On May 10, 2016, the Company’s board of directors approved the Fate Therapeutics, Inc. Inducement Equity Plan (the Inducement Plan), the purpose of which is to enable the Company to grant equity awards to induce highly-qualified prospective officers and employees who are not employed by the Company to accept employment with the Company. Under the Inducement Plan, the Company may grant non-qualified stock options and restricted stock units. A total of 500,000 shares of common stock were initially reserved for issuance under the Inducement Plan. In January 2019 and January 2018, an additional 200,000 shares and 400,000 shares, respectively, of common stock were reserved for issuance under the Inducement Plan. The shares of common stock underlying any awards from the Inducement Plan that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of common stock, expire or are otherwise terminated (other than by exercise) under the Inducement Plan will be added back to the shares of common stock available for issuance under the Inducement Plan.

Employee Stock Purchase Plan

On September 13, 2013, the Company’s board of directors approved and adopted the 2013 Employee Stock Purchase Plan (the ESPP). A total of 729,000 shares of common stock were initially reserved for issuance under the ESPP. In addition, the number of shares of stock available for issuance under the ESPP will be automatically increased each January 1, beginning on January 1, 2015, by the lesser of (i) 2% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31, (ii) 450,000 shares, or (iii) such lesser number as determined by the compensation committee of the Company’s board of directors.

No purchases have been made to date under the ESPP.

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Stock Options and Restricted Stock Unit Awards

Stock Options.  The following table summarizes stock option activity and related information under all equity plans for the years ended December 31, 2019, 2018 and 2017:

 

 

 

For the year ended December 31, 2019, the weighted average grant date fair value of stock options granted per share was equal to $11.52. For the years ended December 31, 2018 and 2017, the weighted average grant date fair value of stock options granted to employees and directors was equal to $8.28 and $2.29, respectively.

As of December 31, 2019, 2018 and 2017, the unrecognized compensation cost related to outstanding options (excluding those with unachieved performance-based conditions) was $40.4 million, $15.9 million and $5.8 million, respectively, which was expected to be recognized as expense over approximately 2.9 years, 3.1 years and 2.6 years, respectively.

The total intrinsic value, which is the amount by which the exercise price was exceeded by the price of the Company’s common stock on the date of exercise, of stock options exercised during the years ended December 31, 2019, 2018, and 2017, was $10.7 million, $5.5 million, and $0.1 million, respectively. Total cash received upon the exercise of stock options was $2.5 million for the year ended December 31, 2019.

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Restricted Stock Units. The following table summarizes restricted stock unit activity and related information under all equity plans for the years ended December 31, 2019, 2018 and 2017:

 

 

As of December 31, 2019, 2018 and 2017, the unrecognized compensation cost related to outstanding restricted stock units was $6.2 million, $0.4 million, and $0.9 million respectively, which was expected to be recognized as expense over approximately 2.7 years, 0.8 years, and 1.8 years respectively.

Stock-Based Compensation Expense

The allocation of stock-based compensation for all stock awards is as follows (in thousands):

 

 

 

Stock Option Grants Valuation.  As of January 1, 2019, the Company adopted ASU 2018-07, which aligned the guidance on share-based payments to nonemployees with that for share-based payments to employees. In accordance with ASU 2018-07, the measurement of equity-classified nonemployee awards is fixed at the grant date and entities are not required to remeasure nonemployee equity awards at each reporting date until such time that the measurement date is established. The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee and nonemployee stock option grants were as follows:

 

 

Risk-free interest rate.  The Company bases the risk-free interest rate assumption on observed interest rates appropriate for the expected term of the stock option grants.

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Expected dividend yield.  The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends.

Expected volatility.  Due to the Company’s limited operating history and limited company-specific historical or implied volatility, the expected volatility assumption is based on historical volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry.

Expected term.  The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period.  

Warrants to Purchase Common Stock in Connection with Debt Issuance

As a result of the financing of the Loan Amendment on July 14, 2017, the Company issued SVB fully-exercisable warrants to purchase an aggregate of 91,463 shares of the Company’s common stock at an exercise price of $3.28 per share. The warrants would have expired in July 2024. In September 2018, the 2017 Warrant was fully exercised in exchange for 67,952 shares of the Company’s common stock in a cashless transaction. See Note 6 of the notes to the consolidated financial statements for additional information on the debt issuance.

The fair value of the warrants was determined to be $0.2 million, which was recorded to additional paid-in capital as a debt discount. The weighted- average assumptions used in the Black-Scholes option pricing model to determine the fair value of the warrants issued were as follows:

 

 

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance is as follows:

 

 

 

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9. Income Taxes

The following is a reconciliation of the Company’s expected federal income tax provision (benefit) to the actual income tax provision (in thousands):

 

 

Significant components of the Company’s deferred tax assets are summarized as follows (in thousands):

 

 

 

A valuation allowance of $94.6 million and $67.4 million at December 31, 2019 and 2018, respectively, has been established to offset the deferred tax assets, as realization of such assets is uncertain.

At December 31, 2019, the Company had federal and California net operating loss (NOL) carryforwards of $168.2 million and $168.2 million, respectively, which may be available to offset future taxable income. The federal and California NOL carryforwards begin to expire in 2027 and 2028, respectively, unless previously utilized. At December 31, 2019, the Company had federal and California research and development (R&D) credit carryforwards of $13.4 million and $8.5 million, respectively. The federal R&D tax credit carryforwards will begin to expire in 2035 unless previously utilized. The California R&D credit carryforwards will carry forward indefinitely.

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Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that could be used annually in the future to offset taxable income. The tax benefits related to future utilization of federal and state net operating loss carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period. The Company completed a study to assess whether an ownership change, as defined by Section 382 of the Code, had occurred from the Company’s formation through December 31, 2015. Based upon this study, the Company determined that several ownership changes had occurred. Accordingly, the Company reduced its deferred tax assets related to the federal NOL carryforwards and the federal R&D credit carryforwards that are anticipated to expire unused as a result of these ownership changes. These tax attributes were excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate. The Company updated the study through December 31, 2019 and concluded there were no ownership changes subsequent to December 31, 2015. Future ownership changes may further limit the Company’s ability to utilize its remaining tax attributes.

The Company files income tax returns in the United States and California, and has historically filed income tax returns in Canada. The Company currently has no years under examination by any jurisdiction; however, the Company is subject to income tax examination by federal, Californian and Canadian tax authorities for years beginning in 2016, 2015, and 2015, respectively. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs and tax credits were generated and carried forward, and make adjustments up to the amount of the carryforwards.

The change in the Company’s unrecognized tax benefits is summarized as follows (in thousands):

 

 

The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2019 will significantly change within the next twelve months. Due to the valuation allowance recorded against the Company’s deferred tax assets, none of the total unrecognized tax benefits as of December 31, 2019 would reduce the effective tax rate if recognized. The Company has not recognized interest or penalties in its consolidated statements of operations and comprehensive loss since inception.

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 34% to 21%. The reduction in the federal corporate tax rate caused the Company to remeasure its deferred tax assets and liabilities at December 31, 2017. The remeasurement resulted in a provisional income tax expense of $25.3 million, offset by an equal reduction in the valuation allowance during the year ended December 31, 2017. During 2018, the Company finalized its analysis of the provisional impact associated with the remeasurement of deferred tax assets. There was no change in the provisional remeasurement amount previously recorded during 2017.  

10. Employee Benefits

Effective January 1, 2009, the Company adopted a defined contribution 401(k) plan for employees who are at least 21 years of age. Employees are eligible to participate in the plan beginning on the first day of the calendar quarter following date of hire. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation. No matching contributions have been made by the Company since the adoption of the 401(k) plan.

11. Commitments and Contingencies

License Agreements

The Company has entered into exclusive license agreements with certain academic institutions and universities pursuant to which the Company acquired certain intellectual property. Pursuant to each agreement, as consideration for an exclusive license to the intellectual property, the Company paid a license fee, reimbursed the institution for historical patent costs and, in certain instances, issued the institution shares of restricted common stock. Additionally, under each agreement, the institution is generally eligible to receive future consideration including, but not limited to, annual maintenance fees, royalties, milestone payments and sublicensing fees. Each of the license agreements is generally cancelable by the Company, given appropriate prior written notice. Minimum annual payments to maintain these cancelable licenses total an aggregate of $0.4 million.

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12. Selected Quarterly Financial Data (Unaudited)

The following tables show a summary of the Company’s quarterly financial information for each quarter of 2019 and 2018 (in thousands, except per share data):

 

 

 

13. Subsequent Events

In January 2020, the Company entered into a lease agreement for office, laboratory, and GMP manufacturing space (the Premises). The Premises is located in San Diego, California and the Company intends to move its corporate headquarters to the Premises in the middle of 2021.

Lease payments shall commence, subject to certain conditions, in May 2021 (the Rent Commencement Date) and the lease has a lease term of 15 years starting from the Rent Commencement Date. The Company has the option to extend the lease for two successive five-year terms.  The Company also has a one-time option to terminate the lease after 10 years from the Rent Commencement Date, subject to payment of a $30.0 million early termination fee.

Total future minimum payments under the lease, assuming a 15-year term from the Rent Commencement Date, are $157.6 million, which are to be paid in monthly installments beginning May 2021. The landlord of the Premises will contribute an aggregate of up to $30.0 million toward tenant improvements of the Premises. In connection with the lease, the Company will maintain a letter of credit for the benefit of the landlord in an initial amount of $15.0 million, which amount is subject to reduction over time.

 

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ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  We are responsible for maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the individual serving as our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on our management’s evaluation (with the participation of the individual serving as our principal executive officer and principal financial officer) of our disclosure controls and procedures as required by Rules 13a-15 and 15d-15 under the Exchange Act, the individual serving as our principal executive officer and principal financial officer has concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019, the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting.  The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including the individual serving as our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2019, our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm, Ernst & Young LLP, has audited the financial statements included in this Form 10-K and has issued an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2019. The report of Ernst & Young LLP is included with the financial statements included under Part II, Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Fate Therapeutics, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Fate Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Fate Therapeutics, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated March 2, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.     

 

 

/s/ Ernst & Young LLP

San Diego, CA

March 2, 2020

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ITEM 9B.  Other Information

None.

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PART III

 

 

ITEM 10.  Directors, Executive Officers and Corporate Governance

Except as set forth below, the information required by this item is contained in our definitive proxy statement (the Proxy Statement), to be filed with the SEC in connection with the Annual Meeting of Stockholders within 120 days after the conclusion of our fiscal year ended December 31, 2019 and is incorporated in this Annual Report on Form 10-K by reference.

We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A current copy of the code is posted on the Corporate Governance section of our website, which is located at www.fatetherapeutics.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions, or any officer or director, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

ITEM 11.  Executive Compensation

The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.

ITEM 13.  Certain Relationships and Related Party Transactions, and Director Independence

The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.

ITEM 14.  Principal Accounting Fees and Services

The information required by this item is contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.

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PART IV

ITEM 15.  Exhibits and Financial Statement Schedules

 

 

All other schedules are omitted because they are not required or the required information is included in the financial statements or notes thereto.

The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.

ITEM 16.  Form 10-K Summary

None.

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EXHIBIT INDEX

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints J. Scott Wolchko as his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:

 

 

 

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Exhibit 4.6

DESCRIPTION OF THE REGISTRANT’S SECURITIES

REGISTERED PURSUANT TO SECTION 12 OF THE

SECURITIES EXCHANGE ACT OF 1934

As of December 31, 2019, Fate Therapeutics, Inc. (the “Company,” “we,” “us,” and “our”) had one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: our Common Stock (as defined below).

 

 

DESCRIPTION OF CAPITAL STOCK

The following description of our Common Stock and Preferred Stock (collectively, the “Capital Stock”) is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”), the Certificate of Designation of Preferences, Rights and Limitations of the Class A Preferred filed with the Delaware Secretary of State on November 22, 2016 (the “Certificate of Designation”) and our Amended and Restated Bylaws (“Bylaws”), each of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.6 is a part, and by applicable law. We encourage you to read our Certificate of Incorporation, Certificate of Designation, our Bylaws and the applicable provisions of the Delaware General Corporation Law for additional information.

Authorized Capital Stock

Our authorized capital stock consists of 150,000,000 shares of common stock, par value $0.001 per share (the “Common Stock”),and 5,000,000 shares of preferred stock, par value $0.001 per share (the “Preferred Stock”). 2,819,549 shares of our authorized Preferred Stock have been designated as Class A Convertible Preferred Stock. 

Common Stock

The holders of our Common Stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders. The holders of our Common Stock do not have any cumulative voting rights. Holders of our Common Stock are entitled to receive ratably any dividends declared by our board of directors (the “Board”) out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding Preferred Stock. Our Common Stock has no preemptive rights, conversion rights or other subscription rights or redemption or sinking fund provisions.

In the event of our liquidation, dissolution or winding up, holders of our Common Stock will be entitled to share ratably in all assets remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding Preferred Stock. All outstanding shares are fully paid and nonassessable.

Exchange Listing

Our Common Stock is listed on The Nasdaq Global Market under the symbol “FATE.”

Transfer Agent and Registrar

The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, LLC. 

Preferred Stock

Undesignated Preferred Stock

Our Board was initially authorized to issue up to 5,000,000 shares of Preferred Stock in one or more series without stockholder approval. As a result of the designation and issuance of 2,819,549 shares of Class A Convertible Preferred Stock described below, our Board is authorized to designate and issue up to 2,180,451 remaining shares of Preferred Stock. Our Board may determine the rights, preferences, privileges and restrictions, including voting

 

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rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of Preferred Stock, any or all of which may be more favorable than the rights of our Common Stock. The issuance of our Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon our liquidation. In addition, the issuance of Preferred Stock could have the effect of delaying, deferring or preventing a change in control of our company or other corporate action.

Class A Convertible Preferred Stock

Each share of Class A Convertible Preferred Stock (the “Preferred Shares”) is convertible into five shares of Common Stock (subject to adjustment for stock dividends, stock splits, combinations and the like). In the event of our liquidation, dissolution or winding up, holders of Preferred Shares will participate pari passu with the holders of our Common Stock in any distribution of proceeds, pro rata based on the number of shares held by each such holder. The Preferred Shares generally have no voting rights. Holders of the Preferred Shares are entitled to receive, on an as-converted-to-common-stock basis, dividends that are equal to dividends actually paid on shares of Common Stock, when, as and if such dividends are paid on shares of the Common Stock.

Anti-Takeover Effects of Our Certificate of Incorporation and Our Bylaws

Our Certificate of Incorporation and Bylaws include a number of provisions that may have the effect of delaying, deferring or discouraging another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our Board rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

Board Composition and Filling Vacancies. Our Certificate of Incorporation provides for the division of our Board into three classes serving staggered three-year terms, with one class being elected each year. Our Certificate of Incorporation also provides that directors may be removed only for cause and then only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our Board, however occurring, including a vacancy resulting from an increase in the size of our Board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum.

No Written Consent of Stockholders. Our Certificate of Incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting.

Meetings of Stockholders. Our Certificate of Incorporation and Bylaws provide that only a majority of the members of our Board then in office may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our Bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.

Advance Notice Requirements. Our Bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. Our Bylaws specify the requirements as to form and content of all stockholders’ notices.

Amendment to Certificate of Incorporation and Bylaws. As required by the Delaware General Corporation Law, any amendment of our Certificate of Incorporation must first be approved by a majority of our Board, and if required by law or our Certificate of Incorporation, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to stockholder action, board composition, limitation of liability and the amendment of our Certificate of Incorporation must be approved by not less than 75%

 

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of the outstanding shares entitled to vote on the amendment, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class. Our Bylaws may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the Bylaws; and may also be amended by the affirmative vote of at least 75% of the outstanding shares entitled to vote on the amendment, or, if our Board recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.

Undesignated Preferred Stock. Our Certificate of Incorporation provides for 5,000,000 authorized shares of Preferred Stock, of which 2,819,549 shares have been designated as Class A Convertible Preferred Stock. The existence of authorized but unissued shares of undesignated Preferred Stock may enable our Board to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our Board were to determine that a takeover proposal is not in the best interests of our stockholders, our Board could cause shares of Preferred Stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our Certificate of Incorporation grants our Board broad power to establish the rights and preferences of authorized and unissued shares of Preferred Stock. The issuance of shares of Preferred Stock could decrease the amount of earnings and assets available for distribution to holders of shares of Common Stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of us.

Exclusive Jurisdiction of Certain Actions. Our Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any 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, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our Certificate of Incorporation or our Bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar exclusive forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could rule that this provision in our Certificate of Incorporation is inapplicable or unenforceable.

Section 203 of the Delaware General Corporation Law

We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or Section 203. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock.

Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions: before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or at or after the time the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

 

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A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. We have not opted out of these provisions. As a result, mergers or other takeover or change in control attempts of us may be discouraged or prevented.

 

 

 

 

Exhibit 10.7

FATE THERAPEUTICS, INC.

AMENDED AND RESTATED NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

The purpose of this Amended and Restated Non-Employee Director Compensation Policy (the “Policy”) of Fate Therapeutics, Inc., a Delaware corporation (the “Company”), is to provide a total compensation package that enables the Company to attract and retain, on a long-term basis, high-caliber directors who are not employees or officers of the Company.  In furtherance of this purpose, effective as of the date of approval by the Company’s Board of Directors (the “Board”) of this Policy (the “Effective Date”), all non-employee directors shall be paid compensation for services provided to the Company as set forth below:¹

Cash Retainers

Annual Retainer for Board Membership:  $40,000 for general availability and participation in meetings and conference calls of the Board.  No additional compensation for attending individual Board meetings.  

Additional Annual Retainers for Committee Membership and Service as Chairperson:

 

 

All cash retainers will be paid quarterly, in arrears, or upon the earlier resignation or removal of the non-employee director.  Cash retainers owing to non-employee directors shall be annualized, meaning that with respect to non-employee directors who join the Board during the calendar year, such amounts shall be pro-rated based on the number of calendar days served by such director.

 

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Equity Retainers

Initial Equity Grant: One-time option grant to each new non-employee director upon his/her election to the Board after the Effective Date to purchase 24,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”).  Such initial equity grant shall vest in equal monthly installments during the 36 months following the grant date, subject to the director’s continued service on the Board.

On the date of each Annual Meeting of Stockholders:  Annual option grant to each non-employee director serving on the Board immediately following the Company’s annual meeting of stockholders to purchase 16,000 shares of Common Stock.  Such annual equity grant shall vest on the earlier of the one-year anniversary of the grant date and the Company’s next annual meeting of stockholders, subject to the director’s continued service on the Board.

The form of option agreement will give directors up to one year following cessation of service as a director to exercise the options (to the extent vested at the date of such cessation), provided that the director has not been removed for cause.

All of the foregoing option grants will have an exercise price equal to the fair market value of a share of Common Stock on the date of grant.

Expenses

The Company shall reimburse all reasonable out-of-pocket expenses incurred by non-employee directors in attending Board and committee meetings.

 

Amended and Restated Non-Employee Director Compensation Policy adopted by the Board of Directors on September 9, 2019.

 

 

Exhibit 10.8

FATE THERAPEUTICS, INC.

INDUCEMENT EQUITY PLAN

SECTION 1.  GENERAL PURPOSE OF THE PLAN; DEFINITIONS

The name of the plan is the Fate Therapeutics, Inc. Inducement Equity Plan (the “Plan”).  The purpose of the Plan is to enable Fate Therapeutics, Inc. (the “Company”) and its Subsidiaries to grant equity awards to induce highly-qualified prospective officers and employees who are not currently employed by the Company or its Subsidiaries to accept employment and to provide them with a proprietary interest in the Company.  It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a closer identification of their interests with those of the Company and its stockholders, thereby stimulating their efforts on the Company’s behalf and strengthening their desire to remain with the Company.  The Company intends that the Plan be reserved for persons to whom the Company may issue securities without stockholder approval as an inducement pursuant to Rule 5635(c)(4) of the Marketplace Rules of the NASDAQ Stock Market, Inc.

The following terms shall be defined as set forth below:

“Administrator” means either the Board or the compensation committee of the Board or a similar committee performing the functions of the compensation committee and which is comprised of not less than two Non‑Employee Directors who are independent.

“Award” or “Awards,” except where referring to a particular category of grant under the Plan, shall include Stock Options and Restricted Stock Units.

“Award Certificate” means a written or electronic document setting forth the terms and provisions applicable to an Award granted under the Plan.  Each Award Certificate is subject to the terms and conditions of the Plan.

“Board” means the Board of Directors of the Company.

“Code” means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations.

“Effective Date” means the date on which the Plan is approved by the Board as set forth in Section 14.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

“Fair Market Value” of the Stock on any given date means the fair market value of the Stock determined in good faith by the Administrator; provided, however, that if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”), NASDAQ Global Market or another national securities exchange, the determination shall be made by reference to market quotations.  If there are no market quotations for such date, the determination shall be made by reference to the last date preceding such date for which there are market quotations.

 

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“Non-Employee Director” means a member of the Board who is not also an employee of the Company or any Subsidiary.

“Option” or “Stock Option” means any option to purchase shares of Stock granted pursuant to Section 5.

“Restricted Stock Units” means an Award of phantom stock units to a grantee.

“Sale Event” shall mean (i) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (ii) a merger, reorganization or consolidation pursuant to which the holders of the Company’s outstanding voting power and outstanding stock immediately prior to such transaction do not own a majority of the outstanding voting power and outstanding stock or other equity interests of the resulting or successor entity (or its ultimate parent, if applicable) immediately upon completion of such transaction, (iii) the sale of all of the Stock of the Company to an unrelated person, entity or group thereof acting in concert, or (iv) any other transaction in which the owners of the Company’s outstanding voting power immediately prior to such transaction do not own at least a majority of the outstanding voting power of the Company or any successor entity immediately upon completion of the transaction other than as a result of the acquisition of securities directly from the Company.

“Sale Price” means the value as determined by the Administrator of the consideration payable, or otherwise to be received by stockholders, per share of Stock pursuant to a Sale Event.

“Section 409A” means Section 409A of the Code and the regulations and other guidance promulgated thereunder.

“Stock” means the Common Stock, par value $0.001 per share, of the Company, subject to adjustments pursuant to Section 3.

“Subsidiary” means any corporation or other entity (other than the Company) in which the Company has at least a 50 percent interest, either directly or indirectly.

SECTION 2.  ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT GRANTEES AND DETERMINE AWARDS

(a)Administration of Plan.  The Plan shall be administered by the Administrator.

(b)Powers of Administrator.  The Administrator shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority:

(i)to select the individuals to whom Awards may from time to time be granted;

(ii)to determine the time or times of grant, and the extent, if any, of Awards granted to any one or more grantees;

(iii)to determine the number of shares of Stock to be covered by any Award;

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(iv)to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and grantees, and to approve the forms of Award Certificates;

(v)to accelerate at any time the exercisability or vesting of all or any portion of any Award;

(vi)subject to the provisions of Section 5(b), to extend at any time the period in which Stock Options may be exercised; and

(vii)at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan.

All decisions and interpretations of the Administrator shall be binding on all persons, including the Company and Plan grantees.

(c)Award Certificate.  Awards under the Plan shall be evidenced by Award Certificates that set forth the terms, conditions and limitations for each Award which may include, without limitation, the term of an Award and the provisions applicable in the event employment or service terminates.

(d)Indemnification.  Neither the Board nor the Administrator, nor any member of either or any delegate thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan, and the members of the Board and the Administrator (and any delegate thereof) shall be entitled in all cases to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under the Company’s articles or bylaws or any directors’ and officers’ liability insurance coverage which may be in effect from time to time and/or any indemnification agreement between such individual and the Company.

(e)Foreign Award Recipients.  Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in other countries in which the Company and its Subsidiaries operate or have employees or other individuals eligible for Awards, the Administrator, in its sole discretion, shall have the power and authority to:  (i) determine which Subsidiaries shall be covered by the Plan; (ii) determine which individuals outside the United States are eligible to participate in the Plan; (iii) modify the terms and conditions of any Award granted to individuals outside the United States to comply with applicable foreign laws; (iv) establish subplans and modify exercise procedures and other terms and procedures, to the extent the Administrator determines such actions to be necessary or advisable (and such subplans and/or modifications shall be attached to this Plan as appendices); provided, however, that no such subplans and/or modifications shall increase the share limitation contained in Section 3(a)

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hereof; and (v) take any action, before or after an Award is made, that the Administrator determines to be necessary or advisable to obtain approval or comply with any local governmental regulatory exemptions or approvals.  Notwithstanding the foregoing, the Administrator may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any other applicable United States securities law, the Code, or any other applicable United States governing statute or law.

SECTION 3.  STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION

(a)Stock Issuable.  The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 1,570,822 shares, subject to adjustment as provided in Section 3(b).  For purposes of this limitation, the shares of Stock underlying any Awards under the Plan that are forfeited, canceled, held back upon exercise of an Option or settlement of an Award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of Stock, or otherwise terminated (other than by exercise or settlement) shall be added back to the shares of Stock available for issuance under the Plan.  Subject to such overall limitation, shares of Stock may be issued up to such maximum number pursuant to any type or types of Award.  The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company.

(b)Changes in Stock.  Subject to Section 3(c) hereof, if, as a result of any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in the Company’s capital stock, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, or, if, as a result of any merger or consolidation, sale of all or substantially all of the assets of the Company, the outstanding shares of Stock are converted into or exchanged for securities of the Company or any successor entity (or a parent or subsidiary thereof), the Administrator shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, (ii) the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, and (iii) the exercise price for each share subject to any then outstanding Stock Options under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of Stock Options) as to which such Stock Options remain exercisable.  The Administrator shall also make equitable or proportionate adjustments in the number of shares subject to outstanding Awards and the exercise price and the terms of outstanding Awards to take into consideration cash dividends paid other than in the ordinary course or any other extraordinary corporate event.  The adjustment by the Administrator shall be final, binding and conclusive.  No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Administrator in its discretion may make a cash payment in lieu of fractional shares.

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(c)Mergers and Other Transactions.  Except as the Administrator may otherwise specify with respect to particular Awards in the relevant Award Certificate, in the case of and subject to the consummation of a Sale Event, the parties thereto may cause the assumption or continuation of Awards theretofore granted by the successor entity, or the substitution of such Awards with new Awards of the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and, if appropriate, the per share exercise prices, as such parties shall agree.  To the extent the parties to such Sale Event do not provide for the assumption, continuation or substitution of Awards, then upon the effective time of the Sale Event, the Plan and all outstanding Awards granted hereunder shall terminate.  In the event of such termination, (i) the Company shall have the option (in its sole discretion) to make or provide for a cash payment to the grantees holding Stock Options, in exchange for the cancellation thereof, in an amount equal to the difference between (A) the Sale Price multiplied by the number of shares of Stock subject to outstanding Stock Options (to the extent then exercisable  at prices not in excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Stock Options; or (ii) each grantee shall be permitted, within a specified period of time prior to the consummation of the Sale Event as determined by the Administrator, to exercise all outstanding Options (to the extent then exercisable) held by such grantee.

SECTION 4.  ELIGIBILITY

Grantees under the Plan will be only such individuals to whom the Company may issue securities without stockholder approval in accordance with Rule 5635(c)(4) of the Marketplace Rules of the NASDAQ Stock Market, Inc., as selected from time to time by the Administrator in its sole discretion.

SECTION 5.  STOCK OPTIONS

Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve.  All Stock Options granted under the Plan shall be non-qualified stock options.

Stock Options granted pursuant to this Section 5 shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable.  

(a)Exercise Price.  The exercise price per share for the Stock covered by a Stock Option granted pursuant to this Section 5 shall be determined by the Administrator at the time of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant.  

(b)Option Term.  The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted.  

(c)Exercisability; Rights of a Stockholder.  Stock Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Administrator at or after the grant date.  The Administrator may at any time accelerate the exercisability of all or any portion of any Stock Option.  An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.

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(d)Method of Exercise.  Stock Options may be exercised in whole or in part, by giving written or electronic notice of exercise to the Company, specifying the number of shares to be purchased.  Payment of the purchase price may be made by one or more of the following methods to the extent provided in the Option Award Certificate:

(i)In cash, by certified or bank check or other instrument acceptable to the Administrator;

(ii)Through the delivery (or attestation to the ownership) of shares of Stock that are not then subject to restrictions under any Company plan.  Such surrendered shares shall be valued at Fair Market Value on the exercise date;

(iii)By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company for the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; or

(iv)By a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price.

Payment instruments will be received subject to collection.  The transfer to the optionee on the records of the Company or of the transfer agent of the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Option Award Certificate or applicable provisions of laws (including the satisfaction of any withholding taxes that the Company is obligated to withhold with respect to the optionee).  In the event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the optionee upon the exercise of the Stock Option shall be net of the number of attested shares.  In the event that the Company establishes, for itself or using the services of a third party, an automated system for the exercise of Stock Options, such as a system using an internet website or interactive voice response, then the paperless exercise of Stock Options may be permitted through the use of such an automated system.

SECTION 6.  RESTRICTED STOCK UNITS

(a)Nature of Restricted Stock Units.   The Administrator shall determine the restrictions and conditions applicable to each Restricted Stock Unit at the time of grant.  Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives.  The terms and conditions of each such Award Certificate shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees.  At the end of the deferral period, the Restricted Stock Units, to the extent vested, shall be settled in the form of shares of Stock.  To the extent that an award of Restricted Stock Units is subject to Section 409A, it may contain such additional terms and conditions as the Administrator shall determine in its sole discretion in order for such Award to comply with the requirements of Section 409A.

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(b)Rights as a Stockholder.  A grantee shall have the rights as a stockholder only as to shares of Stock acquired by the grantee upon settlement of Restricted Stock Units.  

(c)Termination.  Except as may otherwise be provided by the Administrator either in the Award Certificate or, subject to Section 11 below, in writing after the Award is issued, a grantee’s right in all Restricted Stock Units that have not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason.

SECTION 7.  Transferability of Awards

(a)Transferability.  Except as provided in Section 7(b) below, during a grantee’s lifetime, his or her Awards shall be exercisable only by the grantee, or by the grantee’s legal representative or guardian in the event of the grantee’s incapacity.  No Awards shall be sold, assigned, transferred or otherwise encumbered or disposed of by a grantee other than by will or by the laws of descent and distribution or pursuant to a domestic relations order.  No Awards shall be subject, in whole or in part, to attachment, execution, or levy of any kind, and any purported transfer in violation hereof shall be null and void.

(b)Administrator Action.  Notwithstanding Section 7(a), the Administrator, in its discretion, may provide either in the Award Certificate regarding a given Award or by subsequent written approval that the grantee (who is an employee) may transfer his or her Stock  Options to his or her immediate family members, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award.  In no event may an Award be transferred by a grantee for value.

(c)Family Member.  For purposes of Section 7(b), “family member” shall mean a grantee’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the grantee’s household (other than a tenant of the grantee), a trust in which these persons (or the grantee) have more than 50 percent of the beneficial interest, a foundation in which these persons (or the grantee) control the management of assets, and any other entity in which these persons (or the grantee) own more than 50 percent of the voting interests.

(d)Designation of Beneficiary.  Each grantee to whom an Award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or after the grantee’s death.  Any such designation shall be on a form provided for that purpose by the Administrator and shall not be effective until received by the Administrator.  If no beneficiary has been designated by a deceased grantee, or if the designated beneficiaries have predeceased the grantee, the beneficiary shall be the grantee’s estate.

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SECTION 8.  TAX WITHHOLDING

(a)Payment by Grantee.  Each grantee shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the grantee for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld by the Company with respect to such income.  The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the grantee.  The Company’s obligation to deliver evidence of book entry (or stock certificates) to any grantee is subject to and conditioned on tax withholding obligations being satisfied by the grantee.

(b)Payment in Stock.  Subject to approval by the Administrator, a grantee may elect to have the Company’s minimum required tax withholding obligation satisfied, in whole or in part, by authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due.  The Administrator may also require Awards to be subject to mandatory share withholding up to the required withholding amount.  For purposes of share withholding, the Fair Market Value of withheld shares shall be determined in the same manner as the value of Stock includible in income of the Participants.

SECTION 9.  Section 409A awards

To the extent that any Award is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A (a “409A Award”), the Award shall be subject to such additional rules and requirements as specified by the Administrator from time to time in order to comply with Section 409A.  In this regard, if any amount under a 409A Award is payable upon a “separation from service” (within the meaning of Section 409A) to a grantee who is then considered a “specified employee” (within the meaning of Section 409A), then no such payment shall be made prior to the date that is the earlier of (i) six months and one day after the grantee’s separation from service, or (ii) the grantee’s death, but only to the extent such delay is necessary to prevent such payment from being subject to interest, penalties and/or additional tax imposed pursuant to Section 409A.  Further, the settlement of any such Award may not be accelerated except to the extent permitted by Section 409A.

SECTION 10.  Termination of Employment, TRANSFER, LEAVE OF ABSENCE, ETC.

Termination of Employment.  If the grantee’s employer ceases to be a Subsidiary, the grantee shall be deemed to have terminated employment for purposes of the Plan.

(a)For purposes of the Plan, the following events shall not be deemed a termination of employment:

(i)a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or

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(ii)an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee’s right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise so provides in writing.

SECTION 11.  AMENDMENTS AND TERMINATION

The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any outstanding Award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder’s consent.  Except as provided in Section 3(b) or 3(c), without prior stockholder approval, in no event may the Administrator exercise its discretion to reduce the exercise price of outstanding Stock Options or effect repricing through cancellation and re-grants or cancellation of Stock Options in exchange for cash.  Nothing in this Section 11 shall limit the Administrator’s authority to take any action permitted pursuant to Section 3(b) or 3(c).

SECTION 12.  STATUS OF PLAN

With respect to the portion of any Award that has not been settled or exercised and any payments in cash, Stock or other consideration not received by a grantee, a grantee shall have no rights greater than those of a general creditor of the Company unless the Administrator shall otherwise expressly determine in connection with any Award or Awards.  In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the Company’s obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence.

SECTION 13.  GENERAL PROVISIONS

(a)No Distribution.  The Administrator may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof.

(b)Delivery of Stock Certificates.  Stock certificates to grantees under this Plan shall be deemed delivered for all purposes when the Company or a stock transfer agent of the Company shall have mailed such certificates in the United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company.  Uncertificated Stock shall be deemed delivered for all purposes when the Company or a Stock transfer agent of the Company shall have given to the grantee by electronic mail (with proof of receipt) or by United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company, notice of issuance and recorded the issuance in its records (which may include electronic “book entry” records).  Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing shares of Stock pursuant to the exercise of any Award, unless and until the Administrator has determined, with advice of counsel (to the extent the Administrator deems such advice necessary or advisable), that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of

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governmental authorities and, if applicable, the requirements of any exchange on which the shares of Stock are listed, quoted or traded.  All Stock certificates delivered pursuant to the Plan shall be subject to any stop-transfer orders and other restrictions as the Administrator deems necessary or advisable to comply with federal, state or foreign jurisdiction, securities or other laws, rules and quotation system on which the Stock is listed, quoted or traded.  The Administrator may place legends on any Stock certificate to reference restrictions applicable to the Stock.  In addition to the terms and conditions provided herein, the Administrator may require that an individual make such reasonable covenants, agreements, and representations as the Administrator, in its discretion, deems necessary or advisable in order to comply with any such laws, regulations, or requirements.  The Administrator shall have the right to require any individual to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Administrator.  

(c)Stockholder Rights.  Until Stock is deemed delivered in accordance with Section 13(b), no right to vote or receive dividends or any other rights of a stockholder will exist with respect to shares of Stock to be issued in connection with an Award, notwithstanding the exercise of a Stock Option or any other action by the grantee with respect to an Award.

(d)Other Compensation Arrangements; No Employment Rights.  Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases.  The adoption of this Plan and the grant of Awards do not confer upon any employee any right to continued employment with the Company or any Subsidiary.

(e)Trading Policy Restrictions.  Option exercises and other Awards under the Plan shall be subject to the Company’s insider trading policies and procedures, as in effect from time to time.

(f)Forfeiture of Awards under Sarbanes-Oxley Act.  If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, then any grantee who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002 shall reimburse the Company for the amount of any Award received by such individual under the Plan during the 12-month period following the first public issuance or filing with the United States Securities and Exchange Commission, as the case may be, of the financial document embodying such financial reporting requirement.

SECTION 14.  EFFECTIVE DATE OF PLAN

This Plan shall become effective upon approval by the Board.  

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SECTION 15.  GOVERNING LAW

This Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State of Delaware, applied without regard to conflict of law principles.

DATE APPROVED BY BOARD OF DIRECTORS: May 10, 2016

Amended on January 14, 2019

Amended on February 21, 2020

 

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EXHIBIT 10.34

 

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED (INDICATED BY: [***]) FROM THE EXHIBIT BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF PUBLICLY DISCLOSED.

 

12278 SCRIPPS SUMMIT DRIVE

LEASE

SCRIPPS SUMMIT INVESTMENTS LLC,
a California limited liability company

as Landlord,

and

FATE THERAPEUTICS, INC.,
a Delaware corporation,

as Tenant

 

 

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SUMMARY OF BASIC LEASE INFORMATION

This Summary of Basic Lease Information (“Summary”) is hereby incorporated into and made a part of the attached Lease, Each reference in the Lease to any term of this Summary shall have the meaning as set forth in this Summary for such term.  In the event of a conflict between the terms of this Summary and the Lease, the terms of the Lease shall prevail.  Any capitalized terms used herein and not otherwise defined herein shall have the meaning as set forth in the Lease.

Summary P-1

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Summary P-2

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* Subject to abatement as provided in Section 2.1 of Exhibit B.

** The initial Monthly Installment of Base Rent amount was calculated by multiplying the initial Monthly Base Rental Rate per Rentable Square Foot amount by the number of rentable square feet of space in the Premises.  In all subsequent Base Rent payment periods during the Lease Term commencing on the first (1st) day of the thirteenth (13th) full calendar month of the Lease Term, the calculation of each Monthly Installment of Base Rent amount reflects an annual increase of three percent (3.00%).  The amounts identified in the column entitled “Monthly Base Rental Rate per Rentable Square Foot” are rounded amounts provided for informational purposes only.  The Base Rent is subject to reduction in the event Tenant elects to exercise Tenant’s option to reduce the amount of the Tenant Improvement Allowance pursuant to Section 2.1 of the Tenant Work Letter.

Summary P-3

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Summary P-4

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TABLE OF CONTENTS

 

 

 

 

 

(i)

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INDEX

 

(ii)

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(iii)

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(iv)

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(v)

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LEASE

This Lease, which includes the preceding Summary and the exhibits attached hereto and incorporated herein by this reference (the Lease, the Summary and the exhibits to be known sometimes collectively hereafter as the “Lease”), dated as of the date set forth in Section 1 of the Summary, is made by and between SCRIPPS SUMMIT INVESTMENTS LLC, a California limited liability company (“Landlord”), and FATE THERAPEUTICS, INC., a Delaware corporation (“Tenant”).

Article 1
PREMISES

1.1Premises.  Upon and subject to the terms, covenants and conditions hereinafter set forth in this Lease, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises described in Section 6 of the Summary (the “Premises” which is also referred to herein as the “Project”).  Landlord agrees to allow Tenant to access the Premises twenty-four (24) hours per day, seven (7) days per week throughout the Lease Term.

1.2Condition of Premises.  Except as expressly set forth in this Lease and in the Tenant Work Letter, Landlord shall not be obligated to provide or pay for any improvement, remodeling or refurbishment work or services related to the improvement, remodeling or refurbishment of the Premises, and Tenant shall accept the Premises in its “As Is” condition as of the date hereof; provided, however, that Landlord, at Landlord’s sole cost and expense on or before that date which is sixty (60) days after the full execution and delivery of this Lease by Landlord and Tenant, shall repair one (1) of the HVAC chillers serving the Building (in accordance with the proposal from Pacific Rim Mechanical furnished to Tenant prior to the execution of this Lease) and shall have the elevators in the Building recertified.  Notwithstanding anything to the contrary in this Lease, in the event that, as of the date of execution of this Lease, the Project and each portion thereof, including without limitation the Building Systems (as defined in Article 7 of this Lease), in their condition existing as of such date without regard to any of the Tenant Improvements, alterations or other improvements to be constructed or installed by or on behalf of Tenant in the Premises, are not in good working order, good condition and repair with no material deferred maintenance or, except with respect to the interior of the Building, is not in compliance with applicable laws (without regard to any of the Tenant Improvements, alterations or other improvements to be constructed or installed by or on behalf of Tenant in the Building), then Landlord shall be responsible, at its sole cost and expense which shall not be included as part of Additional Rent, for correcting any such matters as soon as reasonably possible after receiving written notice thereof from Tenant; provided, however, that if Tenant fails to give Landlord written notice of such matters within one hundred eighty (180) days after the date hereof, then the correction of any such matters shall, except for latent defects in the Building which could not have been reasonably discoverable by Tenant if Tenant had performed a diligent inspection of the Building during such one hundred eighty (180)-day period, in which case such one hundred eighty (180)-day period shall be deemed extended until that date which is one hundred eighty (180) days after the Lease Commencement Date, be Tenant’s responsibility at Tenant’s sole cost and expense.  Tenant shall be responsible for all compliance with law costs with respect to the interior of the Building.  Tenant also acknowledges that, except as otherwise expressly set forth in this Lease, neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the

 

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Building, or the Project or their condition, or with respect to the suitability thereof for the conduct of Tenant’s business (including, but not limited to, any zoning/conditional use permit requirements which shall be Tenant’s responsibility and Tenant’s failure to obtain any such zoning/use permits (if any are required) shall not affect Tenant’s obligations under this Lease).  The taking of possession of the Premises by Tenant shall conclusively establish that the Premises (including the Building and the other improvements in the Project) were at such time complete and in good, sanitary and satisfactory condition and without any obligation on Landlord’s part to make any alterations, upgrades or improvements thereto.  For purposes of Section 1938(a) of the California Civil Code, Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, that the Premises have not undergone inspection by a Certified Access Specialist (CASp).  In addition, the following notice is hereby provided pursuant to Section 1938(e) of the California Civil Code:

“A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law.  Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant.  The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.”

In furtherance of and in connection with such notice: (i) Tenant, having read such notice and understanding Tenant’s right to request and obtain a CASp inspection and with advice of counsel, hereby elects not to obtain such CASp inspection and waives its rights to obtain a CASp inspection with respect to the Premises to the extent permitted by applicable laws now or hereafter in effect; and (ii) if the waiver set forth in clause (i) hereinabove is not enforceable pursuant to applicable laws, then Landlord and Tenant hereby agree as follows (which constitute the mutual agreement of the parties as to the matters described in the last sentence of the foregoing notice): (A) Tenant shall have the one-time right to request for and obtain a CASp inspection, which request must be made, if at all, in a written notice delivered by Tenant to Landlord on or before that date which is ten (10) days after the date hereof; (B) any CASp inspection timely requested by Tenant shall be conducted (1) between the hours of 9:00 a.m. and 5:00 p.m. on any business day, (2) only after ten (10) days’ prior written notice to Landlord of the date of such CASp inspection, (3) in a professional manner by a CASp designated by Landlord and without any testing that would damage the Premises, Building or Project in any way, and (4) at Tenant’s sole cost and expense, including, without limitation, Tenant’s payment of the fee for such CASp inspection, the fee for any reports prepared by the CASp in connection with such CASp inspection (collectively, the “CASp Reports”) and all other costs and expenses in connection therewith; (C) Tenant shall deliver a copy of any CASp Reports to Landlord within three (3) business days after Tenant’s receipt thereof; and (D) Tenant, at its sole cost and expense, shall be responsible for making any improvements, alterations, modifications and/or repairs to or within the Premises to correct violations of construction-related accessibility standards including, without limitation, any violations disclosed by such CASp inspection.

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1.3Rentable Square Feet.  The parties hereby stipulate that the Building contains the rentable square feet set forth in Section 6 of the Summary, and such square footage amount is not subject to adjustment or remeasurement by Landlord or Tenant.  Accordingly, there shall be no adjustment in the Base Rent or other amounts set forth in this Lease which are determined based upon rentable square feet of the Building.

1.4Conditional Right of First Refusal to Lease.  In the event Landlord, in Landlord’s sole and absolute discretion, elects to construct a building (“New Building”) on the portion of the Premises commonly known as “Parcel 2”, as delineated on Exhibit A-2 attached hereto (“Parcel 2”), then Landlord and Tenant shall promptly enter into an amendment to this Lease whereby Parcel 2 shall be removed from the Premises and Landlord and Tenant shall execute such other commercially reasonable documents required by Landlord and/or Tenant in connection with the same provided that in no event shall such documents adversely affect Tenant’s use of the Premises or add any obligations or costs on Tenant; provided, however, Landlord agrees that neither any New Building, once completed, nor the construction of any New Building, shall reduce Tenant’s Parking Spaces.  During Landlord’s construction of the New Building, Landlord shall provide temporary parking on the remaining portion of the Premises which Tenant shall have the right to use during Landlord’s construction of the New Building as well as during Landlord’s construction of the new parking facility on the Real Property serving the Premises (or Landlord may use Alternative Parking (as defined below) consistent with the provisions of Section 6.3 below).  The removal of Parcel 2 from the Real Property shall not affect the Rent payable by Tenant under this Lease nor affect Tenant’s monetary obligations hereunder.  In the event Landlord elects to construct and does construct such New Building, then Landlord shall provide Tenant with a continuing (subject to the terms hereof) right of first refusal to lease space in the New Building (“First Refusal Space”).  Notwithstanding the foregoing, (i) such first refusal right of Tenant shall become effective only following the expiration or earlier termination of any existing lease pertaining to the First Refusal Space pertaining to any First Refusal Space which Tenant has previously failed to exercise its right of first refusal (the “Superior Leases”), including any renewal, expansion or extension rights of such existing lease, whether or not such renewal, expansion or extension rights are pursuant to an express written provision in such lease, and regardless of whether any such renewal, expansion or extension is consummated pursuant to a lease amendment or a new lease and (ii) Tenant’s first refusal right shall be subordinate and secondary to all currently existing rights of renewal, expansion, first refusal, first offer or similar rights previously granted to the tenants of the Superior Leases and any other future existing tenant of the New Building (the rights described in items (i) and (ii), above to be known collectively as “Superior Rights”).  Tenant’s right of first refusal shall be on the terms and conditions set forth in this Section 1.4.

1.4.1Procedure for Refusal.  Landlord shall notify Tenant (the “First Refusal Notice”) when Landlord receives a bona fide offer from a prospective third party tenant that Landlord is willing to accept for the First Refusal Space and/or when Landlord intends to submit a bona fide counteroffer which Landlord would be willing to accept (in each case where no holder of a Superior Right desires to lease such space).  The economic terms and conditions of Tenant’s lease of such First Refusal Space shall be as provided in Landlord’s First Refusal Notice (“First Refusal Economic Terms”).

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1.4.2Procedure for Acceptance.  If Tenant wishes to exercise Tenant’s right of first refusal with respect to the space described in the First Refusal Notice, then within [***] after delivery of the First Refusal Notice to Tenant (“Election Date”), Tenant shall deliver an unconditional, irrevocable notice to Landlord of Tenant’s exercise of its right of first refusal with respect to the entire space described in the First Refusal Notice and on the First Refusal Economic Terms contained therein.  If Tenant does not exercise its right of first refusal within such [***] time period (on all of the First Refusal Economic Terms), then Landlord shall be free to lease the space described in the First Refusal Notice, during the [***] period after the expiration of such [***] period, to anyone to whom Landlord desires on any terms Landlord desires and Tenant’s right of first refusal with respect to the space described in the First Refusal Space shall, subject to Section 1.4.3 below, automatically terminate and this Section 1.4, shall be deemed null and void and of no further force or effect; provided, however, that if Landlord, within such [***] period, intends to enter into a lease upon First Refusal Economic Terms which are, in the aggregate, materially more favorable to a prospective tenant than those First Refusal Economic Terms proposed by Landlord in the First Refusal Notice to Tenant, then Landlord shall first deliver written notice to Tenant (“Second Chance Notice”) providing Tenant with the opportunity to lease the First Refusal Space on such more favorable First Refusal Economic Terms (such more favorable terms in the Second Chance Notice are referred to herein as the “Second Chance Economic Terms”).  For purposes hereof, Second Chance Economic Terms shall be materially more favorable to a third party if such Second Chance Economic Terms reflect a net effective rental rate [***].  Tenant’s failure to elect to lease the First Refusal Space upon such Second Chance Economic Terms by written notice to Landlord within [***] after Tenant’s receipt of such Second Chance Notice from Landlord shall be deemed to constitute Tenant’s election not to lease such space upon such Second Chance Economic Terms, in which case Landlord shall be entitled to lease such space to any third (3^rd) party on any terms Landlord desires on terms not more favorable to such third party than initially proposed by Landlord in the First Refusal Notice (based on the [***] set forth above) and Tenant shall have no further right to lease such First Refusal Space set forth in the Second Chance Notice (and this Section 1.4 shall, subject to Section 1.4.3 below, be deemed null and void and of no further force or effect).  Notwithstanding anything to the contrary contained herein, Tenant must elect to exercise its right of first refusal, if at all, with respect to all of the space comprising the First Refusal Space offered by Landlord to Tenant at any particular time, and Tenant may not elect to lease only a portion thereof or object to any of the First Refusal Economic Terms.  Landlord’s right to lease space in the New Building shall be subject to Tenant’s rights in this Section 1.4.

1.4.3Continuing Right.  If the space offered in Landlord’s First Refusal Notice is only a portion of the First Refusal Space, then Tenant shall retain its right of first refusal pursuant to the terms of this Section 1.4 with respect to the remaining portion of the First Refusal Space which has never been included in a Landlord’s First Refusal Notice when Landlord determines that such remaining First Refusal Space is available for lease as set forth above.

1.4.4Construction of First Refusal Space.  Tenant shall take the First Refusal Space in its “As-Is” condition (except as otherwise provided in the First Refusal Notice), and Tenant shall be entitled to construct improvements in the First Refusal Space at Tenant’s expense, in accordance with and subject to the provisions of Article 8 of this Lease.

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1.4.5Lease of First Refusal Space.  If Tenant timely exercises Tenant’s right to lease the First Refusal Space as set forth herein, Landlord and Tenant shall execute an amendment adding such First Refusal Space to this Lease upon the First Refusal Economic Terms set forth in Landlord’s First Refusal Notice and upon the same non-economic terms and conditions as applicable to the Premises then leased by Tenant under this Lease.  Tenant shall commence payment of rent for the First Refusal Space and the Lease Term of the First Refusal Space shall commence upon the date of delivery of such First Refusal Space to Tenant.  The Lease Term for the First Refusal Space shall be as provided in the First Refusal Economic Terms.

1.4.6No Defaults.  The rights contained in this Section 1.4 shall be personal to the original Tenant executing this Lease (“Original Tenant”) and to any Affiliate Assignee thereof, and may only be exercised by the Original Tenant or such Affiliate Assignee (and not any other assignee, sublessee or other transferee of the Original Tenant’s interest (or Affiliate Assignee’s interest) in this Lease).  In addition, at Landlord’s option and in addition to Landlord’s other remedies set forth in this Lease, at law and/or in equity, Tenant shall not have the right to lease the First Refusal Space as provided in this Section 1.4 if, as of the date of the First Refusal Notice, or, at Landlord’s option, as of the scheduled date of delivery of such First Refusal Space to Tenant, Tenant is in default of any monetary or material non-monetary provisions under this Lease beyond the expiration of all applicable notice and cure periods.

Article 2
LEASE TERM AND EARLY TERMINATION OPTION

2.1Lease Term.  The term of this Lease (the “Lease Term”) shall be as set forth in Section 7.1 of the Summary and shall commence on the date (the “Lease Commencement Date”) set forth in Section 7.2 of the Summary, and shall terminate on the date (the “Lease Expiration Date”) set forth in Section 7.3 of the Summary, unless this Lease is sooner terminated as hereinafter provided or if the Lease Term is extended per the Extension Option Rider.  Notwithstanding the foregoing, if the Lease Commencement Date falls on any day other than the first day of a calendar month then the Lease Term will be measured from the first day of the month following the month in which the Lease Commencement Date occurs.  Tenant’s early entry rights are set forth in Section 5.1 of Exhibit B.  For purposes of this Lease, the term “Lease Year” shall mean each consecutive twelve (12) month period during the Lease Term, provided that the last Lease Year shall end on the Lease Expiration Date.  If the Lease Commencement Date is a date which is other than the date set forth in Section 7.2(ii) of the Summary, then, following the Lease Commencement Date, Landlord shall deliver to Tenant an amendment to lease in the form attached hereto as Exhibit C, attached hereto, setting forth, among other things, the Lease Commencement Date and the Lease Expiration Date, and Tenant shall (absent manifest error) execute and return such amendment to Landlord within ten (10) business days after Tenant’s receipt thereof.  If Tenant fails to execute and return (or provide reasonable objections to) the amendment (that is absent manifest error) within such 5-business day period, Tenant shall be deemed to have approved and confirmed the dates set forth therein, provided that such deemed approval shall not relieve Tenant of its obligation to execute and return the amendment (and such failure shall constitute a default by Tenant hereunder).

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2.2Early Termination Option.  Provided Tenant fully and completely satisfies each of the conditions set forth in this Section 2.2, Tenant shall have the one-time option (“Termination Option”) to terminate this Lease effective as of the one hundred twentieth (120^th) month anniversary of the Lease Commencement Date (the “Termination Date”).

2.2.1Termination Exercise.  In order to exercise such Termination Option, Tenant must fully and completely satisfy each and every one of the following conditions: (i) Tenant must give Landlord written notice (“Termination Notice”) of its exercise of the Termination Option, which Termination Notice must be delivered to Landlord no earlier than the commencement of the one hundred eighth (108^th) month anniversary of the Lease Commencement Date and no later than the last day of the one hundred twelfth (112^th) month anniversary of the Lease Commencement Date, (ii) at the time of the Termination Notice, Tenant shall not be in default of any monetary or material non-monetary provisions under this Lease after expiration of applicable cure periods, and (iii) concurrently with Tenant’s delivery of the Termination Notice to Landlord, Tenant shall pay to Landlord the “Termination Consideration”.

2.2.2Termination Consideration.  As used herein, the “Termination Consideration” shall mean an amount equal to Thirty Million Dollars ($30,000,000.00).

2.2.3General.  If Tenant properly and timely exercises its Termination Option in Section 2.2 above in strict accordance with the terms hereof, this Lease shall expire at midnight on the Termination Date, and Tenant shall be required to surrender the initial Premises to Landlord on or prior to the Termination Date in accordance with the applicable provisions of this Lease.  The termination right set forth in Section 2.2 above is personal to the Original Tenant and any Affiliate Assignee.  Upon termination of this Lease pursuant to this Section 2.2, the parties shall be relieved of all further obligations under this Lease except for those obligations under this Lease which expressly survive the expiration or sooner termination of this Lease.  In no event shall this Section 2.2 apply to any space leased by Tenant in the New Building.

Article 3
BASE RENT

Tenant shall pay, without notice or demand, to Landlord at the address set forth in Section 3 of the Summary, or at such other place as Landlord may from time to time designate in writing, in currency or a check for currency which, at the time of payment, is legal tender for private or public debts in the United States of America, base rent (“Base Rent”) as set forth in Section 8 of the Summary (and subject to the three percent (3%) annual increases set forth therein), payable in equal monthly installments as set forth in Section 8 of the Summary in advance on or before the first day of each and every month during the Lease Term, without any setoff or deduction whatsoever.  Notwithstanding anything to the contrary in this Lease, Tenant may at its election pay any Rent to Landlord by electronic transfer and Landlord agrees to provide ACH information to Tenant.  No later than three (3) business days after the Lease Commencement Date, Tenant shall deliver to Landlord the Base Rent payable by Tenant for the Premises for the first (1^st) full month of the Lease Term (i.e., $706,024.00).  If any rental payment date (including the Lease Commencement Date) falls on a day of the month other than the first day of such month or if any rental payment is for a period which is shorter than one month, then the rental for any such fractional month shall be a proportionate amount of a full calendar month’s rental based on the

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proportion that the number of days in such fractional month bears to the number of days in the calendar month during which such fractional month occurs (and if the Lease Commencement Date falls on a day of a month other than the first day of such month, then the excess Base Rent paid by Tenant for such calendar month shall be credited against Base Rent for the next calendar month.  All other payments or adjustments required to be made under the terms of this Lease that require proration on a time basis shall be prorated on the same basis.

Article 4
ADDITIONAL RENT

4.1Additional Rent.  Throughout the Lease Term, Tenant shall pay all expenses incurred by Tenant pertaining to the operation, repair, maintenance and restoration of the Premises as set forth in this Lease.  The Base Rent, together with Tax Expenses and any and all other amounts payable by Tenant pursuant to the terms of this Lease as well as any payments payable to any association pertaining to the CC&Rs, shall be hereinafter collectively referred to as the “Additional Rent.” The Base Rent and Additional Rent are herein collectively referred to as the “Rent.”

4.2“Tax Expenses” During the Lease Term, Tenant shall pay directly to the taxing authority or directly to Landlord (in the event Landlord receives the tax bills from the taxing authority) within thirty (30) days after Landlord’s presentation to Tenant of a reasonably detailed invoice including any back-up documentation provided by the applicable governmental authority, all federal, state, county, or local governmental or municipal taxes, fees, assessments, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary, (including, without limitation, real estate taxes, general and special assessments, transit assessments, fees and taxes, child care subsidies, fees and/or assessments, job training subsidies, fees and/or assessments, open space fees and/or assessments, housing subsidies and/or housing fund fees or assessments, public art fees and/or assessments, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Building), which Landlord shall pay during any calendar year because of or in connection with the ownership, leasing and operation of the Premises or Landlord’s interest therein.

(a)Tax Expenses shall include, without limitation:

(i)Any tax on Landlord’s rent, right to rent or other income from the Building;

(ii)Any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June 1978 election (“Proposition 13”) and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants.  It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies, and charges and all similar assessments, taxes, fees, levies and charges be included within the definition of Tax Expenses for purposes of this Lease;

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(iii)Any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; and

(iv)Any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises.

Notwithstanding anything to the contrary contained in this Section 4.3, there shall be excluded from Tax Expenses all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state net income taxes, and other taxes to the extent applicable to Landlord’s net income.

4.3Late Charges.  If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord’s designee by ten (10) days after the due date therefor, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the amount due; provided, however, that Landlord will waive the imposition of the late charge for the first late payment of Rent in any one (1) calendar year.  The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord’s other rights and remedies hereunder, at law and/or in equity and shall not be construed as liquidated damages or as limiting Landlord’s remedies in any manner.  In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid on or before five (5) business days after the date that they are due shall thereafter bear interest until paid at a rate (the “Interest Rate”) equal to the lesser of (i) [***], or (ii) the highest rate permitted by applicable law.

Article 5
USE OF PREMISES; HAZARDOUS MATERIALS

5.1Use.  Tenant shall use the Premises solely for office, life science laboratory research and development, manufacturing, distribution, and any other use permitted under all applicable laws and zoning subject to the provisions within this Lease, and Tenant shall not use or permit the Premises to be used for any other purpose or purposes whatsoever.  Tenant shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the provisions of Exhibit D, attached hereto, or in violation of the laws of the United States of America, the state in which the Project is located, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project.  Tenant shall comply with the rules and regulations described on Exhibit D attached hereto (the “Rules and Regulations”) and all currently recorded covenants, conditions, and restrictions.

5.2Hazardous Materials.

5.2.1Definitions: As used in this Lease, the following terms have the following meanings:

(a)“Environmental Law” means any past, present or future federal, state or local statutory or common law, or any regulation, ordinance, code, plan, order, permit, grant, franchise, concession, restriction or agreement issued, entered, promulgated or approved thereunder, relating to (a) the environment, human health or safety, including, without limitation, emissions, discharges, releases or threatened releases of Hazardous Materials (as defined below)

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into the environment (including, without limitation, air, surface water, groundwater or land), or (b) the manufacture, generation, refining, processing, distribution, use, sale, treatment, receipt, storage, disposal, transport, arranging for transport, or handling of Hazardous Materials.

(b)“Environmental Permits” mean collectively, any and all permits, consents, licenses, approvals and registrations of any nature at any time required pursuant to, or in order to comply with, any Environmental Law or otherwise reasonably desired by Landlord including, but not limited to, any Spill Control Countermeasure Plan and any Hazardous Materials Management Plan.

(c)“Hazardous Materials” shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter (during the Lease Term) designated or regulated under any Environmental Law, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls (“PCBs”), freon and other chlorofluorocarbons, “biohazardous waste,” “medical waste,” “infectious agent”, “mixed waste” or other waste under California Health and Safety Code §§ 117600 et, seq.

(d)“Release” shall mean with respect to any Hazardous Materials, any release, deposit, discharge, emission, leaking, pumping, leaching, spilling, seeping, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Materials.

5.2.2Tenant’s Obligations - Environmental Permits.  Tenant will (i) obtain and maintain in full force and effect all Environmental Permits that are required under any Environmental Laws applicable to Tenant’s operations or Tenant’s use of the Premises and (ii) be and remain in material compliance with all terms and conditions of all such Environmental Permits and with all Environmental Laws applicable to Tenant or Tenant’s use of the Premises.

5.2.3Tenant’s Obligations - Hazardous Materials.  Except as expressly permitted herein, Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, or any other portion of the Premises by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, “Tenant’s Parties”), in violation of any Environmental Law without the prior written consent of Landlord, which consent Landlord may reasonably withhold.  Landlord acknowledges that it is not the intent of this Section 5.2 to prohibit or materially impair Tenant from operating its business for the uses permitted hereunder.  Tenant may operate its business according to the custom of Tenant’s industry so long as the use or presence of Hazardous Materials is strictly and properly monitored in material compliance with applicable Environmental Laws.  As a material inducement to Landlord to allow Tenant to use Hazardous Materials in connection with its business, Tenant agrees to deliver to Landlord prior to the Lease Commencement Date a list identifying each type of Hazardous Material to be present at the Premises and setting forth any and all governmental approvals or permits required in connection with the presence of such Hazardous Material at the Premises (the “Hazardous Materials List”).  If Tenant’s use of Hazardous Materials has changed, Tenant shall deliver to Landlord an updated Hazardous Materials List before any new Hazardous Materials are brought to the Premises.  Tenant shall deliver to Landlord (prior to the Lease Commencement Date or, if unavailable at the time, as soon as practicable after receipt from or submission to any Governmental Authority) true and

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correct copies of the following documents (hereinafter referred to as the “Documents”) relating to the handling, storage, disposal and emission of Hazardous Materials by Tenant at the Premises: permits; approvals; storage and management plans; notices of violations of applicable Environmental Laws; plans relating to the installation of any storage tanks to be installed in, on, under or about the Premises (provided that installation of storage tanks shall only be permitted after Landlord has given Tenant its written consent to do so, which consent Landlord may withhold in its reasonable discretion (but in no event shall Tenant install any below ground storage tanks)); and all closure plans or any other documents required by any and all governmental authorities for any storage tanks installed in, on, under or about the Premises for the closure of any such storage tanks.  For each type of Hazardous Material listed, the Documents shall include (t) the chemical name, (u) the material state (e.g., solid, liquid, gas or cryogen), (v) the concentration, (w) the storage amount and storage condition (e.g., in cabinets or not in cabinets), (x) the use amount and use condition (e.g., open use or closed use), (y) the location (e.g., room number or other identification) and (z) if known, the chemical abstract service number.  Tenant shall not be required, however, to provide Landlord with any portion of the Documents containing information of a proprietary nature, which Documents, in and of themselves, do not contain a reference to any Hazardous Materials or activities related to Hazardous Materials.  Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, at its sole cost and expense, any and all Hazardous Materials brought on to the Premises by Tenant, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises or any portion thereof by Tenant or any of Tenant’s Parties during the Lease Term.

5.2.4Landlord’s Right to Conduct Environmental Assessment.  At any time during the Lease Term, Landlord shall have the right, at Landlord’s sole cost and expense, to retain an environmental professional to conduct an environmental assessment of the Premises (as well as any other areas in, on or about the Premises that Landlord reasonably believes may have been affected adversely by Tenant’s use of the Premises (collectively, the “Affected Areas”) in order to confirm that the Premises and the Affected Areas do not contain any Hazardous Materials in violation of applicable Environmental Laws or under conditions constituting or likely to constitute a Release of Hazardous Materials.  Such environmental assessment shall be a so-called “Phase I” assessment or such other level of investigation which shall be the standard of diligence in the purchase or lease of similar property at the time, together with, at Landlord’s sole cost and expense, any additional investigation and report which would customarily follow any discovery contained in such initial Phase I assessment (including, but not limited to, any so-called “Phase II” report).  Such right to conduct such environmental assessment shall not be exercised more than once per calendar year unless Tenant is in default under this Section 5.2.  Landlord shall use its commercially reasonable efforts to minimize any disruption to Tenant’s business or use of the Premises from any such assessment.  Notwithstanding anything above to the contrary, in the event that any such environmental assessment performed by Landlord reveals that Tenant is in material breach of this Lease pertaining to Hazardous Materials, then the cost of any such environmental assessment shall be at Tenant’s sole cost and expense.

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5.2.5Tenant’s Obligations to perform Corrective Action.  If the data from any environmental assessment authorized and undertaken by Landlord pursuant to Section 5.2.4 concludes that Tenant has Released Hazardous Materials on, under or emanating from the Premises and the Affected Areas in material violation of Environmental Law and that such Release requires any investigation and/or active response action, including without limitation active or passive remediation and monitoring or any combination of these activities (“Corrective Action”), Tenant shall undertake Corrective Action only with respect to contamination caused by Tenant if, and only to the extent required by the governmental authority exercising jurisdiction over the matter.  Any Corrective Action performed by Tenant will be performed with Landlord’s prior written approval, not to be unreasonably withheld, and in accordance with applicable Environmental Laws, at Tenant’s sole cost and expense and by an environmental consulting firm reasonably acceptable to Landlord.  Tenant may perform the Corrective Action before or after the expiration or earlier termination of this Lease, to the extent permitted by governmental agencies with jurisdiction over the Premises, the Building and the Project (provided, however, that any Corrective Action performed after the expiration or earlier termination of this Lease shall be subject to the access fee provisions set forth below).  Tenant or its consultant may install, inspect, maintain, replace and operate remediation equipment and conduct the Corrective Action as it considers necessary, subject to Landlord’s approval.  Tenant and Landlord shall, in good faith, cooperate with each other with respect to any Corrective Action after the expiration or earlier termination of this Lease so as not to interfere unreasonably with the conduct of Landlord’s or any third party’s business on the Premises, the Building and the Project.  It shall be reasonable for Landlord to require Tenant to deliver a “no further action” letter or substantially similar document from the applicable governmental agency and Landlord shall provide reasonable access until such time as such approval is obtained.  Landlord’s “reasonableness” as used in the immediately preceding sentence shall be based on (i) the zoning of the Premises as of the date in question, and (ii) the logical uses of the Premises as of the date in question.  If Landlord is unable to situate a tenant in the Premises as a result of ongoing remediation of the Premises and the Affected Areas by Tenant, Tenant shall be obligated to pay an access fee equal to the Monthly Rent until such time as Landlord is able to situate said tenant in the Premises.  Tenant agrees to install, at Tenant’s sole cost and expense, to the extent commercially reasonable, screening around its remediation equipment so as to protect the aesthetic appeal of the Premises.  Tenant also agrees to use reasonable efforts to locate its remediation and/or monitoring equipment, if any (subject to the requirements of Tenant’s consultant and governmental agencies with jurisdiction over the Premises) in a location which will allow Landlord, to the extent reasonably practicable, the ability to lease the Premises to a subsequent user.  Any Hazardous Materials on, in, under or about the Premises and the Affected Areas existing prior to commencement of this Lease are solely Landlord’s responsibility and Tenant shall have no obligations whatsoever for any investigation or remediation associated with Hazardous Materials existing on the premises prior to the Commencement Date.  Landlord will indemnity Tenant for any and all costs and expenses associated with Hazardous Materials existing on the Premises prior to the Commencement Date; provided, however, that Landlord’s indemnity obligations shall not extend to loss of business, loss of profits or other consequential damages which may be suffered by Tenant.

5.2.6Tenant’s Duty to Notify Landlord Regarding Releases.  Tenant agrees to promptly notify Landlord of any Release of Hazardous Materials in the Premises which Tenant becomes aware of during the Lease Term, whether caused by Tenant or any other persons or entities.

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5.2.7Tenant’s Environmental Indemnity.  To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord’s members, partners, subpartners, independent contractors, officers, directors, shareholders, employees, agents, successors and assigns (collectively, “Landlord Parties”) from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys’ fees, consultant fees and expert fees and court costs) which arise or result from Tenant’s Release of Hazardous Materials on, in, under or about the Premises solely to the extent the Release caused by Tenant or any of Tenant’s Parties during the Lease Term; provided, however, that Tenant’s indemnity obligations shall not extend to loss of business, loss of profits or other consequential damages which may be suffered by Landlord.  Tenant’s obligations hereunder shall include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary repair, cleanup or detoxification or decontamination of the Premises or the preparation and implementation of any closure, remedial action or other required plans in connection therewith.  The provisions of this Section 5.2.7 will survive the expiration or earlier termination of this Lease.

5.2.8Landlord’s Environmental Indemnity.  To the fullest extent permitted by law, Landlord agrees to promptly indemnify, protect, defend and hold harmless Tenant and Tenant’s members, partners, subpartners, independent contractors, officers, directors, shareholders, employees, agents, successors and assigns (collectively, “Tenant Parties”) from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys’ fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Project not caused by Tenant; provided, however, that Landlord’s indemnity obligations shall not extend to loss of business, loss of profits or other consequential damages which may be suffered by Tenant.

5.2.9Landlord’s Remediation.  If Hazardous Materials are present at the Premises that are required by Environmental Law to be remediated and Tenant is not responsible therefor pursuant to Section 5.2, Landlord shall remediate such Hazardous Materials.  Landlord agrees to install, at Landlord’s sole cost and expense, to the extent commercially reasonable, screening around its remediation equipment so as to protect the aesthetic appeal of the Premises.  Landlord also agrees to use reasonable efforts to locate its remediation and/or monitoring equipment, if any (subject to the requirements of Landlord’s consultant and governmental agencies with jurisdiction over the Premises) in a location which will allow Tenant to fully utilize the Premises.

Article 6
SERVICES AND UTILITIES

6.1Services and Utilities.  Tenant shall pay for all water, gas, heat, light, power, telephone, internet service, cable television, other telecommunications and other utilities supplied to the Premises, together with any fees, surcharges and taxes thereon.  Landlord shall not be obligated to provide any janitorial services to the Premises.  Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise, for failure of any service or for any diminution in the quality or quantity thereof, and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant’s use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease.

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6.2Energy Statements.  For any utilities serving the Premises for which Tenant is billed directly by such utility provider, Tenant agrees to furnish to Landlord, upon Landlord’s written request which shall be requested no more than once every twelve (12) months during the Lease Term, (a) any invoices or statements for such utilities and (b) any other utility usage information reasonably requested by Landlord, including an ENERGY STAR® Statement of Performance (or similar comprehensive utility usage report if requested by Landlord) and any other information reasonably requested by Landlord for the immediately preceding year.  Tenant shall retain records of utility usage at the Premises, including invoices and statements from the utility provider, for at least [***], or such other period of time as may be requested by Landlord.  Tenant acknowledges that any utility information for the Premises may be shared with third parties, including Landlord’s consultants and governmental authorities.  In the event that Tenant fails to comply with this Section, Tenant hereby authorizes Landlord to collect utility usage information directly from the applicable utility providers and agree to pay Landlord a fee of [***] per month to collect such utility usage information.

6.3Abatement of Rent.  Notwithstanding anything to the contrary in this Lease, in the event that Tenant is prevented from using, and does not use, the Building or any portion thereof, or Tenant’s Parking Spaces or any portion thereof (where Landlord has not accommodated Tenant with the Alternative Parking (as defined below)), or the spoil courts, fitness center, outdoor seating or walking areas (the “Other Amenities”), in any of such cases as a result of (i) Landlord’s construction of the New Building, (ii) any failure in Tenant obtaining any of the essential utilities due to Landlord’s negligent or intentional acts or omissions, (iii) any failure in Tenant accessing the Building or Tenant’s Parking Spaces due to Landlord’s negligent or intentional acts or omissions or due to a beneficiary pursuant to an easement referenced in the Policy (as defined in Section 10.1 below) causing such failure of access, (iv) any repair, maintenance or alteration performed by Landlord, or (v) Landlord’s negligent or intentional acts or omissions or breach of this Lease, and provided that Tenant did not cause such interference, then Tenant shall immediately notify Landlord in writing and if such prevention continues for the relevant Eligibility Period (as defined below), then Tenant’s obligation to pay Base Rent shall be abated or reduced, as the case may be, from and after the first (1st) day following the Eligibility Period and continuing until such time that Tenant continues to be so prevented from using, and does not use, the Building or a portion thereof or Tenant’s Parking Spaces or any portion thereof (where Landlord has not accommodated Tenant with the Alternative Parking (as defined below)), or the Other Amenities, in the proportion that the rentable square feet of the portion of the Building that Tenant is prevented from using, and does not use, bears to the total rentable square feet of the Building (or in the case of Tenant’s Parking Spaces, in proportion to the number of Tenant’s Parking Spaces that Tenant is prevented from using, and does not use, bears to the total number of Tenant’s Parking Spaces; or in the case of the Other Amenities, Base Rent shall be abated by 10%).  For example, if Tenant is unable to use five percent (5%) of Tenant’s Parking Spaces from and after the relevant Eligibility Period, then Base Rent shall reduce by five percent (5%) (until Tenant is provided the use of Tenant’s Parking Spaces (or until Landlord provides the Alternative Parking to Tenant)).  To the extent Tenant shall be entitled to abatement of rent pursuant to Article 12, then the Eligibility Period shall not be applicable.  “Eligibility Period” means five (5) consecutive business days unless such interference is triggered by construction of the New Building in which case it shall mean one (1) business day and except that, if such five (5) business days Eligibility Period is triggered at least three times in any 12 month period, then the Eligibility Period shall be shortened to one (1) business day for any additional interference during such 12 month period.  With respect

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to parking during any construction of the New Building, Landlord may, at Landlord’s election and at Landlord’s sole cost, use valet/tandem parking or employ a reasonable shuttle service from a separate parking location, provided that (a) neither tandem parking nor such shuttle service shall be used for more than ninety (90) days, in the aggregate, during construction of the New Building, (b) such shuttle service is continuously available between the hours of 6am and 10pm on weekdays and between the hours of 8am and 6pm on weekends, and (c) such shuttle service that does not require more than a ten (10) minute ride from the alternate parking location to the Building (the “Alternative Parking”).

Article 7
REPAIRS

7.1Tenant’s Obligations.  Throughout the Lease Term, Tenant shall, at Tenant’s sole cost and expense, maintain, repair, improve and replace to the Management Standard, all portions of the Premises in accordance with the following provisions of this Article 7.  For purposes of this Lease, the portions of the Building and Premises to be so maintained, repaired and improved by Tenant and its Facilities Team (as defined in Section 7.2.2 below) shall include, without limitation, all of the systems (“Building Systems”) set forth in Exhibit G.  Tenant, at its sole cost and expense, shall also maintain and keep the sidewalks, landscaping, parking areas, curbs, roads, driveways, lighting standards, landscaping, sewers, water, gas and electrical distribution systems and facilities, drainage facilities, and all signs, both illuminated and non-illuminated, in good condition (all such items referenced in this Section 7.1 are collectively referred to herein as “Tenant Maintenance Responsibilities”).

7.2Management Standards.

7.2.1Professional Maintenance.  Tenant shall perform the Tenant Maintenance Responsibilities in a manner consistent with commercially reasonable standards followed by Landlord and other first-class owners and management companies that are managing “Comparable Buildings”, as defined in the Extension Option Rider (the “Management Standard”).

7.2.2Facilities Team.  Landlord and Tenant hereby acknowledge that Tenant’s in-house facilities management department (collectively, the “Facilities Team”) is comprised of a multi-disciplined staff of competent professional facilities maintenance, repair and management personnel.  Tenant shall cause, throughout the Lease Term, its Facilities Team to maintain requisite levels of capability and expertise, and apply such Facilities Team to the Project, as reasonably required to satisfy the Management Standard.

7.2.3Service Agreements.  To the extent required to perform the Tenant Maintenance Responsibilities, Tenant shall enter into service, repair and maintenance agreements (collectively, the “Service Agreements”) upon the terms and conditions of this Lease and with competent providers as required under Exhibit F of this Lease.  Each of Landlord and Tenant shall have the right to reasonably modify and amend the terms and conditions of Exhibit F attached hereto, from time to time, in accordance with commercially reasonable customary practices at Comparable Buildings.  With respect to such Service Agreements, Tenant shall provide Landlord with the name of the particular vendor, and the scope of work for which such vendor is retained.

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7.3Records and Reports and Meeting Requirements.

7.3.1Annual Management Reports.  Two times per calendar year during the Lease Term, Tenant shall prepare and deliver to Landlord the following reports which shall be in form and substance reasonably satisfactory to Landlord.

7.3.1.1Utilities consumption and demand report and analysis for the preceding year, which report shall include, without limitation, the hours of use of the HVAC equipment and systems in the Premises.

7.3.1.2Any other reports as Landlord shall from time to time reasonably request in connection with the operation and management of the Building and Premises.

7.3.2Landlord’s Ownership of Records.  All plans and specifications maintained by Tenant in connection with the Building and/or any improvements, and any warranties and guaranties and operating manuals relating to the Building and/or Premises (collectively, the “Building Documents”) shall become the property of Landlord, and such documents (but Tenant may retain copies thereof) shall be delivered to Landlord upon the expiration or earlier termination of the Lease Term, to the extent not previously delivered to Landlord.

7.3.3Meeting Requirements.  At the written request of either Landlord or Tenant (a “MM Request”), each party shall arrange to meet and confer with the other (at a mutually reasonable and convenient time and location), as to the status of the maintenance, repair and other work required to be performed under this Lease and to (i) conduct a full inspection of the condition of the Premises including the Building structure and Building systems, (ii) review and discuss the Service Agreements, and (iii) review and discuss Tenant’s and Landlord’s obligations as set forth under this Lease (each, a “Maintenance Meeting”); provided, however, in no event shall Landlord or Tenant be required to participate in more than one such Maintenance Meeting during any six month period during the Lease Term, unless such a Maintenance Meeting is required in connection with an emergency situation or event.  In connection with, and in advance of, any such Maintenance Meeting, to the extent Landlord’s MM Request included a request for maintenance and repair reports, documents and back-up materials, Tenant shall promptly deliver any maintenance and repair reports, documents and back-up materials related to the maintenance, repair and other work required to be performed by Tenant under the Lease, to the extent the same are regularly and customarily generated and maintained by, and in the possession of, its Facilities Team (collectively, the “M&R Reports”).

7.3.4Books and Records.  Tenant shall maintain complete, detailed and accurate records, books and accounts of all funds disbursed in connection with Tenant’s obligations under this Article 7 (excepting salary disbursements internal to Tenant), including all M&R Reports.  Tenant agrees to keep all of the aforementioned documents (collectively, the “Books and Records”) safe and available to Landlord, and Tenant shall not dispose of any such Books or Records until the same are at least three (3) years old.

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7.3.5Tenant’s Risk Management Obligations.  Tenant shall promptly investigate and make a full timely written report to Landlord as to all alleged accidents known to Tenant and/or all claims for damages relating to the Premises known to Tenant, including any damage or destruction to the Premises.  Tenant agrees not to knowingly permit the use of the Premises for any purpose which might void any policy of insurance held by Landlord or unreasonably increase the premiums therefor unless Tenant pays for such increased insurance payments or which might render any loss insured thereunder uncollectible.

7.4Repair, Maintenance and Testing.

7.4.1Tenant’s Repair, Maintenance and Improvement Obligations.  Tenant shall, at Tenant’s sole cost and expense maintain and repair and improve, in good repair and in a first- class condition, and pursuant to the specifications set forth in Exhibit F attached hereto, those portions of the Premises (inclusive of fixed improvements) which are Tenant Maintenance Responsibilities.  Tenant shall comply with all applicable laws in connection with the Tenant Maintenance Responsibilities.  At Landlord’s option, if Tenant fails to comply with its obligations as required in this Article 7, Landlord may, after written notice to Tenant, and Tenant’s failure to cure the same within five (5) days (or such shorter period in the event of an emergency) but only if Tenant is not diligently working to cure the same, and after providing Tenant a second notice setting forth Landlord’s intention to engage in self-help (except in the event of an emergency, in which case no notice to Tenant shall be required), but need not, perform such obligations, and Tenant shall pay Landlord the reasonable cost thereof.

7.4.2Tenant’s Testing Obligations.  Tenant shall operate, maintain, and test the Building Systems including all subsystems in any special areas as designated by Landlord, to the extent related to the Tenant Maintenance Responsibilities in a manner consistent with the Management Standard.  Tenant shall conduct such testing and maintenance in accordance with applicable laws.

7.5Capital Improvements.  Tenant[***] shall be required to perform all capital improvements in connection with the performance of Tenant’s Maintenance Obligations.  Tenant shall provide written notice to Landlord in the event that any such capital improvements are required during the Lease Term and shall perform the same in accordance with the terms of Article 8 of the Lease including Landlord’s approval of the same.  Notwithstanding anything to the contrary in this Lease, if, during the Lease Term, any Tenant Maintenance Responsibility is a capital replacement (as determined in accordance with GAAP) or a major repair which extends the useful life of the item which is required to be repaired beyond the remaining Lease Term, and if the useful life of such capital replacement is more than the remaining Lease Term (or major repair extends the useful life of the item which is required to be repaired beyond the remaining Lease Term) [***], then such item shall be replaced and/or repaired by Tenant (subject to Landlord’s prior approval of the plans and specifications and the cost of any such capital replacement or repair, to the extent that such approval is required by the provisions of Section 8.1), and Landlord shall reimburse Tenant a pro rata share of the cost thereof based upon a fraction, the numerator of which is the number of months of the expected useful life of such replacement item or repair item beyond the expiration of the Lease Term, and the denominator of which is the total number of months of the reasonably expected useful life of such capital improvement or major repair item.  Notwithstanding anything above to the contrary, (i) Tenant shall be solely responsible for any

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capital replacement or major repair necessitated due to Tenant’s negligence or willful misconduct or material breach of this Lease and (ii) in the event Tenant exercises an extension option such that the Lease Term extends beyond the useful life of any such capital replacement or major repair, then Landlord shall no longer be obligated to reimburse Tenant for any such capital replacement or major repair.

7.6Tenant’s Responsibilities Upon Termination of Management of the Project.  Upon the expiration or earlier termination of this Lease for any reason, Tenant shall forthwith, without necessity of demand or notice, deliver the following to Landlord, or Landlord’s appointed agent on the effective date of expiration or termination (except to the extent that any such item has already been delivered to Landlord).

7.6.1Copies of the Books and Records for the most recent full calendar year and any subsequent partial calendar year.

7.6.2A final accounting of all of Tenant’s direct payment obligations under Section 4.1 of the Lease (and the remaining terms of this Lease) attributable to the Project and accruing on or before the date of termination.

7.6.3Any third party warranties, guaranties and operating manuals in Tenant’s possession relating to the improvements in the Project and the Building Systems.

7.6.4All keys related to the telephone closets, janitorial closets, electrical closets, storage rooms, storage areas, electrical utility provider rooms or areas, rooftop access points, and other areas which would traditionally be characterized as common areas.

7.6.5The obligation of Tenant to deliver the foregoing shall survive the termination of the Lease.

Article 8
ADDITIONS AND ALTERATIONS

8.1Landlord’s Consent to Alterations.  Tenant may not make any improvements, alterations, additions or changes to the Premises (collectively, the “Alterations”) without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than [***] prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord; provided, however, Landlord may withhold its consent in its sole and absolute discretion with respect to any Alterations which may materially adversely affect the structural components of the Building or the Systems and Equipment.  Tenant shall pay for all overhead, general conditions, fees and other costs and expenses of the Alterations, and [***].  The construction of the initial improvements to the Premises shall be governed by the terms of the Tenant Work Letter and not the terms of this Article 8 and shall not be deemed “Alterations”.  Notwithstanding the foregoing to the contrary, Landlord’s prior consent shall not be required with respect to any interior Alterations to the Building which (i) cost less than [***] for any one (1) job, and (ii) do not adversely affect the Building Systems and/or the Building structure; such alterations shall not be subject to Landlord’s supervision fee.

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8.2Manner of Construction.  Landlord may impose[***], reasonable requirements, including, but not limited to, the requirement that Tenant utilize for such purposes only [***].  Tenant shall construct such Alterations and perform such repairs in compliance with any and all applicable rules and regulations of any federal, state, county or municipal code or ordinance and pursuant to a valid building permit, issued by the city in which the Building is located, and in conformance with Landlord’s reasonable construction rules and regulations.  Landlord’s approval of the plans, specifications and working drawings for Tenant’s Alterations shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities.  All work with respect to any Alterations must be done in a good and workmanlike manner and diligently prosecuted to completion to the end that the Premises shall at all times be a complete unit except during the period of work.  Tenant shall cause all Alterations to be performed in such manner as not to obstruct access by any person to the Building or Project, and as not to obstruct the business of Landlord, or interfere with the labor force working at the Project.  If Tenant makes any Alterations, Tenant agrees to [***], it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 below immediately upon completion thereof.  If Landlord has reasonable cause therefor, then Landlord may require Tenant to obtain [***].  Upon completion of any Alterations, Tenant shall (i) [***], (ii) [***], and (iii) [***].

8.3Landlord’s Property.  All Alterations, improvements, fixtures and/or equipment which may be installed or placed in or about the Premises (including, but not limited to, all floor and wall coverings, built-in cabinet work and paneling, sinks and related plumbing fixtures, laboratory benches, exterior venting fume hoods and walk-in freezers and refrigerators, ductwork, conduits, electrical panels and circuits)[ ***].  Furthermore, Landlord may require that Tenant remove any Alterations (i.e., all Alterations except the Tenant Improvements (other than with respect to the [***] as provided below)) upon the expiration or early termination of the Lease Term, and repair any damage to the Premises and Building caused by such removal (provided that Landlord so designates at the time that Landlord consents to such Alteration but Landlord will only be required to so designate in the event Tenant requests, in Tenant’s request for such consent, that Landlord make such determination).  Furthermore, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given following any earlier termination of this Lease, require Tenant, upon the expiration or sooner termination of this Lease [***], to restore any structural elements which are removed by Tenant as part of the Tenant Improvements within [***] which restoration shall, in the event this Lease is terminated due to Tenant’s default under this Lease (beyond the expiration of all applicable notice and cure periods set forth herein), include Tenant restoring [***].  In connection with such restoration, Tenant shall repair any damage to the Premises and Building and return the affected portion of the Premises to a building standard tenant improved condition as reasonably determined by Landlord; in no event shall Tenant have any other restoration obligations pertaining to the initial Tenant Improvement work performed by Tenant pursuant to the Tenant Work Letter.  If Tenant fails to complete such restoration of the [***] and return the affected portion of the Premises to a building standard tenant improved condition, Landlord may do so and may charge the cost thereof to Tenant.  Tenant hereby protects, defends, indemnifies and holds Landlord harmless from any liability, cost, obligation, expense or claim of lien in any manner relating to the installation, placement, removal or financing of any such Alterations, improvements, fixtures and/or equipment in, on or about the Premises, which obligations of Tenant shall survive the expiration or earlier termination of this Lease.  If Tenant fails to complete such removal and/or to repair by the end of the Lease Term (plus a reasonable

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cure period not to exceed [***]), Landlord may do so and may charge the cost thereof to Tenant.  Notwithstanding any other provision of this Article 8 to the contrary, in no event shall Tenant remove any improvement from the Premises as to which Landlord contributed payment, including the Tenant Improvements, without Landlord’s prior written consent, which consent Landlord may withhold in its sole and absolute discretion.

Article 9
COVENANT AGAINST LIENS

Tenant has no authority or power to cause or permit any lien or encumbrance of any kind whatsoever, whether created by act of Tenant, operation of law or otherwise, to attach to or be placed upon the Project, Building or Premises, and any and all liens and encumbrances created by Tenant shall attach to Tenant’s interest only.  Landlord shall have the right at all times to post and keep posted on the Premises any notice which it deems necessary for protection from such liens.  Tenant shall not cause or permit any lien of mechanics or materialmen or others to be placed against the Project, the Building or the Premises with respect to work or services claimed to have been performed for or materials claimed to have been furnished to Tenant or the Premises, and, in case of any such lien attaching or notice of any lien, Tenant shall cause it to be immediately released and removed of record by payment and release or furnish a bond or other security reasonably acceptable to Landlord.  If any such lien is not released and removed (or bonded over) within five (5) business days after notice of such lien is delivered by Landlord to Tenant, then Landlord may, at its option, take all action necessary to release and remove such lien, without any duty to investigate the validity thereof, and all sums, costs and expenses, including reasonable attorneys’ fees and costs, incurred by Landlord in connection with such lien shall be deemed Additional Rent under this Lease and shall immediately be due and payable by Tenant.  In the event that Tenant leases or finances the acquisition of equipment, furnishings or other personal property of a removable nature utilized by Tenant in the operation of Tenant’s business, Tenant warrants that any Uniform Commercial Code financing statement shall, upon its face or by exhibit thereto, indicate that such financing statement is applicable only to removable personal property of Tenant located within the Premises.  In no event shall the address of the Premises be furnished on a financing statement without qualifying language as to applicability of the lien only to removable personal property located in an identified suite leased by Tenant.  Should any holder of a financing statement record or place of record a financing statement that appears to constitute a lien against any interest of Landlord or against equipment that may be located other than within an identified suite leased by Tenant, Tenant shall, within ten (10) days after filing such financing statement, cause (a) a copy of the Lender security agreement or other documents to which the financing statement pertains to be furnished to Landlord to facilitate Landlord’s ability to demonstrate that the lien of such financing statement is not applicable to Landlord’s interest and (b) Tenant’s lender to amend such financing statement and any other documents of record to clarify that any liens imposed thereby are not applicable to any interest of Landlord in the Premises.  Landlord shall sign any commercially reasonable agreements (and reasonably approved by Landlord’s counsel) which may be required by any such equipment financing lender for the benefit of Tenant.

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Article 10
INDEMNIFICATION AND INSURANCE

10.1Indemnification and Waiver.  Tenant hereby assumes all risk of damage to property and injury to persons, in, on, or about the Premises from any cause whatsoever and agrees that Landlord and the Landlord Parties shall not be liable for, and are hereby released from any responsibility for, any damage to property or injury to persons or resulting from the loss of use thereof, which damage or injury is sustained by Tenant or by other persons claiming through Tenant, except to the extent caused by the gross negligence or willful misconduct of Landlord or any Landlord Parties or any breach of this Lease by Landlord.  Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties from any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys’ fees) (collectively, “Claims”) incurred in connection with or arising from any cause in, on or about the Premises (including, without limitation, Tenant’s installation, placement and removal of Alterations, improvements, fixtures and/or equipment in, on or about the Premises), due to the acts, omissions or negligence of Tenant or of any person claiming by, through or under Tenant, or of the contractors, agents, servants, employees, licensees or invitees of Tenant or any such person, in, on or about the Premises, the Building and Project, but only to the extent Tenant’s liability is not waived and released by Landlord pursuant to the terms of Section 10.4 of this Lease; provided, however, that Tenant’s indemnity shall, in no event, extend to loss of profits, loss of business or other consequential damages incurred by Landlord or any Landlord Parties.  Notwithstanding anything in this Section 10.1 to the contrary, the foregoing assumption of risk, release and indemnity shall not apply to any Claims to the extent resulting from the gross negligence or willful misconduct of Landlord or any Landlord Parties or breach of this Lease by Landlord (collectively, the “Excluded Claims”), and Landlord shall indemnify, protect, defend and hold harmless Tenant and Tenant’s officers, agents and employees (collectively, “Tenant Parties”) from and against any such Excluded Claims, but only to the extent Landlord’s liability is not waived and released by Tenant pursuant to the terms of Section 10.4 of this Lease (provided, however, that Landlord’s indemnity shall, in no event, extend to loss of profits, loss of business or other consequential damages incurred by Tenant or any Tenant Parties).  Landlord represents that Landlord obtained a title insurance policy with respect to the Premises dated December 1, 2014, a copy of which Landlord has furnished to Tenant prior to the execution of this Lease (the “Policy”), which Policy identifies two encroachments as exceptions 21.A and 21.E.  In addition, Landlord previously obtained for Tenant a preliminary title report from First American with respect to the Premises (the “PTR”), which PTR identifies exceptions 3 through 26 as exceptions to title in Schedule B to the PTR (the specific exceptions referenced above with respect to the Policy and the PTR are collectively referred to herein as the “Exceptions”).  If Tenant incurs any losses, claims, liabilities, expenses and costs due to any matters set forth in the Exceptions, then Landlord shall (with counsel reasonably satisfactory to both Landlord and Tenant, at Tenant’s expense) seek recourse under the Policy and indemnify Tenant for such losses, claims, liabilities, expenses and costs but only to the extent Landlord’s indemnity costs are covered under the Policy and only to the extent of Landlord’s rights under the Policy; provided, however, (i) in no event shall Landlord’s indemnity obligations extend to loss of business, loss of profits or other consequential damages which may be suffered by Tenant and (ii) in the event Landlord transfers Landlord’s interest in the Project, then the term “Policy” shall mean a subsequent ownership title policy held by the transferee for the Project.  Each party’s agreement to indemnify the other pursuant to this Section 10.1 is not intended and shall not relieve any insurance carrier of its obligations under policies required to be

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carried by the indemnifying party pursuant to the provisions of this Lease.  The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease.  Notwithstanding anything in this Lease to the contrary but subject to Section 6.3 and Landlord’s indemnity obligations in this Lease, Landlord shall not be liable to Tenant for, and Tenant assumes all risk of, damage to personal property or scientific research or intellectual property, including loss of records kept by Tenant within the Premises and damage or losses caused by fire, electrical malfunction, gas explosion or water damage of any type (including broken water lines, malfunctioning fire sprinkler systems, malfunctioning lab systems including any malfunction of the central plant systems, roof leaks or stoppages of lines), except to the extent caused by the gross negligence or willful misconduct of Landlord or any Landlord Parties.  Tenant further waives any claim for injury to Tenant’s business or loss of income relating to any such damage or destruction of personal property as described above.  Neither Landlord nor Tenant shall have any liability to the other for any consequential, indirect, special or punitive damages, except for Tenant’s liability pursuant to Article 16.

10.2Landlord’s Insurance.  During the Lease Term, Landlord shall carry commercial general liability insurance insuring in a form and with limits as would be covered by a prudent landlord of premises comparable to the Premises in the general vicinity of the Premises.  At Landlord’s option, all such insurance may be carried under any blanket or umbrella policies which Landlord has in force for other buildings and projects.  Landlord may, but shall not be obligated to, carry any other form or forms of insurance as Landlord or the mortgagees or ground lessors of Landlord may reasonably determine is advisable.  The cost of insurance obtained by Landlord pursuant to this Section 10.2 (including deductibles) shall be included in Additional Rent.  If Tenant’s peculiar use of the Premises (e.g. for uses not customarily undertaken by tenants in a similar business and who occupy similar buildings) causes any increase in the premium for such insurance policies, Landlord shall notify Tenant in writing and Tenant shall reimburse Landlord for any such increase.

10.3Tenant’s Insurance.  Tenant shall maintain the following coverages in the following amounts.

10.3.1During the Lease Term, Tenant shall maintain in effect at all times fire and hazard insurance written on a “special form” covering one hundred percent (100%) of the full replacement cost valuation of the Building and structures located on the land comprising the Premises in the event of fire, earthquake, terrorism, lightning and windstorm.  Such insurance shall be written on a “physical loss or damage” basis under a “special form” policy, for the full replacement cost value new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage coverage.  Tenant, at Tenant’s expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body.

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10.3.2Commencing on the date hereof, Tenant shall maintain Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage arising out of Tenant’s operations, assumed liabilities or use of the Premises, including a Broad Form Commercial General Liability endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 above, (and with owned (if applicable) and non-owned automobile liability coverage, and liquor liability coverage if alcoholic beverages are served on the Premises) for limits of liability not less than:

 

 

10.3.3During construction of the Tenant Improvements and at all times during the Lease Term, Physical Damage Insurance covering (i) all furniture, trade fixtures, equipment, merchandise (if any) and all other items of Tenant’s property on the Premises installed by, for, or at the expense of Tenant, (ii) the Tenant Improvements, including any Tenant Improvements which Landlord permits to be installed above the ceiling of the Premises or below the floor of the Premises, and (iii) all other improvements, alterations and additions to the Premises, including any improvements, alterations or additions installed at Tenant’s request above the ceiling of the Premises or below the floor of the Premises.  Such insurance shall be written on a “physical loss or damage” basis under a “special form” policy, for the full replacement cost value new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage coverage.

10.3.4Workers’ compensation insurance as required by law.

10.3.5Loss-of-income, business interruption and extra-expense insurance in such amounts as will reimburse Tenant for direct and indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of loss of access to the Premises or to the Building as a result of such perils.

10.3.6Tenant shall carry comprehensive automobile liability insurance having a combined single limit of not less than [***] ($[***]) per occurrence and insuring Tenant against liability for claims arising out of ownership (if applicable), maintenance or use of any owned (if any), hired or non-owned automobiles.

10.3.7Intentionally blank

10.3.8Form of Policies.  The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease.  Such insurance shall: (i) name Landlord, and any other party it so specifies, as an additional insured; (ii) specifically cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenant’s obligations under Section 10.1 above (to the extent generally available in such coverage); (iii) be issued by an insurance company having a rating of not less than A-VIII in Best’s Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the state in which the Project is located; (iv) be primary insurance as to all claims thereunder and provide that

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any insurance (if any) carried by Landlord is excess and is non-contributing with any insurance requirement of Tenant; (v) provide that said insurance shall not be canceled or coverage changed unless ten (10) days’ prior written notice shall have been given to Landlord and any mortgagee or ground or underlying lessor of Landlord (provided that such provision is commercially available); (vi) contain a cross-liability endorsement or severability of interest clause acceptable to Landlord; and (vii) with respect to the insurance required in Sections 10.3.1, 10.3.2 and 10.3.4 above, have deductible amounts not exceeding [***] ($[***]).  Tenant shall deliver such policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days before the expiration dates thereof.  If Tenant shall fail to procure such insurance, or to deliver such policies or certificate, within such time periods, Landlord may, at its option, in addition to all of its other rights and remedies under this Lease, and without regard to any notice and cure periods set forth in Section 19.1, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent within ten (10) days after delivery of bills therefor.  Tenant shall have the right to carry the insurance required hereunder in the form of blanket and/or umbrella policies.

10.4Subrogation.  Landlord and Tenant agree to have their respective insurance companies issuing property damage insurance waive any rights of subrogation that such companies may have against Landlord or Tenant, as the case may be.  Landlord and Tenant hereby waive any right that either may have against the other on account of any loss or damage to their respective property to the extent such loss or damage is insurable under policies of insurance for fire and all risk coverage, theft, public liability, or other similar insurance.

Article 11
DAMAGE AND DESTRUCTION

11.1Repair of Damage to Premises by Tenant.  Tenant shall promptly notify Landlord of any damage to the Premises resulting from fire or any other casualty (“Casualty”).  [***]  Any such restoration shall be subject to the terms and conditions of Article 8 of this Lease.  Notwithstanding anything above to the contrary, if the Casualty is such that (i) more than [***] of the Building is destroyed and such Casualty occurs during the [***] of the Lease Term, or (ii) the restoration will require [***], or (iii) the damage is not [***], Tenant may elect to terminate this Lease by giving Landlord written notice of such election within ninety (90) days following the Casualty.  In such event, [***].

11.2Waiver of Statutory Provisions.  The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or any other portion of the Project, and any statute or regulation of the state in which the Project is located, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or any other portion of the Project.

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Article 12
CONDEMNATION

12.1Permanent Taking.  If the whole or any part of the Premises, Building or Project shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, Building or Project, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, each of Landlord and Tenant shall have the option to terminate this Lease upon [***] notice, provided such notice is given no later than [***] after the date of such taking, condemnation, deed or other instrument.  [***].  All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur.  If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Base Rent shall be proportionately abated.  Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of The California Code of Civil Procedure.

12.2Temporary faking.  Notwithstanding anything to the contrary contained in this Article 12, in the event of a temporary taking of all or any portion of the Premises for a period of one hundred and eighty (180) days or less, then this Lease shall not terminate but the Base Rent shall be abated for the period of such taking in proportion to the ratio that the amount of rentable square feet of the Premises taken bears to the total rentable square feet of the Premises.  Landlord shall be entitled to receive the entire award made in connection with any such temporary taking.

Article 13
COVENANT OF QUIET ENJOYMENT

Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, and agreements hereof without interference by any persons lawfully claiming by or through Landlord.  The foregoing covenant is in lieu of any other covenant express or implied.

Article 14
ASSIGNMENT AND SUBLETTING

14.1Transfers.  Tenant shall not, without the prior written consent of Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, permit any assignment or other such foregoing transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or permit the use of the Premises by any persons other than Tenant and its employees (all of the foregoing are hereinafter sometimes referred to collectively as “Transfers” and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a “Transferee”).  If Tenant shall desire Landlord’s consent to any Transfer, Tenant shall notify Landlord in writing, which notice (the “Transfer Notice”) shall include (i) the proposed effective date of the Transfer, which shall not be less than twenty (20) days nor more than one hundred

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eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Premises to be transferred (the “Subject Space”), (iii) all of the terms of the proposed Transfer, the name and address of the proposed Transferee, and a copy of all existing and/or proposed documentation pertaining to the proposed Transfer, (iv) current financial statements of the proposed Transferee certified by an officer, partner or owner thereof (which Landlord shall treat as confidential and not disclose), (v) a list of Hazardous Materials, certified by the proposed Transferee to be true and correct, that the proposed Transferee intends to use or store in the Premises, and (vi) such other information as Landlord may reasonably require.  Any Transfer made without Landlord’s prior written consent shall, at Landlord’s option, be null, void and of no effect, and shall, at Landlord’s option, constitute a default by Tenant under this Lease.  Whether or not Landlord shall grant consent, within thirty (30) days after written request by Landlord, Tenant shall pay to Landlord One Thousand Five Hundred Dollars ($1,500.00) to reimburse Landlord for its review and processing fees, and Tenant shall also reimburse Landlord for any reasonable legal fees incurred by Landlord in connection with Tenant’s proposed Transfer, not to exceed the sum of Three Thousand Dollars ($3,000.00).

14.2Landlord’s Consent.  Landlord shall not unreasonably withhold, condition or delay its consent to any proposed Transfer on the terms specified in the Transfer Notice and Landlord shall provide or withhold consent to the Transfer within ten (10) business days after receipt of the Transfer Notice.  If Landlord does not respond to Tenant in writing of its decision within said ten (10) business day period and if such failure continues for an additional three (3) business days after Tenant’s second written request, Landlord’s consent shall be deemed granted.  In no event shall Landlord be deemed to be unreasonable for declining to consent to a Transfer to a transferee jeopardizing directly or indirectly the status of Landlord or any of Landlord’s affiliates as a Real Estate Investment Trust under the Internal Revenue Code of 1986 (as the same may be amended from time to time, the “Revenue Code”) pursuant to the following sentence.  Notwithstanding anything contained in this Lease to the contrary, (w) no Transfer shall be consummated on any basis such that the rental or other amounts to be paid by the occupant, assignee, manager or other transferee thereunder would be based, in whole or in part, on the income or profits derived by the business activities of such occupant, assignee, manager or other transferee; (x) Tenant shall not furnish or render any services to an occupant, assignee, manager or other transferee with respect to whom transfer consideration is required to be paid, or manage or operate the Premises or any capital additions so transferred, with respect to which transfer consideration is being paid; (y) Tenant shall not consummate a Transfer with any person in which Landlord owns an interest, directly or indirectly (by applying constructive ownership rules set forth in Section 856(d)(5) of the Revenue Code); and (z) Tenant shall not consummate a Transfer with any person or in any manner that could cause any portion of the amounts received by Landlord pursuant to this Lease or any sublease, license or other arrangement for the right to use, occupy or possess any portion of the Premises to fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Revenue Code, or any similar or successor provision thereto or which could cause any other income of Landlord to fail to qualify as income described in Section 856(c)(2) of the Revenue Code.  The parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply, without limitation as to other reasonable grounds for withholding consent:

14.2.1The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or Project;

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14.2.2The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease;

14.2.3The Transferee is either a governmental agency or instrumentality thereof;

14.2.4The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities involved under the Lease on the date consent is requested;

14.2.5The proposed Transfer would cause Landlord to be in violation of another lease or agreement to which Landlord is a party, provided that Landlord notified Tenant of such restrictions prior to the date of this Lease; or

14.2.6Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, is negotiating with Landlord to lease space in the Project at such time, provided in each instance that Landlord has space available to meet such party’s needs within the Project.

If Landlord consents to any Transfer pursuant to the terms of this Section 14.2 (and does not exercise any recapture rights Landlord may have under Section 14.4 below), Tenant may within six (6) months after Landlord’s consent, enter into such Transfer of the Premises or portion thereof, upon substantially the same terms and conditions as are set forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 14.1 above, provided that if there are any changes in the terms and conditions from those specified in the Transfer Notice (i) such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 14.2, or (ii) which would cause the proposed Transfer to be materially more favorable to the Transferee than the terms set forth in Tenant’s original Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 14 (including Landlord’s right of recapture, if any, under Section 14.4 of this Lease).

14.3Transfer Premium.  If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord [***] of any Transfer Premium received by Tenant from such Transferee.  “Transfer Premium” shall mean all rent, additional rent or other consideration payable by such Transferee in excess of the Rent and Additional Rent payable by Tenant under this Lease on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any reasonable changes, alterations and improvements to the Premises in connection with the Transfer (but only to the extent approved by Landlord), and (ii) any reasonable legal fees, marketing expenses and/or brokerage commissions in connection with the Transfer (collectively, the “Subleasing Costs”).  Transfer Premium shall also include, but not be limited to, key money and bonus money paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer.

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14.4Landlord’s Option as to Subject Space.  Notwithstanding anything to the contrary contained in this Article 14, in the event of an assignment of this Lease to anyone other than an Affiliate or a subletting of substantially all of the Premises for the balance of the Lease Term to anyone other than an Affiliate, Landlord shall have the option, by giving written notice (“Recapture Notice”) to Tenant within twenty (20) days after receipt of any Transfer Notice, to recapture the Subject Space.  Such recapture notice shall terminate this Lease with respect to the Subject Space as of the date stated in the Transfer Notice as the effective date of the proposed Transfer.  However, if Landlord delivers a Recapture Notice to Tenant, Tenant may, within ten (10) days after Tenant’s receipt of the Recapture Notice, deliver written notice to Landlord indicating that Tenant is rescinding its request for consent to the proposed Transfer, in which case such Transfer shall not be consummated and this Lease shall remain in full force and effect as to the portion of the Premises that was the subject of the Transfer.  Tenant’s failure to so notify Landlord in writing within said ten (10)-day period shall be deemed to constitute Tenant’s election to allow the Recapture Notice to be effective.  If Landlord declines, or fails to elect in a timely manner to recapture the Subject Space under this Section 14.4, then, provided Landlord has consented to the proposed Transfer, Tenant shall be entitled to proceed to transfer the Subject Space to the proposed Transferee, subject to provisions of the last paragraph of Section 14.2 above.

14.5Effect of Transfer.  If Landlord consents to a Transfer: (i) the terms and conditions of this Lease shall in no way be deemed to have been waived or modified; (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee (except that any such further Transfer shall be subject to the provisions of this Article 14); (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord; and (iv) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord’s consent, shall relieve Tenant or any guarantor of the Lease from liability under this Lease.  Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof, provided that Landlord executes a commercially reasonable non-disclosure agreement.  If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency and Landlord’s costs of such audit.

14.6Additional Transfers.  For purposes of this Lease, the term “Transfer” shall also include: (i) if Tenant is a partnership or limited liability company, the withdrawal or change, voluntary, involuntary or by operation of law, of more than fifty percent (50%) of the partners or members, or transfer of more than fifty percent (50%) of the partnership or membership interests, within a twelve (12)-month period, or the dissolution of the partnership without immediate reconstitution thereof; and (ii) if Tenant has become a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), (A) the dissolution, merger, consolidation or other reorganization of Tenant, (B) the sale or other transfer of more than an aggregate of fifty percent (50%) of the voting shares of Tenant (other than to immediate family members by reason of gift or death), within a twelve (12)-month period, or (C) the sale, mortgage, hypothecation or pledge of more than an aggregate of fifty percent (50%) of the value of the unencumbered assets of Tenant within a twelve (12)-month period.

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14.7Special Transferees.  Tenant shall be permitted, upon prior written notice to Landlord (without otherwise triggering the provisions of this Article 14) to enter into any license agreement of offices within the Premises with licensees of Tenant not to exceed twenty percent (20%) of the rentable square feet of the Premises in the aggregate, and such licensees shall not be deemed a Transfer under this Article 15; provided that (a) Tenant shall give Landlord prior written notice of any such license agreement and promptly supply Landlord with any documents or information reasonably requested by Landlord regarding such licensees (including, but not limited to, applicable certificates of insurance), and (b) Tenant shall not be permitted to separately demise any such subleased space nor shall such subtenants be permitted to maintain a separate reception area in the premises.  However, any proposed sublease which would result in an aggregate amount of subleased space which is greater than twenty percent (20%) of the rentable square feet of the Premises, shall require Landlord’s prior written consent and shall be deemed a Transfer under this Article 14.

14.8Permitted Transferees.  Neither (A) the assignment or subletting by Tenant of all or any portion of this Lease or the Premises to (i) a parent or subsidiary of Tenant, or (ii) any person or entity which controls, is controlled by or under common control with Tenant, or (iii) any entity which purchases all or substantially all of the assets of Tenant in one or a series of transactions, or (iv) any entity into which Tenant is merged or consolidated (each such persons or entities described in (i), (ii), (iii) and (iv) being sometimes hereinafter referred to as an “Affiliate”), nor (B) any transfer of the stock of Tenant, shall be deemed a Transfer under this Article 14, provided that:

14.8.1Any such Affiliate was not formed, nor was such financing intended, as a subterfuge to avoid the obligations of this Article 14;

14.8.2Tenant gives Landlord prior written notice of any such assignment, sublease, financing or public offering, unless precluded by non-disclosure obligations, in which case Tenant shall notify Landlord promptly thereafter;

14.8.3Tenant or any such Affiliate (together with Tenant if Tenant survives such Transfer) has, following the effective date of any such assignment, sublease, financing or public offering, a tangible net worth, in the aggregate, computed in accordance with generally accepted accounting principles, which is equal to or greater than Tenant as of the effective date of any such assignment, sublease, financing or public offering;

14.8.4Any such Affiliate (other than in connection with a stock transaction) shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon or prior to the effective date of such assignment or sublease, all the obligations of Tenant under this Lease; and

14.8.5Tenant shall remain fully liable for all obligations to be performed by Tenant under this Lease.

An Affiliate that is an assignee of Original Tenant’s (or a prior Affiliate Assignee’s) entire interest in this Lease may be referred to as an “Affiliate Assignee.”

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Article 15
SURRENDER; OWNERSHIP AND REMOVAL OF PERSONAL PROPERTY

15.1Surrender of Premises.  No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in a writing signed by Landlord.  The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated.  The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises.

15.2Removal of Tenant Property by Tenant.  Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear, casualty and/or repairs which are specifically made the responsibility of Landlord hereunder excepted.  Tenant’s restoration obligations with respect to any Alterations may also include satisfying Landlord’s commercially reasonable procedures regarding the cleaning of any lab systems and sealing any connection points of any such lab systems to the Premises, all at Tenant’s sole cost and expense.  At least ten (10) days prior to Tenant’s surrender of possession of any part of the Premises, Tenant shall provide Landlord with (a) a facility decommissioning and Hazardous Materials closure plan for the Premises (“Exit Survey”) prepared by an independent third party reasonably acceptable to Landlord, and (b) written evidence of all necessary governmental releases obtained by Tenant in accordance with applicable laws, including laws pertaining to the surrender of the Premises.  In addition, Tenant agrees to remain responsible for remediation after the surrender of the Premises to the extent the Exit Survey concludes that Tenant has Released Hazardous Materials on, under or emanating from the Premises and the Affected Areas in material violation of Environmental Law and that such Release requires Corrective Action.  Tenant shall undertake Corrective Action only with respect to contamination caused by Tenant if, and only to the extent required by the governmental authority exercising jurisdiction over the matter.  Tenant shall, upon the expiration or earlier termination of this Lease, furnish to Landlord evidence that Tenant has closed all governmental permits and licenses, if any, issued in connection with Tenant’s or Tenant’s Parties’ activities at the Premises.  If any such governmental permits or licenses have been issued and Tenant fails to provide evidence of such closure on or before the expiration or earlier termination of this Lease, then until Tenant does so, the holdover provisions of Article 16 of this Lease shall apply.  Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all telephone, data, and other cabling and wiring (including any cabling and wiring associated with the wi-fi network, if any) installed or caused to be installed by Tenant (including any cabling and wiring, installed above the ceiling of the Premises or below the floor of the Premises), if and to the extent that such cabling, wiring and wi-fi network will materially adversely affect the next tenant of the Premises), all debris and rubbish, and such items of furniture, equipment, free-standing cabinet work, and other articles of personal property owned by Tenant or installed or placed by

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Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal.  Tenant’s obligations under this Section 15.2 shall survive the expiration or earlier termination of this Lease.

Article 16
HOLDING OVER

If Tenant holds over after the expiration of the Lease Term hereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Base Rent shall be payable at a monthly rate equal to one hundred twenty-five percent (125%) of the Base Rent applicable during the last rental period of the Lease Term under this Lease for the first thirty (30) days of such holding over and one hundred fifty percent (150%) of the Base Rent applicable during the last rental period of the Lease Term under this Lease thereafter.  Such month- to-month tenancy shall be subject to every other term, covenant and agreement contained herein.  Landlord hereby expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease.  The provisions of this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law.  If Tenant fails to surrender the Premises prior to three months after the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys’ fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom; provided, however, that Tenant’s obligation to indemnify and hold Landlord harmless with respect to such claims shall be conditioned upon Landlord providing Tenant with not less than thirty (30) days’ prior written notice that Landlord has entered into a lease for the Premises or has received a bona fide offer to lease the Premises, and that Landlord will be unable to deliver possession, or perform improvements, due to Tenant’s holdover.

Article 17
ESTOPPEL CERTIFICATES

Within ten (10) business days following a request in writing by Landlord, Tenant shall execute and deliver to Landlord a commercially reasonable estoppel certificate, which, as submitted by Landlord, shall be in the form as may be reasonably required by any prospective mortgagee or purchaser of the Project (or any portion thereof), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord’s mortgagee or Landlord’s prospective mortgagees.  Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes.  Failure by Tenant to so deliver such estoppel certificate shall be a material default of the provisions of this Lease.  If Tenant has become a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), then upon request from time to time, Tenant agrees to provide to Landlord, within ten (10) business days after Landlord’s delivery of written request therefor, current financial statements for Tenant, dated no earlier than one (1) year prior to such written request, certified as accurate by Tenant or, if available, audited financial statements prepared by an independent certified public accountant with copies of the

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auditor’s statement; provided that Landlord executes Tenant’s customary and commercially reasonable non-disclosure agreement.  Landlord from time to time shall, within twenty (20) business days after written request by Tenant, execute, acknowledge and deliver to Tenant a written statement certifying that the Lease is unmodified and in full force and effect (or that the same is in full force and effect as modified, listing the instruments of modification), the dates to which rent and the other charges have been paid; and that to the actual knowledge of Landlord, without having made independent investigation, Tenant is not in default hereunder (or specifying the nature of any default(s) Landlord claims to exist at the time of such certification).

Article 18
SUBORDINATION

This Lease is subject and subordinate to all present and future ground leases of the Project and to the lien of any mortgages or trust deeds, now or hereafter in force against the Project, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages or trust deeds, or the lessors under such ground lease, require in writing that this Lease be superior thereto; provided, however, that a condition precedent to the subordination of this Lease to any future ground or underlying lease or to the lien of any future mortgage or deed of trust is that Landlord shall obtain for the benefit of Tenant a commercially reasonable subordination, non-disturbance and attornment agreement from the landlord or lender of such future instrument containing commercially reasonable terms and conditions.  Landlord represents and warrants to Tenant that there is no existing lender with a deed of trust encumbering the Premises as of the date hereof.  Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage, or if any ground lease is terminated, to attorn, without any deductions or set-offs whatsoever, to the purchaser upon any such foreclosure sale, or to the lessor of such ground lease, as the case may be, if so requested to do so by such purchaser or lessor, and to recognize such purchaser or lessor as the lessor under this Lease.  Tenant shall, within five (5) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, or ground leases subject to non-disturbance provisions set forth above.  Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale.

Article 19
TENANT S DEFAULTS; LANDLORD’S REMEDIES

19.1Events of Default by Tenant.  All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant’s sole cost and expense and without any reduction of Rent.  Tenant shall only be deemed to be in default or breach of this Lease only upon the occurrence of any of the following:

19.1.1Any failure by Tenant to pay any Rent, Additional Rent or any other charge required to be paid under this Lease, or any part thereof, within five (5) business days after delivery of written notice that the same was not paid when due, provided however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law; or

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19.1.2Any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant (other than the payment of Rent or Additional Rent) where such failure continues for fifteen (15) days after written notice thereof from Landlord to Tenant; provided however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law; and provided further that if the nature of such default is such that the same cannot reasonably be cured within a fifteen (15)-day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure said default as soon as possible; or

19.1.3Permanent abandonment of the Premises by Tenant.

19.1.4Tenant makes an assignment for the benefit of creditors.

19.1.5A receiver, trustee or custodian is appointed to or does take title, possession or control of all or substantially all of Tenant’s assets and Tenant does not cure same within one hundred twenty (120) days.

19.1.6Tenant files a voluntary petition under the United States Bankruptcy Code or any successor statute (as the same may be amended from time to time, (the “Bankruptcy Code”) or an order for relief is entered against Tenant pursuant to a voluntary or involuntary proceeding commenced under any chapter of the Bankruptcy Code and is not dismissed within one hundred twenty (120) days.

19.1.7Any involuntary petition is filed against Tenant under any chapter of the Bankruptcy Code and is not dismissed within one hundred twenty (120) days.

19.1.8Tenant fails to deliver an estoppel certificate in accordance with Article 17 following a second request from Landlord and the passage of five (5) business days.

19.1.9Tenant’s interest in this Lease is attached, executed upon or otherwise judicially seized and such action is not released within one hundred twenty (120) days of the action.

19.2Landlord’s Remedies Upon Default.  Upon the occurrence of any such default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity, the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever.

19.2.1Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim for damages therefor; and Landlord may recover from Tenant the following:

(i)the worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus

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(ii)the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iii)the worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iv)any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; plus

(v)at Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law.

The term “rent” as used in this Section 19.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others.  As used in Sections 19.2.1(i) and (ii), above, the “worth at the time of award” shall be computed by allowing interest at the Interest Rate set forth in Section 4.5 above.  As used in Section 19.2.1 (iii) above, the “worth at the time of award” shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

19.2.2Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee’s breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations).  Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due.

19.2.3Landlord may, but shall not be obligated to, make any such payment or perform or otherwise cure any such obligation, provision, covenant or condition on Tenant’s part to be observed or performed (and may enter the Premises for such purposes).  In the event of Tenant’s failure to perform any of its obligations or covenants under this Lease, and such failure to perform poses a material risk of injury or harm to persons or damage to or loss of property, then Landlord shall have the right to cure or otherwise perform such covenant or obligation at any time after such failure to perform by Tenant, whether or not any such notice or cure period set forth in Section 19.1 above has expired.  Any such actions undertaken by Landlord pursuant to the foregoing provisions of this Section 19.2.3 shall not be deemed a waiver of Landlord’s rights and remedies as a result of Tenant’s failure to perform and shall not release Tenant from any of its obligations under this Lease.

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19.3Payment by Tenant.  Tenant shall pay to Landlord, within ten (10) days after delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with Landlord’s performance or cure of any of Tenant’s obligations pursuant to the provisions of Section 19.2.3 above; and (ii) sums equal to all expenditures made and obligations incurred by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended.  Tenant’s obligations under this Section 19.3 shall survive the expiration or sooner termination of the Lease Term.

19.4Sublessees of Tenant.  Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 19, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord’s sole discretion, succeed to Tenant’s interest in such subleases, licenses, concessions or arrangements.  If Landlord elects to succeed to Tenant’s interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder.

19.5Waiver of Default.  No waiver by Landlord of any violation or breach by Tenant of any of the terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other or later violation or breach by Tenant of the same or any other of the terms, provisions, and covenants herein contained.  Forbearance by Landlord in enforcement of one or more of the remedies herein provided upon a default by Tenant shall not be deemed or construed to constitute a waiver of such default.  The acceptance of any Rent hereunder by Landlord following the occurrence of any default, whether or not known to Landlord, shall not be deemed a waiver of any such default, except only a default in the payment of the Rent so accepted.

19.6Efforts to Relet.  For the purposes of this Article 19, Tenant’s right to possession shall not be deemed to have been terminated by efforts of Landlord to relet the Premises, by its acts of maintenance or preservation with respect to the Premises, or by appointment of a receiver to protect Landlord’s interests hereunder.  The foregoing enumeration is not exhaustive, but merely illustrative of acts which may be performed by Landlord without terminating Tenant’s right to possession.

19.7Bankruptcy.  In the event a debtor, trustee or debtor in possession under the Bankruptcy Code, or another person with similar rights, duties and powers under any other applicable laws, proposes to cure any default under this Lease or to assume or assign this Lease and is obliged to provide adequate assurance to Landlord that (a) a default shall be cured, (b) Landlord shall be compensated for its damages arising from any breach of this Lease and (c) future performance of Tenant’s obligations under this Lease shall occur, then such adequate assurances shall include any or all of the following, as designated by Landlord in its sole and absolute discretion:

(i)Those acts specified in the Bankruptcy Code or other applicable laws as included within the meaning of “adequate assurance,” even if this Lease does not concern a shopping center or other facility described in such applicable laws;

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(ii)A prompt cash payment to compensate Landlord for any monetary defaults or actual damages arising directly from a breach of this Lease;

(iii)A cash deposit in an amount at least equal to the then-current amount of the Security Deposit; or

(iv)The assumption or assignment of all of Tenant’s interest and obligations under this Lease.

Article 20
LETTER OF CREDIT

20.1Delivery of Letter of Credit.  Tenant shall deliver to Landlord, concurrently with Tenant’s execution of this Lease, an unconditional, clean, irrevocable letter of credit (the “L-C”) in the amount set forth in Section 20.3 below (the “L-C Amount”), which L-C shall be issued by Silicon Valley Bank or any money-center, solvent and nationally recognized bank (a bank which accepts deposits, maintains accounts, has a California office which will negotiate a letter of credit, and whose deposits are insured by the FDIC) reasonably acceptable to Landlord (such approved, issuing bank being referred to herein as the “Bank”), which Bank must have a short term Fitch Rating which is not less than “Fl”, and a long term Fitch Rating which is not less than “A”(or in the event such Fitch Ratings are no longer available, a comparable rating from Standard and Poor’s Professional Rating Service or Moody’s Professional Rating Service) (collectively, the “Bank’s Credit Rating Threshold”), and which L-C shall be in the form of Exhibit E, attached hereto.  Tenant shall pay all expenses, points and/or fees incurred by Tenant in obtaining the L-C.  The L-C shall (i) be “callable” at sight, irrevocable and unconditional (other than as set forth in the L-C), (ii) be maintained in effect, whether through renewal or extension, for the period commencing on the date of this Lease and continuing until the date (the “L-C Expiration Date”) that is no less than forty-five (45) days after the expiration of the Lease Term as the same may be extended (provided that the Bank shall have the right, annually, not to renew by providing the notice to Landlord described here), and, if the L-C shall expire (without auto-renewal) prior to the L-C Expiration Date, Tenant shall deliver a new L-C or certificate of renewal or extension to Landlord at least [***] prior to such expiration prior to the L-C Expiration Date of the L-C then held by Landlord, without any action whatsoever on the part of Landlord, (iii) be fully assignable by Landlord, its successors and assigns, (iv) permit partial draws and multiple presentations and drawings, and (v) be otherwise subject to the International Standby Practices-ISP 98, International Chamber of Commerce Publication #590.  Landlord, or its then managing agent, shall have the right to draw down an amount up to the face amount of the L-C if any of the following shall have occurred or be applicable: (A) such amount is due to Landlord under the terms and conditions of this Lease, beyond any L-C Cure Period (as defined below), or (B) Tenant has filed a voluntary petition under the U. S. Bankruptcy Code or any state bankruptcy code (collectively, “Bankruptcy Code”), or (C) an involuntary petition has been filed against Tenant under the Bankruptcy Code (and the same has not been vacated within [***] thereafter), or (D) the Lease has been rejected, or is deemed rejected, under Section 365 of the U.S. Bankruptcy Code, following the filing of a voluntary petition by Tenant under the Bankruptcy Code, or the filing of an involuntary petition against Tenant under the Bankruptcy Code, or (E) the Bank has notified Landlord that the L-C will not be renewed or extended through the L-C Expiration Date and Tenant has not provided a replacement L-C within the applicable time period above, or (F) Tenant is placed into receivership

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or conservatorship, or becomes subject to similar proceedings under Federal or State law, or (G) Tenant executes an assignment for the benefit of creditors, or (H) if (1) any of the Bank’s Fitch Ratings (or other comparable ratings to the extent the Fitch Ratings are no longer available) have been reduced below the Bank’s Credit Rating Threshold, or (2) there is otherwise a material adverse change in the financial condition of the Bank (each, a “Bank Credit Threat”), and Tenant has failed to provide Landlord with a replacement letter of credit, conforming in all respects to the requirements of this Article 20 (including, but not limited to, the requirements placed on the issuing Bank more particularly set forth in this Section 20.1 above), in the amount of the applicable L-C Amount or, if applicable, provide Landlord with the Interim Cash Deposit (as provided in Section 20.8.1 below), all within [***] following Landlord’s written demand therefor (with no other notice or cure or grace period being applicable thereto, notwithstanding anything in this Lease to the contrary) (each of the foregoing being an “L-C Draw Event”).  The L-C shall be honored by the Bank regardless of whether Tenant disputes Landlord’s right to draw upon the L-C.  In addition, in the event the Bank is placed into receivership or conservator ship by the Federal Deposit Insurance Corporation or any successor or similar entity, then, effective as of the date such receivership or conservatorship occurs, said L-C shall be deemed to fail to meet the requirements of this Article 21, and, within [***] following Landlord’s notice to Tenant of such receivership or conservatorship (the “L-C FDIC Replacement Notice”), Tenant shall replace such L-C with a substitute letter of credit from a different issuer (which issuer shall meet or exceed the Bank’s Credit Rating Threshold and shall otherwise be reasonably acceptable to Landlord) and that complies in all respects with the requirements of this Article 20 or Tenant shall provide Landlord with the Interim Cash Deposit (as provided in Section 20.8.1 below).  If Tenant fails to replace such L-C with such conforming, substitute letter of credit (or Interim Cash Deposit) pursuant to the terms and conditions of this Section 20.1, then, notwithstanding anything in this Lease to the contrary, Landlord shall have the right to declare Tenant in default of this Lease for which there shall be no notice or grace or cure periods being applicable thereto (other than the aforesaid [***] period).  Tenant shall be responsible for the payment of any and all costs incurred with the review of any replacement L-C (including without limitation Landlord’s reasonable attorneys’ fees), which replacement is required pursuant to this Section or is otherwise requested by Tenant.  In the event of an assignment by Tenant of its interest in this Lease (and irrespective of whether Landlord’s consent is required for such assignment), the acceptance of any replacement or substitute letter of credit by Landlord from the assignee shall be subject to Landlord’s prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed, and the attorney’s fees incurred by Landlord in connection with such determination shall be payable by Tenant to Landlord within [***] of billing.  “L-C Cure Period” shall mean any applicable notice and cure period expressly set forth in this Lease except that there shall be no L-C Cure Period if Landlord is not permitted for any legal reason from providing written notice of a default.

20.2Application of L-C.  Tenant hereby acknowledges and agrees that Landlord is entering into this Lease in material reliance upon the ability of Landlord to draw upon the L-C upon the occurrence of any L-C Draw Event.  In the event of any L-C Draw Event, Landlord may, but without obligation to do so, and without notice to Tenant (except in connection with an L-C Draw Event under Section 20.1(H) above), draw upon the L-C, in part or in whole, to cure any such L-C Draw Event and/or to compensate Landlord for any and all damages of any kind or nature sustained or which Landlord reasonably estimates that it will sustain resulting from Tenant’s breach or default of the Lease, beyond any applicable notice and cure period expressly set forth in this Lease, or other L-C Draw Event and/or to compensate Landlord for any and all damages

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arising out of, or incurred in connection with, the termination of this Lease, including, without limitation, those specifically identified in Section 1951.2 of the California Civil Code.  The use, application or retention of the L-C, or any portion thereof, by Landlord shall not prevent Landlord from exercising any other right or remedy provided by this Lease or by any applicable law, it being intended that Landlord shall not first be required to proceed against the L-C, and such L-C shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled.  Tenant agrees not to interfere in any way with payment to Landlord of the proceeds of the L-C, either prior to or following a “draw” by Landlord of any portion of the L-C, regardless of whether any dispute exists between Tenant and Landlord as to Landlord’s right to draw upon the L-C; provided that nothing in this Section 20.2 shall in any way limit Tenant’s rights under Section 20.7.  No condition or term of this Lease shall be deemed to render the L-C conditional to justify the issuer of the L-C in failing to honor a drawing upon such L-C in a timely manner.  Tenant agrees and acknowledges that (i) the L-C constitutes a separate and independent contract between Landlord and the Bank, (ii) Tenant is not a third party beneficiary of such contract, (iii) Tenant has no property interest whatsoever in the L-C or the proceeds thereof, and (iv) in the event Tenant becomes a debtor under any chapter of the Bankruptcy Code, Tenant is placed into receivership or conservatorship, and/or there is an event of a receivership, conservatorship or a bankruptcy filing by, or on behalf of, Tenant, neither Tenant, any trustee, nor Tenant’s bankruptcy estate shall have any right to restrict or limit Landlord’s claim and/or rights to the L-C and/or the proceeds thereof by application of Section 502(b)(6) of the U.S. Bankruptcy Code or otherwise.

20.3L-C Amount: Maintenance of L-C by Tenant: Liquidated Damages.

20.3.1L-C Amount.  The L-C Amount shall be equal to the amount set forth in Section 10 of the Summary.  The L-C Amount shall, at any and all times during the Lease Term (including any Option Term), be equal to Fifteen Million Dollars ($15,000,000), subject to reduction as set forth below or elsewhere in this Lease.

20.3.2Reduction of L-C Amount.  To the extent that Tenant is not in default of any monetary or material non-monetary provisions under this Lease (beyond the applicable notice and cure period set forth in this Lease), the L-C Amount shall be reduced to the following amounts from and after the following dates:

 

 

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Notwithstanding anything to the contrary set forth in this Section 20.3.2, in no event shall the L-C Amount as set forth above decrease during any period in which Tenant is in default of any monetary or material non-monetary provisions under this Lease, but such decrease shall take place retroactively after such default is cured, provided that no such decrease shall thereafter take effect in the event this Lease is terminated early due to such default by Tenant.

The L-C Amount is also subject to reduction as provided in Section 4.2.1 of Exhibit B of the Tenant Work Letter.

Any reduction of the L-C Amount shall be evidenced by Tenant providing to Landlord a certificate amendment to the L-C and such amendment shall conform in all respects to the representations of this Article 20.  Alternatively, Tenant may obtain a replacement L-C in the reduced L-C Amount, and Landlord will return the existing L-C to the Bank with instructions to cancel the such existing L-C.  In addition, Landlord will cooperate with Tenant’s efforts to obtain an L-C amendment or replacement L-C by providing applicable instructions to the Bank to effect such amendment or replacement.

20.3.3In General.  If, as a result of any drawing by Landlord of all or any portion of the L-C, the amount of the L-C shall be less than the L-C Amount, Tenant shall, within [***] thereafter, provide Landlord with additional letter(s) of credit in an amount equal to the deficiency, and any such additional letter(s) of credit shall comply with all of the provisions of this Article 20, and if Tenant fails to comply with the foregoing, the same shall be subject to the terms of Section 20.3.3 below.  Tenant further covenants and warrants that it will neither assign nor encumber the L-C or any part thereof and that neither Landlord nor its successors or assigns will be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.  Without limiting the generality of the foregoing, if the L-C expires earlier than the L-C Expiration Date, Landlord will accept a renewal thereof (such renewal letter of credit to be in effect and delivered to Landlord, as applicable, not later than [***] prior to the expiration of the L- C), which shall be irrevocable and, subject to the annual right of the Bank not to renew, automatically renewable as above provided through the L-C Expiration Date upon the same terms as the expiring L-C or such other terms as may be acceptable to Landlord in its sole discretion.  As an express condition to Tenant’s right to extend the Lease Term pursuant to the Extension Option Rider, Tenant shall, not later than [***] prior to the commencement of the Option Term, deliver to Landlord a new L-C or certificate of renewal or extension evidencing the L-C Expiration Date as [***] after the expiration of the Option Term (the “Extension Option L-C Condition”).  However, if the L-C is not timely renewed, or if Tenant fails to maintain the L-C in the amount and in accordance with the terms set forth in this Article 20, Landlord shall have the right to present the L-C to the Bank in accordance with the terms of this Article 20, and the proceeds of the L-C may be applied by Landlord against any Rent payable by Tenant under this Lease that is not paid when due, beyond any applicable notice and cure period expressly set forth in this Lease, and/or to pay for all losses and damages that Landlord has suffered or that Landlord reasonably estimates that it will suffer as a result of any breach or default by Tenant under this Lease, beyond any applicable notice and cure period set forth in this Lease.  In the event Landlord elects to exercise its rights under the foregoing sentence, (I) any unused proceeds shall constitute the property of Landlord (and not Tenant’s property or, in the event of a receivership, conservatorship, or a bankruptcy filing by, or on behalf of, Tenant, property of such receivership, conservatorship or Tenant’s bankruptcy estate) and need not be segregated from Landlord’s other assets, and (II) Landlord agrees to pay to Tenant within

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[***] after the L-C Expiration Date the amount of any proceeds of the L-C received by Landlord and not applied against any Rent payable by Tenant under this Lease that was not paid when due or used to pay for any losses and/or damages suffered by Landlord (or reasonably estimated by Landlord that it will suffer) as a result of any breach or default by Tenant under this Lease, beyond any applicable notice and cure period expressly set forth in this Lease; provided, however, that if prior to the L-C Expiration Date a voluntary petition is filed by Tenant, or an involuntary petition is filed against Tenant by any of Tenant’s creditors, under the Bankruptcy Code, then Landlord shall not be obligated to make such payment in the amount of the unused L-C proceeds until either all preference issues relating to payments under this Lease have been resolved in such bankruptcy or reorganization case or such bankruptcy or reorganization case has been dismissed.

20.3.4Intentionally Omitted.

20.4Transfer and Encumbrance.  The L-C shall provide that Landlord, its successors and assigns, may, at any time and without notice to Tenant and without first obtaining Tenant’s consent thereto, transfer (one or more times) all or any portion of its interest in and to any party, person or entity, provided such transfer is part of the assignment by Landlord of its rights and interests in and to this Lease or is a transfer by Landlord to its lender.  In the event of a transfer of Landlord’s interest in the Building, Landlord shall transfer the L-C, in whole or in part, to the transferee and thereupon Landlord shall, without any further agreement between the parties, be released by Tenant from all liability therefor, and it is agreed that the provisions hereof shall apply to every transfer or assignment of the whole or any portion of said L-C to a new landlord.  In connection with any such transfer of the L-C by Landlord, Tenant shall, at Tenant’s sole cost and expense, execute and submit to the Bank such applications, documents and instruments as may be necessary to effectuate such transfer and, Tenant shall be responsible for paying the Bank’s transfer and processing fees in connection therewith; provided that, Landlord shall have the right (in its sole discretion), but not the obligation, to pay such fees on behalf of Tenant, in which case Tenant shall reimburse Landlord within [***] after Tenant’s receipt of an invoice from Landlord therefor.

20.5L-C Not a Security Deposit.  Landlord and Tenant (1) acknowledge and agree that in no event or circumstance shall the L-C or any renewal thereof or substitute therefor or any proceeds thereof be deemed to be or treated as a “security deposit” under any law applicable to security deposits in the commercial context, including, but not limited to, Section 1950.7 of the California Civil Code, as such Section now exists or as it may be hereafter amended or succeeded (the “Security Deposit Laws”), (2) acknowledge and agree that the L-C (including any renewal thereof or substitute therefor or any proceeds thereof) is not intended to serve as a security deposit, and the Security Deposit Laws shall have no applicability or relevancy thereto, and (3) waive any and all rights, duties and obligations that any such party may now, or in the future will, have relating to or arising from the Security Deposit Laws.  Tenant hereby irrevocably waives and relinquishes the provisions of Section 1950.7 of the California Civil Code and any successor statute, and all other provisions of law, now or hereafter in effect, which (x) establish the time frame by which a landlord must refund a security deposit under a lease, and/or (y) provide that a landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by a tenant or to clean the premises, it being agreed that Landlord may, in addition, claim those sums specified in this Article 20 and/or those sums reasonably necessary to (a) compensate Landlord for any loss or damage caused by Tenant’s breach of this Lease, including any damages Landlord suffers following termination of

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this Lease, and/or (b) compensate Landlord for any and all damages arising out of, or incurred in connection with, the termination of this Lease, including, without limitation, those specifically identified in Section 1951.2 of the California Civil Code.

20.6Non-Interference By Tenant.  Tenant agrees not to interfere in any way with any payment to Landlord of the proceeds of the L-C, either prior to or following a “draw” by Landlord of all or any portion of the L-C, regardless of whether any dispute exists between Tenant and Landlord as to Landlord’s right to draw down all or any portion of the L-C.  No condition or term of this Lease shall be deemed to render the L-C conditional and thereby afford the Bank a justification for failing to honor a drawing upon such L-C in a timely manner.  Tenant shall not request or instruct the Bank of any L-C to refrain from paying sight draft(s) drawn under such L-C.

20.7Remedy for Improper Drafts.  Tenant’s sole remedy in connection with the improper presentment or payment of sight drafts drawn under any L-C shall be the right to obtain from Landlord a refund of the amount of any sight draft(s) that were improperly presented or the proceeds of which were misapplied, together with interest at the Interest Rate and reasonable actual out-of-pocket attorneys’ fees, provided that at the time of such refund, Tenant increases the amount of such L-C to the amount (if any) then required under the applicable provisions of this Lease.  Tenant acknowledges that the presentment of sight drafts drawn under any L-C, or the Bank’s payment of sight drafts drawn under such L-C, could not under any circumstances cause Tenant injury that could not be remedied by an award of money damages, and that the recovery of money damages would be an adequate remedy therefor.  In the event Tenant shall be entitled to a refund as aforesaid and Landlord shall fail to make such payment within [***] after demand, Tenant shall have the right to deduct the amount thereof together with interest thereon at the Interest Rate from the next installment(s) of Base Rent.

20.8Bank Placed Into Receivership.

20.8.1Bank Placed Into Receivership.  In the event the Bank is placed into receivership or conservatorship (any such event, a “Receivership”) by the Federal Deposit Insurance Corporation or any successor or similar entity (the “FDIC”) or in the event of a Bank Credit Threat then, effective as of the date such Receivership or Bank Credit Threat occurs, the L- C shall be deemed to not meet the requirements of this Article 20, and, within [***] following Landlord’s notice to Tenant of such Receivership (the “LC Replacement Notice”), Tenant shall (i) replace the L-C with a substitute L-C from a different issuer reasonably acceptable to Landlord and that complies in all respects with the requirements of this Article 20 or (ii), in the event Tenant demonstrates to Landlord that Tenant is reasonably unable to obtain a substitute L- C from a different issuer reasonably acceptable to Landlord and that complies in all respects with the requirements of this Article 20 within the foregoing [***] period, deposit with Landlord cash in the L-C Amount (the “Interim Cash Deposit”); provided, however, that, in the case of the foregoing sub-clause (ii), Tenant shall, within [***] after the LC Replacement Notice, replace the L-C with a substitute L-C from a different issuer reasonably acceptable to Landlord and that complies in all respects with the requirements of this Article 20, and upon Landlord’s receipt and acceptance of such replacement L-C, Landlord shall return to Tenant the Interim Cash Deposit, with no obligation on the part of Landlord to pay any interest thereon.  If Tenant fails to comply in any respect with the requirements of this Section 20.8.1, then, notwithstanding anything in this

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Lease to the contrary, Landlord shall have the right to (a) declare Tenant in default of this Lease for which there shall be no notice or grace or cure periods being applicable thereto other than the aforesaid [***] periods, (b) if applicable, retain such Interim Cash Deposit until such time as such default is cured by Tenant, which retention shall not constitute a waiver of any right or remedy available to Landlord under the terms of this Lease or at law, and (c) pursue any and all remedies available to it under this Lease and at law, including, without limitation, if Tenant has failed to provide the Interim Cash Deposit, treating any Receivership as a Bank Credit Threat and exercising Landlord’s remedies under Section 20.8.1 above, to the extent possible pursuant to the existing FDIC policy.  Tenant shall be responsible for the payment of any and all costs incurred with the review of any replacement L-C (including without limitation Landlord’s reasonable attorneys’ fees), which replacement is required pursuant to this Section or is otherwise requested by Tenant.

20.8.2Interim Cash Deposit.  During any period that Landlord remains in possession of the Interim Cash Deposit (any such period, a “Deposit Period”), it is understood by the parties that such Interim Cash Deposit shall be held by Landlord as security for the full and faithful performance of Tenant’s covenants and obligations under this Lease.  The Interim Cash Deposit shall not constitute an advance of any Rent, an advance payment of any other kind, nor a measure of Landlord’s damages in case of Tenant’s default.  If, during any such Deposit Period, Tenant defaults with respect to any provisions of this Lease beyond any applicable notice and cure period expressly set forth in this Lease, including, but not limited to, the provisions relating to the payment of Rent, the removal of property and the repair of resultant damage, then Landlord may but shall not be required to, from time to time, without notice to Tenant and without waiving any other remedy available to Landlord, use the Interim Cash Deposit, or any portion of it, to the extent necessary to cure or remedy such default or failure or to compensate Landlord for all damages sustained by Landlord or which Landlord reasonably estimates that it will sustain resulting from Tenant’s default or failure to comply fully and timely with its obligations pursuant to this Lease, in each case beyond any applicable notice and cure period expressly set forth in this Lease.  Tenant shall immediately pay to Landlord on demand any amount so applied in order to restore the Interim Cash Deposit to its original amount, and Tenant’s failure to immediately do so shall constitute a default under this Lease.  In the event Landlord is in possession of the Interim Cash Deposit at the expiration or earlier termination of this Lease, and Tenant is in compliance with the covenants and obligations set forth in this Lease at the time of such expiration or termination, then Landlord shall return to Tenant the Interim Cash Deposit, less any amounts deducted by Landlord to reimburse Landlord for any sums to which Landlord is entitled under the terms of this Lease, within sixty (60) days following both such expiration or termination and Tenant’s vacation and surrender of the Premises.  Landlord’s obligations with respect to the Interim Cash Deposit are those of a debtor and not a trustee.  Landlord shall not be required to maintain the Interim Cash Deposit separate and apart from Landlord’s general or other funds, and Landlord may commingle the Interim Cash Deposit with any of Landlord’s general or other funds.  Tenant shall not at any time be entitled to interest on the Interim Cash Deposit.  In the event of a transfer of Landlord’s interest in the Building, Landlord shall transfer the Interim Cash Deposit, in whole or in part, to the transferee (including the Ground Lessor) and thereupon Landlord shall, without any further agreement between the parties, be released by Tenant from all liability therefor, and it is agreed that the provisions hereof shall apply to every transfer or assignment of the whole or any portion of said Interim Cash Deposit to a new landlord.  Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, or any successor statute.

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20.8.3Financial Crisis.  Notwithstanding anything above to the contrary, in the event a national or global economic crisis exists such that institutional lenders based in the United States are no longer providing letters of credit to tenants based on the financial condition of Tenant existing as of the date of this Lease then, so long as Landlord and Tenant mutually agree that such financial crisis exists and for so long as such financial crisis exists, Tenant shall have the right to deposit with Landlord a cash security deposit in lieu of the L-C; provided, however, that Tenant’s right to provide cash in lieu of the L-C is conditioned upon Tenant providing Landlord with written rejection letters from no less than three (3) institutional lenders whereby such lenders rejected Tenant’s request for an L-C and such rejection letters expressly state that such rejection was not based on the financial condition of Tenant.

Article 21
COMPLIANCE WITH LAW

Tenant shall not do anything or suffer anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated.  At its sole cost and expense, Tenant shall promptly comply with all such governmental measures, other than the making of structural changes to the Building (the “Excluded Change”); provided, however, to the extent such Excluded Change is required due to or triggered by Tenant’s use of the Premises or Tenant’s Alterations or improvements to the Building, then Tenant shall be responsible to make such Excluded Change.  In addition, Tenant shall fully comply with all present or future governmental mandatory programs intended to manage parking, transportation or traffic in and around the Project.  The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant.

Article 22
ENTRY BY LANDLORD

Landlord reserves the right at all reasonable times and upon reasonable notice to Tenant to enter the Premises to: (i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or tenants, or to the ground lessors; (iii) to post notices of nonresponsibility; or (iv) perform Landlord’s Maintenance Responsibilities.  Notwithstanding anything to the contrary contained in this Article 22, (A) Landlord may enter the Premises at any time, without notice to Tenant, in an Emergency (as defined below) and (B) except in accordance with the preceding Clause (A), (X) Landlord shall be required to provide at least forty-eight (48) hours’ prior written notice of any entry, (Y) any such entry must be accompanied by a Tenant representative and (Z) no such entry shall be permitted to any manufacturing or clean room areas except during planned shutdowns and for no more than one hour.  Any such entries shall be without the abatement of Rent and shall include the right to take such reasonable steps as required to accomplish the stated purposes; provided, however, that Landlord shall use commercially reasonable efforts to minimize any disruption to Tenant’s business operations in the Premises during any such entry.  Subject to Section 6.8 and Landlord’s indemnity obligations in this Lease, Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant’s business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned

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thereby.  For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant’s vaults, safes and special security areas designated in advance by Tenant.  In an Emergency (as defined below), Landlord shall have the right to enter without notice and use any means that Landlord may deem proper to open the doors in and to the Premises.  Any entry into the Premises in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises.  Notwithstanding anything to the contrary in this Lease, Tenant may designate certain areas of the Premises as “Secured Areas” should Tenant require such areas for the purpose of securing certain valuable property or confidential information.  In connection with the foregoing, Landlord shall not enter such Secured Areas except in the event of an emergency (and in such event Landlord agrees to keep any information discovered in such emergency entry strictly confidential).  Landlord shall only repair such secured areas to the extent Landlord is required to perform Landlord’s Maintenance Responsibilities.  For purposes of this Article 22, an “Emergency” shall mean an event threatening immediate and material danger to people located in the Building, or creates a realistic possibility of an immediate and material interference with, or immediate and material interruption of a material aspect of, Tenant’s business operations at the Premises.

Article 23
PARKING

Throughout the Lease Term, Tenant shall have the exclusive right to use, free of parking charges, all of the parking spaces serving the Premises.  The parking rights provided to Tenant pursuant to this Article 23 are provided solely for use by Tenant’s own personnel, visitors, guests, invitees, contractors and agents and such rights may not be transferred, assigned, subleased or otherwise alienated by Tenant without Landlord’s prior approval, except in connection with an assignment of this Lease or sublease of the Premises made in accordance with Article 14 above.

Article 24
MISCELLANEOUS PROVISIONS

24.1Terms; Captions.  The necessary grammatical changes required to make the provisions hereof apply either to corporations or partnerships or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed.  The captions of Articles and Sections are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections.

24.2Binding Effect.  Each of the provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 above.

24.3No Waiver.  No waiver of any provision of this Lease shall be implied by any failure of a party to enforce any remedy on account of the violation of such provision, even if such violation shall continue or be repeated subsequently, any waiver by a party of any provision of this Lease may only be in writing, and no express waiver shall affect any provision other than the one specified in such waiver and that one only for the time and in the manner specifically stated.  No

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receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant’s right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment.

24.4Modification of Lease.  If any current or prospective mortgagee or ground lessor for the Project requires modifications to this Lease, which modifications will not cause an increased cost or expense to Tenant or in any other way adversely (other than adversely in a nonmaterial manner) change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified and agrees to execute whatever commercially reasonable documents are required therefor and deliver the same to Landlord within ten (10) days following the request therefor.  If Landlord or any such current or prospective mortgagee or ground lessor require execution of a short form of Lease for recording, containing, among other customary provisions, the names of the parties, a description of the Premises and the Lease Term, Tenant shall execute such short form of Lease (provided that such form is in a commercially reasonable form) and to deliver the same to Landlord within ten (10) days following the request therefor.

24.5Transfer of Landlord’s Interest.  Landlord has the right to transfer all or any portion of its interest in the Project, the Building and/or in this Lease, and upon any such transfer, Landlord shall automatically be released from all liability under this Lease for matters arising after such transfer and Tenant shall look solely to such transferee for the performance of Landlord’s obligations hereunder after the date of transfer.  The liability of any transferee of Landlord shall be limited to the interest of such transferee in the Project and such transferee shall be without personal liability under this Lease, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant.  Landlord may also assign its interest in this Lease to a mortgage lender as additional security but such assignment shall not release Landlord from its obligations hereunder and Tenant shall continue to look to Landlord for the performance of its obligations hereunder.  Neither Landlord’s affiliates, nor any of Landlord’s or its Affiliates’ partners, shareholders, directors, officers, employees, members or agents shall be personally liable for Landlord’s obligations or any deficiency under this Lease, and service of process shall not be made against any shareholder, member, director, officer, employee or agent of Landlord or any of Landlord’s affiliates (except to the extent necessary to effect service of process against Landlord).  No partner, shareholder, director, officer, employee, member or agent of Landlord or any of its affiliates shall be sued or named as a party in any suit or action, and service of process shall not be made against any partner or member of Landlord except as may be necessary to secure jurisdiction of the partnership joint venture or limited liability company, as applicable.  No partner, shareholder, director, officer, employee, member or agent of Landlord or any of its affiliates shall be required to answer or otherwise plead to any service of process, and no judgment shall be taken or writ of execution levied against any partner, shareholder, director, officer, employee, member or agent of Landlord or any of its affiliates.

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24.6Prohibition Against Recording.  Except as provided in Section 24.4 of this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant, and the recording thereof in violation of this provision shall make this Lease null and void at Landlord’s election.

24.7Landlord’s Title: Air Rights.  Landlord’s title is and always shall be paramount to the title of Tenant.  Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord.  No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease.

24.8Tenant’s Signs.  Subject to this Section 24.8, Tenant shall be entitled to install, at its sole cost and expense, legally permitted signage on the Premises identifying Tenant (“Signage”).  The graphics, materials, size, color, design, lettering, lighting (if any), specifications and exact location of the Signage (collectively, the “Signage Specifications”) shall be subject to Tenant’s receipt of all required governmental permits and approvals, shall be subject to all applicable governmental laws and ordinances, and all current covenants, conditions and restrictions affecting the Premises.  Tenant hereby acknowledges that Landlord has made no representations or warranty to Tenant with respect to the probability of obtaining such approvals and permits.  In the event Tenant does not receive the necessary permits and approvals for the Signage, Tenant’s and Landlord’s rights and obligations under the remaining provisions of this Lease shall not be affected.  The cost of installation of the Signage, as well as all costs of design and construction of such Signage and all other costs associated with such Signage, including, without limitation, permits, maintenance and repair, shall be the sole responsibility of Tenant.  The rights to the Signage shall be personal to the Original Tenant and any Affiliate Assignee and may not be transferred.  Should the Signage require commercially reasonable maintenance or repairs (other than from sun damage, fading or discoloration of the surface areas upon which its Signage was installed), Landlord shall have the right to provide written notice thereof to Tenant and Tenant shall cause such repairs and/or maintenance to be performed within thirty (30) days after receipt of such notice from Landlord at Tenant’s sole cost and expense.  Upon the expiration or earlier termination of this Lease, Tenant shall, at Tenant’s sole cost and expense, cause the Signage to be removed from the Premises and shall cause the Premises to be restored to the condition existing prior to the placement of such Signage (provided that Tenant shall not be responsible for sun damage, fading or discoloration of the surface areas upon which its Signage was installed).  If Tenant fails to remove such Signage and to restore the Premises as provided in the immediately preceding sentence within thirty (30) days following the expiration or earlier termination of this Lease, then Landlord may perform such work, and all costs and expenses incurred by Landlord in so performing such work shall be reimbursed by Tenant to Landlord within ten (10) days after Tenant’s receipt of invoice therefor.  The immediately preceding sentence shall survive the expiration or earlier termination of this Lease.

24.9Relationship of Parties.  Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant, it being expressly understood and agreed that neither the method of computation of Rent nor any act of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant.

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24.10Application of Payments.  Landlord shall have the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenant’s designation of such payments, to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord, in its sole discretion, may elect.

24.11Time of Essence.  Time is of the essence of this Lease and each of its provisions.

24.12Partial Invalidity.  If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law.

24.13No Warranty.  In executing and delivering this Lease, Tenant has not relied on any representation, including, but not limited to, any representation whatsoever as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the Exhibits attached hereto.

24.14Landlord Exculpation.  Notwithstanding anything in this Lease to the contrary, and notwithstanding any applicable law to the contrary, the liability of Landlord and the Landlord Parties under this Lease (including any successor landlord) and any recourse by Tenant against Landlord or the Landlord Parties shall be limited solely and exclusively to an amount which is equal to the ownership interest of Landlord in the Project (excluding any proceeds thereof), and neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant.

24.15Entire Agreement.  There are no oral agreements between the parties hereto affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease.  This Lease and any side letter or separate agreement executed by Landlord and Tenant in connection with this Lease and dated of even date herewith contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Premises, shall be considered to be the only agreement between the parties hereto and their representatives and agents, and none of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto.  All negotiations and oral agreements acceptable to both parties have been merged into and are included herein.  There are no other representations or warranties between the parties, and all reliance with respect to representations is based totally upon the representations and agreements contained in this Lease.

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24.16Telecommunications Equipment.  At any time during the Lease Term, subject to the terms of this Section 24.16, Tenant shall have the exclusive right to install, at Tenant’s sole cost and expense, satellite or microwave dishes or other communication equipment (the “Telecommunications Equipment”) upon the roof of the Building to the extent the same is reasonably necessary for equipment used in connection with Tenant’s business operations at the Premises.  Tenant shall comply with any roof or roof-related warranties.  The physical appearance and the size of the Telecommunications Equipment shall be subject to Landlord’s written approval prior to installation (which approval will not unreasonably be withheld, conditioned or delayed) any covenants, conditions, or restrictions currently encumbering the Premises and, any applicable laws.  Tenant shall maintain such Telecommunications Equipment in good condition and repair, at Tenant’s sole cost and expense.  The cost of the Telecommunications Equipment, including but not limited to the permitting, installation, maintenance and removal thereof shall be at Tenant’s sole cost and expense.  If Tenant fails to maintain its Telecommunications Equipment, or if Tenant fails to remove such Telecommunications Equipment upon termination of this Lease, or fails to repair any damage caused by such removal, Landlord may do so at Tenant’s expense.  Tenant shall on demand reimburse Landlord for all actual, documented and reasonable costs incurred by Landlord to effect such removal, which amounts shall be deemed Additional Rent and shall include without limitation, all sums disbursed, incurred or deposited by Landlord, including Landlord’s costs, expenses and actual attorneys’ fees with interest thereon.  Tenant shall indemnify, defend and hold harmless Landlord from and against any loss, cost, claim, lawsuit, liability or expense (including reasonable attorneys’ fees and disbursements) arising directly or indirectly out of Tenant’s Telecommunications Equipment or any failure to perform any of its obligations under this Section 24.16.

24.17Force Majeure.  Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease (collectively, the “Force Majeure”), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party’s performance caused by a Force Majeure.

24.18Waiver of Redemption by Tenant.  Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease.

24.19Notices.  All notices, demands, statements or communications (collectively, “Notices”) given or required to be given by either party to the other hereunder shall be in writing, shall be sent by United States certified or registered mail, postage prepaid, return receipt requested, or delivered personally, or delivered via any reputable national overnight courier service that provides proof of delivery (i) to Tenant at the appropriate address set forth in Section 5 of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section 3 of the Summary, or to such

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other firm or to such other place as Landlord may from time to time designate in a Notice to Tenant.  Any Notice will be deemed given on the date it is actually delivered or that delivery is attempted but refused.  If Tenant is notified of the identity and address of Landlord’s mortgagee or ground lessor, Tenant shall give to such mortgagee or ground lessor written notice of any default by Landlord under the terms of this Lease by registered or certified mail, and such mortgagee or ground lessor shall be given a reasonable opportunity to cure such default prior to Tenant’s exercising any remedy available to Tenant.

24.20Joint and Several.  If there is more than one person or entity executing this Lease as Tenant, the obligations imposed upon such persons and entities under this Lease are and shall be joint and several.

24.21Representations.  Tenant guarantees, warrants and represents that (a) Tenant is duly incorporated or otherwise established or formed and validly existing under the laws of its state of incorporation, establishment or formation, (b) Tenant has and is duly qualified to do business in the state in which the Project is located, (c) Tenant has full corporate, partnership, trust, association or other appropriate power and authority to enter into this Lease and to perform all Tenant’s obligations hereunder, (d) each person (and all of the persons if more than one signs) signing this Lease on behalf of Tenant is duly and validly authorized to do so and (e) neither (i) the execution, delivery or performance of this Lease nor (ii) the consummation of the transactions contemplated hereby will violate or conflict with any provision of documents or instruments under which Tenant is constituted or to which Tenant is a party.  In addition, Tenant guarantees, warrants and represents that none of (x) it, (y) its affiliates or partners nor (z) to the best of its knowledge, its members, shareholders or other equity owners or any of their respective employees, officers, directors, representatives or agents is a person or entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) or other similar governmental action.

24.22Jury Trial: Attorneys’ Fees.  IF EITHER PARTY COMMENCES LITIGATION AGAINST THE OTHER FOR THE SPECIFIC PERFORMANCE OF THIS LEASE, FOR DAMAGES FOR THE BREACH HEREOF OR OTHERWISE FOR ENFORCEMENT OF ANY REMEDY HEREUNDER, THE PARTIES HERETO AGREE TO AND HEREBY DO WAIVE ANY RIGHT TO A TRIAL BY JURY.  In the event of any such commencement of litigation, the prevailing party shall be entitled to recover from the other party such costs and reasonable attorneys’ fees as may have been incurred, including any and all costs incurred in enforcing, perfecting and executing such judgment.

24.23Governing Law.  This Lease shall be construed and enforced in accordance with the laws of the state in which the Project is located.

24.24Submission of Lease.  Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant.

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24.25Brokers.  Landlord and Tenant each hereby represents and warrants to the other party that it (i) has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 11 of the Summary (collectively, the “Brokers”), and (ii) knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease.  Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of the indemnifying party’s dealings with any real estate broker or agent in connection with this Lease other than the Brokers.

24.26Independent Covenants.  This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord’s expense or to any setoff of the Rent or other amounts owing hereunder against Landlord; provided, however, that the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Building, Project or any portion thereof, of whose address Tenant has theretofore been notified, and an opportunity is granted to Landlord and such holder to correct such violations as provided above.

24.27Signatures.  The parties hereto consent and agree that this Lease may be signed and/or transmitted by facsimile, e-mail of a .pdf document or using electronic signature technology (e.g., via DocuSign or similar electronic signature technology), and that such signed electronic record shall be valid and as effective to bind the party so signing as a paper copy bearing such party’s handwritten signature.  The parties further consent and agree that (1) to the extent a party signs this Lease using electronic signature technology, by clicking “SIGN”, such party is signing this Lease electronically, and (2) the electronic signatures appearing on this Lease shall be treated, for purposes of validity, enforceability and admissibility, the same as handwritten signatures.

24.28Intentionally Omitted.

24.29Notice of Sale.  In the event Landlord, in its sole discretion, elects to sell the entire Premises or the parcel upon which the Building is situated, then Landlord agrees to notify Tenant in writing of Landlord’s intention to market the Premises (“Landlord’s Marketing Notice”), which Landlord’s Marketing Notice shall be provided to Tenant at approximately the same time as the same is provided to potential third party buyers.  In addition, in the event Landlord receives an unsolicited third-party offer to purchase the Premises and only in the event Landlord has not previously provided a Landlord’s Marketing Notice to Tenant, then Landlord agrees to notify Tenant in writing (“Offer Notice”) that Landlord has received an offer but Landlord shall not be obligated to provide Tenant with any of the terms or conditions of the offer.  In such event, Landlord agrees not to respond to such third-party offer within five (5) business days after delivery of the Offer Notice to Tenant.  In no event shall this Section 24.29 provide Tenant with any preferential right or option to purchase the Premises; the sole purpose of this Section 24.29 is to provide Tenant with notice of Landlord’s marketing efforts in connection with a potential sale of the Premises.

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24.30Existing Furniture.   As part of the consideration for entering into this Lease, title to all of the furniture, fixtures and equipment currently located within the Premises as of the date hereof (collectively, the “FF&E”) shall automatically pass to Tenant and Landlord hereby conveys and assigns to Tenant good and marketable title to the FF&E free of any liens or encumbrances of any kind.  Tenant confirms that it has had the reasonable opportunity to inventory and inspect the FF&E and hereby represents that it accepts the FF&E “AS IS AND WITH ALL FAULTS”.

24.31Expansion Right.  Upon Tenant providing written notice to Landlord of its requirement for additional space at the Real Property, Landlord and Tenant shall engage in good faith negotiations with each other related to constructing an additional building on the Real Property and leasing the entirety of such building to Tenant; provided, however, that neither party shall be obligated to enter into any agreement related to any such additional building and/or the leasing of the same.

[Remainder of Page Intentionally Left Blank; Signatures on Next Page]

 

 

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IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written.

 

 

 

*** If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing.  The Lease must be executed by the president or vice president and the secretary or assistant secretary, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which event, the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease.

 

 

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EXHIBIT A

SITE PLAN OF PREMISES

[***]

 

 

 

 

EXHIBIT A

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EXHIBIT A-l

LEGAL DESCRIPTION OF THE PREMISES

PARCEL “A”:

PARCEL 2 OF PARCEL MAP NO. 18391, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, DECEMBER 16, 1999.

PARCEL “B”:

PARCEL 1 OF PARCEL MAP NO. 18391, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, DECEMBER 16, 1999.

PARCEL “C”:

NON-EXCLUSIVE EASEMENTS FOR THE USE OF A FIBER OPTIC CONDUIT AND FOR DRAINAGE OVER THOSE PORTIONS OF LOTS 1,2, 3 AND 4 OF SCRIPPS NORTHRIDGE BUSINESS CENTER, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 12911 FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, JANUARY 8, 1992 AS MORE FULLY DESCRIBED IN THAT CERTAIN “EASEMENT AND MAINTENANCE AGREEMENT” DATED FEBRUARY 25, 2000 AND RECORDED MARCH 6, 2000 AS FILE NO. 2000-011986 OF OFFICIAL RECORDS.

 

 

 

EXHIBIT A-1

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EXHIBIT A-2

PARCEL 2 OUTLINE

[***]

 

 

 

EXHIBIT A-2

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EXHIBIT B

TENANT WORK LETTER

This Tenant Work Letter (“Tenant Work Letter”) shall set forth the terms and conditions relating to the construction of the Premises.  All references in this Tenant Work Letter to the “Lease” shall mean the relevant portions of the Lease to which this Tenant Work Letter is attached as Exhibit B.

SECTION 1

LANDLORD’S OBLIGATIONS

Except for the Tenant Improvement Allowance set forth below, Landlord shall not be obligated to make or pay for any alterations or improvements to the Premises.

SECTION 2

TENANT IMPROVEMENTS

2.1Tenant Improvement Allowance.  Tenant shall be entitled to a one-time tenant improvement allowance (the “Tenant Improvement Allowance”) in the amount of up to, but not exceeding One Hundred Fifty Dollars ($150.00) per rentable square foot of the Building (i.e., up to Twenty-Nine Million Eight Hundred Thirty-Two Thousand Dollars ($29,832,000.00) based on 198,880 rentable square feet of the Building), to help Tenant pay for the costs of the design, permitting and construction of Tenant’s initial improvements which are permanently affixed to the Building (collectively, the “Tenant Improvements”); provided, however, that Landlord shall have no obligation to disburse all or any portion of the Tenant Improvement Allowance to Tenant unless Tenant makes a request for disbursement pursuant to the terms and conditions of Section 2.2 below prior to that date which is six (6) months after the Lease Commencement Date.  Notwithstanding anything above to the contrary Tenant, upon prior written notice to Landlord, shall have the right to reduce the Tenant Improvement Allowance by up to Twenty-Five Dollars ($25.00) per rentable square foot (i.e., an amount not to exceed Four Million Nine Hundred Seventy-Two Thousand Dollars ($4,972,000.00).  In such event, the initial Base Rent payable by Tenant shall be reduced by using a discount rate of eight percent (8%), discounted over the initial 180 month Lease Term.  For example, if Tenant elects not to use Five Dollars ($5.00) per rentable square foot of the Tenant Improvement Allowance then the monthly Base Rent per rentable square foot shall be reduced as provided in Exhibit H attached to the Lease.  Landlord and Tenant shall execute an amendment to the Lease to confirm such reduction in Base Rent.  In no event shall Landlord be obligated to make disbursements pursuant to this Tenant Work Letter in a total amount which exceeds the Tenant Improvement Allowance.  Tenant shall not be entitled to receive any cash payment or credit against Rent or otherwise for any unused portion of the Tenant Improvement Allowance which is not used to pay for the Tenant Improvement Allowance Items (as defined below).  Notwithstanding the foregoing, an amount not to exceed [***] of any unused amount of the Tenant Improvement Allowance shall be made available to Tenant to help Tenant pay for the actual and documented costs incurred by Tenant (the “FF&E/Moving Costs”) for the purchase of and installation of cabling, furniture, fixtures and equipment for the Premises

EXHIBIT B

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(including, without limitation, security, audio/visual systems, signage, and telecommunications costs) and the cost of moving to the Premises.  Landlord shall disburse from the Tenant Improvement Allowance the available portion thereof to help Tenant pay for the FF&E/Moving Costs actually incurred by Tenant within thirty (30) days after Landlord has received Tenant’s written request for disbursement together with copies of invoices from third parties evidencing the amount of such FF&E/Moving Costs to be paid by Landlord.

2.2Disbursement of the Tenant Improvement Allowance.

2.2.1Tenant Improvement Allowance Items.  Except as otherwise set forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be disbursed by Landlord only for the following items and costs (collectively, the “Tenant Improvement Allowance Items”):

2.2.1.1Payment of the fees of the Architect and the Engineers (as such terms are defined below), provided, however, that only an amount not to exceed [***] per rentable square foot of the Building (i.e., [***] based on 198,880 rentable square feet of the Building) may be deducted from the Tenant Improvement Allowance to pay for such fees;

2.2.1.2The payment of plan check, permit and license fees relating to construction of the Tenant Improvements;

2.2.1.3The cost of construction of the Tenant Improvements, including, without limitation, project or construction management fees (including, without limitation, for the Manager (as defined below)), contractors’ fees and general conditions, testing and inspection costs, costs of utilities, trash removal, parking and hoists, and the costs of after-hours freight elevator usage.

2.2.1.4The cost of any changes in the base, shell and core of the Building when such changes are required by the Construction Drawings (including if such changes are due to the fact that such work is prepared on an unoccupied basis), such cost to include all direct architectural and/or engineering fees and expenses incurred in connection therewith;

2.2.1.5The cost of any changes to the Construction Drawings or Tenant Improvements required by applicable laws ;

2.2.1.6Sales and use taxes and Title 24 fees; and

2.2.1.7The Coordination Fee (as defined below).

2.2.2Disbursement of Tenant Improvement Allowance.  Subject to Section 2.1 above, during the construction of the Tenant Improvements, Landlord shall make monthly disbursements of the Tenant Improvement Allowance for Tenant Improvement Allowance Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows:

EXHIBIT B

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2.2.2.1Monthly Disbursements.  From time to time during the construction of the Tenant Improvements (but no more frequently than monthly), Tenant shall deliver to Landlord: (i) a request for payment of the Contractor (as defined below), approved by Tenant, in a commercially reasonable form mutually approved by Landlord and Tenant, showing the schedule, by trade, of percentage of completion of the Tenant Improvements in the Building, detailing the portion of the work completed and the portion not completed, and demonstrating that the relationship between the cost of the work completed and the cost of the work to be completed complies with the terms of the Construction Budget (as defined below) (or any deviations therefrom; (ii) invoices from all of Tenant’s Agents (as defined below), for labor rendered and materials delivered to the Premises; (iii) executed mechanic’s lien releases from all of Tenant’s Agents in accordance with the Contract and California Civil Code Section 8138 (i.e., initially conditional progress payment release forms, then with the next billing cycle (provided that Landlord disbursed the Tenant Improvement Allowance with respect to the prior cycle), unconditional progress payment release forms), and all other information reasonably requested by Landlord; and (iv) with respect to the first request, (1) copy of the contract with the Contractor; (2) copy of the Contractor’s certificate of insurance, including Additional Insured endorsement naming Landlord (and any other party requested by Landlord) as additional insureds; and (3) the Contractor’s schedule of values, showing total contract value.  Within fifteen (15) days following Landlord’s receipt of a completed disbursement request submission,, Landlord shall deliver a check to Tenant made jointly payable to either (as requested by Tenant) Contractor or Tenant in payment of the lesser of (A) the amounts so requested by Tenant, as set forth in this Section 2.2.2.1, above and (B) the balance of any remaining available portion of the Tenant Improvement Allowance, provided that Landlord does not dispute (within five (5) business days after such receipt by Landlord) any request for payment based on material non-compliance of any work with the Approved Working Drawings (as defined below), or due to any materially substandard work.  Landlord’s payment of such amounts shall not be deemed Landlord’s approval or acceptance of the work furnished or materials supplied as set forth in Tenant’s payment request.

2.2.2.2Final Documents.  Upon final completion of the Tenant Improvements, Tenant shall deliver to Landlord copies of (A) properly executed and final unconditional mechanics lien releases in compliance with applicable California law; (B) a (permanent or temporary) certificate of occupancy or permit cards signed off by the City of San Diego (the “City”) with respect to the Premises; (C) as-built plans and City-permitted plans for the Tenant Improvements; and (D) operation manuals and warranties for equipment included within the Tenant Improvements, if applicable.

2.2.2.3Other Terms.  Landlord shall only be obligated to make disbursements from the Tenant Improvement Allowance to the extent costs are incurred by Tenant for Tenant Improvement Allowance Items.

2.2.3Specifications for Building Standard Components.  The components to be used in the construction of the Tenant Improvements in the Building shall be new and comparable in quality to the components in Comparable Buildings which are under construction as of the date hereof or which have been constructed over the three (3)-year period preceding the date of this Lease.

EXHIBIT B

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SECTION 3

CONSTRUCTION DRAWINGS

3.1Selection of Architect/Construction Drawings.  Tenant shall retain [***] as the architect (collectively, the “Architect”) to prepare the Construction Drawings, and [***] as Tenant’s project or construction manager (the “Manager”).  Tenant shall retain the engineering consultants approved (which approval shall not be unreasonably withheld, conditioned or delayed and shall be deemed given if Landlord does not reasonably object to a written request for approval within three (3) business days of request and such failure continues for one (1) additional business day after Tenant’s second written request for approval) by Landlord (the “Engineers”) to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work in the Building; provided that, [***], if selected by Tenant, are hereby approved by Landlord.  The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the “Construction Drawings.” All Construction Drawings shall be subject to Landlord’s approval (which shall not be unreasonably withheld, conditioned or delayed).  Tenant and Architect shall verify, in the field, the dimensions and conditions as shown on the relevant portions of the base building plans, and Tenant and Architect shall be solely responsible for the same, and Landlord shall have no responsibility in connection therewith.  Landlord’s review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord’s review of the same, or obligate Landlord to review the same, for quality, design, code compliance or other like matters.  Accordingly, notwithstanding that any Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Tenant by Landlord or Landlord’s space planner, architect, engineers, and consultants, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings.

3.2Demolition Plan.  Attached hereto as Schedule 1 is a demolition plan for a portion of the Building (“Demolition Plan”), which Demolition Plan is hereby approved by Landlord and Tenant.  Subject to Tenant complying with all applicable laws (including, if applicable, obtaining any required permits and governmental approvals), Tenant shall have the right to commence the work described in the Demolition Plan upon the full execution and delivery of this Lease by Landlord and Tenant.

3.3Final Space Plan.  Tenant shall supply Landlord with four (4) copies signed by Tenant of its final space plan for the Tenant Improvements before any architectural working drawings or engineering drawings have been commenced.  The final space plan (the “Final Space Plan”) shall include a demolition plan of certain existing improvements in the Building as well as a layout and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein.  The Final Space Plan shall be subject to Landlord’s approval (which approval shall not be unreasonably withheld, conditioned or delayed and shall be deemed given if Landlord does not reasonably object to a request for approval within five (5) business days of request with respect to Landlord’s initial review of the Final Space Plan if such failure continues for two (2) additional business days after Tenant’s second written request) and within two (2) business days with respect to any subsequent review of a revised Final Space Plan (and if such failure continues for one (1) additional business day after Tenant’s second written request)).

EXHIBIT B

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3.4Final Working Drawings.  After the Final Space Plan has been approved by Landlord and Tenant, Tenant shall promptly cause the Architect and the Engineers to complete the architectural and engineering drawings for the Premises, and cause the Architect to compile a fully coordinated set of architectural, structural, mechanical, electrical and plumbing working drawings in a form which is complete to allow subcontractors to bid on the work and to obtain all applicable permits for the Tenant Improvements (collectively, the “Final Working Drawings”), and shall submit the same to Landlord for Landlord’s approval.  Tenant shall supply Landlord with four (4) copies of the cover sheet signed by Tenant (and one electronic copy) of such Final Working Drawings.  The Final Working Drawings shall be subject to Landlord’s approval (which approval shall not be unreasonably withheld, conditioned or delayed and shall be deemed given if Landlord does not reasonably object to a request for approval within five (5) business days of request with respect to Landlord’s initial review of the Final Working Drawings if such failure continues for two (2) additional business days after Tenant’s second written request and within two (2) business days with respect to any subsequent review of a revised Final Working Drawing if such failure continues for one (1) additional business day after Tenant’s second written request.

3.5Approved Working Drawings.  The Final Working Drawings shall be approved by Landlord (the “Approved Working Drawings”) prior to the commencement of construction of the Tenant Improvements by Tenant.  After approval by Landlord of the Final Working Drawings, Tenant shall promptly submit the same to the appropriate governmental authorities for all applicable building permits.  Tenant hereby agrees that neither Landlord nor Landlord’s consultants shall be responsible for obtaining any building permit or certificate of occupancy for the Premises and that obtaining the same shall be Tenant’s responsibility; provided, however, that Landlord shall cooperate with Tenant in executing permit applications and performing other ministerial acts reasonably necessary to enable Tenant to obtain any such permit or certificate of occupancy.  No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Landlord, which consent shall not be unreasonably withheld and shall be deemed given if Landlord does not reasonably object to a request for consent within three (3) business days of Tenant’s written request if such failure continues for one (1) additional business day after Tenant’s second written request.

SECTION 4

CONSTRUCTION OF THE TENANT IMPROVEMENTS

4.1Tenant’s Selection of Contractor and Tenant’s Agents.

4.1.1The Contractor.  Tenant shall select and retain a general contractor reasonably approved by Landlord to construct the Tenant Improvements; provided, however, that [***], if selected by Tenant, is hereby approved by Landlord.  Tenant shall deliver to Landlord notice of its selection of the general contractor upon such selection, which contractor shall thereafter be the “Contractor” hereunder.

4.1.2Tenant’s Agents.  All subcontractors, materialmen, and suppliers used by Tenant (such subcontractors, materialmen, and suppliers, and the Contractor to be known collectively as “Tenant’s Agents”) must be approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed; provided, however, that with respect to non-major trade subcontractors, materialmen and suppliers, Landlord’s approval shall not be required so long as the same are competent, licensed and have previously performed work in Comparable Buildings.

EXHIBIT B

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4.2Construction of Tenant Improvements by Tenant’s Agents.

4.2.1Construction Contract; Cost Budget.  Prior to Tenant’s execution of the construction contract and general conditions with Contractor (the “Contract”), Tenant shall submit the Contract to Landlord for its approval, which approval shall not be unreasonably withheld or delayed and shall be deemed given if Landlord does not reasonably object to a request for approval within three (3) business days of Tenant’s written request if such failure continues for one (1) additional business day after Tenant’s second written request.  Prior to the commencement of the construction of the Tenant Improvements, and after Tenant has accepted all bids for the Tenant Improvements, Tenant shall provide Landlord with a written detailed cost breakdown (the “Budgeted Costs Statement”), by trade, of the total costs to be incurred, or which have been incurred, as set forth more particularly in Sections 2.2.1.1 through 2.2.1.7 above, in connection with the design, permitting and construction of the Tenant Improvements to be performed by or at the direction of Tenant or the Contractor (the “Budgeted Costs”).  After completion of the construction of the Tenant Improvements, and after Tenant has paid all invoices for the Tenant Improvements, Tenant shall provide Landlord with a written detailed cost breakdown (the “Final Costs Statement”), by trade, of the final costs actually incurred, as set forth more particularly in Section 2.2.1.1 through 2.2.1.7 above, in connection with the design, permitting and construction of the Tenant Improvements performed by or at the direction of Tenant or the Contractor (the “Final Costs”).  Notwithstanding anything in this Lease to the contrary, (a) if the Budgeted Costs Statement shows that the Budgeted Costs are projected to be less than $49,720,000.00 (the amount of such difference is referred to herein as the “Budget Differential”), then the Tenant Improvement Allowance shall be reduced by an amount equal to [***] of the Budget Differential (such [***] amount, the “Budget Reduction Amount”),¹ and the original L-C Amount (of $15,000,000) shall be reduced by [***] of the Budget Reduction Amount and (b) if the Final Costs Statement shows Final Costs are less than $49,720,000.00 (the amount of such difference is referred to herein as the “Final Differential”), and provided that Landlord had disbursed to Tenant the entire Tenant Improvement Allowance of $29,832,000.00, then Tenant shall pay to Landlord within ten (10) days of Landlord’s request following Landlord’s receipt of the Final Costs Statement (and Tenant’s failure to so pay within such 10-day period shall constitute a default under the Lease) the amount of [***] of the Final Differential (the “Final Reduction Amount”), and the original L-C Amount (of $15,000,000) shall be reduced by 50% of the Final Reduction Amount.  Any reduction of the original L-C Amount pursuant to the preceding sentence shall reduce the three amounts set forth in Section 20.3.2 above by, respectively, [***] of the amount of reduction of the original L-C Amount.

4.2.2Tenant’s Agents.

4.2.2.1Landlord’s General Conditions for Tenant’s Agents and Tenant Improvement Work.  Tenant’s and Tenant’s Agents’ construction of the Tenant Improvements shall comply with the following: The Tenant Improvements shall be constructed in strict accordance with the Approved Working Drawings.

EXHIBIT B

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4.2.2.2Coordination Fee.  Tenant shall pay a logistical coordination fee (the “Coordination Fee”) to Landlord in an amount equal to [***], which Coordination Fee shall be for services relating to the coordination of the construction of the Tenant Improvements and shall be deducted by Landlord from the Tenant Improvement Allowance.

4.2.2.3Indemnity.  Tenant’s indemnity of Landlord as set forth in the Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Tenant or Tenant’s Agents, or anyone directly or indirectly employed by any of them, or in connection with Tenant’s non-payment of any amount arising out of the Tenant Improvements and/or Tenant’s disapproval of all or any portion of any request for payment; except to the extent caused by the grossly negligent or intentional acts or breaches of the Lease of or by Landlord or its agents, contractors, employees or officers and not covered by insurance required to be maintained by Tenant under the Lease.

4.2.2.4Insurance Requirements.

4.2.2.4.1General Coverages.  All of Tenant’s Agents shall carry worker’s compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in the Lease.

4.2.2.4.2Special Coverages.  Tenant shall carry [***] insurance in an amount equal to the [***] of the improvements being constructed by Tenant, and such other insurance [***], it being understood and agreed that the Tenant Improvements shall be insured by Tenant pursuant to the Lease immediately upon completion thereof.  Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord, and in form and with companies as are required to be carried by Tenant as set forth in the Lease.

4.2.2.4.3General Terms.  Certificates for all insurance carried pursuant to this Section 4.2.2.4 shall be delivered to Landlord before the commencement of construction of the Tenant Improvements and before the Contractor’s equipment is moved onto the site.  All such policies of insurance must contain a provision that the company writing said policy will give Landlord thirty (30) days prior written notice of any cancellation of such insurance.  If the Tenant Improvements are damaged by any cause during the course of the construction thereof, Tenant shall immediately repair the same at Tenant’s sole cost and expense.  All policies carried under this Section 4.2.2.4 shall insure Landlord and Tenant, as their interests may appear, as well as Contractor and Tenant’s Agents, and shall name as additional insureds Landlord’s property manager, Landlord’s asset manager, and all mortgagees and ground lessors of the Premises and any other parties specified by Landlord.  All insurance, except Workers’ Compensation, maintained by Tenant’s Agents shall preclude subrogation claims by the insurer against anyone insured thereunder.  Such insurance shall provide that it is primary insurance as respects the owner and that any other insurance maintained by owner is excess and noncontributing with the insurance required hereunder.  The requirements for the foregoing insurance shall not derogate from the provisions for indemnification of Landlord by Tenant under Section 4.2.2.3 of this Tenant Work Letter.

EXHIBIT B

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4.2.3Governmental Compliance.  The Tenant Improvements shall comply in all respects with the following: (i) the Code and other state, federal, city or quasi-governmental laws, codes, ordinances and regulations, as each may apply according to the rulings of the controlling public official, agent or other person; (ii) applicable standards of the American Insurance Association (formerly, the National Board of Fire Underwriters) and the National Electrical Code; and (iii) building material manufacturer’s specifications.

4.2.4Inspection by Landlord.  With prior notification and accompaniment by Contractor to ensure site safety compliance, Landlord shall have the right to inspect the Tenant Improvements at all times, provided however, that Landlord’s failure to inspect the Tenant Improvements shall in no event constitute a waiver of any of Landlord’s rights hereunder nor shall Landlord’s inspection of the Tenant Improvements constitute Landlord’s approval of the same.  Should Landlord disapprove any portion of the Tenant Improvements, Landlord shall notify Tenant in writing of such disapproval and shall specify the items disapproved.  Any defects or deviations in, and/or disapproval by Landlord of, the Tenant Improvements shall be rectified by Tenant at no expense to Landlord, provided however, that if Landlord determines that a material defect or material deviation exists or disapproves of any matter in connection with any portion of the Tenant Improvements and such defect, deviation or matter is likely to adversely affect the mechanical, electrical, plumbing, HVAC or life-safety systems of the Building, the structure or exterior appearance of the Building, Landlord may (after written notice to Tenant and Tenant’s failure to cure same within five (5) days of request but only if Tenant is not diligently working to cure the same) take such action as Landlord deems necessary, at Tenant’s expense and without incurring any liability on Landlord’s part, to correct any such defect, deviation and/or matter, including, without limitation, causing the cessation of performance of the construction of the Tenant Improvements until such time as the defect, deviation and/or matter is corrected to Landlord’s reasonable satisfaction.

4.2.5Meetings.  Commencing upon the execution of the Lease, Tenant shall hold weekly meetings at a reasonable time, with the Architect and the Contractor regarding the progress of the preparation of Construction Drawings and the construction of the Tenant Improvements, which meetings shall be held at a location designated by Landlord, and Landlord and/or its agents shall receive prior notice of, and shall have the right to attend, all such meetings, and, upon Landlord’s request, certain of Tenant’s Agents shall attend such meetings.  In addition, minutes shall be taken at all such meetings, a copy of which minutes shall be promptly delivered to Landlord.  One such meeting each month shall include the review of Contractor’s current request for payment.

4.3Notice of Completion; Copy of “As Built” Plans.  Within ten (10) days after completion of construction of the Tenant Improvements, Landlord shall cause a Notice of Completion to be recorded in the office of the Recorder of the County in which the Building is located in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and shall furnish a copy thereof to Tenant upon such recordation.  At the conclusion of construction, (i) Tenant shall cause the Architect and Contractor (A) to update the Approved Working Drawings as necessary to reflect all changes made to the Approved Working Drawings during the course of construction, (B) to certify to the best of their knowledge that the “record-set” of as-built drawings are true and correct, which certification shall survive the expiration or termination of the Lease, (C) to deliver to Landlord one (1) electronic set of such as-

EXHIBIT B

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built drawings within ninety (90) days following issuance of a certificate of occupancy for the Premises, and (D) to deliver to Landlord a computer disk containing the Approved Working Drawings in AutoCAD format, and (ii) Tenant shall deliver to Landlord an electronic copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems in the Premises.

4.4Coordination by Tenant’s Agents with Landlord.  Upon Tenant’s delivery of the Contract to Landlord under Section 4.2.1 of this Tenant Work Letter, Tenant shall furnish Landlord with a schedule setting forth the projected date of the completion of the Tenant Improvements and showing the critical time deadlines for each phase, item or trade relating to the construction of the Tenant Improvements.

SECTION 5

MISCELLANEOUS

5.1Tenant’s Entry Into the Premises.  Subject to the terms hereof, Landlord shall allow Tenant access to the Premises on the date of the full execution and delivery of this Lease by Landlord and Tenant for the sole purpose of Tenant performing the Tenant Improvement work (including installing trade fixtures and equipment) therein and without the obligation to pay Rent until the Lease Commencement Date; provided, however, that upon no less than thirty (30) days’ prior written notice to Landlord, Tenant shall have the right to occupy up to 25,000 rentable square feet of the Building and, in such event, then Tenant shall be obligated to pay for utilities consumed by Tenant in such occupied portion of the Building as well as any other costs such as janitorial and maintenance costs payable by Tenant under the Lease for such portion of the Premises as provided in Section 4.1 of the Lease (but in no event shall Tenant be obligated to pay Base Rent, exterior maintenance, property management fees, Tax Expenses or insurance other than insurance required to be maintained by Tenant pursuant to Sections 10.3.2 and 10.3.3 of the Lease (unless, with respect to Section 10.3.3, Tenant’s Contractor is carrying such insurance during such period of time).  Tenant shall also have the right to use the Other Amenities during Tenant’s early occupancy of the Building subject to Tenant paying for any costs associated with Tenant’s use of such Other Amenities.  Tenant further acknowledges and agrees that Landlord shall not be liable for any injury, loss or damage which may occur to any of Tenant’s work made in or about the Premises in connection with such entry or to any property placed therein prior to the Lease Commencement Date, the same being at Tenant’s sole risk and liability, except to the extent caused by the grossly negligent or intentional acts or omissions or breach of the Lease by or of Landlord or its employees, officers, agents or contractors and not covered by insurance required to be carried by Tenant under the Lease.  Tenant shall be liable to Landlord for any damage to any portion of the Premises, including the Tenant Improvement work, caused by Tenant or any of Tenant’s employees, agents, contractors, consultants, workmen, mechanics, suppliers and invitees.  If the performance of Tenant’s work in connection with such entry causes extra costs to be incurred by Landlord, Tenant shall promptly reimburse Landlord for such extra costs.  In addition, Tenant shall hold Landlord harmless from and indemnify, protect and defend Landlord against any loss or damage to the Premises and against injury to any persons caused by Tenant’s actions pursuant to this Section 5.1.

EXHIBIT B

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5.2Tenant’s Representative.  Tenant has designated [***] as its sole representative with respect to the matters set forth in this Tenant Work Letter, who shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter.

5.3Landlord’s Representative.  Landlord has designated [***] as its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter.

5.4Time of the Essence in This Tenant Work Letter.  Unless otherwise indicated, all references herein to a “number of days” shall mean and refer to calendar days.  If any item requiring approval is timely disapproved by Landlord, the procedure for preparation of the document and approval thereof shall be repeated until the document is approved by Landlord.

5.5Tenant’s Lease Default.  Notwithstanding any provision to the contrary contained in the Lease, if an event of default (beyond applicable notice and cure periods) by Tenant of the Lease has occurred at any time on or before the substantial completion of the Premises, or if Landlord has notified Tenant of material breach of this Work Letter and Tenant has failed to cure such breach within five (5) days of such notice, then, in addition to all other rights and remedies granted to Landlord pursuant to the Lease, at law and/or in equity, Landlord shall have the right to withhold payment of all or any portion of the Tenant Improvement Allowance and/or Landlord may cause Contractor to cease the construction of the Premises (in which case, Tenant shall be responsible for any delay in the substantial completion of the Premises caused by such work stoppage).  In addition, if the Lease is terminated prior to the Lease Commencement Date, for any reason due to a default by Tenant as described in Section 19.1 of the Lease, in addition to any other remedies available to Landlord under the Lease, at law and/or in equity, Tenant shall pay to Landlord, as Additional Rent under the Lease, within five (5) business days after Tenant’s receipt of a statement therefor, any and all costs (if any) incurred by Landlord (including any portion of the Tenant Improvement Allowance disbursed by Landlord) and not reimbursed or otherwise paid by Tenant through the date of such termination in connection with the Tenant Improvements to the extent planned, installed and/or constructed as of such date of termination, including, but not limited to, any costs related to the removal of all or any portion of the Tenant Improvements and restoration costs related thereto.

 

EXHIBIT B

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EXHIBIT C

CONFIRMATION OF LEASE TERMS/AMENDMENT TO LEASE

This CONFIRMATION OF LEASE TERMS/AMENDMENT TO LEASE ("Confirmation/Amendment") is made and entered into effective as of _________________, 20__, by and between SCRIPPS SUMMIT INVESTMENTS LLC, a California limited liability company ("Landlord") and _______________, a ____________ ("Tenant").

r e c i t a l s :

A.Landlord and Tenant entered into that certain Lease dated as of _____________________ (the "Lease") pursuant to which Landlord leased to Tenant and Tenant leased from Landlord certain "Premises", as described in the Lease, in that certain building located at ________________, ____________, California ______.

B.Except as otherwise set forth herein, all capitalized terms used in this Amendment shall have the same meaning as such terms have in the Lease.

C.Landlord and Tenant desire to amend the Lease to confirm the commencement and expiration dates of the term, as hereinafter provided.

NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Confirmation of Dates.  The parties hereby confirm that the term of the Lease commenced as of ____________________ for a term of _________________________ ending on _______________________ (unless sooner terminated as provided in the Lease.  Tenant shall commence to pay rent on _______________, 20__ ("Lease Commencement Date").

2.No Further Modification.  Except as set forth in this Confirmation/Amendment, all of the terms and provisions of the Lease shall remain unmodified and in full force and effect.

 

 

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IN WITNESS WHEREOF, this Confirmation/Amendment has been executed as of the day and year first above written.

 

 

 

 

 

 

 

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EXHIBIT D

RULES AND REGULATIONS

Tenant shall faithfully observe and comply with the following Rules and Regulations.  In the event of any inconsistency between any provision of the following Rules and Regulations and the provisions of the Lease, the provisions of the Lease shall control.  In the event Landlord's consent or approval is required pursuant to any of the following Rules and Regulations, such consent or approval shall not be unreasonably withheld, conditioned or delayed.

1.Intentionally Blank

2.Neither Tenant nor its employees, agents, contractors, invitees or licensees shall bring any firearm, whether loaded or unloaded, into the Project at any time.

3.Intentionally Blank

4.Upon termination of the Lease, Tenant shall deliver to Landlord all keys and passes for offices, rooms, parking lot and toilet rooms which shall have been furnished Tenant. If the keys so furnished are lost, Tenant shall pay Landlord therefor.  

5.Intentionally Blank

6.No equipment of any type shall be placed on the Premises which in Landlord's opinion exceeds the load limits of the floor or otherwise threatens the soundness of the structure or improvements of the Building.

7.Intentionally Blank

8.Without Landlord's prior written consent, which shall not be unreasonably withheld, Tenant shall not use the name of the Project or any picture of the Project in connection with, or in promoting or advertising the business of, Tenant, except Tenant may use the address of the Project as the address of its business.

9.Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage, which may arise from a cause other than Landlord's negligence, which includes keeping doors locked and other means of entry to the Premises closed and secured.

10.Intentionally Blank

11.Tenant shall not advertise the business, profession or activities of Tenant conducted in the Project in any manner which violates any applicable laws.

12.Tenant shall promptly remove all rubbish and waste from the Premises.

13.Intentionally Blank

 

 

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14.Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations.

Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises.

 

 

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EXHIBIT E

FORM OF LETTER OF CREDIT

[See attached]

 

 

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L/C DRAFT LANGUAGE

 

IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER _____________

 

ISSUE DATE: ______________

 

ISSUING BANK:

SILICON VALLEY BANK

3003 TASMAN DRIVE

2ND FLOOR, MAIL SORT HF210

SANTA CLARA, CALIFORNIA 95054

 

BENEFICIARY:

SCRIPPS SUMMIT INVESTMENTS LLC

3811 TURTLE CREEK BOULEVARD, SUITE 975

DALLAS, TEXAS 75219

ATTENTION:  TIM SULLIVAN

 

 

APPLICANT:

FATE THERAPEUTICS, INC.

3535 GENERAL ATOMICS COURT STE 200

SAN DIEGO CA 92121

AMOUNT: US$15,000.000.00  (FIFTEEN MILLION AND 00/100 U.S. DOLLARS)

 

LADIES AND GENTLEMEN:

WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. ___________ IN YOUR FAVOR FOR THE ACCOUNT OF FATE THERAPEUTICS, INC., UP TO THE AGGREGATE AMOUNT OF USD $15,000,000.00 (U.S. DOLLARS) EFFECTIVE IMMEDIATELY AND EXPIRING ON ___(Expiration Date)___ AVAILABLE BY PAYMENT UPON PRESENTATION OF YOUR DRAFT AT SIGHT DRAWN ON SILICON VALLEY BANK WHEN ACCOMPANIED BY THE FOLLOWING DOCUMENT(S):

1. THE ORIGINAL OF THIS IRREVOCABLE STANDBY LETTER OF CREDIT AND AMENDMENT(S), IF ANY.

2. BENEFICIARY'S SIGNED STATEMENT  SIGNED BY AN AUTHORIZED SIGNATORY OF SCRIPPS SUMMIT INVESTMENTS LLC ("LANDLORD") STATING THE FOLLOWING:

"THE UNDERSIGNED HEREBY CERTIFIES THAT THE LANDLORD, EITHER (A) UNDER THE LEASE (DEFINED BELOW), OR (B) AS A RESULT OF THE TERMINATION OF SUCH LEASE, HAS THE RIGHT TO DRAW DOWN THE AMOUNT OF USD IN ACCORDANCE WITH THE TERMS OF THAT CERTAIN OFFICE LEASE DATED [Insert Lease Date], AS THE SAME MAY HAVE BEEN AMENDED (COLLECTIVELY, THE "LEASE"), OR SUCH AMOUNT CONSTITUTES DAMAGES OWING BY THE TENANT TO BENEFICIARY RESULTING FROM THE BREACH OF SUCH LEASE BY THE TENANT THEREUNDER, OR THE TERMINATION OF SUCH LEASE, AND SUCH AMOUNT REMAINS UNPAID AT THE TIME OF THIS DRAWING."

 

 

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OR

"THE UNDERSIGNED HEREBY CERTIFIES THAT WE HAVE RECEIVED A WRITTEN NOTICE OF [Insert Bank Name] SILICON VALLEY BANK'S ELECTION NOT TO EXTEND ITS STANDBY LETTER OF CREDIT NO. ___________ AND HAVE NOT RECEIVED A REPLACEMENT LETTER OF CREDIT WITHIN AT LEAST THIRTY (30) DAYS PRIOR TO THE PRESENT EXPIRATION DATE."

OR

"THE UNDERSIGNED HEREBY CERTIFIES THAT BENEFICIARY IS ENTITLED TO DRAW DOWN THE FULL AMOUNT OF LETTER OF CREDIT NO. ___________ AS THE RESULT OF THE FILING OF A VOLUNTARY PETITION UNDER THE U.S. BANKRUPTCY CODE OR A STATE BANKRUPTCY CODE BY THE TENANT UNDER THAT CERTAIN OFFICE LEASE DATED [Insert Lease Date], AS THE SAME MAY HAVE BEEN AMENDED (COLLECTIVELY, THE "LEASE"), WHICH FILING HAS NOT BEEN DISMISSED AT THE TIME OF THIS DRAWING."

OR

"THE UNDERSIGNED HEREBY CERTIFIES THAT BENEFICIARY IS ENTITLED TO DRAW DOWN THE FULL AMOUNT OF LETTER OF CREDIT NO. ___________ AS THE RESULT OF AN INVOLUNTARY PETITION HAVING BEEN FILED UNDER THE U.S. BANKRUPTCY CODE OR A STATE BANKRUPTCY CODE AGAINST THE TENANT UNDER THAT CERTAIN OFFICE LEASE DATED [Insert Lease Date], AS THE SAME MAY HAVE BEEN AMENDED (COLLECTIVELY, THE "LEASE"), WHICH FILING HAS NOT BEEN DISMISSED AT THE TIME OF THIS DRAWING."

OR

“THE UNDERSIGNED HEREBY CERTIFIES THAT BENEFICIARY IS ENTITLED TO DRAW DOWN THE FULL AMOUNT OF LETTER OF CREDIT NO. ________________ AS THE RESULT OF THE REJECTION, OR DEEMED REJECTION, OF THAT CERTAIN OFFICE LEASE DATED [Insert Lease Date], AS THE SAME MAY HAVE BEEN AMENDED, UNDER SECTION 365 OF THE U.S. BANKRUPTCY CODE.”

SPECIAL CONDITIONS:

PARTIAL DRAWINGS AND MULTIPLE PRESENTATIONS MAY BE MADE UNDER THIS STANDBY LETTER OF CREDIT, PROVIDED, HOWEVER, THAT EACH SUCH DEMAND THAT IS PAID BY US SHALL REDUCE THE AMOUNT AVAILABLE UNDER THIS STANDBY LETTER OF CREDIT.

ALL INFORMATION REQUIRED WHETHER INDICATED BY BLANKS, BRACKETS OR OTHERWISE, MUST BE COMPLETED AT THE TIME OF DRAWING.

ALL SIGNATURES MUST BE MANUALLY EXECUTED IN ORIGINALS.

ALL BANKING CHARGES ARE FOR THE APPLICANT'S ACCOUNT.

 

 

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IT IS A CONDITION OF THIS STANDBY LETTER OF CREDIT THAT IT SHALL BE DEEMED AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FOR A PERIOD OF ONE YEAR  FROM THE PRESENT OR ANY FUTURE EXPIRATION DATE, UNLESS AT LEAST THIRTY (30) DAYS PRIOR TO THE EXPIRATION DATE WE SEND YOU NOTICE BY NATIONALLY RECOGNIZED OVERNIGHT COURIER SERVICE SUCH AS UPS OR FED-EX THAT WE ELECT NOT TO EXTEND THIS LETTER OF CREDIT FOR ANY SUCH ADDITIONAL PERIOD.  SAID NOTICE WILL BE SENT TO THE ADDRESS INDICATED ABOVE, UNLESS A CHANGE OF ADDRESS IS OTHERWISE NOTIFIED BY YOU TO US IN WRITING BY RECEIPTED MAIL OR COURIER. ANY NOTICE TO US WILL BE DEEMED EFFECTIVE ONLY UPON ACTUAL RECEIPT BY US AT OUR DESIGNATED OFFICE.  IN NO EVENT, AND WITHOUT FURTHER NOTICE FROM OURSELVES, SHALL THE EXPIRATION DATE BE EXTENDED BEYOND A FINAL EXPIRATION DATE OF JULY 31, 2036.

THIS LETTER OF CREDIT MAY BE TRANSFERRED SUCCESSIVELY IN WHOLE OR IN PART ONLY UP TO THE THEN AVAILABLE AMOUNT IN FAVOR OF A NOMINATED TRANSFEREE ("TRANSFEREE"), ASSUMING SUCH TRANSFER TO SUCH TRANSFEREE IS IN COMPLIANCE WITH ALL APPLICABLE U.S. LAWS AND REGULATIONS.  AT THE TIME OF TRANSFER, THE ORIGINAL LETTER OF CREDIT AND ORIGINAL AMENDMENT(S) IF ANY, MUST BE SURRENDERED TO US TOGETHER WITH OUR TRANSFER FORM ATTACHED HERETO AS EXHIBIT “A” DULY EXECUTED AND PAYMENT OF OUR CUSTOMARY TRANSFER FEES, WHICH FEES SHALL BE PAYABLE BY APPLICANT (PROVIDED THAT BENEFICIARY MAY, BUT SHALL NOT BE OBLIGATED TO, PAY SUCH FEES TO US ON BEHALF OF APPLICANT, AND SEEK REIMBURSEMENT THEREOF FROM APPLICANT).  IN CASE OF ANY TRANSFER UNDER THIS LETTER OF CREDIT, THE DRAFT AND ANY REQUIRED STATEMENT MUST BE EXECUTED BY THE TRANSFEREE AND WHERE THE BENEFICIARY'S NAME APPEARS WITHIN THIS STANDBY LETTER OF CREDIT, THE TRANSFEREE'S NAME IS AUTOMATICALLY SUBSTITUTED THEREFOR.

ALL DRAFTS REQUIRED UNDER THIS STANDBY LETTER OF CREDIT MUST BE MARKED: ''DRAWN UNDER SILICON VALLEY BANK STANDBY LETTER OF CREDIT NO. ___________."

We hereby agree with you that if drafts are presented to SILICON VALLEY BANK under this Letter of Credit at or prior to 10:00am california time on a business day, and provided that such drafts presented conform to the terms and conditions of this Letter of Credit, payment shall be initiated by us in immediately available funds by our close of business on the succeeding business day.  If drafts are presented to silicon valley bank under this Letter of Credit after 10:00 am california time, on a business day, and provided that such drafts conform with the terms and conditions of this Letter of Credit, payment shall be initiated by us in immediately available funds by our close of business on the second succeeding business day.  As used in this Letter of Credit, "business day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the state of California are authorized or required by law to close.  If the expiration date for this Letter of Credit shall ever fall on a day which is not a business day then such expiration date shall automatically be extended to the date which is the next business day.

Presentation of a drawing under this Letter of Credit may be made on or prior to the then current expiration date hereof by hand delivery, courier service, overnight mail, or facsimile.  Presentation by facsimile transmission shall be by transmission of the above required sight draft drawn on us together with this Letter of Credit to our facsimile number, (408) 496-2418 OR (408) 969-6510, attention: trade finance department, with telephonic confirmation of our receipt of such facsimile transmission at our telephone number (408) 450-5001 OR (408) 654-7176 or to such other facsimile or telephone numbers, as to which you have received written notice from us as being the applicable such number.  We agree to notify you in writing, by NATIONALLY RECOGNIZED OVERNIGHT courier service such as ups or fed-

 

 

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ex, of any change in such direction. Any facsimile presentation pursuant to this paragraph shall also state thereon that the original of such sight draft and Letter of Credit are being remitted, for delivery on the next business day, to silicon valley bank at the applicable address for presentment pursuant to the paragraph FOLLOWING this one.

WE HEREBY ENGAGE WITH YOU THAT ALL DOCUMENT(S) DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS STANDBY LETTER OF CREDIT WILL BE DULY HONORED IF DRAWN AND PRESENTED FOR PAYMENT AT OUR OFFICE LOCATED AT SILICON VALLEY BANK, 3003 TASMAN DRIVE, 2^ND FLOOR TASMAN DRIVE, MAILSORT HF210, SANTA CLARA, CALIFORNIA 95054 ATTN: TRADE FINANCE DEPARTMENT, ON OR BEFORE THE EXPIRATION DATE OF THIS CREDIT.

IF THE ORIGINAL OF THIS STANDBY LETTER OF CREDIT NO. ___________ IS LOST, STOLEN OR DESTROYED, WE WILL ISSUE YOU A “CERTIFIED TRUE COPY” OF THIS STANDBY LETTER OF CREDIT NO. ____________ UPON OUR RECEIPT OF YOUR INDEMNITY LETTER TO SILICON VALLEY BANK WHICH WILL BE SENT TO YOU UPON OUR RECEIPT OF YOUR WRITTEN REQUEST THAT THIS STANDBY LETTER OF CREDIT NO. ___________ IS LOST, STOLEN, OR DESTROYED.  IF THE ORIGINAL OF THIS STANDBY LETTER OF CREDIT NO. ____________ IS MUTILATED, WE WILL ISSUE YOU A REPLACEMENT STANDBY LETTER OF CREDIT WITH THE SAME NUMBER, DATE AND TERMS AS THE ORIGINAL UPON OUR RECEIPT OF THE MUTILATED STANDBY LETTER OF CREDIT.

IF ANY INSTRUCTIONS ACCOMPANYING A DRAWING UNDER THIS LETTER OF CREDIT REQUEST THAT PAYMENT IS TO BE MADE BY TRANSFER TO YOUR ACCOUNT WITH ANOTHER BANK, WE WILL ONLY EFFECT SUCH PAYMENT BY FED WIRE TO A U.S. REGULATED BANK, AND WE AND/OR SUCH OTHER BANK MAY RELY ON AN ACCOUNT NUMBER SPECIFIED IN SUCH INSTRUCTIONS EVEN IF THE NUMBER IDENTIFIES A PERSON OR ENTITY DIFFERENT FROM THE INTENDED PAYEE.

EXCEPT SO FAR AS OTHERWISE EXPRESSLY STATED HEREIN, THIS STANDBY LETTER OF CREDIT IS SUBJECT TO THE "INTERNATIONAL STANDBY PRACTICES" (ISP 98) INTERNATIONAL CHAMBER OF COMMERCE (PUBLICATION NO. 590).

 

 

 

 

 

 

 

 

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EXHIBIT “A”

TRANSFER FORM

 

DATE: ____________________

 

 

GENTLEMEN:

 

FOR VALUE RECEIVED, THE UNDERSIGNED BENEFICIARY HEREBY IRREVOCABLY TRANSFERS TO:

 

_________________________________________________________________________________________

(NAME OF TRANSFEREE)

_________________________________________________________________________________________

(ADDRESS)

ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF CREDIT UP TO ITS AVAILABLE AMOUNT AS SHOWN ABOVE AS OF THE DATE OF THIS TRANSFER.

 

BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF CREDIT ARE TRANSFERRED TO THE TRANSFEREE. TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS, WHETHER INCREASES OR EXTENSIONS OR OTHER AMENDMENTS, AND WHETHER NOW EXISTING OR HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECTLY TO THE TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED BENEFICIARY.

 

THE ORIGINAL OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK YOU TO ENDORSE THE TRANSFER ON THE REVERSE THEREOF, AND FORWARD IT DIRECTLY TO THE TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF TRANSFER.

 

 

 

 

 

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EXHIBIT F

LIST OF QUALIFICATIONS OF SERVICE PROVIDERS AND AGREEMENTS

For purposes hereof, the term "Experience" shall mean experience in Comparable Buildings.

1.General Qualifications.  Tenant shall enter into and maintain Service Agreements with reputable, certified (if certification in such service area is required) and professionally licensed, if applicable, service vendors and/or providers (each a "Service Provider" and collectively, the "Service Providers") with a proven work history and who are demonstrably qualified to perform the applicable services, repair and maintenance work described in the repair, maintenance and improvement specifications set forth in Exhibit G, and the terms and conditions of such Service Agreements shall require each Service Provider's compliance with the such applicable specifications.

2.Levels of Experience for Critical Systems.  The 'lead' on-site employee for each of the Service Providers providing service, repair and/or maintenance for the Building's mechanical, electrical, plumbing, fire/life safety and HVAC systems (the "Critical Systems") shall (i) have not less than seven (7) years' Experience; (ii) have not less than three thousand (3,000) hours of service logged in as an employee or independent contractor for such Service Provider; and (iii) have obtained all licenses and certifications (if available) that are (a) required by any governmental or quasi‑governmental authority having jurisdiction over the Building, or (b) generally requested by landlords and/or owners of Comparable Buildings.

3.Levels of Experience for Other Building Systems.  The 'lead' on-site employee for those Service Providers providing service, repair and/or maintenance for the Building Systems other than the Critical Systems shall (i) have not less than five (5) years' Experience; (ii) have not less than one thousand (1,000) hours of service logged in as an employee or independent contractor for such Service Provider; and (iii) have obtained all licenses and certifications (if available) that are (a) required by any governmental or quasi‑governmental authority having jurisdiction over the Building, or (b) generally requested by landlords and/or owners of Comparable Buildings.

 

Landlord and Tenant shall periodically review and reasonably adjust the foregoing specifications so as to ensure compliance with the Management Standard while allowing Tenant the flexibility to effectively manage and maintain the Building.

 

 

 

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EXHIBIT G

REPAIR, MAINTENANCE, AND IMPROVEMENTS SPECIFICATIONS

1.FIRE/LIFE/SAFETY.

1.1General Standards.  Tenant shall cause all fire/life/safety equipment to be inspected quarterly, arrange for annual testing and maintenance of such equipment, and have equipment maintenance records available for Landlord's review.

1.2Quarterly Maintenance.  Tenant shall ensure that an inspection is conducted at least quarterly of all exit and emergency lights and a 30‑second functional test be conducted on all battery powered fixtures.  If deficiencies are noted, immediate corrective action must be taken.  Personnel making inspections must keep records of all units inspected, including those found to require corrective action.  The inspection must include at least the following.

1.2.1Test the integrity of the lamp and battery through test button for 30 seconds.

1.2.2Check each light for physical damage.

1.2.3Align beams and tighten if necessary.

1.2.4Check AC and charge lamps if applicable.

1.2.5Replace burnt out bulbs.

1.3Annual Maintenance.  All battery powered exit and emergency lights must be maintained at least annually in accordance with applicable code requirements and the manufacturer's directions, and must include a full function test on every battery powered exit and emergency lighting system.  Equipment shall be fully operational for the duration of the test.  Steps include, but are not limited to the following.

1.3.190 Minute full function test.

1.3.2Disconnect AC power supply to each unit.

1.3.3Check battery and lens for sulfation/corrosion.

1.3.4Clean unit and lens.

1.3.5Adjust beam for proper alignment.

1.3.6Check charging system voltage.

1.3.7Check battery voltage output.

1.3.8Troubleshooting/repair, which may include, but is not limited to, checking charging system voltage and adjusting to correct level, checking battery output voltage and checking line voltage to remote fixtures.

 

 

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1.4Recordkeeping.  Tenant or its Service Providers shall keep written records of all inspections and tests for review by Landlord and/or any governmental or quasi-governmental authority having jurisdiction over the Building.

1.5Removal and Disposition of Old Batteries.  Tenant shall ensure that all discarded batteries are disposed of in an appropriate manner, and in keeping with Applicable Laws and regulations dealing with rechargeable batteries.

2.HVAC and MEP SYSTEMS.  Tenant shall cause the performance of the following services and maintenance specification in connection with the Building's HVAC and mechanical, electrical and plumbing systems.

2.1Tenant shall employ a staff or Service Provider which shall operate, monitor and maintain in good working order and condition, the HVAC, plumbing and electrical systems, and all other equipment related to the mechanical and electrical plant of the building.

2.2Tenant shall engage contractors when required and shall purchase replacement parts and equipment all, at Tenant's expense.

2.3Develop and maintain in operation, a program for preventative maintenance of the mechanical equipment in the building, which program shall include, without limitation, the annual servicing of all HVAC chillers.

2.4Establish a program of inventory control for replacement parts, supplies, removable tools and equipment.

2.5Prepare, maintain and regularly review logs having to do with the service, repair and operation of the mechanical systems of the Building.

2.6Develop and implement a comprehensive program of preventive maintenance for the mechanical and electrical equipment contained on the site, which program shall include, without limitation, (i) servicing (as needed) and annual maintenance of all earthquake motion devices (accelograph) located within the Building; (ii) annual infrared testing of all electrical panels and busses contained with the Building; (iii) annual (but more frequently if needed) inspections of the Building's swingstage and davit systems; and (iv) annual testing and maintenance of the Building's automatic transfer switches.

2.7Provide Landlord  access to daily engineering logs, periodic management reports and preventive maintenance schedules.

2.8Establish and Maintain a maintenance library to include equipment manufacturer owner/operation manuals, maintenance manuals, operating logs and similar compilations of information pertaining to the site and its equipment.

2.9Develop and implement a comprehensive engineering personnel training program addressing:  Safety at the Workplace, Preventive Maintenance, Agency Compliance and Quality Customer Service.

 

 

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2.10Prepare and provide Landlord with periodic reports on energy consumption and analysis.

3.JANITORIAL, SECURITY, LANDSCAPING, PEST CONTROL AND PARKING OPERATION SERVICES. To be provided in a manner consistent with that provided in Comparable Buildings.

 

4.ELEVATOR.  Tenant shall cause the elevators to be maintained in compliance with the following standards.

4.1Motor Rooms.  The motor room and secondary space floors and equipment are to be painted, kept free of dust, lint, oil residue, carbon dust and debris.  Code authorities prohibit the storage of equipment and parts not relative to the operation and maintenance of the elevators in the motor rooms.  Spare parts, lubricants and wiring diagrams will be kept orderly in storage cabinets.  Metal rag pails with covers will be provided for the storage of clean rags only.  All waste materials will be removed from the area immediately and disposed of properly.  Up to date maintenance charts, callback logs, job stamps and material safety data sheets will be readily accessible.  All chemicals must be properly labeled.  Equipment rooms shall be locked to prevent unauthorized access.

4.2Hoistway, Pit and Car Tops.  These areas must be kept free of debris and accumulation or storage of materials such as parts, lubricants, etc.  Pits shall be maintained in a reasonably dry condition as directed by code authorities.  Oil spills shall be cleaned up immediately.  All covers shall be secured in place.

4.3Cab Enclosure.  All covers and accessory boxes shall be secured in place and if lockable, locked at all times.  All fastenings and screws will be secured and tightened.  Missing screws shall be replaced.  Car operating panels, indicators and markings shall be maintained as installed.

4.4Safety Requirement.  Safety awareness is of the utmost importance.  Barricades, proper tools and safety equipment shall be used to minimize risk or exposure to danger to employees and the public.  Under no circumstances shall work be performed in unbarricaded open hoistways.  If continuous work is being performed, hoistway doors shall be closed when the immediate area is unattended.

4.4.1Strict adherence to applicable lockout/tagout procedures shall be enforced.

4.4.2All safety devices and circuits shall operate as intended.  They shall not be overridden and must operate in compliance with applicable codes.  Unsafe equipment or conditions will be corrected or reported to Landlord immediately.  Under no circumstances shall unsafe equipment be put into operation.  Periodic checks shall be performed to ensure the proper operation of all safety devices.

4.4.3Lighting in the work areas shall be sufficient so as not to endanger maintenance personnel.  Unique or adverse job conditions and deviation from applicable codes with respect to the elevator spaces or work areas shall be documented and discussed with Landlord.  Environmental conditions must be suitable for the safe operation of equipment by the public and Tenant employees.

 

 

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4.4.4Adjustments to the operating systems, which may affect the safety of passengers, shall not be made while the passengers have access to riding the elevators.  Doors should be disabled and/or barricades affixed to prevent use during adjustment.

4.5Door Operation.  Doors shall be smooth, quiet and positive without noticeable bumps.  Car and hall door rollers and gibs shall be replaced and hanger tracks cleaned when required.  Upthrusts shall be adjusted and door alignment checked periodically to ensure proper operation and adherence to code clearance requirements.  Consistent operation shall be maintained from floor to floor and with similar cars within a group.  The doors will be maintained per the speed, force and time adjustments specified by the manufacturer or enforced by the local code authority.  An annual check of horizontal power operated doors shall be made to ensure that the force necessary to prevent the closing of the doors does not exceed 30 pounds.  Particular attention shall be paid to reopening features and safety devices such as door open buttons, safety edges, photocells, detector edges, nudging and other related features, which shall be maintained as installed and checked during each visit to the site.  Door pre-opening shall be eliminated when possible.

4.6Signals.  Hall stations, lobby panels, car operating panels, machine room panels, and special feature fixtures such as concealed risers shall be maintained in good operating condition with all markings intact.  Lamps, gongs, chimes, etc. shall operate as designed.  Emergency communications devices shall be checked as required by applicable codes.  Any failures or malfunctions must be reported or corrected.

4.7Car Ride.  Ride quality must not include a condition of excessive sway and rattle, door shimmy, hoistway noises nor any other unusual conditions experienced within the cab during transit.  The car ride shall be consistent and where applicable, smooth.  Inherent noise generated by elevator equipment shall be maintained within normal limits and corrected accordingly when the noise level exceeds such limits.

Floor leveling accuracy must be checked regularly and adjustments made to guarantee the optimum floor level.  Unusual conditions or intermittent failures shall be corrected immediately.  The condition of speed control devices shall be checked periodically to ensure proper operation.  Under no circumstances shall a car be allowed to operate with a potential tripping hazard.

4.8Hoist Machines.  The hoist machine, rotating equipment and hydraulic power units shall be kept clean and painted for ease of maintenance and housekeeping.  Leaks shall be properly sealed when detected.  Cables shall be free of lint and heavy accumulation of dirt, and shall be lubricated at recommended intervals. Brush rigging and windings shall be free of carbon dust, oil and dirt and proper brush tension maintained.  Carbon brushes shall be replaced after no more than 50% wear with the proper grade brush.  Brush grade and manufacturers products shall not be mixed.  Oil levels, seals, tension and adjustments shall be maintained to ensure safe, reliable operation.  Brakes shall be systematically inspected for proper operation.  Periodically the brake pins shall be rotated to make sure they are free from binds.  All components shall be maintained in accordance with the manufacturer's recommended maintenance guidelines at the prescribed intervals.

 

 

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4.9Controllers and Other Equipment.  Controllers, selectors, governors and other operational apparatus shall be kept clean, properly lubricated and adjusted as required.  Relays and contactors shall be kept clean and operating without excessive arc.  All electrical connections shall be tight, taped and tagged when not in use.  Coils, contacts, relays and resistors showing signs of deterioration shall be repaired or replaced.  Controller filters and fans if provided shall be repaired or replaced as necessary.  Care shall be exercised when handling printed circuit boards.  Proper grounding is necessary when handling some versions of solid state devices.  All modes, programs and operations such as loadweighing, dispatching, etc., shall be maintained as manufactured.

4.10Maintenance Contract.  Tenant shall retain a reputable elevator service company to conduct, at a minimum, the following services.

4.10.1Each Visit By Vendor.  Vendor Shall perform the following services upon each visit to the Building.

4.10.2Monthly by Vendor.  Vendor Shall perform the following services on a monthly basis.

4.10.2.1Check hoist motor, generator brushes, commutators and exercise brushes.  Clean carbon residue from brush rigging.  Renew brushes as required.  (50% maximum wear).

4.10.2.2Check hoist motor and generator sleeve bearings.  Lubricate as required.  Observe clearance between rotor and bottom stator field pieces.

4.10.2.3Check hoist machine worm gear oil for proper level.  Add lubricant as required.  Most geared machines have standpipes to gauge gear oil level, however the level should be no higher than the center point of the worm shaft.  Confirm that oil is carrying in both directions on the ring gear.  Clean up oil residue around machine and bedplate.

4.10.3Quarterly by Vendor.  Vendor Shall perform the following services on a quarterly basis.

4.10.3.1Inspect car door operator.  Adjust belts and/or chains as necessary.  Apply lubricant to phenolic or micarta cams.

 

 

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4.10.3.2Inspect and clean car gate switch, main landing door and interlock contacts.  Adjust as required.  Maintain code requirements for settings.

4.10.3.3Clean car top and car top devices.

4.10.3.4Inspect leveling units.

4.10.3.5Clean, adjust and lubricate car and main landing door hangers and tracks.  Check and adjust upthrusts.  Inspect door alignment and adjust as required.

4.10.3.6Clean, adjust and lubricate car door clutch or bayonet assembly.

4.10.3.7Dust debris from mechanism located on hoistway side of car and main landing doors and sills.

4.10.3.8Clean pit and pit equipment.  Report any abnormal conditions such as the presence of water.

4.10.3.9Inspect, clean and lubricate governor and selector tail sheaves if provided.

4.10.3.10Lubricate car and counterweight guide rails if slipper shoes are provided.  Pull mainline disconnect switch.  Inspect and clean controller.  Check power and supervisory relays, shunts and contacts.  Operate each relay manually and check for contact wipe and binding.  Replace any contact, shunt, spring or spring retainer, which shows indications of excessive wear.  Replace controller filters.  Check operation of muffin fans if provided.

4.10.3.11Clean and lubricate selector chains, guides, drums and couplings if provided.  Clean carbon dust accumulation from crossbars.  Replace carbons, contacts and switches as required.  Inspect broken tape switch.  Check and fill selector drive gearbox with gear oil if provided.  Clean and wipe up excess oil and grease.

4.10.3.12Clean and inspect governor.  Lubricate as required.  Manually extend weights and check for free movement.

4.10.3.13Check brake arms and rotate pins.  Lubricate and check for freeness.  Verify that brake sets and holds car at floor.  Inspect brake drum for signs of abrasion.  Clean foreign debris that may be present.

4.10.3.14Clean and lubricate selector chains, guides, drums and couplings.  Clean carbon dust accumulation from crossbars.  Replace carbons, contacts and switches as required.  Inspect broken tape switch.  Check and fill selector drive gearbox with gear oil.  Clean and wipe excess oil and grease.

4.10.3.15Check compensating chain and hitches.

4.10.3.16Lubricate cup-type sheave bearings.

 

 

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4.10.4Semi-Annually by Vendor.  Vendor Shall perform the following services on a semi-annual basis.

4.10.4.1Inspect car and counterweight guide shoes or roller guides.  Lubricate as required.

4.10.4.2Grease roller bearings.

4.10.4.3Inspect and clean counterweight rope fastenings, hitch springs and cotter pins.

4.10.4.4Check car operating panel controls and switches.  Clean and lubricate as required.  Dust out panel box.

4.10.5Annually by Vendor.  Vendor Shall perform the following services on an annual basis

4.10.5.1Clean hoistway.

4.10.5.2Clean, lubricate and adjust hoistway door equipment.  Burnish door interlock contacts and shorting bars.  Replace worn parts as necessary.

4.10.5.3Vacuum and clean the car safety mechanism.  Operate moveable parts and ascertain that they move freely.

4.10.5.4Change oil in sleeve bearings.

4.10.5.5Clean and lubricate the deflector and secondary sheaves.  Check grooves for wear.  Report abnormal conditions.

4.10.5.6Clean and lubricate the car and counterweight 2:1 sheaves.  Check grooves for wear.  Report abnormal conditions.

4.10.5.7Clean, examine and lubricate compensating sheave.  Check switch setting and tie-down mechanism.

4.10.5.8Inspect car and counterweight oil buffers.  Check for proper oil level.  Actuate switches and reset.

4.10.5.9Check car and counterweight run-by.

4.10.5.10Check for abrasions or wear on traveling cables.

4.10.5.11Inspect cab enclosure steadying devices.

4.10.5.12Check and adjust car door pressure and speed.  Log on maintenance chart.

4.10.5.13Check car and main landing door gibs.  Replace if worn.

 

 

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4.10.5.14Lubricate hoist ropes.

4.10.5.15Blowout/vacuum hoist motor and motor generator.

4.10.5.16Tighten mainline connections and check fuse sizing.  Replace any fuses that appear damaged or unmarked.

4.10.5.17Clean and check controller fuses and fuse holders.  Ascertain that the proper fuse is installed.  Replace any fuses that appear damaged or unmarked.

4.10.5.18Test emergency power system.

4.10.5.19Test earthquake device.

4.10.5.20Activate Firemen's Return.

4.10.5.21Perform other tests required by local code authorities.

5.LIGHTING.

5.1Scheduled Maintenance Services.

5.1.1Replace failed lamps.

5.1.2Replace failed ballasts.

5.1.3Replace failed sockets / lampholders.

5.1.4Repair defective wiring within fixture.

6.ROOF.

6.1Tenant shall develop and implement a comprehensive program of preventive maintenance for the roof (including the roof membrane) of the Building, which program shall include, at a minimum, annual preventive maintenance and repairs (which shall be provided more frequently if necessary) and semi‑annual testing and inspection.

7.EMERGENCY GENERATOR.  Tenant shall engage a Service Provider for the regular maintenance (as needed) and annual servicing of the emergency generator(s) (if any) serving the Building and schedules for regular testing and inspection.

 

8.EXTERIOR WINDOW WASHING.  Tenant shall engage a Service Provider for at least annual exterior window cleaning services and annual interior window cleaning services (if the same is not already provided by Tenant's janitorial service provider).

9.PERIODIC REVIEW.  Landlord and Tenant shall periodically review and reasonably adjust the foregoing specifications so as to ensure compliance with the Management Standard while allowing Tenant the flexibility to effectively manage and maintain the Building.

 

 

 

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EXHIBIT H

BASE RENT REDUCTION EXAMPLE

 

 

 

 

 

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RIDER 1

EXTENSION OPTION RIDER

This Extension Option Rider ("Extension Rider") is attached to and made a part of the Lease by and between Landlord and Tenant.  The agreements set forth in this Extension Rider shall have the same force and effect as if set forth in the Lease.  To the extent the terms of this Extension Rider are inconsistent with the terms of the Lease, the terms of this Extension Rider shall control.

1.Extension Options.  Landlord hereby grants Tenant two (2) options (each, an "Extension Option") to extend the Lease Term for a period of five (5) years each (each, an "Option Term"), which options shall be exercisable only by written Exercise Notice (as defined below) delivered by Tenant to Landlord as provided below.  Upon the proper exercise of the applicable Extension Option, the then current Lease Term shall be extended for the applicable Option Term.  Notwithstanding the foregoing, at Landlord's option, in addition to any other remedies available to Landlord under the Lease, at law or in equity, any such Extension Option shall not be deemed properly exercised if as of the date of delivery of the Exercise Notice (as defined below) by Tenant is in default under the Lease beyond all applicable notice and cure periods.  Each Extension Option is personal to the Original Tenant or any Affiliate Assignee.

2.Option Rent.  The annual Base Rent payable by Tenant during the applicable Option Term (the "Option Rent") shall be equal to the greater of:  (i) the annual Base Rent payable by Tenant during the last year of the then current Lease Term; or (ii) the Fair Market Rental Rate.  As used herein, the "Fair Market Rental Rate" shall mean the annual base rent at which tenants, as of the commencement of the applicable Option Term, will be leasing non-sublease space comparable in size and quality to the Premises for a comparable term as the applicable Option Term, which comparable space is located in the Building and in other comparable first-class biotechnology buildings in San Diego County ("Comparable Buildings"), taking into consideration all free rent and other out-of-pocket concessions generally being granted at such time for such comparable space for the applicable Option Term (including, without limitation, any tenant improvement allowance provided for such comparable space, with the amount of such tenant improvement allowance to be provided for the Premises during the applicable Option Term to be determined after taking into account the age, quality and layout of the tenant improvements in the Premises as of the commencement of the applicable Option Term with consideration given to the fact that the improvements existing in the Premises are specifically suitable to Tenant).  All other terms and conditions of the Lease shall apply throughout the applicable Option Term; however, Tenant shall, in no event, have the option to extend the Lease Term beyond the last Option Term described in Section 1 above.

3.Exercise of Options.  The Extension Option shall be exercised by Tenant, if at all, only in the following manner:  (i) Tenant shall deliver written notice ("Interest Notice") to Landlord not more than fifteen (15) months nor less than fourteen (14) months prior to the expiration of the then current Lease Term stating that Tenant may be interested in exercising the Extension Option; (ii) Landlord, after receipt of Tenant's notice, shall deliver notice (the "Option Rent Notice") to Tenant not less than one (1) month after receipt of the Interest Notice setting forth the Option Rent; and (iii) if Tenant wishes to exercise the Extension Option, Tenant shall, on or before the date (the "Exercise Date") which is no later than the later of (A) twelve (12) months

 

 

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prior to the expiration of the initial Lease Term and (B) one month after receipt of the Option Rent Notice, exercise the Extension Option by delivering written notice ("Exercise Notice") thereof to Landlord.  Tenant's failure to deliver the Interest Notice or Exercise Notice on or before the applicable delivery dates therefore specified hereinabove shall be deemed to constitute Tenant's waiver of such Extension Option and any succeeding Option (if any).

4.Determination of Option Rent.  If Tenant timely and appropriately objects in its Exercise Notice to Landlord to the Option Rent initially determined by Landlord (and set forth in the Option Rent Notice), then Landlord and Tenant shall attempt in good faith to agree upon the Fair Market Rental Rate.  If Landlord and Tenant fail to reach agreement within ten (10) business days following Tenant's delivery of such Exercise Notice (the "Outside Agreement Date"), then each party shall submit to the other party a separate written determination of the Fair Market Rental Rate within fifteen (15) business days after the Outside Agreement Date (except that Landlord's determination shall be no higher than as set forth in the Option Rent Notice), and such determinations shall be submitted to arbitration in accordance with the provisions of Sections 4.1 through 4.7 below.  The failure of Tenant or Landlord to submit a written determination of the Fair Market Rental Rate within such fifteen (15) business day period shall conclusively be deemed to be such party's approval of the Fair Market Rental Rate submitted within such fifteen (15) business day period by the other party.

 

 

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4.7The cost of the arbitrators and the arbitration proceeding shall be paid by the non-prevailing party.

4.8In the event the new monthly Base Rent is not established prior to the end of the then current Lease Term, the monthly Base Rent immediately payable at the commencement of such Option Term shall be the monthly Base Rent payable in the immediately preceding month.  Notwithstanding the above, once the fair market rental is determined in accordance with this Section 4, the parties shall settle any underpayment or overpayment on the next monthly Base Rent payment date falling not less than thirty (30) days after such determination.

 

 

 

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in the following Registration Statements:

 

of our reports dated March 2, 2020, with respect to the consolidated financial statements of Fate Therapeutics, Inc. and the effectiveness of internal control over financial reporting of Fate Therapeutics, Inc. included in this Annual Report (Form 10-K) of Fate Therapeutics, Inc. for the year ended December 31, 2019.

/s/ Ernst & Young LLP

San Diego, California

March 2, 2020

 

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, J. Scott Wolchko, certify that:

1. I have reviewed this Annual Report on Form 10-K of Fate Therapeutics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, J. Scott Wolchko, Principal Executive Officer and Principal Financial Officer of Fate Therapeutics, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based upon my knowledge: