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TABLE OF CONTENTS
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 	 	 	
(Mark One)	 	 	

ý	
 	
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	

For the fiscal year ended December 31, 2014	

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

For the transition period from                to                .
	
Commission file number 001-36076

FATE THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
 	 	 	
Delaware
(State or other jurisdiction of
incorporation or organization)	 	65-1311552
(I.R.S. Employer
Identification No.)	

3535 General Atomics Court, Suite 200, San Diego, CA
(Address of principal executive offices)	
 	
92121
(Zip Code)	
(858) 875-1800
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 	 	 	
Title of each class	 	Name of each exchange on which registered	
Common Stock, $0.001 par value	 	NASDAQ Global Market	
Securities registered pursuant to Section 12(g) of the Act:None

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

          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 o or No ý

          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  ý  or No  o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý     No  o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 	 	 	 	 	 	 	
Large accelerated filer o	 	Accelerated filer ý	 	Non-accelerated filer o
(Do not check if a
smaller reporting company)	 	Smaller reporting company o	
          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

          The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $111,535,150 as of June 30, 2014 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 March 12, 2015 was 20,637,217.

INCORPORATION BY REFERENCE

          Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A in connection with the registrant's 2015 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this annual report on Form 10-K. Such proxy statement will be filed with the SEC not later than 120 days after the conclusion of the registrant's fiscal year ended December 31, 2014.

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FATE THERAPEUTICS, INC.

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2014

TABLE OF CONTENTS

 
	 	 
	 	Page	 	
PART I	 	 	 	 	
FORWARD-LOOKING STATEMENTS	 	 	 	 	
Item 1.	 	Business	 	 	2	 	
Item 1A.	 	Risk Factors	 	 	28	 	
Item 1B.	 	Unresolved Staff Comments	 	 	49	 	
Item 2.	 	Properties	 	 	49	 	
Item 3.	 	Legal Proceedings	 	 	50	 	
Item 4.	 	Mine Safety Disclosures	 	 	50	 	
PART II	 	 	 	 	
Item 5.	 	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	 	 	51	 	
Item 6.	 	Selected Financial Data	 	 	53	 	
Item 7.	 	Management's Discussion and Analysis of Financial Condition and Results of Operations	 	 	53	 	
Item 7A.	 	Quantitative and Qualitative Disclosures About Market Risk	 	 	71	 	
Item 8.	 	Financial Statements and Supplementary Data	 	 	72	 	
Item 9.	 	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	 	 	99	 	
Item 9A.	 	Controls and Procedures	 	 	99	 	
Item 9B.	 	Other Information	 	 	99	 	
PART III	 	 	 	 	
Item 10.	 	Directors, Executive Officers and Corporate Governance	 	 	100	 	
Item 11.	 	Executive Compensation	 	 	100	 	
Item 12.	 	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	 	 	100	 	
Item 13.	 	Certain Relationships and Related Transactions, and Director Independence	 	 	100	 	
Item 14.	 	Principal Accounting Fees and Services	 	 	100	 	
PART IV	 	 	 	 	
Item 15.	 	Exhibits and Financial Statement Schedules	 	 	101	 	
SIGNATURES	 	 	102	 	

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FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements, which represent our intent, belief or current expectations, involve risks and uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions. Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, statements about:

•
the initiation, timing, progress and results of our preclinical and clinical studies, and our research and development programs;

•
our ability to obtain and maintain regulatory approval of ProHema and any of our other future product candidates;

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

•
the performance of third parties in connection with the development and manufacture of our product candidates, including third parties conducting our clinical trials as well as third-party suppliers and manufacturers;

•
our ability to develop sales and marketing capabilities, whether alone or with potential collaborators, to commercialize our product candidates, if approved;

•
our ability to successfully commercialize our product candidates, if approved;

•
the potential price and degree of market acceptance of our product candidates;

•
the size and growth of the potential markets for our product candidates and our ability to serve those markets;

•
regulatory developments and approval pathways in the United States and foreign countries for our product candidates;

•
our ability, and the ability of our licensors, to obtain, maintain, defend and enforce intellectual property rights protecting our product candidates, and our ability to develop and commercialize our product candidates without infringing the proprietary rights of third parties;

•
our ability to obtain funding for our operations;

•
the accuracy of our estimates regarding revenues, expenses and capital requirements; and

•
the additional risks and other factors described under the caption "Risk Factors" under Item 1A of this Annual Report on Form 10-K.

        The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future

        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.

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ITEM 1.    Business

General Description of Our Business

        We are a clinical-stage biopharmaceutical company engaged in the development of programmed cellular therapeutics for the treatment of severe, life-threatening diseases. We have built a novel platform to program the function and fate of cells ex vivo  using pharmacologic modulators, such as small molecules. We are focused primarily on developing programmed hematopoietic cellular candidates as therapeutic entities for the treatment of hematologic malignancies, rare genetic disorders, and diseases resulting from the dysregulation of the immune system. We were incorporated in Delaware in 2007, and are headquartered in San Diego, CA.

Our Product Pipeline

        The following table summarizes our programmed cellular therapeutic candidates currently in development and those currently in research:
 	 	 	 	 	
Program	 	Therapeutic Target	 	Status	
Development Programs	 	 	 	 	
ProHema	 	Hematologic	 	Phase 2 (adults)	
FT1050-modulated UCB	 	Malignancies	 	Phase 1b (pediatric)	
ProHema	 	Inherited Metabolic	 	Phase 1b (pediatric)	
FT1050-modulated UCB	 	Disorders	 	 	
Programmed mPB	 	Hematologic	 	IND enablement	
FT1050+FT4145-modulated mPB	 	Malignancies	 	 	

Research Programs	

 	
 	
Programmed Hematopoietic Cells	 	Immune Regulation	 	Preclinical	
hiPSC-derived Hematopoietic Cells	 	Not disclosed	 	Research	
hiPSC-derived Myogenic Progenitor Cells	 	Muscle Regeneration	 	Research	
"UCB" refers to hematopoietic cells within umbilical cord blood.

"mPB" refers to hematopoietic cells within mobilized peripheral blood.

"hiPSC" refers to human induced pluripotent stem cells.

Our Cell Programming Approach

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

        Building upon this well-established medical precedent, the clinical investigation of isolated hematopoietic cells, such as CD34+ cells and T cells, as therapeutic entities for the treatment of human diseases is rapidly expanding. In fact, in the United States alone, over 1,200 clinical trials of hematopoietic cellular therapeutics are currently being conducted, including a growing number of trials with genetically-engineered hematopoietic cells. Many of these clinical trials are investigating potentially

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transformative uses of hematopoietic cellular therapeutics for the treatment of hematologic and solid malignancies, genetic disorders and immunological diseases.

        While advancements in the isolation, expansion, manufacturing and engineering of hematopoietic cells have opened new avenues for their use as therapeutic entities, we believe the function of hematopoietic cells can be pharmacologically optimized to maximize therapeutic benefit. Since our founding, we have been dedicated to programming the function of cells ex vivo  to improve their therapeutic potential. We have built a platform that enables us to systematically and precisely modulate ex vivo  the biological properties of hematopoietic cells. Using advanced molecular characterization tools and technologies, we identify small molecule or biologic modulators that promote rapid and supra-physiologic activation or inhibition of therapeutically-relevant genes and cell-surface proteins, such as those involved in the homing, proliferation and survival of CD34+ cells or those involved in the persistence, proliferation and reactivity of T cells. We apply our deep understanding of the hematopoietic system to rapidly assess and quantify the therapeutic potential of programmed hematopoietic cells in vivo . Applying these capabilities in the settings of malignancies and rare genetic disorders, we aim to develop first-in-kind programmed hematopoietic cellular therapeutics with disease-transforming potential.

        Additionally, we have worked closely with our scientific founders to pioneer the derivation and differentiation of induced pluripotent stem cells, or iPSCs, a potentially disruptive technology to program the fate of cells ex vivo . iPSCs are pluripotent cells that have been reprogrammed through the expression of certain genes and factors, such that the cell's cellular and physiological traits are similar to those of an embryonic stem cell. We use our technology to isolate, genetically engineer, select and characterize iPSCs, at a single-cell level, for clonal expansion. We believe our iPSC platform has the potential to create large quantities of homogeneous cell populations in the hematopoietic lineage, such as CD34+ cells, T cells and natural killer (NK) cells, which can otherwise be limited in quantity, difficult to manufacture, heterogeneous in composition and unoptimized for efficacy. Based on this potential, we believe our iPSC platform may enable the development of a novel class of transformative cellular therapeutics.

Our Strategy

        We seek to develop and commercialize first-in-kind hematopoietic cellular therapeutics for the treatment of severe, life-threatening diseases based on our innovative cell programming approach. The key pillars of our strategy are to:

•
Efficiently develop and commercialize programmed hematopoietic cellular therapeutics addressing key unmet medical needs in allogeneic HSCT.   While over one million HSCT procedures have been performed to date with curative intent, we believe hematopoietic cells administered to patients undergoing HSCT can be therapeutically optimized. Using our cell programming approach, we seek to modulate the biological properties of donor-derived CD34+ cells and T cells ex vivo  to drive long-term therapeutic benefits in vivo . We believe our programmed hematopoietic cellular candidates may significantly improve the curative potential of allogeneic HSCT by addressing major complications that currently contribute to the high morbidity and mortality of the procedure, such as delayed neutrophil engraftment and immune reconstitution, viral infections and graft-versus-host disease, or GvHD. We are developing our product candidates across a wide range of patient ages and a broad spectrum of hematologic malignancies and rare genetic disorders, using cell sources most commonly used in HSCT including umbilical cord blood and mobilized peripheral blood. Due to the rare disease nature of our target indications, we believe any pivotal clinical trials which we conduct will generally require relatively small numbers of patients. Additionally, because HSCT is a highly-specialized procedure performed at a limited number of centers, we intend to build our own focused sales

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and marketing capabilities to commercialize in a cost-efficient manner any products that we may successfully develop.•
Leverage our scientific, clinical and regulatory expertise to build and advance a pipeline of programmed hematopoietic cells as therapeutic entities beyond the allogeneic HSCT setting.   Through the development of our initial product candidates, we have built a leadership position in the identification of pharmacologic modulators that promote rapid and supra-physiologic activation or suppression of therapeutically-relevant genes and cell-surface proteins on CD34+ cells, NK cells, and T cells. Additionally, we have built research, clinical and regulatory affairs teams that are experienced and skilled in the development of novel cellular therapeutics. We are leveraging this expertise to develop a product portfolio of programmed hematopoietic cellular therapeutics for severe, life-threatening diseases, and are currently investigating several attractive product opportunities including programmed CD34+ cells and programmed T cells for the regulation of the immune system. For example, using our screening platform, we have identified a combination of pharmacologic modulators which may enhance immuno-regulatory properties of CD34+ cells by upregulating the gene expression level of PD-L1, a key immunosuppressive protein, by more than 100 fold.

•
Selectively establish strategic research and development partnerships that tap our cell programming approach to maximize the therapeutic potential of hematopoietic cellular therapeutics.   Over 1,200 clinical trials of hematopoietic cellular therapeutics are currently being conducted in the United States, which include ground-breaking approaches for the treatment of cancer, auto-immune diseases, degenerative diseases and genetic disorders. Most of these clinical trials use CD34+ cells or T cells, including genetically engineered cells, as therapeutic entities which have not been programmed ex vivo  to optimize their therapeutic potential. Using our ex vivo  cell programming approach, we believe we have the potential to enhance the in vivo  homing, proliferation and immuno-regulatory potential of CD34+ cells or the in vivo  persistence, proliferation and reactivity of T cells, among other properties, to maximize the therapeutic potential of hematopoietic cellular therapeutics. We seek to collaborate with other companies engaged in the development of hematopoietic cellular therapeutics, tapping our cell programming approach to optimize the therapeutic potential of product candidates.

Our Development Programs

        We believe thatex vivo cell programming can positively affect the biological activity and therapeutic potential of cellsin vivo, and that severe, life-threatening diseases can be addressed through the development of programmed hematopoietic cellular therapeutics. Our initial clinical product candidates are being developed as therapeutic entities for use in allogeneic HSCT.

        Allogeneic HSCT is a well-established procedure that has been performed globally for decades with curative intent in patients with a wide range of hematologic malignancies and rare genetic disorders, including inherited metabolic, immune and blood disorders. The procedure involves transferring donor-derived hematopoietic cells, including hematopoietic stem cells (HSCs) and T cells, to a patient following the administration of chemotherapy and/or radiation therapy. The biological properties of donor-derived CD34+ cells, including HSCs, and T cells each play an essential role in determining outcomes of allogeneic HSCT. Donor-derived HSCs have the unique ability to engraft and reconstitute a new blood and immune system, and donor-derived T cells have an important protective role following a transplant in eliminating residual cancer cells and providing protection against life-threatening infections. The engraftment of donor-derived HSCs is essential for successful reconstitution, and any delay or failure of HSC engraftment leaves a patient severely immuno-compromised and exposed to exceedingly high risk of early morbidity and mortality. Additionally, while the donor-derived T cells impart a critical immunotherapeutic effect, alloreactive T cells can result in a serious complication known as GvHD, where donor-derived T cells recognize antigens on patient's cells as foreign and attack the patient's cells.

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        The number of HSCT procedures has increased steadily over the past two decades—more than 20,000 allogeneic HSCTs are performed annually worldwide. For most patients undergoing allogeneic HSCT, the procedure represents the only remaining therapeutic option available to achieve long-term disease-free remission and/or a functional cure. Disease-free survival rates of approximately 40-50% at two and five-years following HSCT have been reported in multi-center clinical experiences for the treatment of hematologic malignancies. The highest risk of relapse or death occurs during the initial months following the procedure, where the rate of relapse and non-relapse mortality is approximately 30-40% at six-months following HSCT.

Programmed Umbilical Cord Blood for Allogeneic HSCT (ProHema)

        Our lead product candidate, ProHema, is anex vivo programmed hematopoietic cellular therapeutic derived from umbilical cord blood. ProHema is produced by programming the biological properties of CD34+ cells and T cells of umbilical cord blood ex vivo  using the small molecule modulator FT1050 (16,16 dimethyl prostaglandin E2, or dmPGE2). Our proprietary modulation process induces rapid activation of genes involved in the homing, proliferation and survival of HSCs and in the cell cycle, reactivity and anti-viral properties of T cells.

        Prostaglandin E2, or PGE2, was first identified in 2007 as a potent regulator of hematopoiesis by one of our scientific founders, Dr. Leonard Zon of The Children's Hospital Boston. Using a pioneering chemical screening approach in zebrafish embryo, Dr. Zon identified a number of small molecules that regulate processes involved in the development of the hematopoietic system. Dr. Zon subsequently showed that CD34+ cells modulated with dmPGE2 out-compete unmodulated CD34+ cells and preferentially reconstitute the hematopoietic system in a preclinical model of competitive HSCT.

        We are developing ProHema to enable the curative potential of HSCT in patients across a wide range of ages and a broad spectrum of life-threatening malignant diseases and rare genetic disorders. The United States Food and Drug Administration (FDA) has granted orphan designation for ProHema for the enhancement of stem cell engraftment to treat neutropenia, thrombocytopenia, lymphopenia and anemia, and the European Commission has granted orphan designation for ProHema for the treatment of acute myeloid leukemia.

Adult Patients with Hematologic Malignancies

        Our Phase 2 PUMA Study.    We are currently conducting a randomized, controlled, open-label Phase 2 multi-center clinical trial of ProHema in adult subjects undergoing double umbilical cord blood transplantation (dUCBT) for the treatment of hematologic malignancies including acute lymphoblastic leukemia, acute myelogenous leukemia and non-Hodgkin lymphoma, a clinical trial which we refer to as the PUMA ( P roHema in UM bilical cord blood transplant in A dults) study. The PUMA study is designed to enroll 60 subjects, age 15 to 65 years, and is currently being conducted at 11 leading allogeneic HSCT centers in the United States. Eligible subjects are being randomized, at a ratio of 2:1, with approximately 40 subjects expected to receive ProHema plus an unmanipulated cord blood unit, and approximately 20 concurrent control subjects expected to receive a standard dUCBT. Based upon physician choice, subjects are being treated with one of two conditioning regimens, an intense myeloablative regimen (MAC) or a reduced-intensity regimen (RIC), to destroy malignant cells and to prevent rejection of the donor hematopoietic cells. Randomization is being stratified by conditioning regimen. An independent Data Monitoring Committee (iDMC) is providing safety oversight during the conduct of the PUMA study. We expect data on the primary efficacy endpoint from the Phase 2 PUMA study to be available in the second half of 2015.

        The PUMA study is our first clinical investigation of ProHema where the CD34+ cells and T cells of umbilical cord blood are being programmed in a nutrient-rich media, which we refer to as our NRM formulation. Our prior clinical investigations of ProHema utilized a nutrient-free standard cell

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processing media for cell programming, a media which is commonly used throughout the HSCT setting today for the thawing and washing of umbilical cord blood units. We believe, based on a series of preclinical assessments, that the clinical potency and efficacy profile of ProHema may be significantly improved by programming CD34+ cells and T cells in our NRM formulation.

        Multiple clinical endpoints that contribute significantly to the overall morbidity and mortality of allogeneic HSCT are being evaluated in the PUMA study. These clinical endpoints include key measures of the hematopoietic reconstitution and immunotherapeutic potential of ProHema, including time to and incidence of neutrophil and platelet engraftment, rates of engraftment failure, bacterial infections, viral reactivation, GvHD, relapse of underlying disease and overall and disease-free survival. The primary endpoint of the PUMA study is based on a categorical analysis of neutrophil engraftment, and the clinical trial is powered to show with statistical significance that 70% of subjects with neutrophil engraftment in the ProHema treatment arm engraft prior to a pre-specified control day of neutrophil engraftment, which has been established as 26 days for subjects receiving MAC and 21 days for subjects receiving RIC. Complications from delayed or failed neutrophil engraftment following dUCBT are a leading contributor to non-relapse mortality, the risk of which increases several-fold in patients failing to achieve early neutrophil engraftment.

        We initiated enrollment of our PUMA study in March 2014. In December 2014, the PUMA study's iDMC conducted a pre-planned interim safety review. A total of 12 subjects that received ProHema were included in the interim review, which assessed safety, time to engraftment, rates of engraftment failure, infection, GvHD and early mortality. These initial data showed that subjects administered ProHema had an improved median time of neutrophil engraftment and an increased incidence of early neutrophil engraftment, as compared to the pre-specified control values of engraftment. Specifically, eight of 10 ProHema subjects receiving MAC achieved neutrophil engraftment, with a median time to engraftment of 20 days, and one of two ProHema subjects receiving RIC achieved neutrophil engraftment on Day 14. Six of the nine engrafting subjects administered ProHema achieved neutrophil engraftment prior to the applicable pre-specified control value of engraftment. Two early deaths prior to engraftment, which were both attributed to the toxicity of the conditioning regimen received by the subjects, were reported in the ProHema arm, and one subject administered ProHema failed to achieve neutrophil engraftment. Based on its consideration of the data available as well as historical outcomes reported from multi-center clinical experiences, the iDMC determined that ProHema had met established safety criteria and the nature and frequency of the adverse events did not show harm and was consistent with this patient population, and supported continuation of the PUMA study.

        The pre-specified control values of engraftment are based on multi-center reports published in the literature of historical median times to neutrophil engraftment in adult patients undergoing dUCBT in the United States. We plan to utilize the data from the concurrent control subjects in the PUMA study to provide context for validating the pre-specified control values of engraftment and for interpreting other clinical outcomes. As there is no substantive difference in eligibility or in treatment course between the concurrent control arms of our PUMA study and our initial Phase 2 ProHema-03 study described below, our assessment of the concurrent control subjects will include approximately 20 subjects from the concurrent control arm of the PUMA study and the three subjects from the concurrent control arm of the ProHema-03 study.

        If our PUMA trial is successful, we plan to seek additional regulatory guidance with the goal of initiating a registrational trial of ProHema, which may include both adult and pediatric patients undergoing UCBT for hematologic malignancies. Based on the initial regulatory guidance obtained to date, and preliminary statistical power calculations, we believe that a registrational program could consist of a single trial enrolling approximately 200 patients, with time to engraftment of neutrophils, platelets or both, as the primary endpoint to support approval, and that a single trial enrolling both adult and pediatric subjects may be sufficient for approval across both age groups, depending on the results.

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        Our ProHema-03 Study.    In December 2012, we initiated a randomized, controlled, open-label Phase 2 multi-center clinical trial of ProHema in adult subjects undergoing dUCBT for the treatment of hematologic malignancies, a clinical trial which we refer to as our ProHema-03 study. The ProHema-03 study had the same design, subject population, inclusion criteria, conditioning regimens and schedule as the PUMA study, but used a nutrient-free standard cell processing media for the programming of CD34+ cells and T cells of umbilical cord blood. Eight subjects received ProHema plus an unmanipulated cord blood unit and three concurrent control subjects received a standard dUCBT. All subjects were conditioned using a MAC regimen. Seven of eight ProHema subjects achieved neutrophil engraftment, with a median time of engraftment of 28 days, and one subject failed to achieve neutrophil engraftment. All three concurrent control subjects achieved neutrophil engraftment, with a median time of engraftment of 31 days.

        We have continued to follow the subjects in the ProHema-03 study, and we intend to follow such subjects for the two-year period following HSCT. The one-year disease-free survival rate in the ProHema arm was 50%, as compared to 33.3% in the concurrent control arm, and the one-year overall survival rate in the ProHema arm was 50%, as compared to 33.3% in the concurrent control arm. As of January 31, 2015, there was no change in disease-free or overall survival rates from those reported at one-year following HSCT. Additionally, as of January 31, 2015, there are no reports of any subjects experiencing secondary graft failure; one subject in the ProHema arm and one subject in the concurrent control arm experienced Grade III acute GvHD, and one subject in the ProHema arm experienced Grade IV acute GvHD. Adverse events attributed to ProHema were primarily limited to common infusion-related side effects.

        In May 2013, we elected to pause enrollment in our ProHema-03 study, and we notified the FDA of our intent to generate data qualifying an optimized manufacturing process for ProHema using our NRM formulation. In August 2013, we submitted to the FDA an amendment to our Investigational New Drug (IND) application and an amended protocol defining how we planned to resume our Phase 2 clinical investigation of ProHema using our NRM formulation. Specifically, we stated that we planned to enroll approximately 40 subjects using our NRM formulation for the manufacture of ProHema. In March 2014, we submitted to the FDA manufacturing and product data incorporating our NRM formulation for the manufacture of ProHema, and we commenced enrollment of our Phase 2 PUMA study.

        Our ProHema-01 Study.    In September 2011, we completed a controlled, open-label Phase 1b clinical trial of ProHema in adult subjects undergoing dUCBT for the treatment of hematologic malignancies, a clinical trial which we refer to as our ProHema-01 study. All subjects were conditioned using a RIC regimen, and a nutrient-free standard cell processing media was utilized for the programming of CD34+ cells and T cells of umbilical cord blood.

        The ProHema-01 trial consisted of two cohorts of patients with acute leukemia, non-Hodgkin lymphoma and myelodysplastic syndrome: (1) an inactive cohort of nine subjects who received an unmanipulated cord blood unit and a cord blood unit modulated with FT1050 under biologically inactive conditions; and (2) the ProHema cohort of 12 subjects who received ProHema and an unmanipulated cord blood unit. The trial was conducted at the Dana Farber Cancer Institute and the Massachusetts General Hospital, and the results were compared against patient outcomes from a then-current historical control group of 53 adult patients with hematologic malignancies undergoing dUCBT with the same conditioning regimen at these same institutions.

        The primary objective was to evaluate the safety of allogeneic HSCT using ProHema plus an unmanipulated cord blood unit. Secondary objectives of the trial included the assessment of time to

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engraftment and 100-day survival. We observed the following potential clinical benefits in our ProHema-01 trial:

•
The ProHema cohort exhibited a statistically-significant improvement in time to neutrophil engraftment as compared to the historical control group (p=0.043);

•
The disease-free survival rate at Day 100 following HSCT was 100% in the ProHema cohort, as compared to 76% in the historical control group;

•
The cumulative incidence of neutrophil engraftment and the cumulative incidence of platelet engraftment in the ProHema cohort compared favorably to both the inactive cohort and the historical control group; and

•
Cytomegalovirus (CMV) reactivation occurred in only two of 12 subjects (17%) in the ProHema cohort during the one-year period following HSCT, which compares favorably to rates of CMV reactivation reported in the literature.

        The following table shows the results observed in the ProHema-01 trial with respect to the key measures of time to engraftment and rate of failure to achieve neutrophil engraftment:
 	 	 	 	 	 	 	
Cohort	 	Median Time to
Engraftment	 	Rate of Failure to
Achieve Neutrophil
Engraftment	 	
ProHema (n=12)	 	17.5 days	 	 	0	%	
 	 	[range 14 - 31 days]	 	 	 	 	
Inactive (n=9)	 	22.0 days	 	 	11	%	
 	 	[range 14 - 40 days]	 	 	 	 	
Historical (n=53)	 	20.5 days	 	 	6	%	
 	 	[range 13 - 70 days]	 	 	 	 	
        We also evaluated the incidence of GvHD and observed, during the first 100-days following HSCT, there was an 8% incidence of Grade II-IV acute GvHD in the ProHema cohort, as compared to 17% in the historical control group. One subject in the ProHema cohort experienced mild chronic GvHD. The trial met all established safety criteria and demonstrated that ProHema was well tolerated. Adverse events attributed to ProHema consisted of mild to moderate infusion-related events consisting of rash, nausea, chills, flushing, abdominal pain, and cough, all of which are considered common transplant-related side effects. One subject with known coronary artery disease experienced transient myocardial ischemia that resolved promptly after completion of the infusion.

        We followed all subjects in the ProHema cohort for a two-year period following HSCT in accordance with the study protocol, at which time the study was concluded. During the two-year period following HSCT, there were no reports of any subject in the ProHema cohort experiencing secondary graft failure. In addition, the one-year and two-year disease-free survival rates in the ProHema cohort were 58.3% and 41.7%, respectively. The corresponding one and two-year overall survival rates in the ProHema cohort were 75.0% and 58.3%, respectively.

        Additionally, a retrospective analysis of the T cell compartment of subjects from our ProHema-01 study was conducted by the clinical investigators. The assessment revealed that, at Day 100 following HSCT, subjects who received ProHema showed a two-fold increase in the percentage of naïve and early memory T cell fraction within the CD8+ T cell compartment, as compared to subjects who received two unmanipulated cord blood units. Naïve and early memory CD8+ T cell populations are believed to play a key role in promoting immune reconstitution and viral immunity following HSCT. Consistent with these reported immuno-modulatory effects on CD8+ T cells, low rates of viral reactivation were observed in our ProHema-01 study. We believe these findings suggest that ex vivo  programming using

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FT1050 may also enhance the immuno-modulatory properties of T cells, and promote viral immunity and immune reconstitution following HSCT.

Pediatric Patients with Rare Genetic Disorders

        The transformative effect of allogeneic HSCT, and umbilical cord blood transplantation in particular, across a broad spectrum of rare genetic disorders has been demonstrated and published in numerous clinical studies, case series and retrospective analyses of multi-national patient registries. It is estimated that over 50 rare genetic disorders, many of which are life-threatening and lack alternative therapeutic options, have been treated with allogeneic HSCT to date, including lysosomal storage disorders, such as Hurler syndrome, Krabbe disease and metachromatic leukodystrophy; peroxisomal storage disorders, such as adrenoleukodystrophy; hemoglobinopathies, such as sickle cell disease and certain thalassemias; inherited bone marrow failure syndromes, such as Fanconi anemia and Diamond-Blackfan anemia; and inherited immune deficiencies, such as Wiskott-Aldrich syndrome. Since allogeneic hematopoietic cells are sourced from healthy donors, we believe our product candidates have the inherent potential to correct genetic defects across a wide range of rare genetic disorders, whether they are caused by defective genes encoding enzymes, hemoglobin or other essential proteins.

        Inherited metabolic disorders, or IMDs, include a range of genetic enzyme deficiencies that interfere with critical metabolic pathways necessary to maintain normal organ function. In many of these disorders, the enzyme deficiency leads to cellular accumulation of toxic intermediates within the brain, causing progressive neurological damage that cannot be addressed with traditional enzyme replacement therapy. Long-term follow up of children with LSDs and peroxisomal storage disorders who underwent allogeneic HSCT has shown that the progressive worsening of many clinical manifestations can be prevented or substantially reduced through early allogeneic HSCT intervention. These effects have been attributed to the ability of donor-derived HSCs to home to and engraft within the central nervous system (CNS), where they give rise to microglia cells that become a permanent source of enzyme supply through a process called cross-correction.

        We believe the programming of CD34+ cells has the potential to significantly improve the homing of donor-derived cells across the blood-brain barrier, arresting degenerative neurological manifestations and improving the course of disease progression in pediatric patients with rare genetic disorders, such as IMDs. We have demonstrated in sub-lethally irradiated NSG mice that the modulation of human CD34+ cells with FT1050, as compared to unmanipulated CD34+ cells, significantly increases the number of human cells that home to and migrate across the blood-brain barrier into the CNS at 20 hours following administration. Additionally, in in vivo  murine models of allogeneic HSCT, we have demonstrated that the use of FT1050-programmed donor CD34+ cells, as compared to unmanipulated donor CD34+ cells, led to a statistically-significant increase both in the engraftment of donor CD34+ cells (p=0.008) and in the donor-derived expression of iduronidase, the gene that is defective in patients with Hurler syndrome, in the brain (p=0.018) at eight weeks following administration.
 	 	 	
CNS Engraftment	 	Enzyme mRNA in CNS	

 	

 	
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        Our Phase 1b PROVIDE Study.    During the first half of 2015, we plan to initiate an open-label Phase 1b multi-center clinical trial of ProHema in pediatric subjects undergoing single umbilical cord blood transplantation (sUCBT) for the treatment of IMDs, a clinical trial which we refer to as the PROVIDE ( PRO Hema e V aluation for the treatment of I nherited metabolic D isord E rs) study. The PROVIDE trial is designed to enroll up to 12 subjects with various forms of IMDs, between the ages of 1 and 18, at up to three leading pediatric HSCT centers in the United States. The study inclusion criteria allow for the enrollment of pediatric subjects with sixteen different types of IMDs, including Hurler and Hunter syndromes, Krabbe disease and various other leukodystrophies, among others. While the primary endpoint of the PROVIDE study is safety as assessed by neutrophil engraftment, we plan to follow subjects for a two-year period following HSCT and regularly conduct a series of neuro-imaging and neuro-cognitive assessments to explore the potential of the programmed hematopoietic cells to provide long-term replacement of the otherwise deficient enzyme to the CNS. Subject to commencing enrollment in accordance with our plans, we expect to report initial topline data from our PROVIDE study in 2015.

Pediatric Patients with Hematologic Malignancies

        Each year, over 3,500 children in the United States are diagnosed with leukemia, many of whom may ultimately require HSCT. For pediatric patients, the standard of care in umbilical cord blood transplantation for the treatment of hematologic malignancies utilizes a single cord blood unit. While the cell dose received by a pediatric patient from a single cord blood unit can be sufficient, data suggest that pediatric patients undergoing sUCBT are at high risk for experiencing delayed engraftment, graft failure and transplant-related morbidity and mortality.

        Our Phase 1b PROMPT Study.    In April 2014, the FDA permitted our IND amendment to go into effect for the clinical development of ProHema using our NRM formulation in pediatric patients undergoing sUCBT following myeloablative conditioning for the treatment of various hematologic malignancies, such as acute lymphoblastic leukemia and acute myeloid leukemia, a clinical trial which we refer to as the PROMPT ( PRO Hema for the treatment of hematologic M alignancies in P edia T ric patients) study. The PROMPT study is designed to enroll up to 18 subjects, between the ages of 1 and 18, at three leading pediatric HSCT centers in the United States. The primary endpoint of the PROMPT study is safety as assessed by neutrophil engraftment. The study will also evaluate various parameters of efficacy, including additional measures of neutrophil engraftment, platelet engraftment, rates of engraftment failure, GvHD, serious infections, and disease-free and overall survival. We are currently screening subjects for enrollment in our Phase 1b PROMPT study, and data on the primary endpoint is expected in the second half of 2015.

        Our ProHema-02 Study.    Our decision to conduct a Phase 1b clinical trial of ProHema in pediatric subjects undergoing sUCBT for hematologic malignancies was supported by a Phase 1 clinical trial that we conducted to determine safety in the setting of sUCBT in adult subjects with hematologic malignancies, a clinical trial which we refer to as the ProHema-02 trial. Qualifying subjects received a single ProHema cord blood unit following reduced-intensity conditioning. The primary endpoint of the trial was safety, and we analyzed a range of engraftment measures as well as rates of GvHD, relapse and survival. Of the eight subjects enrolled, six subjects, ages 39-63 years (median 43.5 years), were evaluable. Four of the six evaluable subjects engrafted at Days 17, 19, 22 and 37, and two subjects experienced primary graft failure. We followed all evaluable subjects for a one-year period following HSCT, at which time the study was concluded. During the one-year period following HSCT, there were no reports of any subject experiencing secondary graft failure. All four engrafting subjects were alive at Day 100, and two of the four engrafting subject were alive at one year, following HSCT. There were no reported incidents of acute or chronic GvHD. Adverse events attributed to ProHema were limited to common transplant-related side effects.

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Programmed Mobilized Peripheral Blood for Allogeneic HSCT

        Mobilized peripheral blood (mPB) is the predominant cell source used in HSCT. While the use of mPB is associated with faster rates of neutrophil and platelet engraftment compared to other cell sources, approximately 35-50% of patients develop severe viral infections, such as CMV infection, within the first 100 days following HSCT and approximately 50% of patients develop acute GvHD within the first 180 days following HSCT. We believe our cell programming approach has the potential to mitigate these T cell-mediated complications and improve outcomes in patients undergoing HSCT with mPB as a cell source.

        At the 56th Annual Meeting and Exposition of the American Society of Hematology in December 2014, we presented data showing that a newly-identified small molecule modulator, referred to as FT4145, synergizes with FT1050 to promote the supra-physiologic activation of genes implicated in the cell cycle, immune tolerance and anti-viral properties of T cells, as well as in the survival, proliferation and engraftment potential of CD34+ cells. Specifically, the programming of CD34+ cells with FT1050 and FT4145 resulted in a 60-fold increase in CXCR4 gene expression levels and a statistically-significant increase in engraftment as compared to unmodulated cells. Additionally, T cells programmed with FT1050 and FT4145 were found to have a 66% reduction of cell-surface protein expression of ICOS, a key T cell activation marker, and a statistically-significant reduction in proliferation rates as compared to unmodulated cells. We are currently preparing for an IND application for FT1050-FT4145 programmed mobilized peripheral blood, which we plan to submit to the FDA in 2015, to support the initiation of a clinical trial to assess our programmed mobilized peripheral blood candidate in adult subjects undergoing allogeneic HSCT for the treatment of hematologic malignancies.

Nutrient-Rich Media Formulation

        We have incorporated our NRM formulation into all of our clinical development programs for ProHema, including our PUMA, PROMPT and PROVIDE studies. In the conduct of our ProHema-01, ProHema-02 and ProHema-03 clinical trials of ProHema, we utilized a nutrient-free standard cell processing media for cell programming, a media which is commonly used throughout the HSCT setting today for the thawing and washing of umbilical cord blood units. During the second quarter of 2013, we completed in vitro  and animal studies demonstrating that the clinical potency and efficacy profile of ProHema may be significantly improved by programming the biological properties of CD34+ cells and T cells of umbilical cord blood in a nutrient-rich processing media. Using our NRM formulation, as compared to the use of nutrient-free standard cell processing media, we have shown that CD34+ cells programmed with FT1050 had an 8-fold increase in CXCR4 gene expression and a statistically significant increase in cell-surface protein expression of CXCR4, a key receptor implicated in the homing of HSCs to the bone marrow niche (p<0.05); and ex vivo  programmed CD34+ cells exhibited a more than two-fold improvement in HSC engraftment at 12-weeks post-transplant in a xenograft mouse study (p=0.0005). We believe that the clinical potency and efficacy profile of ProHema may be significantly improved by programming CD34+ cells and T cells in our NRM formulation.

Our Research Programs

        We seek to leverage our scientific, clinical and regulatory expertise with ProHema to build a pipeline of programmed CD34+ cells and programmed T cells as therapeutic entities for use beyond the HSCT setting. We have built a leadership position in the identification of pharmacologic modulators, including combinations of modulators, that promote rapid and supra-physiologic activation or inhibition of therapeutically-relevant genes and cell-surface proteins on CD34+ cells and T cells. Additionally, our patent-protected iPSC technology allows us to engineer and program the fate of cells ex vivo , and we have demonstrated the potential to create large quantities of homogeneous cell populations, including hematopoietic cells and myogenic progenitor cells, that can otherwise be limited in quantity, difficult to manufacture, heterogeneous in composition and unoptimized for efficacy.

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Programmed Hematopoietic Cells

        We are currently investigating several attractive opportunities for programmed hematopoietic cellular candidates with disease-transforming potential, including programmed CD34+ cells and programmed T cells for the regulation of the immune system. Using our screening platform, we have identified a triple modulator combination of pharmacologic modulators that programs human CD34+ cells to express high levels of PD-L1, a key immunosuppressive protein. The role of the PD-1/PD-L1 pathway is being explored in the field of cancer immunotherapy and the recent clinical success of PD-1 checkpoint inhibitors to dramatically enhance the ability of T cells to eliminate cancer cells provides support for the potent immunosuppressive potential of PD-L1 expression. We are exploiting PD-L1 expression to limit the activity of activated T cells arising from an inflammatory or auto-immune response. Using a combination of three modulators, we have increased by greater than 100-fold the gene expression levels of PD-L1 on CD34+ cells during a transient ex vivo modulation. Additionally, CD34+ cells programmed with the three-modulator combination have been shown to significantly reduce the proliferation rates of activated T-cells using in vitro assays, as compared to unmodulated HSCs. The Company is currently investigating the in vivo  therapeutic potential of PD-L1 programmed CD34+ cells to selectively home to sites of, and suppress, T cell proliferation and cytokine production. We aim to nominate an additional programmed hematopoietic cellular candidate for further development in 2015.

iPSC-derived Cellular Therapeutics

        We believe iPSC technology has the potential to enable the next frontier in the development of cellular therapeutics. The seminal discovery that it is possible to reprogram the fate of fully-differentiated human cells ex vivo  through the expression of certain genes and factors, such that the reprogrammed cell's cellular and physiological traits are similar to those of an embryonic stem cell, is one of the most remarkable scientific breakthroughs of the past decade and was recognized with the 2012 Nobel Prize in Science and Medicine. The advent of iPSCs, with their capacity to be cultured and expanded indefinitely in vitro  and to serve as a potentially unlimited cell source for differentiation into specialized cell types, introduces a new and potentially disruptive strategy for modeling human disease and developing innovative cellular therapeutics.

        In collaboration with two of our Scientific Founders, Dr. Rudolf Jaenisch of the Whitehead Institute for Biomedical Research and Dr. Sheng Ding of the Gladstone Institute at UCSF, we have developed a proprietary, small molecule-enhanced iPSC platform. We believe our iPSC platform can enable the development of entirely new classes of autologous, allogeneic, and genome-edited cellular therapeutics with disease-transforming potential. Our patent-protected iPSC technology enables the isolation, genetic-engineering, selection and characterization of pluripotent cells, at the single-cell level, for clonal expansion. Additionally, we have demonstrated the potential to create large quantities of homogenous cell populations in the hematopoietic lineage, such as CD34+ cells, T cells and NK cells, which can otherwise be limited in quantity, difficult to manufacture, heterogeneous in composition and unoptimized for efficacy. We are currently applying our iPSC platform to the research and development of iPSC-derived cellular therapeutics for the treatment of hematologic, immunologic and skeletal muscle diseases and disorders.

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

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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 we are prepared to file additional patent applications if 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 March 6, 2015, our intellectual property portfolio is currently composed of 107 issued patents, 148 patent applications that we license from academic and research institutions and 53 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 our product candidates, including ProHema, our cell programming approach and our iPSC technology. We believe that we have a significant intellectual property position and substantial know-how relating to the programming of hematopoietic cells and to iPSC technology.

        We cannot be sure that patents will be granted with respect to any of our 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 the Programming of Hematopoietic Cells

        As of March 6, 2015, we own eight families of pending U.S. and foreign patent applications covering the programming of hematopoietic cells. This portfolio includes 24 pending applications relating to ProHema and other therapeutic compositions of hematopoietic cells that have been pharmacologically-modulated to enhance their therapeutic properties, and methods of manufacturing their cellular compositions. Applications in this portfolio include claims covering (i) therapeutic compositions of human hematopoietic cells that have been programmed ex vivo  with one or more agents, such as a prostaglandin agonist, to guide their fate and optimize their therapeutic function in vivo  and (ii) methods of improving HSCT and methods of treating patients requiring hematopoietic reconstitution, as well as disclosures of methods for preparing cell populations for HSCT. Our portfolio also includes applications relating to cell culture media, including our NRM formulation, for improved processing and programming of cells ex vivo  and a cell potency assay for rapidly assessing and quantifying the biological function and therapeutic potential of programmed cell populations. Any U.S. patents issued from these applications will have statutory expiration dates between 2030 and 2034.

        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 March 6, 2015, we currently have exclusive rights to 20 issued patents and 23 pending patent applications in the United States and worldwide relating to methods for promoting tissue growth or regeneration (including the reconstitution of the hematopoietic system) using modulators that up-regulate the prostaglandin signaling pathway or its downstream mediators. These patent rights consist of issued U.S. patents (including U.S. Patents 8,168,428 and 8,563,310) claiming methods for promoting HSC engraftment and reconstitution through the ex vivo  modulation of HSCs using FT1050, including HSCs obtained from cryopreserved cord blood, bone marrow and mobilized peripheral blood. Pending applications in the United States and foreign jurisdictions are directed to therapeutic compositions of HSCs derived from cord blood, wherein the cells have been modulated by increasing prostaglandin activity, methods of preparing these

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compositions, and methods of promoting hematopoietic reconstitution, expansion and self-renewal using modulators that increase prostaglandin signaling activity. Any 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 patent applications from the Indiana University Research and Technology Corporation claiming methods of enhancing HSCT procedures by altering prostaglandin activity in HSCs and methods of enhancing viral transduction efficiency in the genetic engineering of stem cells including HSCs. These applications describe methods of increasing mobilization of stem cells from a stem cell donor, and methods for increasing HSC homing and engraftment in a stem cell transplant recipient. One family of applications is directed to preferentially modulating certain receptors present on HSCs to increase the therapeutic potential of such cells for homing and engraftment. Claims in these applications specifically cover the modulation of umbilical cord blood by altering prostaglandin activity and methods for increasing viral transduction efficiency for gene therapy. These applications are currently pending in the United States and in certain foreign jurisdictions, and U.S. patents, if issued, from the applications could have terms expiring in 2029 or 2030.

Intellectual Property Relating to iPSC Technology

        As of March 6, 2015, we own three patent families with applications pending in the US and internationally directed to programming the fate of somatic cells ex vivo , including applications related to our platform for industrial-scale iPSC generation and applications related to differentiation of iPSCs into specialized cells with therapeutic potential. These applications cover novel methods of reprogramming and our proprietary small molecule-enhanced cell culture system which enables highly-efficient iPSC derivation, selection, engineering, characterization and expansion while maintaining high quality, homogeneous cells. Any patents issued from these applications will expire on dates ranging from 2031 to 2037.

        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 pluripotent cells from somatic cells and, as of March 6, 2015, includes six issued U.S. patents (including U.S. Patents 8,071,369 and 7,682,828) 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 human 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 (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 are critical for inducing the generation, and maintaining the pluripotency, of iPSCs, and compositions and methods of using the small molecule. Any issued patents and any patents that may issue from patent applications pending in the US and internationally in this portfolio will have statutory expiration dates ranging from 2026 to 2032.

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Our Material Technology License Agreements

Children's Medical Center Corporation

        In May 2009, we entered into a license agreement with Children's Medical Center Corporation, or 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.

        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.

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.

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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.

The Scripps Research Institute

        We have entered into various license agreements with The Scripps Research Institute, or 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, or 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 $1.75 million under each of the TSRI License Agreements. We will also be required to

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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.

Manufacturing

        We are responsible for ensuring consistent manufacture in compliance with regulatory requirements as necessary for marketing approval. We do not own or operate any of our own manufacturing facilities. Other than small amounts of materials that we may synthesize ourselves for preclinical testing, we currently rely, and expect to continue to rely, on third parties for the manufacture of our required materials, including our clinical materials and product candidates.

        ProHema is a composition ofex vivo programmed human cord blood cells. ProHema is produced by treating qualified human umbilical cord units with FT1050 in a multi-step programming process that is performed on the day of HSCT in relative close proximity to the patient, such that ProHema may be administered within two hours after manufacture. Currently, the manufacture of ProHema is performed at clinical cell processing facilities operated by or affiliated with our clinical sites. The manufacturing process consists largely of a closed production environment. We aim to continue to close such process to further standardize the manufacture of ProHema across clinical cell processing facilities. In the future we may manufacture ProHema at facilities operated by us, by transplant centers, or by third parties.

        Human cord blood cells are used as the starting cellular source material for the manufacture of ProHema. Cryopreserved cord blood units, or CBUs, meeting clinical protocol criteria are identified and sourced by the HSCT centers through online search facilities that are able to identify potentially suitable CBUs from cord blood banks around the world, based upon a patient's human leukocyte antigen type and cell dose requirements. Other components used in the manufacture of ProHema include our NRM formulation as well as disposable materials, such as bags and tubing sets. To date, we have obtained all components required for the manufacture of ProHema, including FT1050 and our NRM formulation, 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 components used in the manufacture of ProHema.

Marketing & Sales

        Because HSCT is a highly-specialized procedure performed at a limited number of centers, we intend to commercialize any products that we may successfully develop. We currently have limited 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 products also may include the use of strategic partners, distributors, a contract sales force or the establishment of our own

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commercial infrastructure. We plan to further evaluate these alternatives as we approach approval for one of our product candidates.

Government Regulation

        In the United States, the FDA regulates biological products under the Federal Food, Drug, and Cosmetic Act, or FDCA, and the Public Health Service Act, or 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. 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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completion of nonclinical laboratory and animal tests according to good laboratory practices, or GLPs, and applicable requirements for the humane use of laboratory animals or other applicable regulations;

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submission to the FDA of an IND application which must become effective before human clinical trials may begin;

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performance of adequate and well-controlled human clinical trials according to the FDA's regulations commonly referred to as good clinical practices, or GCPs, and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the proposed biological product or drug for its intended use or uses;

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for a biological product, submission to the FDA of a Biologics License Application, or BLA, for marketing approval that includes substantive evidence of safety, purity, and potency from results of nonclinical testing and clinical trials, and, for a drug, submission of a New Drug Application, or NDA, that includes substantive evidence of the product's safety and efficacy;

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satisfactory completion of an FDA pre-approval inspection of manufacturing facilities where the product is produced to assess compliance with good manufacturing practices, or GMPs, to assure that the facilities, methods and controls are adequate, and, if applicable, the FDA's current good tissue practices, or GTPs, for the use of human cellular and tissue products to prevent the introduction, transmission or spread of communicable diseases;

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potential FDA audit of the nonclinical study sites and clinical trial sites that generated the data in support of the BLA or NDA; and

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FDA review and approval, or licensure, of the BLA and review and approval of the NDA which must occur before a biological product and a drug can be marketed or sold.

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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, or 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.

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

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Phase 1—The investigational product is initially introduced into healthy human subjects and tested for safety. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients. These trials may also provide early evidence on effectiveness.

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Phase 2—These trials are conducted in a limited number of patients in the target population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.

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Phase 3—Phase 3 trials are undertaken to provide statistically significant evidence of clinical efficacy and to further evaluate dosage, potency, and safety in an expanded patient population at multiple clinical trial sites. They are performed after preliminary evidence suggesting effectiveness of the product has been obtained, and are intended to establish the overall benefit-risk relationship of the investigational product, and to provide an adequate basis for product approval and labeling.

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        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.

        Typically, if a product is intended to treat a chronic disease, as is the case with ProHema, 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 GMP 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.

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, or 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 beginning on October 1, 2014 and in effect through September 30, 2015, the user fee for an application requiring clinical data, such as a BLA and an NDA, will be

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$2,335,200 for fiscal year 2015. PDUFA also imposes an annual product fee for biologics and drugs ($110,370 for fiscal year 2015), and an annual establishment fee ($569,200 for fiscal year 2015) on facilities used to manufacture prescription biologics or drugs. 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. 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 GMPs 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 GMP 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 GTPs. FDA regulations also require tissue establishments to register and list their human cells, tissues, and cellular and tissue based products, or 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.

        The FDA also has authority to require a Risk Evaluation and Mitigation Strategy, or 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

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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.

        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

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

        The Food and Drug Administration Safety and Innovation Act of 2012, or FDASIA, also amended the FDCA to require 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.

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, or USPTO, 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, or ANDA, which relies on the preclinical and clinical testing previously conducted for a drug approved under an NDA, known as the reference listed drug, or 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.

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        An abbreviated approval pathway for biological products shown to be similar to, or interchangeable with, an 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, or 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.

        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.

FDA Post-Approval Requirements

        FDA regulation of biological products and drugs continues after approval, particularly with respect to GMP. Other post-approval requirements applicable to biological products and drugs include record-keeping requirements, reporting of adverse effects, reporting updated safety and efficacy information, and complying with electronic record and signature requirements. After a BLA is approved, the BLA holder must report GMP deviations that may affect the identity, potency, purity and overall safety of a distributed product, and the product also may be subject to official lot release. As part of the manufacturing process, the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer's tests performed on the lot. The FDA also may perform certain confirmatory tests on lots of some products, such as viral vaccines, before releasing the lots for distribution by the manufacturer. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and effectiveness of biological products.

        Discovery of previously unknown problems or the failure to comply with the applicable regulatory requirements, by us or our suppliers, may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. FDA sanctions include refusal to approve pending applications, suspension or revocation of an approval, clinical hold, warning or untitled letters, 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.

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        Biological product and drug manufacturers and other entities involved in the manufacture and distribution of approved biological products and drugs are required to register their facilities with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with GMPs and other laws. In addition, changes to the manufacturing process or facility generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

Labeling, Marketing and Promotion

        The FDA closely regulates the labeling, marketing and promotion of biological products and drugs, including direct-to-consumer advertising, promotional activities involving the internet, and industry-sponsored scientific and educational activities that are not independent of the influence of the supporting company. While doctors are free to prescribe any product approved by the FDA for any use, a company can only make claims relating to safety and efficacy of a biological product or drug that are consistent with FDA approval, and the company is allowed to market a biological product or drug only for the particular use and treatment approved by the FDA. In addition, any claims in product advertising or promotion must be appropriately balanced with important safety and risk information and otherwise be adequately substantiated. Failure to comply with these requirements can result in adverse publicity, untitled or warning letters, corrective advertising, injunctions, potential civil and criminal penalties and exclusion from government healthcare programs.

Orphan Designation

        The FDA has granted orphan designation for ProHema for the enhancement of stem cell engraftment to treat neutropenia, thrombocytopenia, lymphopenia and anemia, and the European Commission has granted orphan designation for ProHema for the treatment of acute myeloid leukemia. 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 if the company with the orphan product exclusivity is unable to meet market demand. 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, or PREA, 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

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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. FDASIA 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. By its terms, PREA does not apply to any biological product or drug for an indication for which orphan designation has been granted, unless the FDA issues regulations saying otherwise. Because the FDA has not issued any such regulations, submission of a pediatric assessment is not required for an application to market a product for an orphan-designated indication.

Anti-Kickback and False Claims Laws

        In the United States, the research, manufacturing, distribution, sale and promotion of biological products and drugs are potentially subject to regulation by various federal, state and local authorities in addition to the FDA. For example, sales, marketing and scientific/educational grant programs must comply with the Anti-Kickback Statute, as amended, the federal False Claims Act, as amended (the False Claims Act), the privacy regulations promulgated under the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

        In the United States, we are subject to complex laws and regulations pertaining to healthcare "fraud and abuse," including, but not limited to, the Anti-Kickback Statute, the False Claims Act, and other state and federal laws and regulations. The Anti-Kickback Statute makes it illegal for any person, including a biological product or drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase or order of an item for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties, and exclusion from participation in federal healthcare programs. In addition, many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to the referral of patients for healthcare services reimbursed by any insurer, not just federal healthcare programs such as Medicare and Medicaid. Due to the breadth of these federal and state anti-kickback laws and the potential for additional legal or regulatory change in this area, it is possible that our future sales and marketing practices or our future relationships with physicians might be challenged under anti-kickback laws, which could harm us. Because we intend to commercialize products that could be reimbursed under a federal healthcare program and other governmental healthcare programs, we plan to develop a comprehensive compliance program that establishes internal controls to facilitate adherence to the rules and program requirements to which we will or may become subject.

        The False Claims Act prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including biological products and drugs, that are false or fraudulent. Manufacturers can be held liable under these laws if they are deemed to "cause" the submission of false or fraudulent claims

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by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim, and the potential for exclusion from participation in federal healthcare programs. A False Claims Act violation may also implicate various federal criminal statutes. In addition, private individuals have the ability to bring actions under the False Claims Act and certain states have enacted laws modeled after the False Claims Act.

        There are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. In addition, a federal law requires manufacturers of biological products and drugs that are reimbursable under Medicare, Medicaid, and the Children's Health Insurance Program to track and report to the federal government certain payments made to physicians and teaching hospitals made in the previous calendar year. Many of these laws are evolving and may contain ambiguities as to what is required for compliance or the penalties for non-compliance.

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.

Competition

        The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technology, development experience and scientific knowledge 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. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

        Many of our competitors have substantially greater financial, technical and human resources. Accordingly, our competitors may be more successful in developing or marketing products and technologies that are more effective, safer or less costly than those that we develop. Additionally, our competitors may obtain regulatory approval for their products more rapidly and may achieve more widespread market acceptance.

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.

Employees

        As of December 31, 2014, we employed 50 full-time employees, including 23 in research and development, 17 in clinical development and regulatory affairs and 10 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.

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Corporate Information

        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 the following marks referred to in this document: Fate Therapeutics®, our corporate logo and ProHema®. 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.

        On October 4, 2013, we completed our initial public offering. We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. We would cease to be an emerging growth company on the date that is the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) December 31, 2018; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Information about Segments and Geographic Areas

        In accordance withThe Financial Accounting Standards Board (or FASB) Accounting Standards Codification, or ASC, Topic 280, Segment Reporting,  we have determined that we operate as one operating segment. Decisions regarding our overall operating performance and allocation of our resources are assessed on a consolidated basis. Our operations and assets are predominantly located in the United States.

Available Information

        We post our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on the Investors and Media section of our public website (www.fatetherapeutics.com) as soon as 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. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

PART II. OTHER INFORMATION

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

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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 Development and Regulation of Our Product Candidates

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 clinical development, including our lead product candidate, ProHema, which is currently in Phase 2 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 and efficacy profile necessary to support further preclinical study, clinical development or regulatory approval.

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

•
determining that a product candidate is ineffective or causes harmful side effects during preclinical studies or clinical trials;

•
difficulty establishing predictive preclinical models for demonstration of safety and efficacy of a product candidate in one or more potential therapeutic areas for clinical development;

•
difficulties in manufacturing a product candidate, including the inability to manufacture a product candidate in a sufficient quantity, suitable form, or in a cost-effective manner, or under processes acceptable to the FDA for marketing approval;

•
the proprietary rights of third parties, which may preclude us from developing or commercializing a product candidate;

•
determining that a product candidate may be uneconomical to develop or commercialize, or may fail to achieve market acceptance or adequate reimbursement;

•
our inability to secure strategic partners which may be necessary for advancement of a product candidate into clinical development or commercialization; or

•
our prioritization of other product candidates for advancement.

        Additionally, we will only 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 the product candidate is manufactured in accordance with regulatory requirements, is safe and 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 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 processes are sufficient to support approval. 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 processes or facilities 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, which will harm our business, prospects, financial condition and results of operations.

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

        Developing therapeutic products, including conducting preclinical studies and clinical trials of cellular therapeutics, is expensive. Based upon our currently expected level of operating expenditures, we believe that we will be able to fund our operations for at least the next twelve months. However, our resources will likely be insufficient to conduct research and development programs to the full extent currently planned. We will require substantial additional capital to conduct the research and development and clinical and regulatory activities necessary to bring our product candidates to market. Our future capital requirements will depend on many factors, including, but not limited to:

•
the progress, results, timing and costs of our clinical studies;

•
continued progress in our research and development programs, including the preclinical studies and clinical trials of our product candidates;

•
our ability to initiate, and the progress, results, size, timing and costs of, additional future clinical trials of our product candidates that will be necessary to support any application for regulatory approval;

•
our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

•
the cost of commercialization activities and arrangements, including the commercial manufacturing of our product candidates; and

•
the establishment of strategic arrangements and alliances with third-party collaborators to advance the research, development and commercialization of therapeutic products.

        We cannot guarantee that additional capital will be available in sufficient amounts or on terms acceptable to us, if at all. We intend to seek additional funding through the public or private sales of our securities, including equity securities. Any additional equity financings will be dilutive to our stockholders and any additional debt financings may involve operating covenants that restrict our business.

        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, operating results, prospects, and market price of shares of our common stock.

Interim results from ongoing clinical trials and results from preclinical studies and earlier clinical trials are not predictive of our ongoing 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. For example, although an independent data monitoring committee, or iDMC, supported the continuation of our Phase 2 PUMA study of ProHema based upon two scheduled interim data reviews, the PUMA study has not been completed and the interim data reviews, which were based upon data from a limited number of subjects who are still under evaluation and subject to ongoing safety surveillance, may not be predictive of safety or efficacy of ProHema in the final analysis of the PUMA study. In addition, although the results of our completed Phase 1b ProHema-01 study in adults with hematologic malignancies undergoing double umbilical cord blood transplant demonstrated human proof-of-concept,

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we may not achieve or duplicate these results in the PUMA study or in planned additional clinical trials of ProHema, including the PROMPT or PROVIDE studies in pediatric patients.

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

•
we may not demonstrate the potency and efficacy benefits observed in preclinical studies;

•
our efforts to standardize and automate the manufacture of ProHema may adversely affect its safety, purity, potency or efficacy;

•
the expansion in the number of participating clinical centers, which are independent institutions and are more geographically dispersed, may introduce additional variability and complexity in conducting clinical trials and in evaluating clinical results;

•
deviations in the manufacture of ProHema by cell processing facilities at clinical centers participating in clinical trials that we conduct;

•
use of our product candidates in pediatric patients may result in side effects or other adverse events not observed in adult patients;

•
differences in study design, including differences in conditioning regimens, eligibility criteria, and patient populations;

•
safety or adverse events in patients enrolled in current or future clinical trials; and

•
later-stage trials that enroll a larger number of patients may not produce the same or similar results as earlier trials with fewer patients.

        Results from preclinical testing and early clinical trials are not necessarily predictive of the results of later clinical trials, and interim results from any clinical trial do not necessarily predict final results of that trial. Even if our ongoing clinical trials are successful, we will likely need to conduct additional clinical trials, including registrational trials and trials in additional patient populations or under different treatment 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. Our failure to meet the requirements to support marketing approval for our product candidates in our ongoing and future clinical trials would substantially harm our business and prospects.

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

        We have not completed the clinical trials necessary to support an application for approval to market any of our product candidates. We may experience delays in our ongoing clinical trials, and we do not know whether we will be able to initiate, enroll patients in, or complete, our planned clinical trials on time, if at all. Our current and future clinical trials of our product candidates may be delayed, unsuccessful or terminated as a result of many factors, including factors related to:

•
difficulties in identifying eligible patients for participation in our clinical trials due to our focus on the development of product candidates for the treatment of rare diseases;

•
difficulties enrolling a sufficient number of suitable patients to conduct our clinical trials, including difficulties relating to patients enrolling in studies with agents sponsored by our competitors;

•
difficulties in achieving study endpoints, demonstrating efficacy and safety, and completing data analysis in clinical trials for any of our product candidates;

•
the occurrence of unexpected safety issues or adverse events in any current or subsequent clinical trial of any product candidate;

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•
securing and maintaining the support of clinical investigators and investigational sites, and obtaining institutional review board, or IRB, approval at each site for the conduct of our clinical trials;

•
governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy or guidelines;

•
reaching agreement on acceptable terms with third-party service providers and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different service providers and clinical trial sites;

•
failure of clinical trial sites to manufacture certain of our product candidates consistently in accordance with our protocol-specified processes at their cell processing facilities for use in our clinical trials;

•
our failure, or the failure of third-party service providers or clinical trial sites, to ensure the proper and timely conduct and analysis of our clinical trials;

•
reaching agreement on clinical trial design and parameters with investigators, institutional review boards and regulatory authorities;

•
obtaining sufficient quantities of critical reagents and other materials necessary for the manufacture of any product candidate;

•
data monitoring committees recommending suspension, termination or a clinical hold for various reasons, including concerns about patient safety;

•
the serious, life-threatening diseases of the patients in our clinical trials, who may die or suffer adverse medical events for reasons that may not be related to our product candidates;

•
failure of patients to complete clinical trials due to safety issues, side effects, or other reasons; and

•
approval of competitive agents that may materially alter the standard of care or otherwise render our products or clinical trial designs obsolete.

        If we experience delays in the completion of any clinical trial 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 commencing 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 commencement 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 and results of operations.

Our clinical development of ProHema could be substantially delayed if the FDA requires us to conduct unanticipated studies or trials or imposes other requirements or restrictions.

        The FDA may require us to generate additional preclinical, product or clinical data, including data supporting the use of our NRM formulation, or our reduced volume formulation for pediatric use, as a condition to continuing and completing the PUMA and PROMPT studies, or to initiating and completing the PROVIDE study or any other subsequent clinical trials, of ProHema. Additionally, the FDA may in the future have comments, or impose requirements, on our protocols for conducting the PUMA, PROMPT, or PROVIDE studies, or any other subsequent clinical trials, of ProHema. Any requirements to generate additional data or redesign or modify our protocols, or other additional comments, requirements or impositions by the FDA, may cause delays in the conduct of the PUMA study, the PROMPT study or the PROVIDE study, or other subsequent clinical development activities

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for ProHema, and could require us to incur additional development costs and resources, seek funding for these increased costs or resources or delay our timeline for, or cease, our clinical development activities for ProHema, or could create uncertainty and additional complexity in our ability to obtain regulatory approval for ProHema.

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

•
be delayed in obtaining, or unable to obtain, regulatory approval for our product candidates;

•
obtain approval for indications or patient populations that are not as broad as intended or desired;

•
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings or contraindications;

•
be required to perform additional clinical studies to support approval or be subject to additional post-marketing testing requirements; or

•
have regulatory authorities withdraw their approval of the product or impose restrictions on its use.

Our plans for clinical 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 processes or if we are required to change our manufacturing processes to comply with regulatory requirements.

        The requirement that ProHema be manufactured in close proximity to transplant centers within a short period of time before transplantation may present unprecedented complexities associated with ensuring consistent manufacture in compliance with regulatory requirements as necessary for marketing approval. The FDA has indicated that we will need to standardize the process for manufacturing ProHema, and that ProHema used in registrational clinical trials must be manufactured in compliance with FDA regulatory requirements. In addition, the FDA may impose additional requirements on our processes for the manufacture of ProHema or our other product candidates.

        While ProHema is currently manufactured at clinical cell processing facilities operated by or affiliated with our clinical sites, we may be required to identify alternative processes for the manufacture of ProHema to comply with applicable regulatory requirements, and in the future we may manufacture ProHema at facilities operated by us, by transplant centers, or by third parties. Any requirements to modify our manufacturing processes, and any delays in, or inability to, establish manufacturing processes acceptable to the FDA could require us to incur additional development costs or result in delays to our clinical development plans, or could create uncertainty and additional complexity in our ability to obtain regulatory approval for ProHema. Any such events could delay or prevent our ability to obtain regulatory approval or commercialize ProHema, which would adversely affect our business, financial condition and results of operations.

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

        Patients undergoing treatment with certain of our product candidates, including ProHema, 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 that are unrelated to our product candidates. While these side effects or adverse events are unrelated to our product candidates, they may still affect the success of our clinical studies. The inclusion of critically ill

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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 be using. Any of these events could prevent us from advancing ProHema or other product candidates through clinical development, and from obtaining regulatory approval, and would impair our ability to commercialize our product candidates. Any inability to advance ProHema 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.

Our planned clinical development activities for ProHema in pediatric patients, including our PROMPT and PROVIDE studies, present additional operational, technical and timeline risks.

        Many clinical centers that could potentially participate in our pediatric clinical trials of ProHema are distinct and separate from the centers participating in the PUMA study, and finding a sufficient number of qualified centers that would be interested in participating in our pediatric trials may take additional time. There are fewer eligible patients with hematologic malignancies and rare genetic disorders for our PROMPT and PROVIDE studies because the total number of pediatric patients who undergo allogeneic HSCT for the treatment of such diseases and disorders is lower than it is in adults. This may increase the time to commencement of our planned and future pediatric studies, or may delay or limit our ability to enroll patients in these studies, and any of these events may impair our ability to complete our planned and future pediatric studies, including our PROMPT and PROVIDE studies.

        Further, to evaluate ProHema in pediatric patients, we have developed a reduced volume formulation of ProHema for children, due to their smaller size and requirement for smaller infusion volume. Although we have received permission from the FDA to use a formulation of ProHema having a reduced volume for the treatment of pediatric patients in our planned PROMPT and PROVIDE studies, the FDA may require us to generate additional preclinical, product, or clinical data to support the use of any reduced volume formulation of ProHema in these studies prior to or following their commencement, or in any subsequent trials of ProHema, or may impose other restrictions on the use of any reduced volume formulation of ProHema. Any such requirement or imposition may present technical challenges and may cause further delays in the commencement or conduct of our planned pediatric clinical trials. Any delays in our planned clinical development activities for pediatric patients would have an adverse effect on our business operations.

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

        Our product candidates, and those that we may develop based on our cell programming technology, represent novel therapeutics, and we face uncertainties associated with the clinical development and the regulatory pathways and reimbursement required for successful commercialization of our product candidates. The clinical development and regulatory 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 a lack of prior experiences on the side of both developers and regulatory agencies. Additionally, due to the uncertainties associated with the clinical development and the regulatory pathways of our product candidates, we may be required to modify or change our clinical development plans or our regulatory pathways for approval. Any such modification or changes could delay or prevent our ability to develop, obtain regulatory approval or commercialize our product candidates, which would adversely affect our business, financial condition and results of operations.

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        Cellular therapeutics, and stem cell therapies in particular, represent a relatively new therapeutic area, and the FDA has cautioned consumers about potential safety risks associated with these therapies. To date, there are relatively few approved cellular therapeutics. In addition, there are currently no approved products in any major territory throughout the world with a label designation that supports the use of a product to improve multi-lineage engraftment or survival in patients undergoing HSCT, which makes it difficult to determine the time and cost required to obtain regulatory approvals in the United States or other jurisdictions for ProHema or any other product candidates that we may develop.

        Regulatory requirements governing cell therapy products have changed frequently and may continue to change in the future. For example, the FDA established the Office of Cellular, Tissue and Gene Therapies within its Center for Biologics Evaluation and Research, or CBER, to consolidate the review of gene therapy and related products, and the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER on its review. In addition, the FDA or other regulatory bodies may change the requirements or modify the potential regulatory pathways for approval of any of our product candidates. These 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 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 products will likely be reviewed by the FDA's 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.

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 processes, 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 good manufacturing practices, or 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 products, manufacturing processes, 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.

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

        We expect to rely on orphan drug exclusivity for ProHema and potential future product candidates that we may develop. Orphan drug status confers seven years of marketing exclusivity in the United

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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. The FDA has granted orphan designation for ProHema for the enhancement of stem cell engraftment to treat neutropenia, thrombocytopenia, lymphopenia and anemia, and the European Commission has granted orphan designation for ProHema for the treatment of acute myeloid leukemia. While we have been granted these orphan designations, 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.

        For any product candidate for which we have been 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. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws. Additionally, 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 depend on facilities operated by transplant centers for the manufacture of ProHema under specific conditions. Any failure by these facilities to manufacture ProHema 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, ProHema.

        ProHema is currently manufactured at clinical cell processing facilities operated by or affiliated with our clinical sites and is required to be manufactured in close proximity to the treatment site on the same day as product administration. The FDA has stated that we will be required to standardize the manufacture of ProHema, including our oversight for facility and raw material and vendor

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qualification through to final product analytical testing and release. The manufacture of ProHema for use in registrational clinical trials and commercialization will be subject to the requirements of applicable regulatory authorities, including the FDA, and the use of our current manufacturing processes to manufacture ProHema for commercialization may require the clinical cell processing facilities at which ProHema is manufactured to be approved by applicable regulatory authorities, including the FDA, pursuant to inspections 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 the FDA's requirements and to properly execute the protocol for the manufacture of ProHema. Because of these manufacturing requirements, if the applicable clinical cell processing facilities are unable to manufacture ProHema in a manner that conforms to our specifications and the FDA's strict regulatory requirements, we may be required to identify alternative processes for the manufacture of ProHema, which would impair our ability to commercialize ProHema. To comply with applicable regulatory requirements and our protocols for the manufacture of ProHema, 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 requirements or with our protocols for the manufacture of ProHema, it will be restricted or prohibited from manufacturing ProHema and making it available for administration to patients. Any failure by these clinical cell processing facilities to properly manufacture ProHema may adversely affect the safety and efficacy profile of ProHema or cause the FDA or other regulatory authorities to impose restrictions or prohibitions on the manufacture and use of ProHema in both the clinical and the commercial setting, which would have an adverse effect on our business.

We depend on third-party suppliers for various components required for the manufacture of ProHema and do not have supply arrangements for certain of these components.

        We currently rely, and expect to continue to rely, on third-party suppliers for components necessary for the manufacture of ProHema. We have not entered into, and may not be able to enter into, agreements for the supply of certain components. Even if we are able to enter into such agreements, we may be limited to a sole third-party for the supply of certain required components, including FT1050 and components for our NRM formulation. Additionally, to date, we and our clinical cell processing facilities have purchased equipment, materials and disposables, such as automated cell washing devices, automated cell warming units, commercially available media and cell transfer and wash sets, used for the manufacture of ProHema from third parties. We rely on the general commercial availability of these materials, and we do not have any current contractual relationships for the supply of these materials. Accordingly, we may incur delays or increased costs due to any interruption in supply, and we cannot guarantee that we will have an adequate supply of components, equipment, materials and disposables to complete our planned clinical development and commercialization of ProHema.

        If we are required to change suppliers, or modify the components, equipment, materials or disposables used for the manufacture of ProHema, we may be required to change our manufacturing processes 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 delay, or increase the costs required to complete, our clinical development and commercialization of ProHema. Additionally, any such change or modification may adversely affect the safety, efficacy or potency of ProHema, and could adversely affect our clinical development of ProHema and harm our business.

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We face a variety of challenges and uncertainties associated with our dependence on the availability of human umbilical cord blood units, or CBUs, at cord blood banks for the manufacture of ProHema.

        CBUs are one of the raw materials for the manufacture of ProHema. The CBUs currently used in the manufacture of ProHema are procured directly by the clinical cell processing facilities from cord blood banks. The availability of CBUs for the manufacture of ProHema depends on a number of regulatory, political, economic and technical factors outside of our control, including:

•
government policies relating to the regulation of CBUs for clinical use;

•
the availability of government funding for cord blood banks;

•
individual cord blood bank policies and practices relating to CBU acquisition and banking;

•
the pricing of CBUs;

•
the methods used in searching for and matching CBUs to patients, which involve emerging technology related to current and future CBU parameters that guide the selection of an appropriate CBU for transplantation; and

•
methods for the procurement and shipment of CBUs and their handling and storage at clinical sites.

        Additionally, we do not have control over the supply, availability, price or types of CBUs that these clinical cell processing facilities use in the manufacture of ProHema. We rely heavily on these third parties to procure CBUs from cord blood banks that are compliant with government regulations and within the current standard of care. In addition, we may identify specific characteristics of CBUs, such as their volume and red blood cell content, which may limit their ability to be used to manufacture ProHema even though these CBUs may otherwise be suitable for use in allogeneic transplant. As a result, the requirement for CBUs to meet our specifications may limit the potential inventory of CBUs eligible for use in the manufacture of ProHema.

        In the United States, cord blood banks are required to file a biologics license application, or BLA, and to meet certain continued regulatory requirements, in order to bank and provide CBUs for transplantation. CBUs from a cord blood bank that maintains a BLA are considered to be licensed and have a product label describing their intended use. While the FDA currently allows unlicensed CBUs to be used for transplantation, and we have used both unlicensed and licensed CBUs in the manufacture of ProHema for our clinical trials, the FDA may later prohibit the use of unlicensed CBUs for transplantation or require that ProHema is manufactured using only licensed CBUs. Additionally, although CBUs from foreign cord blood banks, which are generally unlicensed, are currently available in the United States for use in transplantation and we have used CBUs from foreign cord blood banks in our clinical trials, changes in U.S. and foreign regulations may prohibit or limit the future use of foreign CBUs in the United States. Any inability to procure adequate supplies of CBUs will adversely affect our ability to develop and commercialize ProHema.

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

        We have relied upon and expect to continue to rely upon third parties for the execution of our clinical trials, and we control only certain aspects of their activities. We are responsible for complying, and we are responsible for ensuring that our third-party service providers comply, with good clinical practices, or GCP, which are regulations and guidelines enforced by the FDA, as well as comparable foreign regulations and guidelines, for all of our product candidates in clinical development. Regulatory authorities enforce these regulations through periodic inspections of trial sponsors, principal

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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 GCP requirements. In addition, our registrational clinical trials must be conducted with product produced under applicable regulatory requirements.

        If third-party service providers do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our 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. 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.

We rely on third parties for the manufacture of our product candidates.

        We do not independently conduct all aspects of our product manufacturing, and currently rely and expect to continue to rely on third-party manufacturers for the manufacture of any product candidates that we may develop. These third-party manufacturers will be required to comply with applicable FDA regulatory requirements and other applicable laws and regulations. We will have no control over the ability of these third parties to comply with these requirements, or to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve the facilities of these third parties for the manufacture of our product candidates or any products that we may successfully develop, or if it withdraws any such approval, or if our suppliers or contract manufacturers decide they no longer want to supply or manufacture for us, we may need to find alternative manufacturing facilities, in which case we might not be able to identify manufacturers for clinical or commercial supply on acceptable terms, or at all. In addition, we anticipate that the manufacture of our product candidates will be difficult, and it is possible that any third-party manufacturers that we engage may experience delays or technical challenges in such manufacture. Any of these factors would significantly impact our ability to develop, obtain regulatory approval for or commercialize our product candidates, and would adversely affect our business.

Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property, 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 processes used to manufacture them and the methods for using them, in order to prevent third parties from making, using, selling, offering to sell or importing our product candidates. We own and have exclusive licenses to patent portfolios for our product candidates, 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, 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. 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.

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        We also rely upon unpatented trade secrets and improvements, unpatented 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 commercial collaborators, employees and consultants. We also have invention or patent assignment agreements with our employees and some, but not all, of our commercial collaborators and consultants. However, if our employees, commercial 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 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 ProHema and our induced pluripotent stem cell (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 ProHema, 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.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

        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. These lawsuits are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. There is a risk that the court will decide that such patents are not valid and that we do not have the right to stop the other party from using the inventions. 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.

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We 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. Our competitors may have filed, and may in the future file, patent applications covering products and technologies similar to ours. Any such patent application may have priority over our patent applications, which could further require us to obtain rights from third parties to issued patents covering such products and technologies. We cannot guarantee that the manufacture, use or marketing of ProHema or any other product candidates that we develop will not infringe third-party patents.

        A third party may claim that we are using inventions covered by the third party's patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. Patent litigation is costly and time consuming. We may not have sufficient resources to address these actions, and such actions could affect our results of operations and divert the attention of managerial and scientific personnel.

        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, unless that third party grants us rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue development, manufacture or sale of our products. 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.

        As is common in the biotechnology and pharmaceutical industries, 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. 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.

Risks Related to the Commercialization of Our Product Candidates

We have limited marketing experience 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 limited 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.

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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:

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the safety and efficacy of the products, and advantages over alternative treatments;

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the labeling of any approved product;

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the prevalence and severity of any side effects, including any limitations or warnings contained in a product's approved labeling;

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the emergence, and timing of market introduction, of competitive products;

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the effectiveness of our marketing strategy; and

•
sufficient third-party insurance coverage or governmental reimbursement.

        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 ProHema 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 targeted indication of HSCT procedures in general and our HSC 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 therapeutic product candidates that we develop will be relatively high due to their anticipated use in a one-time, potentially life-saving procedure with curative intent, the biopharmaceutical industry has recently experienced significant pricing pressures, including in the area of orphan drug products. Additionally, because our target patient populations are relatively small, the pricing and reimbursement of our product candidates, if approved, must be adequate to support commercial infrastructure. If pricing is set at unsatisfactory levels, our ability to successfully market and sell our product candidates will be adversely affected.

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.

        The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford expensive treatments, such as HSCT. There is significant uncertainty related to the 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 stem cell products, 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 and 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.

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 product development on treatments for orphan diseases and rare genetic disorders. 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.

Risks Related to Our Business and Industry

The success of our product candidates, including ProHema, is substantially dependent on developments within the field of HSCT, some of which are beyond our control.

        Our product candidates, including ProHema, are designed and are being developed as therapeutic entities for use in HSCT. Any adverse developments in the field of stem cell therapeutics 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. In particular, there are several companies and institutions developing products that may obviate the need for HSCT, or may be competitive to products in our research 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.

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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 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.

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, or 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.

We are party to a loan and security agreement that contains operating and financial covenants that may restrict our business and financing activities.

        In July 2014, we entered into an amended and restated loan and security agreement with Silicon Valley Bank, pursuant to which we have been extended term loans in the aggregate principal amount of $20.0 million. Borrowings under this loan and security agreement are secured by substantially all of our assets, excluding certain intellectual property rights. The loan and security agreement restricts our ability, among other things, to:

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sell, transfer or otherwise dispose of any of our business or property, subject to limited exceptions;

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make material changes to our business or management;

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enter into transactions resulting in significant changes to the voting control of our stock;

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make certain changes to our organizational structure;

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consolidate or merge with other entities or acquire other entities;

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incur additional indebtedness or create encumbrances on our assets;

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pay dividends, other than dividends paid solely in shares of our common stock, or make distributions on and, in certain cases, repurchase our stock;

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enter into transactions with our affiliates;

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repay subordinated indebtedness; or

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make certain investments.

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        In addition, we are required under our loan agreement to comply with various operating covenants that may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. A breach of any of these covenants could result in a default under the loan and security agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable.

        If we are unable to generate sufficient cash to repay our debt obligations when they become due and payable, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively affect our business operations and financial condition.

If we engage in an 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 continue to 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 a business combination with another company. If we pursue such a strategy, we could, among other things:

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issue equity securities that would dilute our current stockholders' percentage ownership;

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incur substantial debt that may place strains on our operations;

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spend substantial operational, financial and management resources to integrate new businesses, technologies and products;

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assume substantial actual or contingent liabilities;

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reprioritize our development programs and even cease development and commercialization of our product candidates; or

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merge with, or otherwise enter into a business combination with, another company in which our stockholders would receive cash or shares of the other company on terms that certain of our stockholders may not deem desirable.

        Although we intend to evaluate and consider acquisitions, 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, consumers, healthcare providers, pharmaceutical companies or others selling 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 series of claims brought against us or

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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.

We use hazardous chemicals, biological materials and infectious agents in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

        Our research and development and manufacturing processes involve the controlled use of hazardous materials, including chemicals, biological materials and infectious disease agents. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets.

Our 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, provide accurate information to the FDA or foreign regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or 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.

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 discovery and development company, formed in 2007, with a limited operating history. We have not yet obtained regulatory approval for any 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, 2014 we had an accumulated deficit of approximately $112.4 million. We expect to continue to incur losses for the foreseeable future as we

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continue to fund our ongoing and planned clinical trials of ProHema and our other ongoing and planned research and development activities. We also expect to incur significant operating and capital expenditures as we continue our development of, and seek regulatory approval for, our product candidates, in-license or acquire new product development opportunities, implement additional infrastructure and internal systems and hire additional scientific, clinical, and marketing 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 and biological 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 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 others beyond our control, including:

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the results of our clinical trials and preclinical studies, and the results of clinical trials and preclinical studies by others;

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developments related to the FDA or to regulations applicable to stem cell therapeutics generally or our product candidates in particular, including but not limited to regulatory pathways and clinical trial requirements for approvals;

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

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developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

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additions or departures of key management or scientific personnel;

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actual or anticipated changes in our research and development activities and our business prospects, including in relation to our competitors;

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developments of technological innovations or new therapeutic products by us or others in the field of stem cell therapeutics or immunotherapeutics;

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announcements or expectations of additional equity or debt financing efforts;

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sales of our common stock by us, our insiders or our other stockholders;

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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

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comments by securities analysts;

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fluctuations in our operating results; and

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general economic and market conditions.

        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

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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 pharmaceutical 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 divert the time and attention of our management.

Our principal stockholders exercise significant control over our company.

        As of March 12, 2015, our executive officers, directors and entities affiliated with our five percent stockholders beneficially own, in the aggregate, shares representing approximately 68% of our outstanding voting stock. 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 or affecting the liquidity and volatility of our common stock, and might affect the market price of our common stock.

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, government or other third-party funding and other collaborations, strategic alliances and licensing 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. We have an effective shelf registration statement on file with the SEC that provides for the sale of up to $100 million in the aggregate of shares of our common stock, preferred stock, debt securities, warrants and/or units by us. Any such sale or issuance of securities 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, in July 2014, we entered into an amended and restated loan and security agreement with Silicon Valley Bank, which imposes restrictive covenants on our operations. Any future debt financings may impose additional 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 and cash equivalents and may not use them effectively.

        Our management has broad discretion to use our cash and cash equivalents, and any additional funds that we may raise, to fund our operations and could spend these funds in ways that do not improve 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 and delay the development of our product candidates. Pending their use to fund operations, we may invest our cash and cash equivalents in a manner that does not produce income or that loses value.

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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 and our amended and restated certificate of incorporation and 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:

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a classified board of directors with limitations on the removal of directors;

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advance notice requirements for stockholder proposals and nominations;

•
the inability of stockholders to act by written consent or to call special meetings;

•
the ability of our board of directors to make, alter or repeal our amended and restated bylaws; and

•
the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine.

        As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then-current market price for our common stock.

Our ability to use our net operating loss carryforwards may be subject to limitation and may result in increased future tax liability to us.

        Generally, a change of more than 50% 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. An ownership change may limit a company's ability to use its net operating loss carryforwards attributable to the period prior to such change. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code has occurred after each of our previous private placements of preferred stock or after the issuance of shares of common stock in connection with our IPO. In the event we have undergone an ownership change under Section 382, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.

ITEM 1B.    Unresolved Staff Comments

        None.

ITEM 2.    Properties

Facilities

        As of December 31, 2014, we occupy approximately 23,684 square feet of office and laboratory space in San Diego, California under a lease that expires in 2016. In January 2015, we commenced a sublease providing us an additional 5,620 square feet of laboratory space, expiring in 2017. In March 2015, we extended the term of the lease expiring in 2016 for an additional 15 months, such that the lease and the sublease both expire in 2017. Both leased properties are in the same building. We believe that our facilities are adequate for our current needs.

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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 common stock began trading on The NASDAQ Global Market on October 1, 2013 and trades under the symbol "FATE". Prior to October 1, 2013, there was no public market for our common stock. The table below provides the high and low intra-day sales prices of our common stock for the periods indicated, as reported by The NASDAQ Global Market.

	 	High	 	Low	 	
Year ended December 31, 2014	 	 	 	 	 	 	 	
Fourth quarter	 	$	5.90	 	$	3.50	 	
Third quarter	 	 	6.94	 	 	5.01	 	
Second quarter	 	 	9.95	 	 	5.88	 	
First quarter	 	 	13.55	 	 	5.85	 	
Year ended December 31, 2013	 	 	 	 	 	 	 	
Fourth quarter	 	$	9.19	 	$	4.30	 	
Holders of Common Stock

        As of March 12, 2015, there were approximately 64 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 an indexed basis of a $100 investment in the Company's common stock, the NASDAQ Composite® (US) Index and the NASDAQ Biotechnology Index commencing on October 1, 2013 (the date our common stock began trading on the NASDAQ Global Market) and continuing through December 31, 2014. The past performance of our common stock is no indication of future performance.

Assumes $100 invested on Oct. 1, 2013; Assumes dividend reinvested; Fiscal year ending Dec 31, 2014

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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.

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, 2014, 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, except as follows:

•
On December 24, 2014, we issued warrants to purchase an aggregate of 98,039 shares of our common stock at an exercise price of $4.08 per share to Silicon Valley Bank and one of its affiliated entities in connection with our drawdown of an additional term loan under our Amended and Restated Loan and Security Agreement, dated July 30, 2014, with Silicon Valley Bank. The warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving a public offering.

Issuer Purchases of Equity Securities

        We did not repurchase any securities during the quarter ended December 31, 2014.

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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".

	 	Years Ended and as of December 31,	 	
 
	 	2014	 	2013	 	2012	 	2011	 	
Consolidated Statements of Operations Data (in thousands, except share and per share data):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Collaboration revenue	 	$	—	 	$	626	 	$	1,268	 	$	833	 	
Grant revenue	 	 	—	 	 	345	 	 	1,402	 	 	337	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Total revenue	 	 	—	 	 	971	 	 	2,670	 	 	1,170	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	16,435	 	 	12,007	 	 	11,999	 	 	9,858	 	
General and administrative	 	 	8,469	 	 	6,639	 	 	4,228	 	 	4,605	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Total operating expenses	 	 	24,904	 	 	18,646	 	 	16,227	 	 	14,463	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Loss from operations	 	 	(24,904	)	 	(17,675	)	 	(13,557	)	 	(13,293	)	
Total other expense, net	 	 	(979	)	 	(3,219	)	 	(682	)	 	(134	)	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Net loss and comprehensive loss	 	$	(25,883	)	$	(20,894	)	$	(14,239	)	$	(13,427	)	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Net loss per common share, basic and diluted	 	$	(1.27	)	$	(3.54	)	$	(13.06	)	$	(16.16	)	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Weighted-average common shares used to compute basic and diluted net loss per share	 	 	20,451,840	 	 	5,896,171	 	 	1,090,317	 	 	830,959	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Consolidated Balance Sheet Data (in thousands):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	49,101	 	$	54,036	 	$	9,087	 	$	6,387	 	
Working capital	 	 	45,291	 	 	50,051	 	 	4,943	 	 	3,013	 	
Total assets	 	 	51,204	 	 	55,583	 	 	11,076	 	 	7,852	 	
Convertible notes, net of discount	 	 	—	 	 	—	 	 	—	 	 	1,000	 	
Warrant liability	 	 	—	 	 	—	 	 	184	 	 	221	 	
Long-term debt, net of current portion	 	 	18,083	 	 	—	 	 	1,732	 	 	3,591	 	
Exchangeable share liability	 	 	—	 	 	—	 	 	551	 	 	563	 	
Convertible preferred stock	 	 	—	 	 	—	 	 	56,526	 	 	50,309	 	
Accumulated deficit	 	 	(112,392	)	 	(86,509	)	 	(65,615	)	 	(51,376	)	
Total stockholders' equity (deficit)	 	$	28,340	 	$	50,848	 	$	(52,825	)	$	(50,683	)	
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."

Overview

        We are a clinical-stage biopharmaceutical company engaged in the development of programmed cellular therapeutics for the treatment of severe, life-threatening diseases. We have built a novel platform to program the function and fate of cells ex vivo  using pharmacologic modulators, such as

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small molecules. Our lead product candidate, ProHema®, is anex vivo programmed hematopoietic cellular therapeutic, which is currently in clinical development for the treatment of hematologic malignancies and rare genetic disorders in patients undergoing hematopoietic stem cell transplantation. We are also developing ex vivo  programmed hematopoietic and myogenic cellular product candidates using our patent-protected induced pluripotent stem cell technology. We believe that our programmed cellular product candidates have disease-transformative or curative potential across a broad range of orphan indications.

        Since our inception in 2007, we have devoted substantially all of our resources to the research and development of our product candidates and cellular programming technology, 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 sale of common stock, the private placement of preferred stock and convertible notes and through commercial bank debt that included the issuance of warrants.

        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 next several years. 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 activities as we:

•
conduct clinical trials of our product candidates;

•
continue our research and development efforts;

•
manufacture preclinical study and clinical trial materials;

•
maintain, expand and protect our intellectual property portfolio;

•
engage with regulatory authorities for the development of, and seek regulatory approvals for, our product candidates;

•
hire additional clinical, regulatory, quality control and technical personnel to advance our product candidates;

•
hire additional scientific personnel to advance our research and development efforts; and

•
hire general and administrative personnel to operate as a public company and support our operations.

        We do not expect to generate any revenues from sales of our therapeutics 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 facility in San Diego, California. Fate Therapeutics, Inc. owns 100% of the voting shares of Fate Therapeutics (Canada) Inc., or Fate Canada, that were outstanding at December 31, 2014 and directs all of its operational activities, which are insignificant. The following information is

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presented on a consolidated basis to include the accounts of Fate Therapeutics, Inc. and Fate Canada. All intercompany transactions and balances are eliminated in consolidation.

Revenue

        To date, we have not generated any revenues from therapeutic product sales. Our revenues have been derived from collaboration activities and grant revenues.

        Collaboration revenues have been generated exclusively from our collaboration arrangement with Becton, Dickinson and Company, or BD. In September 2010, we entered into a worldwide exclusive license and collaboration agreement with BD for the joint development and worldwide commercialization of certain induced pluripotent stem cell, or iPSC, tools and technologies for use in drug discovery and development. The license and collaboration agreement was assigned by BD to Corning Incorporated in October 2012. In connection with the agreement, we received an upfront, non-refundable license payment, and received research funding for the conduct of joint development activities during the three-year period ended September 30, 2013. In connection with the arrangement with BD, we recognized $0.6 million and $1.3 million for the years ended December 31, 2013, and 2012, respectively, as collaboration revenue in our consolidated statements of operations. We are eligible to receive certain commercialization milestones and royalties on the sale of iPSC reagent products. We do not anticipate generating any significant revenues under the arrangement with BD in the future.

        Grant revenue has been generated primarily through research and development grant programs offered by the U.S. government and its agencies. In April 2011, we were awarded a $2.1 million grant from the U.S. Army Telemedicine & Advanced Technology Research Center, or TATRC, to identify and develop regenerative medicines for acute sound-induced hearing loss. All funding under the TATRC grant was expended in full as of May 2013.

Research and Development Expenses

        Research and development expenses consist of development costs associated with the research and development of our product candidates and cellular programming technology. These costs are expensed as incurred and include:

•
salaries and employee-related costs, including stock-based compensation;

•
costs associated with conducting our preclinical, clinical and regulatory activities, including fees paid to third-party professional consultants and service providers;

•
costs incurred under clinical trial agreements with investigative sites;

•
costs for laboratory supplies;

•
costs to acquire, develop and manufacture preclinical study and clinical trial materials;

•
charges associated with the achievement of milestones pursuant to our asset acquisition of Verio Therapeutics Inc., or Verio, that was completed in April 2010; and

•
facilities, depreciation and other expenses including allocated expenses for rent and maintenance of facilities.

        We plan to increase our current level of research and development expenses for the foreseeable future as we continue the development of our product candidates and cellular programming technology. Our current planned research and development activities over the next twelve months consist primarily of the following:

•
conducting our Phase 2 clinical trial of ProHema to examine its safety and its curative potential in adult patients with orphan hematologic malignancies undergoing allogeneic hematopoietic stem cell transplants, or HSCT (the PUMA study);

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•
initiating and conducting our Phase 1b clinical trial of ProHema to examine its safety and curative potential in pediatric patients with inherited metabolic disorders, or IMDs, including lysosomal storage disorders, or LSDs, undergoing allogeneic HSCT (the PROVIDE study);

•
conducting our Phase 1b clinical trial of ProHema to examine its safety and curative potential in pediatric patients with orphan hematologic malignancies undergoing allogeneic HSCT (the PROMPT study); and

•
researching the therapeutic potential of our programmed cellular product candidates, including those derived from human induced pluripotent stem cells.

        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, including ProHema. 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.

        The following table summarizes our research and development expenses by major programs for the years ended December 31:
 	 	 	 	 	 	 	 	 	 	 	
(in thousands)
	 	2014	 	2013	 	2012	 	
Hematopoietic cell product candidates	 	$	9,282	 	$	4,980	 	$	5,869	 	
Other preclinical programs and technologies	 	 	4,234	 	 	3,527	 	 	3,589	 	
​	​	​	​	​	​	​	​	​	​	​	
Total direct research and development expenses	 	 	13,516	 	 	8,507	 	 	9,458	 	
Unallocated expenses	 	 	2,919	 	 	3,500	 	 	2,541	 	
​	​	​	​	​	​	​	​	​	​	​	
Total research and development expenses	 	$	16,435	 	$	12,007	 	$	11,999	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
        Unallocated expenses consist primarily of facility costs; general equipment and supply costs; depreciation; and other miscellaneous costs, all of which we do not allocate to specific programs as these expenses are deployed across all of our research and development operations.

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.

Other Income (Expense)

        Other income (expense) consists primarily of interest income earned on cash and cash equivalents; interest expense on convertible notes and on amounts outstanding under our credit facilities; debt extinguishments; changes in fair value of the exchangeable share liability, while outstanding, relating to the total exchangeable shares held by the prior stockholders of Verio Therapeutics Inc. (Verio), a company that we acquired in 2010; and changes in fair value of the warrant liability relating to our warrants that were exercisable for shares of our preferred stock prior to our initial public offering, or

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IPO. We anticipate that our interest expense will increase in the future in connection with our term loans outstanding with Silicon Valley Bank.

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 on an ongoing basis that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. 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

        Our revenues have principally consisted of license fees, periodic research and development funding and milestone payments under our September 2010 license and collaboration agreement with BD, as well as funding received under government grants. Our license and collaboration agreement with BD contains multiple elements, all of which are accounted for as collaboration revenue. We recognize revenues when all four of the following criteria are met: (i) persuasive evidence that an agreement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

Collaboration Revenues

        Agreements entered into prior to 2011.    For multiple-element agreements entered into prior to January 1, 2011 and not materially modified thereafter, such as our agreement with BD, we analyzed the agreement to determine whether the elements within the agreement could be separated or whether they must be accounted for as a single unit of accounting. If the delivered element, which for us is commonly a license, has stand-alone value and the fair value of the undelivered elements, which for us are generally collaboration research activities, can be determined, we recognized revenue separately under the residual method as the elements under the agreement are delivered. If the delivered element does not have stand-alone value or if the fair value of the undelivered element cannot be determined, the agreement is then accounted for as a single unit of accounting, with consideration received under the agreement recognized as revenue on the straight-line basis over the estimated period of performance, which for us is generally the expected term of the research and development activities.

        Agreements entered into or materially modified after December 31, 2010.    In October 2009, the Financial Accounting Standards Board, or FASB, issued a new accounting standard which amended the guidance on accounting for arrangements involving the delivery of more than one element. This standard addresses the determination of the unit(s) of accounting for multiple-element arrangements and how the arrangement's consideration should be allocated to each unit of accounting. In January 2011, we adopted new authoritative guidance on revenue recognition for milestone payments related to agreements under which we have continuing performance obligations. As required under the new literature, we evaluate all milestones at the beginning of the agreement to determine if they meet the definition of a substantive milestone.

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        We recognize revenue from milestone payments when earned, provided that (i) the milestone event is substantive in that it can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance and its achievability was not reasonably assured at the inception of the agreement; (ii) we do not have ongoing performance obligations related to the achievement of the milestone; and (iii) it would result in the receipt of additional payments. A milestone payment is considered substantive if all of the following conditions are met: (i) the milestone payment is non-refundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone payment appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone.

        Collaboration arrangements providing for payments to us upon the achievement of research and development milestones generally involve substantial uncertainty as to whether any such milestone would be achieved. In the event a milestone is considered to be substantive, we expect to recognize future payments as revenue in connection with the milestone as it is achieved. Collaboration arrangements providing for payments to us upon the achievement of milestones that are solely contingent upon the performance of a collaborator also involve substantial uncertainty as to whether any such milestone would be achieved. For such contingent milestones, even if they do not meet the definition of a substantive milestone, since they are based solely upon a collaborator's effort, we expect to recognize future payments as revenue when earned under the applicable arrangement, provided that collection is reasonably assured.

Government Grant Revenue

        Revenue from government grants is recorded when reimbursable expenses are incurred under the grant in accordance with the terms of the grant award. The receivable for reimbursable amounts that have not been collected is reflected in prepaid and other current assets on our consolidated balance sheets.

Deferred Revenue

        Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. Amounts not expected to be recognized within the next 12 months are classified as non-current deferred revenue on our consolidated balance sheets.

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 investigative sites in connection with clinical trials, 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. The financial terms of these

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agreements are 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 grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. 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.

        We account for stock options and restricted stock awards to non-employees using the fair value approach. Stock options and restricted stock awards to non-employees are subject to periodic revaluation over their vesting terms. For stock option grants with performance-based milestones, the expense is recorded over the remaining service period after the point when the performance condition is determined to be probable of achievement or when it has been achieved.

        We generally estimate the fair value of our stock-based awards to employees and non-employees using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including (a) the risk-free interest rate, (b) the expected volatility of our stock, (c) the expected term of the award and (d) the expected dividend yield. Due to the lack of an adequate history of a public market for the trading of our common stock and a lack of adequate 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 5 of the Notes to the Consolidated Financial Statements for additional information.

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        Total stock-based compensation expense for the years ended December 31, 2014, 2013, and 2012, was $2.4 million, $1.6 million, and $0.2 million, respectively. Expense related to unvested employee stock option grants not yet recognized (excluding those with performance-based conditions which are unachieved or determined not to be probable of achievement) as of December 31, 2014 was approximately $4.1 million and the weighted-average period over which these grants are expected to vest is 2.6 years.

Determination of the Fair Value of Common Stock

        Prior to our IPO, we were required to estimate the fair value of the common stock underlying our stock-based awards when performing fair value calculations. The fair value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, taking into account input from management and independent third-party valuation analysis. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant. In the absence of a public trading market for our common stock prior to our IPO, on each grant date we developed an estimate of the fair value of our common stock in order to determine an exercise price for the option grants. Our determinations of the fair value of our common stock for grants made prior to our IPO were made using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid.

        Our board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of our common stock, including:

•
contemporaneous valuations prepared by an independent third-party valuation specialist effective as of August 31, 2011, July 3, 2012, March 31, 2013, June 30, 2013 and August 12, 2013;

•
the prices of our convertible preferred stock sold to investors in arm's length transactions, and the rights, preferences and privileges of our convertible preferred stock as compared to those of our common stock, including the liquidation preferences of our convertible preferred stock;

•
our results of operations, financial position and the status of research and development efforts and achievement of enterprise milestones;

•
the composition of, and changes to, our management team and board of directors;

•
the lack of liquidity of our common stock as a private company;

•
our stage of development and business strategy and the material risks related to our business and industry;

•
the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

•
external market conditions affecting the life sciences and biotechnology industry sectors;

•
the likelihood of achieving a liquidity event for the holders of our common stock, such as an IPO, or a sale of our company, given prevailing market conditions; and

•
the state of the IPO market for similarly situated privately held biotechnology companies prior to our IPO.

        There were significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates included assumptions made regarding our future operating performance, the time to completing an IPO or other liquidity events and the determination

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of the appropriate valuation methods. If we had made different assumptions, our stock- based compensation expense, net loss and net loss per common share could have been significantly different.

Common Stock Valuation Methodologies

        Our valuations were prepared in accordance with the guidelines in the Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our company's future operations, discounting to the present value with an appropriate risk adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics.

        February 2012 and March 2012 grants.    On each of February 9, 2012, March 13, 2012 and March 23, 2012, our board of directors determined that the fair value of our common stock was $1.63 per share in connection with the grant of stock options. As part of each determination, our board of directors concluded that no significant internal or external value-generating events had taken place between the August 2011 valuation analysis and the dates of these stock option grants.

        July 2012 valuation and grants.    The common stock fair value was estimated by our board of directors to be $1.37 per share in July 2012, with input from both management and an independent third-party valuation specialist, in connection with the grant of stock options. The fair value per share of $1.37 represented a decrease of $0.26 per share from the $1.63 per share utilized for the March 2012 option grants. The decrease in fair value was primarily related to our issuance in May 2012 of Series C preferred stock at a price per share reflecting an enterprise value below that of our most recent preferred stock financing.

        October 2012, December 2012, January 2013 and February 2013 grants.    On each of October 10, 2012, December 12, 2012, January 14, 2013 and February 6, 2013, our board of directors determined that the fair value of our common stock was $1.37 per share in connection with the grant of stock options. As part of each determination, our board of directors concluded that no significant internal or external value-generating events had taken place between the July 2012 valuation analysis and the dates of these stock option grants.

        March 2013 valuation.    The common stock fair value was estimated by our board of directors to be $1.63 per share in March 2013, with input from both management and an independent third-party valuation specialist. The fair value per share of $1.63 represented an increase of $0.26 per share from the $1.37 per share utilized for the February 2013 option grants.

        May 2013 grants.    On May 13, 2013, our board of directors determined that the fair value of our common stock was $1.63 per share in connection with the grant of stock options. As part of this determination, our board of directors concluded that no significant internal or external value-generating events had taken place between the March 2013 valuation analysis and the date of these stock option grants.

        June 2013 valuation.    The common stock fair value was estimated by our board of directors to be $4.49 per share in June 2013, with input from both management and an independent third-party valuation specialist. The fair value per share of $4.49 represented an increase of $2.86 per share from the $1.63 per share utilized for the May 2013 option grants.

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        August 2013 valuation and grants.    The common stock fair value was estimated by our board of directors to be $7.87 per share on August 12, 2013, with input from both management and an independent third-party valuation specialist, in connection with the grant of stock options. The fair value per share of $7.87 represented an increase of $3.38 per share from the $4.49 per share utilized for the June 2013 valuation.

Initial public offering price

        Our initial public offering price was $6.00 per share. In comparison, our estimate of the fair value of our common stock was determined to be $7.87 per share as of August 12, 2013 using a contemporaneous valuation prepared by management and an independent third-party valuation specialist.

Warrant Liability

        Freestanding warrants for the purchase of convertible preferred stock were classified as liabilities on the consolidated balance sheets at their estimated fair value since the underlying convertible preferred stock was classified as temporary equity. At the end of each reporting period or at the time of conversion to warrants to purchase shares of the Company's common stock, changes in the estimated fair value during the period were recorded as a component of other income (expense). The freestanding warrants for the purchase of convertible preferred stock were converted into warrants to purchase shares of the Company's common stock in connection with the completion of our IPO on October 4, 2013. After such date, we no longer adjust the fair value of the warrants. Prior to the completion of our IPO, we estimated the fair value of the convertible preferred stock warrants using the Black-Scholes option pricing model based on inputs as of the valuation measurement dates for: the estimated fair value of the underlying convertible preferred stock; the remaining contractual terms of the warrants; the risk-free interest rates; the expected dividend yield; and the estimated volatility of the price of the convertible preferred stock.

Exchangeable Share Liability and Exchangeable Shares

        In April 2010, we acquired Verio, a development stage company headquartered in Ottawa, Ontario. In connection with the acquisition, the stockholders of Verio received 900,000 non-voting shares of Fate Canada (the "Exchangeable Shares") that were initially exchangeable into 138,462 shares of our common stock and, subject to the validation of certain scientific data and the achievement of certain preclinical, clinical, commercial and financial milestones, were exchangeable for up to 884,605 shares of our common stock.

        Based on our evaluation of the set of activities and assets of Verio, at the acquisition date, we determined that Verio did not meet the definition of a business. In addition, we determined that Verio was a development stage enterprise without any material inputs; without any processes that create, or have the ability to create, outputs; and without any outputs. As such, the Verio acquisition was accounted for as an asset acquisition and we charged the $0.4 million purchase price to research and development expense. The initial purchase price of the Verio assets consisted of $0.2 million of assumed net liabilities and an initial exchangeable share liability of $0.2 million. This amount represents the estimated fair value of purchased in-process technology for projects that, as of the acquisition date, had not yet reached technological feasibility and had no alternative future use.

        Prior to our IPO, on the date of achievement of a milestone, the fair value of the related increase in the number of shares of our common stock into which the Exchangeable Shares were exchangeable was charged to research and development expense. Additionally, the fair value of the Exchangeable Shares was re-measured at each reporting date, with any changes in fair value being recognized in the change in fair value of the exchangeable share liability, a component of other income (expense), in the

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accompanying consolidated statements of operations. The fair value of the exchangeable share liability was equal to the fair value of the number of shares of our common stock into which the Exchangeable Shares were exchangeable.

        During the year ended December 31, 2014, based on the achievement of certain preclinical milestones, 38,463 shares of our common stock of the Company were earned and issued, resulting in a $0.4 million charge to research and development expense. During the years ended December 31, 2013, and 2012, we recorded charges of $0.3 million and $0.1 million to research and development expense related to increases in the number of shares of common stock issuable upon the exchange of the Exchangeable Shares of 76,922 shares and 57,691 shares, respectively. Up to an additional 365,379 shares of our common stock remain issuable subject to the achievement of certain milestones, and a charge to research and development expense will be recorded based on the then-current fair value of our common stock on the date of milestone achievement.

        For the years ended December 31, 2013, and 2012, we recorded other income (expense) related to the change in fair value of the Exchangeable Shares of $(2.4) million and $0.1 million, respectively. During the fourth quarter of 2013, we adjusted the exchangeable share liability to its then-current fair value upon the closing of our IPO, and reclassified the liability to additional paid-in capital.

Other Company Information

JOBS Act

        On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

        Subject to certain conditions set forth in the JOBS Act, as an "emerging growth company," we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an "emerging growth company" until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more, (b) December 31, 2018, (c) the date on which we have issued more than $1 billion in non-convertible debt during the previous three years or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Recent Accounting Pronouncements

        For a discussion of recently issued accounting pronouncements, please see Note 1 of the Notes to the Consolidated Financial Statements.

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Results of Operations

Comparison of Years Ended December 31, 2014 and 2013

        The following table summarizes the results of our operations for the years ended December 31, 2014 and 2013:

	 	Years Ended
December 31,	 	
 
	 	2014	 	2013	 	
 
	 	(in thousands)
	 	
Collaboration revenue	 	$	—	 	$	626	 	
Grant revenue	 	 	—	 	 	345	 	
Research and development expenses	 	 	16,435	 	 	12,007	 	
General and administrative expenses	 	 	8,469	 	 	6,639	 	
Total other income (expense), net	 	 	(979	)	 	(3,219	)	
        Revenue.    We did not generate any revenue for the year ended December 31, 2014, compared to $1.0 million for the year ended December 31, 2013. The decrease was due to the completion of a government grant in May 2013, and the conclusion of the three-year joint development period under our license and collaboration agreement with BD in September 2013. We do not expect to generate any significant revenue under these agreements in the future.

        Research and development expenses.    Research and development expenses were $16.4 million for the year ended December 31, 2014, compared to $12.0 million for the year ended December 31, 2013. The $4.4 million increase in research and development expenses primarily reflects the following:

•
$2.3 million increase in employee compensation and benefits expense, including employee-stock based compensation expense, relating to an increase in employee headcount to support the clinical development of ProHema and the preclinical development of our other product candidates;

•
$1.5 million increase in third-party professional consultant and service provider expenses relating to the preparation for and conduct of our PUMA study and the preparation for the commencement of our PROMPT and PROVIDE studies of ProHema; and a

•
$1.0 million increase in expenditures for laboratory equipment and supplies relating to the preparation and conduct of our clinical trials, and to the conduct of our preclinical research activities; which were partially offset by a

•
$0.5 million decrease in non-employee stock-based compensation expense.

        General and administrative expenses.    General and administrative expenses were $8.5 million for the year ended December 31, 2014, compared to $6.6 million for the year ended December 31, 2013. The $1.9 million increase in general and administrative expenses primarily reflects the following:

•
$1.4 million increase in compensation and benefits expense, including employee stock-based compensation expense, relating to an increase in employee headcount to support the expansion of our financial and administrative operations;

•
$0.4 million increase in corporate insurance fees, including director and officer insurance premiums; and a

•
$0.4 million increase in third-party service fees, including accounting and legal professional services fees and exchange listing fees, to support our operations as a public company; which were partially offset by a

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•
$0.3 million decrease in non-employee stock-based compensation expense; and a

•
$0.2 million decrease in intellectual property-related expenses.

        Other expense, net.    Other expense, net, was $1.0 million for the year ended December 31, 2014, compared to $3.2 million for the year ended December 31, 2013. The $2.2 million decrease in other expenses, net, was primarily due to a non-recurring $0.4 million loss on the extinguishment of debt during the year ended December 31, 2014, which was offset by a non-recurring $2.4 million fair value charge on the exchangeable share liability during the year ended December 31, 2013.

Comparison of Years Ended December 31, 2013 and 2012.

        The following table summarizes the results of our operations for the years ended December 31, 2013 and 2012:

	 	Years Ended
December 31,	 	
 
	 	2013	 	2012	 	
 
	 	(in thousands)
	 	
Collaboration revenue	 	$	626	 	$	1,268	 	
Grant revenue	 	 	345	 	 	1,402	 	
Research and development expenses	 	 	12,007	 	 	11,999	 	
General and administrative expenses	 	 	6,639	 	 	4,228	 	
Total other income (expense), net	 	 	(3,219	)	 	(682	)	
        Revenue.    Total revenue was $1.0 million for the year ended December 31, 2013, compared to $2.7 million for the year ended December 31, 2012. The decrease of $1.7 million was due to the completion of a government grant in May 2013 and the receipt of a $0.5 million commercialization milestone payment in 2012 that did not recur in 2013 under our license and collaboration agreement with BD. Our three-year joint development period under our agreement with BD concluded in September 2013.

        Research and development expenses.    Research and development expenses were $12.0 million for each of the years ended December 31, 2013 and 2012, with the following categorical changes:

•
$1.3 million increase in employee compensation and benefits expense, including employee stock-based compensation expense, to support the clinical development of ProHema and the preclinical development of our other product candidates; and a

•
$0.7 million increase in non-employee stock-based compensation expense; which were offset by

•
$1.3 million decrease in third-party professional consultant and service provider expenses relating to the preparation and conduct of our clinical trials of ProHema during 2012, including investigative site fees, costs to support regulatory filings and other clinical start-up activities; and a

•
$0.8 million decrease in expenditures for laboratory equipment and supplies relating to the preparation and conduct of our clinical trials of ProHema during 2012, and to the conduct of our preclinical research activities.

        General and administrative expenses.    General and administrative expenses were $6.6 million for the year ended December 31, 2013, compared to $4.2 million for the year ended December 31, 2012. The increase of $2.4 million in general and administrative expenses primarily reflects the following:

•
$0.8 million increase in employee compensation and benefits expense, including employee stock-based compensation expense, associated with the expansion of our executive management team;

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•
$0.8 million increase in professional fees for third-party accounting, legal and other consulting services to prepare for operating as a public company;

•
$0.4 million increase in non-employee stock-based compensation expense; and a

•
$0.2 million increase in intellectual property related expenses.

        Other expense, net.    Other expense, net, was $3.2 million for the year ended December 31, 2013, compared to $0.7 million for the year ended December 31, 2012. The $2.5 million increase in other expenses, net, was primarily due to a non-recurring $2.4 million fair value charge on the exchangeable share liability during the year ended December 31, 2013.

Liquidity and Capital Resources

        We have incurred losses and negative cash flows from operations since inception. As of December 31, 2014, we had an accumulated deficit of $112.4 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:

	 	2014	 	2013	 	2012	 	
 
	 	(in thousands)
	 	
Net cash used in operating activities	 	$	(22,419	)	$	(15,373	)	$	(13,274	)	
Net cash used in investing activities	 	 	(882	)	 	(238	)	 	(709	)	
Net cash provided by financing activities	 	 	18,366	 	 	60,560	 	 	16,683	 	
​	​	​	​	​	​	​	​	​	​	​	
Net increase (decrease) in cash and cash equivalents	 	$	(4,935	)	$	44,949	 	$	2,700	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	

Operating Activities

        Cash used in operating activities increased $7.0 million from $15.4 million for the year ended December 31, 2013 to $22.4 million for the year ended December 31, 2014. The primary driver of operating cash requirements was our net loss in each period. During the year ended December 31, 2014, we used cash from operating activities of $22.4 million, while our net loss was $25.9 million. The difference was primarily a result of $3.4 million of non-cash charges and deferrals, including $2.4 million of stock-based compensation expense, $0.5 million of depreciation expense and a $0.4 million charge relating to the fair value of shares of common stock of the Company that were earned and issued to the former stockholders of Verio pursuant to the achievement of a preclinical milestone.

        Cash used in operating activities increased $2.1 million from $13.3 million for the year ended December 31, 2012 to $15.4 million for the year ended December 31, 2013. The primary driver of operating cash requirements was our net loss in each period. During the year ended December 31, 2013, we used cash from operating activities of $15.4 million, while our net loss was $20.9 million. The difference was primarily a result of $5.2 million of non-cash charges and deferrals, including a $2.4 million charge relating to an increase in the fair value of the Exchangeable Shares, $1.6 million of stock-based compensation expense, $0.6 million of depreciation expense, a $0.3 million charge relating to an increase in the number of shares of common stock issuable upon the exchange of the Exchangeable Shares and a $0.3 million net change in our operating assets and liabilities.

Investing Activities

        During the years ended December 31, 2014, 2013 and 2012, investing activities used cash of $0.9 million, $0.2 million and $0.7 million, respectively, for the purchase of property and equipment.

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Financing Activities

        Financing activities provided cash of $18.4 million for the year ended December 31, 2014, primarily from $20.0 million of proceeds from long-term borrowings, offset by $1.8 million of principal payments, under our loan and security agreement with Silicon Valley Bank.

        Financing activities provided cash of $60.6 million for the year ended December 31, 2013, primarily from net proceeds from our IPO of $40.5 million and $23.7 million of proceeds from the issuance of convertible promissory notes, offset by $2.0 million of principal payments on our long-term debt under our loan and security agreement and $1.7 million of payments of outstanding principal and accrued interest on the convertible promissory notes.

        Financing activities provided cash of $16.7 million for the year ended December 31, 2012, primarily from the issuance of Series C convertible preferred stock.

        From our inception through December 31, 2014 we have funded our consolidated operations primarily through the public 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, 2014, we had cash and cash equivalents of $49.1 million.

Silicon Valley Bank Debt Facility

        On July 30, 2014, we entered into an Amended and Restated Loan and Security Agreement (the "Restated LSA") with Silicon Valley Bank (the "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 the Company and the Bank (the "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 (the "Term A Loan") and (ii) subject to the achievement of a specified clinical milestone relating to our Phase 2 clinical trial of ProHema, 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 $10.0 million under the Term B Loan.

        The Term A Loan and the Term B Loan mature on January 1, 2018 and June 1, 2018, respectively and bear interest at a fixed annual rate of 6.94% and 7.07%, respectively. Interest became payable in cash on a monthly basis beginning the first day of each month following the month in which the funding date of each loan occurred. The Company is required to make a monthly payment of interest only during the first twelve months following the funding date of each loan, and thereafter is required to repay the principal and interest under each loan in thirty equal monthly installments based on a thirty-month amortization schedule. The Company is required to make a final payment fee of 7.5%, equaling $0.8 million, of the funded amount for each of the Term A Loan and Term B Loan on their respective maturity dates.

        A portion of the proceeds from the Term A Loan were used to repay loans outstanding under the Loan Agreement and to pay for transaction fees related to the Restated LSA, including a commitment fee of $0.4 million paid by the Company to the Bank. Net proceeds from the Term A Loan, after repayment of loans outstanding under the Loan Agreement and transaction fees, were $8.8 million.

        Proceeds from the Term B Loan were $10.0 million. In connection with the funding of the Term B Loan, the Company issued the Bank and one of its affiliates fully-exercisable warrants to purchase an aggregate of 98,039 shares of the Company's common stock (the "Warrants") at an exercise price of $4.08 per share. The Warrants expire in December 2021. The aggregate fair value of the Warrants was determined to be $0.4 million using the Black-Scholes option pricing model (see Note 5 of the Notes to the Consolidated Financial Statements for additional information).

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        The net proceeds from the Term A and Term B Loans have been used for, and we expect to continue to use net proceeds for, working capital purposes, including the research and development of our product candidates and cellular programming technology.

Initial Public Offering and 2013 Convertible Note Financings

        On October 4, 2013, we completed our IPO, whereby we sold 7,666,667 shares of common stock at a public offering price of $6.00 per share. Gross proceeds from the offering were $46.0 million. After giving effect to underwriting discounts, commissions, and other cash costs related to the offering, net proceeds were $40.5 million.

        In June and July 2013, we issued convertible promissory notes in an aggregate principal amount of $3.7 million to certain existing stockholders. In connection with the completion of our IPO on October 4, 2013, the outstanding principal and all accrued and unpaid interest due on the notes converted to 625,828 shares of our common stock. The notes accrued interest at 2% per year.

        In August 2013, we issued convertible promissory notes in an aggregate principal amount of $20.0 million to certain new investors. In connection with the completion of our IPO on October 4, 2013, we repaid $1.7 million of then-outstanding principal and unpaid accrued interest on the notes in cash, with the remaining outstanding principal converting to 3,053,573 shares of our common stock. The notes accrued interest at 2% per year.

Shelf Registration Statement

        In October 2014, the SEC declared effective a shelf registration statement filed by us in October 2014. The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time for an aggregate offering price of up to $100 million. The specific terms of any offering, if any, under the shelf registration statement would be established at the time of such offering. As of March 12, 2015, we had not sold any shares under this shelf registration statement.

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. 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 as of December 31, 2014 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 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

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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 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:

•
the initiation, progress, size, timing, duration, costs and results of preclinical studies and clinical trials for our product candidates;

•
the time, cost and outcome of seeking and obtaining regulatory approvals by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than, or evaluate clinical endpoints other than those that we currently expect;

•
the number and characteristics of product candidates that we pursue;

•
the extent to which we are required to pay milestone or other payments under our in-license agreements and the timing of such payments;

•
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

•
our need to expand our research and development activities, including our need and ability to hire additional employees;

•
our need to implement additional infrastructure and internal systems and hire additional employees to operate as a public company;

•
the establishment of collaborations and strategic alliances;

•
the effect of competing technological and market developments; and

•
the cost of establishing sales, distribution, marketing and manufacturing capabilities, and the pricing and reimbursement, for any products for which we may receive regulatory approval.

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

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Contractual Obligations and Commitments

        The following table summarizes our contractual obligations at December 31, 2014 that are expected to affect our liquidity and cash flows in future periods:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(in thousands)
	 	Total	 	Less than
1 Year	 	Years 1 - 3	 	Years 3 - 5	 	More than
5 Years	 	
Long-term debt (including interest and fees)	 	$	24,468	 	$	2,899	 	$	17,514	 	$	4,055	 	$	—	 	
Operating lease obligations	 	 	1,423	 	 	943	 	 	480	 	 	—	 	 	—	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Total	 	$	25,891	 	$	3,842	 	$	17,994	 	$	4,055	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	
        In January 2015, we entered into a sublease for additional laboratory space. The sublease expires in September 2017 and, under the sublease, future minimum lease rental payments for the years ended December 31, 2015, 2016 and 2017 are $0.3 million, $0.3 million and $0.2 million, respectively. Additionally, in March 2015, we extended the term of the lease on our existing facility for an additional 15 months. The extension expires in September 2017 and, under the lease extension, future minimum lease rental payments for the years ended December 31, 2016 and 2017 are $0.5 million and $0.8 million, respectively.

        We also 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:

•
Under an exclusive license agreement with Children's Medical Center Corporation pursuant to which we license certain patents for use in our HSC modulation platform and our pharmacologically-modulated HSC product candidates, including ProHema, we are required to make annual maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate milestone payments we may be obligated to make per product are $5.0 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low to mid-single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of any sublicense income.

•
Under an exclusive license agreement with the Whitehead Institute for Biomedical Research, pursuant to which we license certain patents relating to the reprogramming of somatic cells, we are required to make annual maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate milestone payments we may be obligated to make per product are $2.3 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of any sublicense income.

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•
We are required to make annual maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by various exclusive license agreements with The Scripps Research Institute, or TSRI, pursuant to which we license certain patents relating to the use of small molecules in the reprogramming of somatic cells. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low to mid-single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under this agreement, but will be required to pay a percentage of any sublicense income.

        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 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 related to changes in interest rates. As of December 31, 2014, we had cash and cash equivalents of $49.1 million, including $35.3 million of money market mutual funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our cash equivalents are in short-term securities. Due to the short-term duration of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not be expected to have a material effect on the fair market value of our portfolio.

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ITEM 8.    Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Fate Therapeutics, Inc.

        We have audited the accompanying consolidated balance sheets of Fate Therapeutics, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fate Therapeutics, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

/s/ERNST & YOUNG LLP

San Diego, California

March 12, 2015

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Fate Therapeutics, Inc.

Consolidated Balance Sheets

(In thousands, except par value and share data)

 
	 	December 31,	 	
 
	 	2014	 	2013	 	
Assets	 	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	49,101	 	$	54,036	 	
Prepaid expenses and other current assets	 	 	771	 	 	615	 	
​	​	​	​	​	​	​	​	
Total current assets	 	 	49,872	 	 	54,651	 	
Property and equipment, net	 	 	1,200	 	 	810	 	
Restricted cash	 	 	122	 	 	122	 	
Other assets	 	 	10	 	 	—	 	
​	​	​	​	​	​	​	​	
Total assets	 	$	51,204	 	$	55,583	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
Liabilities and Stockholders' Equity	 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	
Accounts payable	 	$	645	 	$	682	 	
Accrued expenses	 	 	2,260	 	 	2,039	 	
Current portion of deferred rent	 	 	85	 	 	53	 	
Repurchase liability for unvested equity awards	 	 	45	 	 	94	 	
Long-term debt, current portion	 	 	1,546	 	 	1,732	 	
​	​	​	​	​	​	​	​	
Total current liabilities	 	 	4,581	 	 	4,600	 	
Deferred rent	 	 	51	 	 	135	 	
Accrued expenses	 	 	149	 	 	—	 	
Long-term debt, net of current portion	 	 	18,083	 	 	—	 	
Commitments and contingencies (Note 4)	 	 	 	 	 	 	 	
Stockholders' Equity:	 	 	 	 	 	 	 	
Preferred stock, $0.001 par value; authorized shares—5,000,000 at December 31, 2014 and December 31, 2013; no shares issued or outstanding	 	 	—	 	 	—	 	
Common stock, $0.001 par value; authorized shares—150,000,000 at December 31, 2014 and December 31, 2013; issued and outstanding—20,569,399 at December 31, 2014 and 20,434,080 at December 31, 2013	 	 	21	 	 	20	 	
Additional paid-in capital	 	 	140,711	 	 	137,337	 	
Accumulated deficit	 	 	(112,392	)	 	(86,509	)	
​	​	​	​	​	​	​	​	
Total stockholders' equity	 	 	28,340	 	 	50,848	 	
​	​	​	​	​	​	​	​	
Total liabilities and stockholders' equity	 	$	51,204	 	$	55,583	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	

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)

 
	 	For the Years Ended December 31,	 	
 
	 	2014	 	2013	 	2012	 	
Revenue:	 	 	 	 	 	 	 	 	 	 	
Collaboration revenue	 	$	—	 	$	626	 	$	1,268	 	
Grant revenue	 	 	—	 	 	345	 	 	1,402	 	
​	​	​	​	​	​	​	​	​	​	​	
Total revenue	 	 	—	 	 	971	 	 	2,670	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	16,435	 	 	12,007	 	 	11,999	 	
General and administrative	 	 	8,469	 	 	6,639	 	 	4,228	 	
​	​	​	​	​	​	​	​	​	​	​	
Total operating expenses	 	 	24,904	 	 	18,646	 	 	16,227	 	
​	​	​	​	​	​	​	​	​	​	​	
Loss from operations	 	 	(24,904	)	 	(17,675	)	 	(13,557	)	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	
Interest income	 	 	2	 	 	6	 	 	1	 	
Interest expense	 	 	(549	)	 	(796	)	 	(487	)	
Loss on extinguishment of debt	 	 	(432	)	 	—	 	 	(323	)	
Change in fair value of exchangeable shares	 	 	—	 	 	(2,421	)	 	90	 	
Change in fair value of warrant liability	 	 	—	 	 	(8	)	 	37	 	
​	​	​	​	​	​	​	​	​	​	​	
Total other expense, net	 	 	(979	)	 	(3,219	)	 	(682	)	
​	​	​	​	​	​	​	​	​	​	​	
Net loss and comprehensive loss	 	$	(25,883	)	$	(20,894	)	$	(14,239	)	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Net loss per common share, basic and diluted	 	$	(1.27	)	$	(3.54	)	$	(13.06	)	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Weighted-average common shares used to compute basic and diluted net loss per share	 	 	20,451,840	 	 	5,896,171	 	 	1,090,317	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	

See accompanying notes.

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Fate Therapeutics, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)

(in thousands, except share data)

 
	 	Convertible
Preferred Stock	 	 

	 	 

 
	 	 	 	Common Stock	 	 
	 	 
	 	Total
Stockholders'
Equity
(Deficit)	 	 	 	 	 	 	 	 	
 
	 	 	 	 	 	Additional
Paid-in
Capital	 	Accumulated
Deficit	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 
	 	Shares	 	Amount	 	Shares	 	Amount	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2011	 	 	32,353,366	 	$	50,309	 	 	1,124,689	 	$	1	 	$	692	 	$	(51,376	)	$	(50,683	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Exercise of stock options	 	 	—	 	 	—	 	 	11,154	 	 	—	 	 	15	 	 	—	 	 	15	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock at $0.25 per share for cash	 	 	—	 	 	—	 	 	118,360	 	 	—	 	 	192	 	 	—	 	 	192	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase liability for unvested equity awards	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(143	)	 	—	 	 	(143	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock for technology	 	 	—	 	 	—	 	 	15,385	 	 	—	 	 	21	 	 	—	 	 	21	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Conversion of preferred stock into common stock	 	 	(5,694,180	)	 	(11,889	)	 	87,604	 	 	—	 	 	11,889	 	 	—	 	 	11,889	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Exchange of debt and common stock for Series B-1 preferred stock	 	 	1,500,000	 	 	1,380	 	 	(23,077	)	 	—	 	 	(32	)	 	—	 	 	(32	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of Series C preferred stock for cash at $1.00 per share, net of issuance costs of $84	 	 	16,808,504	 	 	16,726	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation	 	 	—	 	 	—	 	 	—	 	 	—	 	 	155	 	 	—	 	 	155	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(14,239	)	 	(14,239	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2012	 	 	44,967,690	 	 	56,526	 	 	1,334,115	 	 	1	 	 	12,789	 	 	(65,615	)	 	(52,825	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Exercise of stock options	 	 	—	 	 	—	 	 	35,852	 	 	—	 	 	23	 	 	—	 	 	23	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase liability for unvested equity awards	 	 	—	 	 	—	 	 	—	 	 	—	 	 	49	 	 	—	 	 	49	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation	 	 	—	 	 	—	 	 	—	 	 	—	 	 	1,554	 	 	—	 	 	1,554	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock for technology	 	 	—	 	 	—	 	 	7,692	 	 	—	 	 	13	 	 	—	 	 	13	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beneficial conversion feature related to convertible notes	 	 	—	 	 	—	 	 	—	 	 	—	 	 	336	 	 	—	 	 	336	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Impact of initial public offering:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Initial public offering of common stock, net of $5,520 of offering costs	 	 	—	 	 	—	 	 	7,666,667	 	 	8	 	 	40,472	 	 	—	 	 	40,480	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Conversion of convertible preferred stock into common stock	 	 	(44,967,690	)	 	(56,526	)	 	7,229,590	 	 	7	 	 	56,519	 	 	—	 	 	56,526	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Conversion of convertible notes into common stock	 	 	—	 	 	—	 	 	3,679,401	 	 	4	 	 	22,072	 	 	—	 	 	22,076	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Exchange of exchangeable shares into common stock	 	 	—	 	 	—	 	 	480,763	 	 	—	 	 	3,318	 	 	—	 	 	3,318	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrant liability reclassification	 	 	—	 	 	—	 	 	—	 	 	—	 	 	192	 	 	—	 	 	192	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(20,894	)	 	(20,894	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2013	 	 	—	 	 	—	 	 	20,434,080	 	 	20	 	 	137,337	 	 	(86,509	)	 	50,848	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Exercise of stock options, net of issuance costs	 	 	—	 	 	—	 	 	96,856	 	 	1	 	 	141	 	 	—	 	 	142	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase liability for unvested equity awards	 	 	—	 	 	—	 	 	—	 	 	—	 	 	49	 	 	—	 	 	49	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation	 	 	—	 	 	—	 	 	—	 	 	—	 	 	2,434	 	 	—	 	 	2,434	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of warrants for common stock	 	 	—	 	 	—	 	 	—	 	 	—	 	 	375	 	 	—	 	 	375	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of stock on achievement of milestone	 	 	—	 	 	—	 	 	38,463	 	 	—	 	 	375	 	 	—	 	 	375	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(25,883	)	 	(25,883	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2014	 	 	—	 	$	—	 	 	20,569,399	 	$	21	 	$	140,711	 	$	(112,392	)	$	28,340	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

See accompanying notes.

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Fate Therapeutics, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 
	 	Years Ended December 31,	 	
 
	 	2014	 	2013	 	2012	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(25,883	)	$	(20,894	)	$	(14,239	)	
Adjustments to reconcile net loss to net cash used in operating activities	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	496	 	 	571	 	 	590	 	
Issuances of common stock for technology	 	 	—	 	 	13	 	 	21	 	
Stock-based compensation	 	 	2,434	 	 	1,554	 	 	155	 	
Amortization of discounts	 	 	24	 	 	394	 	 	84	 	
Noncash interest expense	 	 	167	 	 	147	 	 	121	 	
Deferred rent	 	 	(52	)	 	(195	)	 	(197	)	
Deferred revenue	 	 	—	 	 	(63	)	 	(83	)	
Stock-based milestone charges and change in fair value of exchangeable shares	 	 	375	 	 	2,767	 	 	(12	)	
Change in fair value of preferred stock warrants	 	 	—	 	 	8	 	 	(37	)	
Loss on disposal of assets	 	 	—	 	 	18	 	 	—	 	
Loss on extinguishment of debt	 	 	3	 	 	—	 	 	323	 	
Changes in assets and liabilities:	 	 	 	 	 	 	 	 	 	 	
Prepaid expenses and other assets	 	 	(146	)	 	(1,271	)	 	(405	)	
Accounts payable and accrued expenses	 	 	163	 	 	1,578	 	 	405	 	
​	​	​	​	​	​	​	​	​	​	​	
Net cash used in operating activities	 	 	(22,419	)	 	(15,373	)	 	(13,274	)	
Cash flows from investing activities	 	 	 	 	 	 	 	 	 	 	
Purchase of property and equipment	 	 	(882	)	 	(244	)	 	(709	)	
Proceeds from sale of property and equipment	 	 	—	 	 	6	 	 	—	 	
​	​	​	​	​	​	​	​	​	​	​	
Net cash used in investing activities	 	 	(882	)	 	(238	)	 	(709	)	
Cash flows from financing activities	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock, net of repurchases and issuance cost	 	 	142	 	 	23	 	 	207	 	
Proceeds from initial public offering, net of offering costs	 	 	—	 	 	40,480	 	 	—	 	
Issuance of convertible promissory notes	 	 	—	 	 	23,736	 	 	—	 	
Proceeds from long-term debt	 	 	20,000	 	 	—	 	 	—	 	
Payments on long-term debt	 	 	(1,750	)	 	(2,000	)	 	(250	)	
Payment on convertible promissory note	 	 	—	 	 	(1,679	)	 	—	 	
Issuance of preferred stock for cash, net of offering costs	 	 	—	 	 	—	 	 	16,726	 	
Payments for the issuance of debt	 	 	(26	)	 	—	 	 	—	 	
​	​	​	​	​	​	​	​	​	​	​	
Net cash provided by financing activities	 	 	18,366	 	 	60,560	 	 	16,683	 	
​	​	​	​	​	​	​	​	​	​	​	
Net change in cash and cash equivalents	 	 	(4,935	)	 	44,949	 	 	2,700	 	
Cash and cash equivalents at beginning of the period	 	 	54,036	 	 	9,087	 	 	6,387	 	
​	​	​	​	​	​	​	​	​	​	​	
Cash and cash equivalents at end of the period	 	$	49,101	 	$	54,036	 	$	9,087	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Supplemental disclosure of cash flow information	 	 	 	 	 	 	 	 	 	 	
Interest paid	 	$	494	 	$	250	 	$	282	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Supplemental schedule of noncash investing and financing activities	 	 	 	 	 	 	 	 	 	 	
Issuance of warrants for common stock in connection with long-term debt	 	$	375	 	$	—	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Beneficial conversion feature related to convertible notes	 	$	—	 	$	336	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Conversion of convertible preferred stock into common stock	 	$	—	 	$	56,526	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Conversion of convertible notes into common stock	 	$	—	 	$	22,076	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Exchange of exchangeable shares into common stock	 	$	—	 	$	3,318	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Warrant liability reclassification to equity	 	$	—	 	$	192	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	

See accompanying notes.

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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 engaged in the development of programmed cellular therapeutics for the treatment of severe, life-threatening diseases. The Company has built a novel platform to program the function and fate of cells ex vivo  using pharmacologic modulators, such as small molecules. The Company's lead product candidate, ProHema®, is an ex vivo  programmed hematopoietic cellular therapeutic, which is currently in clinical development for the treatment of hematologic malignancies and rare genetic disorders in patients undergoing hematopoietic stem cell transplantation. The Company is also developing ex vivo  programmed hematopoietic and myogenic cellular product candidates using its patent-protected induced pluripotent stem cell technology.

        As of December 31, 2014, the Company has devoted substantially all of its efforts to product development, raising capital and building infrastructure and has not generated revenues from its planned principal operations.

Initial Public Offering

        On October 4, 2013, the Company completed its initial public offering (the "IPO") whereby it sold 7,666,667 shares of common stock at a public offering price of $6.00 per share. Gross proceeds from the offering were $46.0 million. After giving effect to underwriting discounts, commissions and other cash costs related to the offering, net proceeds were $40.5 million. In addition, each of the following occurred in connection with the completion of the IPO on October 4, 2013:

•
the conversion of all outstanding shares of the Company's convertible preferred stock into 7,229,590 shares of the Company's common stock;

•
the conversion of the Company's $22.1 million of outstanding principal and accrued interest on its convertible notes into 3,679,401 shares of common stock, the write-off of $0.3 million of unamortized debt discount and the related cash repayment of $1.7 million of outstanding principal and accrued interest on the convertible notes;

•
the issuance of 480,763 shares of the Company's common stock pursuant to the redemption of an aggregate of 900,000 exchangeable shares of Fate Therapeutics (Canada) Inc. ("Fate Canada"), a subsidiary of the Company incorporated in Canada, resulting in a final fair value adjustment charge of $0.4 million on the exchangeable shares, and the resultant reclassification of the exchangeable share liability to additional paid-in capital;

•
the conversion of warrants to purchase 230,000 shares of convertible preferred stock into warrants to purchase 36,074 shares of the Company's common stock, and the resultant reclassification of the warrant liability to additional paid-in capital; and

•
the filing of an amended and restated certificate of incorporation on October 3, 2013, authorizing 150,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock.

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Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

Use of Estimates

        The Company's consolidated financial statements are prepared in accordance with United States generally accepted accounting principles. 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 the valuation of equity awards and 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 Canada, Fate Therapeutics Ltd., incorporated in the United Kingdom, and Destin Therapeutics Inc., incorporated in Canada, which was dissolved in June 2014. 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 segment.

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 short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, which is considered a Level 2 input, 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

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Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

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

        As of December 31, 2014 and 2013, the carrying amount of cash equivalents was $35.3 million and $52.3 million, respectively, which approximates fair value and was determined based upon Level 1 inputs. Cash equivalents primarily consisted of money market funds. As of December 31, 2014 and 2013, the Company did not hold any Level 2 or Level 3 financial assets that are recorded at fair value on a recurring basis.

        As of December 31, 2014 and 2013, the Company had no liabilities measured at fair value on a recurring basis. Financial liabilities that were previously measured at fair value on a recurring basis include the preferred stock warrant liability and exchangeable shares for the period the liabilities were outstanding. The preferred stock warrant liability was recorded at fair value using the Black-Scholes option pricing model and the exchangeable share liability was recorded at fair value based on the fair value of the underlying common stock. These liabilities were reclassified from liabilities to stockholders' equity as a result of the completion of the Company's IPO on October 4, 2013, which was the final fair value measurement date for each.

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

        The following table provides a reconciliation of all liabilities measured at fair value using Level 3 significant unobservable inputs (in thousands):

	 	Warrant
Liability	 	Exchangeable
Share
Liability	 	
Balance at December 31, 2012	 	$	184	 	$	551	 	
Issuance of exchangeable shares	 	 	—	 	 	346	 	
Change in fair value	 	 	8	 	 	2,421	 	
Transfer to stockholders' equity at fair value upon closing of IPO	 	 	(192	)	 	(3,318	)	
​	​	​	​	​	​	​	​	
Balance at December 31, 2013	 	$	—	 	$	—	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
Cash and Cash Equivalents

        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.

Concentration of Credit Risk

        Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash equivalents. 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 are held.

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Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

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. Repairs and maintenance costs are charged to expense as incurred.

Impairment of Long-Lived Assets

        Long-lived assets consist primarily of property and equipment. 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. 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.

Accrued Expenses

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

	 	December 31,	 	
 
	 	2014	 	2013	 	
Accrued payroll and other employee benefits	 	$	1,234	 	$	1,002	 	
Accrued clinical trial costs	 	 	415	 	 	251	 	
Accrued other	 	 	611	 	 	786	 	
​	​	​	​	​	​	​	​	
Accrued expenses	 	$	2,260	 	$	2,039	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
        Long-term accrued expenses consist primarily of accruals for the final payment fees associated with our long-term debt.

Deferred Rent

        Deferred rent consists of the difference between cash payments and the recognition of rent expense on a straight-line basis for the facilities the Company occupies. The Company's lease for its facilities provides for fixed increases in minimum annual rental payments. The total amount of rental payments due over the lease term is being charged to rent expense ratably over the life of the lease.

Revenue Recognition

        The Company recognizes revenues when all four of the following criteria are met: (i) persuasive evidence that an agreement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

        Revenue arrangements with multiple elements are analyzed to determine whether the elements can be divided into separate units of accounting or whether the elements must be accounted for as a single unit of accounting. The Company divides the elements into separate units of accounting and applies the applicable revenue recognition criteria to each of the elements, if the delivered elements have value to the customer on a stand-alone basis, if the arrangement includes a general right of return relative to

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Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

the delivered elements, and if the delivery or performance of the undelivered elements is considered probable and substantially within the Company's control.

        For transactions entered into prior to 2011, revenue was allocated to each element based on its relative fair value when objective and reliable evidence of fair value existed for all elements in an arrangement. If an element was sold on a stand-alone basis, the fair value of the element was the price charged for the element. When the Company was unable to establish fair value for delivered elements or when fair value of undelivered elements had not been established, revenue was deferred until all elements were delivered or until fair value could be objectively determined for any undelivered elements.

        Beginning in 2011, revenue has been allocated to each element at the inception of the arrangement using the relative selling price method that is based on a three-tier hierarchy. The relative selling price method requires that the estimated selling price for each element be based on vendor-specific objective evidence ("VSOE") of fair value, which represents the price charged for each element when it is sold separately or, for an element not yet being sold separately, the price established by management. When VSOE of fair value is not available, third-party evidence ("TPE") of fair value is acceptable, or a best estimate of selling price is used if neither VSOE nor TPE is available. A best estimate of selling price should be consistent with the objective of determining the price at which the Company would transact if the element were sold regularly on a stand-alone basis and should also take into account market conditions and company-specific factors. The Company has not entered into or materially modified any multiple element arrangements subsequent to 2010.

        Revenue arrangements with multiple elements may include license fees, research and development payments, milestone payments, other contingent payments, and royalties on any product sales derived from collaborations. The Company recognizes nonrefundable license fees with stand-alone value as revenue at the time that the Company has satisfied all performance obligations, and recognizes license fees without stand-alone value as revenue in combination with any undelivered performance obligations. The Company recognizes a research and development payment as revenue over the term of the collaboration agreement as contracted amounts are earned, or reimbursable costs are incurred, under the agreement, where contracted amounts are considered to be earned in relative proportion to the performance required under the applicable agreement. The Company recognizes a milestone payment, which is contingent upon the achievement of a milestone in its entirety, as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. These criteria include the following: (i) the consideration being earned should be commensurate with either the Company's performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the Company's performance to achieve the milestone; (ii) the consideration being earned should relate solely to past performance; (iii) the consideration being earned should be reasonable relative to all deliverables and payment terms in the arrangement; and (iv) the milestone should be considered in its entirety and cannot be bifurcated into substantive and nonsubstantive components. Any amounts received pursuant to revenue arrangements with multiple elements prior to satisfying the Company's revenue recognition criteria are recorded as deferred revenue on the Company's consolidated balance sheets.

        Revenue from government grants is recorded when reimbursable expenses are incurred under the grant in accordance with the terms of the grant award. The receivable for reimbursable amounts that have not been collected is reflected in prepaid and other current assets as of December 31, 2013. No such amounts were outstanding as of December 31, 2014.

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Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

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 grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. 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 Company accounts for stock options and restricted stock awards to non-employees using the fair value approach. Stock options and restricted stock awards to non-employees are subject to periodic revaluation over their vesting terms. 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 performance condition is determined to be probable of achievement or when it has been achieved.

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.

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Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

        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.

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. Net loss and comprehensive loss were the same for all periods presented.

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. Excluded from the weighted-average number of shares outstanding are shares which have been issued upon the early exercise of stock options and are subject to future vesting and unvested restricted stock totaling 76,947 shares, 107,570 shares, and 173,772 shares for the years ended December 31, 2014, 2013, and 2012, respectively. Diluted net loss per common share is calculated by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Dilutive common stock equivalents are comprised of convertible preferred stock, warrants for the purchase of convertible preferred stock and common stock, exchangeable shares and common stock options 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):

	 	As of December 31,	 	
 
	 	2014	 	2013	 	2012	 	
Convertible preferred stock outstanding	 	 	—	 	 	—	 	 	7,229,590	 	
Warrants for convertible preferred stock	 	 	—	 	 	—	 	 	36,074	 	
Warrants for common stock	 	 	134,113	 	 	36,074	 	 	—	 	
Exchangeable shares	 	 	—	 	 	—	 	 	403,841	 	
Common stock options	 	 	2,425,969	 	 	1,726,991	 	 	1,432,369	 	
​	​	​	​	​	​	​	​	​	​	​	
 	 	 	2,560,082	 	 	1,763,065	 	 	9,101,874	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
        The convertible preferred stock and exchangeable shares were converted into shares of the Company's common stock as a result of the completion of the Company's IPO on October 4, 2013.

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Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

        In August 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2014-15, which defined management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related disclosure. ASU 2014-15 defined the term substantial doubt and requires an assessment for a period of one year after the date of the issuance of the financial statements. It requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, and requires an express statement and other disclosures when substantial doubt is not alleviated. The guidance becomes effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact that the adoption of this guidance will have on its Consolidated Financial Statements.

        In June 2014, the FASB issued ASU 2014-10, which eliminated all incremental financial reporting requirements from United States generally accepted accounting principles (U.S. GAAP) for development stage entities, including inception-to-date information, the labeling of financial statements as those of a development stage entity, and the disclosure of a description of the development stage activities in which the entity is engaged. Effectively, ASU 2014-10 removed the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification. For public business entities, this guidance is effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption of the guidance is permitted for any annual reporting period or interim period for which the entity's financial statements have not yet been issued. Accordingly, we elected the early adoption of ASU 2014-10 beginning with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, and no longer disclose inception-to-date information or incremental financial reporting requirements related to development stage entities.

        In May 2014, the FASB issued ASU 2014-09, which created a single, principle-based revenue recognition model that will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance. Entities will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. The model provides that entities follow five steps: (i) identify the contract with a customer; (ii) 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. For public business entities, the guidance becomes effective for annual reporting periods beginning after December 15, 2016, and interim periods therein. We are currently evaluating the impact that the adoption of this guidance will have on its Consolidated Financial Statements.

2. Asset Acquisition of Verio Therapeutics Inc.

        Acquisitions are analyzed to determine whether an acquired set of activities and assets represents a business. A business is considered to be an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. A business commonly has three elements: inputs, processes applied to those inputs, and outputs. A set of activities and assets is required to have only the first two of those three elements, which together are or

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Notes to Consolidated Financial Statements (Continued)

2. Asset Acquisition of Verio Therapeutics Inc. (Continued)

will be used to create outputs, to be considered a business. If an acquired set of activities and assets does not represent a business, the acquired set of activities and assets represents an asset.

        On April 7, 2010, the Company acquired Verio Therapeutics Inc. ("Verio"), a development stage company headquartered in Ottawa, Ontario to gain access to its exclusively licensed intellectual property. Based on its evaluation of the set of activities and assets of Verio, the Company determined that Verio did not meet the definition of a business. Based on its assessment, the Company determined that Verio was a development stage enterprise without any material inputs; without any processes that create, or have the ability to create, outputs; and without any outputs. As such, the Company accounted for the acquisition of Verio as an asset acquisition and charged the associated consideration paid for the assets to research and development expense.

        In connection with the asset acquisition of Verio, the stockholders of Verio received 900,000 non-voting shares of Fate Canada (the "Exchangeable Shares") that were initially exchangeable into 138,462 shares of the Company's common stock and, subject to the validation of certain scientific data and the achievement of certain preclinical, clinical, commercial and financial milestones, were exchangeable for up to 884,605 shares of the Company's common stock. Additionally, the Company assumed $212,090 of net liabilities of Verio. The purchase price of the Verio asset acquisition is summarized as follows (in thousands):
 	 	 	 	 	
Net liabilities	 	$	212	 	
Initial fair value of Exchangeable Shares	 	 	234	 	
​	​	​	​	​	
 	 	$	446	 	
​	​	​	​	​	
​	​	​	​	​	
​	​	​	​	​	
        The amounts in the table above represent an estimate of the fair value of purchased in-process technology for projects that, as of the acquisition date, had not yet reached technological feasibility and had no alternative future use.

        As a result of the Company's IPO on October 4, 2013, 480,763 shares of the Company's common stock were issued during the fourth quarter of 2013 pursuant to the redemption of the Exchangeable Shares. The total number of shares of the Company's common stock issued upon the exchange of the Exchangeable Shares as a result of the IPO had increased from 138,462 shares of the Company's common stock to a total of 480,763 shares of the Company's common stock based upon the achievement of certain contractual milestones.

        During the year ended December 31, 2014, based on the achievement of certain preclinical milestones, an additional 38,463 shares of the Company's common stock were earned and issued, resulting in a $0.4 million charge to research and development expense. The Company may issue an additional 365,379 shares of the Company's common stock based on the achievement of additional contractual milestones as follows: (i) 38,461 shares for the achievement of certain preclinical milestones, (ii) 211,538 shares for the achievement of certain clinical milestones and (iii) 115,380 shares for the achievement of certain commercialization milestones, such that the maximum aggregate number of shares of the Company's common stock issuable in connection with the Verio acquisition is 884,605.

        Prior to the Company's IPO, on the date of achievement of a milestone, the fair value of the related increase in the number of shares of common stock of the Company into which the Exchangeable Shares were exchangeable was charged to research and development expense.

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Notes to Consolidated Financial Statements (Continued)

2. Asset Acquisition of Verio Therapeutics Inc. (Continued)

Additionally, the fair value of the Exchangeable Shares was re-measured at each reporting date, with any changes in fair value being recognized in the change in fair value of the exchangeable share liability, a component of other income (expense), in the accompanying consolidated statements of operations. The fair value of the exchangeable share liability was equal to the fair value of the number of shares of common stock of the Company into which the Exchangeable Shares were exchangeable.

        For the years ended December 31, 2013 and 2012, the Company recorded other income (expense) related to the change in fair value of the Exchangeable Shares of $(2.4) million and $0.1 million, respectively. For the fourth quarter of 2013, the Company recorded other income (expense) of $(0.4) million related to the final fair value adjustment of the exchangeable share liability as of the IPO date, and reclassified the then-corresponding $3.3 million exchangeable share liability into additional paid-in capital.

        The changes in the number of shares of the Company's common stock issuable, and the initial fair value of the issuable shares, are summarized as follows (in thousands, except share and per share amounts):

	 	Shares of
Common
Stock	 	Fair Value Per
Share of
Underlying
Common Stock	 	Initial Fair
Value of
Common Stock	 	
April 2010	 	 	138,462	 	$	1.69	 	$	234	 	
March 2011	 	 	92,308	 	 	1.69	 	 	156	 	
May 2011	 	 	115,380	 	 	1.69	 	 	195	 	
April 2012	 	 	57,691	 	 	1.37	 	 	78	 	
July 2013	 	 	76,922	 	 	4.49	 	 	346	 	
March 2014	 	 	38,463	 	 	9.74	 	 	375	 	
​	​	​	​	​	​	​	​	​	​	​	
 	 	 	519,226	 	 	 	 	$	1,384	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
3. Property and Equipment

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

	 	December 31,	 	
 
	 	2014	 	2013	 	
Furniture and fixtures	 	$	265	 	$	247	 	
Computer and office equipment	 	 	169	 	 	123	 	
Software	 	 	103	 	 	103	 	
Leasehold improvements—building	 	 	66	 	 	60	 	
Scientific equipment	 	 	3,384	 	 	2,573	 	
​	​	​	​	​	​	​	​	
Property and equipment, gross	 	 	3,987	 	 	3,106	 	
Less accumulated depreciation and amortization	 	 	(2,787	)	 	(2,296	)	
​	​	​	​	​	​	​	​	
Property and equipment, net	 	$	1,200	 	$	810	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
        Depreciation expense related to property and equipment was $0.5 million, $0.6 million, and $0.6 million, for the years ended December 31, 2014, 2013, and 2012, respectively. No material gains or

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Notes to Consolidated Financial Statements (Continued)

3. Property and Equipment (Continued)

losses on the disposal of property and equipment have been recorded for the years ended December 31, 2014, 2013, and 2012.

4. Long-Term Debt, Commitments and Contingencies

Long-Term Debt

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

	 	Years Ended
December 31,	 	
 
	 	2014	 	2013	 	
Long-term debt	 	$	20,000	 	$	1,750	 	
Less debt discount, net of current portion	 	 	(371	)	 	—	 	
​	​	​	​	​	​	​	​	
Long-term debt, net of discount	 	 	19,629	 	 	1,750	 	
​	​	​	​	​	​	​	​	
Less current portion of long-term debt	 	 	(1,546	)	 	(1,750	)	
​	​	​	​	​	​	​	​	
Long-term debt, net of current portion	 	$	18,083	 	$	—	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
Current portion of long-term debt	 	$	1,546	 	$	1,750	 	
Current portion of debt discount	 	 	—	 	 	(18	)	
​	​	​	​	​	​	​	​	
Current portion of long-term debt, net	 	$	1,546	 	$	1,732	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
        On July 30, 2014, the Company entered into an 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 (the "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 relating to the Company's Phase 2 clinical trial of ProHema, 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.

        The Term A Loan and the Term B Loan mature on January 1, 2018 and June 1, 2018, respectively and bear interest at a fixed annual rate of 6.94% and 7.07%, respectively. Interest became payable in cash on a monthly basis beginning the first day of each month following the month in which the funding date of each loan occurred. The Company is required to make a monthly payment of interest only during the first twelve months following the funding date of each loan, and thereafter is required to repay the principal and interest under each loan in thirty equal monthly installments based on a thirty-month amortization schedule. The Company is required to make a final payment fee of 7.5%, equaling $0.8 million, of the funded amount for each of the Term A Loan and Term B Loan on the respective maturity dates. The final payment fees are accrued as interest expense over the terms of the loans and recorded in long-term accrued expenses as of December 31, 2014.

        A portion of the proceeds from the Term A Loan were used to repay loans outstanding under the Loan Agreement and to pay for transaction fees related to the Restated LSA, including a commitment fee of $0.4 million paid by the Company to the Bank. Net proceeds from the Term A Loan, after repayment of loans outstanding under the Loan Agreement and transaction fees, were $8.8 million.

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Notes to Consolidated Financial Statements (Continued)

4. Long-Term Debt, Commitments and Contingencies (Continued)

        The Company determined the repayment of the Loan Agreement was a debt extinguishment, and accounted for the Term A Loan at fair value as of the issuance date accordingly. For the year ended December 31, 2014, the Company recorded a loss on debt extinguishment of $0.4 million, primarily related to the commitment fee paid to the Bank.

        Proceeds from the Term B Loan were $10.0 million. In connection with the funding of the Term B Loan, the Company issued the Bank and one of its affiliates fully-exercisable warrants to purchase an aggregate of 98,039 shares of the Company's common stock (the "Warrants") at an exercise price of $4.08 per share. The Warrants expire in December 2021. The aggregate fair value of the Warrants was determined to be $0.4 million using the Black-Scholes option pricing model (see Note 5 of the Notes to the Consolidated Financial Statements for additional information) and was recorded as a debt discount on the Term B Loan and will be amortized to interest expense over the term of the Term B Loan using the effective interest method.

        The Company determined the effective interest rates of the Term A Loan and Term B Loan to be 10.3% and 12.0%, respectively. For the year ended December 31, 2014 the Company recorded $0.5 million in aggregate interest expense related to the Term A and Term B Loans. For the years ended December 31, 2014, 2013, and 2012, the Company recorded aggregate interest expense related to the Loan Agreement of $0.1 million, $0.3 million, and $0.5 million, respectively.

        Warrants to purchase 36,074 shares of the Company's common stock at a weighted average exercise price of $7.21 per share issued in connection with the Loan Agreement remain outstanding as of December 31, 2014, with 5,305 and 30,769 of such warrants having expiration dates in January 2019 and August 2021, respectively.

June and July 2013 Convertible Note Financing

        In June and July 2013, the Company issued convertible promissory notes in an aggregate principal amount of $3.7 million to certain existing stockholders. The notes accrued interest at 2% per year and were due on June 24, 2014. The outstanding principal and all accrued and unpaid interest due on the notes were converted into 625,828 shares of the Company's common stock as a result of the Company's IPO on October 4, 2013.

        In connection with the issuance of the convertible notes, the Company recorded a debt discount of $0.3 million related to a beneficial conversion feature that was recorded as the proceeds allocated to the debt instrument were less than the gross fair value of the shares of Series C convertible preferred stock into which the notes could convert. This debt discount was amortized as interest expense utilizing the effective interest method over the one-year term of the notes. For the year ended December 31, 2013, the entire $0.3 million debt discount was charged to interest expense in connection with its amortization during the period for which the notes were outstanding and the conversion of the notes into common stock pursuant to the Company's IPO on October 4, 2013.

August 2013 Convertible Note Financing

        In August 2013, the Company issued convertible promissory notes in an aggregate principal amount of $20.0 million to certain new investors. The notes accrued interest at 2% per year and were due on August 8, 2016. In connection with the completion of the Company's IPO on October 4, 2013, the Company repaid $1.7 million of then-outstanding principal and unpaid accrued interest on the

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Notes to Consolidated Financial Statements (Continued)

4. Long-Term Debt, Commitments and Contingencies (Continued)

notes in cash, with the remaining outstanding principal converting to 3,053,573 shares of the Company's common stock. For the year ended December 31, 2013, the Company recorded aggregate interest expense of $0.1 million on the stated interest rate of the notes issued in August 2013.

Facility Lease

        The Company leases certain office and laboratory space from a stockholder of the Company under a non-cancelable operating lease. The lease expires in June 2016. The lease is subject to additional charges for common area maintenance and other costs. In connection with the lease, the Company entered into a cash-collateralized irrevocable standby letter of credit in the amount of $0.1 million. Rent expense was $0.9 million, $0.9 million, and $0.7 million for the years ended December 31, 2014, 2013, and 2012, respectively.

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 $0.3 million.

Commitments

        Future minimum payments under the long-term debt and the non-cancelable operating lease as of December 31, 2014 are as follows (in thousands):

	 	Long-Term
Debt	 	Operating
Lease	 	Total	 	
Years Ending December 31,	 	 	 	 	 	 	 	 	 	 	
2015	 	$	2,899	 	$	943	 	$	3,842	 	
2016	 	 	8,757	 	 	480	 	 	9,237	 	
2017	 	 	8,757	 	 	—	 	 	8,757	 	
2018	 	 	4,055	 	 	—	 	 	4,055	 	
​	​	​	​	​	​	​	​	​	​	​	
Total	 	$	24,468	 	$	1,423	 	$	25,891	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
Less interest	 	 	(2,968	)	 	 	 	 	 	 	
Less additional payments due upon maturity	 	 	(1,500	)	 	 	 	 	 	 	
Less unamortized debt discount	 	 	(371	)	 	 	 	 	 	 	
Less current portion of long-term debt	 	 	(1,546	)	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	
Long-term debt, net of current portion	 	$	18,083	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
        See Note 10 of the Notes to the Consolidated Financial Statements for additional subsequent event information related to operating leases.

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Notes to Consolidated Financial Statements (Continued)

5. Convertible Preferred Stock and Stockholders' Equity

Reverse Stock Split

        On September 12, 2013, the Company filed an amendment to its amended and restated certificate of incorporation, effecting an one-for-6.5 reverse stock split of the Company's issued and outstanding shares of common stock. All issued and outstanding common stock and per share amounts contained in the Company's consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

Convertible Preferred Stock

        The authorized, issued and outstanding shares of convertible preferred stock by series immediately prior to October 4, 2013 (the date each outstanding share of convertible preferred stock was converted to common stock as a result of the Company's IPO) is as follows:

	 	Shares
Authorized	 	Shares
Outstanding	 	
Series A	 	 	14,609,186	 	 	14,609,186	 	
Series B	 	 	12,080,000	 	 	12,050,000	 	
Series B-1	 	 	1,500,000	 	 	1,500,000	 	
Series C	 	 	29,000,000	 	 	16,808,504	 	
Series C-1	 	 	11,171,000	 	 	—	 	
​	​	​	​	​	​	​	​	
 	 	 	68,360,186	 	 	44,967,690	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
        In connection with the completion of the Company's IPO on October 4, 2013, all of the outstanding shares of convertible preferred stock converted into 7,229,590 shares of the Company's common stock. Each outstanding share of Series A and Series C convertible preferred stock converted into approximately 0.1538 shares of common stock, or 4,833,490 common shares, and each outstanding share of Series B and Series B-1 convertible preferred stock converted into approximately 0.1768 shares of common stock, or 2,396,100 common shares.

Description of Securities

Dividends

        As of December 31, 2014, the Board of Directors of the Company has not declared any dividends.

2007 Equity Incentive Plan and 2013 Stock Option and Incentive Plan

        The Company adopted an Equity Incentive Plan in 2007 (the 2007 Plan) under which, as amended in August 2013, 2,423,072 shares of common stock were reserved for issuance to employees, nonemployee directors and consultants of the Company. The 2007 Plan provides for the grant of incentive stock options, non-statutory stock options, rights to purchase restricted stock, stock appreciation rights, dividend equivalents, stock payments, and restricted stock units to eligible recipients. In connection with the issuance of restricted common stock, the Company maintains a repurchase right where shares of restricted common stock are released from such repurchase right over a period of time of continued service by the recipient. Effective upon the completion of the Company's IPO, the board of directors determined not to grant any further awards under the 2007 Plan.

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Notes to Consolidated Financial Statements (Continued)

5. Convertible Preferred Stock and Stockholders' Equity (Continued)

        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" and collectively with the 2007 Plan "the Plans"). The 2013 Plan became effective immediately prior to the Company's IPO. 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. 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 the 2007 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 2013 Plan and the 2007 Plan 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 incentive stock options under the Plans 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 Plans, 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 Plans is ten years.

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"). The ESPP became effective immediately prior to the completion of the IPO. 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 were made under the ESPP during the years ended December 31, 2014 and 2013.

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Notes to Consolidated Financial Statements (Continued)

5. Convertible Preferred Stock and Stockholders' Equity (Continued)

Stock Options and Restricted Stock Awards

        Stock Options.    The following table summarizes stock option activity and related information under the Plans for the year ended December 31, 2014:

	 	Options	 	Weighted
Average
Exercise
Price Per Share	 	Weighted
Average
Remaining
Contractual
Term	 	Aggregate
Intrinsic Value
(in 000s)	 	
Outstanding at December 31, 2013	 	 	1,726,991	 	$	2.30	 	 	8.47	 	$	7,203	 	
Granted	 	 	885,624	 	 	6.62	 	 	 	 	 	 	 	
Exercised	 	 	(96,856	)	 	1.65	 	 	 	 	 	 	 	
Cancelled	 	 	(89,790	)	 	4.38	 	 	 	 	 	 	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Outstanding at December 31, 2014	 	 	2,425,969	 	$	3.83	 	 	8.06	 	$	4,839	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Options vested and expected to vest at December 31, 2014	 	 	2,287,320	 	$	3.74	 	 	8.04	 	$	4,639	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
Options exercisable at December 31, 2014	 	 	949,427	 	$	2.75	 	 	7.38	 	$	2,565	 	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	​	​	​	
        As of December 31, 2014 and 2013, the outstanding options included 138,649 and 174,730, respectively, of performance-based options for which the achievement of the performance-based vesting provisions was determined not to be probable. The aggregate grant date fair value of these options at December 31, 2014 and December 31, 2013 was $0.6 million and $0.8 million, respectively.

        For the years ended December 31, 2014, 2013 and 2012, the Company granted its employees 0.9 million, 0.3 million and 1.1 million stock options, respectively, at a weighted-average grant date fair value per share equal to $5.10, $4.40 and $1.11, respectively.

        As of December 31, 2014 and 2013, the unrecognized compensation cost related to outstanding options (excluding those with unachieved performance-based conditions) was $4.1 million and $1.9 million, respectively, which is expected to be recognized as expense over approximately 2.6 years and 2.9 years, respectively.

        The total intrinsic value, which is the amount by which the exercise price was exceeded by the sale price of the Company's common stock on the date of sale, of stock options exercised during the year ended December 31, 2014 was $0.7 million. Total cash received upon the exercise of stock options was $0.2 million for the year ended December 31, 2014.

        Restricted Stock Awards.    Outstanding restricted stock awards granted both under and outside of the 2007 Plan are summarized as follows:

	 	Under the Plan	 	Outside the Plan	 	
 
	 	Number of
Shares	 	Weighted-Average
Price	 	Number of
Shares	 	Weighted-Average
Price	 	
Balance at December 31, 2014 and December 31, 2013	 	 	434,884	 	$	0.468	 	 	564,904	 	$	0.007	 	
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Notes to Consolidated Financial Statements (Continued)

5. Convertible Preferred Stock and Stockholders' Equity (Continued)

        Unvested outstanding restricted stock awards, issued under the 2007 Plan, as of December 31, 2014 and 2013 were 62,150 and 91,740 shares, respectively. As of December 31, 2014, these awards consist of 27,123 shares that vest monthly over a four year period and 35,027 shares that cliff vest in April 2018 or earlier upon the achievement of specified milestones. All restricted stock awards outside the 2007 Plan were fully vested as of December 31, 2014 and 2013.

Stock-Based Compensation Expense

        The allocation of stock-based compensation for all options granted and restricted stock awards are as follows (in thousands):

	 	Years Ended
December 31,	 	
 
	 	2014	 	2013	 	2012	 	
Research and development	 	$	1,416	 	$	912	 	$	97	 	
General and administrative	 	 	1,018	 	 	642	 	 	58	 	
​	​	​	​	​	​	​	​	​	​	​	
Total stock-based compensation expense	 	$	2,434	 	$	1,554	 	$	155	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
        Employee Stock Option Grants.    The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:

	 	Years Ended
December 31,	 	
 
	 	2014	 	2013	 	2012	 	
Risk-free interest rate	 	 	1.9	%	 	1.6	%	 	1.0	%	
Expected volatility	 	 	94	%	 	90	%	 	94	%	
Expected term (in years)	 	 	6.0	 	 	5.9	 	 	6.1	 	
Expected dividend yield	 	 	0.0	%	 	0.0	%	 	0.0	%	
        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.

        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 lack of 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 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.

        Based on historical employee turnover experience, pre-vesting forfeitures for all employee stock option grants was at estimated at 0% for each of the years ended December 31, 2014, 2013, and 2012.

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Notes to Consolidated Financial Statements (Continued)

5. Convertible Preferred Stock and Stockholders' Equity (Continued)

        Non-Employee Stock Option Grants.    The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the non-employee stock option grants were as follows:

	 	Years Ended
December 31,	 	
 
	 	2014	 	2013	 	2012	 	
Risk-free interest rate	 	 	2.1	%	 	2.1	%	 	1.2	%	
Expected volatility	 	 	87	%	 	91	%	 	94	%	
Expected term (in years)	 	 	6.5	 	 	7.3	 	 	7.5	 	
Expected dividend yield	 	 	0.0	%	 	0.0	%	 	0.0	%	
Warrants to Purchase Common Stock in Connection with Debt Issuance

        As a result of the financing of the Term B Loan on December 24, 2014, 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 at an exercise price of $4.08 per share. The warrants expire in December 2021. See Note 4 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 $0.4 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:

	 	As of
December 24,
2014	 	
Risk-free interest rate	 	 	2.1	%	
Expected volatility	 	 	85	%	
Expected term (in years)	 	 	7.0	 	
Expected dividend yield	 	 	0.0	%	
Common Stock Reserved for Future Issuance

        Common stock reserved for future issuance is as follows:

	 	December 31,	 	
 
	 	2014	 	2013	 	
Common stock warrants	 	 	134,113	 	 	36,074	 	
Common stock options	 	 	2,425,969	 	 	1,726,991	 	
Awards available under the 2013 Plan	 	 	999,482	 	 	1,003,526	 	
Exchangeable shares	 	 	365,379	 	 	403,842	 	
Employee stock purchase plan	 	 	729,000	 	 	729,000	 	
​	​	​	​	​	​	​	​	
 	 	 	4,653,943	 	 	3,899,433	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
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Fate Therapeutics, Inc.

Notes to Consolidated Financial Statements (Continued)

6. Collaboration Agreement

        On September 30, 2010, the Company entered into a worldwide exclusive collaboration and license agreement with Becton, Dickinson and Company ("BD") for the joint development and worldwide commercialization of certain induced pluripotent stem cell ("iPSC") tools and technologies for use in drug discovery and development. In connection with the agreement, the Company received a $0.3 million upfront, nonrefundable license payment and received research funding of $0.8 million per year, during a three-year joint development period, for the conduct of its development activities. In addition, the Company is eligible to receive: (i) milestone payments in the amount of $0.5 million, $0.7 million and $0.8 million in connection with the first commercial sale of up to three different iPSC products developed under the agreement, (ii) milestone payments of up to an aggregate amount of $4.0 million in connection with the achievement of certain annual net sales of iPSC products and (iii) royalties on the sale of such iPSC products. In 2012, the Company received a milestone payment of $0.5 million in connection with the first commercial sale of an iPSC product. The Company does not believe it is probable that it will receive any future milestone payments in connection with the first commercial sale of an iPSC product or the achievement of certain annual net sales of iPSC products, or any material royalties, under the agreement.

        License payments under the BD agreement were recorded as deferred revenue upon receipt and recognized ratably as revenue over the three-year program period as a result of the Company's continuing involvement with the collaboration. Funding received for the Company's research efforts under the program was recognized as revenue as costs were incurred, which approximated the level of effort over the three year period of the program. The Company recognized revenue from milestone payments when earned, provided that (i) the milestone event is substantive in that it can only be achieved based in whole or in part on either the Company's performance or on the occurrence of a specific outcome resulting from the Company's performance and its achievability was not reasonably assured at the inception of the agreement, (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone and (iii) it would result in the receipt of additional payments. A milestone payment is considered substantive if all of the following conditions are met: (i) the milestone payment is non-refundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone payment appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone. Royalties received under the agreement will generally be recognized as revenue upon receipt of the related royalty payment. In connection with the BD agreement for the years ended December 31, 2013 and 2012, the Company recognized $0.6 million, and $1.3 million, respectively, as revenue in its consolidated statements of operations.

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Fate Therapeutics, Inc.

Notes to Consolidated Financial Statements (Continued)

7. 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):

	 	Years Ended December 31,	 	
 
	 	2014	 	2013	 	2012	 	
Tax computed at federal statutory rate	 	$	(8,800	)	$	(7,104	)	$	(4,842	)	
State tax, net of federal tax benefit	 	 	(1,311	)	 	(1,011	)	 	(777	)	
Permanent differences	 	 	159	 	 	755	 	 	113	 	
Stock compensation	 	 	426	 	 	161	 	 	36	 	
R&D tax credits	 	 	(994	)	 	(621	)	 	(243	)	
Other	 	 	(256	)	 	(8	)	 	207	 	
Valuation allowance	 	 	10,776	 	 	7,828	 	 	5,506	 	
​	​	​	​	​	​	​	​	​	​	​	
Income tax expense	 	$	—	 	$	—	 	$	—	 	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	​	​	​	
        Significant components of the Company's deferred tax assets are summarized as follows (in thousands):

	 	As of December 31,	 	
 
	 	2014	 	2013	 	
Deferred tax assets:	 	 	 	 	 	 	 	
Section 59e amortization	 	$	13,905	 	$	12,070	 	
Foreign net operating losses	 	 	36	 	 	72	 	
Depreciation and amortization	 	 	1,050	 	 	880	 	
Other	 	 	961	 	 	845	 	
​	​	​	​	​	​	​	​	
Deferred tax assets	 	 	15,952	 	 	13,867	 	
Valuation allowance(1)	 	 	(15,952	)	 	(13,867	)	
​	​	​	​	​	​	​	​	
Net deferred tax assets	 	$	—	 	$	—	 	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	
​	​	​	​	​	​	​	​	

(1)
The removal of the valuation allowance related to the NOL and R&D carryforwards are not included in the change in valuation allowance as the Company has not completed a Section 382 analysis and has removed DTAs associated with NOL and R&D credits, as described below.

        A valuation allowance of $16.0 million and $13.9 million at December 31, 2014 and 2013, respectively, has been established to offset the deferred tax assets, as realization of such assets is uncertain.

        At December 31, 2014, the Company had federal, California and Canadian net operating loss ("NOL") carryforwards of approximately $65.3 million, $61.7 million and $0.2 million, respectively, which may be available to offset future taxable income. The federal, California and Canadian NOL carryforwards begin to expire in 2027, 2028 and 2029, respectively, unless previously utilized. At December 31, 2014, the Company had federal and California research and development ("R&D") credit carryforwards of approximately $2.3 million and $2.1 million, respectively. The federal R&D tax

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Fate Therapeutics, Inc.

Notes to Consolidated Financial Statements (Continued)

7. Income Taxes (Continued)

credit carryforwards will begin to expire in 2027 unless previously utilized. The California R&D credit carryforwards will carry forward indefinitely.

        Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions, including the IPO in 2013, which on their own or combined with the purchasing stockholders' subsequent disposition of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future.

        The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future. If the Company has experienced an ownership change at any time since its formation, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization. Further, until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets, with a corresponding reduction of the valuation allowance.

        The Company files income tax returns in the United States, California and Canada. The Company currently has no years under examination by any jurisdiction; however, the Company is subject to income tax examination by federal, state and Canadian tax authorities for years beginning in 2011, 2010, and 2010, 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 adjustment up to the amount of the carryforwards.

        The change in the Company's unrecognized tax benefits is summarized as follows (in thousands):
 	 	 	 	 	
Balance at December 31, 2012	 	$	11	 	
Increase related to prior year positions	 	 	5	 	
​	​	​	​	​	
Balance at December 31, 2013	 	$	16	 	
Increase related to current year positions	 	 	11	 	
​	​	​	​	​	
Balance at December 31, 2014	 	$	27	 	
​	​	​	​	​	
​	​	​	​	​	
​	​	​	​	​	
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Fate Therapeutics, Inc.

Notes to Consolidated Financial Statements (Continued)

7. Income Taxes (Continued)

        The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2014 will significantly change within the next twelve months. The Company has not recognized interest or penalties in its consolidated statements of operations and comprehensive loss since inception.

8. 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.

9. Selected Quarterly Financial Data
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(in thousands, except per share data) (unaudited)
	 	First
Quarter	 	Second
Quarter	 	Third
Quarter	 	Fourth
Quarter	 	
2014	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	—	 	$	—	 	$	—	 	$	—	 	
Total operating expenses	 	 	6,937	 	 	6,040	 	 	5,984	 	 	5,943	 	
Net loss	 	 	(6,980	)	 	(6,067	)	 	(6,603	)	 	(6,233	)	
Basic and diluted net loss per common share	 	$	(0.34	)	$	(0.30	)	$	(0.32	)	$	(0.30	)	
2013	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	472	 	$	290	 	$	209	 	$	—	 	
Total operating expense	 	 	3,828	 	 	4,559	 	 	5,357	 	 	4,902	 	
Net loss	 	 	(3,548	)	 	(5,534	)	 	(6,073	)	 	(5,739	)	
Basic and diluted net loss per common share	 	$	(2.92	)	$	(4.46	)	$	(4.81	)	$	(0.29	)	
10. Subsequent Events

        In January 2015, we entered into a sublease for additional laboratory space. The sublease expires in September 2017 and, under the sublease, future minimum lease rental payments for the years ended December 31, 2015, 2016 and 2017 are $0.3 million, $0.3 million and $0.2 million, respectively.

        In March 2015, we extended the term of the lease on our existing facility for an additional 15 months. The extension expires in September 2017 and, under the lease extension, future minimum lease rental payments for the years ended December 31, 2016 and 2017 are $0.5 million and $0.8 million, respectively.

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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 our Chief Executive Officer and Chief 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 our Chief Executive Officer and Chief Financial Officer) of our disclosure controls and procedures as required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2014, 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 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, 2014, our internal control over financial reporting was effective based on those criteria.

        Attestation Report on Internal Control over Financial Reporting.    This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to the deferral allowed under the JOBS Act for emerging growth companies.

        Changes in Internal Control over Financial Reporting.    There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 will be contained in our definitive 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, 2014, or the Proxy Statement, 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 will be 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 will be 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 will be 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 will be 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
(a)
The following documents are filed as part of this report:

(1)
Index list to Financial Statements:

	 	Page	 	
Report of Independent Registered Public Accounting Firm	 	 	72	 	
Consolidated Balance Sheets	 	 	73	 	
Consolidated Statements of Operations and Comprehensive Loss	 	 	74	 	
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)	 	 	75	 	
Consolidated Statements of Cash Flows	 	 	76	 	
Notes to Consolidated Financial Statements	 	 	77	 	

(2)
Financial Statement Schedules

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

(3)
Exhibits

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

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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.
 	 	 	 	 	
 	 	Fate Therapeutics, Inc.	
Date: March 12, 2015	 	By:	 	/s/ CHRISTIAN WEYER

Christian Weyer
President and Chief Executive Officer (Principal Executive Officer and Authorized Signatory)	
        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christian Weyer and J. Scott Wolchko, jointly and severally, his or her attorneys-in-fact, each 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 each of said attorneys-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:
 	 	 	 	 	
SIGNATURE	 	TITLE	 	DATE	

 	

 	
/s/ CHRISTIAN WEYER

Christian Weyer, M.D., M.A.S.	 	President and Chief Executive Officer and Director (Principal Executive Officer)	 	March 12, 2015	

/s/ J. SCOTT WOLCHKO

J. Scott Wolchko	
 	
Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)	
 	
March 12, 2015	

/s/ WILLIAM H. RASTETTER

William H. Rastetter, Ph.D.	
 	
Chairman of the Board and Director	
 	
March 12, 2015	

/s/ JOHN D. MENDLEIN

John D. Mendlein, Ph.D., J.D.	
 	
Vice Chairman of the Board and Director	
 	
March 12, 2015	

/s/ TIMOTHY P. COUGHLIN

Timothy P. Coughlin	
 	
Director	
 	
March 12, 2015	
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SIGNATURE	 	TITLE	 	DATE	

 	

 	
/s/ MARK J. ENYEDY

Mark J. Enyedy	 	Director	 	March 12, 2015	

/s/ AMIR NASHAT

Amir Nashat, Sc.D.	
 	
Director	
 	
March 12, 2015	

/s/ ROBERT S. EPSTEIN

Robert S. Epstein	
 	
Director	
 	
March 12, 2015	
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EXHIBIT INDEX

Exhibit No.	 	Exhibit Index	
 	3.1	 	Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect(1).	
 	  	 	 	
 	3.2	 	Amended and Restated Bylaws of the Registrant, as currently in effect(2).	
 	  	 	 	
 	4.1	 	Specimen Common Stock Certificate(3).	
 	  	 	 	
 	4.2	 	Warrant to Purchase Stock issued to Silicon Valley Bank on January 5, 2009(4).	
 	  	 	 	
 	4.3	 	First Amendment to Warrant to Purchase Stock dated January 5, 2009 by and between the Registrant and SVB Financial Group, dated August 25, 2011(4).	
 	  	 	 	
 	4.4	 	Warrant to Purchase Stock issued to Silicon Valley Bank on August 25, 2011(4).	
 	  	 	 	
 	4.5	 	Form of Warrant to Purchase Common Stock issuable to Silicon Valley Bank and its affiliates(5).	
 	  	 	 	
 	10.1	#	2007 Equity Incentive Plan and forms of agreements thereunder(3).	
 	  	 	 	
 	10.2	#	2013 Stock Option and Incentive Plan and forms of agreements thereunder(6).	
 	  	 	 	
 	10.3	#	Employment Offer Letter by and between the Registrant and Christian Weyer, dated October 2, 2012(4).	
 	  	 	 	
 	10.4	#	Employment Offer Letter by and between the Registrant and Scott Wolchko, dated September 17, 2007(4).	
 	  	 	 	
 	10.5	#	Amendment to Employment Offer Letter by and between the Registrant and Scott Wolchko, dated November 11, 2008(4).	
 	  	 	 	
 	10.6	 	Consulting Agreement by and between the Registrant and John D. Mendlein, dated December 31, 2012(4).	
 	  	 	 	
 	10.7	 	Director Letter Agreement by and between the Registrant and Mark Enyedy, dated May 24, 2012(4).	
 	  	 	 	
 	10.8	†	Exclusive License Agreement by and between the Registrant and Children's Medical Center Corporation, dated May 13, 2009(4).	
 	  	 	 	
 	10.9	†	Exclusive License Agreement by and between the Registrant and The Board of Trustees of the Leland Stanford Junior University, dated May 2, 2013(4).	
 	  	 	 	
 	10.10	†	Restated License Agreement by and between The Ottawa Hospital Research Institute and Fate Therapeutics (Canada) Inc. (as successor to Verio Therapeutics, Inc.), effective April 6, 2010(4).	
 	  	 	 	
 	10.11	 	First Amendment to Restated License Agreement by and between The Ottawa Hospital Research Institute and Fate Therapeutics (Canada) Inc. (as successor to Verio Therapeutics, Inc.), effective February 14, 2012(4).	
 	  	 	 	
 	10.12	 	Second Amendment to Restated License Agreement by and between The Ottawa Hospital Research Institute and Fate Therapeutics (Canada) Inc. (as successor to Verio Therapeutics, Inc.), effective June 3, 2013(4).	
 	  	 	 	
 	10.13	 	Lease Agreement by and between the Registrant and ARE-3535/3565 General Atomics Court, LLC, dated December 3, 2009(4).	

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Exhibit No.	 	Exhibit Index	
 	10.14	 	First Amendment to Lease Agreement by and between the Registrant and ARE-3535/3565 General Atomics Court, LLC, dated October 1, 2011(4).	
 	  	 	 	
 	10.15	 	Amended and Restated Loan and Security Agreement by and between the Registrant and Silicon Valley Bank, dated as of July 30, 2014(7).	
 	  	 	 	
 	10.16	 	Amended and Restated Investor Rights Agreement, dated August 8, 2013 by and between the Registrant and the stockholders named therein(4).	
 	  	 	 	
 	10.17	 	Form of Indemnification Agreement(3).	
 	  	 	 	
 	10.18	 	Director Letter Agreement by and between the Registrant and Timothy Coughlin, dated August 5, 2013(8).	
 	  	 	 	
 	10.19	#	2013 Employee Stock Purchase Plan(9).	
 	  	 	 	
 	10.20	 	Second Amendment to Lease Agreement by and between the Registrant and ARE-3535/3565 General Atomics Court, dated September 26, 2013(10).	
 	  	 	 	
 	10.21	#	Amended and Restated Senior Executive Incentive Bonus Plan(11).	
 	  	 	 	
 	10.22	#	Form of Unrestricted Stock Award Agreement under the 2013 Stock Option and Incentive Plan(12).	
 	  	 	 	
 	10.23	†	Whitehead Institute for Biomedical Research Exclusive Patent License Agreement between the Registrant and the Whitehead Institute for Biomedical Research, dated as of February 24, 2009.	
 	  	 	 	
 	10.24	†	License Agreement between the Registrant and The Scripps Research Institute, dated as of July 13, 2009.	
 	  	 	 	
 	10.25	†	License Agreement between the Registrant and The Scripps Research Institute, dated as of May 25, 2010.	
 	  	 	 	
 	10.26	†	License Agreement between the Registrant and The Scripps Research Institute, dated as of August 26, 2010.	
 	  	 	 	
 	14.1	 	Code of Business Conduct and Ethics(13).	
 	  	 	 	
 	21.1	 	Subsidiaries of the Registrant(4).	
 	  	 	 	
 	23.1	 	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.	
 	  	 	 	
 	24.1	 	Power of Attorney (included in page 133).	
 	  	 	 	
 	31.1	 	Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15-d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	  	 	 	
 	31.2	 	Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15-d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	  	 	 	
 	32.1	 	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	  	 	 	
 	32.2	 	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	  	 	 	
 	101.INS	 	XBRL Instance Document	

105

Table of Contents
 	 	 	 	
Exhibit No.	 	Exhibit Index	
 	101.SCH	 	XBRL Taxonomy Extension Schema Document	
 	  	 	 	
 	101.CAL	 	XBRL Taxonomy Extension Calculation Linkbase Document	
 	  	 	 	
 	101.DEF	 	XBRL Taxonomy Extension Definition Linkbase Document	
 	  	 	 	
 	101.LAB	 	XBRL Taxonomy Extension Label Linkbase Document	
 	  	 	 	
 	101.PRE	 	XBRL Taxonomy Extension Presentation Linkbase Document	

†
Certain provisions of this Exhibit have been omitted pursuant to a request for confidential treatment.

#
Indicates a management contract or any compensatory plan, contract or arrangement.

(1)
Filed as Exhibit 3.2 to the registrant's Registration Statement on Form S-1/A (File No. 333-190608) filed with the SEC on August 29, 2013 and incorporated herein by reference.

(2)
Filed as Exhibit 3.4 to the registrant's Registration Statement on Form S-1/A (File No. 333-190608) filed with the SEC on August 29, 2013 and incorporated herein by reference.

(3)
Filed as same numbered exhibit to the registrant's Registration Statement on Form S-1/A (File No. 333-190608) filed with the SEC on August 29, 2013 and incorporated herein by reference.

(4)
Filed as same numbered exhibit to the registrant's Registration Statement on Form S-1 (File No. 333-190608) filed with the SEC on August 13, 2013 and incorporated herein by reference.

(5)
Filed as Exhibit 10.2 to the registrant's Current Report on Form 8-K (File No. 001-36076), filed with the SEC on August 5, 2014 and incorporated herein by reference.

(6)
Filed as Exhibit 10.2 to the registrant's Registration Statement on Form S-1/A (File No. 333-190608) filed with the SEC on September 16, 2013 and incorporated herein by reference.

(7)
Filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K (File No. 001-36076), filed with the SEC on August 5, 2014 and incorporated herein by reference.

(8)
Filed as Exhibit 10.22 to the registrant's Registration Statement on Form S-1 (File No. 333-190608) filed with the SEC on August 13, 2013 and incorporated herein by reference.

(9)
Filed as Exhibit 10.24 to the registrant's Registration Statement on Form S-1/A (File No. 333-190608) filed with the SEC on September 16, 2013 and incorporated herein by reference.

(10)
Filed as Exhibit 10.25 to the registrant's Registration Statement on Form S-1/A (File No. 333-190608) filed with the SEC on September 30, 2013 and incorporated herein by reference.

(11)
Filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K (File No. 001-36076), filed with the SEC on January 7, 2015 and incorporated herein by reference.

(12)
Filed as Exhibit 10.2 to the registrant's Current Report on Form 8-K (File No. 001-36076), filed with the SEC on January 7, 2015 and incorporated herein by reference.

(13)
Filed as Exhibit 14.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-36076) and incorporated herein by reference.

106

Exhibit 10.23
 
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

 

WHITEHEAD INSTITUTE FOR BIOMEDICAL RESEARCH

and

FATE THERAPEUTICS, INC.

EXCLUSIVE PATENT LICENSE AGREEMENT

 
TABLE OF CONTENTS
 
 	 	 	Page	
 	 	 	 	
1.	DEFINITIONS	1	
 	 	 	
2.	GRANT OF RIGHTS	7	
 	2.1	License Grants	7	
 	2.2	Exclusivity	7	
 	2.3	Sublicenses	8	
 	2.4	U.S. Manufacturing	8	
 	2.5	Retained Rights	8	
 	2.6	No Additional Rights	9	
 	2.7	Marketing of Future Improvements	9	
 	 	 	 	
3.	COMPANY DILIGENCE OBLIGATIONS	9	
 	3.1	 	9	
 	3.2	Diligence Requirements	10	
 	 	 	 	
4.	ROYALTIES AND PAYMENT TERMS	11	
 	4.1	Consideration for Grant of Rights	11	
 	4.2	Payments	13	
 	 	 	 	
5.	REPORTS AND RECORD KEEPING	13	
 	5.1	Frequency of Reports	13	
 	5.2	Content of Reports and Payments	14	
 	5.3	Financial Statements	15	
 	5.4	Record Keeping	15	
 	 	 	 	
6.	PATENT PROSECUTION	15	
 	6.1	Responsibility for PATENT RIGHTS	15	
 	6.2	International (non-United States) Filings	15	
 	6.3	Payment of Expenses	16	
 	 	 	 	
7.	INFRINGEMENT	16	
 	7.1	Notification of Infringement	16	
 	7.2	Right to Prosecute infringements	16	
 	7.3	Declaratory Judgment Actions	17	
 	7.4	Offsets	17	
 	7.5	Recovery	17	
 	7.6	Cooperation	17	
 	7.7	Right to Sublicense	18	
 	 	 	 	
8.	PATENT CHALLENGE	18	
 	8.1	 	18	
 	8.2	 	18	
 	 	 	 	
9.	INDEMNIFICATION AND INSURANCE	19	
 	9.1	Indemnification	19	
 	9.2	Insurance	20	
 	 	 	 	
10.	NO REPRESENTATIONS OR WARRANTIES	21	
 
i

 
11.	ASSIGNMENT	21	
 	 	 	 	
12.	GENERAL COMPLIANCE WITH LAWS	22	
 	12.1	Compliance with Laws	22	
 	12.2	Export Control	22	
 	12.3	Non-Use of Name	22	
 	12.4	Marking of LICENSED PRODUCTS	22	
 	 	 	 	
13.	TERMINATION	22	
 	13.1	Voluntary Termination by FATE	22	
 	13.2	Cessation of Business	23	
 	13.3	Termination for Default	23	
 	13.4	Effect of Termination	23	
 	 	 	 	
14.	DISPUTE RESOLUTION	24	
 	14.1	Mandatory Procedures	24	
 	14.2	Equitable Remedies	24	
 	14.3	Dispute Resolution Procedures	24	
 	14.4	Performance to Continue	25	
 	14.5	Statute of Limitations	25	
 	 	 	 	
15.	CONFIDENTIALITY	25	
 	15.1	Confidential Information	25	
 	15.2	Judicial or Administrative Process	26	
 	15.3	SEC Filings	26	
 	 	 	 	
16.	MISCELLANEOUS	27	
 	16.1	Notice	27	
 	16.2	Governing Law	27	
 	16.3	Force Majeure	28	
 	16.4	Amendment and Waiver	28	
 	16.5	Severability	28	
 	16.6	Binding Effect	28	
 	16.7	Headings	28	
 	16.8	Entire Agreement	28	
 
APPENDIX A	List of Patent Applications and Patents	
APPENDIX B	List of Countries (excluding United States) for which PATENT RIGHTS Applications Will be Filed, Prosecuted and Maintained	
APPENDIX C	Initial Common Stock Distribution to WHITEHEAD and Whitehead Holders	
APPENDIX D	Tangible Property	
APPENDIX E	Tangible Property not subject to exclusivity	
 
ii

 
WHITEHEAD INSTITUTE FOR BIOMEDICAL RESEARCH
EXCLUSIVE PATENT LICENSE AGREEMENT
 
This Agreement, effective as of February 24, 2009 (the “EFFECTIVE DATE”), is between the  Whitehead Institute for Biomedical Research  (“ WHITEHEAD ”), a Delaware corporation, with a principal office at Nine Cambridge Center, Cambridge, MA 02142, and  Fate Therapeutics, Inc.  (“ FATE ”), a Delaware corporation, with a principal place of business at 10931 N. Torrey Pines Road, Suite 107, La Jolla, California 92037.
 
RECITALS
 
WHEREAS, WHITEHEAD is the owner of certain PATENT RIGHTS and TANGIBLE PROPERTY (as later defined herein) relating to WHITEHEAD  Case No. [*** ]; [ *** ]; [ *** ]; WHITEHEAD  Case No. [*** ], and WHITEHEAD has the right to grant licenses under said PATENT RIGHTS and TANGIBLE PROPERTY;
 
WHEREAS, Rudolf Jaenisch, an inventor of the PATENT RIGHTS, has or will shortly acquire equity in the FATE not resulting from this Agreement, and as per WHITEHEAD policy, will not receive any share of equity income received by WHITEHEAD in consideration for this license;
 
WHEREAS, equity received pursuant to this Agreement will satisfy WHITEHEAD’S policy on equity sharing as stated in Appendix 6.4 of the Faculty Guide “Policy on Equity Received by Faculty or Professional Staff Being Shared with the Institute”;
 
WHEREAS, WHITEHEAD desires to have the PATENT RIGHTS and TANGIBLE PROPERTY developed and commercialized to benefit the public, and WHITEHEAD is willing to grant a license thereunder;
 
WHEREAS, FATE has represented to WHITEHEAD, to induce WHITEHEAD to enter into this Agreement, that FATE will commit itself to a thorough, vigorous and diligent program of exploiting the PATENT RIGHTS and TANGIBLE PROPERTY so that public utilization will result therefrom; and
 
WHEREAS, FATE desires to obtain a license under the PATENT RIGHTS and TANGIBLE PROPERTY upon the terms and conditions hereinafter set forth.
 
NOW, THEREFORE, WHITEHEAD and FATE hereby agree as follows:
 
1.                                    DEFINITIONS
 
1.1                            “AFFILIATE” will mean any legal entity (such as a corporation, partnership, or limited liability company) that directly or indirectly controls, is controlled by, or is under common control with FATE.  For the purposes of this definition, the term “control” means (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

 
1.2                            “COMBINATION PRODUCT” will mean a product which contains (i) a component that is a LICENSED PRODUCT and (ii) one or more other essential functional components which could be sold separately and which perform(s) a useful function independent of the LICENSED PRODUCT component.
 
1.3                            “CORPORATE PARTNER” will mean any entity which agrees to compensate FATE or an AFFILIATE or SUBLICENSEE for FATE’s, AFFILIATE’S or SUBLICENSEE’S practice of the PATENT RIGHTS and/or LICENSED PRODUCTS on behalf of or in collaboration with such entity, including without limitation for discovery and development activities for LICENSED PRODUCTS.  Any entity which meets the foregoing criteria and receives a sublicense of the PATENT RIGHTS and/or TANGIBLE PROPERTY will be considered a SUBLICENSEE.
 
1.4                            “FIELD” will mean all fields (including, for the avoidance of doubt, the REAGENT DISCOVERY FIELD, as defined below)  except  the REAGENT FIELD, as defined herein.
 
1.5                            “IND” will mean, with respect to a particular LICENSED PRODUCT, an Investigational New Drug application submitted to the FDA, or a corresponding application filed with any other regulatory agency, seeking approval to begin tests of a new drug in human subjects.
 
1.6                            “LICENSED PRODUCT” will mean a device, composition, method, process or service, the manufacture, use, sale, offer for sale or import of which, but for the licenses granted herein, (i) would infringe a VALID CLAIM (including a device, composition, method, process or service) or (ii) utilizes or incorporates TANGIBLE PROPERTY.
 
1.7                            “NDA” will mean a New Drug Application submitted to the FDA seeking approval to market and sell a PRODUCT in the United States of America, or a corresponding application filed with any other regulatory agency seeking approval to market and sell a LICENSED PRODUCT in a country in the TERRITORY.
 
1.8                            “NET SALES”
 
(a)                              NET SALES will mean the gross amount billed by FATE, AFFILIATES and SUBLICENSEES for LICENSED PRODUCTS, less the following:
 
(i)                                  customary trade, quantity, or cash discounts to the extent actually allowed and taken;
 
(ii)                              amounts repaid or credited by reason of rejection or return;
 
(iii)                          to the extent separately stated on purchase orders, invoices, or other documents of sale, any taxes or other governmental charges levied on the
 
2

 
production, sale, transportation, delivery, or use of a LICENSED PRODUCT which is paid by or on behalf of FATE; and
 
(iv)                          reasonable charges for delivery or transportation provided by third parties, if separately stated.
 
No deductions will be made for commissions paid to individuals whether they are with independent sales agencies or regularly employed by FATE and on its payroll, or for cost of collections.  NET SALES will occur on the date of billing for a LICENSED PRODUCT.  If a LICENSED PRODUCT is distributed at a discounted price that is substantially lower than the customary price charged by FATE, or distributed for non-monetary consideration (whether or not at a discount), NET SALES will be calculated based on the non-discounted amount of the LICENSED PRODUCT charged to an independent third party during the same REPORTING PERIOD or, in the absence of such sales, on the fair-market value of the LICENSED PRODUCT.  For clarity, the transfer and/or sale of LICENSED PRODUCTS between FATE and an AFFILIATE, or between FATE or an AFFILIATE and a SUBLICENSEE, in each case for the purpose of a subsequent timely sale of such LICENSED PRODUCT to an end-user purchaser, will not be considered a sale for purposes of NET SALES calculations;  provided that , such subsequent timely sale of such LICENSED PRODUCT to an end-user purchaser sale shall be considered a sale for NET SALES calculations upon the billing of the end-user purchaser.  NET SALES shall be determined at the gross amount billed to the end-user purchaser less the deductions set forth in this Section 1.8(a)(1) through (iv), above.
 
Non-monetary consideration will not be accepted by FATE, any AFFILIATE, or any SUBLICENSEE for any LICENSED PRODUCT without the prior written consent of WHITEHEAD.
 
(b)                             NET SALES of COMBINATION PRODUCT.  In the event that a LICENSED PRODUCT is sold as a COMBINATION PRODUCT, for the purposes of determining royalty payments on the COMBINATION PRODUCT, NET SALES will mean the gross amount billed for the COMBINATION PRODUCT less the deductions set forth in Section 1.8(a), multiplied by a proration factor that is determined as follows:
 
(i)                                  If all components of the COMBINATION PRODUCT were sold separately during the same or immediately preceding REPORTING PERIOD, the proration factor will be determined by the formula [ A I  ( A+B )], where  A  is the average gross sales price of all LICENSED PRODUCT components during such period when sold separately from the other component(s), and  B  is the average gross sales price of the other component(s) during such period when sold separately from the LICENSED PRODUCT components; or
 
(ii)                              If all components of the COMBINATION PRODUCT were not sold or provided separately during the same or immediately preceding REPORTING PERIOD, the proration factor will be determined by WHITEHEAD and FATE in good-faith negotiations based on the relative value contributed by each component.
 
3

 
1.9                            “PATENT CHALLENGE” will mean:
 
(i)                                  a challenge under any court action or proceeding to the validity, patentability, enforceability and/or non-infringement of any of the PATENT RIGHTS (as defined below);
 
(ii)                              a reexamination of any of the PATENT RIGHTS initiated by FATE, AFFILIATE, or SUBLICENSEE without thirty (30)-day prior written notice to WHITEHEAD; or
 
(iii)                          a reexamination of any of the PATENT RIGHTS initiated by FATE, AFFILIATE, or SUBLICENSEE, in which WHITEHEAD reasonably concludes in good faith that such reexamination is not beneficial to the PATENT RIGHTS.
 
1.10                    “PATENT RIGHTS” will mean:
 
(i)                                  the United States and international patents listed on Appendix A;
 
(ii)                              the United States and international patent applications and/or provisional applications listed on  Appendix A  and the resulting patents;
 
(iii)                          any patent applications resulting from the provisional applications listed on Appendix A , and any divisional, continuations, continuation-in-part applications, and continued prosecution applications (and their relevant international equivalents) of the patent applications listed on Appendix A  and of such patent applications that result from the provisional applications listed on Appendix A , to the extent the claims are directed to subject matter specifically described in the patent applications listed on  Appendix A , and the resulting patents;
 
(iv)                          any patents resulting from reissues, reexaminations, or extensions (and their relevant international equivalents) of the patents described in (i), (ii), and (iii) above; and
 
(v)                              international (non-United States) patent applications and provisional applications filed after the EFFECTIVE DATE and the relevant international equivalents to divisionals, continuations, continuation-in-part applications and continued prosecution applications of the patent applications to the extent the claims are directed to subject matter specifically described in the patents or patent applications referred to in (i), (ii), (iii), and (iv) above, and the resulting patents.
 
1.11                    “PHASE I CLINICAL TRIAL” will mean a controlled clinical study of the first introduction of the LICENSED PRODUCT into human subjects.
 
1.12                    “PHASE II CLINICAL TRIAL” will mean a controlled clinical study conducted to obtain preliminary data on the effectiveness of the LICENSED PRODUCT for a
 
4

 
particular indication or indications in human subjects with the disease or condition and the possible short-term side effects and risks associated with the LICENSED PRODUCT.
 
1.13                    “PHASE III CLINICAL TRIAL” will mean a clinical trial of a LICENSED PRODUCT in human subjects for the purpose of gathering the definitive information about efficacy, dosage and safety in the proposed therapeutic indication that is needed for the FDA or other appropriate regulatory agency to evaluate the overall benefit-risk relationship of the drug prior to granting (or denying) approval to market the drug.
 
1.14                    “REAGENT FIELD” will mean the sale and/or distribution of reagents for basic research use, including without limitation basic research having as its primary purpose understanding the biology or pathology of cells or cell lines and diseases or disorders affecting them.  For avoidance of doubt, the REAGENT FIELD permits the research and development of reagent products;  provided that , the REAGENT FIELD shall specifically exclude the use, sale and/or distribution of reagents for the following activities (the “ REAGENT DISCOVERY FIELD ”):
 
(i)                                  any human clinical vise or veterinary use including without limitation therapeutic, prophylactic or diagnostic use;
 
(ii)                              the development, manufacture or provision of any healthcare or consumer products, processes or services;
 
(iii)                          discovery, development, or manufacturing of pharmaceutical products (including without limitation assay development or cell line generation for drug discovery or drug development, screening of chemical and/or biological compounds for the identification of pharmaceutically active agents, preclinical testing, or services related to the above); and
 
(iv)                          conducting services for the purpose of discovering or developing pharmaceutical products.
 
1.15                    “REPORTING PERIOD” will begin on the first day of each calendar quarter and end on the last day of such calendar quarter.
 
1.16                    “SUBLICENSE INCOME”
 
(a)                               “SUBLICENSE INCOME” will mean the following:
 
(i)                                  any payments that FATE receives from a SUBLICENSEE in consideration of the sublicense of the rights granted FATE under Section 2.1, including without limitation license fees, milestone payments, license maintenance fees, and other payments, but specifically excluding royalties on NET SALES;
 
5

 
(ii)                              any payments that FATE or an AFFILIATE or SUBLICENSEE receives from a CORPORATE PARTNER in consideration of any of the rights described in Section 1.3, including without limitation fees, milestone payments, agreement maintenance fees, and other payments.
 
(b)                              “SUBLICENSE INCOME” specifically excludes the following:
 
(i)                                  royalties on NET SALES as provided in 1.16(a)(i) above;
 
(ii)                              payments made by SUBLICENSEE or CORPORATE PARTNER as consideration for the issuance of equity or debt securities of FATE at fair-market value;  provided that , if a SUBLICENSEE or CORPORATE PARTNER pays more than fair-market value for equity or debt securities, the portion in excess of fair-market value will be considered SUBLICENSE INCOME;
 
(iii)                          payments to FATE or an AFFILIATE from a SUBLICENSEE or CORPORATE PARTNER for the purposes of funding the costs of bona fide research and development of LICENSED PRODUCTS and that are expressly intended only to fund or pay for (I) the purchase or use of equipment, supplies, products or services, or (2) the use of employees and/or consultants to achieve a research or development goal for the commercialization of LICENSED PRODUCTS, as indicated by their inclusion as specific line items in a written agreement between FATE (or AFFILIATE) and the SUBLICENSEE, or between FATE (or AFFILIATE) and CORPORATE PARTNER.
 
1.17                    “SUBLICENSEE” will mean any non-AFFILIATE sublicensee of the rights granted to FATE under Section 2.1.
 
1.18                    “TANGIBLE PROPERTY” will mean the materials supplied by WHITEHEAD from the laboratory of Rudolf Jaenisch, whether by themselves or incorporated into another material, and any progeny and unmodified derivatives thereof.  A complete list of TANGIBLE PROPERTY is provided in Appendix D  and  Appendix E , and such list may be updated upon the mutual written consent between the parties during the TERM.
 
1.19                    “TERM” will mean the term of this Agreement, which will commence on the EFFECTIVE DATE and remain in effect until the expiration or abandonment of all issued patents and filed patent applications within the PATENT RIGHTS, unless earlier terminated in accordance with the provisions of this Agreement.
 
1.20                    “TERRITORY” will mean worldwide.
 
1.21                    “VALID CLAIM” will mean a claim of the following:
 
(i)                                  an issued patent under the PATENT RIGHTS which has not been revoked or held unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for
 
6

 
appeal, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise; or
 
(ii)                              a pending patent application under the PATENT RIGHTS which has not been pending for a period of more than [ *** ] from the date such application was first examined and has been prosecuted in good faith and has not been abandoned or finally disallowed without the possibility of appeal or re-filing of such application.
 
2.                                    GRANT OF RIGHTS
 
2.1                           License Grants.
 
(a)                              PATENT RIGHTS.  Subject to the terms of this Agreement, WHITEHEAD hereby grants to FATE and its AFFILIATES for the TERM a royalty-bearing license under the PATENT RIGHTS, including, without limitation, to develop, make, have made, use, have used, sell, have sold, offer to sell, have offered to sell, lease, have leased, import and have imported LICENSED PRODUCTS in the FIELD in the TERRITORY.
 
(b)                             TANGIBLE PROPERTY.  Subject to WHITEHEAD’S provision of the TANGIBLE PROPERTY to FATE, WHITEHEAD hereby grants to FATE and its AFFILIATES for the TERM a royalty-bearing license to use the TANGIBLE PROPERTY, including, without limitation, to make, have made, use, have used, sell, have sold, offer for sell, have offered to sell, lease, have leased, import and have imported LICENSED PRODUCTS in the FIELD in the TERRITORY.  Legal title to the TANGIBLE PROPERTY will remain with WHITEHEAD.
 
2.2                           Exclusivity.
 
(a)                              PATENT RIGHTS.  Subject to the terms of this Agreement, in order to establish an exclusive period for FATE, WHITEHEAD agrees that it will not grant any other license under the PATENT RIGHTS to make, have made, use, have used, sell, have sold, offer to sell, have offered to sell, lease, have leased, import and have imported LICENSED PRODUCTS in the FIELD in the TERRITORY during the TERM, and WHITEHEAD shall not have any right to practice the PATENT RIGHTS in the FIELD other than in accordance with Section 2.5.
 
(b)                             TANGIBLE PROPERTY.  Subject to the terms of this Agreement, in order to establish an exclusive period for FATE, WHITEHEAD agrees that it will not provide TANGIBLE PROPERTY to for-profit entities in the FIELD in the TERRITORY during the TERM.  WHITEHEAD will refer any TANGIBLE PROPERTY request from a for-profit entity in the FIELD to FATE.  Furthermore, subject to the terms of this Agreement, WHITEHEAD agrees that it will not grant any other licenses to use the TANGIBLE PROPERTY, including, without limitation, to make, have made, use, have used, sell, have sold, offer for sell, have offered to sell, lease, have leased, import and have imported LICENSED PRODUCTS in the FIELD in the TERRITORY.  This Section 2.2(b) does not apply to the TANGIBLE PROPERTY listed in  Appendix E .
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
7

 
2.3       Sublicenses.
 
(a)        FATE will have the right to grant sublicenses of its rights under Section 2.1.  FATE shall incorporate terms and conditions into its sublicense agreements sufficient to enable SUBLICENSEE to comply with this Agreement.  FATE shall furnish WHITEHEAD with a fully signed photocopy of any sublicense agreement within thirty (30) days of its effective date.
 
(b)        Upon termination of this Agreement for any reason, any SUBLICENSEE not then in default will be granted a license from WHITEHEAD under rights and terms equivalent to the sublicense rights and terms which FATE previously granted to such SUBLICENSEE.
 
2.4       U.S. Manufacturing.  FATE agrees that any LICENSED PRODUCT used or sold in the United States will be manufactured substantially in the United States.
 
2.5       Retained Rights.
 
(a)        WHITEHEAD.
 
(i)         The granting and exercise of the license set forth in this Agreement is subject to WHITEHEAD’S “Policy Statement Regarding Patents, Copyrights and Other Intellectual Property” as may be amended from time to time in a manner that does not limit or restrict FATE’s rights hereunder, and WHITEHEAD’S obligations under existing agreements with other sponsors of research or WHITEHEAD’S obligations to the U.S. Government or non-profit foundations.
 
(ii)        WHITEHEAD retains the right to practice under the PATENT RIGHTS and use TANGIBLE PROPERTY for research, teaching, and educational purposes.
 
(iii)       WHITEHEAD reserves the right to practice the PATENT RIGHTS and use the TANGIBLE PROPERTY in corporate-sponsored research with a third party including, but not limited to, [ *** ] (the “ MODEL FIELD ”);  provided that , corporate-sponsored research outside of the MODEL FIELD will be permitted under the following: (1) WHITEHEAD will provide written notification to FATE prior to the commencement of such corporate-sponsored research  and  (2) FATE does not provide written objection to the corporate-sponsored research reasonably demonstrating to WHITEHEAD that such corporate-sponsored research is competitive to the development of a LICENSED PRODUCT within ten (10) business days of its receipt of such written notification by WHITEHEAD.
 
WHITEHEAD will notify FATE if and when WHITEHEAD seeks to license any inventions resulting from any exercise of rights under this Section 2.5(a) in accord with Section 2.7.
 
*       Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
8

 
(b)        Academic and Not-For-Profit Research Institutes.
 
(i)         WHITEHEAD retains the right to grant licenses to academic and not-for-profit research institutes to practice under the PATENT RIGHTS for research, teaching, and educational purposes;  provided that  such purposes shall exclude corporate-sponsored research.
 
(ii)        WHITEHEAD retains the right to provide TANGIBLE PROPERTY to academic and not-for-profit research institutes for research, teaching, and educational purposes under a Material Transfer Agreement on terms consistent with the terms of this Agreement;  provided that  such purposes shall exclude (1) use in corporate-sponsored research; (2) any human or veterinary use (including without limitation therapeutic, prophylactic or diagnostic use) but permitting their use in laboratory animals; (3) development, manufacture or provision of any services or products; (4) discovery, development or manufacturing of pharmaceutical products (including screening compound libraries); and (5) conducting services for the purpose of discovering or developing pharmaceutical products.  WHITEHEAD will notify FATE when it enters into such Material Transfer Agreement.
 
(c)        Federal Government.  FATE acknowledges that the United States Government retains a royalty-free, non-exclusive, non-transferable license to practice any government-funded invention claimed in any PATENT RIGHTS as set forth in 35 U.S.C. §§ 201-211, and the regulations promulgated thereunder, as amended, or any successor statutes or regulations.
 
All rights reserved to the United States Government and others under Public Law 96-517, and Public Law 98-620, will remain and will in no way be affected by this Agreement
 
2.6       No Additional Rights.  Nothing in this Agreement shall be construed to confer any rights upon FATE by implication, estoppel, or otherwise as to any technology or patent rights of WHITEHEAD or any other entity other than the PATENT RIGHTS, regardless of whether such technology or patent rights shall be dominant or subordinate to any PATENT RIGHTS.
 
2.7       Marketing of Future Improvements.  WHITEHEAD will notify FATE concurrently with marketing to third parties if and when WHITEHEAD seeks to license any inventions developed or conceived within [ *** ] of the EFFECTIVE DATE from the WHITEHEAD laboratory of Rudolf Jaenisch (including any such invention dominated by any of the PATENT RIGHTS), or any related patent rights or tangible properly, and FATE will be on equal footing with other parties to negotiate a license thereto subject to any funding obligations.
 
3.                                    COMPANY DILIGENCE OBLIGATIONS
 
3.1       FATE shall use commercially reasonable efforts, or shall cause its AFFILIATES and SUBLICENSEES to use commercially reasonable efforts, to develop LICENSED
 
*       Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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PRODUCTS and to introduce LICENSED PRODUCTS into the commercial market; thereafter, FATE or its AFFILIATES or SUBLICENSEES shall make LICENSED PRODUCTS or LICENSED PROCESSES reasonably available to the public.  Specifically, FATE or AFFILIATE or SUBLICENSEE shall fulfill the following obligations:
 
(i)         Within [***] after the EFFECTIVE DATE, FATE shall furnish WHITEHEAD with a written research and development plan describing the major tasks to be achieved in order to bring to market a LICENSED PRODUCT, specifying the number of staff and other resources to be devoted to such commercialization effort.
 
(ii)        Within [***] after the end of each calendar year, FATE shall furnish WHITEHEAD with a written report (consistent with Section 5.1(a)) on the progress of its efforts during the immediately preceding calendar year to develop and commercialize LICENSED PRODUCTS.  The report will also contain a discussion of intended efforts and sales projections for the year in which the report is submitted.
 
3.2       Diligence Requirements.  If, in a calendar year, FATE, its AFFILIATES or a SUBLICENSEE, alone or together, has performed any one of the following with respect to a LICENSED PRODUCT, then FATE will be deemed to have complied with FATE’s obligations under this Section 3.2 with respect to a LICENSED PRODUCT:
 
(i)         has expended a minimum of [***] for the development of a LICENSED PRODUCT, which will include sponsored-research funding and AFFILIATES’ and SUBLICENSEES’ expenditures;
 
(ii)        is actively [***];
 
(iii)       is actively [***];
 
(iv)       is actively [***];
 
(v)        [***];
 
(vi)       [***];
 
(vii)      [***];
 
(viii)     [***];
 
(ix)       a LICENSED PRODUCT is [***].
 
In the event that FATE, its AFFILIATES or SUBLICENSEES have not performed at least one of Sections 3.2(i) through (ix) during a calendar year with respect to a LICENSED PRODUCT, then WHITEHEAD may treat such failure as a material breach in accordance with Section 13.3(b), but subject to a [ *** ] and not a [ *** ] cure period.
 
*       Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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4.                                    ROYALTIES AND PAYMENT TERMS
 
4.1       Consideration for Grant of Rights.
 
(a)        Patent Cost Reimbursement.  FATE shall pay to WHITEHEAD on the EFFECTIVE DATE such amounts required as reimbursement in accordance with Section 6.3, relating to actual expenses incurred as of the EFFECTIVE DATE in connection with obtaining the PATENT RIGHTS.  These payments are nonrefundable.
 
(b)        License Maintenance Fees.  FATE shall pay to WHITEHEAD the following nonrefundable license maintenance fees on January 1 of each year set forth below:
 
Year	 	Maintenance Fee	
2010	 	[***]	
2011	 	[***]	
2012	 	[***]	
2013	 	[***]	
2014 and every year thereafter	 	[***]	
 
This License Maintenance Fee may be credited to payments made in the same calendar year, if any, for Milestone Payments, Running Royalties, and SUBLICENSE INCOME.  Payments in excess of the License Maintenance Fee in a given calendar year will  not  be creditable to License Maintenance Fees due in another calendar year.  The License Maintenance Fee may not be credited to the payment for Patent Issuance.
 
(c)        Milestone Payments.  FATE shall pay to WHITEHEAD the following nonrefundable Milestone Payments upon first achievement of the following events whether by FATE, its AFFILIATE, or SUBLICENSEE:
 
(i)         [***] upon the [***].
 
(ii)        [***].
 
(iii)       [***] upon the [***].
 
(iv)       [***] upon the [***].
 
(v)        [***] upon the [***].
 
For the purpose of this Section 4.1(c), ***].
 
(d)       Patent Issuance: FATE shall pay to WHITEHEAD [***] upon the issuance of a patent under the PATENT RIGHTS.  This Patent Issuance payment may be paid in whole or in part by common stock of the FATE (based on such common stock’s then fair-market value), at FATE’s sole option.  In no event will this payment be due earlier than three (3) years
 
*       Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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after the EFFECTIVE DATE; provided however that if there is an issuance of a patent under the PATENT RIGHTS prior to such date, then this Patent Issuance payment will be due at the three-year anniversary of the EFFECTIVE DATE.  This Patent Issuance payment is:  (1) payable once only under the Agreement (irrespective of the total number of patents issued under the PATENT RIGHTS under the Agreement); (2) nonrefundable; and (3) not creditable against any payments due under this Agreement.
 
(e)        Running Royalties.  Running Royalties will be payable for each REPORTING PERIOD and will be due to WHITEHEAD within sixty (60) days of the end of each REPORTING PERIOD.
 
(i)         LICENSED PRODUCTS covered by a VALID CLAIM.  FATE shall pay to WHITEHEAD a running royalty of [ *** ] of NET SALES of LICENSED PRODUCTS in which the [ *** ], by FATE, AFFILIATES and SUBLICENSEES.
 
(ii)        LICENSED PRODUCTS not covered by a VALID CLAIM.  FATE shall pay to WHITEHEAD a running royalty of [ *** ] of NET SALES of LICENSED PRODUCTS in which [ *** ], by FATE, AFFILIATES and SUBLICENSEES.
 
(f)        Share of SUBLICENSE INCOME.  FATE shall pay to WHITEHEAD a percentage of all SUBLICENSE INCOME received by FATE or AFFILIATES according to the following schedule:
 
SUBLICENSE INCOME received by FATE
(on a cumulative basis)	 	Share of SUBLICENSE INCOME payable to
WHITEHEAD	
Up to [***]	 	[***]	
[***]	 	[***]	
More than [***]	 	[***]	
 
A share of the SUBLICENSE INCOME will be payable for each REPORTING PERIOD and will be due to WHITEHEAD within [ *** ] of the end of each REPORTING PERIOD.  The total aggregate amount payable by FATE to WHITEHEAD under this Section 4.1(f) will not exceed [ *** ].
 
To the extent that rights or obligations other than the PATENT RIGHTS or TANGIBLE PROPERTY are sublicensed by FATE, any income received will be equitably apportioned between those PATENT RIGHTS and/or TANGIBLE PROPERTY and those other rights and obligations for purposes of calculating the amounts owed WHITEHEAD pursuant to the above schedule.  The parties shall determine the apportionment in good-faith negotiations, and FATE shall provide reasonable documentation to WHITEHEAD in support of such apportionment.
 
(g)        No Multiple Royalties.  If the manufacture, use, lease, or sale of any LICENSED PRODUCT is covered by more than one of the PATENT RIGHTS, multiple royalties will  not  be due.
 
*       Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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(h)        Equity.  FATE shall issue a total of [***] shares of Common Stock of FATE (the “ Shares ”) in the name of WHITEHEAD and of such persons as WHITEHEAD will direct (“ Whitehead Holders ”), according to the Common Stock distribution in  Appendix C  and pursuant to a Stock Purchase Agreement to be provided, where the Whitehead Holders shall be specified by WHITEHEAD at the time of execution of the Stock Purchase Agreement.  Such issuance will be recorded on the Stock Transfer Ledger of FATE on the EFFECTIVE DATE and the Shares will be delivered to WHITEHEAD and Whitehead Holders, if any, within thirty (30) days of the EFFECTIVE DATE.
 
FATE represents to WHITEHEAD that, as of the EFFECTIVE DATE, the aggregate number of Shares equals [ *** ] of FATE’s issued and outstanding Common Stock calculated on a “Fully Diluted Basis.”  For purposes of this Section 4.1(h), “Fully Diluted Basis” will mean that the total number of issued and outstanding shares of FATE’s Common Stock will be calculated to include conversion of all issued and outstanding securities then convertible into Common Stock, the exercise of all then outstanding options and warrants to purchase shares of Common Stock, whether or not then exercisable, and will assume the issuance or grant of all securities reserved for issuance pursuant to any FATE stock or stock option plan in effect on the date of the calculation.
 
4.2       Payments.
 
(a)        Method of Payment.  All payments under this Agreement will be made payable to “Whitehead Institute for Biomedical Research” and sent to WHITEHEAD’S address identified in Section 16.1.  Each payment will reference this Agreement and identify the obligation under this Agreement that the payment satisfies.
 
(b)        Payments in U.S. Dollars.  All payments due under this Agreement will be drawn on a United Slates bank and will be payable in United States Dollars.  Conversion of foreign currency to U.S. Dollars will be made at the conversion rate existing in the United States (as reported in the  Wall Street Journal ) on the last working day of the calendar quarter of the applicable REPORTING PERIOD.  Such payments will be without deduction of exchange, collection, or other charges, and, specifically, without deduction of withholding or similar taxes or other government imposed fees or taxes, except as permitted in the definition of NET SALES.
 
(c)        Late Payments.  Any payments by FATE that are not paid on or before the date such payments are due under this Agreement will bear interest, to the extent permitted by law, at [ *** ] above the Prime Rate of interest as reported in the  Wall Street Journal  on the date payment is due or [ *** ], whichever is greater.
 
5.                                    REPORTS AND RECORD KEEPING
 
5.1       Frequency of Reports.
 
(a)        Before First Commercial Sale.  Prior to the first commercial sale of any LICENSED PRODUCT, FATE shall deliver reports to WHITEHEAD annually, within sixty
 
*       Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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(60) days of the end of each calendar year, containing information concerning the immediately preceding calendar year, as further described in Section 5.2.
 
(b)                             Upon First Commercial Sale of a LICENSED PRODUCT.  FATE shall report to WHITEHEAD the date of first commercial sale of a LICENSED PRODUCT within sixty (60) days of occurrence in each country.
 
(c)                              After First Commercial Sale.  After the first commercial sale of a LICENSED PRODUCT, FATE shall deliver reports to WHITEHEAD within sixty (60) days of the end of each REPORTING PERIOD, containing information concerning the immediately preceding REPORTING PERIOD, as further described in Section 5.2.
 
5.2                           Content of Reports and Payments.  Each report delivered by FATE to WHITEHEAD will contain at least the following information for the immediately preceding REPORTING PERIOD:
 
(i)                                  the number of LICENSED PRODUCTS sold, leased or distributed by FATE, AFFILIATES and SUBLICENSEES to independent third parties in each country specifying which PATENT RIGHTS and/or TANGIBLE PROPERTY are utilized for each LICENSED PRODUCT included in the report;
 
(ii)                              the number of LICENSED PRODUCTS used by FATE, AFFILIATES and SUBLICENSEES in the provision of services in each country specifying which PATENT RIGHTS and/or TANGIBLE PROPERTY are utilized for each LICENSED PRODUCT included in the report;
 
(iii)                          the gross price charged by FATE, AFFILIATES and SUBLICENSEES for each LICENSED PRODUCT and, if applicable, the gross price charged for each LICENSED PRODUCT used to provide services in each country;
 
(iv)                          calculation of NET SALES for the applicable REPORTING PERIOD in each country, including a detailed listing of deductions and credits taken;
 
(v)                              total royalty payable on NET SALES in U.S. dollars, together with the exchange rates used for conversion;
 
(vi)                          the amount of SUBLICENSE INCOME received by FATE from each SUBLICENSEE and the amount deliverable to WHITEHEAD from such SUBLICENSE INCOME, including an itemized breakdown of the sources of income comprising the SUBLICENSE INCOME; and
 
(vii)                      the number of sublicenses entered into for the PATENT RIGHTS, LICENSED PRODUCTS and/or TANGIBLE PROPERTY.
 
If no amounts arc due for any REPORTING PERIOD, the report will so state.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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5.3                           Financial Statements.  On or before the ninetieth (90th) day following the close of FATE’s fiscal year, FATE shall provide WHITEHEAD with FATE’s financial statements for the preceding fiscal year including, at a minimum, a balance sheet and an income statement, certified by FATE’s treasurer or chief financial officer or by an independent auditor;  provided that  WHITEHEAD agrees that such financial statements may be unaudited and subject to additional revisions upon audit by an independent auditor (and FATE shall deliver audited financials to WHITEHEAD upon the completion of such audit by an independent auditor).
 
5.4                           Record Keeping.  FATE shall maintain, and shall cause its AFFILIATES and SUBLICENSEES to maintain, complete and accurate records together with supporting documentation relating to the rights and obligations under this Agreement and any amounts payable to WHITEHEAD in relation to this Agreement, which records shall contain sufficient information to permit WHITEHEAD to confirm the accuracy of any reports delivered to WHITEHEAD and compliance in other respects with this Agreement.  The relevant party shall retain such records for at least three (3) years following the end of the calendar year to which they pertain, during which time WHITEHEAD or WHITEHEAD’S appointed agents, shall have the right, at WHITEHEAD’S expense, to inspect such records during normal business hours to verily any reports and payments made or compliance in other respects under this Agreement.  In the event that any audit performed under this Section reveals an underpayment in excess of [ *** ] or more for any twelve (12)-month period, FATE shall bear the full cost of such audit and shall remit any amounts due to WHITEHEAD (including accrued interest pursuant to Section 4.2(c)) within thirty (30) days of receiving notice thereof from WHITEHEAD.  WHITEHEAD may exercise its audit rights under this Section 5.4 no more frequently than once in any calendar year.
 
6.                                    PATENT PROSECUTION
 
6.1                           Responsibility for PATENT RIGHTS.  WHITEHEAD shall prepare, file, prosecute, and maintain all of the PATENT RIGHTS.  WHITEHEAD’S patent attorney(s) will directly copy FATE on all patent correspondence related to the PATENT RIGHTS.  FATE will have reasonable advance opportunities to advise WHITEHEAD and shall cooperate with WHITEHEAD in such filing, prosecution and maintenance.  WHITEHEAD will consult with FATE on the prosecution of the PATENT RIGHTS and the FATE’s suggestions and requests regarding patent prosecution will be reasonably considered and included unless WHITEHEAD reasonably concludes in good faith that they are not beneficial to the PATENT RIGHTS.  Continuation-in-part applications within the PATENT RIGHTS will be filed only upon the mutual agreement of the parties.  WHITEHEAD shall keep FATE timely informed with regard to the patent application and maintenance processes.  WHITEHEAD shall deliver to FATE copies of all patent applications, amendments, related correspondence, and other related matters in a timely manner.
 
6.2                           International (non-United States) Filings.  Appendix B is a list of countries in which patent applications corresponding to the United States patent applications listed in Appendix A shall be filed, prosecuted, and maintained.   Appendix B  may be amended by mutual agreement of FATE and WHITEHEAD.  FATE may elect to surrender PATENT RIGHTS in
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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any country upon at least [***] prior written notice to WHITEHEAD.  Such notice will not relieve FATE from its responsibility to reimburse WHITEHEAD for patent-related expenses incurred prior to the expiration of the [ *** ] notice period (or such longer period specified in FATE’s notice).  FATE shall surrender its commercial license to PATENT RIGHTS and TANGIBLE PROPERTY in countries where it surrenders PATENT RIGHTS.
 
6.3                           Payment of Expenses.  Subject to a one-time credit of Ten-Thousand Dollars ($10,000), payment of all fees and costs, including attorneys’ fees, relating to the filing, prosecution and maintenance of the PATENT RIGHTS will be the responsibility of FATE, whether such amounts were incurred before or after the EFFECTIVE DATE.  As of November 1, 2008, WHITEHEAD has incurred approximately Sixty-Seven-Thousand Dollars ($67,000) for such patent-related fees and costs.  FATE shall reimburse all amounts due pursuant to this Section 6.3 within thirty (30) days of invoicing; late payments will accrue interest pursuant to Section 4.2(c).  In the event that WHITEHEAD licenses PATENT RIGHTS in a field separate from the FIELD to a third-party, where possible, a reasonable adjustment to patent reimbursement payment will be made to account for such third-party license; provided however that FATE will be responsible for reimbursing ongoing patent expenses from the FIELD.  In all instances, WHITEHEAD shall pay the fees prescribed for large entities to the United States Patent and Trademark Office.
 
7.                                    INFRINGEMENT
 
7.1                           Notification of Infringement.  Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the PATENT RIGHTS.
 
7.2                           Right to Prosecute infringements.
 
(a)                              FATE Right to Prosecute.  So long as FATE remains the exclusive licensee of the PATENT RIGHTS in the FIELD in the TERRITORY, FATE, to the extent permitted by law, will have the right, under its own control and at its own expense, to prosecute any third-party infringement of the PATENT RIGHTS in the FIELD in the TERRITORY, subject to Sections 7.4 and 7.5.  If required by law, WHITEHEAD shall permit any action under this Section to be brought in its name, including being joined as a party-plaintiff,  provided that  FATE shall hold WHITEHEAD harmless from, and indemnify WHITEHEAD against, any costs, expenses, or liability that WHITEHEAD incurs in connection with such action.  FATE shall reimburse WHITEHEAD for any costs WHITEHEAD incurs, including reasonable attorneys’ fees, as part of any action brought by FATE, irrespective of whether WHITEHEAD becomes a party-plaintiff.
 
Prior to commencing any such action, FATE shall consult with WHITEHEAD and shall consider the views of WHITEHEAD regarding the advisability of the proposed action and its effect on the public interest.  FATE shall not enter into any settlement, consent judgment, or other voluntary final disposition of any infringement action under this Section which imposes obligations on WHITEHEAD beyond those set forth herein, or which invalidates or restricts the
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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PATENT RIGHTS, without the prior written consent of WHITEHEAD, which consent shall not be unreasonably withheld or delayed.
 
(b)                             WHITEHEAD Right to Prosecute.  In the event that FATE is unsuccessful in persuading the alleged infringer to desist or fails to have initiated an infringement action within [ *** ] after FATE first becomes aware of the basis for such action, WHITEHEAD will have the right, at its sole discretion, to prosecute such infringement under its sole control and expense and any recovery obtained will belong to WHITEHEAD.
 
7.3                           Declaratory Judgment Actions.  In the event that a PATENT CHALLENGE is brought against WHITEHEAD or FATE by a third party, WHITEHEAD, at its option, will have the right within twenty (20) days after commencement of such action to take over the sole defense of the action at its own expense.  If WHITEHEAD does not exercise this right, FATE may take over the sole defense of the action at FATE’s sole expense, subject to Sections 7.4 and 7.5.
 
7.4                           Offsets.  FATE may offset a total of [***] of any expenses incurred under Sections 7.2 and 7.3 against any payments due to WHITEHEAD under Article 4,  provided that  in no event will such payments under Article 4, [ *** ] in any REPORTING PERIOD.  If such [ *** ] of FATE’s expenses and costs exceeds the amount of royalties deducted by FATE for any REPORTING PERIOD, then FATE may to that extent reduce the royalties due to WHITEHEAD in succeeding REPORTING PERIODS, but never by more than [ *** ] of the total royalty due in any one calendar year with respect to the patent(s) subject to such suit.
 
7.5                           Recovery.  Any recovery obtained in an action brought by FATE under Sections 7.2 or 7.3 will be distributed as follows:
 
(i)                                  each party will be reimbursed for any expenses incurred in the action (including the amount of any royalty or other payments withheld from WHITEHEAD as described in Section 7.4);
 
(ii)                              compensation for lost profits on the infringing sales will be paid to FATE, and FATE shall make payments to WHITEHEAD according to Article 4 based upon hypothetical NET SALES that FATE would have paid to WHITEHEAD if FATE had sold the infringing products, processes and services rather than the infringer;
 
(iii)                          compensation for a reasonable royalty on the infringing sales will be divided as [ *** ] to FATE and the remainder to WHITEHEAD;
 
(iv)                          additional damages (for example, enhanced or punitive damages) will be [***].
 
7.6                           Cooperation.  Each party agrees to cooperate in any action under this Article 7 which is controlled by the other party,  provided that  the controlling party reimburses the
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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cooperating party promptly for any costs and expenses incurred by the cooperating party in connection with providing such assistance.
 
7.7                           Right to Sublicense.  So long as FATE remains the exclusive licensee of the PATENT RIGHTS in the FIELD in the TERRITORY, FATE will have the sole right to sublicense any alleged infringer in the FIELD in the TERRITORY for future use of the PATENT RIGHTS in accordance with the terms and conditions of this Agreement relating to sublicenses.  Any upfront fees as part of such sublicense shall be treated as set forth in Article 4.
 
8.                                    PATENT CHALLENGE
 
8.1                            In the event that (1) FATE or AFFILIATES brings a PATENT CHALLENGE against WHITEHEAD, or (2) FATE or AFFILIATES assists another party in bringing a PATENT CHALLENGE against WHITEHEAD (except as required under a court order or subpoena), WHITEHEAD may terminate this Agreement immediately upon written notice to FATE without any liability and without any opportunity to cure by FATE.  In the event that (3) SUBLICENSEE brings a PATENT CHALLENGE against WHITEHEAD, or (4) SUBLICENSEE assists another party in bringing a PATENT CHALLENGE against WHITEHEAD (except as required under a court order or subpoena), FATE agrees that it will immediately terminate such sublicense.
 
8.2                            If Section 8.1 is determined to be unenforceable or illegal and, in the event that (1) FATE or AFFILIATES brings a PATENT CHALLENGE against WHITEHEAD, or (2) FATE or AFFILIATES assists another party in bringing a PATENT CHALLENGE against WHITEHEAD (except as required under a court order or subpoena), or (3) SUBLICENSEE brings a PATENT CHALLENGE against WHITEHEAD and FATE does not terminate such sublicense, or (4) SUBLICENSEE assists another party in bringing a PATENT CHALLENGE against WHITEHEAD (except as required under a court order or subpoena) and FATE does not terminate such sublicense, then the following:
 
(a)                               WHITEHEAD, in its sole discretion, may choose at any time following the initiation of such PATENT CHALLENGE to grant one or more licenses to third parties under the PATENT RIGHTS, including without limitation, to develop, make, have made, use, have used, sell, have sold, offer to sell, have offered to sell, lease, have leased, import and have imported LICENSED PRODUCTS in the FIELD in the TERRITORY;
 
(b)                              WHITEHEAD, in its sole discretion, may choose at any time following the initiation of such PATENT CHALLENGE to grant one or more licenses to third parties under the TANGIBLE PROPERTY, including without limitation, to develop, make, have made, use, have used, sell, have sold, offer to sell, have offered to sell, lease, have leased, import and have imported LICENSED PRODUCTS in the FIELD in the TERRITORY;
 
(c)                               The exclusive period under Section 2.2(a) and Section 2.2(b) will immediately terminate;
 
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(d)                             FATE, AFFILIATES, and SUBLICENSEES shall immediately destroy all TANGIBLE PROPERTY, and FATE shall confirm such destruction in writing to WHITEHEAD;
 
(e)                               FATE [***] and
 
(f)                                FATE shall [***] the PATENT CHALLENGE.
 
9.                                    INDEMNIFICATION AND INSURANCE
 
9.1                           Indemnification.
 
(a)                              Indemnity.  FATE shall indemnify, defend, and hold harmless WHITEHEAD and its current and former directors, governing board members, trustees, officers, faculty, staff, employees, students, and agents and their respective successors, heirs, and assigns (the “ Indemnitees ”), from and against any claim, liability, cost, damage, deficiency, loss, expense, or obligation of any kind or nature (including without limitation reasonable attorneys’ fees and other costs and expenses of litigation) (collectively the “ Claims ”) incurred by or imposed upon any of the Indemnitees in connection with [ *** ].
 
FATE’S indemnification under Section 9.1(a)(1) applies to any liability, damage, loss or expense whether or not [ *** ].  FATE’S indemnification under Section 9.1(b)(ii) through 9.l(b)(iv) does not apply to any liability, damage, loss or expense to the extent that it is attributable [ *** ].
 
(b)                             Procedures.  The Indemnitees agree to provide FATE with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement.  FATE agrees, at its own expense, to provide attorneys reasonably acceptable to WHITEHEAD to defend against any such Claims brought or filed against any of the Indemnitees whether or not such actions are rightfully brought.  The Indemnitees shall cooperate fully with FATE in such defense and will permit FATE to conduct and control such defense and the disposition of such Claims (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indemnitee will have the right to retain its own counsel, at the expense of FATE, if representation of such Indemnitee by the counsel retained by FATE would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel.  FATE shall keep WHITEHEAD informed of the progress in the defense and disposition of such Claim and to consult with WHITEHEAD with regard to any proposed settlement.
 
The right of FATE to assume the defense of any action is limited to that part of the action commenced against WHITEHEAD and/or Indemnitees that relates to FATE’s obligation of indemnification and holding harmless.
 
FATE shall require any AFFILIATE(S) or SUBLICENSEE(S) to indemnify, hold harmless and defend WHITEHEAD under the same terms set forth in this Section 9.1.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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9.2                           Insurance.  FATE shall obtain and carry in full force and effect commercial general liability insurance and, beginning at the time any product, process, or service relating to, or developed pursuant to, this Agreement is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by FATE, AFFILIATE(S), or SUBLICENSEE(S), product liability insurance and/or errors and omissions insurance, as appropriate, which will protect FATE and Indemnitees with respect to events covered by Section 9.1(a) above.  Such insurance will:
 
(i)                                  be issued by an insurer licensed to practice in the Commonwealth of Massachusetts or an insurer pre-approved by WHITEHEAD, such approval not to be unreasonably withheld;
 
(ii)                              list WHITEHEAD as an additional insured thereunder; and
 
(iii)                          require thirty (30) days written notice to be given to WHITEHEAD prior to any cancellation or material change thereof.
 
The limits of such insurance will not be less than [***] per occurrence with an aggregate of [***] for bodily injury including death; and [ *** ] per occurrence with an aggregate of [ *** ] for property damage; and, if appropriate, [ *** ] per occurrence with an aggregate of [ *** ] for errors and omissions.
 
In the alternative, FATE may self-insure subject to prior approval of WHITEHEAD.  FATE shall provide WHITEHEAD with Certificates of Insurance evidencing compliance with this Section.  FATE shall provide WHITEHEAD with written notice at least thirty (30) days prior to the cancellation, non renewal or material change in such insurance; if FATE does not obtain replacement insurance providing comparable coverage within such thirty (30)-day period, WHITEHEAD has the right to terminate this Agreement effective at the end of such thirty (30)-day period without any notice or additional waiting periods.
 
The minimum amounts of insurance coverage required under these provisions may not be construed to create a limit of FATE’s liability with respect to its indemnification obligation under Section 9.1 of this Agreement.
 
FATE shall maintain such comprehensive general liability insurance beyond the expiration or termination of this Agreement during (a) the period that any product, process, or service, relating to, or developed pursuant to, this Agreement is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by FATE or by a SUBLICENSEE, AFFILIATE or agent of FATE and (b) a reasonable period after such time as any product, process or service relating to, or developed pursuant to, this Agreement is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals), which in no event shall be less than [ *** ].
 
FATE shall require any AFFILIATE(S) or SUBLICENSEE(S) to maintain insurance in favor of WHITEHEAD and the Indemnitees under the same terms set forth in this Section 9.2.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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10.                            NO REPRESENTATIONS OR WARRANTIES
 
WHITEHEAD hereby represents and warrants that (a) it solely and exclusively owns the patents and applications included within the PATENT RIGHTS; (b) it has the power and authority to grant the licenses provided for herein to FATE, and that it has not earlier granted, or assumed any obligation to grant, any rights in the PATENT RIGHTS to any third party that would conflict with the rights granted to FATE herein; and (c) this Agreement constitutes the legal, valid and binding obligation of WHITEHEAD, enforceable against WHITEHEAD in accordance with its terms.
 
EXCEPT AS MAY OTHERWISE BE EXPRESSLY SET FORTH IN THIS AGREEMENT, WHITEHEAD MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND CONCERNING THE PATENT RIGHTS OR TANGIBLE PROPERTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, VALIDITY OF PATENT’ RIGHTS CLAIMS, WHETHER ISSUED OR PENDING, AND THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE.  Specifically, and not to limit the foregoing, WHITEHEAD has made no investigation and makes no warranty or representation (i) regarding the validity or scope of the PATENT RIGHTS, and (ii) that the exploitation of the PATENT RIGHTS or any LICENSED PRODUCT’ or methods used in making or using such TANGIBLE PROPERTY will not infringe any patents or other intellectual property rights of WHITEHEAD or of a third party.
 
The TANGIBLE PROPERTY is experimental in nature and will be used with prudence and appropriate caution since not all of its characteristics are known.
 
IN NO EVENT SHALL WHITEHEAD, ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES AND/OR AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING ECONOMIC DAMAGES OR INJURY TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER WHITEHEAD SHALL BE ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF THE FOREGOING.
 
11.                            ASSIGNMENT
 
Neither party may assign this Agreement without the other party’s prior written consent, not to be unreasonably withheld.  The foregoing notwithstanding, FATE may assign this Agreement without WHITEHEAD’S consent to an AFFILIATE or in connection with a FATE change of control, merger, or consolidation, or sale of all or substantially all of its assets;  provided however , that this Agreement will immediately terminate if the proposed assignee fails to agree in writing to be bound by the terms and conditions of this Agreement on or before the effective date of the assignment.
 
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12.                            GENERAL COMPLIANCE WITH LAWS
 
12.1                   Compliance with Laws.  FATE shall use reasonable commercial efforts to comply with all commercially material local, state, federal, and international laws and regulations relating to the development, manufacture, use, and sale of LICENSED PRODUCTS.
 
12.2                   Export Control.  FATE and its AFFILIATES and SUBLICENSEES shall comply with all United States laws and regulations controlling the export of certain commodities and technical data, including without limitation all Export Administration Regulations of the United States Department of Commerce.  Among other things, these laws and regulations prohibit or require a license for the export of certain types of commodities and technical data to specified countries.  FATE hereby gives written assurance that it will comply with, and will cause its AFFILIATES and SUBLICENSEES to comply with, all United States export control laws and regulations, that it bears sole responsibility for any violation of such laws and regulations by itself or its AFFILIATES or SUBLICENSEES, and that it will indemnify, defend, and hold WHITEHEAD harmless (in accordance with Section 9.1) for the consequences of any such violation.
 
12.3                   Non-Use of Name.  FATE and its AFFILIATES and SUBLICENSEES shall not use the name of “Whitehead Institute”, “Massachusetts Institute of Technology”, or any variation, adaptation, or abbreviation thereof, or of any of their trustees, officers, faculty, students, employees, or agents, or any trademark owned by WHITEHEAD or any terms of this Agreement in any promotional material or other public announcement or disclosure without the prior written consent of WHITEHEAD, which consent it may withhold in its sole discretion.  The foregoing notwithstanding, without the consent of WHITEHEAD, (i) FATE may make factual statements during the term of this Agreement that FATE has a license from WHITEHEAD under one or more of the patents and/or patent applications comprising the PATENT RIGHTS, and (ii) FATE may comply with disclosure requirements of all applicable laws relating to its business, including, without limitation, United States and state securities laws.
 
12.4                   Marking of LICENSED PRODUCTS.  To the extent commercially feasible and consistent with prevailing business practices, FATE shall mark, and shall cause its AFFILIATES and SUBLICENSEES to mark, all LICENSED PRODUCTS that are manufactured or sold under this Agreement with the number of each issued patent under the PA TENT RIGHTS that applies to such LICENSED PRODUCT.
 
13.                            TERMINATION
 
13.1                   Voluntary Termination by FATE.  FATE will have the right to terminate this Agreement, for any reason, (i) upon at least ninety (90) days prior written notice to WHITEHEAD, such notice to state the date at least ninety (90) days in the future upon which termination is to be effective, and (ii) upon payment of all amounts due to WHITEHEAD through such termination effective date.
 
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13.2                   Cessation of Business.  If FATE ceases to carry on its business related to this Agreement, becomes insolvent, makes an assignment for the benefit of creditors, or has a petition in bankruptcy filed for or against it, then WHITEHEAD will have the right to terminate this Agreement immediately upon written notice to FATE.
 
13.3                   Termination for Default.
 
(a)                              Nonpayment.  In the event FATE fails to pay any amounts due and payable to WHITEHEAD hereunder, and fails to make such payments within thirty (30) days after receiving written notice of such failure, WHITEHEAD may terminate this Agreement immediately upon written notice to FATE.  Further, if an audit pursuant to Section 5.4 shows an underreporting or underpayment by FATE in excess of twenty percent (20%) for any twelve (12)-month period, and FATE fails to make such payments within fifteen (15) days after receiving written notice of such failure, then WHITEHEAD may terminate this Agreement immediately upon written notice to FATE.
 
(b)                             Material Breach.  In the event FATE commits a material breach of its obligations under this Agreement, except for breach as described in Section 3.2 and Section 13.3(a), and tails to cure that breach within ninety (90) days after receiving written notice thereof, WHITEHEAD may terminate this Agreement immediately upon written notice to FATE.
 
(c)                              Insurance.  WHITEHEAD will have the right to terminate this Agreement if FATE fails to maintain the insurance required in accordance with Section 9.2.
 
13.4                   Effect of Termination.
 
(a)                              Survival.  The following provisions shall survive the expiration or termination of this Agreement: Articles 1, 9, 10, 14, 15 and 16, and Sections 5.2 (obligation to provide final report and payment), 5.4, 12.1, 12.2 and 13.4,
 
(b)                             Inventory.  Upon the early termination of this Agreement, FATE, AFFILIATES and SUBLICENSEES may complete and sell any work-in-progress and inventory of LICENSED PRODUCTS that exist as of the effective date of termination,  provided that :
 
(i)                                  FATE pays WHITEHEAD the applicable running royalty or other amounts due on such sales of LICENSED PRODUCTS in accordance with the terms and conditions of this Agreement; and
 
(ii)                              FATE and its AFFILIATES and SUBLICENSEES shall complete and sell all work-in-progress and inventory of LICENSED PRODUCTS within six (6) months after the effective date of termination.
 
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(c)                              TANGIBLE PROPERTY.  Except as provided in Section 13.4(b), FATE and AFFILIATES shall destroy all TANGIBLE PROPERTY upon termination.  FATE shall confirm such destruction in writing to WHITEHEAD.
 
(d)                            Sublicenses.  Upon termination, SUBLICENSEES in good standing may continue by way of a direct license with WHITEHEAD in accord with Section 2.3.  If a SUBLICENSEE in good standing does not continue by way of a direct license with WHITEHEAD, then such SUBLICENSEE shall destroy all TANGIBLE PROPERTY and confirm such destruction in writing to WHITEHEAD.
 
(e)                              Pre-termination Obligations.  In no event will termination of this Agreement release FATE, AFFILIATES, or SUBLICENSEES from the obligation to pay any amounts that became due on or before the effective date of termination.
 
14.                            DISPUTE RESOLUTION
 
14.1                   Mandatory Procedures.  The parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement.  If any party fails to observe the procedures of this Article, as may be modified by their written agreement, the other party may bring an action for specific performance of these procedures in any court of competent jurisdiction.
 
14.2                   Equitable Remedies.  Although the procedures specified in this Article are the sole and exclusive procedures for the resolution of disputes arising out of or relating to this Agreement, any party may seek a preliminary injunction or other provisional equitable relief if, in its reasonable judgment, such action is necessary- to avoid irreparable harm to itself or to preserve its rights under this Agreement.
 
14.3                   Dispute Resolution Procedures.
 
(a)                              Mediation.  In the event any dispute arising out of or relating to this Agreement remains unresolved within [ *** ] from the date the affected party informed the other parties of such dispute, any party may initiate mediation upon written notice to the other party (“ Notice Date ”), whereupon all parties shall be obligated to engage in a mediation proceeding under the then current Center for Public Resources (“ CPR ”) Model Procedure for Mediation of Business Disputes (http://www.cpTadr.org), except that specific provisions of this Article shall override inconsistent provisions of the CPR Model Procedure.  The mediator will be selected from the CPR Panels of Neutrals.  If the parties cannot agree upon the selection of a mediator within [ *** ] after the Notice Date, then upon the request of any party, the CPR shall appoint the mediator.  The parties shall attempt to resolve the dispute through mediation until the first of the following occurs:
 
(i)                                  the parties reach a written settlement;
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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(ii)                              the mediator notifies the parties in writing that they have reached an impasse;
 
(iii)                          the parties agree in writing that they have reached an impasse; or
 
(iv)                          the parties have not reached a settlement within [***] after the Notice Date.
 
(b)                             Trial Without Jury.  If the parties fail to resolve the dispute through mediation, or if no party elects to initiate mediation, each party shall have the right to pursue any other remedies legally available to resolve the dispute, provided, however, that the parties expressly waive any right to a jury trial in any legal proceeding under this Article.
 
14.4                   Performance to Continue.  Each party shall continue to perform its undisputed obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement; provided, however, that a party may suspend performance of its undisputed obligations during any period in which the other party fails or refuses to perform its undisputed obligations.  Nothing in this Article is intended to relieve FATE from its obligation to make undisputed payments pursuant to Articles 4 and 6 of this Agreement.
 
14.5                   Statute of Limitations.  The parties agree that all applicable statutes of limitation and time-based defenses (such as estoppel and laches) will be tolled while the procedures set forth in Section 14.3(a) are pending.  The parties shall cooperate in taking any actions necessary to achieve this result.
 
15.                            CONFIDENTIALITY
 
15.1                   Confidential Information.
 
(a)                               All information disclosed by one party to the other party hereunder including but not limited to this Agreement, progress reports, and royalty reports (the “ Confidential Information ”) will be maintained in confidence by the receiving party and will not be disclosed to any third party or used for any purpose except as set forth herein without the prior written consent of the disclosing party, for a period of seven (7) years from disclosure of such Confidential Information, except to the extent that such information is:
 
(i)                                  known by receiving party at the lime of its receipt, and not through a prior disclosure by the disclosing party, as documented by the receiving party’s business records;
 
(ii)                              becomes part of the public domain through no fault of the receiving party;
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
25

 
(iii)                          subsequently disclosed to the receiving party by a third party who may lawfully do so and is not under an obligation of confidentiality to the disclosing party; or
 
(iv)                          developed by the receiving party independently of information received from the disclosing party, as documented by the receiving party’s business records.
 
(b)                              Notwithstanding the foregoing, a party may disclose Confidential Information:
 
(i)                                  to governmental or other regulatory agencies in order to obtain patents or to gain or maintain approval to conduct clinical trials or to market LICENSED PRODUCT, provided however that such disclosure may be only lo the extent reasonably necessary to obtain patents or authorizations.
 
(ii)                              deemed necessary by FATE to be disclosed to AFFILIATES, SUBLICENSEES, agents, consultants, and/or other third parties for the development and/or commercialization of LICENSED PRODUCT’ and/or in connection with a licensing transaction and/or a permitted assignment under this Agreement, and/or loan, financing or investment and/or acquisition, merger, consolidation or similar transaction (or for such entities to determine their interest in performing such activities) in each case on the condition that any third party to whom such disclosures arc made agree to be bound by a confidentiality agreement under terms substantially similar to those of this Agreement.
 
Confidential Information that is disclosed under 15.1(b)(i) or 15.1(b)(ii) will remain otherwise subject to the confidentiality and non-use provisions hereof.
 
15.2                   Judicial or Administrative Process.  If a party is required by judicial or administrative process to disclose Confidential Information, such party shall promptly inform the other party of the disclosure that is being sought in order to provide the other party an opportunity to challenge or limit the disclosure obligations.
 
Confidential Information that is disclosed by judicial or administrative process will remain otherwise subject to the confidentiality and non-use provisions hereof, and the disclosing party, pursuant to law or court order, shall take all steps reasonably necessary, including without limitation obtaining an order of confidentiality, to ensure the continued confidential treatment of such Confidential Information.
 
15.3                   SEC Filings.  Either party may disclose the terms of this Agreement to the extent required, in the reasonable opinion of such party’s legal counsel, to comply with applicable laws, including without limitation the rules and regulations promulgated by the United States Securities and Exchange Commission (the “ SEC ”).  Notwithstanding the foregoing, before disclosing this Agreement or any of the terms hereof pursuant to this Section 15.3, the parties
 
26

 
shall consult with one another on the terms of this Agreement to be redacted in making any such disclosure.  If a party discloses this Agreement or any of the terms hereof in accordance with this Section 15.3, such party agrees, at its own expense, to seek confidential treatment of portions of this Agreement or such terms, as may be reasonably requested by the other party.
 
16.                            MISCELLANEOUS
 
16.1                   Notice.  Any notices required or permitted under this Agreement will be in writing, will specifically refer to this Agreement, and will be sent by hand, recognized national overnight courier, confirmed facsimile transmission, confirmed electronic mail, or registered or certified mail, postage prepaid, return receipt requested, to the following addresses or facsimile numbers of the parties:
 
If to WHITEHEAD:
 
Whitehead Institute for Biomedical Research
Nine Cambridge Center
Cambridge, MA 02142
Attention:  Intellectual Property Office
Tel:  617-258-5104
Fax:  617-258-6204
 
If to FATE:
 
Fate Therapeutics, Inc.
10931 N. Torrey Pines Road, Suite 107
La Jolla, CA 92037
Attention:  Chief Financial Officer
Tel:  858-875-1800
Fax:  858-875-1843
 
All notices under this Agreement will be deemed effective upon receipt.  A party may change its contact information immediately upon written notice to the other parties in the manner provided in this Section.
 
16.2                   Governing Law.  This Agreement and all disputes arising out of or related to this Agreement, or the performance, enforcement, breach or termination hereof, and any remedies relating thereto, shall be construed, governed, interpreted and applied in accordance with the laws of the Commonwealth of Massachusetts, U.S.A., without regard to conflict of laws principles, except that questions affecting the construction and effect of any patent shall be determined by the law of the country in which the patent shall have been granted.  The state and federal courts having jurisdiction over Cambridge, MA, U.S.A., provide the exclusive forum for any PATENT CHALLENGE and/or any court action between the parties relating to this Agreement.  FATE submits to the jurisdiction of such courts and waives any claim that such
 
27

 
court lacks jurisdiction over FATE or its AFFILIATES or constitutes an inconvenient or improper forum.
 
16.3                   Force Majeure.  No party will be responsible for delays resulting from causes beyond the reasonable control of such party, including without limitation fire, explosion, flood, war, strike, or riot, provided that  the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance under this Agreement with reasonable dispatch whenever such causes are removed.
 
16.4                   Amendment and Waiver.  This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by the parties.  Any waiver of any rights or failure to act in a specific instance will relate only to such instance and will not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar.
 
16.5                   Severability.  In the event that any provision of this Agreement will be held invalid or unenforceable for any reason, such invalidity or unenforceability will not affect any other provision of this Agreement, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent.  If the parties fail to reach a modified agreement within thirty (30) days alter the relevant provision is held invalid or unenforceable, then the dispute will be resolved in accordance with the procedures set forth in Article 14.  While the dispute is pending resolution, this Agreement will be construed as if such provision were deleted by agreement of the parties.
 
16.6                   Binding Effect.  This Agreement will be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns.
 
16.7                   Headings.  All headings are for convenience only and will not affect the meaning of any provision of this Agreement.
 
16.8                   Entire Agreement.  This Agreement and the Bilateral Nondisclosure Agreement of March 25, 2008, constitute the entire agreement between the parties with respect to its subject matter and supersedes all prior agreements or understandings between the parties relating to its subject matter.
 
[Signatures on the following page.]
 
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives.
 
For WHITEHEAD:	 	For FATE:	

By:	/s/ Martin A. Mullins	 	By:	/s/ Paul Grayson	
Name: 	Martin A. Mullins	 	Name: 	Paul Grayson	
Title:	Vice President	 	Title:	President & CEO	
Date:	2/24/2009	 	Date:	2/24/09	

 
APPENDIX A
 
List of Patent Applications and Patents
 
WHITEHEAD Case No. [***]
 
WHITEHEAD Case No. [***]
 
WHITEHEAD Case No. [***]
 
WHITEHEAD Case No. [***]
 
*       Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
A-1

 
APPENDIX B
 
List of Countries (excluding United States) for which
PATENT RIGHTS Applications Will Be Filed, Prosecuted and Maintained
 
The parties will mutually agree on which countries to prosecute the PATENT RIGHTS.
 
B-1

 
APPENDIX C
 
Initial Common Stock Distribution to WHITEHEAD and Whitehead Holders
 
To WHITEHEAD	[number]	
 	 	
To Whitehead Holders:	 	
[***]	 	
 	 	
Total number of shares	[***]	
 
          Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
C-1

 
APPENDIX D
 
Tangible Property
 
This Appendix D shall be completed by FATE prior to March 31, 2009, to list the TANGIBLE PROPERTY.
 
FATE acknowledges and understands that there may be tangible property of interest to FATE and covered under patent rights that are not subject to this Agreement.
 
D-1

 
APPENDIX E
 
TANGIBLE PROPERTY not subject to exclusivity
 
[To be completed by WHITEHEAD based upon Appendix D.]
 
E-1

Exhibit 10.24
 
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

 
LICENSE AGREEMENT
 
by and between
 
THE SCRIPPS RESEARCH INSTITUTE,
a California nonprofit
public benefit corporation
 
and
 
FATE THERAPEUTICS, INC.,
a Delaware corporation

 
LICENSE AGREEMENT
 
This License Agreement is entered into and made effective as of this 13th day of July, 2009 (the “ Effective Date ”), by and between THE SCRIPPS RESEARCH INSTITUTE, a California nonprofit public benefit corporation (“ TSRI ”), and Fate Therapeutics, Inc., a Delaware corporation (“ Licensee ”), each located at the respective address set forth in  Section 14.17 below, with respect to the facts set forth below.
 
RECITALS
 
A.                                TSRI is the owner of certain Licensed Patent Rights and has the right to grant licenses under such Licensed Patent Rights, subject to the rights set forth in  Sections 2.8  and  2.9  of this Agreement.
 
B.                                 TSRI desires to have the Licensed Patent Rights developed and commercialized to benefit the public and is willing to grant a license thereunder to Licensee.
 
C.                                 Licensee desires to obtain a license under the Licensed Patent Rights and to use the Licensed Biological Materials pursuant to the terms and conditions set forth herein.
 
NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth herein, TSRI and Licensee hereby agree as follows:
 
1.                                   Definitions.  Capitalized terms shall have the meaning set forth herein.
 
1.1                           Affiliate.  The term “Affiliate” shall mean any entity which directly or indirectly controls, or is controlled by, or is under common control with, Licensee.  The term “control” as used herein means (a) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares entitled to vote for the election of directors or with the power to direct the management and policies of such corporate entities; or (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interests with the power to direct the management and policies of such non-corporate entities.  All Affiliates shall be deemed to be licensees under  Section 2.1 - 2.4  of this Agreement.
 
1.2                           Confidential Information.  The term “Confidential Information” shall mean any and all proprietary or confidential information of TSRI or Licensee which may be exchanged between the parties at any time and from time to time during the term of this Agreement.  Confidential Information shall also include any information which, given the circumstances surrounding disclosure, would be considered confidential by the disclosing party.  Information shall not be considered confidential to the extent that either party can establish by competent proof that it:
 
a.                                     Is publicly disclosed through no fault of the receiving party, either before or after it becomes known to the receiving party; or

 
b.                                    Was known to the receiving party without obligation of confidentiality prior to the date of this Agreement, which knowledge was acquired independently and not from the disclosing party (including such party’s employees, consultants or agents); or
 
c.                                     Is subsequently disclosed to the receiving party without obligation of confidentiality in good faith by a third party who is not under any obligation to maintain the confidentiality of such information, and without breach of this Agreement by a receiving party; or
 
d.                                   Has been published by a third party not in breach of any obligation of confidentiality; or
 
e.                                     Was independently developed by the receiving party without the use of or reliance on the Confidential Information of the disclosing party.
 
If Confidential Information is required to be disclosed by the receiving party by law or court order, the party required to make such disclosure shall limit the same to the minimum required to comply with the law or court order, and shall use reasonable efforts to attempt to seek confidential treatment for that disclosure, and prior to making such disclosure by the receiving party shall notify the other party, not later than ten (10) days (or such shorter period of time as may be reasonably practicable under the circumstances) before the disclosure in order to allow that other party to comment and/or to obtain a protective or other order, including extensions of time and the like, with respect to such disclosure.
 
1.3                           Field.  The term “Field” shall mean all fields.
 
1.4                           Licensed Biological Materials.  The term “Licensed Biological Materials” shall mean the materials identified in  Exhibit A  and supplied by TSRI to Licensee, together with any progeny or mutants of such materials, or unmodified derivatives of such materials (defined as substances created by Licensee that constitute an unmodified functional sub-unit or product expressed by such materials).
 
1.5                           Licensed Patent Rights.  The term “Licensed Patent Rights” shall mean rights arising out of or resulting from (a) the U.S./PCT Patent Application(s) set forth on  Exhibit B ; (b) the foreign patent applications associated with the application(s) referenced in subclause (a) above; (c) the patents issued from the application(s) referenced in subclauses (a) and (b), and in subclauses (d) and (e) below; (d) divisional, continuations, reissues, reexaminations, renewals, and extensions of any patent or application set forth in subclauses (a)-(c) above; and (e) all claims of continuations-in-part that are entitled to the benefit of the priority date of the application(s) referenced in subclause (a) above.
 
1.6                           Licensed Product.  The term “Licensed Product” shall mean any product (a) the manufacture, use, importation, sale or offer for sale of which would, in the absence of the license granted by this Agreement, infringe a Valid Claim of any of the Licensed Patent Rights, or (b) that is comprised of, utilizes or incorporates Licensed Biological Materials, or (c) that is discovered, developed or made using a Licensed Process.
 
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1.7                           Licensed Process.  The term “Licensed Process” shall mean any method or process (a) claimed in a Valid Claim of any of the Licensed Patent Rights, (b) the practice of which would, in the absence of the license granted by this Agreement, infringe a Valid Claim of any of the Licensed Patent Rights, or (c) that utilizes or incorporates Licensed Biological Materials.
 
1.8                           Net Sales.  The term “Net Sales” shall mean the gross amount invoiced by Licensee and its Affiliates or its Sublicensees, or any of them, on all sales of Licensed Products and Licensed Processes, less (a) discounts actually allowed; (b) credits for claims, allowances, retroactive price reductions or returned or rejected goods; (c) amounts invoiced and actually paid for third party transportation, insurance or shipping charges to an end user of the Licensed Product or Licensed Process; (d) any taxes or other governmental charges actually paid in connection with the sale, transportation, or delivery of Licensed Products or Licensed Processes (but excluding what are commonly known as income taxes and value-added taxes).  Net Sales shall include all consideration invoiced by Licensee, its Affiliates or its Sublicensees in exchange for any Licensed Products or Licensed Processes including without limitation any monetary payments or, with regard to any other property paid in exchange for any Licensed Products or Licensed Processes, an amount in cash equal to the fair market value of such property.  For purposes of determining Net Sales, a sale shall be deemed to have occurred when an invoice therefore is generated, the Licensed Product shipped for delivery or the Licensed Process completed or provided.  Sales of Licensed Products or Licensed Processes by and amongst Licensee, its Affiliates or Sublicensees shall be excluded, unless the Affiliates or Sublicensees consume the Licensed Products or Licensed Processes, and only the subsequent sale of such Licensed Products or Licensed Processes to unrelated parties shall be deemed Net Sales hereunder.
 
1.9                           Research Tool.  The term “Research Tool” shall mean a Licensed Product, Licensed Process or Licensed Biological Material that is designed and developed solely for use in performing basic research including, without limitation, basic research having as its primary purpose understanding the biology or pathology of cells or cell lines and diseases or disorders affecting them, or education purposes, and not for Commercial Drug Development purposes.  “ Commercial Drug Development ” includes the following activities:  (a) any human clinical use or veterinary use (including, without limitation, therapeutic, prophylactic or diagnostic use); (b) any screening of compound libraries; (c) any development, manufacture or provision of any commercial pharmaceutical, healthcare or consumer products, processes or services; or (d) any provision of services related to the above (a)-(c).
 
1.10                   Sublicensee.  The term “Sublicensee” shall mean any third party (other than an Affiliate) to whom Licensee grants a sublicense with respect to the rights conferred upon Licensee under this Agreement, as contemplated by  Section 2.6 .
 
1.11                   Valid Claim.  The term “Valid Claim” shall mean a claim of any issued and unexpired patent within the Licensed Patent Rights which has not been revoked or held unenforceable, unpatentable or invalid by a decision of a court or governmental body of competent jurisdiction in a ruling that is unappealed or unappealable, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.  The term
 
3

 
‘‘Valid Claim” shall also include the claims of a pending patent application within the Licensed Patent Rights which have not been (i) cancelled, withdrawn, abandoned or finally disallowed without the possibility of appeal or refilling of such application, or (ii) pending for a period of more than [***] from the date of the first examination of the patent application.
 
2.                                   Grant of License.
 
2.1                           Grant of Exclusive License for Licensed Products.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, under the Licensed Patent Rights, including, without limitation, to make and have made, to use and have used, to sell and have sold, to offer to sell and have offered for sale, and to import and have imported Licensed Products in the Field.
 
2.2                           Grant of Exclusive License for Licensed Processes.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, under the Licensed Patent Rights to make and have made, to use and have used, to practice and have practiced, to offer to sell and have offered for sale, to sell and have sold, and to import and have imported any Licensed Processes in the Field.
 
2.3                           Grant of Exclusive License for Licensed Biological Materials.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, to the Licensed Biological Materials to make and have made, to use and have used, to sell and have sold, to offer to sell and have offered for sale, and to import and have imported, and to transfer and distribute any Licensed Biological Materials in the Field.
 
2.4                           Research Tools.
 
a.                                     For clarity, Research Tools are subject to the license grants in Sections 2.1-2.3, Section 2.8 , the retained rights set forth in  Sections 2.9 , and the due diligence requirements in  Section 6 .
 
b.                                    If TSRI reasonably believes that a Licensed Product, Licensed Process or Licensed Biological Material should be classified as a Research Tool hereunder, [***.]  If the Parties are unable to reach agreement regarding the classification within [***] after receipt of such notice, either party may request resolution of such issue in accordance with the dispute resolution process set forth in  Section 14.9 (and, during any such process, such Licensed Product, Licensed Process or Licensed Biological Material shall not be classified as a Research Tool under this Agreement).
 
c.                                     If such item is ultimately classified as a Research Tool as provided above, then Licensee shall comply with the due diligence obligations set forth in  Section 6.2.b .
 
2.5                           Covenants Not To Grant Third Party Licenses.  As of the Effective Date and until this Agreement is terminated, TSRI covenants not (i) to grant to any third party any
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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licenses or any rights to Licensed Patent Rights in the Field, or (ii) to grant to any third party any licenses or any rights to, or to transfer samples of, Licensed Biological Materials in the Field, except as permitted under  Sections 2.8  and  2.9  hereof.
 
2.6                           Sublicensing.  Licensee shall have the right to grant and authorize sublicenses to any party with respect to the rights conferred upon Licensee under this Agreement.  Sublicensees shall not have the right to further sublicense without TSRI’s prior written consent, which will not be unreasonably withheld or delayed.  Any sublicense granted under this  Section 2.6  shall be subject in all respects to the applicable provisions contained in this Agreement as are needed to enable Licensee to comply with this Agreement (including the provisions regarding governmental interest, reservation of rights, development efforts, reporting, audit rights, indemnity, insurance, limited warranty, disclaimer, limitation of liability, confidentiality, and rights upon expiration or termination).  It is anticipated that Licensee may enter into agreements with third parties wherein some of the rights granted herein will be transferred to third parties who are performing a service for Licensee, such as a contract manufacturer or contract research organization, but specifically excluding agreements that contain the rights to sell, or offer for sale Licensed Products or Licensed Processes.  These types of service agreements are not subject in all respects to the applicable provisions contained in this Agreement as are needed to enable Licensee to comply with this Agreement but shall include the following provisions contained herein:  indemnity, insurance, limited warranty, disclaimer, limitation of liability, and confidentiality.  In the event of a conflict between this Agreement and the terms of any sublicense, the terms of this Agreement shall control.  Licensee shall forward to TSRI a copy of any and all fully executed sublicense and service agreements within thirty (30) days of execution.
 
2.7                           No Other License.  This Agreement confers no license or rights by implication, estoppel, or otherwise under any patent applications or patents or other intellectual property of TSRI other than Licensed Patent Rights regardless of whether such patents or intellectual property are dominant or subordinate to Licensed Patent Rights.
 
2.8                           Governmental Interest.  Licensee and TSRI acknowledge that TSRI has received, and expects to continue to receive, funding from the United States Government in support of TSRI’s research activities.  Licensee and TSRI acknowledge and agree that their respective rights and obligations pursuant to this Agreement shall be subject to the rights of the United States Government, existing and as amended, which may arise or result from TSRI’s receipt of research support from the United States Government, including but not limited to, 37 CFR 401, the NIH Grants Policy Statement and the NIH Guidelines for Obtaining and Disseminating Biomedical Research Resources.
 
2.9                           Reservation of Rights.  TSRI reserves the right to use for any internal basic research or educational purposes any Licensed Patent Rights and Licensed Biological Materials licensed hereunder, without TSRI being obligated to pay Licensee any royalties or other compensation or to account to Licensee in any way.  During the term, including any extension thereof, of the Research Funding and Option Agreement dated February 19, 2008 between Licensee and TSRI (“ Research Agreement ”), TSRI will not enter into any agreements
 
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with any other third party for the performance of sponsored research in the same field of research described in Appendix A of such Research Agreement.
 
In addition, TSRI reserves the right to grant, non-exclusive licenses to use the Licensed Patent Rights and Licensed Biological Materials for internal basic research and educational purposes to other nonprofit or academic institutions, and in no event for any Commercial Drug Development activities.  TSRI may distribute Licensed Biological Materials to other nonprofit or academic institutions (but in no event to any for-profit third party) for the uses expressly permitted above, under the terms of a Material Transfer Agreement with such institution (an “ MTA ”).  Licensee may request on an annual basis a list of the parties with whom TSRI has entered into an MTA for Licensed Patent Rights and Licensed Biological Materials, and TSRI shall provide such list within thirty (30) days of its receipt of such request by Licensee.
 
2.10                   Know-how License.  TSRI grants to Licensee a non-exclusive license to utilize the information, and materials listed on  Exhibit D  in the exploitation of the Licensed Patent Rights.
 
3.                                   Royalties.
 
3.1                           License Issue Fee.  Licensee agrees to pay and shall pay to TSRI a noncreditable, nonrefundable license issue fee in the amount of Ten Thousand U.S. Dollars (U.S. $10,000) within fifteen (15) days of the Effective Date (the “ License Issue Fee ”).  Failure of Licensee to make this payment shall render this Agreement null and void (ab initio).
 
3.2                           Minimum Annual Royalty.  Licensee agrees to pay and shall pay to TSRI a nonrefundable minimum annual royalty in the amount of [***].  The first payment is due no later than January 1, 2010 and on January f of each subsequent calendar year until the first January 1 after the first commercial sale of the first Licensed Product by Licensee or any of its Sublicensees, at which time the amount of the minimum annual royalty shall become and shall remain [***] (the “ Minimum Annual Royalty Fee ”).  Such payments shall be credited against running royalties due for that calendar year and Licensee’s royalty reports shall reflect such a credit.  Such payments shall not be credited against milestone payments (if any), Sublicensing Payments (if any), nor against royalties due for any preceding or subsequent calendar year.
 
3.3                           Running Royalties.  Licensee agrees to pay and shall pay to TSRI a running royalty, on a country-by-country basis, in the following percentage amounts of Net Sales of Licensed Products sold or transferred, or Licensed Processes performed, by Licensee, Affiliates or Sublicensees,
 
a.                                     where such sale or transfer or performance in the applicable country then infringes one or more Valid Claims contained in the Licensed Patent Rights for such country:  (i) [***] (ii) [***] (iii) [***] and (iv) [***];  provided ,  however , where such sale or transfer or performance in the applicable country does not then infringe one or more Valid Claims contained in the Licensed Patent Rights for such country, the running royalty percentages as set forth above in  3.3.a(i) - (iv) , as applicable, shall be reduced by [***]; and
 
*                                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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b.                                    where the manufacture, use or sale of such Licensed Product or Licensed Process is not covered by a Valid Claim in any country but utilizes, is comprised of or , incorporates Licensed Biological Materials or was discovered, developed or made using any Licensed Process:  [***] in any country.
 
3.4                           Royalty Increase.  Notwithstanding Section 3.3, in the event Licensee, an Affiliate, or a Sublicensee directly or indirectly initiates any action or proceeding in or before any court or patent office alleging that (i) any of the Licensed Patent Rights are invalid or unenforceable, or (ii) no royalties, Sublicense Payments, milestone payments, patent costs or other monies are due or required to be paid to TSRI under this Agreement because some or all of the Licensed Patent Rights are invalid or unenforceable (collectively “ Challenges ”), the royalty rates specified in  Section 3.3  shall be increased to the following rates:  [***];  provided ,  however , that such increase shall only be applied to a Licensed Product and/or a Licensed Process covered by the Licensed Patent Right(s) that are the subject of such Challenge (and shall not be applied, for the avoidance of doubt, to a Licensed Product and/or a Licensed Process that is covered by Licensed Patent Rights that are not the subject of such Challenge).  Any such increase shall be effective during the pendency of such Challenge from the date Licensee first initiates such Challenge, and thereafter during the term of the Agreement,  provided  that at least one (1) claim that covers such Licensed Product or Licensed Process within the Licensed Patent Rights being Challenged is held to be valid and enforceable as a result of such Challenge.  Licensee (i) agrees that [***].
 
3.5                           Royalty Credit.  If Licensee, its Affiliate or its Sublicensee is required to license or acquire technology (including, but not limited to, patent rights and/or other intellectual property rights) from a third party in order to practice the Licensed Patent Rights or to develop or commercialize a Licensed Product or Licensed Process because the exploitation of the Licensed Patent Rights would infringe that third party’s intellectual property rights without obtaining a license to such third party technology, [***], then Licensee may deduct up to [***] of the amount paid to such third party from the payments owing to TSRI for such Licensed Product or Licensed Process [***].  The above offset right is subject to the requirement that Licensee, its Affiliate or its Sublicensee shall not decrease the royalty or other amounts owed to TSRI under this Agreement by more than [***] of the amount due.  Notwithstanding the above, Licensee, its Affiliate or its Sublicensee shall have no right to deduct or offset any royalties or other amounts with respect to any third party technology that is the subject of any cross license or similar arrangements (whether in the same or related transactions) where Licensee, its Affiliate or its Sublicensee grants or provides to such third party or its affiliates licenses, options or other rights to existing or future technology, intellectual property, research or development activities or other information or materials.  Licensee will give TSRI advance written notice of any third party arrangement sufficiently prior to seeking to deduct any payments to the third party under the terms of this  Section 3.5  in order to allow TSRI and Licensee to mutually determine whether such third party’s technology is required in order to practice or exploit the Licensed Patent Rights.
 
3.6                           Combination Products.  If a Licensed Product or Licensed Process is sold in combination with another component(s), which other component(s) if sold alone would not be subject to a royalty payment hereunder, then Net Sales as applicable, from such combination
 
*                                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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sales, for purposes of calculating the amounts due under this Section 3, shall be calculated by multiplying the gross selling price of the combination product by the fraction A/(A+B), where A is the gross selling price, during the royalty period in question, of the Licensed Product or Licensed Process sold separately, and B is the gross selling price, during the royalty period in question, of the other component(s), sold separately.  If the other component(s) are not sold separately during that royalty period, then the Net Sales, as applicable, on the combination product shall be as reasonably allocated between such Licensed Product and such other component(s) as mutually agreed upon by Licensee and TSRI based on the relative value contributed by each component;  provided ,  however , that the Net Sales allocated to such Licensed Product shall not be less than [***] of the Net Sales of such combination product.
 
3.7                           Royalty Floor.  In no event may the royalty owed to TSRI be reduced by more than [***].  Licensee may utilize either the Combination Products or the Royalty Credit calculation at its discretion, but may not use both.
 
3.8                           No Multiple Royalties.  No multiple royalties shall be due because any Licensed Product or Licensed Process is covered by more than one of the Licensed Patent Rights.  In such case, Licensee shall pay only one royalty at the highest of the applicable rates pursuant to  Section 3.3  above.
 
3.9                           Arms-Length Transactions.  On sales of Licensed Products or Licensed Processes which are made in other than an arm’s-length transaction, the value of the Net Sales attributed under this Section 3  to such a transaction shall be that which would have been received in an arm’s-length transaction, based on sales of like quality and quantity products, services or processes on or about the time of such transaction.
 
3.10                   Duration of Royalty Obligations.  The royalty obligations of Licensee as to each Licensed Product or Licensed Process shall continue on a country-by-country basis until (a) (i) the expiration of the last to expire of a Valid Claim that covers such Licensed Product or Licensed Process in that country, or (ii) in the countries where no Valid Claim was filed the royalty obligation shall run concurrent with the last to expire Valid Claim in the United States or Europe, or (b) for a Licensed Product or Licensed Process not covered by a Valid Claim in any country but [***] after the date of the first commercial sale of such Licensed Product or Licensed Process in such country.  Upon the termination of Licensee’s royalty obligations with respect to a Licensed Product or Licensed Process in a country, the license grants contained in  Sections 2.1 .- 2.3  shall become fully paid-up, royalty-free, perpetual and irrevocable for such Licensed Product or Licensed Process in such country.
 
3.11                   Other License Agreements.
 
a.                                     In the event that Licensee would be required to pay a Licensee Issue Fee under (i) any other license agreements arising from the Research Agreement or the Option Agreement dated January 5, 2009 between Licensee and TSRI (“ Option Agreement ”), entered into between Licensee and TSRI (such written agreements are collectively the “ Other License Agreements ”) and (ii)  Section 3.1  under this Agreement, then the maximum aggregate Licensee Issue Fee Licensee shall be required to pay under the Other License Agreements and this Agreement shall be $[***] under the applicable sections of such agreements.
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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b.                                    In the event that Licensee would be required to pay a Minimum Annual Royalty Fee under (i) any Other License Agreements and (ii)  Section 3.2  under this Agreement, then (x) the maximum Minimum Annual Royalty Fee [***] shall be $[***] under the applicable sections of such agreements; and (y) the maximum Minimum Annual Royalty Fee [***] shall be $[***] under the applicable sections of such agreements.
 
c.                                     In the event that Licensee would, in connection with the sale or transfer of a product or service, be required to pay a royalty under (i) any Other License Agreements and (ii)  Section 3.3  under this Agreement in connection with the same sale or transfer, then Licensee shall be required under the Other License Agreements and this Agreement only to pay a single royalty under such agreements in connection with such sale or transfer, such royalty to be payable at the highest of the royalties owed to TSRI under the applicable sections of such agreements.
 
4.                                   Non-Royalty Revenues.
 
4.1                           Sublicense Payments.  Any and all revenues, equity interests and other consideration paid to Licensee in consideration of the grant to a third party of a sublicense to the Licensed Patent Rights and/or Licensed Biological Materials to any Sublicensee that is not an Affiliate of Licensee (collectively “ Sublicense Revenues ”) shall be reported and paid to TSRI by Licensee on a quarterly basis within sixty (60) days of the end of the applicable quarter in which such Sublicense Revenues are received by Licensee.  Notwithstanding the foregoing, all royalties based upon transfers or sales of Licensed Products or Licensed Processes, payments for or reimbursement for costs for research and development (to the extent itemized in the sublicense agreement), payments for or reimbursements for costs for patent prosecution, defense, enforcement and maintenance, and payments for equity and debt securities, so long as said payments reflect the current fair market value, and not a premium thereon, shall be excluded from Sublicense Revenues.  Any non-cash Sublicense Revenues received by Licensee from a Sublicensee or other third party shall be valued at its fair market value as of the date of receipt, as determined in good faith by Licensee.  Licensee shall pay to TSRI a non-creditable, non-refundable percentage of these Sublicense Revenues according to the following schedule (“ Sublicense Payments ”):
 
Sublicense Revenues received by Licensee
(on a cumulative basis)	Percent of Sublicense Revenues
payable to TSRI	
 	 	
Up to $[***]	[***]	
 	 	
$[***]	[***]	
 	 	
More than $[***]	[***]	
 
Any milestone payment that Licensee makes to TSRI under Section 4.4 below upon achievement of a given milestone event by a Sublicensee would be credited against any payment due under this  Section 4.1  only with respect to Sublicense Revenues received in connection with achievement of the same milestone event.
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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To the extent that patent rights, other intellectual property rights or other rights or obligations other than Licensed Patent Rights are sublicensed or granted by Licensee, including, without limitation, pursuant to Other License Agreements, that:  portion of the consideration received by Licensee and subject to this Section 4.1  shall be equitably apportioned between the Licensed Patent Rights and those other rights and obligations, and such apportionment shall be reasonable and in accordance with customary standards in the industry.  Licensee shall promptly deliver to TSRI a written report setting forth such apportionment.  In the event TSRI disagrees with the determination made by Licensee, TSRI shall so notify Licensee within thirty (30) days of receipt of Licensee’s report and the parties shall meet to discuss and resolve such disagreement in good faith.  If the parties are unable to agree in good faith as to such fair market values within [***] days, then the matter shall be submitted in accordance with the dispute resolution process set forth in  Section 14.9 .
 
Notwithstanding the foregoing, with respect to any sublicense agreement, the parties agree that the percentage of “ Sublicense Revenues ” attributable to such sublicense agreement is not cumulative across Other License Agreements, regardless of the number of Other License Agreements that are applicable to such sublicense agreement, and regardless of whether sublicenses are granted under more than one Other License Agreement.
 
4.2                           Increase in Sublicense Payments.  Notwithstanding Section 4.1, in the event Licensee directly or indirectly initiates a Challenge in or before any court or patent office, the percentages specified in Section 4.1  shall be increased to the following rates:
 
Sublicense Revenues received by Licensee
(on a cumulative basis)	Percent of Sublicense Revenues
payable to TSRI	
 	 	
Up to $[***]	[***]	
 	 	
$[***]	[***]	
 	 	
More than $[***]	[***]	
 
provided, however, that such increase shall only be applied to Sublicense Revenues derived from the Licensed Patent Rights that are the subject of such Challenge (and shall not be applied, for the avoidance of doubt, to Sublicense Revenue derived from any Licensed Patent Rights that are not the subject of such Challenge).  Any such increase shall be effective during the pendency of such Challenge from the date Licensee first initiates such Challenge, and thereafter during the term of the Agreement,  provided  that at least one (I) claim that covers a Licensed Product or Licensed Process within the Licensed Patent Rights being Challenged is held to be valid and enforceable as a result of such Challenge.  [***]
 
4.3                           Product Development Milestones.  Licensee agrees to pay and shall pay to TSRI the following non-creditable, non-refundable product development milestones within sixty (60) days of the end of the applicable quarter in which the first occurrence in the United States or Europe of each milestone for the first Licensed Product or first Licensed Process to meet such milestone as follows:
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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 	Milestone	Payment	
 	
[***]	
 
Each such milestone shall be payable only once under the Agreement.  In the event that any Licensed Product or Licensed Process would be subject to development milestones and payments under this Section 4.3  as well as under any Other License Agreements, then it is understood and agreed that such Licensed Product or Licensed Process shall be subject to only a single schedule of development milestones and payments under this Agreement and the Other License Agreements.
 
5.                                   Royalty Payments.
 
5.1                           Sales by Licensee.  Royalties payable pursuant to Section 3 herein, shall be payable by Licensee quarterly, within sixty (60) days after the end of each calendar quarter, based upon Net Sales during the immediately preceding calendar quarter.
 
5.2                           Sales by Sublicensees.  Licensee agrees to pay and shall pay to TSRI, or cause its Sublicensees to pay to TSRI, all royalties pursuant to  Section 3  herein resulting from the Net Sales of its Sublicensees, within sixty (60) days after the end of each calendar quarter, based on Net Sales during the immediately preceding calendar quarter.
 
6.                                   Development and Commercialization Activities.
 
6.1                           Commercial Development Plan.  Licensee has provided to TSRI its development plan attached hereto as  Exhibit C , under which Licensee intends to bring the subject matter of the Licensed Patent Rights to the point of commercial use (“ Commercial Development Plan ”), where such Commercial Development Plan is subject to the mutual agreement by Licensee and TSRI.  Pursuant to the Commercial Development Plan, Licensee shall use commercially reasonable efforts to achieve the development benchmarks specified in the Commercial Development Plan (“ Benchmarks ”) within the time periods set forth in such specified in the Commercial Development Plan.  Notwithstanding the foregoing, in the event that Licensee, its Affiliates or a Sublicensee, alone or together, has expended a minimum of [***] (excluding amounts paid to TSRI under the Research Funding and Option Agreement) per each calendar year during the initial [***] period of development under such Commercial Development Plan (where, for the avoidance of doubt, such period shall commence upon the addition to this Agreement of the Licensed Patent Rights that are the subject of such Commercial Development Plan) (“ Initial Development Period ”), Licensee will be deemed to have complied with Licensee’s obligations under this  Section 6  in connection with such Commercial Development Plan for each year during such initial [***] period.
 
6.2                           Licensee’s Commercialization Activities.
 
a.                                     Licensee shall use commercially reasonable efforts and due diligence, or shall cause one or more of its Affiliates and Sublicensees to use commercially reasonable efforts and due diligence, to conduct research and achieve development of one or more Licensed Products and Licensed Processes, as promptly as is commercially feasible. 
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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Following Licensee’s receipt of necessary regulatory approvals, Licensee or its Affiliates or Sublicensees shall earnestly and diligently produce and sell reasonable quantities of Licensed Products or Licensed Processes sufficient to meet market demands.
 
b.                                    If a Licensed Product, Licensed Process or License Biological Material is ultimately classified as a Research Tool under  Section 2.4 , then Licensee shall use commercially reasonable efforts and due diligence, or shall cause one or more of its Affiliates and Sublicensees to use commercially reasonable efforts and due diligence to distribute and make such Research Tool reasonably available to third parties on commercially reasonable terms;  provided ,  however , that Licensee shall not be obligated to make such Research Tool available pursuant to this  Section 6.2(b)  to (i) third parties if Licensee reasonably believes that the manufacture, use, offer for sale, sale or import of such Research Tool might infringe the patent or other intellectual property rights of a third party; or (ii) to for-profit third parties if Licensee can reasonably demonstrate that such Research Tool may be materially detrimental to a non-Research Tool it is currently developing and/or commercializing under this Agreement.
 
c.                                     Licensee shall keep TSRI generally informed as to Licensee’s progress in such research, development, regulatory approval, marketing, production and sale, including its efforts, if any, to sublicense Licensed Patent Rights, and Licensee shall deliver to TSRI an annual written report of such efforts by June 30th of each calendar year and such other reports of such efforts as TSRI may reasonably request.  In these annual reports, Licensee shall describe its progress in complying with the Commercial Development Plan and in achieving the Benchmarks and shall explain in detail the reasons for any variances thereof.  Licensee shall also report in writing to TSRI the dates when it has achieved the Benchmarks and the date of first commercial sale of a Licensed Product or Licensed Process in each country within thirty (30) days of such occurrences.  The contents of Licensee’s progress reports to TSRI shall be deemed to be Licensee’s Confidential Information.  Licensee may amend its Commercial Development Plan and/or the Benchmarks upon TSRI’s prior written consent, which will not be unreasonably withheld if such proposed amendment is supported by a detailed showing by Licensee or its Affiliates or its Sublicensees using its best efforts and due diligence in its performance of research and development of one or more Licensed Products and Licensed Processes.
 
d.                                   Any time after the Initial Development Period (or such later time as agreed in writing by TSRI and Licensee), in the event (i) TSRI has a reasonable basis to believe, based on Licensee’s reports to TSRI, that Licensee is not using commercially reasonable efforts and due diligence as required under  Sections 6.1  and  6.2.a , or (ii) Licensee has not achieved the Benchmarks within the time provided in  Exhibit C  (as may be amended as provided above), TSRI has the right to terminate this Agreement by providing written notice to Licensee, where any such right to terminate shall be subject to a [***] cure period by Licensee.  Failure to meet any of the Benchmarks within the time provided in Exhibit C  (as may be amended as provided above) shall not constitute a breach by Licensee of this Agreement, but shall entitle TSRI, at TSRI’s sole discretion, to terminate this Agreement as provided above or convert the licenses granted under  Sections 2.1 - 2.3  to a non-exclusive license upon delivery of written notice to Licensee.  Notwithstanding the foregoing, at any time after the initial one-year period of development under a Commercial Development Plan (where, for the avoidance of doubt, such period shall commence upon the addition to this Agreement of the Licensed Patent Rights that
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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are the subject of such Commercial Development Plan), in the event TSRI has a reasonable basis to believe that Licensee is not using commercially reasonable efforts and due diligence as required as required under Section 6.2.b , TSRI has the right to convert, subject to a [***] day cure period, the license granted under Section 2.4  in connection with such Licensed Patent Rights to a non-exclusive license upon delivery of written notice to Licensee.
 
6.3                           Reports on Revenues and Payments.  Licensee shall submit to TSRI at the time payment is due after the end of each calendar quarter, on a country-by-country and per Licensed Product and Licensed Process basis, a royalty report (the “ Royalty Report ”) setting forth for such quarter:
 
a.                                     the number of units of Licensed Products sold by Licensee, its Affiliates and each of its Sublicensees;
 
b.                                    the gross amount due or invoiced for such Licensed Products by Licensee, its Affiliates and each of its Sublicensees;
 
c.                                     the gross amounts due or invoiced for all Licensed Processes performed by Licensee, its Affiliates and each of its Sublicensees;
 
d.                                   a detailed listing of any offsets under Section 3.5 and deductions used to determine Net Sales of Licensed Products and Licensed Processes pursuant to  Section 1.8 , and calculations on Combination Products under  Section 3.6 ;
 
e.                                     the amount of royalty due under Section 3, or if no royalties are due to TSRI for any reporting period, the statement that no royalties are due and an explanation why they are not due for that quarterly period;
 
f.                                      the amount of Sublicense Revenues received by Licensee; and
 
g.                                    the amount of Sublicense Payments due under Section 4.1, or if no Sublicense Payments are due to TSRI for any reporting period, the statement that no Sublicense Payments are due and an explanation why they are not due for that quarterly period.
 
Such Royalty Report shall be certified as correct by an officer of Licensee.  The contents of such Royalty Reports shall be deemed to be Licensee’s Confidential Information.
 
6.4                           Royalty Payments.  Licensee agrees to pay and shall pay to TSRI with each Royalty Report the amount of royalty and/or Sublicense Payments due with respect to such quarter.  If multiple technologies are covered by the licenses granted hereunder, Licensee shall specify which Licensed Patent Rights and Licensed Biological Materials are utilized for each Licensed Product or Licensed Process included in the Royalty Report.  All payments due hereunder shall be deemed received when funds are credited to TSRI’s bank account and shall be payable by check or wire transfer in United States Dollars.
 
6.5                           Foreign Sales.  The remittance of royalties payable on sales outside the United States shall be payable to TSRI in United States Dollar equivalents at the official rate of
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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exchange of the currency of the country from which the royalties are payable, as quoted in the Wall Street Journal for the last business day of the calendar quarter in which the royalties are payable.  If the transfer of or the conversion into the United States Dollar equivalents of any such remittance in any such instance is not lawful or possible, the payment of such part of the royalties as is necessary shall be made by the deposit thereof, in the currency of the country where the sale was made on which the royalty was based to the credit and account of TSRI or its nominee in any commercial bank or trust company of TSRI’s choice located in that country, prompt written notice of which shall be given by Licensee to TSRI.
 
6.6                           Foreign Taxes.  Any tax required to be withheld by Licensee under the laws of any foreign country for any royalties or other amounts due hereunder or for the accounts of TSRI shall be promptly paid by Licensee for and on behalf of TSRI to the appropriate governmental authority, and Licensee shall furnish TSRI with proof of payment of such tax together with official or other appropriate evidence issued by the applicable government authority.  Any such tax actually paid on TSRI’s behalf shall be deducted from royalty payments due TSRI.
 
7.                                   Record Keeping.  Licensee shall keep, and shall require its Affiliates and Sublicensees to keep, accurate records (together with supporting documentation) of sales of Licensed Products and Licensed Processes as appropriate to determine the amount of royalties, Sublicense Payments, Product Development Milestone Payments and other monies due to TSRI hereunder, as well as records regarding the calculations of royalty offsets and Combination Products.  Such records shall be retained for at least five (5) years following the end of the reporting period to which such records relate.  Such records shall be available during normal business hours for examination and copying by an independent certified public accounting firm selected by TSRI and reasonably acceptable to Licensee for the purpose of verifying that Licensee’s reports and payments are accurate and that Licensee is in compliance with this Agreement.  In conducting such examinations pursuant to this  Section 7 , TSRI’s accountant shall have access to, and may disclose to TSRI, all records which TSRI reasonably believes to be relevant to the calculation of royalties under  Section 3 , non-royalty revenues under  Section 4  and Licensee’s compliance with this Agreement.  Such examination shall be at TSRI’s expense, except that if such examination shows an underreporting or underpayment of [***] or more for any twelve (12) month period, then Licensee shall pay the cost of such examination (including without limitation TSRI’s attorney’s fees, accountants fees and other costs), as well as any additional payments that would have been payable to TSRI under this Agreement had Licensee reported correctly, plus interest on such sum at the rate of [***] per month.  All payments due hereunder shall be made within thirty (30) days of Licensee’s receipt of a copy of the audit report.  TSRI may exercise its audit rights under this Section 7  no more frequently than once in any calendar year.
 
8.                                   Patent Matters.
 
8.1                           Patent Prosecution and Maintenance.  From and after the date of this Agreement, the provisions of this  Section 8  shall control the prosecution of any patent application and maintenance of any patent included within Licensed Patent Rights.  TSRI shall (a) direct and control the preparation, filing and prosecution of the United States and foreign
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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patent applications within Licensed Patent Rights (including without limitation any reissues, reexaminations, appeals to appropriate patent offices and/or courts, interferences and foreign oppositions); and (b) maintain the patents issuing therefrom.  TSRI shall select the patent attorney, subject to Licensee’s written approval, which approval shall not be unreasonably withheld.  Both parties agree that TSRI shall have the right, at its sole discretion, to utilize TSRI’s Office of Patent Counsel in lieu of or in addition to independent counsel for patent prosecution and maintenance described herein, and the fees and expenses associated with the work done by such Office of Patent Counsel and/or independent patent counsel with regard to the preparation, filing and prosecution of patent applications and maintenance of patents included within Licensed Patent Rights shall be paid as set forth below.  Licensee shall have full rights of consultation with the patent attorney so selected on all matters relating to Licensed Patent Rights.  TSRI shall use its reasonable efforts to implement all reasonable and timely requests made by Licensee with regard to the preparation, filing, prosecution and/or maintenance of the patent applications and/or patents within Licensed Patent Rights.
 
8.2                           Information to Licensee.  TSRI shall keep Licensee timely informed with regard to the patent application and maintenance processes.  TSRI shall deliver to Licensee copies of all patent applications, amendments, related correspondence, and other related matters in a timely manner.
 
8.3                           Patent Costs.  Licensee acknowledges and agrees that the licenses granted hereunder are in partial consideration for Licensee’s assumption of patent costs and expenses as described herein.  Licensee agrees to pay and shall pay for all expenses referenced in  Sections 8.1  and  8.2  hereof.  In addition, Licensee agrees to reimburse and shall reimburse TSRI for all patent costs and expenses previously paid or associated with Licensed Patent Rights incurred by TSRI up to the Effective Date, less any such patent costs and expenses previously reimbursed by Licensee under the Option Agreement.  Licensee agrees to pay and shall pay all such past and future patent expenses associated with the work on the Licensed Patent Rights performed by TSRI’s Office of Patent Counsel and/or its independent counsel within thirty (30) days after Licensee receives an itemized invoice therefor.  Failure of Licensee to pay patent costs and expenses as set forth in this  Section 8.3  shall immediately relieve TSRI from its obligation to incur any further patent costs and expenses.  For the avoidance of doubt, should Licensee not pay any patent costs and expenses due to TSRI or independent counsel within thirty (30) days after Licensee’s receipt of any itemized invoice therefor, TSRI shall have the right, at its sole discretion, to cease all patent prosecution and allow Licensed Patent Rights to go abandoned.  Such action by TSRI shall not constitute a breach of this Agreement.  Payment can be made directly to independent counsel, or to TSRI.  Licensee may elect with a minimum of ninety (90) days’ prior written notice to TSRI, to discontinue payment for the filing, prosecution and/or maintenance of any patent application and/or patent within Licensed Patent Rights.  Licensee shall remain liable for all patent prosecution and maintenance costs incurred prior to the date of notice of election and for a ninety (90) day period following the date of such notice.  Any such patent application or patent so elected shall immediately be excluded from the definition of Licensed Patent Rights and from the scope of the licenses granted under this Agreement, and all rights relating thereto shall revert to TSRI and may be freely licensed by TSRI.
 
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8.4                           Ownership.  The patent applications filed and the patents obtained by TSRI pursuant to Section 8.1  hereof shall be owned solely by TSRI, assigned solely to TSRI and deemed a part of Licensed Patent Rights.
 
8.5                           TSRI Right to Pursue Patent.  If at any time during the term of this Agreement, Licensee’s rights with respect to Licensed Patent Rights are terminated in accordance with the terms of this Agreement, TSRI shall have the right to take whatever action TSRI deems appropriate to obtain or maintain the corresponding patent protection.  If TSRI pursues patents under this  Section 8.5 , Licensee agrees to use commercially reasonable efforts to cooperate fully, including by providing, at no charge to, all appropriate technical data and executing all necessary legal documents.
 
8.6                           Infringement Actions.
 
8.6.1               Prosecution of Infringements.
 
a.                                     Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the Licensed Patent Rights by a third party and of any available evidence thereof.  After receiving notice from the other party of a possible infringement of the Licensed Patent Rights by a third party, the parties will consult with each other about whether and to what extent such third party’s products or activities are infringing upon the Licensed Patent Rights, and the extent to which the infringing products or activities are damaging sales of Licensed Products.  Within ninety (90) days of such notice, Licensee shall notify TSRI of its decision and proposed course of action, where the date of Licensee’s notice to TSRI, or the expiration of the ninety (90) day period, shall be known as the “ Commencement Date ”.  If Licensee determines, in its reasonable commercial discretion, and provides TSRI with its assessment supporting such determination, that the prosecution of such infringement would be commercially unreasonable, and TSRI does not object to such determination, then Licensee shall not have the obligation as set forth under  Section 8.6.1(d)  to prosecute such infringement and the consequences in  Section 8.6.1(d)  shall not apply;  provided ,  however , that TSRI shall then have the right, but not the obligation, to prosecute such infringement.
 
b.                                    In the event Licensee is obligated to, pursuant to Section 8.6.1(d) below, or elects to, pursuant to  8.6.1(a)  above, pursue a third party infringer, then Licensee may enter into settlements, stipulated judgments or other arrangements respecting such infringement, at its own expense, but only with TSRI’s prior written consent, which will not be unreasonably withheld or delayed.  TSRI shall permit any action to be brought in its name if required by law, and Licensee shall hold TSRI harmless from any costs, expenses or liability respecting all such infringements.  TSRI agrees to provide reasonable assistance which Licensee may require in any litigation arising in accordance with the provisions of this  Section 8.6.1 , for which Licensee shall pay to TSRI a reasonable hourly rate of compensation, including, without limitation, joining such action as a party plaintiff if necessary or desirable for initiation or continuation of such action;  provided  that the Licensee reimburses TSRI promptly for any reasonable costs and expenses incurred by TSRI in connection with providing such assistance.
 
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c.                                     In the event Licensee is not obligated to, pursuant to Section 8.6.1(d) below, pursue a third party infringer, then Licensee shall notify TSRI in writing promptly and TSRI shall have the right, but not the obligation, to prosecute such infringement on its own behalf.  If TSRI prosecutes such infringement, then TSRI may, at its discretion, convert the licenses granted to Licensee with respect to the patent(s) at issue to a non-exclusive license.  Conversion by TSRI pursuant to this  Section 8.6.1(c)  shall only be applicable to the country or countries within the Licensed Patent Rights that are the subject of TSRI’s prosecution of such infringement.
 
d.                                   Notwithstanding the foregoing Sections 8.6.l(b)-8.6.1(c), in order to maintain the licenses granted hereunder in force, Licensee shall have the first right and obligation to prosecute any and all third party infringements.  Unless Licensee and TSRI otherwise agree, pursuant to  Section 8.6.1(a) , that the prosecution of any third party infringement is commercially unreasonable, failure on the part of Licensee to prosecute any third party infringement within six (6) months after the Commencement Dale shall be grounds for termination of the licenses granted to Licensee with respect to the patent(s) at issue, and such patent(s) shall thereafter be excluded from the definition of Licensed Patent Rights.  Termination by TSRI pursuant to this  Section 8.6.1(d)  shall only be applicable to the country or countries within the Licensed Patent Rights that are the subject of Licensee’s failure to prosecute such infringement.
 
8.6.2               Allocation of Recovery.  Any damages, settlements or other recovery from an infringement action undertaken by Licensee pursuant to  Section 8.6.1  shall first be used to reimburse the parties for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows:  (i) [***] to TSRI, (ii) and [***] to Licensee.  If Licensee fails to prosecute any such action to completion or if TSRI prosecutes any such action, then any damages, settlements, or other recovery, net of the parties’ costs and expenses incurred in such infringement action shall [***].
 
8.6.3               Defense of Infringements.  Licensee shall have the first right, but not the obligation, to defend any suits against Licensee, Affiliates or Sublicensees alleging infringement of any third party intellectual property right due to Licensee’s use of the Licensed Patent Rights or its development or commercialization of Licensed Products or Licensed Processes.  Licensee shall promptly notify TSRI in writing of such claims, and TSRI and Licensee shall confer with each other and cooperate during the defense of any such action.  If Licensee finds it necessary or desirable for TSRI to become a party to such action, TSRI shall execute all papers as may reasonably be necessary to add TSRI as a party to such action.  Licensee shall bear all costs and expenses associated with any such suit or action.  TSRI shall be entitled to, at its expense, participate in and have counsel, selected by it and reasonably acceptable to Licensee, participate in any such action.  In no event shall TSRI have any out-of-pocket liability for costs of litigation or royalties, damages and/or settlement amounts due to any third party (except for costs of its own counsel as provided above).  If the third party intellectual property right is held not to be infringed, unenforceable or invalid, any recovery of damages for such suit shall be applied first [***] shall be entitled to keep the balance remaining from any such recovery.  For the purpose of clarity, it is acknowledged that this Section 8.6.3  shall in no way limit Licensee’s obligations
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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under Section 9.1 to indemnify, defend and hold harmless TSRI with respect to third party claims alleging infringement of such third party’s intellectual property rights.
 
8.6.4               Declaratory Judgment Actions.  If a declaratory judgment action is brought naming TSRI or Licensee or any of its Affiliates or Sublicensees as a defendant and alleging invalidity, unenforceability or non-infringement of any Licensed Patent Rights, Licensee or TSRI, as the case may be, shall promptly notify the other party in writing and Licensee may elect, upon written notice to TSRI within twenty (20) days after receiving or giving notice of the commencement of such action, to take over the sole control of such action at its own expense. TSRI shall be entitled to, at its expense, participate in and have counsel, selected by it and reasonably acceptable to Licensee, participate in any such action.  If Licensee does not defend any such action, then TSRI shall have the right, but shall not be obligated, to defend such action at TSRI’s expense.
 
9.                                   Indemnity and Insurance.
 
9.1                           Indemnity.  Licensee hereby agrees to indemnify, defend (by counsel reasonably acceptable to TSRI) and hold harmless TSRI and any parent, subsidiary or other affiliated entity of TSRI and their trustees, directors, officers, employees, scientists, agents, successors, assigns and other representatives (collectively, the “ Indemnitees ”) from and against all claims, suits, actions, damages, liabilities, losses and other expenses, including without limitation reasonable attorney’s fees, expert witness fees and costs incurred by the Indemnitees, with respect to any third party claim [***] (collectively “ Claim ”), that arises out of or relates to (a) [***], (b) [***], (c) [***], (d) [***], (e) [***], and/or (f) Licensee’s or any Sublicensee’s failure to comply with any applicable laws, rules or regulations, except that [***]. Licensee’s obligation to defend such Claims shall apply to any third party allegations or disputes that arise out of or relate to any of the items described in subparagraphs (a) through (f) above.  Licensee shall not enter into any settlement of such Claims that imposes any obligation on TSRI, that does not unconditionally release TSRI from all liability or that would have a material adverse effect on TSRI’s reputation or business without TSRI’s prior written consent.  Notwithstanding the above, Indemnitees, at their expense, shall have the right to retain separate independent counsel to assist in defending any such Claims.  In the event Licensee fails to promptly indemnify and defend such Claims and/or pay Indemnitees’ expenses as provided above, Indemnitees shall have the right to defend themselves, and in that case, Licensee shall reimburse Indemnitees for all of their reasonable attorney’s fees, costs and damages incurred in settling or defending such Claims within thirty (30) days of each of Indemnitees’ written requests.  This indemnity shall be a direct payment obligation and not merely a reimbursement obligation of Licensee to Indemnitees.
 
9.2                           Insurance.  Licensee shall name TSRI and Indemnitees as additional insured parties on any commercial general liability and product liability insurance policies maintained by Licensee, its Affiliates, and Sublicensees applicable to the Licensed Products, Licensed Processes and Licensed Biological Materials.
 
9.2.1                Beginning at the time any such Licensed Product or Licensed Process is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by Licensee or by a Sublicensee, Licensee shall, at its sole cost and expense, procure
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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and maintain commercial general liability insurance and product liability insurance in amounts and on terms consistent with industry standards for similarly situated pharmaceutical companies commercializing products, but in no case will such insurance be less than $3,000,000 per incident and $5,000,000 annual aggregate.  During clinical trials involving any Licensed Product, Licensed Process or Licensed Biological Material, Licensee shall, at its sole cost and expense, procure and maintain commercial general liability insurance in the same amounts and terms as specified above.  Licensee’s commercial general liability insurance shall provide coverage for personal injury, broad form property damage, advertising injury, premises-operations, products and completed operations and contractual liability including Licensee’s indemnity and other obligations under this Agreement.  Licensee may elect to self-insure all or part of the foregoing on commercially reasonable terms, which must be pre-approved by TSRI in writing; however, TSRI shall be obligated to approve such self-insurance if Licensee has and continues to maintain minimum cash reserves covering such self-insurance or minimum book equity, in either case in the amount of Five Hundred Million Dollars ($500,000,000), which Licensee sufficiently demonstrates to TSRI in writing.  The insurance coverage amounts specified herein or the maintenance of such insurance policies shall not in any way limit Licensee’s indemnity or other liability under this Agreement.
 
9.2.2                In addition, Licensee, on behalf of itself and its insurance carriers, waives any and all claims and rights of recovery against TSRI and the Indemnitees, including without limitation all rights of subrogation, with respect to either party’s performance under this Agreement or for any loss of or damage to Licensee or its property or the property of others under its control.  Licensee’s commercial general liability insurance policy shall also include a waiver of subrogation consistent with this paragraph in favor of TSRI and the Indemnitees.  Licensee shall be responsible for obtaining such waiver of subrogation from its insurance carriers.  Licensee’s insurance policies shall be primary and not contributory to any insurance carried by its Sublicensees or TSRI.  Upon TSRI’s request, Licensee shall deliver to TSRI copies of insurance certificates or binders and such waiver of subrogation that complies with the requirements of this  Section 9.2.2 .  Licensee shall provide TSRI with written notice at least fifteen (15) days prior to the cancellation, non-renewal or material change in such insurance described in  Section 9.2.1 .  If Licensee does not obtain replacement insurance providing comparable coverage within such fifteen (15) day period, TSRI shall have the right to terminate this Agreement for material breach under  Section 12.3 .
 
9.2.3                Licensee shall maintain such commercial general liability insurance beyond the expiration or termination of this Agreement during (a) the period that any Licensed Product or Licensed Process is being commercially distributed or sold by Licensee or by a Sublicensee, Affiliate or agent of Licensee; and (b) a reasonable period after the period referred to in  Section 9.2.3(a)  above, which in no event shall be less than five (5) years.
 
9.3                           Pre-Challenge Requirements.  Licensee will provide written notice to TSRI at least [***] prior to Licensee directly or indirectly initiating a Challenge in or before any court or patent office.  Licensee will include with such written notice [***] to enable the parties to attempt in good faith to mutually resolve such issues.
 
10.                           Limited Warranty.
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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10.1                   Limited Warranty.  TSRI hereby represents and warrants that, to the actual knowledge of TSRI, and only as of the Effective Date, (a) it is the sole and exclusive owner, appointed agent for licensing or licensee of all right, title and interest in and to the Licensed Patent Rights that exist as of the Effective Date; (b) it has the power and authority to grant the licenses provided for herein to Licensee, and that it has not earlier granted, or assumed any obligation to grant, any rights in such Licensed Patent Rights to any third party that have not been waived that would conflict with the rights granted to Licensee herein; and (c) this Agreement constitutes the legal, valid and binding obligation of TSRI, enforceable against TSRI in accordance with its terms, except with respect to creditor’s rights generally and the enforcement of equitable remedies.
 
10.2                    Licensee hereby warrants and represents this Agreement constitutes the legal, valid and binding obligation of Licensee, enforceable against Licensee in accordance with its terms, except with respect to creditor’s rights generally and the enforcement of equitable remedies.
 
10.3                   Disclaimer.  EXCEPT AS PROVIDED IN SECTION 10.1, TSRI MAKES NO OTHER WARRANTIES CONCERNING LICENSED PATENT RIGHTS, LICENSED BIOLOGICAL MATERIALS OR ANY OTHER MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR ARISING OUT OF COURSE OF CONDUCT OR TRADE CUSTOM OR USAGE, AND DISCLAIMS ALL SUCH EXPRESS OR IMPLIED WARRANTIES.  TSRI MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY OR SCOPE OF LICENSED PATENT RIGHTS, OR THAT ANY LICENSED PRODUCT, LICENSED PROCESS OR LICENSED BIOLOGICAL MATERIAL WILL BE FREE FROM AN INFRINGEMENT ON PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING UPON ANY LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL MATERIALS COVERED BY THIS AGREEMENT.  FURTHER, TSRI HAS MADE NO INVESTIGATION AND MAKES NO REPRESENTATION THAT THE LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL MATERIALS ARE SUITABLE FOR LICENSEE’S PURPOSES.
 
10.4                   Limitation of Liability.  IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF PROFITS OR EXPECTED SAVINGS) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER, EXCEPT FOR LIABILITY FOR BREACH BY SUCH PARTY OF ANY OF THE CONFIDENTIALITY PROVISIONS IN  SECTION 11  AND EXCEPT FOR LICENSEE’S INDEMNITY UNDER  SECTION 9.1 .  TSRI’S AGGREGATE LIABILITY, IF ANY, FOR ALL DAMAGES OF ANY KIND RELATING TO THIS AGREEMENT OR ITS SUBJECT MATTER SHALL NOT EXCEED THE AMOUNT PAID BY LICENSEE TO TSRI UNDER THIS AGREEMENT.  THE FOREGOING EXCLUSIONS AND LIMITATIONS SHALL APPLY TO ALL CLAIMS AND ACTIONS OF ANY KIND AND ON ANY THEORY OF LIABILITY, WHETHER BASED
 
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ON CONTRACT, TORT (INCLUDING, BUT NOT LIMITED TO NEGLIGENCE OR STRICT LIABILITY), OR ANY OTHER GROUNDS, AND REGARDLESS OF WHETHER A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.  THE PARTIES FURTHER AGREE THAT EACH WARRANTY DISCLAIMER, EXCLUSION OF DAMAGES OR OTHER LIMITATION OF LIABILITY HEREIN IS INTENDED TO BE SEVERABLE AND INDEPENDENT OF THE OTHER PROVISIONS BECAUSE THEY EACH REPRESENT SEPARATE ELEMENTS OF RISK ALLOCATION BETWEEN THE PARTIES.
 
11.                           Confidentiality and Publication.
 
11.1                   Treatment of Confidential Information.  The parties agree that during the term of this Agreement, and for a period of five (5) years after this Agreement terminates, a party receiving Confidential Information of the other party will (a) maintain in confidence such Confidential Information to the same extent such party maintains its own proprietary information; (b) not disclose such Confidential Information to any third party without prior written consent of the other party; and (c) not use such Confidential Information for any purpose except those permitted by this Agreement.  Notwithstanding the foregoing, if a party is required by law, regulation or court order to disclose Confidential Information of the other party, the party required to make such disclosure shall (i) promptly send a copy of the order or notice to the other party not later than ten (10) days before the proposed disclosure or such shorter period of time as may be reasonably practical under the circumstances; (ii) cooperate with the other party if the other party wishes to object or condition such disclosure through a protective order or otherwise; (iii) limit the extent of such disclosure to the minimum required to comply with the order or notice; and (iv) use reasonable efforts to seek confidential treatment (i.e., filing “under seal”) for that disclosure.  In addition, a party may disclose Confidential Information of the other party to its Affiliates and employees, to Sublicensees and potential Sublicensees (in the case of Licensee), or to other third parties who are investors or potential investors in connection with due diligence or similar investigations or in confidential financing documents, provided, in each case, that any such Affiliate, employee, Sublicensee, potential Sublicensee or other third party investor or potential investor agrees in writing to be bound by terms of confidentiality and non-use at least as stringent as those set forth in this  Section 11 , but with no further right to disclose or otherwise distribute TSRI’s Confidential Information.
 
11.2                   Publications.  Licensee agrees that TSRI shall have the right to publish in accordance with its general policies, and that this Agreement shall not restrict, in any fashion, TSRI’s right to publish.
 
11.3                   Publicity.  Except as otherwise provided herein or required by any applicable law, rule or regulation (including, without limitation, rules of the U.S. Securities and Exchange Commission and rules of any stock exchange upon which Licensee’s securities may be listed), no party shall originate any publication, news release or other public announcement, written or oral, whether in the public press, stockholders’ reports, or otherwise, relating to this Agreement or to any sublicense hereunder, or to the performance hereunder or under any such sublicense agreements, without the prior written approval of the other party, which approval
 
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shall not be unreasonably withheld.  Scientific publications published in accordance with Section 11.2 of this Agreement shall not be construed as publicity governed by this  Section 11.3 .
 
12.                           Term and Termination.
 
12.1                   Term.  Unless terminated sooner in accordance with the terms set forth herein, this Agreement, and the licenses granted hereunder, shall terminate upon termination of the royalty obligations as provided in  Section 3.10  hereof.
 
12.2                   Termination Upon Mutual Agreement.  This Agreement may be terminated by mutual written consent of both parties.
 
12.3                   Termination by TSRI.  TSRI may terminate this Agreement as follows:
 
a.                                     If Licensee does not make a payment due hereunder and fails to cure such non-payment (including the payment of interest in accordance with  Section 14.2 ) within thirty (30) days after the date of notice in writing of such non-payment by TSRI;
 
b.                                    If Licensee defaults upon its indemnification and insurance obligations under Section 9  and the default has not been remedied within thirty (30) days after the date of notice in writing of such default by TSRI;
 
c.                                     As provided in Section 6.2;
 
d.                                   Upon written notice to Licensee in the event of the filing of bankruptcy or the bankruptcy of Licensee or the appointment of a receiver of any of Licensee’s assets, or the making by Licensee of any assignment for the benefit of creditors, or the institution of any proceedings against Licensee under any bankruptcy or insolvency laws;
 
e.                                     If Licensee is convicted of a felony relating to the development, manufacture, use, marketing, distribution or sale of Licensed Products, Licensed Processes or Licensed Biological Materials;
 
f.                                      In the event Licensee brings any Challenge(s), TSRI has the right to immediately terminate this Agreement without any liability and without any opportunity to cure by Licensee upon written notice to Licensee.  In the event that Sublicensee brings any Challenge(s).  Licensee agrees that it will terminate such Sublicense;
 
g.                                    Except as provided in subparagraphs (a) - (f) above, if Licensee commits a material breach of any of its obligations under this Agreement and the material breach has not been remedied within ninety (90) days after the date of notice in writing of such default by TSRI.
 
12.4                   Termination by Licensee.  Licensee may terminate this Agreement by giving ninety (90) days’ advance written notice of termination to TSRI.
 
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12.5                   Rights Upon Expiration.  Neither party shall have any further rights or obligations upon the expiration of this Agreement upon its regularly scheduled expiration date, other than the obligation of Licensee to make any and all reports and payments due under  Articles 3  and/or  4  with respect to events that occurred prior to such expiration in accordance with  Sections 6.3 ,  6.4 ,  6.5  and  6.6 , and to reimburse patent costs and expenses accrued prior to expiration in accordance with  Section 8.3 .  Notwithstanding the above, Sections 2.7 ,  2.8 ,  2.9 ,  2.10 ,  7 ,  9.1 ,  9.2 ,  10.3 ,  10.4 ,  11 ,  12.5 ,  12.8  and  14  shall also survive the expiration of this Agreement.
 
12.6                   Rights Upon Termination.
 
12.6.1        Notwithstanding any other provision of this Agreement, upon any termination of this Agreement prior to the regularly scheduled expiration date of this Agreement, the licenses granted hereunder shall terminate and revert to TSRI.  Except as otherwise provided in  Section 12.7  of this Agreement with respect to work-in-progress, upon such termination, Licensee shall have no further right to develop, manufacture or market any Licensed Product, Licensed Process, or to otherwise use any Licensed Patent Rights or any Licensed Biological Materials.  Upon any such termination, Licensee shall promptly return all materials, samples, documents, information, and other materials which embody or disclose Licensed Patent Rights or any Licensed Biological Materials;  provided ,  however , that Licensee shall not be obligated to provide TSRI with proprietary information which Licensee can show that it independently developed.  Any such termination shall not relieve either party from any obligations accrued to the date, of such termination, including without limitation the obligation of Licensee to make any and all reports and payments due under Articles 3  and/or  4  with respect to events that occurred prior to such termination or as provided in Section 12.7 , in each case in accordance with  Sections 6.3 ,  6.4 ,  6.5  and  6.6 , and to reimburse patent costs and expenses accrued prior to termination in accordance with  Section 8.3 .  Notwithstanding the above, Sections 2.7 ,  2.8 ,  2.9 ,  2.10 ,  7 ,  9.1 ,  9.2 ,  10.3 ,  10.4 ,  11 ,  12.6 ,  12.8  and  14  shall also survive the termination of this Agreement.
 
12.6.2        Any sublicense shall, upon the delivery of written notice by Sublicensee, except those Sublicensee’s in default, to TSRI prior to termination of this Agreement, survive termination of this Agreement on the same terms and conditions set forth in the applicable sublicense for a period of [***] following termination of this Agreement (the “ Temporary License Period ”);  provided , however , that if such written notice is not delivered prior to termination of this Agreement, such sublicense shall immediately terminate upon termination of this Agreement.  In the event a Sublicensee provides such written notice, as a condition precedent to TSRI’s obligation to grant the direct license to such Sublicensee as set forth below, such Sublicensee must pay to TSRI all past due royalties, non-royalty revenue, patent costs and all other monies owed by Licensee to TSRI under this Agreement.  Upon TSRI’s receipt of all such outstanding monies, TSRI shall enter into a license agreement directly with such Sublicensee (the “ New License Agreement ”).  Each New License Agreement shall be subject to the same non-financial terms and conditions as those in this Agreement;  provided ,  however , that each New License Agreement shall contain substantially the same terms and conditions regarding sublicense scope, sublicense territory, duration of sublicense grant, and diligence obligations of the Sublicensee as the sublicense agreement between such Sublicensee and
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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Licensee.  Notwithstanding the above, TSRI’s obligation to enter into a New License Agreement is expressly conditioned upon each of the following:  (i) Sublicensee shall agree in the New License Agreement to terms providing that in no event shall TSRI be liable to Sublicensee for any actual or alleged breach of such sublicense agreement by Licensee; (ii) TSRI shall not have any obligations to such Sublicensee other than TSRI’s obligations to Licensee as set forth herein; (iii) each New License Agreement shall be subordinate and comply in all respects to the applicable provisions of this Agreement, and the financial terms of each New License Agreement, including without limitation, the running royalty rate, shall be consistent with the terms of the sublicense agreement with Licensee, but shall in no event be less than the corresponding financial terms set forth in this Agreement, including without limitation the obligation to pay minimum annual royalties and other monetary payments required to be made by Licensee to TSRI; and (iv) in no event shall TSRI be obliged to accept provisions in the New License Agreement (a) unless such provisions correspond to rights granted by Licensee to Sublicensee in conformance with this Agreement, and such provisions are not in conflict with the rights, duties and obligations accruing to Licensee under this Agreement; or (b) where such provisions are inconsistent with the legal obligations under any other sublicense agreement granted by Licensee, or by applicable federal, state or local statute or regulation.  In the event Sublicensee does not comply with the provisions of this  Section 12.6.2 , such Sublicensee’s sublicense shall immediately terminate upon expiration of the Temporary License Period.  Licensee must include or specifically reference this  Section 12.6.2  in each of its sublicense agreements.
 
12.7                   Work-in-Progress.  Upon any early termination of the license granted hereunder in accordance with this Agreement, Licensee shall be entitled to finish any work-in-progress and to sell any completed inventory of Licensed Products covered by such license which remain on hand as of the date of the termination, so long as Licensee sells such inventory in the normal course of business and at regular selling prices and pays to TSRI the royalties applicable to such subsequent sales in accordance with the terms and conditions as set forth in this Agreement,  provided  that no such sales shall be permitted after the expiration of six (6) months after the date of termination.
 
12.8                   Final Royalty Report.  Upon termination or expiration of this Agreement, Licensee shall submit a final report to TSRI, and any payments due TSRI and unreimbursed patent expenses invoiced by TSRI shall become immediately payable.
 
13.                           Assignment; Successors.
 
13.1                   Assignment.  Any and all assignments of this Agreement or any rights granted hereunder by Licensee without TSRI’s prior written consent are void, except either party may assign this Agreement or rights granted hereunder without the other party’s prior written consent (i) to an Affiliate of the assigning party; or (ii) to a successor in connection with the merger, consolidation or sale of all or substantially all of its assets to which this Agreement relates.
 
13.2                   Binding Upon Successors and Assigns.  Subject to the limitations on assignment herein, this Agreement shall be binding upon and inure to the benefit of any
 
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successors in interest and assigns of TSRI and Licensee.  Any such successor or assignee of Licensee’s interest shall expressly assume in writing the performance of all the terms and conditions of this Agreement to be performed by Licensee.
 
14.                           General Provisions.
 
14.1                   Independent Contractors.  The relationship between TSRI and Licensee is that of independent contractors.  TSRI and Licensee are not joint venturers, partners, principal and agent, master and servant, employer or employee, and have no other relationship other than independent contracting parties.  TSRI and Licensee shall have no power to bind or obligate each other in any manner, other than as is expressly set forth in this Agreement.
 
14.2                   Late Payments.  Late payments of any and all payments due hereunder shall be subject to a charge of [***] per month, or [***] whichever is greater.
 
14.3                   Governmental Approvals and Marketing of Licensed Products.  Licensee shall be responsible for obtaining all necessary governmental approvals for the development, production, distribution, performance, sale and use of any Licensed Product or Licensed Process, at Licensee’s expense, including, without limitation, any safety studies.  Licensee shall have sole responsibility for any warning labels, packaging and instructions as to the use of Licensed Products and for the quality control for any Licensed Products or Licensed Processes.
 
14.4                   Patent Marking.  To the extent required by applicable law, Licensee shall mark all Licensed Products or their containers in accordance with the applicable patent marking laws.
 
14.5                   No Use of Name.  The use of the name “The Scripps Research Institute”, “Scripps”, “TSRI” or any variation thereof in connection with the advertising, distribution, sale or performance of Licensed Products or Licensed Processes is expressly prohibited.  The foregoing notwithstanding, without the consent of TSRI, Licensee may state that it is licensed by TSRI under the Licensed Patent Rights and identify the inventors, their affiliation with TSRI and their relationship to Licensee, and further, Licensee may comply with disclosure requirements of all applicable laws relating to its business, including, without limitation, United Sates and state securities laws.
 
14.6                   U.S. Manufacture.  Licensee agrees to abide by the Preference for United States Industry as set forth in 37 CFR 401.14 (I), which includes Licensee’s agreement that any Licensed Product or Licensed Process sold in the United States shall be manufactured substantially in the United States.
 
14.7                   Foreign Registration.  Licensee agrees to register this Agreement with any foreign governmental agency which requires such registration, and Licensee shall pay all costs and legal fees in connection therewith.  In addition, Licensee shall ensure that all foreign laws affecting this Agreement or the sale of Licensed Products or Licensed Processes are fully satisfied.
 
*                  Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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14.8                   Use of Biological Materials.  Licensee agrees that its use of any Licensed Biological Materials shall comply with all applicable statutes, regulations, and guidelines.  Licensee agrees not to use the Licensed Biological Materials for research involving human subjects or clinical trials in the United States without complying with 21 CFR 50 and 45 CFR 46.  Licensee agrees not to use the Licensed Biological Materials for research involving human subjects or clinical trials outside of the United States without complying with the applicable regulations of the appropriate national control authorities.
 
14.9                   Arbitration.  Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, including without limitation any and all Challenges, shall be settled by binding confidential arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“ AAA ”), and the procedures set forth below.  In the event of any inconsistency between the Rules of AAA and the procedures set forth below, the procedures set forth below shall control.  Judgment upon the award rendered by the arbitrators may be enforced in any court having jurisdiction thereof.
 
14.9.1       Location.  The location of the arbitration shall be in the County of San Diego.  TSRI and Licensee hereby irrevocably submit to the exclusive jurisdiction and venue of the American Arbitration Association arbitration panel selected by the parties and located in San Diego County, California for any dispute regarding this Agreement, including without limitation any Challenges, and to the exclusive jurisdiction and venue of the federal and state courts located in San Diego County, California for any action or proceeding to enforce an arbitration award or as otherwise provided in  Section 14.9.5  below, and waive any right to contest or otherwise object to such jurisdiction or venue.
 
14.9.2       Selection of Arbitrators.  The arbitration shall be conducted by a panel of three neutral arbitrators who are independent and disinterested with respect to the parties, this Agreement, and the outcome of the arbitration.  Each party shall appoint one neutral arbitrator, and these two arbitrators so selected by the parties shall then select the third arbitrator, and all arbitrators must have at least ten (10) years experience in mediating or arbitrating cases regarding the same or substantially similar subject matter as the dispute between Licensee and TSRI.  If one party has given written notice to the other party as to the identity of the arbitrator appointed by the party, and the party thereafter makes a written demand on the other party to appoint its designated arbitrator within the next ten days, and the other party fails to appoint its designated arbitrator within ten days after receiving said written demand, then the arbitrator who has already been designated shall appoint the other two arbitrators.
 
14.9.3       Discovery.  The arbitrators shall decide any disputes and shall control the process concerning these pre-hearing discovery matters.  Pursuant to the Rules of AAA, the parties may subpoena witnesses and documents for presentation at the hearing.
 
14.9.4       Case Management.  Prompt resolution of any dispute is important to both parties; and the parties agree that the arbitration of any dispute shall be conducted expeditiously.  The arbitrators are instructed and directed to assume case management initiative and control over the arbitration process (including scheduling of events, pre-hearing discovery and activities, and
 
26

 
the conduct of the hearing), in order to complete the arbitration as expeditiously as is reasonably practical for obtaining a just resolution of the dispute.
 
14.9.5       Remedies.  The arbitrators may grant any legal or equitable remedy or relief that the arbitrators deem just and equitable, to the same extent that remedies or relief could be granted by a state or federal court,  provided ,  however , that no punitive damages may be awarded.  No court action shall be maintained seeking punitive damages.  The decision of any two of the three arbitrators appointed shall be binding upon the parties.  Notwithstanding anything to the contrary in this Agreement, prior to or while an arbitration proceeding is pending, either party has the right to seek and obtain injunctive and other equitable relief from a court of competent jurisdiction to enforce that party’s rights hereunder.
 
14.9.6       Expenses.  The expenses of the arbitration, including the arbitrators’ fees, expert witness fees, and attorney’s fees, may be awarded to the prevailing party, in the discretion of the arbitrators, or may be apportioned between the parties in any manner deemed appropriate by the arbitrators.  Unless and until the arbitrators decide that one party is to pay for all (or a share) of such expenses, both parties shall share equally in the payment of the arbitrators’ fees as and when billed by the arbitrators.
 
14.9.7       Confidentiality.  Except as set forth below, and as necessary to obtain or enforce a judgment upon any arbitration award, the parties shall keep confidential the fact of the arbitration, the dispute being arbitrated, and the decision of the arbitrators.  Notwithstanding the foregoing, the parties may disclose information about the arbitration to persons who have a need to know, such as directors, trustees, management employees, witnesses, experts, investors, attorneys, lenders, insurers, and others who may be directly affected.  Additionally, if a party has stock which is publicly traded, the party may make such disclosures as are required by applicable securities laws or rules or regulations of any stock exchange upon which securities are traded or listed, but will use commercially reasonable efforts to seek confidential treatment for such disclosure.
 
14.10           Entire Agreement; Modification.  This Agreement and all of the attached Exhibits set forth the entire agreement and understanding between the parties as to the subject matter hereof, and supersede all prior or contemporaneous agreements or understandings, whether oral or written.  There shall be no amendments or modifications to this Agreement, except by a written document which is signed by both parties.
 
14.11           California Law.  This Agreement shall be construed and enforced in accordance with the laws of the State of California without regard to its conflicts or choice of laws principles thereof.
 
14.12           Headings.  The headings for each article and section in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular article or section.
 
14.13           Severability.  Should any one or more of the provisions of this Agreement be held invalid or unenforceable by a court of competent jurisdiction, it shall be considered severed from this Agreement and shall not serve to invalidate the remaining provisions thereof. 
 
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The parties shall make a good faith effort to replace any invalid or unenforceable provision with a valid and enforceable one such that the objectives contemplated by them when entering this Agreement may be realized.
 
14.14           No Waiver.  Any delay in enforcing a party’s rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such party’s rights to the future enforcement of its rights under this Agreement, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time.
 
14.15           Name.  Whenever there has been an assignment or a sublicense by Licensee as permitted by this Agreement, the term “ Licensee ” as used in this Agreement shall also include and refer to, if appropriate, such assignee or Sublicensee (to the extent of such assignment or sublicense).
 
14.16           Attorneys’ Fees.  In the event of a dispute between the parties hereto or in the event of any default hereunder, the party prevailing in the resolution of any such dispute or default shall be entitled to recover its reasonable attorneys’ fees and other costs incurred in connection with resolving such dispute or default.  Notwithstanding anything to the contrary herein, the parties agree that this Section 14.16  shall not apply and attorney’s fees and costs shall not be awarded to either party with respect to any Challenge or any action where Licensee alleges that it is not required to comply with or perform some or all of the provisions of this Agreement based upon a good faith claim that any of the Licensed Patent Rights are invalid or unenforceable.  TSRI and Licensee each represent that it has been represented by its own counsel in the negotiation and execution of this Agreement.  Each party further represents that it has relied solely on the advice and representation of its respective counsel in agreeing to this  Section 14.16  and all of the other provisions of this Agreement.
 
14.17           Notices.  Any notices required by this Agreement shall be in writing, shall specifically refer to this Agreement and shall be sent by registered or certified airmail, postage prepaid, or by facsimile machine, charges prepaid, or by overnight courier, postage prepaid and shall be forwarded to the respective addresses set forth below unless subsequently changed by written notice to the other party:
 
For TSRI:	The Scripps Research Institute	
 	10550 North Torrey Pines Road, TPC-9	
 	La Jolla, California 92037	
 	Attention: Vice President, Business Development	
 	Fax No.: (858) 784-9910	
 	 	
with a copy to:	The Scripps Research Institute	
 	10550 North Torrey Pines Road, TPC-8	
 	La Jolla, California 92037	
 	Attention: Chief Business Counsel	
 	Fax No.: (858) 784-9399	
 	 	
For Licensee:	Fate Therapeutics, Inc.	
 	10931 North Torrey Pines Road, Suite 107	
 
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 	La Jolla, CA 92037	
 	Attention: Chief Financial Officer	
 	Fax No.: (858) 875-1843	
 	 	
With a copy to:	Goodwin Procter LLP	
 	Exchange Place	
 	Boston, MA 02109	
 	Attn: Kingsley L. Taft, Esq.	
 	Telephone: (617)570-1000	
 	Facsimile: (617) 523-1231	
 
Notices shall be deemed delivered upon the earlier of (a) when received; (b) three (3) days after deposit into the U.S. mail; (c) the date notice is sent via telefax, telex or cable; or (d) the day immediately following delivery to an overnight courier guaranteeing next-day delivery (except Sunday and holidays).
 
14.18           Compliance with U.S. Laws.  Nothing contained in this Agreement shall require or permit TSRI or Licensee to do any act inconsistent with the requirements of any United States law, regulation or executive order as the same may be in effect from time to time.
 
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IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date set forth above.

TSRI:	 	LICENSEE:	 	

THE SCRIPPS RESEARCH INSTITUTE	 	FATE THERAPEUTICS, INC.	 	

 	 	 	 	 	
By:	/s/ Thomas E. Northrup Ph.d., J.D.	 	By:	/s/ J. Scott Wolchko	 	
 	 	 	 	 	
Title:	Chief Business Counsel, The Scripps Research Institute	 	 	 	
 	 	 	Title:	CFO	 	 	 	

 
Exhibit A
 
LICENSED BIOLOGICAL MATERIALS
 
[***]
 
*                                        Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
A-1

 
Exhibit B
 
LICENSED PATENT RIGHTS
 
[***]
 
*                                        Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
B-1

 
Exhibit C
 
LICENSEE’S COMMERCIAL DEVELOPMENT PLAN
(including Benchmarks)

 	 	
Benchmark	Timeline	
 	 	
[***]	[***]	
[***]	[***]	
[***]	[***]	
[***]	[***]	
[***]	[***]	
 
Notwithstanding anything to the contrary in the Agreement, in the event that Licensee is unable to achieve a given Benchmark according to its applicable timeline, Licensee may, on a one-time only basis under the Agreement, extend the timeline by [***] by making a [***] payment to TSRI (where, for the avoidance of doubt, all later occurring Benchmark(s) shall also be similarly extended by [***].
 
*                                        Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
C-1

 
Exhibit D
 
INFORMATION AND MATERIALS
 
TSRI and Licensee shall add items to this Exhibit D upon mutual agreement.
 
D-1

Exhibit 10.25
 
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

LICENSE AGREEMENT
 
by and between
 
THE SCRIPPS RESEARCH INSTITUTE,
a California nonprofit
public benefit corporation
 
and
 
FATE THERAPEUTICS, INC.
a Delaware corporation
 
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LICENSE AGREEMENT
 
This License Agreement is entered into and made effective as of this 25th day of May, 2010 (the “ Effective Date ”), by and between THE SCRIPPS RESEARCH INSTITUTE, a California nonprofit public benefit corporation (“ TSRI ”), and Fate Therapeutics, Inc., a Delaware corporation (“ Licensee ”), each located at the respective address set forth in  Section 14.17 below, with respect to the facts set forth below.
 
RECITALS
 
A.                                TSRI is the owner of certain Licensed Patent Rights and has the right to grant licenses under such Licensed Patent Rights, subject to the rights set forth in  Sections 2.8  and  2.9  of this Agreement.
 
B.                                 TSRI desires to have the Licensed Patent Rights developed and commercialized to benefit the public and is willing to grant a license thereunder to Licensee.
 
C.                                 Licensee desires to obtain a license under the Licensed Patent Rights and to use the Licensed Biological Materials pursuant to the terms and conditions set forth herein.
 
NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth herein, TSRI and Licensee hereby agree as follows:
 
1.                                   Definitions.  Capitalized terms shall have the meaning set forth herein.
 
1.1                           Affiliate.  The term “Affiliate” shall mean any entity which directly or indirectly controls, or is controlled by, or is under common control with, Licensee.  The term “control” as used herein means (a) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares entitled to vote for the election of directors or with the power to direct the management and policies of such corporate entities; or (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interests with the power to direct the management and policies of such non-corporate entities.  All Affiliates shall be deemed to be licensees under  Section 2.1-2.4  of this Agreement.
 
1.2                           Confidential Information.  The term “Confidential Information” shall mean any and all proprietary or confidential information of TSRI or Licensee which may be exchanged between the parties at any time and from time to time during the term of this Agreement.  Confidential Information shall also include any information which, given the circumstances surrounding disclosure, would be considered confidential by the disclosing party.  Information shall not be considered confidential to the extent that either party can establish by competent proof that it:
 
a.                                     Is publicly disclosed through no fault of the receiving party, either before or after it becomes known to the receiving party; or
 
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b.                                    Was known to the receiving party without obligation of confidentiality prior to the date of this Agreement, which knowledge was acquired independently and not from the disclosing party (including such party’s employees, consultants or agents); or
 
c.                                     Is subsequently disclosed to the receiving party without obligation of confidentiality in good faith by a third party who is not under any obligation to maintain the confidentiality of such information, and without breach of this Agreement by a receiving party; or
 
d.                                   Has been published by a third party not in breach of any obligation of confidentiality; or
 
e.                                     Was independently developed by the receiving party without the use of or reliance on the Confidential Information of the disclosing party.
 
If Confidential Information is required to be disclosed by the receiving party by law or court order, the party required to make such disclosure shall limit the same to the minimum required to comply with the law or court order, and shall use reasonable efforts to attempt to seek confidential treatment for that disclosure, and prior to making such disclosure by the receiving party shall notify the other party, not later than ten (10) days (or such shorter period of time as may be reasonably practicable under the circumstances) before the disclosure in order to allow that other party to comment and/or to obtain a protective or other order, including extensions of time and the like, with respect to such disclosure.
 
1.3                           Field.  The term “Field” shall mean all fields.
 
1.4                           Licensed Biological Materials.  The term “Licensed Biological Materials” shall mean the materials identified in  Exhibit A  and supplied by TSRI to Licensee, together with any progeny or mutants of such materials, or unmodified derivatives of such materials (defined as substances created by Licensee that constitute an unmodified functional sub-unit or product expressed by such materials).
 
1.5                           Licensed Patent Rights.  The term “Licensed Patent Rights” shall mean rights arising out of or resulting from (a) the U.S./PCT Patent Application(s) set forth on  Exhibit B ; (b) the foreign patent applications associated with the application(s) referenced in sub clause (a) above; (c) the patents issued from the application(s) referenced in sub clauses (a) and (b), and in sub clauses (d) and (e) below; (d) divisionals, continuations, reissues, reexaminations, renewals, and extensions of any patent or application set forth in sub clauses (a)-(c) above; and (e) all claims of continuations-in-part that are entitled to the benefit of the priority date of the application(s) referenced in sub clause (a) above.
 
1.6                           Licensed Product.  The term “Licensed Product” shall mean any product (a) the manufacture, use, importation, sale or offer for sale of which would, in the absence of the license granted by this Agreement, infringe a Valid Claim of any of the Licensed Patent Rights,
 
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or (b) that is comprised of, utilizes or incorporates Licensed Biological Materials, or (c) that is discovered, developed or made using a Licensed Process.
 
1.7                           Licensed Process.  The term “Licensed Process” shall mean any method or process (a) claimed in a Valid Claim of any of the Licensed Patent Rights, (b) the practice of which would, in the absence of the license granted by this Agreement, infringe a Valid Claim of any of the Licensed Patent Rights, or (c) that utilizes or incorporates Licensed Biological Materials.
 
1.8                           Net Sales.  The term “Net Sales” shall mean the gross amount invoiced by Licensee and its Affiliates or its Sublicensees, or any of them, on all sales of Licensed Products and Licensed Processes, less (a) discounts actually allowed; (b) credits for claims, allowances, retroactive price reductions or returned or rejected goods; (c) amounts invoiced and actually paid for third party transportation, insurance or shipping charges to an end user of the Licensed Product or Licensed Process; (d) any taxes or other governmental charges actually paid in connection with the sale, transportation, or delivery of Licensed Products or Licensed Processes (but excluding what are commonly known as income taxes and value-added taxes).  Net Sales shall include all consideration invoiced by Licensee, its Affiliates or its Sublicensees in exchange for any Licensed Products or Licensed Processes including without limitation any monetary payments or, with regard to any other property paid in exchange for any Licensed Products or Licensed Processes, an amount in cash equal to the fair market value of such property.  For purposes of determining Net Sales, a sale shall be deemed to have occurred when an invoice therefore is generated, the Licensed Product shipped for delivery or the Licensed Process completed or provided.  Sales of Licensed Products or Licensed Processes by and amongst Licensee, its Affiliates or Sublicensees shall be excluded, unless the Affiliates or Sublicensees consume the Licensed Products or Licensed Processes, and only the subsequent sale of such Licensed Products or Licensed Processes to unrelated parties shall be deemed Net Sales hereunder.
 
1.9                            [***]
 
1.10                   Research Tool.  The term “Research Tool” shall mean a Licensed Product, Licensed Process or Licensed Biological Material that is designed and developed solely for use in performing basic research including, without limitation, basic research having as its primary purpose understanding the biology or pathology of cells or cell lines and diseases or disorders affecting them, or education purposes, and not for Commercial Drug Development purposes.  “ Commercial Drug Development ” includes the following activities: (a) any human clinical use or veterinary use (including, without limitation, therapeutic, prophylactic or diagnostic use); (b) any screening of compound libraries; (c) any development, manufacture or provision of any commercial pharmaceutical, healthcare or consumer products, processes or services; or (d) any provision of services related to the above (a)-(c).
 
1.11                   Sublicensee.  The term “Sublicensee” shall mean any third party (other than an Affiliate) to whom Licensee grants a sublicense with respect to the rights conferred upon Licensee under this Agreement, as contemplated by  Section 2.6 .
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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1.12                   Valid Claim.  The term “Valid Claim” shall mean a claim of any issued and unexpired patent within the Licensed Patent Rights which has not been revoked or held unenforceable, unpatentable or invalid by a decision of a court or governmental body of competent jurisdiction in a ruling that is unappealed or unappealable, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.  The term “ Valid Claim ” shall also include the claims of a pending patent application within the Licensed Patent Rights which have not been (i) cancelled, withdrawn, abandoned or finally disallowed without the possibility of appeal or refilling of such application, or (ii) pending for a period of more than [***] from the date of the first examination of the patent application.
 
2.                                   Grant of License.
 
2.1                           Grant of Exclusive License for Licensed Products.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, under the Licensed Patent Rights, including, without limitation, to make and have made, to use and have used, to sell and have sold, to offer to sell and have offered for sale, and to import and have imported Licensed Products in the Field.
 
2.1a.                Pfizer Research License.  The license rights granted by TSRI to Licensee under this agreement are subject to the non-exclusive license rights granted to Pfizer pursuant to the Pfizer Research License.
 
2.2                           Grant of Exclusive License for Licensed Processes.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, under the Licensed Patent Rights to make and have made, to use and have used, to practice and have practiced, to offer to sell and have offered for sale, to sell and have sold, and to import and have imported any Licensed Processes in the Field.
 
2.3                           Grant of Exclusive License for Licensed Biological Materials.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, to the Licensed Biological Materials to make and have made, to use and have used, to sell and have sold, to offer to sell and have offered for sale, and to import and have imported, and to transfer and distribute any Licensed Biological Materials in the Field.
 
2.4                           Research Tools.
 
a.                                     For clarity, Research Tools are subject to the license grants in Sections 2.1-2.3 ,  Section 2.8 , the retained rights set forth in  Sections 2.9 , and the due diligence requirements in Section 6 .
 
b.                                    If TSRI reasonably believes that a Licensed Product, Licensed Process or Licensed Biological Material should be classified as a Research Tool hereunder, [***].  If the Parties are unable to reach agreement regarding the classification
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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within [***] after receipt of such notice, either party may request resolution of such issue in accordance with the dispute resolution process set forth in  Section 14.9  (and, during any such process, such Licensed Product, Licensed Process or Licensed Biological Material shall not be classified as a Research Tool under this Agreement).
 
c.                                     If such item is ultimately classified as a Research Tool as provided above, then Licensee shall comply with the due diligence obligations set forth in  Section 6.2.b .
 
2.5                           Covenants Not To Grant Third Party Licenses.  As of the Effective Date and until this Agreement is terminated, TSRI covenants not (i) to grant to any third party any licenses or any rights to Licensed Patent Rights in the Field, or (ii) to grant to any third party any licenses or any rights to, or to transfer samples of, Licensed Biological Materials in the Field, except as permitted under  Sections 2.8  and 2.9  hereof.
 
2.6                           Sublicensing.  Licensee shall have the right to grant and authorize sublicenses to any party with respect to the rights conferred upon Licensee under this Agreement.  Sublicensees shall not have the right to further sublicense without TSRI’s prior written consent, which will not be unreasonably withheld or delayed.  Any sublicense granted under this  Section 2.6  shall be subject in all respects to the applicable provisions contained in this Agreement as are needed to enable Licensee to comply with this Agreement (including the provisions regarding governmental interest, reservation of rights, development efforts, reporting, audit rights, indemnity, insurance, limited warranty, disclaimer, limitation of liability, confidentiality, and rights upon expiration or termination).  It is anticipated that Licensee may enter into agreements with third parties wherein some of the rights granted herein will be transferred to third parties who are performing a service for Licensee, such as a contract manufacturer or contract research organization, but specifically excluding agreements that contain the rights to sell, or offer for sale Licensed Products or Licensed Processes.  These types of service agreements are not subject in all respects to the applicable provisions contained in this Agreement as are needed to enable Licensee to comply with this Agreement but shall include the following provisions contained herein: indemnity, insurance, limited warranty, disclaimer, limitation of liability, and confidentiality.  In the event of a conflict between this Agreement and the terms of any sublicense, the terms of this Agreement shall control.  Licensee shall forward to TSRI a copy of any and all fully executed sublicense and service agreements within thirty (30) days of execution.
 
2.7                           No Other License.  This Agreement confers no license or rights by implication, estoppel, or otherwise under any patent applications or patents or other intellectual property of TSRI other than Licensed Patent Rights regardless of whether such patents or intellectual property are dominant or subordinate to Licensed Patent Rights.
 
2.8                           Governmental Interest.  Licensee and TSRI acknowledge that TSRI has received, and expects to continue to receive, funding from the United States Government in support of TSRI’s research activities.  Licensee and TSRI acknowledge and agree that their respective rights and obligations pursuant to this Agreement shall be subject to the rights of the
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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United States Government, existing and as amended, which may arise or result from TSRI’s receipt of research support from the United States Government, including but not limited to, 37 CFR 401, the NIH Grants Policy Statement and the NIH Guidelines for Obtaining and Disseminating Biomedical Research Resources.
 
2.9                           Reservation of Rights.  TSRI reserves the right to use for any internal basic research or educational purposes any Licensed Patent Rights and Licensed Biological Materials licensed hereunder, without TSRI being obligated to pay Licensee any royalties or other compensation or to account to Licensee in any way.  During the term, including any extension thereof, of the Research Funding and Option Agreement dated February 19, 2008 between Licensee and TSRI (“ Research Agreement ”), TSRI will not enter into any agreements with any other third party for the performance of sponsored research in the same field of research described in Appendix A of such Research Agreement.
 
In addition, TSRI reserves the right to grant non-exclusive licenses to use the Licensed Patent Rights and Licensed Biological Materials for internal basic research and educational purposes to other nonprofit or academic institutions, and in no event for any Commercial Drug Development activities.  TSRI may distribute Licensed Biological Materials to other nonprofit or academic institutions (but in no event to any for-profit third party) for the uses expressly permitted above, under the terms of a Material Transfer Agreement with such institution (an “ MTA ”).  Licensee may request on an annual basis a list of the parties with whom TSRI has entered into an MTA for Licensed Patent Rights and Licensed Biological Materials, and TSRI shall provide such list within thirty (30) days of its receipt of such request by Licensee.
 
2.10                   Know-how License.  TSRI grants to Licensee a non-exclusive license to utilize the information, and materials listed on  Exhibit D  in the exploitation of the Licensed Patent Rights.
 
3.                                   Royalties.
 
3.1                           License Issue Fee.  Licensee agrees to pay and shall pay to TSRI a noncreditable, nonrefundable license issue fee in the amount of Ten Thousand U.S. Dollars (U.S. $10,000) within fifteen (15) days of the Effective Date (the “ License Issue Fee ”).  Failure of Licensee to make this payment shall render this Agreement null and void (ab initio).
 
3.2                           Minimum Annual Royalty.  Licensee agrees to pay and shall pay to TSRI a nonrefundable minimum annual royalty in the amount of [***].  The first payment is due no later than January 1, 2011 and on January 1st of each subsequent calendar year until the first January 1 after the first commercial sale of the first Licensed Product by Licensee or any of its Sublicensees, at which time the amount of the minimum annual royalty shall become and shall remain [***] (the “ Minimum Annual Royalty Fee ”).  Such payments shall be credited against running royalties due for that calendar year and Licensee’s royalty reports shall reflect such a credit.  Such payments shall not be credited against milestone payments (if any), Sublicensing Payments (if any), nor against royalties due for any preceding or subsequent calendar year.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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3.3                           Running Royalties.  Licensee agrees to pay and shall pay to TSRI a running royalty, on a country-by-country basis, in the following percentage amounts of Net Sales of Licensed Products sold or transferred, or Licensed Processes performed, by Licensee, Affiliates or Sublicensees,
 
a.                                     where such sale or transfer or performance in the applicable country then infringes one or more Valid Claims contained in the Licensed Patent Rights for such country: (i) [***]; (ii) [***]; (iii) [***]; and (iv) [***];  provided ,  however , where such sale or transfer or performance in the applicable country does not then infringe one or more Valid Claims contained in the Licensed Patent Rights for such country, the running royalty percentages as set forth above in  3.3.a(i)-(iv) , as applicable, shall be reduced by [***]; and
 
b.                                    where the manufacture, use or sale of such Licensed Product or Licensed Process is not covered by a Valid Claim in any country but utilizes, is comprised of or incorporates Licensed Biological Materials or was discovered, developed or made using any Licensed Process: [***] in any country.
 
3.4                           Royalty Increase.  Notwithstanding Section 3.3, in the event Licensee, an Affiliate, or a Sublicensee directly or indirectly initiates any action or proceeding in or before any court or patent office alleging that (i) any of the Licensed Patent Rights are invalid or unenforceable, or (ii) no royalties, Sublicense Payments, milestone payments, patent costs or other monies are due or required to be paid to TSRI under this Agreement because some or all of the Licensed Patent Rights are invalid or unenforceable (collectively “ Challenges ”), the royalty rates specified in  Section 3.3  shall be increased to the following rates: [***];  provided ,  however , that such increase shall only be applied to a Licensed Product and/or a Licensed Process covered by the Licensed Patent Right(s) that are the subject of such Challenge (and shall not be applied, for the avoidance of doubt, to a Licensed Product and/or a Licensed Process that is covered by Licensed Patent Rights that are not the subject of such Challenge).  Any such increase shall be effective during the pendency of such Challenge from the date Licensee first initiates such Challenge, and thereafter during the term of the Agreement, provided that at least one (1) claim that covers such Licensed Product or Licensed Process within the Licensed Patent Rights being Challenged is held to be valid and enforceable as a result of such Challenge.  Licensee (i) agrees that [***].
 
3.5                           Royalty Credit.  If Licensee, its Affiliate or its Sublicensee is required to license or acquire technology (including, but not limited to, patent rights and/or other intellectual property rights) from a third party in order to practice the Licensed Patent Rights or to develop or commercialize a Licensed Product or Licensed Process because the exploitation of the Licensed Patent Rights would infringe that third party’s intellectual property rights without obtaining a license to such third party technology, [***], then Licensee may deduct up to [***] of the amount paid to such third party from the payments owing to TSRI for such Licensed Product or Licensed Process [***].  The above offset right is subject to the requirement that Licensee, its Affiliate or its Sublicensee shall not decrease the royalty or other amounts owed to TSRI under this Agreement by more than [***] of the amount due.  Notwithstanding the above, Licensee, its
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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Affiliate or its Sublicensee shall have no right to deduct or offset any royalties or other amounts with respect to any third party technology that is the subject of any cross license or similar arrangements (whether in the same or related transactions) where Licensee, its Affiliate or its Sublicensee grants or provides to such third party or its affiliates licenses, options or other rights to existing or future technology, intellectual property, research or development activities or other information or materials.  Licensee will give TSRI advance written notice of any third party arrangement sufficiently prior to seeking to deduct any payments to the third party under the terms of this  Section 3.5  in order to allow TSRI and Licensee to mutually determine whether such third party’s technology is required in order to practice or exploit the Licensed Patent Rights.
 
3.6                           Combination Products.  If a Licensed Product or Licensed Process is sold in combination with another component(s), which other component(s) if sold alone would not be subject to a royalty payment hereunder, then Net Sales as applicable, from such combination sales, for purposes of calculating the amounts due under this  Section 3 , shall be calculated by multiplying the gross selling price of the combination product by the fraction A/(A+B), where A is the gross selling price, during the royalty period in question, of the Licensed Product or Licensed Process sold separately, and B is the gross selling price, during the royalty period in question, of the other component(s), sold separately.  If the other component(s) are not sold separately during that royalty period, then the Net Sales, as applicable, on the combination product shall be as reasonably allocated between such Licensed Product and such other component(s) as mutually agreed upon by Licensee and TSRI, based on the relative value contributed by each component;  provided ,  however , that the Net Sales allocated to such Licensed Product shall not be less than [***] of the Net Sales of such combination product.
 
3.7                           Royalty Floor.  In no event may the royalty owed to TSRI be reduced by more than [***].  Licensee may utilize either the Combination Products or the Royalty Credit calculation at its discretion, but may not use both.
 
3.8                           No Multiple Royalties.  No multiple royalties shall be due because any Licensed Product or Licensed Process is covered by more than one of the Licensed Patent Rights.  In such case, Licensee shall pay only one royalty at the highest of the applicable rates pursuant to  Section 3.3  above.
 
3.9                           Arms-Length Transactions.  On sales of Licensed Products or Licensed Processes which are made in other than an arm’s-length transaction, the value of the Net Sales attributed under this Section 3  to such a transaction shall be that which would have been received in an arm’s-length transaction, based on sales of like quality and quantity products, services or processes on or about the time of such transaction.
 
3.10                   Duration of Royalty Obligations.  The royalty obligations of Licensee as to each Licensed Product or Licensed Process shall continue on a country-by-country basis until (a) (i) the expiration of the last to expire of a Valid Claim that covers such Licensed Product or Licensed Process in that country, or (ii) in the countries where no Valid Claim was filed the royalty obligation shall run concurrent with the last to expire Valid Claim in the United States or
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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Europe, or (b) for a Licensed Product or Licensed Process not covered by a Valid Claim in any country but [***] years after the date of the first commercial sale of such Licensed Product or Licensed Process in such country.  Upon the termination of Licensee’s royalty obligations with respect to a Licensed Product or Licensed Process in a country, the license grants contained in  Sections 2.1.-2.3  shall become fully paid-up, royalty-free, perpetual and irrevocable for such Licensed Product or Licensed Process in such country.
 
3.11                   Other License Agreements.
 
a.                                     In the event that Licensee would be required to pay a Licensee Issue Fee under (i) any other license agreements arising from the Research Agreement or the Option Agreement dated January 5, 2009 between Licensee and TSRI (“ Option Agreement ”), entered into between Licensee and TSRI (such written agreements are collectively the “ Other License Agreements ”) and (ii)  Section 3.1  under this Agreement, then the maximum aggregate Licensee Issue Fee Licensee shall be required to pay under the Other License Agreements and this Agreement shall be $[***] under the applicable sections of such agreements.
 
b.                                    In the event that Licensee would be required to pay a Minimum Annual Royalty Fee under (i) any Other License Agreements and (ii)  Section 3.2  under this Agreement, then (x) the maximum Minimum Annual Royalty Fee [***] shall be $[***] under the applicable sections of such agreements; and (y) the maximum Minimum Annual Royalty Fee [***] shall be $[***] under the applicable sections of such agreements.
 
c.                                     In the event that Licensee would, in connection with the sale or transfer of a product or service, be required to pay a royalty under (i) any Other License Agreements and (ii)  Section 3.3  under this Agreement in connection with the same sale or transfer, then Licensee shall be required under the Other License Agreements and this Agreement only to pay a single royalty under such agreements in connection with such sale or transfer, such royalty to be payable at the highest of the royalties owed to TSRI under the applicable sections of such agreements.
 
4.                                   Non-Royalty Revenues.
 
4.1                           Sublicense Payments.  Any and all revenues, equity interests and other consideration paid to Licensee in consideration of the grant to a third party of a sublicense to the Licensed Patent Rights and/or Licensed Biological Materials to any Sublicensee that is not an Affiliate of Licensee (collectively “ Sublicense Revenues ”) shall be reported and paid to TSRI by Licensee on a quarterly basis within sixty (60) days of the end of the applicable quarter in which such Sublicense Revenues are received by Licensee.  Notwithstanding the foregoing, all royalties based upon transfers or sales of Licensed Products or Licensed Processes, payments for or reimbursement for costs for research and development (to the extent itemized in the sublicense agreement), payments for or reimbursements for costs for patent prosecution, defense, enforcement and maintenance, and payments for equity and debt securities, so long as said
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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payments reflect the current fair market value, and not a premium thereon, shall be excluded from Sublicense Revenues.  Any non-cash Sublicense Revenues received by Licensee from a Sublicensee or other third party shall be valued at its fair market value as of the date of receipt, as determined in good faith by Licensee.  Licensee shall pay to TSRI a non-creditable, nonrefundable percentage of these Sublicense Revenues according to the following schedule (“ Sublicense Payments ”):
 
Sublicense Revenues received by Licensee(on
a cumulative basis)	Percent of Sublicense Revenues payable to
TSRI	
 	 	
Up to $[***]	[***]	
 	 	
$[***]	[***]	
 	 	
More than $[***]	[***]	
 
Any milestone payment that Licensee makes to TSRI under Section 4.4 below upon achievement of a given milestone event by a Sublicensee would be credited against any payment due under this  Section 4.1 only with respect to Sublicense Revenues received in connection with achievement of the same milestone event.
 
To the extent that patent rights, other intellectual property rights or other rights or obligations other than Licensed Patent Rights are sublicensed or granted by Licensee, including, without limitation, pursuant to Other License Agreements, that portion of the consideration received by Licensee and subject to this Section 4.1  shall be equitably apportioned between the Licensed Patent Rights and those other rights and obligations, and such apportionment shall be reasonable and in accordance with customary standards in the industry.  Licensee shall promptly deliver to TSRI a written report setting forth such apportionment.  In the event TSRI disagrees with the determination made by Licensee, TSRI shall so notify Licensee within [***] of receipt of Licensee’s report and the parties shall meet to discuss and resolve such disagreement in good faith.  If the parties are unable to agree in good faith as to such fair market values within thirty (30) days, then the matter shall be submitted in accordance with the dispute resolution process set forth in Section 14.9 .
 
Notwithstanding the foregoing, with respect to any sublicense agreement, the parties agree that the percentage of “ Sublicense Revenues ” attributable to such sublicense agreement is not cumulative across Other License Agreements, regardless of the number of Other License Agreements that are applicable to such sublicense agreement, and regardless of whether sublicenses are granted under more than one Other License Agreement.
 
4.2                           Increase in Sublicense Payments.  Notwithstanding Section 4.1, in the event Licensee directly or indirectly initiates a Challenge in or before any court or patent office, the percentages specified in Section 4.1  shall be increased to the following rates:
 
Sublicense Revenues received by Licensee(on	Percent of Sublicense Revenues payable to	
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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a cumulative basis)	TSRI	
 	 	
Up to $[***]	[***]	
 	 	
$[***]	[***]	
 	 	
More than $[***]	[***]	
 
provided, however, that such increase shall only be applied to Sublicense Revenues derived from the Licensed Patent Rights that are the subject of such Challenge (and shall not be applied, for the avoidance of doubt, to Sublicense Revenue derived from any Licensed Patent Rights that are not the subject of such Challenge).  Any such increase shall be effective during the pendency of such Challenge from the date Licensee first initiates such Challenge, and thereafter during the term of the Agreement, provided that at least one (1) claim that covers a Licensed Product or Licensed Process within the Licensed Patent Rights being Challenged is held to be valid and enforceable as a result of such Challenge.  [***]
 
4.3                           Product Development Milestones.  Licensee agrees to pay and shall pay to TSRI the following non-creditable, non-refundable product development milestones within sixty (60) days of the end of the applicable quarter in which the first occurrence in the United States or Europe of each milestone for the first Licensed Product or first Licensed Process to meet such milestone as follows:
 
Milestone	 	Payment	
 	 	 	
[***]	
 
Each such milestone shall be payable only once under the Agreement.  In the event that any Licensed Product or Licensed Process would be subject to development milestones and payments under this Section 4.3  as well as under any Other License Agreements, then it is understood and agreed that such Licensed Product or Licensed Process shall be subject to only a single schedule of development milestones and payments under this Agreement and the Other License Agreements.
 
5.                                   Royalty Payments.
 
5.1                           Sales by Licensee.  Royalties payable pursuant to Section 3 herein, shall be payable by Licensee quarterly, within sixty (60) days after the end of each calendar quarter, based upon Net Sales during the immediately preceding calendar quarter.
 
5.2                           Sales by Sublicensees.  Licensee agrees to pay and shall pay to TSRI, or cause its Sublicensees to pay to TSRI, all royalties pursuant to  Section 3  herein resulting from the Net Sales of its Sublicensees, within sixty (60) days after the end of each calendar quarter, based on Net Sales during the immediately preceding calendar quarter.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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6.                                   Development and Commercialization Activities.
 
6.1                           Commercial Development Plan.  Licensee has provided to TSRI its development plan attached hereto as  Exhibit C , under which Licensee intends to bring the subject matter of the Licensed Patent Rights to the point of commercial use (“ Commercial Development Plan ”), where such Commercial Development Plan is subject to the mutual agreement by Licensee and TSRI.  Pursuant to the Commercial Development Plan, Licensee shall use commercially reasonable efforts to achieve the development benchmarks specified in the Commercial Development Plan (“ Benchmarks ”) within the time periods set forth in such specified in the Commercial Development Plan.  Notwithstanding the foregoing, in the event that Licensee, its Affiliates or a Sublicensee, alone or together, has expended a minimum of [***] (excluding amounts paid to TSRI under the Research Funding and Option Agreement) per each calendar year during the initial [***] period of development under such Commercial Development Plan (where, for the avoidance of doubt, such period shall commence upon the addition to this Agreement of the Licensed Patent Rights that are the subject of such Commercial Development Plan) (“ Initial Development Period ”), Licensee will be deemed to have complied with Licensee’s obligations under this  Section 6  in connection with such Commercial Development Plan for each year during such initial [***] period.
 
6.2                           Licensee’s Commercialization Activities.
 
a.                                     Licensee shall use commercially reasonable efforts and due diligence, or shall cause one or more of its Affiliates and Sublicensees to use commercially reasonable efforts and due diligence, to conduct research and achieve development of one or more Licensed Products and Licensed Processes, as promptly as is commercially feasible.  Following Licensee’s receipt of necessary regulatory approvals, Licensee or its Affiliates or Sublicensees shall earnestly and diligently produce and sell reasonable quantities of Licensed Products or Licensed Processes sufficient to meet market demands.
 
b.                                    If a Licensed Product, Licensed Process or License Biological Material is ultimately classified as a Research Tool under  Section 2.4 , then Licensee shall use commercially reasonable efforts and due diligence, or shall cause one or more of its Affiliates and Sublicensees to use commercially reasonable efforts and due diligence to distribute and make such Research Tool reasonably available to third parties on commercially reasonable terms;  provided ,  however , that Licensee shall not be obligated to make such Research Tool available pursuant to this  Section 6.2(b)  to (i) third parties if Licensee reasonably believes that the manufacture, use, offer for sale, sale or import of such Research Tool might infringe the patent or other intellectual property rights of a third party; or (ii) to for-profit third parties if Licensee can reasonably demonstrate that such Research Tool may be materially detrimental to a non-Research Tool it is currently developing and/or commercializing under this Agreement.
 
c.                                     Licensee shall keep TSRI generally informed as to Licensee’s progress in such research, development, regulatory approval, marketing,
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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production and sale, including its efforts, if any, to sublicense Licensed Patent Rights, and Licensee shall deliver to TSRI an annual written report of such efforts by June 30th of each calendar year and such other reports of such efforts as TSRI may reasonably request.  In these annual reports, Licensee shall describe its progress in complying with the Commercial Development Plan and in achieving the Benchmarks and shall explain in detail the reasons for any variances thereof.  Licensee shall also report in writing to TSRI the dates when it has achieved the Benchmarks and the date of first commercial sale of a Licensed Product or Licensed Process in each country within thirty (30) days of such occurrences.  The contents of Licensee’s progress reports to TSRI shall be deemed to be Licensee’s Confidential Information.  Licensee may amend its Commercial Development Plan and/or the Benchmarks upon TSRI’s prior written consent, which will not be unreasonably withheld if such proposed amendment is supported by a detailed showing by Licensee or its Affiliates or its Sublicensees using its best efforts and due diligence in its performance of research and development of one or more Licensed Products and Licensed Processes.
 
d.                                   Any time after the Initial Development Period (or such later time as agreed in writing by TSRI and Licensee), in the event (i) TSRI has a reasonable basis to believe, based on Licensee’s reports to TSRI, that Licensee is not using commercially reasonable efforts and due diligence as required under  Sections 6.1  and  6.2.a , or (ii) Licensee has not achieved the Benchmarks within the time provided in  Exhibit C  (as may be amended as provided above), TSRI has the right to terminate this Agreement by providing written notice to Licensee, where any such right to terminate shall be subject to a [***] cure period by Licensee.  Failure to meet any of the Benchmarks within the time provided in  Exhibit C  (as may be amended as provided above) shall not constitute a breach by Licensee of this Agreement, but shall entitle TSRI, at TSRI’s sole discretion, to terminate this Agreement as provided above or convert the licenses granted under  Sections 2.1-2.3  to a non-exclusive license upon delivery of written notice to Licensee.  Notwithstanding the foregoing, at any time after the initial one-year period of development under a Commercial Development Plan (where, for the avoidance of doubt, such period shall commence upon the addition to this Agreement of the Licensed Patent Rights that are the subject of such Commercial Development Plan), in the event TSRI has a reasonable basis to believe that Licensee is not using commercially reasonable efforts and due diligence as required as required under  Section 6.2.b , TSRI has the right to convert, subject to a [***] cure period, the license granted under  Section 2.4  in connection with such Licensed Patent Rights to a non-exclusive license upon delivery of written notice to Licensee.
 
6.3                           Reports on Revenues and Payments.  Licensee shall submit to TSRI at the time payment is due after the end of each calendar quarter, on a country-by-country and per Licensed Product and Licensed Process basis, a royalty report (the “ Royalty Report ”) setting forth for such quarter:
 
a.                                     the number of units of Licensed Products sold by Licensee, its Affiliates and each of its Sublicensees;
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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b.                                    the gross amount due or invoiced for such Licensed Products by Licensee, its Affiliates and each of its Sublicensees;
 
c.                                     the gross amounts due or invoiced for all Licensed Processes performed by Licensee, its Affiliates and each of its Sublicensees;
 
d.                                   a detailed listing of any offsets under Section 3.5 and deductions used to determine Net Sales of Licensed Products and Licensed Processes pursuant to  Section 1.8 , and calculations on Combination Products under  Section 3.6 ;
 
e.                                     the amount of royalty due under Section 3, or if no royalties are due to TSRI for any reporting period, the statement that no royalties are due and an explanation why they are not due for that quarterly period;
 
f.                                      the amount of Sublicense Revenues received by Licensee; and
 
g.                                    the amount of Sublicense Payments due under Section 4.1, or if no Sublicense Payments are due to TSRI for any reporting period, the statement that no Sublicense Payments are due and an explanation why they are not due for that quarterly period.
 
Such Royalty Report shall be certified as correct by an officer of Licensee.  The contents of such Royalty Reports shall be deemed to be Licensee’s Confidential Information.
 
6.4                           Royalty Payments.  Licensee agrees to pay and shall pay to TSRI with each Royalty Report the amount of royalty and/or Sublicense Payments due with respect to such quarter.  If multiple technologies are covered by the licenses granted hereunder, Licensee shall specify which Licensed Patent Rights and Licensed Biological Materials are utilized for each Licensed Product or Licensed Process included in the Royalty Report.  All payments due hereunder shall be deemed received when funds are credited to TSRI’s bank account and shall be payable by check or wire transfer in United States Dollars.
 
6.5                           Foreign Sales.  The remittance of royalties payable on sales outside the United States shall be payable to TSRI in United States Dollar equivalents at the official rate of exchange of the currency of the country from which the royalties are payable, as quoted in the Wall Street Journal for the last business day of the calendar quarter in which the royalties are payable.  If the transfer of or the conversion into the United States Dollar equivalents of any such remittance in any such instance is not lawful or possible, the payment of such part of the royalties as is necessary shall be made by the deposit thereof, in the currency of the country where the sale was made on which the royalty was based to the credit and account of TSRI or its nominee in any commercial bank or trust company of TSRI’s choice located in that country, prompt written notice of which shall be given by Licensee to TSRI.
 
6.6                           Foreign Taxes.  Any tax required to be withheld by Licensee under the laws of any foreign country for any royalties or other amounts due hereunder or for the accounts
 
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of TSRI shall be promptly paid by Licensee for and on behalf of TSRI to the appropriate governmental authority, and Licensee shall furnish TSRI with proof of payment of such tax together with official or other appropriate evidence issued by the applicable government authority.  Any such tax actually paid on TSRI’s behalf shall be deducted from royalty payments due TSRI.
 
7.                                   Record Keeping.  Licensee shall keep, and shall require its Affiliates and Sublicensees to keep, accurate records (together with supporting documentation) of sales of Licensed Products and Licensed Processes as appropriate to determine the amount of royalties, Sublicense Payments, Product Development Milestone Payments and other monies due to TSRI hereunder, as well as records regarding the calculations of royalty offsets and Combination Products.  Such records shall be retained for at least five (5) years following the end of the reporting period to which such records relate.  Such records shall be available during normal business hours for examination and copying by an independent certified public accounting firm selected by TSRI and reasonably acceptable to Licensee for the purpose of verifying that Licensee’s reports and payments are accurate and that Licensee is in compliance with this Agreement.  In conducting such examinations pursuant to this  Section 7 , TSRI’s accountant shall have access to, and may disclose to TSRI, all records which TSRI reasonably believes to be relevant to the calculation of royalties under  Section 3 , non-royalty revenues under  Section 4  and Licensee’s compliance with this Agreement.  Such examination shall be at TSRI’s expense, except that if such examination shows an underreporting or underpayment of [***] or more for any twelve (12) month period, then Licensee shall pay the cost of such examination (including without limitation TSRI’s attorney’s fees, accountants fees and other costs), as well as any additional payments that would have been payable to TSRI under this Agreement had Licensee reported correctly, plus interest on such sum at the rate of [***] per month.  All payments due hereunder shall be made within thirty (30) days of Licensee’s receipt of a copy of the audit report.  TSRI may exercise its audit rights under this Section 7  no more frequently than once in any calendar year.
 
8.                                   Patent Matters.
 
8.1                           Patent Prosecution and Maintenance.  From and after the date of this Agreement, the provisions of this  Section 8  shall control the prosecution of any patent application and maintenance of any patent included within Licensed Patent Rights.  TSRI shall (a) direct and control the preparation, filing and prosecution of the United States and foreign patent applications within Licensed Patent Rights (including without limitation any reissues, reexaminations, appeals to appropriate patent offices and/or courts, interferences and foreign oppositions); and (b) maintain the patents issuing therefrom.  TSRI shall select the patent attorney, subject to Licensee’s written approval, which approval shall not be unreasonably withheld.  Both parties agree that TSRI shall have the right, at its sole discretion, to utilize TSRI’s Office of Patent Counsel in lieu of or in addition to independent counsel for patent prosecution and maintenance described herein, and the fees and expenses associated with the work done by such Office of Patent Counsel and/or independent patent counsel with regard to the preparation, filing and prosecution of patent applications and maintenance of patents included within Licensed Patent Rights shall be paid as set forth below.  Licensee shall have full
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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rights of consultation with the patent attorney so selected on all matters relating to Licensed Patent Rights.  TSRI shall use its reasonable efforts to implement all reasonable and timely requests made by Licensee with regard to the preparation, filing, prosecution and/or maintenance of the patent applications and/or patents within Licensed Patent Rights.
 
8.2                           Information to Licensee.  TSRI shall keep Licensee timely informed with regard to the patent application and maintenance processes.  TSRI shall deliver to Licensee copies of all patent applications, amendments, related correspondence, and other related matters in a timely manner.
 
8.3                           Patent Costs.  Licensee acknowledges and agrees that the licenses granted hereunder are in partial consideration for Licensee’s assumption of patent costs and expenses as described herein.  Licensee agrees to pay and shall pay for all expenses referenced in  Sections 8.1  and  8.2  hereof.  In addition, Licensee agrees to reimburse and shall reimburse TSRI for all patent costs and expenses previously paid or associated with Licensed Patent Rights incurred by TSRI up to the Effective Date, less any such patent costs and expenses previously reimbursed by Licensee under the Option Agreement.  Licensee agrees to pay and shall pay all such past and future patent expenses associated with the work on the Licensed Patent Rights performed by TSRI’s Office of Patent Counsel and/or its independent counsel within thirty (30) days after Licensee receives an itemized invoice therefor.  Failure of Licensee to pay patent costs and expenses as set forth in this  Section 8.3  shall immediately relieve TSRI from its obligation to incur any further patent costs and expenses.  For the avoidance of doubt, should Licensee not pay any patent costs and expenses due to TSRI or independent counsel within thirty (30) days after Licensee’s receipt of any itemized invoice therefor, TSRI shall have the right, at its sole discretion, to cease all patent prosecution and allow Licensed Patent Rights to go abandoned.  Such action by TSRI shall not constitute a breach of this Agreement.  Payment can be made directly to independent counsel, or to TSRI.  Licensee may elect with a minimum of ninety (90) days’ prior written notice to TSRI, to discontinue payment for the filing, prosecution and/or maintenance of any patent application and/or patent within Licensed Patent Rights.  Licensee shall remain liable for all patent prosecution and maintenance costs incurred prior to the date of notice of election and for a ninety (90) day period following the date of such notice.  Any such patent application or patent so elected shall immediately be excluded from the definition of Licensed Patent Rights and from the scope of the licenses granted under this Agreement, and all rights relating thereto shall revert to TSRI and may be freely licensed by TSRI.
 
8.4                           Ownership.  The patent applications filed and the patents obtained by TSRI pursuant to Section 8.1  hereof shall be owned solely by TSRI, assigned solely to TSRI and deemed a part of Licensed Patent Rights.
 
8.5                           TSRI Right to Pursue Patent.  If at any time during the term of this Agreement, Licensee’s rights with respect to Licensed Patent Rights are terminated in accordance with the terms of this Agreement, TSRI shall have the right to take whatever action TSRI deems appropriate to obtain or maintain the corresponding patent protection.  If TSRI pursues patents under this  Section 8.5 , Licensee agrees to use commercially reasonable efforts to
 
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cooperate fully, including by providing, at no charge to, all appropriate technical data and executing all necessary legal documents.
 
8.6                           Infringement Actions.
 
8.6.1               Prosecution of Infringements.
 
a.                                     Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the Licensed Patent Rights by a third party and of any available evidence thereof.  After receiving notice from the other party of a possible infringement of the Licensed Patent Rights by a third party, the parties will consult with each other about whether and to what extent such third party’s products or activities are infringing upon the Licensed Patent Rights, and the extent to which the infringing products or activities are damaging sales of Licensed Products.  Within ninety (90) days of such notice, Licensee shall notify TSRI of its decision and proposed course of action, where the date of Licensee’s notice to TSRI, or the expiration of the ninety (90) day period, shall be known as the “ Commencement Date ”.  If Licensee determines, in its reasonable commercial discretion, and provides TSRI with its assessment supporting such determination, that the prosecution of such infringement would be commercially unreasonable, and TSRI does not object to such determination, then Licensee shall not have the obligation as set forth under  Section 8.6.1(d)  to prosecute such infringement and the consequences in  Section 8.6.1(d)  shall not apply;  provided ,  however , that TSRI shall then have the right, but not the obligation, to prosecute such infringement.
 
b.                                    In the event Licensee is obligated to, pursuant to Section 8.6.1(d) below, or elects to, pursuant to  8.6.1(a)  above, pursue a third party infringer, then Licensee may enter into settlements, stipulated judgments or other arrangements respecting such infringement, at its own expense, but only with TSRI’s prior written consent, which will not be unreasonably withheld or delayed.  TSRI shall permit any action to be brought in its name if required by law, and Licensee shall hold TSRI harmless from any costs, expenses or liability respecting all such infringements.  TSRI agrees to provide reasonable assistance which Licensee may require in any litigation arising in accordance with the provisions of this  Section 8.6.1 , for which Licensee shall pay to TSRI a reasonable hourly rate of compensation, including, without limitation, joining such action as a party plaintiff if necessary or desirable for initiation or continuation of such action; provided that the Licensee reimburses TSRI promptly for any reasonable costs and expenses incurred by TSRI in connection with providing such assistance.
 
c.                                     In the event Licensee is not obligated to, pursuant to Section 8.6.1(d) below, pursue a third party infringer, then Licensee shall notify TSRI in writing promptly and TSRI shall have the right, but not the obligation, to prosecute such infringement on its own behalf.  If TSRI prosecutes such infringement, then TSRI may, at its discretion, convert the licenses granted to Licensee with respect to the patent(s) at
 
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issue to a non-exclusive license.  Conversion by TSRI pursuant to this Section 8.6.1(c) shall only be applicable to the country or countries within the Licensed Patent Rights that are the subject of TSRI’s prosecution of such infringement.
 
d.                                   Notwithstanding the foregoing Sections 8.6.1(b)-8.6.1(c), in order to maintain the licenses granted hereunder in force, Licensee shall have the first right and obligation to prosecute any and all third party infringements.  Unless Licensee and TSRI otherwise agree, pursuant to Section 8.6.1(a) , that the prosecution of any third party infringement is commercially unreasonable, failure on the part of Licensee to prosecute any third party infringement within six (6) months after the Commencement Date shall be grounds for termination of the licenses granted to Licensee with respect to the patent(s) at issue, and such patent(s) shall thereafter be excluded from the definition of Licensed Patent Rights.  Termination by TSRI pursuant to this  Section 8.6.1(d)  shall only be applicable to the country or countries within the Licensed Patent Rights that are the subject of Licensee’s failure to prosecute such infringement.
 
8.6.2               Allocation of Recovery.  Any damages, settlements or other recovery from an infringement action undertaken by Licensee pursuant to  Section 8.6.1  shall first be used to reimburse the parties for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (i) [***] to TSRI, (ii) and [***] to Licensee.  If Licensee fails to prosecute any such action to completion or if TSRI prosecutes any such action, then any damages, settlements, or other recovery, net of the parties’ costs and expenses incurred in such infringement action shall [***].
 
8.6.3               Defense of Infringements.  Licensee shall have the first right, but not the obligation, to defend any suits against Licensee, Affiliates or Sublicensees alleging infringement of any third party intellectual property right due to Licensee’s use of the Licensed Patent Rights or its development or commercialization of Licensed Products or Licensed Processes.  Licensee shall promptly notify TSRI in writing of such claims, and TSRI and Licensee shall confer with each other and cooperate during the defense of any such action.  If Licensee finds it necessary or desirable for TSRI to become a party to such action, TSRI shall execute all papers as may reasonably be necessary to add TSRI as a party to such action.  Licensee shall bear all costs and expenses associated with any such suit or action.  TSRI shall be entitled to, at its expense, participate in and have counsel, selected by it and reasonably acceptable to Licensee, participate in any such action.  In no event shall TSRI have any out-of-pocket liability for costs of litigation or royalties, damages and/or settlement amounts due to any third party (except for costs of its own counsel as provided above).  If the third party intellectual property right is held not to be infringed, unenforceable or invalid, any recovery of damages for such suit shall be applied first [***] shall be entitled to keep the balance remaining from any such recovery.  For the purpose of clarity, it is acknowledged that this Section 8.6.3  shall in no way limit Licensee’s obligations under  Section 9.1  to indemnify, defend and hold harmless TSRI with respect to third party claims alleging infringement of such third party’s intellectual property rights.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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8.6.4               Declaratory Judgment Actions.  If a declaratory judgment action is brought naming TSRI or Licensee or any of its Affiliates or Sublicensees as a defendant and alleging invalidity, unenforceability or non-infringement of any Licensed Patent Rights, Licensee or TSRI, as the case may be, shall promptly notify the other party in writing and Licensee may elect, upon written notice to TSRI within twenty (20) days after receiving or giving notice of the commencement of such action, to take over the sole control of such action at its own expense.  TSRI shall be entitled to, at its expense, participate in and have counsel, selected by it and reasonably acceptable to Licensee, participate in any such action.  If Licensee does not defend any such action, then TSRI shall have the right, but shall not be obligated, to defend such action at TSRI’s expense.
 
9.                                   Indemnity and Insurance.
 
9.1                           Indemnity.  Licensee hereby agrees to indemnify, defend (by counsel reasonably acceptable to TSRI) and hold harmless TSRI and any parent, subsidiary or other affiliated entity of TSRI and their trustees, directors, officers, employees, scientists, agents, successors, assigns and other representatives (collectively, the “ Indemnitees ”) from and against all claims, suits, actions, damages, liabilities, losses and other expenses, including without limitation reasonable attorney’s fees, expert witness fees and costs incurred by the Indemnitees, with respect to any third party claim [***] (collectively “ Claim ”), that arises out of or relates to (a) [***], (b) [***], (c) [***], (d) [***], (e) [***], and/or (f) Licensee’s or any Sublicensee’s failure to comply with any applicable laws, rules or regulations, except that [***].  Licensee’s obligation to defend such Claims shall apply to any third party allegations or disputes that arise out of or relate to any of the items described in subparagraphs (a) through (f) above.  Licensee shall not enter into any settlement of such Claims that imposes any obligation on TSRI, that does not unconditionally release TSRI from all liability or that would have a material adverse effect on TSRI’s reputation or business without TSRI’s prior written consent.  Notwithstanding the above, Indemnitees, at their expense, shall have the right to retain separate independent counsel to assist in defending any such Claims.  In the event Licensee fails to promptly indemnify and defend such Claims and/or pay Indemnitees’ expenses as provided above, Indemnitees shall have the right to defend themselves, and in that case, Licensee shall reimburse Indemnitees for all of their reasonable attorney’s fees, costs and damages incurred in settling or defending such Claims within thirty (30) days of each of Indemnitees’ written requests.  This indemnity shall be a direct payment obligation and not merely a reimbursement obligation of Licensee to Indemnitees.
 
9.2                           Insurance.  Licensee shall name TSRI and Indemnitees as additional insured parties on any commercial general liability and product liability insurance policies maintained by Licensee, its Affiliates, and Sublicensees applicable to the Licensed Products, Licensed Processes and Licensed Biological Materials.
 
9.2.1                Beginning at the time any such Licensed Product or Licensed Process is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by Licensee or by a Sublicensee, Licensee shall, at its sole cost and expense, procure and maintain commercial general liability insurance and product liability insurance in amounts and on terms consistent with industry standards for similarly situated
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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pharmaceutical companies commercializing products, but in no case will such insurance be less than $3,000,000 per incident and $5,000,000 annual aggregate.  During clinical trials involving any Licensed Product, Licensed Process or Licensed Biological Material, Licensee shall, at its sole cost and expense, procure and maintain commercial general liability insurance in the same amounts and terms as specified above.  Licensee’s commercial general liability insurance shall provide coverage for personal injury, broad form property damage, advertising injury, premises-operations, products and completed operations and contractual liability including Licensee’s indemnity and other obligations under this Agreement.  Licensee may elect to self-insure all or part of the foregoing on commercially reasonable terms, which must be pre-approved by TSRI in writing;  however , TSRI shall be obligated to approve such self-insurance if Licensee has and continues to maintain minimum cash reserves covering such self-insurance or minimum book equity, in either case in the amount of Five Hundred Million Dollars ($500,000,000), which Licensee sufficiently demonstrates to TSRI in writing.  The insurance coverage amounts specified herein or the maintenance of such insurance policies shall not in any way limit Licensee’s indemnity or other liability under this Agreement.
 
9.2.2                In addition, Licensee, on behalf of itself and its insurance carriers, waives any and all claims and rights of recovery against TSRI and the Indemnitees, including without limitation all rights of subrogation, with respect to either party’s performance under this Agreement or for any loss of or damage to Licensee or its property or the property of others under its control.  Licensee’s commercial general liability insurance policy shall also include a waiver of subrogation consistent with this paragraph in favor of TSRI and the Indemnitees.  Licensee shall be responsible for obtaining such waiver of subrogation from its insurance carriers.  Licensee’s insurance policies shall be primary and not contributory to any insurance carried by its Sublicensees or TSRI.  Upon TSRI’s request, Licensee shall deliver to TSRI copies of insurance certificates or binders and such waiver of subrogation that complies with the requirements of this  Section 9.2.2 .  Licensee shall provide TSRI with written notice at least fifteen (15) days prior to the cancellation, non-renewal or material change in such insurance described in  Section 9.2.1 .  If Licensee does not obtain replacement insurance providing comparable coverage within such fifteen (15) day period, TSRI shall have the right to terminate this Agreement for material breach under  Section 12.3 .
 
9.2.3                Licensee shall maintain such commercial general liability insurance beyond the expiration or termination of this Agreement during (a) the period that any Licensed Product or Licensed Process is being commercially distributed or sold by Licensee or by a Sublicensee, Affiliate or agent of Licensee; and (b) a reasonable period after the period referred to in  Section 9.2.3(a)  above, which in no event shall be less than five (5) years.
 
9.3                           Pre-Challenge Requirements.  Licensee will provide written notice to TSRI at least [***] prior to Licensee directly or indirectly initiating a Challenge in or before any court or patent office.  Licensee will include with such written notice [***] to enable the parties to attempt in good faith to mutually resolve such issues.
 
10.                           Limited Warranty.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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10.1                   Limited Warranty.  TSRI hereby represents and warrants that, to the actual knowledge of TSRI, and only as of the Effective Date, (a) it is the sole and exclusive owner, appointed agent for licensing or licensee of all right, title and interest in and to the Licensed Patent Rights that exist as of the Effective Date; (b) it has the power and authority to grant the licenses provided for herein to Licensee, and that it has not earlier granted, or assumed any obligation to grant, any rights in such Licensed Patent Rights to any third party that have not been waived that would conflict with the rights granted to Licensee herein; and (c) this Agreement constitutes the legal, valid and binding obligation of TSRI, enforceable against TSRI in accordance with its terms, except with respect to creditor’s rights generally and the enforcement of equitable remedies.
 
10.2                    Licensee hereby warrants and represents this Agreement constitutes the legal, valid and binding obligation of Licensee, enforceable against Licensee in accordance with its terms, except with respect to creditor’s rights generally and the enforcement of equitable remedies.
 
10.3                   Disclaimer.  EXCEPT AS PROVIDED IN SECTION 10.1, TSRI MAKES NO OTHER WARRANTIES CONCERNING LICENSED PATENT RIGHTS, LICENSED BIOLOGICAL MATERIALS OR ANY OTHER MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR ARISING OUT OF COURSE OF CONDUCT OR TRADE CUSTOM OR USAGE, AND DISCLAIMS ALL SUCH EXPRESS OR IMPLIED WARRANTIES.  TSRI MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY OR SCOPE OF LICENSED PATENT RIGHTS, OR THAT ANY LICENSED PRODUCT, LICENSED PROCESS OR LICENSED BIOLOGICAL MATERIAL WILL BE FREE FROM AN INFRINGEMENT ON PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING UPON ANY LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL MATERIALS COVERED BY THIS AGREEMENT.  FURTHER, TSRI HAS MADE NO INVESTIGATION AND MAKES NO REPRESENTATION THAT THE LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL MATERIALS ARE SUITABLE FOR LICENSEE’S PURPOSES.
 
10.4                   Limitation of Liability.  IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF PROFITS OR EXPECTED SAVINGS) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER, EXCEPT FOR LIABILITY FOR BREACH BY SUCH PARTY OF ANY OF THE CONFIDENTIALITY PROVISIONS IN  SECTION 11  AND EXCEPT FOR LICENSEE’S INDEMNITY UNDER  SECTION 9.1 .  TSRI’S AGGREGATE LIABILITY, IF ANY, FOR ALL DAMAGES OF ANY KIND RELATING TO THIS AGREEMENT OR ITS SUBJECT MATTER SHALL NOT EXCEED THE AMOUNT PAID BY LICENSEE TO TSRI UNDER THIS AGREEMENT.  THE FOREGOING EXCLUSIONS AND LIMITATIONS SHALL APPLY TO ALL CLAIMS AND
 
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ACTIONS OF ANY KIND AND ON ANY THEORY OF LIABILITY, WHETHER BASED ON CONTRACT, TORT (INCLUDING, BUT NOT LIMITED TO NEGLIGENCE OR STRICT LIABILITY), OR ANY OTHER GROUNDS, AND REGARDLESS OF WHETHER A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.  THE PARTIES FURTHER AGREE THAT EACH WARRANTY DISCLAIMER, EXCLUSION OF DAMAGES OR OTHER LIMITATION OF LIABILITY HEREIN IS INTENDED TO BE SEVERABLE AND INDEPENDENT OF THE OTHER PROVISIONS BECAUSE THEY EACH REPRESENT SEPARATE ELEMENTS OF RISK ALLOCATION BETWEEN THE PARTIES.
 
11.                           Confidentiality and Publication.
 
11.1                   Treatment of Confidential Information.  The parties agree that during the term of this Agreement, and for a period of five (5) years after this Agreement terminates, a party receiving Confidential Information of the other party will (a) maintain in confidence such Confidential Information to the same extent such party maintains its own proprietary information; (b) not disclose such Confidential Information to any third party without prior written consent of the other party; and (c) not use such Confidential Information for any purpose except those permitted by this Agreement.  Notwithstanding the foregoing, if a party is required by law, regulation or court order to disclose Confidential Information of the other party, the party required to make such disclosure shall (i) promptly send a copy of the order or notice to the other party not later than ten (10) days before the proposed disclosure or such shorter period of time as may be reasonably practical under the circumstances; (ii) cooperate with the other party if the other party wishes to object or condition such disclosure through a protective order or otherwise; (iii) limit the extent of such disclosure to the minimum required to comply with the order or notice; and (iv) use reasonable efforts to seek confidential treatment (i.e., filing “under seal”) for that disclosure.  In addition, a party may disclose Confidential Information of the other party to its Affiliates and employees, to Sublicensees and potential Sublicensees (in the case of Licensee), or to other third parties who are investors or potential investors in connection with due diligence or similar investigations or in confidential financing documents, provided, in each case, that any such Affiliate, employee, Sublicensee, potential Sublicensee or other third party investor or potential investor agrees in writing to be bound by terms of confidentiality and non-use at least as stringent as those set forth in this  Section 11 , but with no further right to disclose or otherwise distribute TSRI’s Confidential Information.
 
11.2                   Publications.  Licensee agrees that TSRI shall have the right to publish in accordance with its general policies, and that this Agreement shall not restrict, in any fashion, TSRI’s right to publish.
 
11.3                   Publicity.  Except as otherwise provided herein or required by any applicable law, rule or regulation (including, without limitation, rules of the U.S. Securities and Exchange Commission and rules of any stock exchange upon which Licensee’s securities may be listed), no party shall originate any publication, news release or other public announcement, written or oral, whether in the public press, stockholders’ reports, or otherwise, relating to this
 
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Agreement or to any sublicense hereunder, or to the performance hereunder or under any such sublicense agreements, without the prior written approval of the other party, which approval shall not be unreasonably withheld.  Scientific publications published in accordance with  Section 11.2  of this Agreement shall not be construed as publicity governed by this  Section 11.3 .
 
12.                           Term and Termination.
 
12.1                   Term.  Unless terminated sooner in accordance with the terms set forth herein, this Agreement, and the licenses granted hereunder, shall terminate upon termination of the royalty obligations as provided in  Section 3.10  hereof.
 
12.2                   Termination Upon Mutual Agreement.  This Agreement may be terminated by mutual written consent of both parties.
 
12.3                   Termination by TSRI.  TSRI may terminate this Agreement as follows:
 
a.                                     If Licensee does not make a payment due hereunder and fails to cure such non-payment (including the payment of interest in accordance with  Section 14.2 ) within thirty (30) days after the date of notice in writing of such non-payment by TSRI;
 
b.                                    If Licensee defaults upon its indemnification and insurance obligations under Section 9  and the default has not been remedied within thirty (30) days after the date of notice in writing of such default by TSRI;
 
c.                                     As provided in Section 6.2;
 
d.                                   Upon written notice to Licensee in the event of the filing of bankruptcy or the bankruptcy of Licensee or the appointment of a receiver of any of Licensee’s assets, or the making by Licensee of any assignment for the benefit of creditors, or the institution of any proceedings against Licensee under any bankruptcy or insolvency laws;
 
e.                                     If Licensee is convicted of a felony relating to the development, manufacture, use, marketing, distribution or sale of Licensed Products, Licensed Processes or Licensed Biological Materials;
 
f.                                      In the event Licensee brings any Challenge(s), TSRI has the right to immediately terminate this Agreement without any liability and without any opportunity to cure by Licensee upon written notice to Licensee.  In the event that Sublicensee brings any Challenge(s), Licensee agrees that it will terminate such Sublicense;
 
g.                                    Except as provided in subparagraphs (a) - (f) above, if Licensee commits a material breach of any of its obligations under this Agreement and
 
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the material breach has not been remedied within ninety (90) days after the date of notice in writing of such default by TSRI.
 
12.4                   Termination by Licensee.  Licensee may terminate this Agreement by giving ninety (90) days’ advance written notice of termination to TSRI.
 
12.5                   Rights Upon Expiration.  Neither party shall have any further rights or obligations upon the expiration of this Agreement upon its regularly scheduled expiration date, other than the obligation of Licensee to make any and all reports and payments due under  Articles 3  and/or  4  with respect to events that occurred prior to such expiration in accordance with  Sections 6.3 ,  6.4 ,  6.5  and  6.6 , and to reimburse patent costs and expenses accrued prior to expiration in accordance with  Section 8.3 .  Notwithstanding the above, Sections 2.7 ,  2.8 ,  2.9 ,  2.10 ,  7 ,  9.1 ,  9.2 ,  10.3 ,  10.4 ,  11 ,  12.5 ,  12.8  and  14  shall also survive the expiration of this Agreement.
 
12.6                   Rights Upon Termination.
 
12.6.1        Notwithstanding any other provision of this Agreement, upon any termination of this Agreement prior to the regularly scheduled expiration date of this Agreement, the licenses granted hereunder shall terminate and revert to TSRI.  Except as otherwise provided in  Section 12.7  of this Agreement with respect to work-in-progress, upon such termination, Licensee shall have no further right to develop, manufacture or market any Licensed Product, Licensed Process, or to otherwise use any Licensed Patent Rights or any Licensed Biological Materials.  Upon any such termination, Licensee shall promptly return all materials, samples, documents, information, and other materials which embody or disclose Licensed Patent Rights or any Licensed Biological Materials;  provided ,  however , that Licensee shall not be obligated to provide TSRI with proprietary information which Licensee can show that it independently developed.  Any such termination shall not relieve either party from any obligations accrued to the date of such termination, including without limitation the obligation of Licensee to make any and all reports and payments due under Articles 3  and/or  4  with respect to events that occurred prior to such termination or as provided in Section 12.7 , in each case in accordance with  Sections 6.3 ,  6.4 ,  6.5  and  6.6 , and to reimburse patent costs and expenses accrued prior to termination in accordance with  Section 8.3 .  Notwithstanding the above, Sections 2.7 ,  2.8 ,  2.9 ,  2.10 ,  7 ,  9.1 ,  9.2 ,  10.3 ,  10.4 ,  11 ,  12.6 ,  12.8  and  14  shall also survive the termination of this Agreement.
 
12.6.2        Any sublicense shall, upon the delivery of written notice by Sublicensee, except those Sublicensee’s in default, to TSRI prior to termination of this Agreement, survive termination of this Agreement on the same terms and conditions set forth in the applicable sublicense for a period of [***] following termination of this Agreement (the “ Temporary License Period ”);  provided however , that if such written notice is not delivered prior to termination of this Agreement, such sublicense shall immediately terminate upon termination of this Agreement.  In the event a Sublicensee provides such written notice, as a condition precedent to TSRI’s obligation to grant the direct license to such Sublicensee as set forth below, such Sublicensee must pay to TSRI all past due royalties, non-royalty revenue,
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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patent costs and all other monies owed by Licensee to TSRI under this Agreement.  Upon TSRI’s receipt of all such outstanding monies, TSRI shall enter into a license agreement directly with such Sublicensee (the “ New License Agreement ”).  Each New License Agreement shall be subject to the same non-financial terms and conditions as those in this Agreement;  provided ,  however , that each New License Agreement shall contain substantially the same terms and conditions regarding sublicense scope, sublicense territory, duration of sublicense grant, and diligence obligations of the Sublicensee as the sublicense agreement between such Sublicensee and Licensee.  Notwithstanding the above, TSRI’s obligation to enter into a New License Agreement is expressly conditioned upon each of the following: (i) Sublicensee shall agree in the New License Agreement to terms providing that in no event shall TSRI be liable to Sublicensee for any actual or alleged breach of such sublicense agreement by Licensee; (ii) TSRI shall not have any obligations to such Sublicensee other than TSRI’s obligations to Licensee as set forth herein; (iii) each New License Agreement shall be subordinate and comply in all respects to the applicable provisions of this Agreement, and the financial terms of each New License Agreement, including without limitation, the running royalty rate, shall be consistent with the terms of the sublicense agreement with Licensee, but shall in no event be less than the corresponding financial terms set forth in this Agreement, including without limitation the obligation to pay minimum annual royalties and other monetary payments required to be made by Licensee to TSRI; and (iv) in no event shall TSRI be obliged to accept provisions in the New License Agreement (a) unless such provisions correspond to rights granted by Licensee to Sublicensee in conformance with this Agreement, and such provisions are not in conflict with the rights, duties and obligations accruing to Licensee under this Agreement; or (b) where such provisions are inconsistent with the legal obligations under any other sublicense agreement granted by Licensee, or by applicable federal, state or local statute or regulation.  In the event Sublicensee does not comply with the provisions of this  Section 12.6.2 , such Sublicensee’s sublicense shall immediately terminate upon expiration of the Temporary License Period.  Licensee must include or specifically reference this Section 12.6.2  in each of its sublicense agreements.
 
12.7                   Work-in-Progress.  Upon any early termination of the license granted hereunder in accordance with this Agreement, Licensee shall be entitled to finish any work-in-progress and to sell any completed inventory of Licensed Products covered by such license which remain on hand as of the date of the termination, so long as Licensee sells such inventory in the normal course of business and at regular selling prices and pays to TSRI the royalties applicable to such subsequent sales in accordance with the terms and conditions as set forth in this Agreement, provided that no such sales shall be permitted after the expiration of six (6) months after the date of termination.
 
12.8                   Final Royalty Report.  Upon termination or expiration of this Agreement, Licensee shall submit a final report to TSRI, and any payments due TSRI and unreimbursed patent expenses invoiced by TSRI shall become immediately payable.
 
13.                           Assignment; Successors.
 
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13.1                   Assignment.  Any and all assignments of this Agreement or any rights granted hereunder by Licensee without TSRI’s prior written consent are void, except either party may assign this Agreement or rights granted hereunder without the other party’s prior written consent (i) to an Affiliate of the assigning party; or (ii) to a successor in connection with the merger, consolidation or sale of all or substantially all of its assets to which this Agreement relates.
 
13.2                   Binding Upon Successors and Assigns.  Subject to the limitations on assignment herein, this Agreement shall be binding upon and inure to the benefit of any successors in interest and assigns of TSRI and Licensee.  Any such successor or assignee of Licensee’s interest shall expressly assume in writing the performance of all the terms and conditions of this Agreement to be performed by Licensee.
 
14.                           General Provisions.
 
14.1                   Independent Contractors.  The relationship between TSRI and Licensee is that of independent contractors.  TSRI and Licensee are not joint venturers, partners, principal and agent, master and servant, employer or employee, and have no other relationship other than independent contracting parties.  TSRI and Licensee shall have no power to bind or obligate each other in any manner, other than as is expressly set forth in this Agreement.
 
14.2                   Late Payments.  Late payments of any and all payments due hereunder shall be subject to a charge of [***] per month, or [***] whichever is greater.
 
14.3                   Governmental Approvals and Marketing of Licensed Products.  Licensee shall be responsible for obtaining all necessary governmental approvals for the development, production, distribution, performance, sale and use of any Licensed Product or Licensed Process, at Licensee’s expense, including, without limitation, any safety studies.  Licensee shall have sole responsibility for any warning labels, packaging and instructions as to the use of Licensed Products and for the quality control for any Licensed Products or Licensed Processes.
 
14.4                   Patent Marking.  To the extent required by applicable law, Licensee shall mark all Licensed Products or their containers in accordance with the applicable patent marking laws.
 
14.5                   No Use of Name.  The use of the name “The Scripps Research Institute”, “ Scripps ”, “ TSRI ” or any variation thereof in connection with the advertising, distribution, sale or performance of Licensed Products or Licensed Processes is expressly prohibited.  The foregoing notwithstanding, without the consent of TSRI, Licensee may state that it is licensed by TSRI under the Licensed Patent Rights and identify the inventors, their affiliation with TSRI and their relationship to Licensee, and further, Licensee may comply with disclosure requirements of all applicable laws relating to its business, including, without limitation, United Sates and state securities laws.
 
14.6                   U.S. Manufacture.  Licensee agrees to abide by the Preference for United States Industry as set forth in 37 CFR 401.14 (I), which includes Licensee’s agreement that any
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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Licensed Product or Licensed Process sold in the United States shall be manufactured substantially in the United States.
 
14.7                   Foreign Registration.  Licensee agrees to register this Agreement with any foreign governmental agency which requires such registration, and Licensee shall pay all costs and legal fees in connection therewith.  In addition, Licensee shall ensure that all foreign laws affecting this Agreement or the sale of Licensed Products or Licensed Processes are fully satisfied.
 
14.8                   Use of Biological Materials.  Licensee agrees that its use of any Licensed Biological Materials shall comply with all applicable statutes, regulations, and guidelines.  Licensee agrees not to use the Licensed Biological Materials for research involving human subjects or clinical trials in the United States without complying with 21 CFR 50 and 45 CFR 46. Licensee agrees not to use the Licensed Biological Materials for research involving human subjects or clinical trials outside of the United States without complying with the applicable regulations of the appropriate national control authorities.
 
14.9                   Arbitration.  Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, including without limitation any and all Challenges, shall be settled by binding confidential arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“ AAA ”), and the procedures set forth below.  In the event of any inconsistency between the Rules of AAA and the procedures set forth below, the procedures set forth below shall control.  Judgment upon the award rendered by the arbitrators may be enforced in any court having jurisdiction thereof.
 
14.9.1       Location.  The location of the arbitration shall be in the County of San Diego.  TSRI and Licensee hereby irrevocably submit to the exclusive jurisdiction and venue of the American Arbitration Association arbitration panel selected by the parties and located in San Diego County, California for any dispute regarding this Agreement, including without limitation any Challenges, and to the exclusive jurisdiction and venue of the federal and state courts located in San Diego County, California for any action or proceeding to enforce an arbitration award or as otherwise provided in  Section 14.9.5  below, and waive any right to contest or otherwise object to such jurisdiction or venue.
 
14.9.2       Selection of Arbitrators.  The arbitration shall be conducted by a panel of three neutral arbitrators who are independent and disinterested with respect to the parties, this Agreement, and the outcome of the arbitration.  Each party shall appoint one neutral arbitrator, and these two arbitrators so selected by the parties shall then select the third arbitrator, and all arbitrators must have at least ten (10) years experience in mediating or arbitrating cases regarding the same or substantially similar subject matter as the dispute between Licensee and TSRI.  If one party has given written notice to the other party as to the identity of the arbitrator appointed by the party, and the party thereafter makes a written demand on the other party to appoint its designated arbitrator within the next ten days, and the other party fails to appoint its designated arbitrator within ten days after receiving said written demand, then the arbitrator who has already been designated shall appoint the other two arbitrators.
 
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14.9.3       Discovery.  The arbitrators shall decide any disputes and shall control the process concerning these pre-hearing discovery matters.  Pursuant to the Rules of AAA, the parties may subpoena witnesses and documents for presentation at the hearing.
 
14.9.4       Case Management.  Prompt resolution of any dispute is important to both parties; and the parties agree that the arbitration of any dispute shall be conducted expeditiously.  The arbitrators are instructed and directed to assume case management initiative and control over the arbitration process (including scheduling of events, pre-hearing discovery and activities, and the conduct of the hearing), in order to complete the arbitration as expeditiously as is reasonably practical for obtaining a just resolution of the dispute.
 
14.9.5       Remedies.  The arbitrators may grant any legal or equitable remedy or relief that the arbitrators deem just and equitable, to the same extent that remedies or relief could be granted by a state or federal court,  provided however , that no punitive damages may be awarded.  No court action shall be maintained seeking punitive damages.  The decision of any two of the three arbitrators appointed shall be binding upon the parties.  Notwithstanding anything to the contrary in this Agreement, prior to or while an arbitration proceeding is pending, either party has the right to seek and obtain injunctive and other equitable relief from a court of competent jurisdiction to enforce that party’s rights hereunder.
 
14.9.6       Expenses.  The expenses of the arbitration, including the arbitrators’ fees, expert witness fees, and attorney’s fees, may be awarded to the prevailing party, in the discretion of the arbitrators, or may be apportioned between the parties in any manner deemed appropriate by the arbitrators.  Unless and until the arbitrators decide that one party is to pay for all (or a share) of such expenses, both parties shall share equally in the payment of the arbitrators’ fees as and when billed by the arbitrators.
 
14.9.7       Confidentiality.  Except as set forth below, and as necessary to obtain or enforce a judgment upon any arbitration award, the parties shall keep confidential the fact of the arbitration, the dispute being arbitrated, and the decision of the arbitrators.  Notwithstanding the foregoing, the parties may disclose information about the arbitration to persons who have a need to know, such as directors, trustees, management employees, witnesses, experts, investors, attorneys, lenders, insurers, and others who may be directly affected.  Additionally, if a party has stock which is publicly traded, the party may make such disclosures as are required by applicable securities laws or rules or regulations of any stock exchange upon which securities are traded or listed, but will use commercially reasonable efforts to seek confidential treatment for such disclosure.
 
14.10           Entire Agreement; Modification.  This Agreement and all of the attached Exhibits set forth the entire agreement and understanding between the parties as to the subject matter hereof, and supersede all prior or contemporaneous agreements or understandings, whether oral or written.  There shall be no amendments or modifications to this Agreement, except by a written document which is signed by both parties.
 
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14.11           California Law.  This Agreement shall be construed and enforced in accordance with the laws of the State of California without regard to its conflicts or choice of laws principles thereof.
 
14.12           Headings.  The headings for each article and section in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular article or section.
 
14.13           Severability.  Should any one or more of the provisions of this Agreement be held invalid or unenforceable by a court of competent jurisdiction, it shall be considered severed from this Agreement and shall not serve to invalidate the remaining provisions thereof.  The parties shall make a good faith effort to replace any invalid or unenforceable provision with a valid and enforceable one such that the objectives contemplated by them when entering this Agreement may be realized.
 
14.14           No Waiver.  Any delay in enforcing a party’s rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such party’s rights to the future enforcement of its rights under this Agreement, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time.
 
14.15           Name.  Whenever there has been an assignment or a sublicense by Licensee as permitted by this Agreement, the term “ Licensee ” as used in this Agreement shall also include and refer to, if appropriate, such assignee or Sublicensee (to the extent of such assignment or sublicense).
 
14.16           Attorneys’ Fees.  In the event of a dispute between the parties hereto or in the event of any default hereunder, the party prevailing in the resolution of any such dispute or default shall be entitled to recover its reasonable attorneys’ fees and other costs incurred in connection with resolving such dispute or default.  Notwithstanding anything to the contrary herein, the parties agree that this Section 14.16  shall not apply and attorney’s fees and costs shall not be awarded to either party with respect to any Challenge or any action where Licensee alleges that it is not required to comply with or perform some or all of the provisions of this Agreement based upon a good faith claim that any of the Licensed Patent Rights are invalid or unenforceable.  TSRI and Licensee each represent that it has been represented by its own counsel in the negotiation and execution of this Agreement.  Each party further represents that it has relied solely on the advice and representation of its respective counsel in agreeing to this  Section 14.16  and all of the other provisions of this Agreement.
 
14.17           Notices.  Any notices required by this Agreement shall be in writing, shall specifically refer to this Agreement and shall be sent by registered or certified airmail, postage prepaid, or by facsimile machine, charges prepaid, or by overnight courier, postage prepaid and shall be forwarded to the respective addresses set forth below unless subsequently changed by written notice to the other party:
 
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For TSRI:	The Scripps Research Institute	
 	10550 North Torrey Pines Road, TPC-9	
 	La Jolla, California 92037	
 	Attention: Vice President, Business Development	
 	Fax No.: (858)784-9910	
 	 	
with a copy to:	The Scripps Research Institute	
 	10550 North Torrey Pines Road, TPC-8	
 	La Jolla, California 92037	
 	Attention: Chief Business Counsel	
 	Fax No.: (858) 784-9399	
 	 	
For Licensee:	Fate Therapeutics, Inc.	
 	3535 General Atomics Court, Suite 200	
 	San Diego, CA 92121	
 	Attention: Chief Financial Officer	
 	Fax No.: (858) 875-1843	
 	 	
With a copy to:	Cooley Godward Kronish LLP	
 	4401 Eastgate Mall	
 	San Diego, CA 92121-190	
 	Attn: Tom A. Coll, Esq.	
 	Telephone: (858) 550-6000	
 	Facsimile: (858) 550-6420	
 
Notices shall be deemed delivered upon the earlier of (a) when received; (b) three (3) days after deposit into the U.S. mail; (c) the date notice is sent via telefax, telex or cable; or (d) the day immediately following delivery to an overnight courier guaranteeing next-day delivery (except Sunday and holidays).
 
14.18           Compliance with U.S. Laws.  Nothing contained in this Agreement shall require or permit TSRI or Licensee to do any act inconsistent with the requirements of any United States law, regulation or executive order as the same may be in effect from time to time.
 
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IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date set forth above.
 
TSRI:	 	LICENSEE:	

THE SCRIPPS RESEARCH INSTITUTE	 	FATE THERAPEUTICS, INC.	

By:	/s/ Illegible	 	By:	/s/ J. Scott Wolchko	

Title:	Ex. VP/COO	 	Title:	CFO	

 
EXHIBIT A
 
LICENSED BIOLOGICAL MATERIALS
 
[***]
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

 
EXHIBIT B
 
LICENSED PATENT RIGHTS
 
[***]
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

 
EXHIBIT C
 
LICENSEE’S COMMERCIAL DEVELOPMENT PLAN
(including Benchmarks)
 
Benchmark
 	Timeline
 	
  [***]	  [***]	
 	 	
  [***]	  [***]	
  [***]	  [***]	
  [***]	  [***]	
  [***]	  [***]	
  [***]	  [***]	

Notwithstanding anything to the contrary in the Agreement, in the event that Licensee is unable to achieve a given Benchmark according to its applicable timeline, Licensee may, on a one-time only basis under the Agreement, extend the timeline by [***] by making a [***] payment to TSRI (where, for the avoidance of doubt, all later occurring Benchmark(s) shall also be similarly extended by [***].
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

 
EXHIBIT D
 
INFORMATION AND MATERIALS
 
TSRI and Licensee shall add items to this Exhibit D upon mutual agreement.

Exhibit 10.26
 
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

 
LICENSE AGREEMENT
 
by and between
 
THE SCRIPPS RESEARCH INSTITUTE,
a California nonprofit
public benefit corporation
 
and
 
FATE THERAPEUTICS, INC.
a Delaware corporation

 
LICENSE AGREEMENT
 
This License Agreement is entered into and made effective as of this 24th day of August, 2010 (the “ Effective Date ”), by and between THE SCRIPPS RESEARCH INSTITUTE, a California nonprofit public benefit corporation (“ TSRI ”), and Fate Therapeutics, Inc., a Delaware corporation (“ Licensee ”), each located at the respective address set forth in  Section 14.17 below, with respect to the facts set forth below.
 
RECITALS
 
A.                                TSRI is the owner of certain Licensed Patent Rights and has the right to grant licenses under such Licensed Patent Rights, subject to the rights set forth in  Sections 2.8  and  2.9  of this Agreement.
 
B.                                 TSRI desires to have the Licensed Patent Rights developed and commercialized to benefit the public and is willing to grant a license thereunder to Licensee.
 
C.                                 Licensee desires to obtain a license under the Licensed Patent Rights and to use the Licensed Biological Materials pursuant to the terms and conditions set forth herein.
 
NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth herein, TSRI and Licensee hereby agree as follows:
 
1.                                   Definitions.  Capitalized terms shall have the meaning set forth herein.
 
1.1                           Affiliate.  The term “Affiliate” shall mean any entity which directly or indirectly controls, or is controlled by, or is under common control with, Licensee.  The term “control” as used herein means (a) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares entitled to vote for the election of directors or with the power to direct the management and policies of such corporate entities; or (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interests with the power to direct the management and policies of such non-corporate entities.  All Affiliates shall be deemed to be licensees under  Section 2.1-2.4  of this Agreement.
 
1.2                           Confidential Information.  The term “Confidential Information” shall mean any and all proprietary or confidential information of TSRI or Licensee which may be exchanged between the parties at any time and from time to time during the term of this Agreement.  Confidential Information shall also include any information which, given the circumstances surrounding disclosure, would be considered confidential by the disclosing party.  Information shall not be considered confidential to the extent that either party can establish by competent proof that it:
 
a.                                     Is publicly disclosed through no fault of the receiving party, either before or after it becomes known to the receiving party; or
 
b.                                    Was known to the receiving party without obligation of confidentiality prior to the date of this Agreement, which knowledge was acquired

 
independently and not from the disclosing party (including such party’s employees, consultants or agents); or
 
c.                                     Is subsequently disclosed to the receiving party without obligation of confidentiality in good faith by a third party who is not under any obligation to maintain the confidentiality of such information, and without breach of this Agreement by a receiving party; or
 
d.                                   Has been published by a third party not in breach of any obligation of confidentiality; or
 
e.                                     Was independently developed by the receiving party without the use of or reliance on the Confidential Information of the disclosing party.
 
If Confidential Information is required to be disclosed by the receiving party by law or court order, the party required to make such disclosure shall limit the same to the minimum required to comply with the law or court order, and shall use reasonable efforts to attempt to seek confidential treatment for that disclosure, and prior to making such disclosure by the receiving party shall notify the other party, not later than ten (10) days (or such shorter period of time as may be reasonably practicable under the circumstances) before the disclosure in order to allow that other party to comment and/or to obtain a protective or other order, including extensions of time and the like, with respect to such disclosure.
 
1.3                           Field.  The term “Field” shall mean all fields.
 
1.4                           Licensed Biological Materials.  The term “Licensed Biological Materials” shall mean the materials identified in  Exhibit A  and supplied by TSRI to Licensee, together with any progeny or mutants of such materials, or unmodified derivatives of such materials (defined as substances created by Licensee that constitute an unmodified functional sub-unit or product expressed by such materials).
 
1.5                           Licensed Patent Rights.  The term “Licensed Patent Rights” shall mean rights arising out of or resulting from (a) the U.S./PCT Patent Application(s) set forth on  Exhibit B ; (b) the foreign patent applications associated with the application(s) referenced in sub clause (a) above; (c) the patents issued from the application(s) referenced in sub clauses (a) and (b), and in sub clauses (d) and (e) below; (d) divisionals, continuations, reissues, reexaminations, renewals, and extensions of any patent or application set forth in sub clauses (a)-(c) above; and (e) all claims of continuations-in-part that are entitled to the benefit of the priority date of the application(s) referenced in sub clause (a) above.
 
1.6                           Licensed Product.  The term “Licensed Product” shall mean any product (a) the manufacture, use, importation, sale or offer for sale of which would, in the absence of the license granted by this Agreement, infringe a Valid Claim of any of the Licensed Patent Rights, or (b) that is comprised of, utilizes or incorporates Licensed Biological Materials, or (c) that is discovered, developed or made using a Licensed Process.
 
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1.7                           Licensed Process.  The term “Licensed Process” shall mean any method or process (a) claimed in a Valid Claim of any of the Licensed Patent Rights, (b) the practice of which would, in the absence of the license granted by this Agreement, infringe a Valid Claim of any of the Licensed Patent Rights, or (c) that utilizes or incorporates Licensed Biological Materials.
 
1.8                           Net Sales.  The term “Net Sales” shall mean the gross amount invoiced by Licensee and its Affiliates or its Sublicensees, or any of them, on all sales of Licensed Products and Licensed Processes, less (a) discounts actually allowed; (b) credits for claims, allowances, retroactive price reductions or returned or rejected goods; (c) amounts invoiced and actually paid for third party transportation, insurance or shipping charges to an end user of the Licensed Product or Licensed Process; (d) any taxes or other governmental charges actually paid in connection with the sale, transportation, or delivery of Licensed Products or Licensed Processes (but excluding what are commonly known as income taxes and value-added taxes).  Net Sales shall include all consideration invoiced by Licensee, its Affiliates or its Sublicensees in exchange for any Licensed Products or Licensed Processes including without limitation any monetary payments or, with regard to any other property paid in exchange for any Licensed Products or Licensed Processes, an amount in cash equal to the fair market value of such property.  For purposes of determining Net Sales, a sale shall be deemed to have occurred when an invoice therefore is generated, the Licensed Product shipped for delivery or the Licensed Process completed or provided.  Sales of Licensed Products or Licensed Processes by and amongst Licensee, its Affiliates or Sublicensees shall be excluded, unless the Affiliates or Sublicensees consume the Licensed Products or Licensed Processes, and only the subsequent sale of such Licensed Products or Licensed Processes to unrelated parties shall be deemed Net Sales hereunder.
 
1.9                           Research Tool.  The term “Research Tool” shall mean a Licensed Product, Licensed Process or Licensed Biological Material that is designed and developed solely for use in performing basic research including, without limitation, basic research having as its primary purpose understanding the biology or pathology of cells or cell lines and diseases or disorders affecting them, or education purposes, and not for Commercial Drug Development purposes.  “ Commercial Drug Development ” includes the following activities: (a) any human clinical use or veterinary use (including, without limitation, therapeutic, prophylactic or diagnostic use); (b) any screening of compound libraries; (c) any development, manufacture or provision of any commercial pharmaceutical, healthcare or consumer products, processes or services; or (d) any provision of services related to the above (a)-(c).
 
1.10                   Sublicensee.  The term “Sublicensee” shall mean any third party (other than an Affiliate) to whom Licensee grants a sublicense with respect to the rights conferred upon Licensee under this Agreement, as contemplated by  Section 2.6 .
 
1.11                   Valid Claim.  The term “Valid Claim” shall mean a claim of any issued and unexpired patent within the Licensed Patent Rights which has not been revoked or held unenforceable, unpatentable or invalid by a decision of a court or governmental body of competent jurisdiction in a ruling that is unappealed or unappealable, and which has not been
 
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admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.  The term “Valid Claim ” shall also include the claims of a pending patent application within the Licensed Patent Rights which have not been (i) cancelled, withdrawn, abandoned or fmally disallowed without the possibility of appeal or refiling of such application, or (ii) pending for a period of more than [***] from the date of the first examination of the patent application.
 
2.                                   Grant of License.
 
2.1                           Grant of Exclusive License for Licensed Products.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, under the Licensed Patent Rights, including, without limitation, to make and have made, to use and have used, to sell and have sold, to offer to sell and have offered for sale, and to import and have imported Licensed Products in the Field.
 
2.2                           Grant of Exclusive License for Licensed Processes.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, under the Licensed Patent Rights to make and have made, to use and have used, to practice and have practiced, to offer to sell and have offered for sale, to sell and have sold, and to import and have imported any Licensed Processes in the Field.
 
2.3                           Grant of Exclusive License for Licensed Biological Materials.  TSRI hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive worldwide license, with the right to sublicense, to the Licensed Biological Materials to make and have made, to use and have used, to sell and have sold, to offer to sell and have offered for sale, and to import and have imported, and to transfer and distribute any Licensed Biological Materials in the Field.
 
2.4                           Research Tools.
 
a.                                     For clarity, Research Tools are subject to the license grants in Sections 2.1-2.3 ,  Section 2.8 , the retained rights set forth in  Sections 2.9 , and the due diligence requirements in Section 6 .
 
b.                                    If TSRI reasonably believes that a Licensed Product, Licensed Process or Licensed Biological Material should be classified as a Research Tool hereunder, [***].  If the Parties are unable to reach agreement regarding the classification within [***] after receipt of such notice, either party may request resolution of such issue in accordance with the dispute resolution process set forth in  Section 14.9  (and, during any such process, such Licensed Product, Licensed Process or Licensed Biological Material shall not be classified as a Research Tool under this Agreement).
 
c.                                     If such item is ultimately classified as a Research Tool as provided above, then Licensee shall comply with the due diligence obligations set forth in  Section 6.2.b .
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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2.5                           Covenants Not To Grant Third Party Licenses.  As of the Effective Date and until this Agreement is terminated, TSRI covenants not (i) to grant to any third party any licenses or any rights to Licensed Patent Rights in the Field, or (ii) to grant to any third party any licenses or any rights to, or to transfer samples of, Licensed Biological Materials in the Field, except as permitted under  Sections 2.8  and 2.9  hereof.
 
2.6                           Sublicensing.  Licensee shall have the right to grant and authorize sublicenses to any party with respect to the rights conferred upon Licensee under this Agreement.  Sublicensees shall not have the right to further sublicense without TSRI’s prior written consent, which will not be unreasonably withheld or delayed.  Any sublicense granted under this  Section 2.6  shall be subject in all respects to the applicable provisions contained in this Agreement as are needed to enable Licensee to comply with this Agreement (including the provisions regarding governmental interest, reservation of rights, development efforts, reporting, audit rights, indemnity, insurance, limited warranty, disclaimer, limitation of liability, confidentiality, and rights upon expiration or termination).  It is anticipated that Licensee may enter into agreements with third parties wherein some of the rights granted herein will be transferred to third parties who are performing a service for Licensee, such as a contract manufacturer or contract research organization, but specifically excluding agreements that contain the rights to sell, or offer for sale Licensed Products or Licensed Processes.  These types of service agreements are not subject in all respects to the applicable provisions contained in this Agreement as are needed to enable Licensee to comply with this Agreement but shall include the following provisions contained herein: indemnity, insurance, limited warranty, disclaimer, limitation of liability, and confidentiality.  In the event of a conflict between this Agreement and the terms of any sublicense, the terms of this Agreement shall control.  Licensee shall forward to TSRI a copy of any and all fully executed sublicense and service agreements within thirty (30) days of execution.
 
2.7                           No Other License.  This Agreement confers no license or rights by implication, estoppel, or otherwise under any patent applications or patents or other intellectual property of TSRI other than Licensed Patent Rights regardless of whether such patents or intellectual property are dominant or subordinate to Licensed Patent Rights.
 
2.8                           Governmental Interest.  Licensee and TSRI acknowledge that TSRI has received, and expects to continue to receive, funding from the United States Government in support of TSRI’s research activities.  Licensee and TSRI acknowledge and agree that their respective rights and obligations pursuant to this Agreement shall be subject to the rights of the United States Government, existing and as amended, which may arise or result from TSRI’s receipt of research support from the United States Government, including but not limited to, 37 CFR 401, the NIH Grants Policy Statement and the NIH Guidelines for Obtaining and Disseminating Biomedical Research Resources.
 
2.9                           Reservation of Rights.  TSRI reserves the right to use for any internal basic research or educational purposes any Licensed Patent Rights and Licensed Biological Materials licensed hereunder, without TSRI being obligated to pay Licensee any royalties or other compensation or to account to Licensee in any way.  During the term, including any
 
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extension thereof, of the Research Funding and Option Agreement dated February 19, 2008 between Licensee and TSRI (“ Research Agreement ”), TSRI will not enter into any agreements with any other third party for the performance of sponsored research in the same field of research described in Appendix A of such Research Agreement.
 
In addition, TSRI reserves the right to grant non-exclusive licenses to use the Licensed Patent Rights and Licensed Biological Materials for internal basic research and educational purposes to other nonprofit or academic institutions, and in no event for any Commercial Drug Development activities.  TSRI may distribute Licensed Biological Materials to other nonprofit or academic institutions (but in no event to any for-profit third party) for the uses expressly permitted above, under the terms of a Material Transfer Agreement with such institution (an “ MTA ”).  Licensee may request on an annual basis a list of the parties with whom TSRI has entered into an MTA for Licensed Patent Rights and Licensed Biological Materials, and TSRI shall provide such list within thirty (30) days of its receipt of such request by Licensee.
 
2.10                   Know-how License.  TSRI grants to Licensee a non-exclusive license to utilize the information, and materials listed on  Exhibit D  in the exploitation of the License Patent Rights.
 
3.                                   Royalties.
 
3.1                           License Issue Fee.  Licensee agrees to pay and shall pay to TSRI a noncreditable, nonrefundable license issue fee in the amount of Ten Thousand U.S. Dollars (U.S. $10,000) within fifteen (15) days of the Effective Date (the “ License Issue Fee ”).  Failure of Licensee to make this payment shall render this Agreement null and void (ab initio).
 
3.2                           Minimum Annual Royalty.  Licensee agrees to pay and shall pay to TSRI a nonrefundable minimum annual royalty in the amount of [***].  The first payment is due no later than January 1, 2010 and on January 1st of each subsequent calendar year until the first January 1 after the first commercial sale of the first Licensed Product by Licensee or any of its Sublicensees, at which time the amount of the minimum annual royalty shall become and shall remain [***] (the “ Minimum Annual Royalty Fee ”).  Such payments shall be credited against running royalties due for that calendar year and Licensee’s royalty reports shall reflect such a credit.  Such payments shall not be credited against milestone payments (if any), Sublicensing Payments (if any), nor against royalties due for any preceding or subsequent calendar year.
 
3.3                           Running Royalties.  Licensee agrees to pay and shall pay to TSRI a running royalty, on a country-by-country basis, in the following percentage amounts of Net Sales of Licensed Products sold or transferred, or Licensed Processes performed, by Licensee, Affiliates or Sublicensees,
 
a.                                     where such sale or transfer or performance in the applicable country then infringes one or more Valid Claims contained in the Licensed Patent Rights for such country: (i) [***]; (ii) [***]; (iii) [***]; and (iv) [***];  provided ,  however , where such sale or transfer or performance in the applicable country does not then infringe one or more Valid Claims contained in the Licensed Patent Rights for such
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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country, the running royalty percentages as set forth above in 3.3.a(i)-(iv), as applicable, shall be reduced by [***]; and
 
b.                                    where the manufacture, use or sale of such Licensed Product or Licensed Process is not covered by a Valid Claim in any country but utilizes, is comprised of or incorporates Licensed Biological Materials or was discovered, developed or made using any Licensed Process: [***] in any country.
 
3.4                           Royalty Increase.  Notwithstanding Section 3.3, in the event Licensee, an Affiliate, or a Sublicensee directly or indirectly initiates any action or proceeding in or before any court or patent office alleging that (i) any of the Licensed Patent Rights are invalid or unenforceable, or (ii) no royalties, Sublicense Payments, milestone payments, patent costs or other monies are due or required to be paid to TSRI under this Agreement because some or all of the Licensed Patent Rights are invalid or unenforceable (collectively “ Challenges ”), the royalty rates specified in  Section 3.3  shall be increased to the following rates: [***];  provided ,  however , that such increase shall only be applied to a Licensed Product and/or a Licensed Process covered by the Licensed Patent Right(s) that are the subject of such Challenge (and shall not be applied, for the avoidance of doubt, to a Licensed Product and/or a Licensed Process that is covered by Licensed Patent Rights that are not the subject of such Challenge).  Any such increase shall be effective during the pendency of such Challenge from the date Licensee first initiates such Challenge, and thereafter during the term of the Agreement, provided that at least one (1) claim that covers such Licensed Product or Licensed Process within the Licensed Patent Rights being Challenged is held to be valid and enforceable as a result of such Challenge.  Licensee (i) agrees that [***].
 
3.5                           Royalty Credit.  If Licensee, its Affiliate or its Sublicensee is required to license or acquire technology (including, but not limited to, patent rights and/or other intellectual property rights) from a third party in order to practice the Licensed Patent Rights or to develop or commercialize a Licensed Product or Licensed Process because the exploitation of the Licensed Patent Rights would infringe that third party’s intellectual property rights without obtaining a license to such third party technology, [***], then Licensee may deduct up to [***] of the amount paid to such third party from the payments owing to TSRI for such Licensed Product or Licensed Process [***].  The above offset right is subject to the requirement that Licensee, its Affiliate or its Sublicensee shall not decrease the royalty or other amounts owed to TSRI under this Agreement by more than [***] of the amount due.  Notwithstanding the above, Licensee, its Affiliate or its Sublicensee shall have no right to deduct or offset any royalties or other amounts with respect to any third party technology that is the subject of any cross license or similar arrangements (whether in the same or related transactions) where Licensee, its Affiliate or its Sublicensee grants or provides to such third party or its affiliates licenses, options or other rights to existing or future technology, intellectual property, research or development activities or other information or materials.  Licensee will give TSRI advance written notice of any third party arrangement sufficiently prior to seeking to deduct any payments to the third party under the terms of this  Section 3.5  in order to allow TSRI and Licensee to mutually determine whether such third party’s technology is required in order to practice or exploit the Licensed Patent Rights.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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3.6                           Combination Products.  If a Licensed Product or License Process is sold in combination with another component(s), which other component(s) if sold alone would not be subject to a royalty payment hereunder, then Net Sales as applicable, from such combination sales, for purposes of calculating the amounts due under this  Section 3 , shall be calculated by multiplying the gross selling price of the combination product by the fraction A/(A+B), where A is the gross selling price, during the royalty period in question, of the Licensed Product or Licensed Process sold separately, and B is the gross selling price, during the royalty period in question, of the other component(s), sold separately.  If the other component(s) are not sold separately during that royalty period, then the Net Sales, as applicable, on the combination product shall be as reasonably allocated between such Licensed Product and such other component(s) as mutually agreed upon by License and TSRI, based on the relative value contributed by each component;  provided ,  however , that the Net Sales allocated to such Licensed Product shall not be less than [***] of the Net Sales of such combination product.
 
3.7                           Royalty Floor.  In no event may the royalty owed to TSRI be reduced by more than [***].  Licensee may utilize either the Combination Products or the Royalty Credit calculation at its discretion, but may not use both.
 
3.8                           No Multiple Royalties.  No multiple royalties shall be due because any Licensed Product or Licensed Process is covered by more than one of the Licensed Patent Rights.  In such case, Licensee shall pay only one royalty at the highest of the applicable rates pursuant to  Section 3.3  above.
 
3.9                           Arms-Length Transactions.  On sales of Licensed Products or Licensed Processes which are made in other than an arm’s-length transaction, the value of the Net Sales attributed under this Section 3  to such a transaction shall be that which would have been received in an arm’s-length transaction, based on sales of like quality and quantity products, services or processes on or about the time of such transaction.
 
3.10                   Duration of Royalty Obligations.  The royalty obligations of Licensee as to each Licensed Product or Licensed Process shall continue on a country-by-country basis until (a) (i) the expiration of the last to expire of a Valid Claim that covers such Licensed Product or Licensed Process in that country, or (ii) in the countries where no Valid Claim was filed the royalty obligation shall run concurrent with the last to expire Valid Claim in the United States or Europe, or (b) for a Licensed Product or Licensed Process not covered by a Valid Claim in any country but [***] after the date of the first commercial sale of such Licensed Product or Licensed Process in such country.  Upon the termination of Licensee’s royalty obligations with respect to a Licensed Product or Licensed Process in a country, the license grants contained in  Sections 2.1.-2.3  shall become fully paid-up, royalty-free, perpetual and irrevocable for such Licensed Product or Licensed Process in such country.
 
3.11                   Other License Agreements.
 
a.                                     In the event that Licensee would be required to pay a Licensee Issue Fee under (i) any other license agreements arising from the Research Agreement or the Option Agreement dated January 5, 2009 between Licensee and TSRI
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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(“Option Agreement”), entered into between Licensee and TSRI (such written agreements are collectively the “ Other License Agreements ”) and (ii)  Section 3.1  under this Agreement, then the maximum aggregate Licensee Issue Fee Licensee shall be required to pay under the Other License Agreements and this Agreement shall be $[***] under the applicable sections of such agreements.
 
b.                                    In the event that Licensee would be required to pay a Minimum Annual Royalty Fee under (i) any Other License Agreements and (ii)  Section 3.2  under this Agreement, then (x) the maximum Minimum Annual Royalty Fee [***] shall be $[***] under the applicable sections of such agreements; and (y) the maximum Minimum Annual Royalty Fee [***] shall be $[***] under the applicable sections of such agreements.
 
c.                                     In the event that Licensee would, in connection with the sale or transfer of a product or service, be required to pay a royalty under (i) any Other License Agreements and (ii)  Section 3.3  under this Agreement in connection with the same sale or transfer, then Licensee shall be required under the Other License Agreements and this Agreement only to pay a single royalty under such agreements in connection with such sale or transfer, such royalty to be payable at the highest of the royalties owed to TSRI under the applicable sections of such agreements.
 
4.                                   Non-Royalty Revenues.
 
4.1                           Sublicense Payments.  Any and all revenues, equity interests and other consideration paid to Licensee in consideration of the grant to a third party of a sublicense to the Licensed Patent Rights and/or Licensed Biological Materials to any Sublicensee that is not an Affiliate of Licensee (collectively “ Sublicense Revenues ”) shall be reported and paid to TSRI by Licensee on a quarterly basis within sixty (60) days of the end of the applicable quarter in which such Sublicense Revenues are received by Licensee.  Notwithstanding the foregoing, all royalties based upon transfers or sales of Licensed Products or Licensed Processes, payments for or reimbursement for costs for research and development (to the extent itemized in the sublicense agreement), payments for or reimbursements for costs for patent prosecution, defense, enforcement and maintenance, and payments for equity and debt securities, so long as said payments reflect the current fair market value, and not a premium thereon, shall be excluded from Sublicense Revenues.  Any non-cash Sublicense Revenues received by Licensee from a Sublicensee or other third party shall be valued at its fair market value as of the date of receipt, as determined in good faith by Licensee.  Licensee shall pay to TSRI a non-creditable, non-refundable percentage of these Sublicense Revenues according to the following schedule (“ Sublicense Payments ”):
 
Sublicense Revenues received by Licensee(on a cumulative basis)	Percent of Sublicense Revenues payable to TSRI	
 	 	
Up to $[***]	[***]	
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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$[***]	[***]	
 	 	
More than $[***]	[***]	
 
Any milestone payment that Licensee makes to TSRI under Section 4.4 below upon achievement of a given milestone event by a Sublicensee would be credited against any payment due under this  Section 4.1 only with respect to Sublicense Revenues received in connection with achievement of the same milestone event.
 
To the extent that patent rights, other intellectual property rights or other rights or obligations other than Licensed Patent Rights are sublicensed or granted by Licensee, including, without limitation, pursuant to Other License Agreements, that portion of the consideration received by Licensee and subject to this Section 4.1  shall be equitably apportioned between the Licensed Patent Rights and those other rights and obligations, and such apportionment shall be reasonable and in accordance with customary standards in the industry.  Licensee shall promptly deliver to TSRI a written report setting forth such apportionment.  In the event TSRI disagrees with the determination made by Licensee, TSRI shall so notify Licensee within [***] days of receipt of Licensee’s report and the parties shall meet to discuss and resolve such disagreement in good faith.  If the parties are unable to agree in good faith as to such fair market values within thirty (30) days, then the matter shall be submitted in accordance with the dispute resolution process set forth in  Section 14.9 .
 
Notwithstanding the foregoing, with respect to any sublicense agreement, the parties agree that the percentage of “ Sublicense Revenues ” attributable to such sublicense agreement is not cumulative across Other License Agreements, regardless of the number of Other License Agreements that are applicable to such sublicense agreement, and regardless of whether sublicenses are granted under more than one Other License Agreement.
 
4.2                           Increase in Sublicense Payments.  Notwithstanding Section 4.1, in the event Licensee directly or indirectly initiates a Challenge in or before any court or patent office, the percentages specified in Section 4.1  shall be increased to the following rates:
 
Sublicense Revenues received by Licensee(on a cumulative basis)	Percent of Sublicense Revenues payable to TSRI	
 	 	
Up to $[***]	[***]	
 	 	
$[***]	[***]	
 	 	
More than $[***]	[***]	
 
provided, however, that such increase shall only be applied to Sublicense Revenues derived from the Licensed Patent Rights that are the subject of such Challenge (and shall not be applied, for the avoidance of doubt, to Sublicense Revenue derived from any Licensed Patent
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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Rights that are not the subject of such Challenge).  Any such increase shall be effective during the pendency of such Challenge from the date Licensee first initiates such Challenge, and thereafter during the term of the Agreement, provided that at least one (1) claim that covers a Licensed Product or Licensed Process within the Licensed Patent Rights being Challenged is held to be valid and enforceable as a result of such Challenge.  [***]
 
4.3                           Product Development Milestones.  Licensee agrees to pay and shall pay to TSRI the following non-creditable, non-refundable product development milestones within sixty (60) days of the end of the applicable quarter in which the first occurrence in the United States or Europe of each milestone for the first Licensed Product or first Licensed Process to meet such milestone as follows:
 
Milestone	Payment	
 
[***]
 
Each such milestone shall be payable only once under the Agreement.  In the event that any Licensed Product or Licensed Process would be subject to development milestones and payments under this Section 4.3  as well as under any Other License Agreements, then it is understood and agreed that such Licensed Product or Licensed Process shall be subject to only a single schedule of development milestones and payments under this Agreement and the Other License Agreements.
 
5.                                   Royalty Payments.
 
5.1                           Sales by Licensee.  Royalties payable pursuant to Section 3 herein, shall be payable by Licensee quarterly, within sixty (60) days after the end of each calendar quarter, based upon Net Sales during the immediately preceding calendar quarter.
 
5.2                           Sales by Sublicensees.  Licensee agrees to pay and shall pay to TSRI, or cause its Sublicensees to pay to TSRI, all royalties pursuant to  Section 3  herein resulting from the Net Sales of its Sublicensees, within sixty (60) days after the end of each calendar quarter, based on Net Sales during the immediately preceding calendar quarter.
 
6.                                   Development and Commercialization Activities.
 
6.1                           Commercial Development Plan.  Licensee has provided to TSRI its development plan attached hereto as  Exhibit C , under which Licensee intends to bring the subject matter of the Licensed Patent Rights to the point of commercial use (“ Commercial Development Plan ”), where such Commercial Development Plan is subject to the mutual agreement by Licensee and TSRI.  Pursuant to the Commercial Development Plan, Licensee shall use commercially reasonable efforts to achieve the development benchmarks specified in the Commercial Development Plan (“ Benchmarks ”) within the time periods set forth in such specified in the Commercial Development Plan.  Notwithstanding the foregoing, in the event that Licensee, its Affiliates or a Sublicensee, alone or together, has expended a minimum of [***] (excluding amounts paid to TSRI under the Research Funding and Option Agreement) per each
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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calendar year during the initial [***] period of development under such Commercial Development Plan (where, for the avoidance of doubt, such period shall commence upon the addition to this Agreement of the Licensed Patent Rights that are the subject of such Commercial Development Plan) (“ Initial Development Period ”), Licensee will be deemed to have complied with Licensee’s obligations under this  Section 6  in connection with such Commercial Development Plan for each year during such initial [***] period.
 
6.2                           Licensee’s Commercialization Activities.
 
a.                                     Licensee shall use commercially reasonable efforts and due diligence, or shall cause one or more of its Affiliates and Sublicensees to use commercially reasonable efforts and due diligence, to conduct research and achieve development of one or more Licensed Products and Licensed Processes, as promptly as is commercially feasible.  Following Licensee’s receipt of necessary regulatory approvals, Licensee or its Affiliates or Sublicensees shall earnestly and diligently produce and sell reasonable quantities of Licensed Products or Licensed Processes sufficient to meet market demands.
 
b.                                    If a Licensed Product, Licensed Process or License Biological Material is ultimately classified as a Research Tool under  Section 2.4 , then Licensee shall use commercially reasonable efforts and due diligence, or shall cause one or more of its Affiliates and Sublicensees to use commercially reasonable efforts and due diligence to distribute and make such Research Tool reasonably available to third parties on commercially reasonable terms;  provided ,  however , that Licensee shall not be obligated to make such Research Tool available pursuant to this  Section 6.2(b)  to (i) third parties if Licensee reasonably believes that the manufacture, use, offer for sale, sale or import of such Research Tool might infringe the patent or other intellectual property rights of a third party; or (ii) to for-profit third parties if Licensee can reasonably demonstrate that such Research Tool may be materially detrimental to a non-Research Tool it is currently developing and/or commercializing under this Agreement.
 
c.                                     Licensee shall keep TSRI generally informed as to Licensee’s progress in such research, development, regulatory approval, marketing, production and sale, including its efforts, if any, to sublicense Licensed Patent Rights, and Licensee shall deliver to TSRI an annual written report of such efforts by June 30th of each calendar year and such other reports of such efforts as TSRI may reasonably request.  In these annual reports, Licensee shall describe its progress in complying with the Commercial Development Plan and in achieving the Benchmarks and shall explain in detail the reasons for any variances thereof.  Licensee shall also report in writing to TSRI the dates when it has achieved the Benchmarks and the date of first commercial sale of a Licensed Product or Licensed Process in each country within thirty (30) days of such occurrences.  The contents of Licensee’s progress reports to TSRI shall be deemed to be Licensee’s Confidential Information.  Licensee may amend its Commercial Development Plan and/or the Benchmarks upon TSRI’s prior written consent, which will not be unreasonably withheld if such proposed amendment is supported by a detailed showing
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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by Licensee or its Affiliates or its Sublicensees using its best efforts and due diligence in its performance of research and development of one or more Licensed Products and Licensed Processes.
 
d.                                   Any time after the Initial Development Period (or such later time as agreed in writing by TSRI and Licensee), in the event (i) TSRI has a reasonable basis to believe, based on Licensee’s reports to TSRI, that Licensee is not using commercially reasonable efforts and due diligence as required under  Sections 6.1  and  6.2.a , or (ii) Licensee has not achieved the Benchmarks within the time provided in  Exhibit C  (as may be amended as provided above), TSRI has the right to terminate this Agreement by providing written notice to Licensee, where any such right to terminate shall be subject to a [***] cure period by Licensee.  Failure to meet any of the Benchmarks within the time provided in  Exhibit C  (as may be amended as provided above) shall not constitute a breach by Licensee of this Agreement, but shall entitle TSRI, at TSRI’s sole discretion, to terminate this Agreement as provided above or convert the licenses granted under  Sections 2.1-2.3  to a non-exclusive license upon delivery of written notice to Licensee.  Notwithstanding the foregoing, at any time after the initial one-year period of development under a Commercial Development Plan (where, for the avoidance of doubt, such period shall commence upon the addition to this Agreement of the Licensed Patent Rights that are the subject of such Commercial Development Plan), in the event TSRI has a reasonable basis to believe that Licensee is not using commercially reasonable efforts and due diligence as required as required under  Section 6.2.b , TSRI has the right to convert, subject to a [***] cure period, the license granted under  Section 2.4  in connection with such Licensed Patent Rights to a non-exclusive license upon delivery of written notice to Licensee.
 
6.3                           Reports on Revenues and Payments.  Licensee shall submit to TSRI at the time payment is due after the end of each calendar quarter, on a country-by-country and per Licensed Product and Licensed Process basis, a royalty report (the “ Royalty Report ”) setting forth for such quarter:
 
a.                                     the number of units of Licensed Products sold by Licensee, its Affiliates and each of its Sublicensees;
 
b.                                    the gross amount due or invoiced for such Licensed Products by Licensee, its Affiliates and each of its Sublicensees;
 
c.                                     the gross amounts due or invoiced for all Licensed Processes performed by Licensee, its Affiliates and each of its Sublicensees;
 
d.                                   a detailed listing of any offsets under Section 3.5 and deductions used to determine Net Sales of Licensed Products and Licensed Processes pursuant to  Section 1.8 , and calculations on Combination Products under  Section 3.6 ;
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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e.                                     the amount of royalty due under Section 3, or if no royalties are due to TSRI for any reporting period, the statement that no royalties are due and an explanation why they are not due for that quarterly period;
 
f.                                      the amount of Sublicense Revenues received by Licensee; and
 
g.                                    the amount of Sublicense Payments due under Section 4.1, or if no Sublicense Payments are due to TSRI for any reporting period, the statement that no Sublicense Payments are due and an explanation why they are not due for that quarterly period.
 
Such Royalty Report shall be certified as correct by an officer of Licensee.  The contents of such Royalty Reports shall be deemed to be Licensee’s Confidential Information.
 
6.4                           Royalty Payments.  Licensee agrees to pay and shall pay to TSRI with each Royalty Report the amount of royalty and/or Sublicense Payments due with respect to such quarter.  If multiple technologies are covered by the licenses granted hereunder, Licensee shall specify which Licensed Patent Rights and Licensed Biological Materials are utilized for each Licensed Product or Licensed Process included in the Royalty Report.  All payments due hereunder shall be deemed received when funds are credited to TSRI’s bank account and shall be payable by check or wire transfer in United States Dollars.
 
6.5                           Foreign Sales.  The remittance of royalties payable on sales outside the United States shall be payable to TSRI in United States Dollar equivalents at the official rate of exchange of the currency of the country from which the royalties are payable, as quoted in the Wall Street Journal for the last business day of the calendar quarter in which the royalties are payable.  If the transfer of or the conversion into the United States Dollar equivalents of any such remittance in any such instance is not lawful or possible, the payment of such part of the royalties as is necessary shall be made by the deposit thereof, in the currency of the country where the sale was made on which the royalty was based to the credit and account of TSRI or its nominee in any commercial bank or trust company of TSRI’s choice located in that country, prompt written notice of which shall be given by Licensee to TSRI.
 
6.6                           Foreign Taxes.  Any tax required to be withheld by Licensee under the laws of any foreign country for any royalties or other amounts due hereunder or for the accounts of TSRI shall be promptly paid by Licensee for and on behalf of TSRI to the appropriate governmental authority, and Licensee shall furnish TSRI with proof of payment of such tax together with official or other appropriate evidence issued by the applicable government authority.  Any such tax actually paid on TSRI’s behalf shall be deducted from royalty payments due TSRI.
 
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7.                                   Record Keeping.  Licensee shall keep, and shall require its Affiliates and Sublicensees to keep, accurate records (together with supporting documentation) of sales of Licensed Products and Licensed Processes as appropriate to determine the amount of royalties, Sublicense Payments, Product Development Milestone Payments and other monies due to TSRI hereunder, as well as records regarding the calculations of royalty offsets and Combination Products.  Such records shall be retained for at least five (5) years following the end of the reporting period to which such records relate.  Such records shall be available during normal business hours for examination and copying by an independent certified public accounting firm selected by TSRI and reasonably acceptable to Licensee for the purpose of verifying that Licensee’s reports and payments are accurate and that Licensee is in compliance with this Agreement.  In conducting such examinations pursuant to this  Section 7 , TSRI’s accountant shall have access to, and may disclose to TSRI, all records which TSRI reasonably believes to be relevant to the calculation of royalties under  Section 3 , non-royalty revenues under  Section 4  and Licensee’s compliance with this Agreement.  Such examination shall be at TSRI’s expense, except that if such examination shows an underreporting or underpayment of [***] or more for any twelve (12) month period, then Licensee shall pay the cost of such examination (including without limitation TSRI’s attorney’s fees, accountants fees and other costs), as well as any additional payments that would have been payable to TSRI under this Agreement had Licensee reported correctly, plus interest on such sum at the rate of [***] per month.  All payments due hereunder shall be made within thirty (30) days of Licensee’s receipt of a copy of the audit report.  TSRI may exercise its audit rights under this Section 7  no more frequently than once in any calendar year.
 
8.                                   Patent Matters.
 
8.1                           Patent Prosecution and Maintenance.  From and after the date of this Agreement, the provisions of this  Section 8  shall control the prosecution of any patent application and maintenance of any patent included within Licensed Patent Rights.  TSRI shall (a) direct and control the preparation, filing and prosecution of the United States and foreign patent applications within Licensed Patent Rights (including without limitation any reissues, reexaminations, appeals to appropriate patent offices and/or courts, interferences and foreign oppositions); and (b) maintain the patents issuing therefrom.  TSRI shall select the patent attorney, subject to Licensee’s written approval, which approval shall not be unreasonably withheld.  Both parties agree that TSRI shall have the right, at its sole discretion, to utilize TSRI’s Office of Patent Counsel in lieu of or in addition to independent counsel for patent prosecution and maintenance described herein, and the fees and expenses associated with the work done by such Office of Patent Counsel and/or independent patent counsel with regard to the preparation, filing and prosecution of patent applications and maintenance of patents included within Licensed Patent Rights shall be paid as set forth below.  Licensee shall have full rights of consultation with the patent attorney so selected on all matters relating to Licensed Patent Rights.  TSRI shall use its reasonable efforts to implement all reasonable and timely requests made by Licensee with regard to the preparation, filing, prosecution and/or maintenance of the patent applications and/or patents within Licensed Patent Rights.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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8.2                           Information to Licensee.  TSRI shall keep Licensee timely informed with regard to the patent application and maintenance processes.  TSRI shall deliver to Licensee copies of all patent applications, amendments, related correspondence, and other related matters in a timely manner.
 
8.3                           Patent Costs.  Licensee acknowledges and agrees that the licenses granted hereunder are in partial consideration for Licensee’s assumption of patent costs and expenses as described herein.  Licensee agrees to pay and shall pay for all expenses referenced in  Sections 8.1  and  8.2  hereof.  In addition, Licensee agrees to reimburse and shall reimburse TSRI for all patent costs and expenses previously paid or associated with Licensed Patent Rights incurred by TSRI up to the Effective Date, less any such patent costs and expenses previously reimbursed by Licensee under the Option Agreement.  Licensee agrees to pay and shall pay all such past and future patent expenses associated with the work on the Licensed Patent Rights performed by TSRI’s Office of Patent Counsel and/or its independent counsel within thirty (30) days after Licensee receives an itemized invoice therefor.  Failure of Licensee to pay patent costs and expenses as set forth in this  Section 8.3  shall immediately relieve TSRI from its obligation to incur any further patent costs and expenses.  For the avoidance of doubt, should Licensee not pay any patent costs and expenses due to TSRI or independent counsel within thirty (30) days after Licensee’s receipt of any itemized invoice therefor, TSRI shall have the right, at its sole discretion, to cease all patent prosecution and allow Licensed Patent Rights to go abandoned.  Such action by TSRI shall not constitute a breach of this Agreement.  Payment can be made directly to independent counsel, or to TSRI.  Licensee may elect with a minimum of ninety (90) days’ prior written notice to TSRI, to discontinue payment for the filing, prosecution and/or maintenance of any patent application and/or patent within Licensed Patent Rights.  Licensee shall remain liable for all patent prosecution and maintenance costs incurred prior to the date of notice of election and for a ninety (90) day period following the date of such notice.  Any such patent application or patent so elected shall immediately be excluded from the definition of Licensed Patent Rights and from the scope of the licenses granted under this Agreement, and all rights relating thereto shall revert to TSRI and may be freely licensed by TSRI.
 
8.4                           Ownership.  The patent applications filed and the patents obtained by TSRI pursuant to Section 8.1  hereof shall be owned solely by TSRI, assigned solely to TSRI and deemed a part of Licensed Patent Rights.
 
8.5                           TSRI Right to Pursue Patent.  If at any time during the term of this Agreement, Licensee’s rights with respect to Licensed Patent Rights are terminated in accordance with the terms of this Agreement, TSRI shall have the right to take whatever action TSRI deems appropriate to obtain or maintain the corresponding patent protection.  If TSRI pursues patents under this  Section 8.5 , Licensee agrees to use commercially reasonable efforts to cooperate fully, including by providing, at no charge to, all appropriate technical data and executing all necessary legal documents.
 
8.6                           Infringement Actions.
 
8.6.1               Prosecution of Infringements.
 
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a.                                     Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the Licensed Patent Rights by a third party and of any available evidence thereof.  After receiving notice from the other party of a possible infringement of the Licensed Patent Rights by a third party, the parties will consult with each other about whether and to what extent such third party’s products or activities are infringing upon the Licensed Patent Rights, and the extent to which the infringing products or activities are damaging sales of Licensed Products.  Within ninety (90) days of such notice, Licensee shall notify TSRI of its decision and proposed course of action, where the date of Licensee’s notice to TSRI, or the expiration of the ninety (90) day period, shall be known as the “ Commencement Date ”.  If Licensee determines, in its reasonable commercial discretion, and provides TSRI with its assessment supporting such determination, that the prosecution of such infringement would be commercially unreasonable, and TSRI does not object to such determination, then Licensee shall not have the obligation as set forth under  Section 8.6.1(d)  to prosecute such infringement and the consequences in  Section 8.6.1(d)  shall not apply;  provided ,  however , that TSRI shall then have the right, but not the obligation, to prosecute such infringement.
 
b.                                    In the event Licensee is obligated to, pursuant to Section 8.6.1(d) below, or elects to, pursuant to  8.6.1(a)  above, pursue a third party infringer, then Licensee may enter into settlements, stipulated judgments or other arrangements respecting such infringement, at its own expense, but only with TSRI’s prior written consent, which will not be unreasonably withheld or delayed.  TSRI shall permit any action to be brought in its name if required by law, and Licensee shall hold TSRI harmless from any costs, expenses or liability respecting all such infringements.  TSRI agrees to provide reasonable assistance which Licensee may require in any litigation arising in accordance with the provisions of this  Section 8.6.1 , for which Licensee shall pay to TSRI a reasonable hourly rate of compensation, including, without limitation, joining such action as a party plaintiff if necessary or desirable for initiation or continuation of such action; provided that the Licensee reimburses TSRI promptly for any reasonable costs and expenses incurred by TSRI in connection with providing such assistance.
 
c.                                     In the event Licensee is not obligated to, pursuant to Section 8.6.1(d) below, pursue a third party infringer, then Licensee shall notify TSRI in writing promptly and TSRI shall have the right, but not the obligation, to prosecute such infringement on its own behalf.  If TSRI prosecutes such infringement, then TSRI may, at its discretion, convert the licenses granted to Licensee with respect to the patent(s) at issue to a non-exclusive license.  Conversion by TSRI pursuant to this Section 8.6.1(c)  shall only be applicable to the country or countries within the Licensed Patent Rights that are the subject of TSRI’s prosecution of such infringement.
 
d.                                   Notwithstanding the foregoing Sections 8.6.1(b)-8.6.1(c), in order to maintain the licenses granted hereunder in force, Licensee shall have the first right and obligation to prosecute any and all third party infringements.  Unless Licensee
 
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and TSRI otherwise agree, pursuant to Section 8.6.1(a), that the prosecution of any third party infringement is commercially unreasonable, failure on the part of Licensee to prosecute any third party infringement within six (6) months after the Commencement Date shall be grounds for termination of the licenses granted to Licensee with respect to the patent(s) at issue, and such patent(s) shall thereafter be excluded from the definition of Licensed Patent Rights.  Termination by TSRI pursuant to this Section 8.6.1(d)  shall only be applicable to the country or countries within the Licensed Patent Rights that are the subject of Licensee’s failure to prosecute such infringement.
 
8.6.2               Allocation of Recovery.  Any damages, settlements or other recovery from an infringement action undertaken by Licensee pursuant to  Section 8.6.1  shall first be used to reimburse the parties for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (i) [***] to TSRI, (ii) and[***] to Licensee.  If Licensee fails to prosecute any such action to completion or if TSRI prosecutes any such action, then any damages, settlements, or other recovery, net of the parties’ costs and expenses incurred in such infringement action shall [***].
 
8.6.3               Defense of Infringements.  Licensee shall have the first right, but not the obligation, to defend any suits against Licensee, Affiliates or Sublicensees alleging infringement of any third party intellectual property right due to Licensee’s use of the Licensed Patent Rights or its development or commercialization of Licensed Products or Licensed Processes.  Licensee shall promptly notify TSRI in writing of such claims, and TSRI and Licensee shall confer with each other and cooperate during the defense of any such action.  If Licensee finds it necessary or desirable for TSRI to become a party to such action, TSRI shall execute all papers as may reasonably be necessary to add TSRI as a party to such action.  Licensee shall bear all costs and expenses associated with any such suit or action.  TSRI shall be entitled to, at its expense, participate in and have counsel, selected by it and reasonably acceptable to Licensee, participate in any such action.  In no event shall TSRI have any out-of-pocket liability for costs of litigation or royalties, damages and/or settlement amounts due to any third party (except for costs of its own counsel as provided above).  If the third party intellectual property right is held not to be infringed, unenforceable or invalid, any recovery of damages for such suit shall be applied first [***] shall be entitled to keep the balance remaining from any such recovery.  For the purpose of clarity, it is acknowledged that this Section 8.6.3  shall in no way limit Licensee’s obligations under  Section 9.1  to indemnify, defend and hold harmless TSRI with respect to third party claims alleging infringement of such third party’s intellectual property rights.
 
8.6.4               Declaratory Judgment Actions.  If a declaratory judgment action is brought naming TSRI or Licensee or any of its Affiliates or Sublicensees as a defendant and alleging invalidity, unenforceability or non-infringement of any Licensed Patent Rights, Licensee or TSRI, as the case may be, shall promptly notify the other party in writing and Licensee may elect, upon written notice to TSRI within twenty (20) days after receiving or giving notice of the commencement of such action, to take over the sole control of such action at its own expense.  TSRI shall be entitled to, at its expense, participate in and have counsel, selected by it and reasonably acceptable to Licensee, participate in any such action.  If Licensee does not defend
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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any such action, then TSRI shall have the right, but shall not be obligated, to defend such action at TSRI’s expense.
 
9.                                   Indemnity and Insurance.
 
9.1                           Indemnity.  Licensee hereby agrees to indemnify, defend (by counsel reasonably acceptable to TSRI) and hold harmless TSRI and any parent, subsidiary or other affiliated entity of TSRI and their trustees, directors, officers, employees, scientists, agents, successors, assigns and other representatives (collectively, the “ Indemnitees ”) from and against all claims, suits, actions, damages, liabilities, losses and other expenses, including without limitation reasonable attorney’s fees, expert witness fees and costs incurred by the Indemnitees, with respect to any third party claim [***] (collectively “ Claim ”), that arises out of or relates to (a) [***], (b) [***], (c) [***], (d) [***], (e) [***], and/or (f) Licensee’s or any Sublicensee’s failure to comply with any applicable laws, rules or regulations, except that [***].  Licensee’s obligation to defend such Claims shall apply to any third party allegations or disputes that arise out of or relate to any of the items described in subparagraphs (a) through (f) above.  Licensee shall not enter into any settlement of such Claims that imposes any obligation on TSRI, that does not unconditionally release TSRI from all liability or that would have a material adverse effect on TSRI’s reputation or business without TSRI’s prior written consent.  Notwithstanding the above, Indemnitees, at their expense, shall have the right to retain separate independent counsel to assist in defending any such Claims.  In the event Licensee fails to promptly indemnify and defend such Claims and/or pay Indemnitees’ expenses as provided above, Indemnitees shall have the right to defend themselves, and in that case, Licensee shall reimburse Indemnitees for all of their reasonable attorney’s fees, costs and damages incurred in settling or defending such Claims within thirty (30) days of each of Indemnitees’ written requests.  This indemnity shall be a direct payment obligation and not merely a reimbursement obligation of Licensee to Indemnitees.
 
9.2                           Insurance.  Licensee shall name TSRI and Indemnitees as additional insured parties on any commercial general liability and product liability insurance policies maintained by Licensee, its Affiliates, and Sublicensees applicable to the Licensed Products, Licensed Processes and Licensed Biological Materials.
 
9.2.1                Beginning at the time any such Licensed Product or Licensed Process is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by Licensee or by a Sublicensee, Licensee shall, at its sole cost and expense, procure and maintain commercial general liability insurance and product liability insurance in amounts and on terms consistent with industry standards for similarly situated pharmaceutical companies commercializing products, but in no case will such insurance be less than $3,000,000 per incident and $5,000,000 annual aggregate.  During clinical trials involving any Licensed Product, Licensed Process or Licensed Biological Material, Licensee shall, at its sole cost and expense, procure and maintain commercial general liability insurance in the same amounts and terms as specified above.  Licensee’s commercial general liability insurance shall provide coverage for personal injury, broad form property damage, advertising injury, premises-operations, products and completed operations and contractual liability including Licensee’s indemnity and other obligations under this Agreement.  Licensee may elect to self-insure all or
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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part of the foregoing on commercially reasonable terms, which must be pre-approved by TSRI in writing; however , TSRI shall be obligated to approve such self-insurance if Licensee has and continues to maintain minimum cash reserves covering such self-insurance or minimum book equity, in either case in the amount of Five Hundred Million Dollars ($500,000,000), which Licensee sufficiently demonstrates to TSRI in writing.  The insurance coverage amounts specified herein or the maintenance of such insurance policies shall not in any way limit Licensee’s indemnity or other liability under this Agreement.
 
9.2.2                In addition, Licensee, on behalf of itself and its insurance carriers, waives any and all claims and rights of recovery against TSRI and the Indemnitees, including without limitation all rights of subrogation, with respect to either party’s performance under this Agreement or for any loss of or damage to Licensee or its property or the property of others under its control.  Licensee’s commercial general liability insurance policy shall also include a waiver of subrogation consistent with this paragraph in favor of TSRI and the Indemnitees.  Licensee shall be responsible for obtaining such waiver of subrogation from its insurance carriers.  Licensee’s insurance policies shall be primary and not contributory to any insurance carried by its Sublicensees or TSRI.  Upon TSRI’s request, Licensee shall deliver to TSRI copies of insurance certificates or binders and such waiver of subrogation that complies with the requirements of this  Section 9.2.2 .  Licensee shall provide TSRI with written notice at least fifteen (15) days prior to the cancellation, non-renewal or material change in such insurance described in  Section 9.2.1 .  If Licensee does not obtain replacement insurance providing comparable coverage within such fifteen (15) day period, TSRI shall have the right to terminate this Agreement for material breach under  Section 12.3 .
 
9.2.3                Licensee shall maintain such commercial general liability insurance beyond the expiration or termination of this Agreement during (a) the period that any Licensed Product or Licensed Process is being commercially distributed or sold by Licensee or by a Sublicensee, Affiliate or agent of Licensee; and (b) a reasonable period after the period referred to in  Section 9.2.3(a)  above, which in no event shall be less than five (5) years.
 
9.3                           Pre-Challenge Requirements.  Licensee will provide written notice to TSRI at least [***] prior to Licensee directly or indirectly initiating a Challenge in or before any court or patent office.  Licensee will include with such written notice [***] to enable the parties to attempt in good faith to mutually resolve such issues.
 
10.                           Limited Warranty.
 
10.1                   Limited Warranty.  TSRI hereby represents and warrants that, to the actual knowledge of TSRI, and only as of the Effective Date, (a) it is the sole and exclusive owner, appointed agent for licensing or licensee of all right, title and interest in and to the Licensed Patent Rights that exist as of the Effective Date; (b) it has the power and authority to grant the licenses provided for herein to Licensee, and that it has not earlier granted, or assumed any obligation to grant, any rights in such Licensed Patent Rights to any third party that have not been waived that would conflict with the rights granted to Licensee herein; and (c) this Agreement constitutes the legal, valid and binding obligation of TSRI, enforceable against TSRI
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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in accordance with its terms, except with respect to creditor’s rights generally and the enforcement of equitable remedies.
 
10.2                    Licensee hereby warrants and represents this Agreement constitutes the legal, valid and binding obligation of Licensee, enforceable against Licensee in accordance with its terms, except with respect to creditor’s rights generally and the enforcement of equitable remedies.
 
10.3                   Disclaimer.  EXCEPT AS PROVIDED IN SECTION 10.1, TSRI MAKES NO OTHER WARRANTIES CONCERNING LICENSED PATENT RIGHTS, LICENSED BIOLOGICAL MATERIALS OR ANY OTHER MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR ARISING OUT OF COURSE OF CONDUCT OR TRADE CUSTOM OR USAGE, AND DISCLAIMS ALL SUCH EXPRESS OR IMPLIED WARRANTIES.  TSRI MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY OR SCOPE OF LICENSED PATENT RIGHTS, OR THAT ANY LICENSED PRODUCT, LICENSED PROCESS OR LICENSED BIOLOGICAL MATERIAL WILL BE FREE FROM AN INFRINGEMENT ON PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING UPON ANY LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL MATERIALS COVERED BY THIS AGREEMENT.  FURTHER, TSRI HAS MADE NO INVESTIGATION AND MAKES NO REPRESENTATION THAT THE LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL MATERIALS ARE SUITABLE FOR LICENSEE’S PURPOSES.
 
10.4                   Limitation of Liability.  IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF PROFITS OR EXPECTED SAVINGS) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER, EXCEPT FOR LIABILITY FOR BREACH BY SUCH PARTY OF ANY OF THE CONFIDENTIALITY PROVISIONS IN  SECTION 11  AND EXCEPT FOR LICENSEE’S INDEMNITY UNDER  SECTION 9.1 .  TSRI’S AGGREGATE LIABILITY, IF ANY, FOR ALL DAMAGES OF ANY KIND RELATING TO THIS AGREEMENT OR ITS SUBJECT MATTER SHALL NOT EXCEED THE AMOUNT PAID BY LICENSEE TO TSRI UNDER THIS AGREEMENT.  THE FOREGOING EXCLUSIONS AND LIMITATIONS SHALL APPLY TO ALL CLAIMS AND ACTIONS OF ANY KIND AND ON ANY THEORY OF LIABILITY, WHETHER BASED ON CONTRACT, TORT (INCLUDING, BUT NOT LIMITED TO NEGLIGENCE OR STRICT LIABILITY), OR ANY OTHER GROUNDS, AND REGARDLESS OF WHETHER A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.  THE PARTIES FURTHER AGREE THAT EACH WARRANTY DISCLAIMER, EXCLUSION OF DAMAGES OR OTHER LIMITATION OF LIABILITY HEREIN IS INTENDED TO BE SEVERABLE AND INDEPENDENT OF THE OTHER PROVISIONS
 
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BECAUSE THEY EACH REPRESENT SEPARATE ELEMENTS OF RISK ALLOCATION BETWEEN THE PARTIES.
 
11.                           Confidentiality and Publication.
 
11.1                   Treatment of Confidential Information.  The parties agree that during the term of this Agreement, and for a period of five (5) years after this Agreement terminates, a party receiving Confidential Information of the other party will (a) maintain in confidence such Confidential Information to the same extent such party maintains its own proprietary information; (b) not disclose such Confidential Information to any third party without prior written consent of the other party; and (c) not use such Confidential Information for any purpose except those permitted by this Agreement.  Notwithstanding the foregoing, if a party is required by law, regulation or court order to disclose Confidential Information of the other party, the party required to make such disclosure shall (i) promptly send a copy of the order or notice to the other party not later than ten (10) days before the proposed disclosure or such shorter period of time as may be reasonably practical under the circumstances; (ii) cooperate with the other party if the other party wishes to object or condition such disclosure through a protective order or otherwise; (iii) limit the extent of such disclosure to the minimum required to comply with the order or notice; and (iv) use reasonable efforts to seek confidential treatment (i.e., filing “under seal”) for that disclosure.  In addition, a party may disclose Confidential Information of the other party to its Affiliates and employees, to Sublicensees and potential Sublicensees (in the case of Licensee), or to other third parties who are investors or potential investors in connection with due diligence or similar investigations or in confidential financing documents, provided, in each case, that any such Affiliate, employee, Sublicensee, potential Sublicensee or other third party investor or potential investor agrees in writing to be bound by terms of confidentiality and non-use at least as stringent as those set forth in this  Section 11 , but with no further right to disclose or otherwise distribute TSRI’s Confidential Information.
 
11.2                   Publications.  Licensee agrees that TSRI shall have the right to publish in accordance with its general policies, and that this Agreement shall not restrict, in any fashion, TSRI’s right to publish.
 
11.3                   Publicity.  Except as otherwise provided herein or required by any applicable law, rule or regulation (including, without limitation, rules of the U.S. Securities and Exchange Commission and rules of any stock exchange upon which Licensee’s securities may be listed), no party shall originate any publication, news release or other public announcement, written or oral, whether in the public press, stockholders’ reports, or otherwise, relating to this Agreement or to any sublicense hereunder, or to the performance hereunder or under any such sublicense agreements, without the prior written approval of the other party, which approval shall not be unreasonably withheld.  Scientific publications published in accordance with  Section 11.2  of this Agreement shall not be construed as publicity governed by this Section 11.3 .
 
12.                           Term and Termination.
 
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12.1                   Term.  Unless terminated sooner in accordance with the terms set forth herein, this Agreement, and the licenses granted hereunder, shall terminate upon termination of the royalty obligations as provided in  Section 3.10  hereof.
 
12.2                   Termination Upon Mutual Agreement.  This Agreement may be terminated by mutual written consent of both parties.
 
12.3                   Termination by TSRI.  TSRI may terminate this Agreement as follows:
 
a.                                     If Licensee does not make a payment due hereunder and fails to cure such non-payment (including the payment of interest in accordance with  Section 14.2 ) within thirty (30) days after the date of notice in writing of such non-payment by TSRI;
 
b.                                    If Licensee defaults upon its indemnification and insurance obligations under Section 9  and the default has not been remedied within thirty (30) days after the date of notice in writing of such default by TSRI;
 
c.                                     As provided in Section 6.2;
 
d.                                   Upon written notice to Licensee in the event of the filing of bankruptcy or the bankruptcy of Licensee or the appointment of a receiver of any of Licensee’s assets, or the making by Licensee of any assignment for the benefit of creditors, or the institution of any proceedings against Licensee under any bankruptcy or insolvency laws;
 
e.                                     If Licensee is convicted of a felony relating to the development, manufacture, use, marketing, distribution or sale of Licensed Products, Licensed Processes or Licensed Biological Materials;
 
f.                                      In the event Licensee brings any Challenge(s), TSRI has the right to immediately terminate this Agreement without any liability and without any opportunity to cure by Licensee upon written notice to Licensee.  In the event that Sublicensee brings any Challenge(s), Licensee agrees that it will terminate such Sublicense;
 
g.                                    Except as provided in subparagraphs (a) - (f) above, if Licensee commits a material breach of any of its obligations under this Agreement and the material breach has not been remedied within ninety (90) days after the date of notice in writing of such default by TSRI.
 
12.4                   Termination by Licensee.  Licensee may terminate this Agreement by giving ninety (90) days’ advance written notice of termination to TSRI.
 
12.5                   Rights Upon Expiration.  Neither party shall have any further rights or obligations upon the expiration of this Agreement upon its regularly scheduled expiration date,
 
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other than the obligation of Licensee to make any and all reports and payments due under Articles 3 and/or 4  with respect to events that occurred prior to such expiration in accordance with  Sections 6.3 ,  6.4 ,  6.5  and 6.6 , and to reimburse patent costs and expenses accrued prior to expiration in accordance with  Section 8.3 .  Notwithstanding the above,  Sections 2.7 ,  2.8 ,  2.9 ,  2.10 ,  7 ,  9.1 ,  9.2 ,  10.3 ,  10.4 ,  11 ,  12.5 ,  12.8  and  14 shall also survive the expiration of this Agreement.
 
12.6                   Rights Upon Termination.
 
12.6.1        Notwithstanding any other provision of this Agreement, upon any termination of this Agreement prior to the regularly scheduled expiration date of this Agreement, the licenses granted hereunder shall terminate and revert to TSRI.  Except as otherwise provided in  Section 12.7  of this Agreement with respect to work-in-progress, upon such termination, Licensee shall have no further right to develop, manufacture or market any Licensed Product, Licensed Process, or to otherwise use any Licensed Patent Rights or any Licensed Biological Materials.  Upon any such termination, Licensee shall promptly return all materials, samples, documents, information, and other materials which embody or disclose Licensed Patent Rights or any Licensed Biological Materials;  provided ,  however , that Licensee shall not be obligated to provide TSRI with proprietary information which Licensee can show that it independently developed.  Any such termination shall not relieve either party from any obligations accrued to the date of such termination, including without limitation the obligation of Licensee to make any and all reports and payments due under Articles 3  and/or  4  with respect to events that occurred prior to such termination or as provided in Section 12.7 , in each case in accordance with  Sections 6.3 ,  6.4 ,  6.5  and  6.6 , and to reimburse patent costs and expenses accrued prior to termination in accordance with  Section 8.3 .  Notwithstanding the above, Sections 2.7 ,  2.8 ,  2.9 ,  2.10 ,  7 ,  9.1 ,  9.2 ,  10.3 ,  10.4 ,  11 ,  12.6 ,  12.8  and  14  shall also survive the termination of this Agreement.
 
12.6.2        Any sublicense shall, upon the delivery of written notice by Sublicensee, except those Sublicensee’s in default, to TSRI prior to termination of this Agreement, survive termination of this Agreement on the same terms and conditions set forth in the applicable sublicense for a period of [***] following termination of this Agreement (the “ Temporary License Period ”);  provided however , that if such written notice is not delivered prior to termination of this Agreement, such sublicense shall immediately terminate upon termination of this Agreement.  In the event a Sublicensee provides such written notice, as a condition precedent to TSRI’s obligation to grant the direct license to such Sublicensee as set forth below, such Sublicensee must pay to TSRI all past due royalties, non-royalty revenue, patent costs and all other monies owed by Licensee to TSRI under this Agreement.  Upon TSRI’s receipt of all such outstanding monies, TSRI shall enter into a license agreement directly with such Sublicensee (the “ New License Agreement ”).  Each New License Agreement shall be subject to the same non-financial terms and conditions as those in this Agreement;  provided ,  however , that each New License Agreement shall contain substantially the same terms and conditions regarding sublicense scope, sublicense territory, duration of sublicense grant, and diligence obligations of the Sublicensee as the sublicense agreement between such Sublicensee and Licensee.  Notwithstanding the above, TSRI’s obligation to enter into a New License
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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Agreement is expressly conditioned upon each of the following: (i) Sublicensee shall agree in the New License Agreement to terms providing that in no event shall TSRI be liable to Sublicensee for any actual or alleged breach of such sublicense agreement by Licensee; (ii) TSRI shall not have any obligations to such Sublicensee other than TSRI’s obligations to Licensee as set forth herein; (iii) each New License Agreement shall be subordinate and comply in all respects to the applicable provisions of this Agreement, and the financial terms of each New License Agreement, including without limitation, the running royalty rate, shall be consistent with the terms of the sublicense agreement with Licensee, but shall in no event be less than the corresponding financial terms set forth in this Agreement, including without limitation the obligation to pay minimum annual royalties and other monetary payments required to be made by Licensee to TSRI; and (iv) in no event shall TSRI be obliged to accept provisions in the New License Agreement (a) unless such provisions correspond to rights granted by Licensee to Sublicensee in conformance with this Agreement, and such provisions are not in conflict with the rights, duties and obligations accruing to Licensee under this Agreement; or (b) where such provisions are inconsistent with the legal obligations under any other sublicense agreement granted by Licensee, or by applicable federal, state or local statute or regulation.  In the event Sublicensee does not comply with the provisions of this  Section 12.6.2 , such Sublicensee’s sublicense shall immediately terminate upon expiration of the Temporary License Period.  Licensee must include or specifically reference this  Section 12.6.2  in each of its sublicense agreements.
 
12.7                   Work-in-Progress.  Upon any early termination of the license granted hereunder in accordance with this Agreement, Licensee shall be entitled to finish any work-in-progress and to sell any completed inventory of Licensed Products covered by such license which remain on hand as of the date of the termination, so long as Licensee sells such inventory in the normal course of business and at regular selling prices and pays to TSRI the royalties applicable to such subsequent sales in accordance with the terms and conditions as set forth in this Agreement, provided that no such sales shall be permitted after the expiration of six (6) months after the date of termination.
 
12.8                   Final Royalty Report.  Upon termination or expiration of this Agreement, Licensee shall submit a final report to TSRI, and any payments due TSRI and unreimbursed patent expenses invoiced by TSRI shall become immediately payable.
 
13.                           Assignment; Successors.
 
13.1                   Assignment.  Any and all assignments of this Agreement or any rights granted hereunder by Licensee without TSRI’s prior written consent are void, except either party may assign this Agreement or rights granted hereunder without the other party’s prior written consent (i) to an Affiliate of the assigning party; or (ii) to a successor in connection with the merger, consolidation or sale of all or substantially all of its assets to which this Agreement relates.
 
13.2                   Binding Upon Successors and Assigns.  Subject to the limitations on assignment herein, this Agreement shall be binding upon and inure to the benefit of any successors in interest and assigns of TSRI and Licensee.  Any such successor or assignee of
 
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Licensee’s interest shall expressly assume in writing the performance of all the terms and conditions of this Agreement to be performed by Licensee.
 
14.                           General Provisions.
 
14.1                   Independent Contractors.  The relationship between TSRI and Licensee is that of independent contractors.  TSRI and Licensee are not joint venturers, partners, principal and agent, master and servant, employer or employee, and have no other relationship other than independent contracting parties.  TSRI and Licensee shall have no power to bind or obligate each other in any manner, other than as is expressly set forth in this Agreement.
 
14.2                   Late Payments.  Late payments of any and all payments due hereunder shall be subject to a charge of [***] per month, or [***] whichever is greater.
 
14.3                   Governmental Approvals and Marketing of Licensed Products.  Licensee shall be responsible for obtaining all necessary governmental approvals for the development, production, distribution, performance, sale and use of any Licensed Product or Licensed Process, at Licensee’s expense, including, without limitation, any safety studies.  Licensee shall have sole responsibility for any warning labels, packaging and instructions as to the use of Licensed Products and for the quality control for any Licensed Products or Licensed Processes.
 
14.4                   Patent Marking.  To the extent required by applicable law, Licensee shall mark all Licensed Products or their containers in accordance with the applicable patent marking laws.
 
14.5                   No Use of Name.  The use of the name “The Scripps Research Institute”, “ Scripps ”, “ TSRI ” or any variation thereof in connection with the advertising, distribution, sale or performance of Licensed Products or Licensed Processes is expressly prohibited.  The foregoing notwithstanding, without the consent of TSRI, Licensee may state that it is licensed by TSRI under the Licensed Patent Rights and identify the inventors, their affiliation with TSRI and their relationship to Licensee, and further, Licensee may comply with disclosure requirements of all applicable laws relating to its business, including, without limitation, United Sates and state securities laws.
 
14.6                   U.S. Manufacture.  Licensee agrees to abide by the Preference for United States Industry as set forth in 37 CFR 401.14 (I), which includes Licensee’s agreement that any Licensed Product or Licensed Process sold in the United States shall be manufactured substantially in the United States.
 
14.7                   Foreign Registration.  Licensee agrees to register this Agreement with any foreign governmental agency which requires such registration, and Licensee shall pay all costs and legal fees in connection therewith.  In addition, Licensee shall ensure that all foreign laws affecting this Agreement or the sale of Licensed Products or Licensed Processes are fully satisfied.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission
 
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14.8                   Use of Biological Materials.  Licensee agrees that its use of any Licensed Biological Materials shall comply with all applicable statutes, regulations, and guidelines.  Licensee agrees not to use the Licensed Biological Materials for research involving human subjects or clinical trials in the United States without complying with 21 CFR 50 and 45 CFR 46. Licensee agrees not to use the Licensed Biological Materials for research involving human subjects or clinical trials outside of the United States without complying with the applicable regulations of the appropriate national control authorities.
 
14.9                   Arbitration.  Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, including without limitation any and all Challenges, shall be settled by binding confidential arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“ AAA ”), and the procedures set forth below.  In the event of any inconsistency between the Rules of AAA and the procedures set forth below, the procedures set forth below shall control.  Judgment upon the award rendered by the arbitrators may be enforced in any court having jurisdiction thereof.
 
14.9.1       Location.  The location of the arbitration shall be in the County of San Diego.  TSRI and Licensee hereby irrevocably submit to the exclusive jurisdiction and venue of the American Arbitration Association arbitration panel selected by the parties and located in San Diego County, California for any dispute regarding this Agreement, including without limitation any Challenges, and to the exclusive jurisdiction and venue of the federal and state courts located in San Diego County, California for any action or proceeding to enforce an arbitration award or as otherwise provided in  Section 14.9.5  below, and waive any right to contest or otherwise object to such jurisdiction or venue.
 
14.9.2       Selection of Arbitrators.  The arbitration shall be conducted by a panel of three neutral arbitrators who are independent and disinterested with respect to the parties, this Agreement, and the outcome of the arbitration.  Each party shall appoint one neutral arbitrator, and these two arbitrators so selected by the parties shall then select the third arbitrator, and all arbitrators must have at least ten (10) years experience in mediating or arbitrating cases regarding the same or substantially similar subject matter as the dispute between Licensee and TSRI.  If one party has given written notice to the other party as to the identity of the arbitrator appointed by the party, and the party thereafter makes a written demand on the other party to appoint its designated arbitrator within the next ten days, and the other party fails to appoint its designated arbitrator within ten days after receiving said written demand, then the arbitrator who has already been designated shall appoint the other two arbitrators.
 
14.9.3       Discovery.  The arbitrators shall decide any disputes and shall control the process concerning these pre-hearing discovery matters.  Pursuant to the Rules of AAA, the parties may subpoena witnesses and documents for presentation at the hearing.
 
14.9.4       Case Management.  Prompt resolution of any dispute is important to both parties; and the parties agree that the arbitration of any dispute shall be conducted expeditiously.  The arbitrators are instructed and directed to assume case management initiative and control over the arbitration process (including scheduling of events, pre-hearing discovery
 
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and activities, and the conduct of the hearing), in order to complete the arbitration as expeditiously as is reasonably practical for obtaining a just resolution of the dispute.
 
14.9.5       Remedies.  The arbitrators may grant any legal or equitable remedy or relief that the arbitrators deem just and equitable, to the same extent that remedies or relief could be granted by a state or federal court,  provided however , that no punitive damages may be awarded.  No court action shall be maintained seeking punitive damages.  The decision of any two of the three arbitrators appointed shall be binding upon the parties.  Notwithstanding anything to the contrary in this Agreement, prior to or while an arbitration proceeding is pending, either party has the right to seek and obtain injunctive and other equitable relief from a court of competent jurisdiction to enforce that party’s rights hereunder.
 
14.9.6       Expenses.  The expenses of the arbitration, including the arbitrators’ fees, expert witness fees, and attorney’s fees, may be awarded to the prevailing party, in the discretion of the arbitrators, or may be apportioned between the parties in any manner deemed appropriate by the arbitrators.  Unless and until the arbitrators decide that one party is to pay for all (or a share) of such expenses, both parties shall share equally in the payment of the arbitrators’ fees as and when billed by the arbitrators.
 
14.9.7       Confidentiality.  Except as set forth below, and as necessary to obtain or enforce a judgment upon any arbitration award, the parties shall keep confidential the fact of the arbitration, the dispute being arbitrated, and the decision of the arbitrators.  Notwithstanding the foregoing, the parties may disclose information about the arbitration to persons who have a need to know, such as directors, trustees, management employees, witnesses, experts, investors, attorneys, lenders, insurers, and others who may be directly affected.  Additionally, if a party has stock which is publicly traded, the party may make such disclosures as are required by applicable securities laws or rules or regulations of any stock exchange upon which securities are traded or listed, but will use commercially reasonable efforts to seek confidential treatment for such disclosure.
 
14.10           Entire Agreement; Modification.  This Agreement and all of the attached Exhibits set forth the entire agreement and understanding between the parties as to the subject matter hereof, and supersede all prior or contemporaneous agreements or understandings, whether oral or written.  There shall be no amendments or modifications to this Agreement, except by a written document which is signed by both parties.
 
14.11           California Law.  This Agreement shall be construed and enforced in accordance with the laws of the State of California without regard to its conflicts or choice of laws principles thereof.
 
14.12           Headings.  The headings for each article and section in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular article or section.
 
14.13           Severability.  Should any one or more of the provisions of this Agreement be held invalid or unenforceable by a court of competent jurisdiction, it shall be considered
 
29

 
severed from this Agreement and shall not serve to invalidate the remaining provisions thereof.  The parties shall make a good faith effort to replace any invalid or unenforceable provision with a valid and enforceable one such that the objectives contemplated by them when entering this Agreement may be realized.
 
14.14           No Waiver.  Any delay in enforcing a party’s rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such party’s rights to the future enforcement of its rights under this Agreement, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time.
 
14.15           Name.  Whenever there has been an assignment or a sublicense by Licensee as permitted by this Agreement, the term “ Licensee ” as used in this Agreement shall also include and refer to, if appropriate, such assignee or Sublicensee (to the extent of such assignment or sublicense).
 
14.16           Attorneys’ Fees.  In the event of a dispute between the parties hereto or in the event of any default hereunder, the party prevailing in the resolution of any such dispute or default shall be entitled to recover its reasonable attorneys’ fees and other costs incurred in connection with resolving such dispute or default.  Notwithstanding anything to the contrary herein, the parties agree that this Section 14.16  shall not apply and attorney’s fees and costs shall not be awarded to either party with respect to any Challenge or any action where Licensee alleges that it is not required to comply with or perform some or all of the provisions of this Agreement based upon a good faith claim that any of the Licensed Patent Rights are invalid or unenforceable.  TSRI and Licensee each represent that it has been represented by its own counsel in the negotiation and execution of this Agreement.  Each party further represents that it has relied solely on the advice and representation of its respective counsel in agreeing to this  Section 14.16  and all of the other provisions of this Agreement.
 
14.17           Notices.  Any notices required by this Agreement shall be in writing, shall specifically refer to this Agreement and shall be sent by registered or certified airmail, postage prepaid, or by facsimile machine, charges prepaid, or by overnight courier, postage prepaid and shall be forwarded to the respective addresses set forth below unless subsequently changed by written notice to the other party:
 
For TSRI:	The Scripps Research Institute
10550 North Torrey Pines Road, TPC-9
La Jolla, California 92037
Attention: Vice President, Business Development
Fax No.: (858)784-9910	
 	 	
with a copy to:	The Scripps Research Institute
10550 North Torrey Pines Road, TPC-8
La Jolla, California 92037
Attention: Chief Business Counsel
Fax No.: (858) 784-9399	
 
30

 
For Licensee:	Fate Therapeutics, Inc.
10931 North Torrey Pines Road, Suite 107
La Jolla, CA 92037
Attention: Chief Financial Officer
Fax No.: (858) 875-1843	
 	 	
With a copy to:	Goodwin Procter LLP
Exchange Place
Boston, MA 02109
Attn: Kingsley L. Taft, Esq.
Telephone: (617) 570-1000
Facsimile: (6117) 523-1231	
 
Notices shall be deemed delivered upon the earlier of (a) when received; (b) three (3) days after deposit into the U.S. mail; (c) the date notice is sent via telefax, telex or cable; or (d) the day immediately following delivery to an overnight courier guaranteeing next-day delivery (except Sunday and holidays).
 
14.18           Compliance with U.S. Laws.  Nothing contained in this Agreement shall require or permit TSRI or Licensee to do any act inconsistent with the requirements of any United States law, regulation or executive order as the same may be in effect from time to time.
 
31

 
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date set forth above.
 
TSRI:	 	LICENSEE:	

THE SCRIPPS RESEARCH INSTITUTE	 	FATE THERAPEUTICS, INC.	

By:	/s/ Scott Forrest	 	By:	/s/ J. Scott Wolchko	

Title: Senior Director, Business & Technology	 	Title:	CFO	
Development	 	 	 	

 
EXHIBIT A
 
LICENSED BIOLOGICAL MATERIALS
 
[***]
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

 
EXHIBIT B
 
LICENSED PATENT RIGHTS
 
[***]
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

 
EXHIBIT C
 
LICENSEE’S COMMERCIAL DEVELOPMENT PLAN
(including Benchmarks)
 
Benchmark
 	Timeline
 	
[***]
 	[***]
 	
[***]	[***]	
[***]	[***]	
[***]	[***]	
[***]	[***]	
 
Notwithstanding anything to the contrary in the Agreement, in the event that Licensee is unable to achieve a given Benchmark according to its applicable timeline, Licensee may, on a one-time only basis under the Agreement, extend the timeline by [***] by making a [***] payment to TSRI (where, for the avoidance of doubt, all later occurring Benchmark(s) shall also be similarly extended by [***].
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

 
EXHIBIT D
 
INFORMATION AND MATERIALS
 
TSRI and Licensee shall add items to this Exhibit D upon mutual agreement.
 
*                     Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

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Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

        We consent to the incorporation by reference in the following Registration Statements

1.
Registration Statement (Form S-3 No. 333-199107) of Fate Therapeutics, Inc., and

2.
Registration Statements (Form S-8 Nos. 333-191576 and 333-194625) pertaining to the 2007 Equity Incentive Plan, the 2013 Stock Option and Incentive Plan, and 2013 Employee Stock Purchase Plan of Fate Therapeutics, Inc.;
of our report dated March 12, 2015, with respect to the consolidated financial statements of Fate Therapeutics, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2014.

/s/ Ernst & Young

San Diego, CA
March 12, 2015

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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm

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Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE 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, Christian Weyer, 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.
 	 	 	
Date: March 12, 2015	 	/s/ CHRISTIAN WEYER

Christian Weyer
President and Chief Executive Officer
(Principal Executive Officer)	

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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE 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

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Exhibit 31.2

CERTIFICATION OF 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.
 	 	 	
Date: March 12, 2015	 	/s/ J. SCOTT WOLCHKO

J. Scott Wolchko
Chief Financial Officer and Chief Operating Officer
(Principal Financial Officer)	

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Exhibit 31.2
CERTIFICATION OF 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

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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, Christian Weyer, Chief Executive 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:

(1)
this Annual Report on Form 10-K of the Registrant, to which this certification is attached as an exhibit (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: March 12, 2015

 	 	/s/ CHRISTIAN WEYER

Christian Weyer
President and Chief Executive Officer	

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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

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Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        I, J. Scott Wolchko, Chief 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:

(1)
this Annual Report on Form 10-K of the Registrant, to which this certification is attached as an exhibit (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: March 12, 2015

 	 	/s/ J. SCOTT WOLCHKO

J. Scott Wolchko
Chief Financial Officer and Chief Operating Officer	

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Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002