UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

OR

 

¨   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: 001-35005

 

ASSEMBLY BIOSCIENCES, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware 20-8729264
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

 

11711 N. Meridian St., Suite 310  
Carmel, Indiana 46032
(Address of principal executive offices) (zip code)

 

(317) 210-9311

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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      x     NO        ¨

 

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

 

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

 

Large Accelerated Filer ¨   Accelerated Filer   x
Non-accelerated Filer ¨   Smaller Reporting Company   ¨
Emerging growth company ¨      

 

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

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨    NO x

 

As of November 5, 2018, there were 25,463,172 shares of the registrant’s common stock outstanding.

 

 

  

 

 

 

Index

 

  Page
Number
PART I: FINANCIAL INFORMATION  
   
Item 1. Condensed Consolidated Financial Statements (unaudited) 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
   
Item 4. Controls and Procedures 20
   
PART II: OTHER INFORMATION 21
   
Item 1. Legal Proceedings 21
   
Item 1A. Risk Factors 21
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
   
Item 3. Defaults Upon Senior Securities 47
   
Item 4. Mine Safety Disclosures 47
   
Item 5. Other Information 47
   
Item 6. Exhibits 47
   
SIGNATURES 47

 

 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $119,752,339   $82,033,209 
Marketable securities, at fair value   114,187,793    37,914,482 
Accounts receivable from collaboration   2,589,862    2,273,421 
Prepaid expenses and other current assets   3,342,759    897,400 
Total current assets   239,872,753    123,118,512 
           
Long-term assets          
Marketable securities, at fair value   -    3,347,213 
Property, plant and equipment, net   515,798    860,026 
Security deposits   950,515    339,558 
Intangible assets   29,000,000    29,000,000 
Goodwill   12,638,136    12,638,136 
Total long-term assets   43,104,449    46,184,933 
Total assets  $282,977,202   $169,303,445 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $2,987,565   $2,123,939 
Accrued expenses   6,517,053    6,139,000 
Deferred revenue - short-term   5,105,104    5,229,227 
Total current liabilities   14,609,722    13,492,166 
           
Long-term liabilities          
Deferred rent   7,903    - 
Deferred tax liabilities   2,107,300    2,135,802 
Deferred revenue - long-term   36,819,053    40,555,708 
Total long-term liabilities   38,934,256    42,691,510 
Total liabilities   53,543,978    56,183,676 
           
Commitments and contingencies          
           
Stockholders' equity          
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding   -    - 
Common stock, $0.001 par value; 100,000,000 and 50,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 25,460,122 and 20,137,974 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively   25,460    20,138 
Additional paid-in capital   545,388,704    364,528,037 
Accumulated other comprehensive loss   (354,896)   (392,391)
Accumulated deficit   (315,626,044)   (251,036,015)
Total stockholders' equity   229,433,224    113,119,769 
Total liabilities and stockholders' equity  $282,977,202   $169,303,445 

 

See Notes to Condensed Consolidated Financial Statements.

 

 1 

 

 

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Collaboration revenue  $4,285,848   $2,659,613   $11,068,773   $5,703,293 
                     
 Operating expenses:                    
 Research and development   19,108,918    10,929,436    51,490,220    33,628,196 
 General and administrative   7,752,493    4,180,357    25,992,186    12,022,357 
 Total operating expenses   26,861,411    15,109,793    77,482,406    45,650,553 
 Loss from operations   (22,575,563)   (12,450,180)   (66,413,633)   (39,947,260)
                     
 Other income (expenses)                    
 Interest and other income   1,116,053    241,326    2,015,475    617,668 
 Realized loss from marketable securities   (82,070)   (99,068)   (232,320)   (577,300)
 Total other income   1,033,983    142,258    1,783,155    40,368 
 Loss before income taxes   (21,541,580)   (12,307,922)   (64,630,478)   (39,906,892)
                     
 Income tax benefit   6,542    35,903    40,449    105,416 
 Net loss  $(21,535,038)  $(12,272,019)  $(64,590,029)  $(39,801,476)
                     
 Other comprehensive (loss) income                    
 Unrealized loss recognized in accumulated other comprehensive loss before reclassification, net of tax benefit of $50,664, $31,844, $44,192 and $89,281, respectively   (8,749)   (51,203)   (138,686)   (143,562)
 Reclassification adjustment of unrealized loss included in net loss, net of tax expense of $56,139, $37,987, $56,139 and $221,358, respectively   25,931    61,081    176,181    355,942 
 Comprehensive loss  $(21,517,856)  $(12,262,141)  $(64,552,534)  $(39,589,096)
                     
Net loss per share, basic and diluted  $(0.87)  $(0.71)  $(2.95)  $(2.30)
                     
Weighted average common shares outstanding, basic and diluted   24,878,413    17,367,523    21,900,943    17,326,506 

 

See Notes to Condensed Consolidated Financial Statements.

 

 2 

 

 

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

   

   Nine Months Ended September 30, 
   2018   2017 
Cash flows from operating activities          
Net loss  $(64,590,029)  $(39,801,476)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   473,430    124,676 
Stock-based compensation   21,677,510    5,833,010 
Amortization of premium (discount) on investment securities, net   232,320    577,300 
Deferred income tax benefit   (40,449)   (105,416)
Changes in operating assets and liabilities:          
Accounts receivable from collaboration   (316,441)   (1,400,374)
Prepaid expenses and other current assets   (2,445,359)   (340,158)
Accounts payable   863,626    (1,497,524)
Accrued expenses   378,053    1,599,689 
Deferred revenue   (3,860,778)   46,810,840 
Deferred rent   7,903    - 
Security deposits   (610,957)   (170,423)
Net cash (used in) provided by operating activities   (48,231,171)   11,630,144 
           
Cash flows from investing activities          
Purchases of fixed assets   (129,202)   (503,115)
Purchases of marketable securities   (115,029,814)   (40,022,384)
Redemptions of marketable securities   41,920,838    26,556,566 
Net cash used in investing activities   (73,238,178)   (13,968,933)
           
Cash flows from financing activities          
Proceeds from common stock sold, net of underwriters' discounts and cost   155,425,765    - 
Proceeds from the exercise of stock options   3,762,714    1,010,936 
Net cash provided by financing activities   159,188,479    1,010,936 
           
Net increase (decrease) in cash and cash equivalents   37,719,130    (1,327,853)
Cash and cash equivalents at the beginning of the period   82,033,209    28,575,085 
Cash and cash equivalents at the end of the period  $119,752,339   $27,247,232 
           
Supplemental disclosure of cash flow information:          
Shares issued for option exercise - receivable  $-   $8 
Change in unrealized gain on marketable securities available-for-sale, before tax expense  $49,442   $344,457 

 

See Notes to Condensed Consolidated Financial Statements.

 

 3 

 

 

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

   Common Stock   Additional   Accumulated Other   Accumulated   Total Stockholders' 
   Shares   Amount   Paid-in Capital   Comprehensive Loss   Deficit   Equity 
Balance as of December 31, 2017   20,137,974   $20,138   $364,528,037   $(392,391)  $(251,036,015)  $113,119,769 
Proceeds from common stock sold, net of underwriters' discounts and cost   4,600,000    4,600    155,421,165    -    -    155,425,765 
Proceeds from the exercise of stock options   721,210    721    3,761,993    -    -    3,762,714 
Settlement of restricted stock units into common stock   938    1    (1)   -    -    - 
Change in unrealized gain on marketable securities, net of income tax expense of $11,947   -    -    -    37,495    -    37,495 
Stock-based compensation   -    -    21,677,510    -    -    21,677,510 
Net loss   -    -    -    -    (64,590,029)   (64,590,029)
Balance as of September 30, 2018   25,460,122   $25,460   $545,388,704   $(354,896)  $(315,626,044)  $229,433,224 

 

 

See Notes to Condensed Consolidated Financial Statements

.

 4 

 

 

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Nature of Business

 

Overview

 

Assembly Biosciences, Inc., together with its subsidiaries (Assembly or the Company), is a clinical-stage biotechnology company advancing two innovative platform programs: a new class of oral therapeutic candidates for the treatment of hepatitis B virus (HBV) infection and a novel class of oral synthetic live biotherapeutic candidates, which are designed to treat disorders associated with the microbiome.

 

The Company’s HBV-cure program is pursuing multiple drug candidates that inhibit the HBV lifecycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of increasing the current low cure rates for patients with HBV. Assembly has discovered multiple novel core inhibitors, which are small molecules that directly target and allosterically modify the HBV core (HBc) protein.

 

The Company’s Microbiome program consists of a fully integrated platform that includes a disease targeted strain identification and selection process, methods for strain isolation and growth under current Good Manufacturing Practices (cGMP) conditions, and a licensed patented delivery system called GEMICEL®, which is designed to allow for targeted oral delivery of live biologic and conventional therapies to the lower gastrointestinal (GI) tract. The Microbiome program is prioritizing efforts on optimizing the Company’s lead product candidates, ABI-M201 (Ulcerative Colitis), which is currently undergoing IND-enabling studies, and ABI-M301 (Crohn’s disease). Using its microbiome platform, the Company is exploring additional product candidates for other disease indications, including irritable bowel syndrome, non-alcoholic steatohepatitis (NASH) and immuno-oncology, which indications the Company may pursue either internally or in collaboration with partners.

 

In January 2017, the Company entered into a Research, Development, Collaboration and License Agreement (the Collaboration Agreement) with Allergan Pharmaceuticals International Limited (Allergan) to develop and commercialize select microbiome gastrointestinal programs. Pursuant to the terms of the Collaboration Agreement, in connection with the closing of the transaction in February 2017, Allergan paid the Company an upfront payment of $50 million. Additionally, the Company is eligible to receive up to approximately $630 million in payments related to seven development milestones and up to approximately $2.15 billion in payments related to 12 commercial development and sales milestones in connection with the successful development and commercialization of licensed compounds for up to six different indications (see Note 7). Allergan and the Company have agreed to share development costs up to an aggregate of $75 million through proof-of-concept (POC) studies on a ⅔, ⅓ basis, respectively, and Allergan has agreed to assume all post-POC development costs. Additionally, the Company has an option to co-promote the licensed programs in the United States and China, subject to certain conditions set forth in the Collaboration Agreement.

 

On July 16, 2018, the Company issued to various investors an aggregate of 4,600,000 shares of common stock in a public offering at $36.00 per share, which included the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock. The Company received aggregate net proceeds of approximately $155.4 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

 

Liquidity

 

The Company has not derived any revenue from product sales to date and currently has no approved products. Once a product has been developed, it will need to be approved for sale by the U.S. Food and Drug Administration (FDA) or an applicable foreign regulatory agency. Since inception, the Company’s operations have been financed primarily through the sale of equity securities, the proceeds from the exercise of warrants and stock options, the issuance of debt and an up-front payment related to the Collaboration Agreement. The Company has incurred losses from operations since inception and expects to continue to incur substantial losses for the next several years as it continues its product development efforts. Management believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months. If the Company cannot generate significant cash from its operations, it intends to obtain any additional funding it requires through strategic relationships, public or private equity or debt financings, grants or other arrangements. The Company cannot assure such funding will be available on reasonable terms, if at all.

 

If the Company is unable to generate enough revenue from the Collaboration Agreement when needed or to secure additional sources of funding and receive related full and timely collections of amounts due, it may be necessary to significantly reduce the current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs, including more costly clinical trials.

 

 5 

 

 

Note 2 - Summary of Significant Accounting Policies and Recent Accounting Pronouncements

 

Basis of Presentation

 

The accompanying condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet at September 30, 2018, condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2018 and 2017, condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017, and condensed consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018 or for any future interim period. The consolidated balance sheet at December 31, 2017 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017 and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018 (the 2017 Annual Report).

  

Use of Estimates

 

The preparation of the condensed consolidated financial statements in conformity with the U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates inherent in the preparation of the accompanying condensed consolidated financial statements include recoverability and useful lives (indefinite or finite) of intangible assets, assessment of impairment of goodwill, provisions for income taxes, amounts receivable under the collaboration agreement, and the fair value of stock options, restricted stock units (RSUs) granted to employees and directors.

 

The Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions.

 

Significant Accounting Policies

 

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2017 Annual Report other than the adoption of the Financial Accounting Standards Board (FASB) Accounting Standard Updates (ASU) 606, Revenue from Contracts with Customers (see Note 7).

 

Loss per Share of Common Stock

 

Basic net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.  Diluted net loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive.  Since the Company has only incurred losses, basic and diluted net loss per share is the same.  Securities that could potentially result in diluted loss per share in the future that were not included in the computation of diluted loss per share at September 30, 2018 and 2017 are as follows:

 

   Nine Months Ended September 30, 
   2018   2017 
Warrants to purchase common stock   15,296    16,909 
Options to purchase common stock   4,422,194    4,859,680 
Unvested restricted stock units   343,465    - 
Total   4,780,955    4,876,589 

 

 6 

 

 

Revenue Recognition

 

The Company recognizes revenue under the FASB’s Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

·Step 1: Identify the contract with the customer

 

·Step 2: Identify the performance obligations in the contract

 

·Step 3: Determine the transaction price

 

·Step 4: Allocate the transaction price to the performance obligations in the contract

 

·Step 5: Recognize revenue when the company satisfies a performance obligation

 

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

·the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct); and

 

·the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (e.g., some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts or both. When determining the transaction price, an entity must consider the effects of all of the following:

  

·variable consideration;

 

·constraining estimates of variable consideration;

 

·existence of a significant financing component in the contract;

 

·non-cash consideration; and

 

·consideration payable to a customer.

 

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

 

The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

 

Revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property is recognized only when (or as) the later of the following events occurs:

 

·the subsequent sale or usage occurs; or

 

·the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).

 

 7 

 

 

Adoption of Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as modified by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company adopted the new standard on January 1, 2018 using the modified retrospective approach. The Collaboration Agreement is the Company’s only revenue contract, and adoption of ASU 2014-09 did not have any impact on the Company’s accounting for the Collaboration Agreement in the accompanying condensed consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. On January 1, 2018, the Company implemented ASU 2016-01 without any impact on the Company’s condensed consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. On January 1, 2018, the Company implemented ASU 2016-15 without any material impact on the Company’s condensed consolidated statement of cash flows and related disclosures.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. On January 1, 2018, the Company implemented ASU 2017-09 without any material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

Recent Accounting Pronouncements 

  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842, which amends ASU 2016-02 to provide entities an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 842. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact of pending adoption on its condensed consolidated financial statements and related disclosures. The Company currently expects that its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption of Topic 842, which will increase the total assets and total liabilities that the Company reports relative to such amounts prior to adoption.

 

 8 

 

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective on January 1, 2020. Early adoption will be available on January 1, 2019. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the federal corporate income tax rate enacted under the Tax Cuts and Jobs Act (the Tax Act). The amount of the reclassification would be the difference between the historical corporate income tax rate and the Tax Act’s 21% corporate income tax rate. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018 with early adoption permitted in any interim period. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.

 

In March 2018, the FASB issued a new accounting standard to incorporate SEC Staff Accounting Bulletin No. 118 (SAB 118), which addresses accounting implications of the Tax Act. SAB 118 allows an entity to record provisional amounts during a measurement period not to extend beyond one year from the enactment date and was effective upon issuance. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years and interim periods beginning after December 15, 2018. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule became effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements and related disclosures.

  

Note 3 - Marketable Securities

 

Marketable securities consisted of the following as of September 30, 2018 and December 31, 2017:

  

   September 30, 2018 
   Amortized Cost   Gross Unrealized
Gain (1)
   Gross Unrealized
Loss (1)
   Fair Value 
Short-term available-for-sale securities                    
Corporate bonds  $112,354,731   $35,030   $(192,407)  $112,197,354 
Commercial paper   1,972,288    18,151    -    1,990,439 
Total  $114,327,019   $53,181   $(192,407)  $114,187,793 

 

  (1) Gross unrealized gain (loss) is pre-tax.

 

   December 31, 2017 
   Amortized Cost  

Gross
Unrealized
Gain (1)

  

Gross
Unrealized
Loss (1)

   Fair Value 
Short-term available-for-sale securities                    
Corporate bonds  $38,092,585   $5,635   $(183,738)  $37,914,482 
                     
Long-term available-for-sale securities                    
Corporate bonds   3,357,778    -    (10,565)   3,347,213 
Total  $41,450,363   $5,635   $(194,303)  $41,261,695 

 

(1) Gross unrealized gain (loss) is pre-tax.

 

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The contractual term to maturity of short-term marketable securities held by the Company as of September 30, 2018 is less than one year. There were no long-term marketable securities held by the Company as of September 30, 2018.

 

The fair value of marketable securities was classified into fair value measurement categories as of September 30, 2018 and December 31, 2017 as follows:

 

   September 30,   December 31, 
   2018   2017 
Quoted prices in active markets for identical assets (Level 1)  $-   $- 
Quoted prices for similar assets observable in the marketplace (Level 2)   114,187,793    41,261,695 
Significant unobservable inputs (Level 3)   -    - 
Total  $114,187,793   $41,261,695 

 

The fair values of marketable securities are determined using quoted market prices from daily exchange traded markets based on the closing prices as of September 30, 2018 and December 31, 2017.

 

There were no transfers of marketable securities between Levels 1, 2 or 3 for the nine months ended September 30, 2018 and 2017.

 

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018.

 

   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
Corporate bonds  $50,178,552   $(185,687)  $999,390   $(6,720)  $51,177,942   $(192,407)
Total  $50,178,552   $(185,687)  $999,390   $(6,720)  $51,177,942   $(192,407)

 

The Company has determined that the unrealized losses are deemed to be temporary as of September 30, 2018. The Company believes that the unrealized losses generally are caused by increases in the risk premiums required by market participants rather than an adverse change in cash flows or a fundamental weakness in the credit quality of the issuer or underlying assets. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, it does not consider the investment in corporate bonds to be other-than-temporarily impaired at September 30, 2018.

 

Note 4 - Property, Plant and Equipment, Net

 

Property, plant and equipment, consists of the following:

 

       September 30,   December 31, 
   Useful life (Years)   2018   2017 
Computer hardware and software  3   $175,355   $104,968 
Lab equipment  3 to 5    369,827    369,827 
Office equipment  7    68,004    25,354 
Leasehold improvement  1 to 3.25    789,865    773,700 
Total property, plant and equipment       1,403,051    1,273,849 
Less: Accumulated depreciation and amortization       (887,253)   (413,823)
Property, plant and equipment, net      $515,798   $860,026 

  

Depreciation expense for the three months ended September 30, 2018 and 2017 was approximately $161,484 and $41,846, respectively, and was recorded in both research and development expense and general and administrative expense in the condensed consolidated statements of operations.

 

Depreciation expense for the nine months ended September 30, 2018 and 2017 was approximately $473,430 and $124,676, respectively, and was recorded in both research and development expense and general and administrative expense in the condensed consolidated statements of operations.

 

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Note 5 - Accrued Expenses

 

Accrued expenses consist of the following:

 

   September 30,   December 31, 
   2018   2017 
Accrued expenses:          
Salaries, bonuses and employee benefits  $4,229,895   $4,518,128 
Research and development expenses   1,435,902    674,686 
General and administrative expenses   851,256    946,186 
Total accrued expenses  $6,517,053   $6,139,000 

 

Note 6 - Stockholders’ Equity

 

Common Stock

 

On May 30, 2018, the Company’s stockholders approved the adoption of the Fourth Amended and Restated Certificate of Incorporation, which amended and restated the Company’s Third Amended and Restated Certificate of Incorporation, as amended, to, among other things, increase the authorized number of shares of common stock, par value $0.001 per share, from 50,000,000 shares to 100,000,000 shares. The Fourth Amended and Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on May 31, 2018.

 

On July 16, 2018, the Company issued to various investors an aggregate of 4,600,000 shares of common stock in a public offering at $36.00 per share, which included the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock. The purchase price paid by investors was $36.00 per share. The Company received aggregate net proceeds of approximately $155.4 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

 

For the nine months ended September 30, 2018, the Company issued an aggregate of 721,210 shares of common stock and received gross proceeds of approximately $3.8 million from the exercise of options.

 

Preferred Stock

 

On January 24, 2018, the Board authorized the filing of a Certificate of Elimination with the Secretary of State of the State of Delaware to remove the Certificate of Designation of Series A Non-Voting Convertible Preferred Stock (the Series A Preferred Stock) from the Company’s Third Amended and Restated Certificate of Incorporation, as amended (which was amended and restated on May 31, 2018), because no shares of the Series A Preferred Stock were outstanding and no shares were available to be issued.

 

Options

 

On May 30, 2018, the Company’s stockholders approved the Assembly Biosciences, Inc. 2018 Stock Incentive Plan (the 2018 Plan) pursuant to which the Company reserved 1,900,000 shares of common stock for issuance.

 

As of September 30, 2018, the Company had awards outstanding under the following shareholder approved plans: 2010 Equity Incentive Plan (the 2010 Plan), which has been frozen; the Amended and Restated 2014 Stock Incentive Plan (the 2014 Plan); and the 2018 Stock Incentive Plan (the 2018 Plan). Shares of common stock underlying awards that are forfeited under the 2010 Plan on or after June 2, 2016 will become available for issuance under the 2014 Plan. Shares underlying awards that are forfeited under the 2014 Plan on or after May 30, 2018 will also become available for issuance under the 2018 Plan. The Company also had awards outstanding under the Assembly Biosciences, Inc. 2017 Inducement Award Plan.

 

A summary of the Company’s option activity and related information for the nine-month period ended September 30, 2018 is as follows:

 

   Number of Shares   Weighted Average
Exercise Price
Per Share
   Total Intrinsic
Value
 
Outstanding as of December 31, 2017   4,551,819   $9.66   $162,002,439 
Granted   760,854    50.31    - 
Exercised   (761,404)   7.22    30,982,452 
Forfeited   (129,075)   17.30    3,189,211 
Outstanding as of September 30, 2018   4,422,194   $16.85   $99,742,377 
Options vested and exercisable   2,977,705   $8.82   $84,359,401 

 

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The fair value of the options granted for the nine months ended September 30, 2018 and 2017, were based on the following assumptions:

 

    Nine Months Ended September 30,
    2018 2017
Exercise price   $38.88 - $57.53   $12.81 - $25.96
Expected volatility   76.0% - 86.1%   83.3% - 87.0%
Risk-free rate   2.56% - 2.94%   2.02% - 2.23%
Expected term (years)   5.5 - 7.0   5.5 - 7.0

  

Estimated future stock-based compensation expense relating to unvested stock options is as follows:

 

   Future Stock Option
Compensation
Expenses
 
Three Months Ending December 31, 2018  $5,058,506 
Year Ending December 31, 2019   10,864,062 
Year Ending December 31, 2020   3,859,597 
Year Ending December 31, 2021   973,485 
Year Ending December 31, 2022   52,638 
Total  $20,808,288 

 

The weighted average remaining contractual term of exercisable options is approximately 6.4 years at September 30, 2018.

 

Warrants

 

There was no warrant activity during the nine months ended September 30, 2018.

 

Restricted Stock Units

 

A summary of the Company's RSUs and related information is as follows:

 

   Number of RSUs   Weighted
average
grant price
 
Unvested as of December 31, 2017   120,000   $44.28 
Granted   231,559    46.56 
Vested and Settled   (938)   49.14 
Forfeited   (7,156)   49.14 
Unvested as of September 30, 2018   343,465   $45.70 

 

As of September 30, 2018, the Company had unrecognized stock-based compensation expense related to all unvested RSUs of $6.7 million. The weighted average remaining contractual term of unvested RSUs is approximately 9.4 years at September 30, 2018.

 

ESPP

 

On May 30, 2018, the Company’s stockholders approved the Assembly Biosciences, Inc. 2018 Employee Stock Purchase Plan (the 2018 ESPP). The 2018 ESPP provides for the purchase by employees of up to an aggregate of 400,000 shares of the Company’s common stock.

 

Eligible employees can purchase the Company’s Common Stock at the end of a predetermined offering period at 85% of the lower of the fair market value at the beginning or end of the offering period. The ESPP is compensatory and results in stock-based compensation expense.

 

As of September 30, 2018, no shares have been purchased and 400,000 shares are available for future sale under the Company’s 2018 ESPP. Share-based compensation expense recorded was approximately $104,239 and $123,126 for the three and nine months ended September 30, 2018, respectively.

 

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Total stock-based compensation expense for the three and nine months ended September 30, 2018 and 2017 is as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Research and development  $2,473,405   $1,557,298   $8,686,926   $3,735,494 
General and administrative   3,532,367    1,039,803    12,990,584    2,097,516 
Total stock-based compensation expense  $6,005,772   $2,597,101   $21,677,510   $5,833,010 

 

Note 7 -  Collaboration Agreement

 

In January 2017, the Company entered into the Collaboration Agreement with Allergan to develop and commercialize select microbiome gastrointestinal programs. Pursuant to the Collaboration Agreement, the Company granted Allergan an exclusive worldwide license to certain of its intellectual property, including its intellectual property arising under the Collaboration Agreement, to develop and commercialize licensed compounds for ulcerative colitis (UC), Crohn’s disease, and irritable bowel syndrome (IBS). Allergan and the Company will collaborate on research and development activities with respect to the licensed compounds in accordance with a mutually agreed upon research and development plan.

 

In connection with the closing of the transaction in February 2017, Allergan paid the Company an upfront payment of $50 million. Additionally, the Company is eligible to receive variable consideration in the form of cost-sharing reimbursements, up to approximately $630 million related to seven development milestones and up to approximately $2.15 billion related to 12 commercial development and sales milestones in connection with the successful development and commercialization of licensed compounds for up to six different indications. There is significant uncertainty as to whether the stated milestones will be achieved, and the Company has not included the associated variable consideration in the transaction price as it is not probable that a significant reversal in the amount of cumulative revenue recognized would not occur.

 

In addition, the Company is eligible to receive tiered royalties at rates ranging from the mid-single digits to the mid-teens based on net sales. Allergan and the Company have agreed to share development costs up to an aggregate of $75 million through POC studies on a ⅔, ⅓ basis, respectively, and Allergan has agreed to assume all post-POC development costs. In the event any pre-POC development costs exceed $75 million in the aggregate, the Company may elect either (a) to fund ⅓ of such costs in excess of $75 million or (b) to allow Allergan to deduct from future development milestone payments ⅓ of the development costs funded by Allergan in excess of $75 million plus a premium of 25%. The Company has an option to co-promote the licensed programs in the U.S. and China, subject to certain conditions set forth in the Collaboration Agreement. Allergan may terminate the Collaboration Agreement for convenience at any time upon either 90 days’ (prior to the initiation of the first POC trial of a licensed product) or 120 days’ (after the initiation of the first POC trial of a licensed product), as applicable, advance written notice to the Company. The Collaboration Agreement also contains customary provisions for termination by either party, including in the event of breach of the Collaboration Agreement, subject to cure.

 

The Company determined that it has four performance obligations under the Collaboration Agreement associated with the transfer of the license and the performance of the research and development services combined for each of the four indications; the license is not distinct because Allergan cannot obtain value from the license without the research and development services that the Company is uniquely able to perform. The deferred revenue associated with the $50 million upfront payment will be recorded proportionally over a ten-year service period as the research and development services are expected to be performed. As such, the Company recognized the upfront payment received of $50.0 million as approximately $5.0 million in short-term deferred revenue and $45.0 million in long-term deferred revenue as of the closing date. Given the early stage of development, the Company has determined the relative selling price for each of the four indications to be $12.5 million. For the three months ended September 30, 2018 and 2017, the Company recorded approximately $1.2 million and $1.3 million, respectively, in revenue related to the amortization of deferred revenue. For the nine months ended September 30, 2018 and 2017, the Company recorded approximately $3.7 million and $3.2 million, respectively, in revenue related to the amortization of deferred revenue. Short-term and long-term deferred revenue contract liabilities related to the Collaboration Agreement were approximately $5.1 million and approximately $36.8 million at September 30, 2018 and approximately $5.2 million and approximately $40.6 million at December 31, 2017.

 

Expense reimbursements will be recognized as collaboration revenue when the related expenses are incurred. The reimbursable expenses incurred in connection with the Collaboration Agreement during the three months ended September 30, 2018 and 2017 were approximately $3.1 million and $1.4 million, and during the nine months ended September 30, 2018 and 2017 were approximately $7.4 million and $2.5 million, respectively, and recorded in collaboration revenue on the condensed consolidated statement of operations. On the condensed consolidated balance sheets, contract balances of approximately $2.6 million and approximately $2.3 million were recorded as accounts receivable from collaboration as of September 30, 2018 and December 31, 2017, respectively. As of January 1, 2018, and September 30, 2018, the Company had a contract liability balance of $0.2 million and $0.1 million, respectively, related to expense reimbursement performance obligations that were not satisfied.

 

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Note 8 - Commitments and Contingencies  

 

Real Property Leases

 

The Company leases office space for corporate functions in Carmel, Indiana under a lease agreement that expires in August 2023. The leased location in Carmel, Indiana supports both the HBV-cure and Microbiome programs. The Company leases office and laboratory space in San Francisco, California under a sublease that currently expires in December 2018. The leased location in San Francisco, California supports both the HBV-cure and Microbiome programs. On July 18, 2018, the Company entered into a sub-sublease for office and laboratory space in South San Francisco, California, and on September 24, 2018, a portion of the leased space was delivered to the Company. The sub-sublease expires December 15, 2023. The Company expects to move its San Francisco operations to the South San Francisco location around the beginning of 2019. The Company also conducts research, development and small-scale manufacturing activities for the Microbiome program at office and laboratory space in Groton, Connecticut under a lease that expires in March 2019.

 

The total rent expense for real property for the three months ended September 30, 2018 and 2017 were approximately $0.5 million and $0.4 million, respectively. The total rent expense for real property for the nine months ended September 30, 2018 and 2017 were approximately $1.3 million and $1.1 million, respectively.

 

Equipment Lease

 

Pursuant to a Master Lease Agreement dated November 25, 2014, the Company leases certain equipment. The equipment lease expense for the three months ended September 30, 2018 and 2017 amounted to approximately $0.3 million and $0.2 million, respectively. The equipment lease expense for the nine months ended September 30, 2018 and 2017 amounted to approximately $1.0 million and $0.6 million, respectively. These equipment leases began to expire in 2017, with the final lease expiring in 2021. The sum of all future payments through termination is approximately $2.2 million.

 

Litigation

 

The Company is not a party to any material legal proceedings. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2017, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018 (2017 Annual Report). In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements are subject to risks and uncertainties, including those set forth under “Part I. Item 1A. Risk Factors” in our 2017 Annual Report, “Part II. Item 1A. Risk Factors” in this report, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

 

Overview

 

We are a clinical-stage biotechnology company advancing two innovative platform programs: a new class of oral therapeutic candidates for the treatment of hepatitis B virus (HBV) infection and a novel class of oral synthetic live biotherapeutic candidates, which are designed to treat disorders associated with the microbiome.

 

HBV-cure Program

 

Over 250 million people worldwide are chronically infected with HBV. Our HBV-cure program is pursuing multiple drug candidates that inhibit the HBV lifecycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of increasing the current low cure rate for patients with HBV. We have discovered multiple novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core (HBc) protein. The lead product candidate from this program, ABI-H0731, has completed a Phase 1a/1b human clinical trial in New Zealand and other countries outside the United States. We have also completed an additional Phase 1a (ABI-H0731-102) pharmacokinetic (PK), safety and tolerability study of ABI-H0731 in healthy volunteers in the United States.

 

ABI-H0731

 

Interim data from our completed Phase 1a (ABI-H0731-102) safety and PK study and Phase 1b (ABI-H0731-101b) study of antiviral effects was presented at The International Liver Congress, the Annual Meeting of the European Association for the Study of the Liver (EASL) on April 12, 2018. The poster presented data for two cohorts (100 mg and 200 mg) of HBV patients that had completed dosing in the Phase 1b trial. Initial results from two incomplete patient cohorts (300 mg and 400 mg) were also reported. The poster also presented the safety and PK from three additional cohorts (100 mg, 200 mg and 300 mg) from study ABI-H0731-102, which was a separate Phase 1a study in healthy volunteers.

 

The Phase 1b patient study enrolled both HBV e-antigen (HBeAg) positive and negative patients. Potent antiviral activity was observed across patient cohorts in a dose dependent manner. Specifically, in the 300 mg dose cohort, the mean maximal declines from baseline was reported as ≥2.8 log 10 IU/mL, with ≥2.9 and 2.5 log 10 IU/mL mean declines in HBeAg positive and negative patients, respectively. Maximal viral load declines of 3.6 to 4.0 log 10 IU/mL were observed in HBeAg negative patients treated at all dose levels (100 mg to 400 mg). We expect to present the final results from the completed study at the upcoming American Association for the Study of Liver Diseases (AASLD) Annual Meeting (The Liver Meeting®) on November 11, 2018.

 

Across all cohorts in the Phase 1a and Phase 1b studies, ABI-H0731 was generally well tolerated. No serious adverse effects or dose-limiting toxicities were identified, and there was no pattern of treatment emergent clinical or laboratory abnormalities observed. Among the 62 patients and volunteers treated for 14-28 days, all treatment emergent adverse events were observed to be minor (Grade 1), with the exception of an isolated Grade 3 rash at the 400 mg dose that resolved with no intervention required other than treatment discontinuation. No other drug discontinuations have occurred in these studies.

 

In July 2018, we commenced two Phase 2a combination studies for ABI-H0731. The first Phase 2a trial, ABI-H0731-201 (the 201 Study), is enrolling HBV patients whose viral load has already been suppressed on a standard of care nucleos(t)ide therapy. Approximately 70 patients will be randomized 3:2 to receive either daily ABI-H0731 (300 mg) or placebo in addition to their continued nucleos(t)ide therapy for six months. The 201 Study will compare the safety and tolerability of combination therapy with ABI-H0731 as well as declines in HBV S antigen (HBsAg) and HBV E antigen (HBeAg) to those seen in patients on monotherapy. Blood levels of HBsAg and HBeAg can be biomarkers for the presence of active cccDNA in HBV infected liver cells. Accordingly, a decline in these markers would be expected to correlate with loss of cccDNA anticipated with more effective inhibition of cccDNA generation.

 

The second Phase 2a trial, ABI-H0731-202 (the 202 Study), is enrolling HBeAg positive HBV patients who are naïve to nucleos(t)ide treatment. Approximately 25 patients will be randomized 1:1 to receive either daily ABI-H0731 (300 mg) or placebo in combination with standard of care entecavir (0.5 mg) for six months. The 202 Study will assess the antiviral potency of the combination compared with entecavir alone. Endpoints include the speed and depth of viral suppression, as well as changes in biomarkers (HBsAg and HBeAg) for the presence of cccDNA, and the safety and tolerability of ABI-H0731.

 

ABI-H2158

 

ABI-H2158, our second product candidate in the HBV-cure program, is an internally discovered and developed drug product candidate that is chemically distinct from ABI-H0731. In November 2018, we initiated a Phase 1a dose-ranging clinical trial of ABI-H2158, which will assess the safety, tolerability and PK of ABI-H2158 in healthy volunteers. Following this Phase 1a trial, ABI-H2158 may advance to a Phase 1b dose-ranging study in non-cirrhotic patients with chronic HBV infection. Initial data from this trial is expected in mid-2019.

 

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Other Product Candidates

 

We also selected a third-generation candidate, ABI-H3733, which is a novel chemical scaffold separate from ABI-H0731 and ABI-H2158 and is currently undergoing its investigational new drug (IND) enabling studies. We plan to conduct additional research and development to identify additional product candidates for our HBV-cure program.

 

Microbiome Program

 

Our Microbiome program consists of a fully integrated platform that includes a disease-targeted strain identification and selection process, methods for strain isolation and growth under current Good Manufacturing Practice (cGMP) conditions, and a patented delivery system that we call GEMICEL®, which is designed to allow for targeted oral delivery of live biologic and conventional therapies to the lower gastrointestinal (GI) tract. The Microbiome program is prioritizing efforts on optimizing our lead product candidates, ABI-M201 (Ulcerative Colitis), which is currently undergoing IND-enabling studies, and ABI-M301 (Crohn’s disease). Pending the successful completion of IND-enabling studies and clearance of an IND, ABI-M201 is expected to begin a Phase 1b human clinical trial in 2019. Using our microbiome platform, we are exploring additional product candidates for other disease indications, including irritable bowel syndrome, non-alcoholic steatohepatitis (NASH) and immuno-oncology, which indications we may pursue either internally or in collaboration with partners.

 

In January 2017, we entered into the Research, Development, Collaboration and License Agreement (the Collaboration Agreement) with Allergan Pharmaceuticals International Limited (Allergan) to develop and commercialize select microbiome gastrointestinal programs. Pursuant to the terms of the Collaboration Agreement, in connection with the closing of the transaction in February 2017, Allergan paid us an upfront payment of $50 million. Additionally, we are eligible to receive up to approximately $630 million in payments related to seven development milestones and up to approximately $2.15 billion in payments related to 12 commercial development and sales milestones in connection with the successful development and commercialization of licensed compounds for up to six different indications. We have agreed with Allergan to share development costs up to an aggregate of $75 million through proof-of-concept (POC) studies on a ⅔, ⅓ basis, respectively, and Allergan has agreed to assume all post-POC development costs. Additionally, we have an option to co-promote the licensed programs in the United States and China, subject to certain conditions set forth in the Collaboration Agreement.

 

Operations

 

We currently have corporate and administrative offices in Carmel, Indiana, administrative offices and research laboratory space in San Francisco, California and research, development and small-scale manufacturing activities for the Microbiome program in facilities located in Groton, Connecticut. On July 18, 2018, we entered into a sublease for administrative and laboratory space in South San Francisco, California. The term of the sublease began on September 24, 2018 and continues until December 15, 2023. Assuming the necessary permits are obtained, we expect to move our administrative and research laboratory operations currently located in San Francisco to this new location around the beginning of 2019.

 

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 condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.

 

We evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation, on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Our critical accounting policies and significant estimates are detailed in our 2017 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our 2017 Annual Report, except for those accounting subjects mentioned in the section of the notes to the condensed consolidated financial statements titled Adoption of Recent Accounting Pronouncements. 

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2018 and 2017

 

Collaboration Revenue

 

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Collaboration revenue consists of the amortization of deferred revenue and reimbursement revenue incurred under the Collaboration Agreement. Collaboration revenue was approximately $4.3 million for the three months ended September 30, 2018, an increase of approximately $1.6 million from approximately $2.7 million for the same period in 2017. This increase is the result of an increase in activities under the Collaboration Agreement and related reimbursements received from Allergan.

 

Research and Development Expense

 

Research and development expense, excluding stock-based compensation expense, was approximately $16.6 million for the three months ended September 30, 2018, an increase of approximately $7.2 million from approximately $9.4 million for the same period in 2017. The increase was primarily due to an increase of approximately $5.5 million in research and development expenses for our HBV-cure program and an increase of approximately $1.6 million in research and development expenses for our Microbiome program.

 

Research and development-related stock-based compensation expense was approximately $2.5 million for the three months ended September 30, 2018, an increase of approximately $0.9 million from approximately $1.6 million for the same period in 2017.

 

General and Administrative Expense

 

General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services and accounting services, insurance and travel expenses, as well as the stock-based compensation expense associated with equity awards to our employees, consultants, and directors.

 

General and administrative expense, excluding stock-based compensation expense, was approximately $4.2 million for the three months ended September 30, 2018, an increase of approximately $1.1 million from approximately $3.1 million for the same period in 2017. The increase was primarily due to an increase of approximately $0.3 million in salary and benefits expenses due to additional employees in IT, HR and Finance, an increase of approximately $0.3 million in legal expenses, $0.3 million in office and equipment rent expenses and $0.2 million in recruitment expenses.

 

General and administrative-related stock-based compensation expense was approximately $3.5 million for the three months ended September 30, 2018, an increase of approximately $2.5 million from approximately $1.0 million for the same period in 2017.

 

Comparison of the Nine Months Ended September 30, 2018 and 2017

 

Collaboration Revenue

 

Collaboration revenue consists of the amortization of deferred revenue and reimbursement revenue in each case incurred under the Collaboration Agreement. Collaboration revenue was approximately $11.1 million for the nine months ended September 30, 2018, an increase of approximately $5.4 million from approximately $5.7 million for the same period in 2017. This increase is the result of an increase in activities under the Collaboration Agreement and related reimbursements received from Allergan.

 

Research and Development Expense

 

Research and development expense, excluding stock-based compensation expense, was approximately $42.8 million for the nine months ended September 30, 2018, an increase of approximately $12.9 million from approximately $29.9 million for the same period in 2017. The increase was primarily due to an increase of approximately $2.7 million in research and development expenses for our Microbiome program and an increase of approximately $10.2 million in research and development expenses for our HBV-cure program, which were offset by a decrease of approximately $0.1 million in research expenses for outsourced chemistry.

 

Research and development-related stock-based compensation expense was approximately $8.7 million for the nine months ended September 30, 2018, an increase of approximately $5.0 million from approximately $3.7 million for the same period in 2017.

 

General and Administrative Expense

 

General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services and accounting services, insurance and travel expenses, as well as the stock-based compensation expense associated with equity awards to our employees, consultants, and directors.

 

General and administrative expense, excluding stock-based compensation expense, was approximately $13.0 million for the nine months ended September 30, 2018, an increase of approximately $3.1 million from approximately $9.9 million for the same period in 2017. The increase was primarily due to an increase of approximately $1.9 million in salary and benefits expenses due to additional employees in IT, HR and Finance, an increase of approximately $0.6 million in office and equipment rent expenses, and $0.3 million in recruitment expenses.

 

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General and administrative-related stock-based compensation expense was approximately $13.0 million for the nine months ended September 30, 2018, an increase of approximately $10.9 million from approximately $2.1 million for the same period in 2017.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

As a result of our significant research and development expenditures and the lack of any FDA-approved products to generate product sales revenue, we have not been profitable and have generated operating losses since we were incorporated in October 2005. We have funded our operations through September 30, 2018 principally through equity financing, raising an aggregate of approximately $412.8 million in net proceeds, and a strategic partnership raising an aggregate of $50 million in upfront payments.

  

Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

Net Cash from Operating Activities

 

Net cash used in operating activities was approximately $48.2 million for the nine months ended September 30, 2018. This was primarily due to approximately $64.6 million of net loss and a decrease of $6.0 million of operating assets and liabilities, which were offset by a $21.7 million non-cash expense recorded for the stock-based compensation, $0.5 million of depreciation and amortization expense and approximately $0.2 million of realized loss from marketable securities.

 

Net cash provided by operating activities was approximately $11.6 million for the nine months ended September 30, 2017 and funded our research and development program build out and general and administrative expenses. This was primarily due to $46.8 million of deferred revenue related to the Collaboration Agreement, $5.8 million of non-cash stock-based compensation expense and $0.6 million of realized loss from marketable securities, which were offset by a $39.8 million of net loss, a $1.8 million of changing in operating assets and liabilities, excluding deferred revenue, and a $0.1 million of deferred income tax benefit. 

 

Net Cash from Investing Activities

 

Net cash used in investing activities from continuing operations for the nine months ended September 30, 2018 was approximately $73.2 million primarily due to a purchase of approximately $115.0 million marketable securities and $0.1 million of fixed assets and construction in progress, which were offset by approximately $41.9 million for the redemption of marketable securities.

 

Net cash used in investing activities from continuing operations for the nine months ended September 30, 2017 was $14.0 million and primarily due to a purchase of $40.0 million marketable securities and $0.5 million of fixed assets and construction in progress, which were offset by $26.6 million of redemptions of marketable securities.

  

Net Cash from Financing Activities

 

Net cash provided by financing activities from continuing operations for the nine months ended September 30, 2018 was approximately $159.2 million, resulting from the net proceeds of approximately $155.4 million from our public offering of 4,600,000 shares of common stock, including 600,000 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, and approximately $3.8 million from the exercise of stock options to purchase 721,210 shares of common stock.

 

Net cash provided by financing activities from continuing operations for the nine months ended September 30, 2017 was $1.0 million, resulting from the exercise of stock options to purchase 142,911 shares of common stock (139,019 shares of common stock on a net exercise basis).

 

Funding Requirements

 

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of our product candidates. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we will be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

 

We monitor our cash needs and the status of the capital markets on a continuous basis. From time to time, we opportunistically raise capital and have done so multiple times since our initial public offering by issuing equity securities, most recently in July 2018. We expect to continue to raise capital when and as needed and at the time and in the manner most advantageous to us.

 

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Based upon our cash position as of September 30, 2018, we expect that our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including:

 

the initiation, scope, progress, timing, results and costs of our ongoing discovery, nonclinical development, laboratory testing and clinical trials of our product candidates and any additional clinical trials we may conduct in the future;

 

the extent to which we further acquire or in-license other medicines and technologies;

 

the number and characteristics of product candidates that we pursue in preclinical and clinical development;

 

our ability to manufacture, and to contract with third parties to manufacture, adequate supplies of our product candidates for our clinical trials and any eventual commercialization;

 

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

 

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and

 

our ability to establish and maintain collaborations on favorable terms, if at all.

 

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of the holders of our common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

  

If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Off-Balance Sheet Arrangements

 

None. 

 

Contractual Obligations

 

Sublease of Office and Laboratory Space in South San Francisco, California

 

On July 18, 2018, we entered into a sub-sublease with Prothena Biosciences Inc. (Sub-Sublandlord) for approximately 46,641 square feet of office and laboratory space (the Sublease) in South San Francisco, California (the Premises). The term of the Sublease continues until December 15, 2023. Our obligation to pay rent began on September 24, 2018.

 

We are obligated to pay monthly base rent in the following approximate amounts:

 

Months   Monthly Base Rent per
Rentable Square Foot
  Total Monthly Base Rent for the
Complete Premises (following
delivery of Premises)
  September 24, 2018 - August 31, 2019       $ 4.85       $ 226,208 (prorated )
  September 1, 2019 - August 31, 2020       $ 5.02     $ 234,137  
  September 1, 2020 - August 31, 2021       $ 5.20     $ 242,533  
  September 1, 2021 - August 31, 2022       $ 5.38     $ 250,928  
  September 1, 2022 - August 31, 2023       $ 5.57     $ 259,790  
  September 1, 2023 - December 15, 2023       $ 5.76       $ 268,652 (prorated )

  

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In addition to our monthly base rent obligations, we are obligated to pay Sub-Sublandlord (1) all of the operating expenses allocated to the Premises, (2) additional charges, costs, fees or expenses for which Sub-Sublandlord is separately charged under the sublease or the master lease, (3) other sums of money relating to the Premises that are or become payable by Sub-Sublandlord to sublandlord that have accrued during the term, (4) any real property taxes and assessments related to the Premises that are separately billed to the sublandlord or Sub-Sublandlord during the term of the Sublease, (5) any and all charges of the master landlord or the sublandlord or other amounts payable to the master landlord or the sublandlord under the master lease or the sublease caused by our failure to perform our obligations under the Sublease.

 

Pursuant to the Sublease, we deposited $552,986 as security for our performance of the terms of the Sublease.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our 2017 Annual Report.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, which is designed to provide reasonable assurance that information that is required to be disclosed in our reports filed pursuant to the Exchange Act, is accumulated and communicated to management in a timely manner. At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting in the quarter ended September 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not a party to any material legal proceedings. In the future, we might from time to time become involved in litigation relating to claims arising from our ordinary course of business.

 

Item 1A.   Risk Factors.

 

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

 

You should carefully consider the following risk factors, together with all other information in this report, including our financial statements and notes thereto, and in our other filings with the SEC. If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment.

 

Risks Related to Our Business

 

We have no approved products and currently are dependent on the future success of our HBV-cure and Microbiome programs.

 

To date, we have no approved products on the market and have generated no product revenues. Our prospects are substantially dependent on our ability to develop and commercialize our HBV and microbiome product candidates. Unless and until we receive approval from the FDA or other regulatory authorities for our product candidates, we cannot sell our product candidates and will not have product revenues. We will have to fund all of our operations and capital expenditures from cash on hand, any future securities offerings or debt financings and any fees we may generate from out-licensing, collaborations or other strategic arrangements. If we are unable to develop and commercialize any product candidates from our HBV-cure and Microbiome programs, we will be unable to generate revenues from the sale of products or build a sustainable or profitable business.

 

In addition, all of our product candidates are currently in early clinical development or in varying stages of nonclinical development and their risk of failure is high. The data supporting our drug discovery and nonclinical and clinical development programs are derived from either laboratory, nonclinical studies or Phase 1a/1b clinical data. We cannot predict when or if any one of our product candidates will prove safe and effective in humans or will receive regulatory approval. The scientific evidence to support the feasibility of our product candidates and therapeutic approaches is limited, and many companies, some with more resources than we have, are and may be developing competitive product candidates. For these and other reasons, our drug discovery and development may not be successful, and we may not generate viable products or revenue.

 

We depend entirely on the success of product candidates from our HBV-cure program and our Microbiome program. We cannot be certain that we or our collaborators will be able to obtain regulatory approval for, or successfully commercialize, product candidates from either of our current programs or any other product candidates we may subsequently identify.

 

We and our collaborators are not permitted to market or promote any product candidates in the United States, Europe or other countries before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for our current product candidates. We have not submitted a biologics license application (BLA) or new drug application (NDA) to the FDA or comparable applications to other regulatory authorities and do not expect to be in a position to do so in the foreseeable future.

 

All of our product candidates are currently in early clinical development or in varying stages of nonclinical development. It may be years before the larger, pivotal trials necessary to support regulatory approval of our product candidates are initiated, if ever. The clinical trials of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must successfully meet a number of critical developmental milestones, including:

 

developing dosages that will be tolerated, safe and effective;

 

reaching agreement with the FDA or comparable foreign regulatory authorities regarding the scope, design and data necessary to support regulatory approval for the product candidate;

 

demonstrating through clinical trials that the product candidate is safe and effective in patients for the intended indication;

 

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determining the appropriate delivery mechanism;

 

demonstrating that the product candidate formulation will be stable for commercially reasonable time periods; and

 

completing the development and scale-up to permit manufacture of our product candidates in quantities sufficient to execute on our clinical development plans and, eventually, in commercial quantities and at acceptable prices.

 

The time necessary to achieve these developmental milestones for any individual product candidate is long and uncertain, and we may not successfully complete these milestones for our HBV and microbiome therapies or any other product candidates that we may develop. We have not yet completed and may never complete the development of any products. If we are unable to complete clinical development of our HBV or microbiome therapies, or any other product candidates that we may identify, we will be unable to generate revenue from the sale of products or build a sustainable or profitable business.

 

Nonclinical studies may not be representative of disease behavior in clinical trials. The outcomes of nonclinical testing and clinical trials are uncertain, and results of earlier nonclinical studies and clinical trials may not be predictive of future clinical trial results.

 

The results of nonclinical studies may not be representative of disease behavior in a clinical setting and thus may not be predictive of the outcomes of our clinical trials. In addition, the results of nonclinical studies and early clinical trials of product candidates may not be predictive of the results of later-stage clinical trials, and the results of any study or trial for any of our product candidates may not be as positive as the results for any prior studies or trials, if at all.

 

Nonclinical studies and clinical testing are expensive, can take many years to complete and their outcomes are highly uncertain. Failure can occur at any time during the nonclinical study and clinical trial processes due to inadequate performance of a drug candidate or inadequate adherence by patients or investigators to clinical trial protocols. Further, clinical trials might not provide statistically significant data supporting a product candidate’s safety and effectiveness to obtain the requisite regulatory approvals. In addition, there is a high failure rate for drugs and biologics proceeding through clinical trials. Our failure to replicate earlier positive results in later-stage clinical trials or otherwise demonstrate the required characteristics to support marketing approval for any of our product candidates would substantially harm our business, prospects, financial condition and results of operations.

 

Top-line or interim data may not accurately reflect the complete results of a particular study or trial.

 

We may publicly disclose top-line or interim data from time to time, which is based on a preliminary analysis of then-available efficacy, tolerability, PK and safety data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to evaluate fully and carefully all data. As a result, the top-line or interim results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Top-line data also remain subject to audit and verification procedures that may result in the final data being materially different from the interim or preliminary data we previously published. As a result, top-line and interim data should be viewed with caution until the final data are available.

 

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimations, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular drug candidate or biotherapeutic and our company in general. In addition, the information we may publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular drug, drug candidate or our business. If the top-line or interim data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed or delayed, which could harm our business, financial condition, operating results or prospects.

 

Nonclinical and clinical testing required for our product candidates is expensive and time-consuming and may result in delays or may fail to demonstrate safety and efficacy for desired indications.

 

In order to obtain FDA approval to market a new drug product, we must demonstrate safety and effectiveness in humans. To meet these requirements, we must conduct extensive nonclinical testing and sufficient adequate and well-controlled clinical trials. Conducting clinical trials is a lengthy, time consuming, and expensive process. The length of time might vary substantially according to the type, complexity, novelty, and intended use of the product candidate, and often can be several years or more per trial. Delays associated with product candidates for which we are directly conducting nonclinical studies or clinical trials might cause us to incur additional operating expenses. The commencement and rate of completion of clinical trials might be delayed by many factors, including, for example:

 

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delays in reaching agreement with regulatory authorities on trial design;

 

delays in reaching agreement on acceptable terms with prospective contract research organizations (CROs) and clinical trial sites;

 

failure to demonstrate efficiency during clinical trials;

 

the emergence of unforeseen safety issues;

 

inability to manufacture sufficient quantities of qualified materials under cGMP for use in clinical trials;

 

slower than expected rates of patient recruitment;

 

failure to recruit a sufficient number of patients;

 

delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

delays caused by patients dropping out of a trial due to product side effects, disease progression or other reasons;

 

clinical sites dropping out of a trial to the detriment of enrollment;

 

modification of clinical trial protocols;

 

delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials;

 

occurrence of adverse events associated with the product candidate that are viewed to outweigh its potential benefits;

 

changes in regulatory requirements for clinical trials;

 

delays, suspension, or termination of clinical trials by the institutional review board or ethics committee responsible for overseeing the study at a particular study site; and

 

government, institutional review board, ethics committee, or other regulatory delays or clinical holds requiring suspension or termination of the trials.

 

We have used and intend to continue to rely on one or more CROs to conduct our nonclinical studies and clinical trials. We are highly dependent on these CROs to conduct our studies and trials in accordance with the requirements of the FDA, applicable local laws and good clinical and scientific practice. In the event the CROs fail to perform their duties in such a fashion, we may not be able to complete our clinical trials and may fail to obtain regulatory approval for any of our product candidates.

 

The failure of nonclinical studies and clinical trials to demonstrate safety and effectiveness of a product candidate for the desired indications could harm the development of that product candidate or other product candidates. This failure could cause us to abandon a product candidate and could delay development of other product candidates. Any delay in, or termination of, our nonclinical studies or clinical trials would delay the filing of our NDAs or BLAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues. Any change in, or termination of, our clinical trials could materially harm our business, financial condition, and results of operation.

 

Any product candidates that we may discover and develop may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

 

Many product candidates that initially showed promise in early stage testing have later been found to cause side effects that prevented their further development. Undesirable side effects caused by any product candidates that we may discover or develop, or safety, tolerability or toxicity issues that may occur in our nonclinical studies, clinical trials or in the future, could cause us or regulatory authorities to interrupt, restrict, delay, or halt clinical trials. Such results could also cause us to, or regulatory authorities to require us to, cease further development of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, prospects, financial condition and results of operations. The most common treatment-emergent adverse events that we observed in our completed Phase 1a (ABI-H0731-102) safety and PK study and Phase 1b (ABI-H0731-101b) study of antiviral effects were headaches and rashes, which were among the only adverse events deemed by clinical investigators to be probably or possibly related to the study drug, with the exception of a single isolated Grade 3 rash that resolved rapidly without intervention other than treatment discontinuation, which is the only study discontinuation to date.

 

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Additionally, if any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by these product candidates, a number of potentially significant negative consequences could result, including:

 

regulatory authorities may withdraw approvals of such product and require us to take them off the market;

 

regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;

 

regulatory authorities may require a medication guide outlining the risks of such side effects for distribution to patients, or that we implement a Risk Evaluation Mitigation Strategies (REMS) plan to ensure that the benefits of the product outweigh its risks;

 

we may be required to change the way a product is administered, conduct additional clinical trials or change the labeling of a product;

 

we may be subject to limitations on how we may promote the product;

 

sales of the product may decrease significantly;

 

we may be subject to litigation or product liability claims; and

 

our reputation may suffer.

 

Any of these events could prevent us or any collaborators from achieving or maintaining market acceptance of our product candidates or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of our product candidates.

 

We have a limited operating history and a history of operating losses and expect to incur significant additional operating losses.

 

We were established in October 2005, began active operations in the spring of 2007, terminated programs related to three prior product candidates, then merged with Assembly Pharmaceuticals, Inc. (Assembly Pharmaceuticals), a private company, in July 2014. We have only a limited operating history since the merger. Therefore, there is limited historical financial information upon which to base an evaluation of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations. We, and Assembly Pharmaceuticals prior to our merger, have generated losses since we began operations and as of September 30, 2018 and December 31, 2017, the combined company had an accumulated deficit of approximately $315.6 million and $251.0 million, respectively, and net losses of approximately $42.8 million, $44.3 million and $28.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. These net losses have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. We expect to incur substantial additional losses over the next several years as we continue to pursue our research, development, nonclinical studies and clinical trial activities. Further, since our initial public offering, we have incurred and will continue to incur as a public company significant additional legal, accounting and other expenses to which we were not subject to as a private company, including expenses related to our efforts in complying with the requirements of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and other public company disclosure and corporate governance requirements and responding to requests of government regulators. The amount of future losses and when, if ever, we will achieve profitability are uncertain and will depend, in part, on the rate of increase in our expenses, our ability to generate revenues from the sale of products and our ability to raise additional capital. We have no products that have generated any commercial revenue, do not expect to generate revenues from the commercial sale of products unless and until our HBV or microbiome therapies or any other product candidate is approved by the FDA for sale, and we might never generate revenues from the sale of products. 

 

We are not currently profitable and might never become profitable.

 

We have a history of losses and expect to incur significant operating and capital expenditures and resultant substantial losses and negative operating cash flow for the next several years and beyond if we do not successfully launch and commercialize any product candidates from our HBV or Microbiome programs. We might never achieve or maintain profitability. We anticipate that our expenses will continue to be substantial in the foreseeable future as we:

 

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advance ABI-H0731, our first HBV-cure candidate, through clinical development and conduct nonclinical studies and clinical trials with ABI-H2158 and ABI-H3733, our second and third HBV-cure product candidates, respectively;

 

advance ABI-M201 and ABI-M301, the lead candidates from our Microbiome program, toward potential INDs;

 

continue to undertake research and development to identify potential additional product candidates in both our HBV-cure and Microbiome programs;

 

seek regulatory approvals for our product candidates; and

 

pursue our intellectual property strategy.

 

Because of the numerous risks and uncertainties associated with pharmaceutical 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 or the development of any of our product candidates.

 

As a result, we will need to generate significant revenues in order to achieve and maintain profitability. Our ability to generate revenue from the sale of products and achieve profitability will depend on, among other things:

 

successful completion of research, nonclinical studies and clinical trials for our product candidates;

 

obtaining necessary regulatory approvals from the FDA and comparable foreign regulatory authorities for our product candidates;

 

maintaining patent protection for our products, methods, processes and technologies;

 

establishing manufacturing, sales, and marketing arrangements internally and/or with third parties for any approved products; and

 

raising sufficient funds to finance our activities, if and when needed.

 

We might not succeed at any of these undertakings. If we are unsuccessful at some or all of these undertakings, our business, prospects, and results of operations might be materially adversely affected.

 

We are an early stage company and might not be able to commercialize any product candidates.

 

We are an early stage company and have not demonstrated our ability to perform the functions necessary for the successful commercialization of any product candidates. The successful commercialization of any product candidates will require us to perform a variety of functions, including:

 

continuing to undertake research and development and nonclinical studies and clinical trials;

 

participating in regulatory approval processes;

 

formulating and manufacturing products; and

 

conducting sales, marketing and distribution activities.

 

Our failure to commercialize successfully our product candidates would negatively impact the value of our company and could impair our ability to raise capital, expand our business, diversify our research and development pipeline, market our product candidates, if approved, or continue our operations.

 

Our development of product candidates is subject to risks and delays.

 

Our development of our product candidates is subject to the risks of failure and delay inherent in the development of new pharmaceutical products and products based on new technologies, including:

 

delays in product development, nonclinical and clinical testing;

 

unplanned expenditures in product development, nonclinical and clinical testing;

 

failure of a product candidate to demonstrate acceptable safety and efficacy;

 

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failure to receive regulatory approvals;

 

emergence of superior or equivalent products;

 

inability to manufacture and sell on our own, or through others, product candidates on a commercial scale or at a financially viable cost; and

 

failure to achieve market acceptance.

 

Because of these risks, our research and development efforts might not result in any commercially viable products. If we do not successfully complete a significant portion of these development efforts, obtain required regulatory approvals, and have commercial success with any approved products, our business, financial condition and results of operations will be materially harmed.

 

There are substantial risks inherent in attempting to commercialize new drugs and biologics, and, as a result, we may not be able to develop successfully products for commercial use.

 

Scientific research and development require significant amounts of capital and takes a long time to reach commercial viability, if it can be achieved at all. To date, our research and development projects have not produced commercially viable drugs or biologics and may never do so. During the research and development process, we may experience technological barriers that we may be unable to overcome. Further, certain underlying premises in our development programs are not fully proven.

 

Our HBV therapy research and development efforts involve therapeutics based on modulating forms of HBV core proteins with core inhibitors. The development of our core inhibitor technology is in early stages, and the commercial feasibility and acceptance of our core inhibitor technology is unknown. More specifically, the theory that treatment with core inhibitors may result in the loss of covalently closed circular DNA (cccDNA) compared to conventional (standard of care) therapies is unproven. It is also unknown if the biomarkers assumed to be indicators of active cccDNA (serum viral antigen levels in HBV patients) will be meaningfully altered in patients on treatment with core inhibitors. Additionally, even if core inhibitor technology is successful at targeting the HBV core protein and treatment is successful at reducing cccDNA levels in HBV patients, it may not result in a commercially viable drug if there is not a corresponding medical benefit related to the underlying HBV infection.  

  

Similarly, our Microbiome program is based on a novel therapeutic approach designed to treat disorders associated with the microbiome. To our knowledge, no companies have received regulatory approval for, or manufactured on a commercial scale, any microbiome-based therapeutics. The technology for our microbiome therapy is in nonclinical development and our GEMICEL® dual-targeted release capsule formulation is novel and has not yet shown to deliver successfully live bacteria in patients. The ability to deliver bacteria effectively and reliably to the GI tract is unproven, and, even if it can be proven, it may be difficult or impossible to provide the treatment economically. Because of these uncertainties, it is possible that no commercial products will be successfully developed. If we are unable to develop successfully commercial products, we will be unable to generate revenue from the sale of products or build a sustainable or profitable business.

 

We will need additional financing to complete the development of any product candidate and fund our activities in the future.

 

We anticipate that we will incur operating losses for the next several years as we continue to develop our HBV product candidates and our microbiome platform as well as initiate any development of any other product candidates and will require substantial funds during that time to support our operations. We expect that our current resources will provide us with sufficient capital to fund our operations for at least the next twelve months. However, we might consume our available capital before that time if, for example, we are not efficient in managing our resources or if we encounter unforeseen costs, delays or other issues or if regulatory requirements change. If that happens, we may need additional financing to continue the development of our HBV product candidates and our Microbiome program, which we might seek and receive from the public financial markets or from third-party commercial partners. There is no assurance that we will be able to generate sufficient revenue from our Collaboration Agreement with Allergan when needed to or that we will be successful in raising any necessary additional capital on terms that are acceptable to us, or at all. If such event or other unforeseen circumstances occurred and we were unable to generate sufficient revenue or raise capital, we could be forced to delay, scale back or discontinue product development, sacrifice attractive business opportunities, cease operations entirely and sell or otherwise transfer all or substantially all of our remaining assets.

 

Our product candidates face significant development and regulatory hurdles prior to marketing, which could delay or prevent our receipt of licensing, sales and/or milestone revenue.

 

Before we or any commercial partners obtain the approvals necessary to sell any of our product candidates, we must show through nonclinical studies and human testing in clinical trials that each potential product is safe and effective. The rates at which we complete our scientific studies and clinical trials depend on many factors, including, but not limited to, our ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, and other potential drug candidates being studied. Delays in patient enrollment for our trials may result in increased costs and longer development times. Further, we currently do not have the infrastructure to manufacture, market and sell our product candidates. If we partner with one or more third-party entities, those commercial partners may demand and receive rights to control product development and commercialization. As a result, these commercial partners may conduct these programs and activities more slowly or in a different manner than expected. If any of these events were to occur, the development of any product candidate could be significantly delayed, more expensive or less lucrative to us than anticipated, any of which would have a significant adverse effect on our business.

 

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We are substantially dependent on our Collaboration Agreement with Allergan, which may be terminated or may not be successful due to a number of factors, which could have a material adverse effect on our business and operating results.

 

In January 2017, we entered into the Collaboration Agreement with Allergan for the development and commercialization of select microbiome gastrointestinal programs in ulcerative colitis, Crohn’s disease and irritable bowel syndromes. Our collaboration with Allergan may be terminated, or may not be successful, due to a number of factors.  In particular, Allergan may terminate the Collaboration Agreement for convenience at any time upon either 90 days’ (prior to the initiation of the first proof of concept (POC) trial of a licensed product) or 120 days’ (after the initiation of the first POC trial of a licensed product), as applicable, advance written notice to us. The Collaboration Agreement also contains customary provisions for termination by either party, including in the event of breach of the Collaboration Agreement, subject to cure. In addition, if we are unable to identify product candidates for the licensed indications or we are unable to protect our products by obtaining and defending patents, the collaboration could fail. If the collaboration is unsuccessful for these or other reasons, or is otherwise terminated for any reason, we may not receive all or any of the research program funding, milestone payments or royalties under the agreement. Any of the foregoing could result in a material adverse effect on our business, results of operations and prospects and would likely cause our stock price to decline.

 

We are dependent on a license relationship for each of our HBV-cure program and our Microbiome program.

 

Our license agreement with Indiana University Research and Technology Corporation (IURTC) from whom we have licensed ABI-H0731 and certain other HBV therapies, requires us to make milestone payments based upon the successful accomplishment of clinical and regulatory milestones related to ABI-H0731 and certain other HBV therapies. The aggregate amount of all performance milestone payments under the IURTC License Agreement, should all performance milestones through development be met, is $825,000, with a portion related to the first performance milestone having been paid. We also are obligated to pay IURTC royalty payments based on net sales of the licensed technology. We are also obligated to pay diligence maintenance fees ($25,000-$100,000) each year to the extent that the royalty, sublicensing, and milestone payments to IURTC are less than the diligence maintenance fee for that year. Our license with Therabiome, LLC (Therabiome), from whom we have licensed our delivery platform of our Microbiome program, also requires us to pay regulatory and clinical milestones as well as royalty payments to Therabiome. If we breach any of these obligations, we could lose our rights to the targeted delivery mechanism of our Microbiome program. If we fail to comply with similar obligations to any other licensor, then that licensor would have the right to terminate the license, in which event we would not be able to commercialize drug candidates or technologies that were covered by the license. In addition, the milestone and other payments associated with licenses will make it less profitable for us to develop our drug candidates than if we owned the technology ourselves.

 

Corporate and academic collaborators might take actions to delay, prevent, or undermine the success of our product candidates.

 

Our operating and financial strategy for the development, nonclinical and clinical testing, manufacture, and commercialization of drug candidates heavily depends on collaborating with corporations, academic institutions, licensors, licensees, and other parties. However, there can be no assurance that we will successfully establish or maintain these collaborations. In addition, should a collaboration be terminated, replacement collaborators might not be available on attractive terms, or at all. The activities of any collaborator will not be within our control and might not be within our power to influence. There can be no assurance that any collaborator will perform its obligations to our satisfaction or at all, that we will derive any revenue or profits from these collaborations, or that any collaborator will not compete with us. If any collaboration is not successful, we might require substantially greater capital to undertake development and marketing of our proposed products and might not be able to develop and market these products effectively, if at all. In addition, a lack of development and marketing collaborations might lead to significant delays in introducing proposed products into certain markets and/or reduced sales of proposed products in such markets.

 

We rely on data provided by our collaborators and others that has not been independently verified and could prove to be false, misleading, or incomplete.

 

We rely on third-party vendors, scientists, investigators and collaborators to provide us with significant data and other information related to our projects, nonclinical studies and clinical trials, and our business. If these third parties provide inaccurate, misleading, or incomplete data, our business, prospects, and results of operations could be materially adversely affected.

 

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Research, development and commercialization goals may not be achieved in the timeframes that we publicly estimate, which could have an adverse impact on our business and could cause our stock price to decline.

 

We set goals, and make public statements regarding our expectations, regarding the timing of certain accomplishments, developments and milestones under our research and development programs. The actual timing of these events can vary significantly due to a number of factors, including, without limitation, the amount of time, effort and resources committed to our programs by us and any collaborators and the uncertainties inherent in the clinical development and regulatory approval process. As a result, there can be no assurance that we or any collaborators will initiate or complete clinical development activities, make regulatory submissions or receive regulatory approvals as planned or that we or any collaborators will be able to adhere to our current schedule for the achievement of key milestones under any of our programs. If we or any collaborators fail to achieve one or more of the milestones as planned, our business could be materially adversely affected, and the price of our common stock could decline.

 

We lack suitable facilities for certain nonclinical and clinical testing and expect to rely on third parties to conduct some of our research and nonclinical testing and our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such research, testing or trials.

 

We do not have sufficient facilities to conduct all of our anticipated nonclinical and clinical testing. As a result, we expect to contract with third parties to conduct a significant portion of our nonclinical and clinical testing required for regulatory approval for our product candidates. We will be reliant on the services of third parties to conduct studies on our behalf. If we are unable to retain or continue with third parties for these purposes on acceptable terms, we may be unable to develop successfully our product candidates. In addition, any failures by third parties to perform adequately their responsibilities may delay the submission of our product candidates for regulatory approval, which would impair our financial condition and business prospects.

 

Our reliance on these third parties for research and development activities also reduces our control over these activities but will not relieve us of our responsibilities. For example, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, including, in the case of clinical trials, good clinical practices, and our reliance on third parties does not relieve us of our regulatory responsibilities. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. In addition, these third parties are not our employees, and except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our clinical and nonclinical programs. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our research, nonclinical studies or clinical trials may be extended, delayed or terminated and we may not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates. As a result, our results of operations and business prospects would be harmed, our costs could increase and our ability to generate revenues from the sale of products could be delayed.

 

We will need to either establish our own clinical and commercial manufacturing capabilities or rely on third parties to formulate and manufacture our product candidates, and we rely on third parties to manufacture products that we study in combination with our product candidates. Our use of third parties to manufacture these materials may increase the risk that we will not have sufficient quantities of our product candidates or other products, or necessary quantities of such materials on time or at an acceptable cost.

 

We currently do not have our own manufacturing facilities and rely on third-party manufacturers to supply the quantities of ABI-H0731, ABI-H2158 and ABI-H3733 used in our clinical and nonclinical trials and drug substance and drug product for our Microbiome program. In the past, we have relied exclusively on third-party manufacturers to supply drug substance and drug product materials for our Microbiome program. We are currently transitioning some of the third-party manufacturing to a small scale internal manufacturing facility to supply quantities of our microbiome drug substance and drug product for use in our planned nonclinical studies and early phase clinical trials. In addition, if any product candidate we might develop or acquire in the future receives FDA or other regulatory approval, we will need to either manufacture commercial quantities of the product on our own or rely on one or more third-party contractors to manufacture our products. The establishment of internal manufacturing capabilities is difficult and costly, and we may not be successful in doing so. If, for any reason, we are unable to establish our own manufacturing capabilities and we are unable to rely on any third-party sources we have identified to manufacture our product candidates, either for clinical trials or, at some future date, for commercial quantities, then we would need to identify and contract with additional or replacement third-party manufacturers to manufacture compounds, drug substance and drug products for nonclinical, clinical and commercial purposes. We might not be successful in identifying additional or replacement third-party manufacturers, or in negotiating acceptable terms with any that we do identify. If we are unable to establish and maintain manufacturing capacity either on our own or through third parties, the development and sales of our products and our financial performance will be materially and adversely affected.

 

In addition, before we or any of our collaborators can begin to commercially manufacture our product candidates, each manufacturing facility and process is subject to regulatory review. Manufacturing of drugs for clinical and commercial purposes must comply with the FDA’s cGMPs and applicable non-U.S. regulatory requirements. The cGMP requirements govern quality control and documentation policies and procedures. Complying with cGMP and non-U.S. regulatory requirements will require that we expend time, money, and effort in production, recordkeeping, and quality control to assure that the product meets applicable specifications and other requirements. Any manufacturing facility must also pass a pre-approval inspection prior to FDA approval. Failure to pass a pre-approval inspection might significantly delay FDA approval of our product candidates. If we or any of our future collaborators fails to comply with these requirements with respect to the manufacture of any of our product candidates, regulatory action could limit the jurisdictions in which we are permitted to sell our products, if approved. As a result, our business, financial condition, and results of operations might be materially harmed.

 

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We are exposed to the following risks with respect to the manufacture of our product candidates:

 

If we are unable to establish our own manufacturing capabilities, we will need to identify manufacturers for commercial supply on acceptable terms, which we may not be able to do because the number of potential manufacturers is limited, and the FDA must approve any new or replacement contractor. This approval would generally require compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA approval, if any.

 

We or any third-party manufacturers with whom we contract might be unable to formulate and manufacture our product candidates in the volume and of the quality required to meet our clinical and, if approved, commercial needs in a timely manner.

 

Any third-party manufacturers with whom we contract might not perform as agreed or might not remain in the contract manufacturing business for the time required to supply our clinical trials or to produce, store and distribute successfully our products.

 

One or more of any third-party manufacturers with whom we contract could be foreign, which increases the risk of shipping delays and adds the risk of import restrictions.

 

Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with cGMP and other government regulations and corresponding foreign requirements. Any internal manufacturing facilities we establish may fail to comply, and we would not have complete control over any third-party manufacturers’ compliance, with these regulations and requirements.

 

We may be required to obtain additional intellectual property rights from third parties in order to manufacture our product candidates, and if any third-party manufacturer makes improvements in the manufacturing process for our product candidates, we might not own, or might have to share, the intellectual property rights to the innovation with our licensors.

 

We may be required to share our trade secrets and know-how with third parties, thereby risking the misappropriation or disclosure of our intellectual property by or to third parties.

   

If we contract with third-party manufacturers, we might compete with other companies for access to these manufacturers’ facilities and might be subject to manufacturing delays if the manufacturers give other clients higher priority than us.

 

Each of these risks could delay our development efforts, nonclinical studies and clinical trials or the approval, if any, of our product candidates by the FDA or applicable non-U.S. regulatory authorities or the commercialization of our product candidates and could result in higher costs or deprive us of potential product revenues. As a result, our business, financial condition, and results of operations might be materially harmed.

 

If we or our collaborators cannot compete successfully for market share against other companies, we might not achieve sufficient product revenues and our business will suffer.

 

If our product candidates receive approval from the FDA or applicable non-U.S. regulatory authorities, they will compete with a number of existing and future drugs and biologics developed, manufactured and marketed by others. Existing or future competing drugs might provide greater therapeutic convenience or clinical or other benefits for a specific indication than our product candidates or might offer comparable performance at a lower cost. If our product candidates fail to capture and maintain market share, we might not achieve sufficient product revenues and our business will suffer.

 

We might compete against fully integrated pharmaceutical or biotechnology companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs or have substantially greater financial resources than we do, as well as significantly greater experience in:

 

developing drugs;

 

undertaking nonclinical testing and human clinical trials;

 

obtaining FDA and other regulatory approvals of drugs;

 

formulating and manufacturing drugs; and

 

launching, marketing and selling drugs.

 

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We may not have or be able to obtain the same resources and experience as our competitors. If we are unable to perform these tasks effectively and efficiently, our results of operations might be materially adversely affected.

 

Developments by competitors might render our product candidates or technologies obsolete or non-competitive.

 

The pharmaceutical and biotechnology industries are intensely competitive. In addition, the clinical and commercial landscape for HBV, ulcerative colitis (UC), inflammatory bowel disease (IBD), including Crohn’s disease, irritable bowel syndrome (IBS), nonalcoholic steatohepatitis disease (NASH) and immuno-oncology is rapidly changing; we expect new data from commercial and clinical-stage products to continue to emerge. We will compete with organizations that have existing treatments and that are or will be developing treatments for the indications that our product candidates target. If our competitors develop effective treatments for HBV, UC, IBD, IBS, NASH and immuno-oncology or any other indication or field we might pursue, and successfully commercialize those treatments, our business and prospects might be materially harmed, due to intense competition in these markets.

 

Our product candidates under development in our Microbiome program will be subject to regulation as biologics. These candidates, and any other future product candidates for which we or our collaborators intend to seek approval as biologic products, may face competition sooner than anticipated.

 

The Patient Protection and Affordable Care Act (ACA) signed into law on March 23, 2010, includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 (BPCIA), which created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement the BPCIA may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

 

We believe that if product candidates from our Microbiome program are approved as biological products under a BLA, they should qualify for the 12-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

  

If we or our collaborators are not able to develop collaborative marketing relationships with licensees or partners, or create effective internal sales, marketing, and distribution capability, we might be unable to market our products successfully.

 

To market our product candidates, if approved, we will have to establish our own marketing and sales force or out-license our product candidates to, or collaborate with, larger firms with experience in marketing and selling pharmaceutical products. There can be no assurance that we will be able to successfully establish our own marketing capabilities or establish marketing, sales, or distribution relationships with third parties; that such relationships, if established, will be successful; or that we will be successful in gaining market acceptance for our product candidates. To the extent that we enter into any marketing, sales, or distribution arrangements with third parties, our product revenues will be lower than if we marketed and sold our products directly, and any revenues we receive will depend upon the efforts of such third parties. If we are unable to establish such third-party sales and marketing relationships, or choose not to do so, we will have to establish our own in-house capabilities. We, as a company, have no experience in marketing or selling pharmaceutical products and currently have no sales, marketing, or distribution infrastructure. To market any of our products directly, we would need to develop a marketing, sales, and distribution force that both has technical expertise and the ability to support a distribution capability. To establish our own marketing, sales, and distribution capacity would significantly increase our costs, and require substantial additional capital. In addition, there is intense competition for proficient sales and marketing personnel, and we might not be able to attract individuals who have the qualifications necessary to market, sell, and distribute our products. There can be no assurance that we will be able to establish internal marketing, sales, or distribution capabilities.

 

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The commercial success of our product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors 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 payors 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:

 

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

 

the pricing and cost-effectiveness of our products relative to competing products or therapies, including generic drugs or biosimilars, if available;

 

the labeling of any approved product;

 

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

 

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

 

the effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any; and

 

the availability of third-party insurance coverage or governmental reimbursement.

 

Even if a potential product displays a favorable efficacy and safety profile in nonclinical 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.

 

If we lose key management or scientific personnel, cannot recruit qualified employees, directors, officers, or other significant personnel or experience increases in our compensation costs, our business might materially suffer.

 

We are highly dependent on the services of our executive officers and senior management team. Our employment agreements with our executive officers and senior management team members do not ensure their retention.

 

Furthermore, our future success also depends, in part, on our ability to identify, hire, and retain additional management team members as our operations grow and our ability to replace our management team members in the event any leave us for any reason. We expect to experience intense competition for qualified personnel and might be unable to attract and retain the personnel necessary for the development of our business. Finally, we do not currently maintain, nor do we intend to obtain in the future, “key man” life insurance that would compensate us in the event of the death or disability of any of the members of our management team.

 

The failure by us to retain, attract and motivate executives and other key employees could have a material adverse impact on our business, financial condition and results of operations.

 

If we are unable to hire additional qualified personnel, our ability to grow our business might be harmed.

 

As of September 30, 2018, we had 92 employees and contracts with a number of temporary contractors, consultants and contract research organizations. We will need to hire or contract with additional qualified personnel with expertise in clinical research and testing, formulation and manufacturing and sales and marketing to commercialize our HBV drug candidates and our microbiome biotherapeutic candidates or any other product candidate we may seek to develop. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for these individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.

 

We might not successfully manage our growth.

 

Our success will depend upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our current and future management and other administrative and operational resources. To manage this growth, we may need to expand our facilities, augment our operational, financial and management systems and hire and train additional qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.

 

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We might seek to develop our business through acquisitions of or investment in new or complementary businesses, products or technologies, and the failure to manage these acquisitions or investments, or the failure to integrate them with our existing business, could have a material adverse effect on us.

 

We might consider opportunities to acquire or invest in other technologies, products and businesses that might enhance our capabilities or complement our current product candidates. Potential and completed acquisitions and strategic investments involve numerous risks, including potential problems or issues associated with the following:

 

assimilating the purchased technologies, products or business operations;

 

maintaining uniform standards, procedures, controls and policies;

 

unanticipated costs associated with the acquisition or investment;

 

diversion of our management’s attention from our preexisting business;

 

maintaining or obtaining the necessary regulatory approvals or complying with regulatory requirements; and

 

adverse effects on existing business operations.

 

We have no current commitments with respect to any acquisition or investment in other technologies or businesses. We do not know if we will identify suitable acquisitions, whether we will be able to successfully complete any acquisitions, or whether we will be able to successfully integrate any acquired product, technology or business into our business or retain key personnel, suppliers or collaborators.

 

Our ability to develop successfully our business through acquisitions would depend on our ability to identify, negotiate, complete and integrate suitable target businesses or technologies and obtain any necessary financing. These efforts could be expensive and time consuming and might disrupt our ongoing operations. If we are unable to integrate efficiently any acquired business, technology or product into our business, our business and financial condition might be adversely affected.

 

Risks Related to Our Regulatory and Legal Environment

 

We are and will be subject to extensive and costly government regulation and the failure to comply with these regulations may have a material adverse effect on our operations and business.

 

Product candidates employing our technology are subject to extensive and rigorous domestic government regulation including regulation by the FDA, the Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human Services, the U.S. Department of Justice, state and local governments, and their respective foreign equivalents. Both before and after approval of any product, we and our collaborators, suppliers, contract manufacturers and clinical investigators are subject to extensive regulation by governmental authorities in the United States and other countries, covering, among other things, testing, manufacturing, quality control, clinical trials, post-marketing studies, labeling, advertising, promotion, distribution, import and export, governmental pricing, price reporting and rebate requirements. Failure to comply with applicable requirements could result in one or more of the following actions: warning or untitled letters; unanticipated expenditures; delays in approval or refusal to approve a product candidate; voluntary product recall; product seizure; interruption of manufacturing or clinical trials; operating or marketing restrictions; injunctions; criminal prosecution and civil or criminal penalties including fines and other monetary penalties; exclusion from federal health care programs such as Medicare and Medicaid; adverse publicity; and disruptions to our business. Further, government investigations into potential violations of these laws would require us to expend considerable resources and face adverse publicity and the potential disruption of our business even if we are ultimately found not to have committed a violation. If products employing our technologies are marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not they have obtained FDA approval for a given product and its uses. Such foreign regulation might be equally or more demanding than corresponding U.S. regulation.

 

Government regulation substantially increases the cost and risk of researching, developing, manufacturing, and selling our product candidates. The regulatory review and approval process, which includes nonclinical testing and clinical trials of each product candidate, is lengthy, expensive, and uncertain. We or our collaborators must obtain and maintain regulatory authorization to conduct clinical trials and approval for each product we intend to market, and the manufacturing facilities used for the products must be inspected and meet legal requirements. Securing regulatory approval requires submitting extensive nonclinical and clinical data and other supporting information for each proposed therapeutic indication in order to establish the product’s safety and efficacy for each intended use. The development and approval process might take many years, requires substantial resources, and might never lead to the approval of a product.

  

Even if we or our collaborators are able to obtain regulatory approval for a particular product, the approval might limit the intended medical uses for the product, limit our ability to promote, sell, and distribute the product, require that we conduct costly post-marketing surveillance, and/or require that we conduct ongoing post-marketing studies. Material changes to an approved product, such as, for example, manufacturing changes or revised labeling, might require further regulatory review and approval. Once obtained, any approvals might be withdrawn, including, for example, if there is a later discovery of previously unknown problems with the product, such as a previously unknown safety issue.

  

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If we, our collaborators, or our contract manufacturers fail to comply with applicable regulatory requirements at any stage during the regulatory process, such noncompliance could result in, among other things, delays in the approval of applications or supplements to approved applications; refusal by a regulatory authority, including the FDA, to review pending market approval applications or supplements to approved applications; untitled letters or warning letters; fines; import and export restrictions; product recalls or seizures; injunctions; total or partial suspension of production; civil penalties; withdrawals of previously approved marketing applications; recommendations by the FDA or other regulatory authorities against governmental contracts; and/or criminal prosecutions.

 

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we or our collaborators are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

 

We, or any current or future collaborators, cannot assure you that we will receive the approvals necessary to commercialize for sale any of our product candidates, or any product candidate we acquire or develop in the future. We will need FDA approval to commercialize our product candidates in the United States and approvals from the applicable regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any product candidate, we must submit to the FDA an NDA, in the case of our HBV-cure program, or a BLA, in the case of our product candidates in our Microbiome program, demonstrating that the product candidate is safe for humans and effective for its intended use (for biological products, this standard is referred to as safe, pure and potent). This demonstration requires significant research, nonclinical studies, and clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our research and clinical approaches will result in drugs or biological products that the FDA considers safe for humans and effective for their indicated uses. The FDA has substantial discretion in the approval process and might require us to conduct additional nonclinical and clinical testing, perform post-marketing studies or otherwise limit or impose conditions on any approval we obtain.

 

The approval process might also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals might:

 

delay commercialization of, and our ability to derive product revenues from, our product candidates;

 

impose costly procedures on us; and

 

diminish any competitive advantages that we might otherwise enjoy.

 

Even if we comply with all FDA requests, the FDA might ultimately reject one or more of our NDAs or BLAs. We cannot be sure that we will ever obtain regulatory approval for our product candidates. Failure to obtain FDA approval of our product candidates will severely undermine our business by leaving us without a saleable product, and therefore without any source of revenues, until another product candidate could be developed or obtained. There is no guarantee that we will ever be able to develop an existing, or acquire another, product candidate.

 

In foreign jurisdictions, we must receive approval from the appropriate regulatory authorities before we can commercialize any product candidates. The risks associated with foreign regulatory approval processes are similar to the risks associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals necessary to commercialize our product candidates for sale outside the United States.

 

Even if our product candidates are approved, we and our collaborators will be subject to extensive post-approval regulation, including ongoing obligations and continued regulatory review, which may result in significant additional expense. If approved, our product candidates could be subject to post-marketing restrictions or withdrawal from the market and we, or any collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory requirements or if we, or they, experience unanticipated problems with our products following approval.

 

Once a product candidate is approved, numerous post-approval requirements apply. Among other things, we and our collaborators will be subject to requirements regarding testing, manufacturing, quality control, clinical trials, post-marketing studies, labeling, advertising, promotion, distribution, import and export, governmental pricing, price reporting and rebate requirements. The holder of an approved NDA or BLA is subject to ongoing FDA oversight, monitoring and reporting obligations, including obligations to monitor and report adverse events and instances of the failure of a product to meet the specifications in the NDA or BLA. Application holders must submit new or supplemental applications and obtain FDA approval for changes to the approved product, product labeling, or manufacturing process, depending on the nature of the change. Application holders also must submit advertising and other promotional material to the FDA and report on ongoing clinical trials. The FDA also has the authority to require changes in the labeling of approved drug products and to require post-marketing studies. The FDA can also impose distribution and use restrictions under a REMS.

 

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Advertising and promotional materials must comply with FDA rules in addition to other applicable federal and state laws. The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act. Manufacturing facilities remain subject to FDA inspection and must continue to adhere to the FDA’s cGMP requirements. Sales, marketing, and scientific/educational grant programs, among other activities, must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each 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.

 

Depending on the circumstances, failure to meet these post-approval requirements can result in criminal prosecution, fines, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, or refusal to allow us to enter into supply contracts, including government contracts. In addition, even if we comply with FDA and other requirements, new information regarding the safety or effectiveness of a product could lead the FDA to modify or withdraw product approval.

 

The policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the current administration may impact our business and industry. Namely, the current administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. Notably, on January 30, 2017, an Executive Order was issued directing all executive agencies, including the FDA, that, for each notice of proposed rulemaking or final regulation to be issued in fiscal years 2018 and beyond, the agencies must identify regulations to offset any incremental cost of a new regulation. On September 8, 2017, the FDA published notices in the Federal Register soliciting broad public comment to identify regulations that could be modified in compliance with these Executive Orders. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. In addition, if we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.

 

Even if we or our collaborators are able to commercialize any product candidates, those products may become subject to unfavorable pricing regulations, third-party coverage and reimbursement practices or healthcare reform initiatives, which would harm our business.  

 

The regulations that govern marketing approvals, pricing and reimbursement for new medicines vary widely from country to country. In the United States, recently enacted legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a medicine before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a medicine in a particular country, but then be subject to price regulations that delay our commercial launch of the medicine, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the medicine in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain marketing approval.

 

Our ability to commercialize any medicines successfully also will depend in part on the extent to which reimbursement for these medicines and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product candidate that we commercialize and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize successfully any product candidate for which we obtain marketing approval.

 

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There may be significant delays in obtaining reimbursement for newly approved medicines, and coverage may be more limited than the purposes for which the medicine is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any medicine will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new medicines, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the medicine and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost medicines and may be incorporated into existing payments for other services. Net prices for medicines may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of medicines from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to obtain promptly coverage and profitable payment rates from both government-funded and private payors for any approved product candidates that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize product candidates and our overall financial condition.

 

In the United States and in other countries, there have been, and we expect there will continue to be, a number of legislative and regulatory proposals to change the healthcare system in ways that could significantly affect our business. International, federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. The U.S. government and other governments have shown significant interest in pursuing healthcare reform, as evidenced by the Patient Protection and Affordable Care Act and its amendment, the Health Care and Education Reconciliation Act (the ACA).

 

Among the provisions of the ACA of importance to our potential drug candidates are the following:

 

an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologics;

 

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

 

expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance;

 

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices;

 

extension of manufacturers’ Medicaid rebate liability;

 

expansion of eligibility criteria for Medicaid programs;

 

expansion of the entities eligible for discounts under the Public Health Service Act pharmaceutical pricing program;

 

new requirements to report financial arrangements with physicians and teaching hospitals;

 

a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and

 

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

 

Since its enactment, there have been many judicial, Presidential, and Congressional challenges to numerous aspects of the ACA. In 2012, the U.S. Supreme Court heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of the Healthcare Reform Act. The Supreme Court’s decision upheld most of the Healthcare Reform Act and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, as a result of tax reform legislation passed in late December 2017, the individual mandate has been eliminated. The long ranging effects of the elimination of the individual mandate on the viability of the ACA are unknown at this time.

 

On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, Centers for Medicare & Medicaid Services has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. The full impact of the ACA, any law repealing and/or replacing elements of it, and the political uncertainty surrounding any repeal or replacement legislation on our business remains unclear.

 

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In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, then President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and other healthcare funding. Further, in some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. The continuing efforts of U.S. and other governments, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce healthcare costs may adversely affect our ability to set satisfactory prices for our products, to generate revenues from the sale of products, and to achieve and maintain profitability.

 

We and our collaborators may be subject, directly or indirectly, to applicable U.S. federal and state anti-kickback, false claims laws, physician payment transparency laws, fraud and abuse laws or similar healthcare and security laws and regulations, and health information privacy and security laws, which could expose us or them to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

Healthcare providers, physicians and others play a primary role in the recommendation and prescription of any products for which we obtain regulatory approval. If we obtain FDA approval for any of our drug candidates and begin commercializing those drugs in the United States, our operations may be subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician payment sunshine laws and regulations. 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. The laws that may affect our ability to operate include:

 

the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs;

 

federal civil and criminal false claims laws and civil monetary penalty laws, such as the federal False Claims Act, which impose criminal and civil penalties and authorize civil whistleblower or qui tam actions, against individuals or entities for, among other things: knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent; making a false statement or record material to a false or fraudulent claim or obligation to pay or transmit money or property to the federal government; or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;

 

the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

 

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information;

 

the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

the U.S. federal Food, Drug and Cosmetic Act (FDCA), which prohibits, among other things, the adulteration or misbranding of drugs, biologics and medical devices, and the Public Health Service Act (PHSA), which prohibits, among other things, the introduction into interstate commerce of a biological product unless a biologics license is in effect for that product;

 

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the federal transparency requirements under the ACA, including the provision commonly referred to as the Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the U.S. Department of Health and Human Services information related to payments or other transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and

 

federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers.

 

Additionally, we are subject to state and non-U.S. equivalents of each of the healthcare laws described above, among others, some of which may be broader in scope and may apply regardless of the payor. Many U.S. states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not just governmental payors, including private insurers. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties.

 

In addition, regulators globally are also imposing greater monetary fines for privacy violations. For example, in 2016, the European Union adopted a new regulation governing data practices and privacy called the General Data Protection Regulation (GDPR), which became effective on May 25, 2018. The GDPR applies to any company established in the European Union as well as to those outside the European Union if they collect and use personal data in connection with the offering goods or services to individuals in the European Union or the monitoring of their behavior.  The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements and onerous new obligations on services providers. Non-compliance with the GDPR may result in monetary penalties of up to €20 million or 4% of worldwide revenue, whichever is higher. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of personal data, such as healthcare data or other sensitive information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services in jurisdictions that we may operate in.

 

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the ACA, among other things, amends the intent requirement of the federal Anti-Kickback and criminal healthcare fraud statutes. As a result of such amendment, a person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them in order to have committed a violation. Moreover, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

 

Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including penalties, fines and/or exclusion or suspension from federal and state healthcare programs such as Medicare and Medicaid and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the U.S. government under the federal False Claims Act as well as under the false claims laws of several states.

 

Law enforcement authorities are increasingly focused on enforcing fraud and abuse laws, and it is possible that some of our practices may be challenged under these laws. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. In addition, the approval and commercialization of any of our drug candidates outside the United States will also likely subject us to non-U.S. equivalents of the healthcare laws mentioned above, among other non-U.S. laws.

 

If any of the physicians or other providers or entities with whom we expect to do business with are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs, which may also adversely affect our business.

 

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

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to refine our disclosure controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we will file with the SEC is properly recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are also continuing to improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

 

Our current controls and any new controls that we develop in the future may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will be required to include in our periodic reports that will be filed with the SEC. If we were to have ineffective disclosure controls and procedures or internal control over financial reporting, our investors could lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.

 

We face the risk of product liability claims and might not be able to obtain insurance.

 

Our business exposes us to the risk of product liability claims that are inherent in the development of drugs and biotherapeutics. If the use of one or more of our product candidates or approved drugs, if any, harms people, we might be subject to costly and damaging product liability claims brought against us by clinical trial participants, consumers, health care providers, pharmaceutical companies or others selling our products. Our inability to obtain sufficient product liability/clinical trial insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop. We cannot predict all of the possible harms or side effects that might result and, therefore, the amount of insurance coverage we maintain might not be adequate to cover all liabilities we might incur. We intend to expand our insurance coverage to include product liability insurance covering the sale of commercial products if we obtain marketing approval for our drug candidates in development, but we might be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. If we are unable to obtain insurance at an acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which might materially and adversely affect our business and financial position. If we are sued for any injury allegedly caused by our products, our liability could exceed our total assets and our ability to pay the liability. Any successful product liability claims or series of claims brought against us would decrease our cash and could cause the value of our common stock to decrease.

 

We might be exposed to liability claims associated with the use of hazardous materials and chemicals.

 

Our research, development and manufacturing activities and/or those of our third-party contractors might involve the controlled use of hazardous materials and chemicals. Although we will strive to have our safety procedures, and those of our contractors, for using, storing, handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages, and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products might require us to incur substantial compliance costs that could materially adversely affect our business, financial condition and results of operations. We currently do not carry hazardous materials liability insurance. We intend to obtain such insurance in the future, if necessary, but cannot give assurance that we could obtain such coverage.

 

Our employees, independent contractors, consultants, collaborators and contract research organizations may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could result in significant liability for us and harm our reputation.

 

We are exposed to the risk of fraud or other misconduct, including intentional failure to:

 

comply with FDA regulations or similar regulations of comparable foreign regulatory authorities;

 

provide accurate information to the FDA or comparable foreign regulatory authorities;

 

comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities;

 

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comply with the United States Foreign Corrupt Practices Act (the FCPA), the U.K. Bribery Act 2010, the PRC Criminal Law, the PRC Anti-unfair Competition Law and other anti-bribery laws;

 

report financial information or data accurately; or

 

disclose unauthorized activities to us.

 

Misconduct could also involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in our nonclinical studies or clinical trials or illegal misappropriation of product materials, which could result in regulatory sanctions, delays in clinical trials, or serious harm to our reputation. We have adopted a code of conduct for our directors, officers and employees (the Code of Conduct), but it is not always possible to identify and deter employee misconduct. The precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could harm our business, results of operations, financial condition and cash flows, including through the imposition of significant fines or other sanctions.

 

We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations (collectively, Trade Laws). We can face serious consequences for violations.

 

Among other matters, Trade Laws prohibit companies and their employees, agents, clinical research organizations, legal counsel, accountants, consultants, contractors, and other partners from authorizing, promising, offering, providing, soliciting, or receiving directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. We also expect our non-U.S. activities, particularly in China, to increase in time. We engage third parties for clinical trials and/or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals. We can be held liable for the corrupt or other illegal activities of our personnel, agents, or partners, even if we do not explicitly authorize or have prior knowledge of such activities.

 

We have international operations, including in China, and conduct clinical trials outside of the United States. A number of risks associated with international operations could materially and adversely affect our business.

 

We expect to be subject to a number of risks related with our international operations, many of which may be beyond our control. These risks include:

 

different regulatory requirements for drug approvals in foreign countries;

 

different standards of care in various countries that could complicate the evaluation of our product candidates;

 

different U.S. and foreign drug import and export rules;

 

different reimbursement systems and different competitive drugs indicated to treat the indication for which our product candidates are being developed;

 

reduced protection for intellectual property rights in certain countries;

 

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

compliance with the FCPA and other anti-corruption and anti-bribery laws;

 

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

foreign taxes, including withholding of payroll taxes;

 

foreign currency fluctuations and compliance with foreign currency exchange rules, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country; and

 

business interruptions resulting from geopolitical actions, including tariffs, war and terrorism, or natural disasters.

 

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Risks Related to Our Intellectual Property

 

Our business depends on protecting our intellectual property.

 

If we and our licensors, IURTC and Therabiome, do not obtain protection for our respective intellectual property rights, our competitors might be able to take advantage of our research and development efforts to develop competing drugs. Our success, competitive position and future revenues, if any, depend in part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.

 

We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and chemical and biological compositions that are important to our business. To date, although our licensors and the Company have filed patent applications and we have an issued patent in the U.S. related to our licensed delivery technology, which is expected to expire in 2034, we do not own or have any rights to any issued patents that cover any of our product candidates, and we cannot be certain that we will secure any rights to any issued patents with claims that cover any of our proprietary product candidates and technologies. The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection.

 

The patent process also is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our products by obtaining and defending patents. These risks and uncertainties include the following:

 

Any patent rights, if obtained, might be challenged, invalidated, or circumvented, or otherwise might not provide any competitive advantage;

 

Our competitors, many of which have substantially greater resources than we do and many of which might make significant investments in competing technologies, might seek, or might already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products either in the United States or in international markets;

 

As a matter of public policy regarding worldwide health concerns, there might be significant pressure on the U.S. government and other international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful; and

 

Countries other than the United States might have patent laws that provide less protection than those governing U.S. courts, allowing foreign competitors the ability to exploit these laws to create, develop, and market competing products.

 

In addition, the U.S. Patent and Trademark Office (the USPTO) and patent offices in other jurisdictions have often required that patent applications concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain patents, the patents might be substantially narrower than anticipated.

 

Patent and other intellectual property protection is crucial to the success of our business and prospects, and there is a substantial risk that such protections, if obtained, will prove inadequate. Our business and prospects will be harmed if we fail to obtain these protections or they prove insufficient.

 

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

 

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We may 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.

 

We rely on trade secret protections through confidentiality agreements with our employees, collaborators and other parties, and the breach of these agreements could adversely affect our business and prospects.

 

We rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality, invention, and non-disclosure agreements with our employees, scientific advisors, consultants, collaborators, suppliers, and other parties. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that our trade secrets will not otherwise become known to or independently developed by our competitors. If any of these events occurs, or we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.

 

If our employees or consultants breach their confidentiality obligations, to be able to enforce these confidentiality provisions, we would need to know of the breach and have sufficient funds to enforce the provisions. We cannot assure you that we would know of or be able to afford enforcement of any breach. In addition, such provisions are subject to state law and interpretation by courts, which could limit the scope and duration of these provisions. Any limitation on or non-enforcement of these confidentiality provisions could have an adverse effect on our business.

 

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 any 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.

 

If our efforts to protect our proprietary technologies are not adequate, we may not be able to compete effectively in our market.

 

We rely upon a combination of patents, trade secret protection and contractual arrangements to protect the intellectual property related to our technologies. We will only be able to protect our products and proprietary information and technology by preventing unauthorized use by third parties to the extent that our patents, trade secrets, and contractual position allow us to do so. Any disclosure to or misappropriation by third parties of our trade secrets or confidential information could compromise our competitive position. Moreover, we may in the future be involved in legal or administrative proceedings involving our intellectual property initiated by third parties, and which proceedings can result in significant costs and commitment of management time and attention. As our product candidates continue in development, third parties may attempt to challenge the validity and enforceability of our patents and proprietary information and technologies.

 

We may in the future be involved in initiating legal or administrative proceedings involving the product candidates and intellectual property of our competitors. These proceedings can result in significant costs and commitment of management time and attention, and there can be no assurance that our efforts would be successful in preventing or limiting the ability of our competitors to market competing products.

 

Composition-of-matter patents relating to the active pharmaceutical ingredient (API) are generally considered to be the strongest form of intellectual property protection for pharmaceutical products. Such patents provide protection not limited to any one method of use. Method-of-use patents protect the use of a product for the specified method(s), and do not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. We rely on a combination of these and other types of patents to protect our product candidates, and there can be no assurance that our intellectual property will create and sustain the competitive position of our product candidates.

 

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Biotechnology and pharmaceutical product patents involve highly complex legal and scientific questions and can be uncertain. Any patent applications that we own or license may fail to result in issued patents. Even if patents do successfully issue from our applications, third parties may challenge their validity or enforceability, which may result in such patents being narrowed, invalidated, or held unenforceable. Even if our patents and patent applications are not challenged by third parties, those patents and patent applications may not prevent others from designing around our claims and may not otherwise adequately protect our product candidates. If the breadth or strength of protection provided by the patents and patent applications we hold with respect to our product candidates is threatened, competitors with significantly greater resources could threaten our ability to commercialize our product candidates. Discoveries are generally published in the scientific literature well after their actual development, and patent applications in the United States and other countries are typically not published until 18 months after filing, and in some cases are never published. Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned and licensed patents or patent applications, or that we or our licensors were the first to file for patent protection covering such inventions. Subject to meeting other requirements for patentability, for U.S. patent applications filed prior to March 16, 2013, the first to invent the claimed invention is entitled to receive patent protection for that invention while, outside the United States, the first to file a patent application encompassing the invention is entitled to patent protection for the invention. The United States moved to a “first to file” system under the Leahy-Smith America Invents Act (AIA), effective March 16, 2013. The effects of this change and other elements of the AIA are currently unclear, as the USPTO is still implementing associated regulations, and the applicability of the AIA and associated regulations to our patents and patent applications have not been fully determined. This new system also includes new procedures for challenging issued patents and pending patent applications, which creates additional uncertainty. We may become involved in any variety of proceedings challenging our patents and patent applications or the patents and patent applications of others, and the outcome of any such proceedings are highly uncertain. An unfavorable outcome in any such proceedings could reduce the scope of, invalidate, and/or find our patent rights unenforceable, allowing third parties to commercialize our technology and compete directly with us, or result in our inability to manufacture, develop or commercialize our product candidates without infringing the patent rights of others. In addition to ongoing changes with the AIA and USPTO regulations, recent decisions of the Supreme Court of the United States, and the possibility of statutory change to patent subject matter eligibility law advocated by such groups as the Intellectual Property Owners Association and the American Intellectual Property Law Association, provide additional uncertainty.

 

In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how, information, or technology that is not covered by our patents. Although our agreements require all of our employees to assign their inventions to us, and we require all of our employees, consultants, advisors and any third parties who have access to our trade secrets, proprietary know-how and other confidential information and technology to enter into appropriate confidentiality agreements, we cannot be certain that our trade secrets, proprietary know-how and other confidential information and technology will not be subject to unauthorized disclosure or that our competitors will not otherwise gain access to or independently develop substantially equivalent trade secrets, proprietary know-how and other information and technology. Furthermore, the laws of some foreign countries, in particular China, where we anticipate increasing our activity and commercializing our product candidates, do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property globally. If we are unable to prevent unauthorized disclosure of our intellectual property related to our product candidates and technology to third parties, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business and operations.

 

Our reliance on third parties and agreements with collaboration partners requires us to share our trade secrets, which increases the possibility that a competitor may discover them or that our trade secrets will be misappropriated or disclosed.

 

Our reliance on third-party contractors to develop and manufacture our product candidates is based upon agreements that limit the rights of the third parties to use or disclose our confidential information, including our trade secrets and know-how. Despite the contractual provisions, the need to share trade secrets and other confidential information increases the risk that such trade secrets and information are disclosed or used, even if unintentionally, in violation of these agreements. In the highly competitive markets in which our product candidates are expected to compete, protecting our trade secrets, including our strategies for addressing competing products, is imperative, and any unauthorized use or disclosure could impair our competitive position and may have a material adverse effect on our business and operations.

 

In addition, some of our collaboration partners are larger, more complex organizations than ours, and the risk of inadvertent disclosure of our proprietary information may be increased despite their internal procedures and contractual obligations in place with our collaboration partners. Despite our efforts to protect our trade secrets and other confidential information, a competitor’s discovery of such trade secrets and information could impair our competitive position and have an adverse impact on our business.

 

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We are developing an extensive worldwide patent portfolio. The cost of maintaining our patent protection is high and maintaining our patent protection requires continuous review and compliance in order to maintain worldwide patent protection. We may not be able to maintain effectively our intellectual property position throughout the major markets of the world.

 

The USPTO and foreign patent authorities require maintenance fees and payments as well as continued compliance with a number of procedural and documentary requirements. Noncompliance may result in abandonment or lapse of the subject patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance may result in reduced royalty payments for lack of patent coverage in a particular jurisdiction from our collaboration partners or may result in competition, either of which could have a material adverse effect on our business.

 

We have made, and will continue to make, certain strategic decisions in balancing costs and the potential protection afforded by the patent laws of certain countries. As a result, we may not be able to prevent third parties from practicing our inventions in all countries throughout the world, or from selling or importing products made using our inventions in and into the United States or other countries. Third parties may use our technologies in territories in which we have not obtained patent protection to develop their own products and, further, may infringe our patents in territories which provide inadequate enforcement mechanisms, even if we have patent protection. Such third-party products may compete with our product candidates, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

 

The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States, and we may encounter significant problems in securing and defending our intellectual property rights outside the United States

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in certain countries. The legal systems of certain countries, particularly countries such as China, do not always favor the enforcement of patents, trade secrets, and other intellectual property rights, particularly those relating to pharmaceutical and biotechnology products, which could make it difficult for us to stop infringement of our patents, misappropriation of our trade secrets, or marketing of competing products in violation of our proprietary rights. In China, our intended establishment of significant operations will depend in substantial part on our ability to enforce effectively our intellectual property rights in that country. Proceedings to enforce our intellectual property rights in foreign countries could result in substantial costs and divert our efforts and attention from other aspects of our business and could put our patents in these territories at risk of being invalidated or interpreted narrowly, or our patent applications at risk of not being granted and could provoke third parties to assert claims against us. We may not prevail in all legal or other proceedings that we may initiate and, if we were to prevail, the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

Intellectual property rights do not address all potential threats to any competitive advantage we may have.

 

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and intellectual property rights may not adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:

 

Others may be able to make compounds that are the same as or similar to our current or future product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed.

 

We or any of our licensors or strategic partners might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own or have exclusively licensed.

 

We or any of our licensors or strategic partners might not have been the first to file patent applications covering certain of our inventions.

 

Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.

 

The prosecution of our pending patent applications may not result in granted patents.

 

Granted patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.

 

Patent protection on our product candidates may expire before we are able to develop and commercialize the product, or before we are able to recover our investment in the product.

 

Our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for such activities, as well as in countries in which we do not have patent rights and may then use the information learned from such activities to develop competitive products for sale in markets where we intend to market our product candidates.

 

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The existence of counterfeit pharmaceutical products in pharmaceutical markets may damage our brand and reputation and have a material adverse effect on our business, operations and prospects.

 

Counterfeit products, including counterfeit pharmaceutical products, are a significant problem, particularly in China. Counterfeit pharmaceuticals are products sold or used for research under the same or similar names, or similar mechanism of action or product class, but which are sold without proper licenses or approvals. The proliferation of counterfeit pharmaceuticals has grown in recent years and may continue to grow in the future. Such products may be used for indications or purposes that are not recommended or approved or for which there is no data or inadequate data with regard to safety or efficacy. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product. If counterfeit pharmaceuticals illegally sold or used for research result in adverse events or side effects to consumers, we may be associated with any negative publicity resulting from such incidents. Consumers may buy counterfeit pharmaceuticals that are in direct competition with our pharmaceuticals, which could have an adverse impact on our revenues, business and results of operations. In addition, counterfeit products could be used in nonclinical studies or clinical trials or could otherwise produce undesirable side effects or adverse events that may be attributed to our products as well, which could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the delay or denial of regulatory approval by the FDA or other regulatory authorities and potential product liability claims. With respect to China, although the government has recently been increasingly active in policing counterfeit pharmaceuticals, there is not yet an effective counterfeit pharmaceutical regulation control and enforcement system in China. As a result, we may not be able to prevent third parties from selling or purporting to sell our products in China. The existence of and any increase in the sales and production of counterfeit pharmaceuticals, or the technological capabilities of counterfeiters, could negatively impact our revenues, brand reputation, business and results of operations.

 

Risks Related to Our Common Stock

 

We might not be able to maintain the listing of our common stock on the Nasdaq Capital Market.

 

Our common stock is listed on the Nasdaq Capital Market under the symbol “ASMB.” We might not be able to maintain the listing standards of that exchange. If we fail to maintain the listing requirements, our common stock might trade on the OTC Bulletin Board or in the “pink sheets” maintained by OTC Markets Group Inc. These alternative markets are generally considered to be markets that are less efficient and less broad than the Nasdaq Capital Market. A delisting of our common stock from the Nasdaq Capital Market and our inability to list the stock on another national securities exchange could negatively impact us by: (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets and (iv) impairing our ability to provide equity incentives to our employees.

 

The price of our common stock might fluctuate significantly, and you could lose all or part of your investment.

 

Since our merger with Assembly Pharmaceuticals on July 11, 2014 through September 30, 2018, the closing price of our common stock has fluctuated between $4.54 and $64.16. Continued volatility in the market price of our common stock might prevent a stockholder from being able to sell shares of our common stock at or above the price paid for such shares. The trading price of our common stock might be volatile and subject to wide price fluctuations in response to various factors, including:

 

the progress, results and timing of our clinical trials and nonclinical studies and other studies involving our product candidates;

 

success or failure of our product candidates;

 

the receipt or loss of required regulatory approvals for our product candidates;

 

availability of capital;

 

future issuances by us of our common stock or securities exercisable for or convertible into common stock;

 

sale of shares of our common stock by our significant stockholders or members of our management;

 

additions or departures of key personnel;

 

investor perceptions of us and the pharmaceutical industry;

 

issuance of new or changed securities analysts’ reports or recommendations, or the announcement of any changes to our credit rating;

 

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introduction of new products or announcements of significant contracts, acquisitions or capital commitments by us or our competitors;

 

threatened or actual litigation and government investigations;

 

legislative, political or regulatory developments;

 

the overall performance of the equity markets;

 

actual or anticipated fluctuations in our quarterly financial and operating results;

 

general economic conditions;

 

changes in interest rates; and

 

changes in accounting standards, policies, guidance, interpretations or principles.

 

These and other factors might cause the market price of our common stock to fluctuate substantially, which might limit or prevent investors from readily selling their shares of our common stock and might otherwise negatively affect the liquidity of our common stock. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies across many industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Accordingly, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of our common stock may be volatile, and in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

 

At September 30, 2018, our executive officers and directors owned approximately 6.3% of our outstanding voting common stock, and this group together with other stockholders holding beneficially 5% of more of our outstanding voting common stock, owned approximately 43.7% of our outstanding voting common stock. Therefore, these stockholders, if acting together, have the ability to influence us through their ownership position. These stockholders may be able to determine the outcome of certain significant matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

Our ability to use our net operating loss and credit carryforwards to offset future taxable income may be subject to certain limitations.

 

At December 31, 2017, we had potentially utilizable gross Federal net operating loss carryforwards of approximately $153.2 million, State net operating loss carry-forwards of approximately $165.0 million and research and development credit carry forward of approximately $5.6 million, all of which expire between 2027 and 2037. Our ability to utilize our net operating loss and credit carryforwards is dependent upon our ability to generate taxable income in future periods and may be limited due to restrictions imposed on utilization of net operating loss and credit carryforwards under federal and state laws upon a change in ownership.

 

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change,” is subject to annual limitations on its ability to use its pre-change net operating loss carryforwards (NOLs) and other pre-change tax attributes (such as research tax credits) to offset its post-change income or taxes. For these purposes, an ownership change generally occurs where the equity ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a three-year period (calculated on a rolling basis). We have determined that an ownership change occurred in each of December 2010, January 2013 and October 2014. The result of these ownership changes is that approximately $40.0 million of our approximately $153.2 million of net operating losses will not be available to us to offset future taxable income. In addition, we may experience ownership changes in the future, some of which are outside our control. Accordingly, we may not be able to utilize a material portion of our net operating losses or credits. Limitations on our ability to utilize our net operating losses to offset U.S. federal taxable income could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of net operating losses is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

 

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Because U.S. federal net operating losses incurred in taxable periods beginning before January 1, 2018 generally may be carried forward for up to 20 years, the annual limitation may effectively provide a cap on the cumulative amount of pre-ownership change losses, including certain recognized built-in losses that may be utilized. Such pre-ownership change losses in excess of the cap may be lost. In addition, if an ownership change were to occur, it is possible that the limitations imposed on our ability to use pre-ownership change losses and certain recognized built-in losses could cause a net increase in our U.S. federal income tax liability and require U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect. Further, if for financial reporting purposes the amount or value of these deferred tax assets is reduced, such reduction would have a negative impact on the book value of our common stock.

 

In addition, under the Tax Cuts and Jobs Act (the Tax Act), the amount of U.S. federal net operating losses generated in taxable periods beginning after December 31, 2017 that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. The Tax Act generally eliminates the ability to carry back any post-2017 NOL to prior taxable years, while allowing unused post-2017 NOLs to be carried forward indefinitely. There is a risk that due to ownership changes, changes in law or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.

 

We do not intend to pay dividends for the foreseeable future and our stock may not appreciate in value.

 

We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or that the price at which our stockholders have purchased their shares will be able to be maintained.

 

The requirements of being a public company add to our operating costs and might strain our resources and distract our management.

 

As a public company, we face increased legal, accounting, administrative and other costs and expenses not faced by private companies. We are subject to the reporting requirements of the Exchange Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, and the listing standards of the Nasdaq Capital Market, each of which imposes additional reporting and other obligations on public companies. Although we are currently unable to estimate these costs with any degree of certainty, we expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly and place significant strain on our personnel, systems and resources. These increased costs will require us to divert a significant amount of money that we could otherwise use to develop our product candidates or otherwise expand our business. Complying with these requirements might divert management’s attention from other business concerns, which could have a material adverse effect on our prospects, business, and financial condition. If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

 

Several provisions of the Delaware General Corporation Law and our charter documents could discourage, delay or prevent a merger or acquisition, which could adversely affect the market price of our securities.

 

Several provisions of the Delaware General Corporation Law and our charter documents could discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, and the market price of our securities could be reduced as a result. These provisions may include:

 

authorizing the issuance of “blank check” preferred stock, the terms of which we may establish and shares of which we may issue without stockholders’ approval;

 

prohibiting us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder unless certain provisions are met;

 

prohibiting cumulative voting in the election of directors;

 

prohibiting shareholder action by written consent;

 

limiting the persons who may call special meetings of stockholders; and

 

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

 

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If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.

 

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. Currently, a limited number of financial analysts publish reports about us and our business. We do not control these analysts or any other analysts. Furthermore, there are many large, well-established, publicly traded companies active in our industry and market, which may mean that it is less likely that we will receive widespread analyst coverage. If any analyst who covers us downgrades our stock, our stock price would likely decline rapidly. If one or more analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6. Exhibits

 

(a) Exhibits.   The following exhibits are filed as part of this quarterly report on Form 10-Q:

 

Exhibit

Number

  Description of Document  

Filed

Herewith

 

Incorporated

by Reference

from

  Date   Number
                     
10.1   Sub-Sublease, dated as of July 18, 2018, between Prothena Biosciences, Inc., as Sub-Sublandlord, and Assembly Biosciences, Inc., as Sub-Subtenant.   X            
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   X            
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   X            
32.1*   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   X            
32.2*   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   X            
101   Financials in XBRL format.   X            

 

* The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Assembly Biosciences, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

47

 

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Assembly Biosciences, Inc.
     
Date: November 8, 2018 By: /s/ Derek A. Small
    Derek A. Small
    President and Chief Executive Officer
    (Principal Executive Officer)
     
Date: November 8, 2018 By: /s/ Graham Cooper
    Graham Cooper
    Chief Financial Officer and Chief Operating Officer
    (Principal Financial Officer and Principal Accounting Officer)

 

48

 

 

Exhibit 10.1

 

SUB-SUBLEASE

 

Dated as of July 18, 2018

 

between

 

PROTHENA BIOSCIENCES INC,

as Sub-Sublandlord

 

and

 

ASSEMBLY BIOSCIENCES, INC.,

as Sub-Subtenant

 

  331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

TABLE OF CONTENTS

 

      Page
       
1. Sub-Sublease of Premises; Access 24/7 2
       
2. Term; Rent Commencement Date; Early Access 3
       
  2.1 Term; Measurement 3
       
  2.2 Rent Commencement 4
       
  2.3 Utilities 4
       
3. Rent 5
       
  3.1 Base Rent 5
       
  3.2 Management Fee 6
       
  3.3 Operating Costs And Expenses 6
       
  3.4 Building Operating Costs And Expenses 10
       
4. Use 12
       
5. Parking 12
       
  5.1 Spaces 12
       
  5.2 Compliance 13
       
6. Additional Rights 13
       
  6.1 Signage 13
       
  6.2 Other Permits 14
       
7. Broker Commissions 14
       
8. Condition Of Premises 14
       
  8.1 AS IS 14
       
9. Sublease and Master Lease 15
       
  9.1 Compliance With The Sublease and The Master Lease 15
       
  9.2 Excluded Provisions 20
       
  9.3 Inapplicable Amendments 21
       
  9.4 Termination Of Sublease or Master Lease 22
       
  9.5 Holding Over 23
       
  9.6 Compliance with Law 23
       
  9.7 Definitions 24
       
  9.8 Use of Common Areas 24

 

 -i-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

  9.9 Personal Property 24
       
  9.10 Real Property 24
       
  9.11 Intentionally Omitted 24
       
  9.12 Alterations; Surrender Obligations 24
       
  9.13 Maintenance and Repairs 25
       
  9.14 Use; No Nuisance, Compliance with Laws, Liquidation Sales, & Environmental Matters 25
       
  9.15 Insurance 26
       
  9.16 Sublease and Assignment 26
       
  9.17 Right of Entry and Quiet Enjoyment 26
       
  9.18 Casualty and Taking 27
       
  9.19 Default 27
       
  9.20 Subordination 27
       
  9.21 Sale of Sublandlord’s Interest 27
       
  9.22 Estoppel Certificate 27
       
  9.23 Subordination to CC&Rs 28
       
  9.24 Mortgagee Protection 28
       
  9.25 Severability 28
       
  9.26 Surrender; No Merger 28
       
  9.27 Interpretation 28
       
  9.28 No Partnership 28
       
  9.29 Financial Information 28
       
  9.30 Costs 28
       
  9.31 Time 28
       
  9.32 Rules and Regulations 29
       
  9.33 Parking and Traffic 29
       
  9.34 Site Plan 29
       
10. Additional Provisions 29
       
  10.1 Notices 29
       
  10.2 [Intentionally Omitted] 30
       
  10.3 [Intentionally Omitted] 30
       
  10.4 Furniture 30

 

 -ii-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

  10.5 Removal of Personal Property 31
       
  10.6 Waiver 31
       
  10.7 Complete Agreement 31
       
11. Indemnification; Exculpation 32
       
  11.1 Non-Liability Of Sub-Sublandlord 32
       
  11.2 Non-Liability of Sub-Subtenant 32
       
  11.3 Indemnification of Sublandlord; Indemnification of Master Landlord 33
       
  11.4 Indemnification of Sub-Subtenant 33
       
  11.5 Sublandlord Default; Refusal of Consents 33
       
  11.6 Master Landlord Default; Refusal of Consents 34
       
12. Security Deposit 34
       
13. Abatement for Failure of Services 35
       
14. Miscellaneous 35
       
  14.1 Counterparts 35
       
  14.2 Modification 35
       
  14.3 Attorneys’ Fees 35
       
  14.4 Binding Effect 36
       
  14.5 Time Is Of Essence 36
       
  14.6 Governing Law 36
       
  14.7 Representations And Warranties Regarding Authority 36
       
  14.8 Confidentiality 36
       
  14.9 Securities Filings 36
       
  14.10 Publicity 37
       
  14.11 Consents 37
       
  14.12 Cooperation 39
       
  14.13 Certified Access Specialist 39
       
  14.14 Nonresidential Building Energy Use Disclosure Requirement Compliance 39
       
  14.15 Survival 40
       
  14.16 Expansion Option 40
       
  14.17 Right of First Refusal 41

 

 -iii-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

SUB-SUBLEASE

 

THIS SUB-SUBLEASE (this “Sub-Sublease”) is made and entered into this 18th day of July 2018 (the “Effective Date”), by and between PROTHENA BIOSCIENCES INC, a Delaware corporation (“Sub-Sublandlord”), and ASSEMBLY BIOSCIENCES, INC., a Delaware corporation (“Sub-Subtenant”, and together with Sub-Sublandlord, the “Parties”).

 

RECITALS

 

A.           Tularik Inc. (“Original Tenant”), the predecessor-in-interest of Amgen Inc., a Delaware corporation (“Sublandlord”), entered into that certain Build-to-Suit Lease dated as of December 20, 2001 (the “Original Master Lease”) with HCP BTC, LLC (“Master Landlord”), a Delaware limited liability company, formerly known as Slough BTC, LLC, for the initial lease of three (3) buildings in the Oyster Point center in South San Francisco, California (the “Center”) and rights to lease additional buildings to be constructed in the Center. The Original Master Lease was subsequently amended on numerous occasions to, among other things, lease additional space and buildings located in the Center to Original Tenant or Sublandlord.

 

B.           Sublandlord and Master Landlord entered into that certain Fifth Amendment to Build-to-Suit Lease and Second Amendment to Workletter dated as of June 19, 2006 (the “Master Amendment”), pursuant to which Master Landlord leased to Sublandlord and Sublandlord leased from Master Landlord those certain two (2) buildings in the Center with the addresses of 331 Oyster Point Boulevard, as depicted on Exhibit B-1 attached hereto (such building, the “Subleased Premises” or the “331 Building”), and 333 Oyster Point Boulevard (such building, the “333 Building”). The 331 Building consists of 128,751 rentable square feet and the 333 Building consists of 121,706 rentable square feet. The 331 Building and the 333 Building are collectively referred to herein as the “Buildings”. As used herein, the Original Master Lease, as amended by the Master Amendment only shall be referred to as the “Master Lease”, a copy of which is attached as Exhibit A-1 hereto.

 

C.           Sub-Sublandlord and Sublandlord entered into that certain Sublease, dated as of March 22, 2016 (the “Sublease”), pursuant to which Sublandlord leased to Sub-Sublandlord and Sub-Sublandlord leased from Sublandlord the Subleased Premises. A copy of the Sublease is attached as Exhibit A-2 hereto.

 

D.           Sub-Sublandlord and Sub-Subtenant now desire to provide for a sub-sublease of part of the Subleased Premises that comprises a portion of the first (1st) floor of the 331 Building (the “First Floor Premises”) and the entire fourth (4th) floor of the 331 Building (the “Fourth Floor Premises”), all as depicted on Exhibit B-2 attached hereto (the “Complete Premises”), subject to and conditioned upon the terms and conditions set forth herein.

 

 -1-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the recitals set forth above, the agreements set forth below and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sub-Sublandlord and Sub-Subtenant hereby agree as follows:

 

1.           Sub-Sublease of Premises; Access 24/7. Subject and pursuant to the provisions hereof, Sub-Sublandlord subleases to Sub-Subtenant, and Sub-Subtenant subleases from Sub-Sublandlord, the Premises. As used in this Sub-Sublease, at any time the “Premises” shall mean each Delivery Portion (as defined below) that Sub-Sublandlord shall have then delivered to Sub-Subtenant. Sub-Sublandlord may from time to time designate portions of the Complete Premises to deliver to Sub-Subtenant (each, a “Delivery Portion”) (which may comprise all of the Complete Premises); provided, however, that (a) Sub-Subtenant must have reasonable access to such Delivery Portion and (b) the first Delivery Portion with respect to the Fourth Floor Premises must include as much of the Fourth Floor Premises as can then be delivered in accordance with applicable law, it being understood that (x) if the Stair Closure Work (as defined below) has been completed at such time, then the first Delivery Portion with respect to the Fourth Floor Premises is expected to include all of the Fourth Floor Premises and (y) if the Stair Closure Work has not been completed at such time, then the first Delivery Portion with respect to the Fourth Floor Premises will include as much of the Fourth Floor Premises as can then be delivered in accordance with applicable law (but in no event shall such delivery consist of less than 35,020 rentable square feet). Sub-Sublandlord shall use good faith efforts to (1) submit and obtain any and all necessary permits required to be obtained by Sub-Sublandlord under this Lease for Sub-Sublandlord to deliver the Complete Premises to Sub-Subtenant, (2) complete any and all improvements required to be completed by Sub-Sublandlord under this Lease for Sub-Sublandlord to deliver the Complete Premises to Sub-Subtenant, (3) deliver the Fourth Floor Premises not later than the date that is ninety (90) days after the Effective Date, and (4) deliver the Complete Premises not later than November 30, 2018. As used in this Sub-Sublease, “Delivery Date” shall mean each date on which Sub-Sublandlord delivers a Delivery Portion to Sub-Subtenant. Sub-Sublandlord shall have no obligation to deliver any Delivery Portion to Sub-Subtenant until all of the following have been satisfied: (i) this Sub-Sublease has been executed and delivered by Sub-Sublandlord and Sub-Subtenant, (ii) all consents necessary for the effectiveness of this Sub-Sublease have been executed and delivered, including, without limitation, any consents required pursuant to the Master Lease, including the Master Landlord Consent (as defined in Section 14.11.2), and the Sublease, including the Sublandlord Consent (as defined in Section 14.11.1), (iii) as a condition to the delivery of the first Delivery Portion to be delivered by Sub-Sublandlord to Sub-Subtenant only, (A) Sub-Subtenant has delivered to Sub-Sublandlord the first month’s Base Rent, Operating Expenses and Building Operating Expenses, as more particularly set forth in Sections 3.1, 3.3.1 and 3.4.1 below and (B) Sub-Subtenant has delivered to Sub-Sublandlord the Security Deposit (as defined in Section 12 below); (iv) Sub-Subtenant has delivered to Sub-Sublandlord written evidence that Sub-Subtenant carries the insurance Sub-Subtenant is required to carry as set forth in Section 9.15 of this Sub-Sublease in form and substance reasonably acceptable to Sub-Sublandlord; and (v) as a condition to the delivery of any Delivery Portion that constitutes First

 

 -2-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

Floor Premises only, Sub-Sublandlord shall have received, to the extent required by applicable law, approval from the applicable local and state governmental authorities with respect to decommissioning of any such Delivery Portion that is currently used as wet laboratory space (each such approval, a “Decommissioning Approval”). Sub-Sublandlord shall deliver the First Floor Premises vacant, in good condition with all systems serving the First Floor Premises in good repair, and fully demised including doorways to adjacent premises not subleased sealed. Following receipt of the Master Landlord Consent and the Sublandlord Consent, Sub-Sublandlord shall diligently proceed to close the stairs connecting the third (3rd) and fourth (4th) floors of the 331 Building (the “Stair Closure Work”). Sub-Subtenant acknowledges and agrees that Sub-Sublandlord intends to vacate portions of the first floor of the 331 Building and to convert portions of the first floor of the 331 Building into laboratory space before Sub-Sublandlord seeks any Decommissioning Approval for certain portions of the first floor of the 331 Building.

 

Subject to the terms of the Sublease and the Master Lease incorporated into this Sub-Sublease, Sub-Subtenant shall have access to the Premises 24 hours per day, seven days a week, 52 weeks per year. For the avoidance of doubt, Sub-Subtenant’s access to the 331 Building prior to the first Delivery Date shall be at Sub-Sublandlord’s sole discretion.

 

2.            Term; Rent Commencement Date; Early Access.

 

2.1           Term; Measurement. The term (the “Term”) of this Sub-Sublease shall commence upon the date (the “Commencement Date”) that this Sub-Sublease has been executed and delivered by Sub-Sublandlord and Sub-Subtenant, all consents necessary for the effectiveness of this Sub-Sublease have been executed and delivered, including, without limitation, any consents required pursuant to the Master Lease, including the Master Landlord Consent, and the Sublease, including the Sublandlord Consent, and shall continue until December 15, 2023 (the “Expiration Date”), unless sooner terminated pursuant to the provisions of this Sub-Sublease. The obligation to pay Rent (as defined in Section 3.3.5 below) shall commence upon the earliest Rent Commencement Date as described in Section 2.2 below, and shall continue throughout the Term. Sub-Sublandlord and Sub-Subtenant hereby agree that (i) the Complete Premises are deemed to consist of 46,641 rentable square feet (comprised of 37,955 usable square feet plus 8,686 shared square feet), (ii) the First Floor Premises are deemed to consist of 7,730 rentable square feet (comprised of 6,290 usable square feet plus 1,440 shared square feet), (ii) the three (3) labs constituting a portion of the First Floor Premises are deemed to consist of 4,467 rentable square feet (comprised of 3,635 usable square feet plus 832 shared square feet), (iii) the tissue culture space constituting a portion of the First Floor Premises is deemed to consist of 3,263 rentable square feet (comprised of 2,655 usable square feet plus 608 shared square feet) and (iv) the Fourth Floor Premises are deemed to consist of 38,911 rentable square feet (comprised of 31,665 usable square feet plus 7,246 shared square feet), in each case, without regard to the actual rentable square feet, usable square feet or shared square feet of such areas. Neither Party makes, and neither Party has made, any representation or warranty with respect to the size of the Premises or the Complete Premises; each Party is responsible for undertaking its own analysis of the size of the Premises and the Complete Premises; and neither Party is relying on any representation, warranty or

 

 -3-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

statement made by the other Party with respect to the size of the Premises or the Complete Premises in connection with this Sub-Sublease.

 

2.2          Rent Commencement.

 

2.2.1           Rent Commencement Date. Sub-Subtenant’s obligation to pay Base Rent, Operating Expenses and Building Operating Expenses under this Sub-Sublease shall commence, with respect to any Delivery Portion, on the Delivery Date with respect to such Delivery Portion (each, a “Rent Commencement Date”).

 

2.2.2           Confirmation of Dates and Measurements. Following the request of either Party, the Parties agree to promptly execute and deliver a factually-correct written confirmation documenting the Commencement Date, each Rent Commencement Date, and the Expiration Date. Sub-Sublandlord and Sub-Subtenant shall jointly determine the rentable square feet of any Delivery Portion and the Premises, subject to the agreed determinations of the rentable square feet of the Complete Premises and certain portions thereof as set forth in Section 2.1. Following the request of either Party, the Parties agree to promptly execute and deliver a written confirmation documenting the rentable square feet of each Delivery Portion and the Premises.

 

2.3          Utilities. From and after each Delivery Date, Sub-Subtenant shall be solely responsible to pay for all utilities and services provided to the Premises (including water, electricity, gas, heat, sewer, telephone, alarm system and janitorial), including any taxes on such services and utilities. However, if any of the utilities are not separately metered, then Sub-Subtenant shall pay, within five (5) business days of Sub-Subtenant’s receipt of Sub-Sublandlord’s invoice therefor, the amount reasonably determined by Sub-Sublandlord to be Sub-Subtenant’s equitable share of the monthly charge for any such utilities (or Sub-Sublandlord may include such costs in Building Operating Expenses (as defined in Section 3.4.1 below). Sub-Subtenant shall not, without Sub-Sublandlord’s prior written consent, use heat-generating machines, machines other than normal fractional horsepower office machines, or equipment or lighting other than building standard lights in the Premises, which may affect the temperature otherwise maintained by the air conditioning system or increase the water normally furnished for the Premises. If such consent is given Sub-Sublandlord shall have the right to require installation of supplementary air conditioning units or other facilities in or serving the Premises, including supplementary or additional metering devices, and all of the reasonable costs thereof allocable to the Premises, including the cost of installation, operation and maintenance, increased wear and tear on existing equipment (subject to normal wear and tear) and other similar charges, shall be paid by Sub-Subtenant to Sub-Sublandlord upon billing by Sub-Sublandlord.

 

 -4-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

3.            Rent.

 

3.1          Base Rent. Commencing on the earliest Rent Commencement Date, Sub-Subtenant shall pay as monthly base rent for the Premises (“Base Rent”) at the rates set forth in the following table:

 

Months   Monthly Base Rent per
rentable square foot
  Monthly Base Rent for the
Complete Premises
(following delivery of
Premises)
Rent Commencement Date –August 31, 2019    $4.85 per rentable square foot   $226,208.85 (prorated)
September 1, 2019-August 31, 2020    $5.02 per rentable square foot   $234,137.82
September 1, 2020-August 31, 2021    $5.20 per rentable square foot   $242,533.20
September 1, 2021-August 31, 2022    $5.38 per rentable square foot   $250,928.58
September 1, 2022-August 31, 2023   $5.57 per rentable square foot   $259,790.37
September 1, 2023-December 15, 2023     $5.76 per rentable square foot  

$268,652.16

(prorated for December)

 

Such Base Rent shall be applicable to the months set forth above without regard to when any Rent Commencement Date actually occurs. Base Rent and Additional Rent (as defined herein) shall be paid to Sub-Sublandlord without demand, deduction, set-off or counterclaim, in each case except as expressly provided to the contrary herein, in advance, with respect to any calendar month during the Term of this Sub-Sublease, on the date that is at least five (5) days before the end of the preceding calendar month during the Term of this Sub-Sublease, except Sub-Subtenant shall pay the Base Rent that would be payable with respect to the Complete Premises for the first (1st) full calendar month within two (2) business days following the earliest Rent Commencement Date (as if the Premises were comprised of the Complete Premises at such time) (which amount is $226,208.85). Such pre-paid Base Rent shall be applied to the Monthly Base Rent of the Premises as it becomes due for subsequent months until exhausted. In the event of a partial rental month as a result of a Rent Commencement Date occurring on a day other than the first (1st) day of a calendar

 

 -5-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

month, Base Rent with respect to the Delivery Portion to which such Rent Commencement Date relates shall be prorated on the basis of the number of actual days in such month. All payments due to Sub-Sublandlord shall be paid to Sub-Sublandlord by wire transfer to the following bank account:

 

 

[redacted]

 

 

or such other payment method as Sub-Sublandlord may specify in a written notice delivered pursuant to Section 10.1 below.

 

3.2          Management Fee. Concurrently with each payment of Base Rent, Sub-Subtenant shall pay to Sub-Sublandlord a management fee equal to 3.0% of such payment of Base Rent for any Premises delivered (the “Management Fee”). Notwithstanding the foregoing, Sub-Subtenant shall not be required to pay the Management Fee if Sub-Sublandlord has retained a manager to manage the 331 Building and includes the management fee owed to such manager as a Building Operating Expense.

 

3.3          Operating Costs And Expenses.

 

3.3.1           Payment; Annual Statement of Operating Expenses. Commencing on the earliest Rent Commencement Date, Sub-Subtenant shall pay to Sub-Sublandlord, as “Additional Rent” hereunder, all of the Operating Expenses (as defined in the Master Lease) allocated to the Premises under this Sub-Sublease, the Sublease and the Master Lease. All Operating Expenses shall be payable, in advance, with respect to any calendar month during the Term of this Sub-Sublease, on the date that is at least five (5) days before the end of the preceding calendar month during the Term of this Sub-Sublease in accordance with Section 9.3 of the Original Master Lease, except Sub-Subtenant shall pay the estimated Operating Expenses that would be payable with respect to the Complete Premises for the first (1st) full calendar month after the earliest Rent Commencement Date (as if the Premises were comprised of the Complete Premises at such time) (currently estimated to be $41,063.30, subject to adjustment and reconciliation in accordance with the terms hereof) within two (2) business days following the earliest Rent Commencement Date (as if the Premises were comprised of the Complete Premises at such time). Such pre-payment of Operating Expenses shall be applied to Operating Expenses as amounts become due until exhausted. Within thirty (30) days following Sub-Sublandlord’s receipt thereof, Sub-Sublandlord shall provide Sub-Subtenant with copies of (i) Master Landlord’s estimated statement of Operating Expenses (as applicable to the Premises) provided to Sub-Sublandlord pursuant to Section 3.3.1 of the Sublease, as may be adjusted from time to time pursuant to the terms of the Master Lease or the Sublease, and (ii) Master Landlord’s annual

 

 -6-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

statement of Operating Expenses (as applicable to the Premises) provided to Sub-Sublandlord pursuant to Section 3.3.1 of the Sublease (with reference to Section 9.3 of the Master Lease), as may be adjusted from time to time pursuant to the terms of the Master Lease or the Sublease). Sub-Sublandlord agrees that Sub-Subtenant shall be entitled, upon reasonable written notice to Sub-Sublandlord and during normal business hours at Sub-Sublandlord’s office or such other place as Sub-Sublandlord shall designate, to inspect and examine Sub-Sublandlord’s books and records relating to the determination and payment of Operating Expenses (including, for the avoidance of doubt, the Building Operating Expenses) related to the Premises for the immediately preceding Lease Year. Subject to the Incorporation Provisions (defined below), the provisions of Article 9 of the Master Lease are incorporated herein only to the extent specifically referenced in this Sub-Sublease. Further, Sub-Subtenant acknowledges and agrees that, although Article 9 of the Original Master Lease is not otherwise specifically incorporated into this Sub-Sublease, Article 9 of the Master Lease governs and controls for all purposes the determination of Operating Expenses payable by Sub-Sublandlord that Sub-Sublandlord is passing through to Sub-Subtenant in accordance with the terms of this Section 3.3. Notwithstanding anything in this Sub-Sublease to the contrary, Sub-Subtenant shall not be required to pay any Operating Expenses attributable to or arising from the Phase I Buildings (as defined in the Original Master Lease), it being agreed that Sub-Subtenant shall only be obligated to pay Operating Expenses that Sub-Sublandlord is obligated to pay under the Master Lease or the Sublease that are allocated by Master Landlord or Sublandlord to the Subleased Premises (and further allocated by the Sub-Sublandlord to the Premises), without duplication, subject to Sub-Subtenant’s audit rights set forth in Section 3.3.3. Notwithstanding anything in this Sub-Sublease to the contrary, in no event shall the Operating Expenses allocated to the Premises under the Sublease or the Master Lease be less than the Proportional Share of Operating Expenses of the Operating Expenses that are allocated to the Subleased Premises under the Sublease. “Proportional Share of Operating Expenses” means a fraction, the numerator of which is the number of rentable square feet of the Premises at the time of the calculation and the denominator of which is the number of rentable square feet of the Subleased Premises that is occupied by Sub-Sublandlord, Sub-Subtenant or any other person or entity (the “Occupied Subleased Premises”), which as of the first Delivery Date is expected to be equal to approximately 39.6% and, upon the date of delivery of the Complete Premises, is expected to be equal to 47.5%.

 

3.3.2           Pro-ration. If the Term shall commence on any day other than January 1 or expire or earlier terminate on any date other than December 31, Sub-Subtenant’s obligations under Section 3.3.1 for such first or last partial calendar year shall be prorated on the basis of (a) the number of days elapsed during such calendar year during which this Sub-Sublease is in effect bears to (b) 365. In the event that the Term shall expire or earlier terminate on any date other than December 31, for purposes of Section 3.3.1, Sub-Sublandlord may either reasonably project, as of the date of such expiration or termination, the Operating Expenses for such calendar year and bill Sub-Subtenant for Sub-Subtenant’s share thereof at any time thereafter or wait until receipt of Master Landlord’s calculation thereof for the entire calendar year in question and bill Sub-Subtenant for Sub-Subtenant’s share thereof at any time thereafter; provided, however, if Sub-Sublandlord reasonably projects the amount of such Operating

 

 -7-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

Expenses, Sub-Sublandlord shall reconcile such projection with the actual Operating Expenses due following the receipt of the actual annual statement of Operating Expenses for such calendar year and shall follow the terms of Section 9.4(a) of the Original Master Lease with respect to the amounts owed or to be reimbursed. Sub-Sublandlord shall from time to time equitably adjust the estimated Operating Expenses payable by Sub-Subtenant to reflect, with respect to the then-current calendar year, (i) the delivery by Sub-Sublandlord to Sub-Subtenant of any Delivery Portion during such calendar year and the increase in the Proportional Share of Operating Expenses in connection therewith and (ii) any increase or decrease in the Occupied Subleased Premises and the increase or decrease, as applicable, in the Proportional Share of Operating Expenses in connection therewith; provided, that for purposes of this Section 3.3, the Occupied Subleased Premises shall not be deemed to decrease as a result of Sub-Sublandlord’s failure to occupy any portion of the Subleased Premises that is occupied by Sub-Sublandlord as of the Effective Date.

 

If the obligation to pay any component of Rent under this Sub-Sublease commences on a day other than the first day of a calendar month, or if the Term of this Sub-Sublease terminates on a day other than the last day of a calendar month, the Rent for such first or last month of the Term shall be prorated based on the number of days the Term of this Sub-Sublease is in effect during such month. If an increase in Rent becomes effective on a day other than the first day of a calendar month, the calculation of Rent for such month shall be the sum of the two applicable rates, each prorated for the portion of the month during which such rate is in effect.

 

3.3.3           Annual Reconciliation; Accounting; Audit Rights. Because the Master Lease and the Sublease provide for the payment by Sub-Sublandlord of Operating Expenses on the basis of an estimate thereof, as and when adjustments between estimated and actual Operating Expenses are made under the Master Lease or the Sublease, as applicable, the obligations of Sub-Sublandlord and Sub-Subtenant hereunder shall be adjusted in a like manner; and if any such adjustment shall occur after the expiration or earlier termination of the Term, then the obligations of Sub-Sublandlord and Sub-Subtenant under this Section 3 shall survive such expiration or termination. Sub-Subtenant shall pay those Operating Expenses allocated to the Premises by the Sub-Sublandlord based on Master Landlord’s estimate thereof (as it may be adjusted from time to time in accordance with the Master Lease) provided to Sub-Subtenant pursuant to Section 3.3.1 above. Within thirty (30) days after Sub-Sublandlord receives from the Sublandlord the annual statement of actual Operating Expenses incurred by Master Landlord (the “Accounting”), Sub-Sublandlord shall provide Sub-Subtenant an accounting of the actual Operating Expenses payable with respect to the Premises as reflected in the Accounting. Sub-Sublandlord shall equitably adjust the Accounting, with respect to the period to which the Accounting relates, to reflect the delivery by Sub-Sublandlord to Sub-Subtenant of any Delivery Portion during such period and the increase in the Proportional Share of Operating Expenses in connection therewith. In the event that the Accounting shows that Sub-Subtenant paid more or less than the actual Operating Expenses payable by Sub-Subtenant hereunder, then Sub-Subtenant shall either promptly receive a credit against future Rent (or such amount shall be promptly paid to Sub-Subtenant if the Term has expired or been terminated) or shall be required to pay to Sub-Sublandlord the deficient amount within twenty (20) days after Sub-Subtenant’s receipt of such

 

 -8-331 OYSTER POINT BOULEVARD.
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Accounting. Sub-Sublandlord shall, upon the written request of Sub-Subtenant and at Sub-Subtenant’s sole cost and expense, request in writing that Sublandlord exercise its rights to examine Master Landlord’s books and records in a commercially reasonable manner (subject to, and in accordance with, the terms of the Sublease and the Master Lease), to confirm the accuracy of the Operating Expenses identified in the annual statement provided by Master Landlord as payable with respect to the Premises. In such event, Sub-Sublandlord shall deliver the results of such examination to Sub-Subtenant promptly after Sub-Sublandlord receives such results from Sublandlord, and shall reasonably cooperate with Sub-Subtenant, Sublandlord and Master Landlord to resolve any outstanding issues or concerns in accordance with the terms of the Master Lease and the Sublease. Subject to the foregoing, any and all amounts paid by Sub-Sublandlord under the Sublease or the Master Lease for Operating Expenses, real estate taxes or assessments, and other charges with respect to the Premises accrued during the Term (or otherwise due to the actions of Sub-Subtenant, or its agents, employees or contractors) shall be conclusively deemed to be accurate and binding upon Sub-Subtenant for purposes of interpretation of this Section 3.

 

3.3.4           Payment of Extra Charges. In addition to the amounts payable under Section 3.3.1, Sub-Subtenant shall pay to Sub-Sublandlord within seven (7) days of Sub-Subtenant’s receipt of Sub-Sublandlord’s written invoice therefor: (i) any charges, costs, fees or expenses for which Sub-Sublandlord or Sublandlord is separately charged under the Sublease or the Master Lease (and which are not part of Operating Expenses) and which are attributable to the Premises and accrued during the Term, including, without limitation, personal property taxes and excess electrical consumption charges (if any); (ii) any and all other sums of money (other than those attributable to Operating Expenses and the charges, costs, fees or expenses covered by clause (i) above) which are or may become payable by Sub-Sublandlord to Sublandlord or by Sublandlord to Master Landlord relating to the Premises and that have accrued during the Term; (iii) any real property taxes and assessments related to the Premises that are separately billed to Sublandlord or Sub-Sublandlord and that have accrued during the Term; (iv) any and all charges of Master Landlord or other amounts payable to Master Landlord under the Master Lease caused by Sub-Subtenant’s failure to perform its obligations under this Sub-Sublease and (v) any and all charges of Sublandlord or other amounts payable to Sublandlord under the Sublease caused by Sub-Subtenant’s failure to perform its obligations under this Sub-Sublease.

 

3.3.5           “Rent” Definition. All forms of additional rent and any other amounts payable by Sub-Subtenant to Sub-Sublandlord shall be payable by Sub-Subtenant without notice, demand, deduction, offset or abatement, in each case except as expressly provided to the contrary herein, in lawful money of the United States to Sub-Sublandlord at such places and to such persons as Sub-Sublandlord may direct. All such amounts, together with Base Rent, are collectively referred to herein as “Rent.

 

3.3.6           Interest and Late Charges. Subject to the Incorporation Provisions (defined below), Section 3.2 of the Original Master Lease is hereby incorporated by reference. Any interest and late charges accrued under this Section and Section 3.4 below shall be deemed to be “Additional Rent” payable hereunder. Notwithstanding anything

 

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in this Sub-Sublease to the contrary, Sub-Subtenant shall be entitled to a grace period of five (5) business days for the first delinquent payment of Base Rent without the payment of interest or late charges, provided, however, that such late charge and payment of interest shall accrue from and after expiration of such 5-business day grace period.

 

3.4           Building Operating Costs And Expenses.

 

3.4.1           Payment; Annual Statement of Building Operating Expenses. Commencing on the earliest Rent Commencement Date, Sub-Subtenant shall pay to Sub-Sublandlord, as “Additional Rent” hereunder, Sub-Subtenant’s Proportional Share of Building Operating Expenses of the cost of (i) repairing and maintaining the Subleased Premises (including the Building Common Areas and the Building Common Systems (each as defined in Section 9.13 below)) (other than costs, if any, that are included in Operating Expenses or costs paid directly by Sub-Subtenant), but excluding any portion of the Subleased Premises that is not available for use by Sub-Subtenant, (ii) paying real estate taxes and assessments for the Subleased Premises and (iii) procuring and maintaining insurance for the Subleased Premises (other than, in each case, costs that are included in Operating Expenses) (collectively, the “Building Operating Expenses”). All Building Operating Expenses shall be payable, in advance, with respect to any calendar month during the Term of this Sub-Sublease, on the date that is at least five (5) days before the end of the preceding calendar month during the Term of this Sub-Sublease in accordance with Section 9.3 of the Original Master Lease, except Sub-Subtenant shall pay the estimated Building Operating Expenses that would be payable with respect to the Complete Premises for the first (1st) full calendar month after the earliest Rent Commencement Date (as if the Premises were comprised of the Complete Premises at such time) (currently estimated to be $18,525.00, subject to adjustment and reconciliation in accordance with the terms hereof and excluding the cost of utilities) within two (2) business days following the earliest Rent Commencement Date (as if the Premises were comprised of the Complete Premises at such time). Such pre-payment of Building Operating Expenses shall be applied to Building Operating Expenses as amounts become due until exhausted. Sub-Sublandlord shall provide to Sub-Subtenant an estimated statement of Building Operating Expenses with respect to any calendar year (an “Estimate”) not later than March 15 of such calendar year. Sub-Sublandlord shall endeavor to provide an Estimate for the calendar year in which the Commencement Date occurs on or before the Commencement Date. The Estimate may be revised and reissued by Sub-Sublandlord from time to time. “Proportional Share of Building Operating Expenses” means a fraction, the numerator of which is the number of rentable square feet of the Premises at the time of the calculation and the denominator of which is the number of rentable square feet of the Occupied Subleased Premises, which as of the first Delivery Date is expected to be equal to approximately 39.6% and, upon the date of delivery of the Complete Premises, is expected to be equal to 47.5%. In no event will Building Operating Expenses allocated to the Premises be less than the Proportional Share of Building Operating Expenses of the Building Operating Expenses.

 

3.4.2           Pro-ration. If the Term shall commence on any day other than January 1 or expire or earlier terminate on any date other than December 31, Sub-

 

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Subtenant’s obligations under Section 3.4.1 for such first or last partial calendar year shall be prorated on the basis of (a) the number of days elapsed during such calendar year during which this Sub-Sublease is in effect bears to (b) 365. In the event that the Term shall expire or earlier terminate on any date other than December 31, for purposes of Section 3.4.1, Sub-Sublandlord may reasonably project, as of the date of such expiration or termination, the Building Operating Expenses for such calendar year and bill Sub-Subtenant for Sub-Subtenant’s share thereof at any time thereafter; provided, however, if Sub-Sublandlord reasonably projects the amount of such Building Operating Expenses, Sub-Sublandlord shall reconcile such projection with the actual Building Operating Expenses due following the delivery to Sub-Subtenant of the actual annual statement of Building Operating Expenses for such calendar year. If on the basis of such statement Sub-Subtenant owes an amount that is more or less than the estimated payments for such calendar previously made by Sub-Subtenant, Sub-Subtenant or Sub-Sublandlord, as the case may be, shall pay the deficiency to the other Party within thirty (30) days after delivery of the statement. Sub-Sublandlord shall from time to time equitably adjust the estimated Building Operating Expenses payable by Sub-Subtenant to reflect, with respect to the then-current calendar year, (i) the delivery by Sub-Sublandlord to Sub-Subtenant of any Delivery Portion during such calendar year and the increase in the Proportional Share of Building Operating Expenses in connection therewith and (ii) any increase or decrease in the Occupied Subleased Premises and the increase or decrease, as applicable, in the in the Proportional Share of Building Operating Expenses in connection therewith.

 

3.4.3           Annual Reconciliation; Accounting. Sub-Subtenant shall pay those Building Operating Expenses allocated to the Premises by the Sub-Sublandlord based on the Estimate (as it may be adjusted from time to time). Within one hundred twenty (120) days after the end of any calendar year, Sub-Sublandlord shall provide Sub-Subtenant an accounting of the actual Building Operating Expenses payable with respect to the Premises (the “Sub-Sublease Accounting”). Such Sub-Sublease Accounting shall include an equitable adjustment of the actual Building Operating Expenses to reflect, with respect to preceding calendar year, the delivery by Sub-Sublandlord to Sub-Subtenant of any Delivery Portion during such calendar year and the increase in the Proportional Share of Building Operating Expenses in connection therewith. In the event that the Sub-Sublease Accounting shows that Sub-Subtenant paid more or less than the actual Building Operating Expenses payable by Sub-Subtenant hereunder, then Sub-Subtenant shall either promptly receive a credit against future Rent (or such amount shall be promptly paid to Sub-Subtenant if the Term has expired or been terminated) or shall be required to pay to Sub-Sublandlord the deficient amount within fifteen (15) days after Sub-Subtenant’s receipt of such Sub-Sublease Accounting.

 

At any time within one hundred twenty (120) days after receipt of such Sub-Sublease Accounting, Sub-Subtenant shall be entitled, upon reasonable written notice to Sub-Sublandlord and during normal business hours at Sub-Sublandlord's office, to request an independent audit to inspect and examine those books and records of Sub-Sublandlord relating to the determination and payment of Building Operating Expenses relating to the immediately preceding lease year covered by such annual Sub-Sublease Accounting. The independent audit of the books and records shall

 

 -11-331 OYSTER POINT BOULEVARD.
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be conducted by a certified public accountant or professional lease auditor reasonably acceptable to both Sub-Sublandlord and Sub-Subtenant or, if the parties are unable to agree, by a certified public accountant appointed by the Presiding Judge of the San Mateo County Superior Court upon the application of either Sub-Sublandlord or Sub-Subtenant (with notice to the other party). In either event, such certified public accountant shall be one who (i) is not then or at any time within the preceding five (5) years employed in any capacity by Sub-Sublandlord or Sub-Subtenant or by any of their respective affiliates and (ii) is not retained on a contingency fee basis. If it is determined, by mutual agreement of Sub-Sublandlord and Sub-Subtenant or by independent audit, that the amount of Building Operating Expenses billed to or paid by Sub-Subtenant for the applicable lease year was incorrect, then the appropriate party shall pay to the other party the deficiency or overpayment, as applicable, within thirty (30) days after the final determination of such deficiency or overpayment. All costs and expenses of the audit shall be paid by Sub-Subtenant unless the audit shows that Sub-Sublandlord overstated Building Operating Expenses for the subject lease year by more than five percent (5%), in which case Sub-Sublandlord shall pay all costs and expenses of the audit.

 

3.5         Shared Services Fee. Sub-Sublandlord and Sub-Subtenant shall negotiate in good faith a side letter agreement to address allocation of costs for shared services which, to the extent agreed by Sub-Sublandlord and Sub-Subtenant, may include, but are not limited to, specialty gas delivery, lab coat service, glass washing, loading dock receiving, and security.

 

4.           Use. Sub-Subtenant shall use and occupy the Premises only for the purposes set forth in Section 13.1 of the Original Master Lease, and for no other purpose.

 

5.           Parking.

 

5.1           Spaces. Subject to the provisions of this Section 5, Sub-Subtenant shall have the same parking rights as Sub-Sublandlord has with respect to the Premises under the Sublease (the “Parking Spaces”) during the Term, including, without limitation, as set forth in Section 21.20 of the Original Master Lease and Section 1(g) of the Master Amendment; provided, that, for the avoidance of doubt, Sub-Subtenant shall not be entitled to more than Sub-Subtenant’s Proportional Share of the parking spaces constituting the Parking Spaces (rounded up to the next whole parking space). Sub-Sublandlord shall not take any action to cause Master Landlord or Sublandlord to reduce Sub-Sublandlord’s parking rights with respect to the Premises under the Master Lease or the Sublease. All Parking Spaces are unassigned and nonexclusive spaces, and notwithstanding any provision herein or in the Master Lease to the contrary, shall be provided to Sub-Subtenant at no cost or expense, except for expenses included in Operating Expenses pursuant to (i) Section 9.2(a)(vi) of the Master Lease or (ii) the second to last sentence of Section 9.2(b) of the Master Lease.

 

5.2           Compliance. Sub-Subtenant shall comply (and cause each of its employees, contractors, representatives, and invitees using such privileges to comply) with all

 

 -12-331 OYSTER POINT BOULEVARD.
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rules, regulations and requirements of Master Landlord with respect to use of the Parking Spaces, the Transportation Demand Management Plan (TDMP) and other matters relating thereto.

 

6.           Additional Rights.

 

6.1           Signage. Subject to the Incorporation Provisions, Section 11.5 of the Original Master Lease is hereby incorporated by reference; provided, however, that the phrase “with lighted signage” is hereby replaced with “one lighted sign, which shall be located in a location reasonably determined by Sub-Sublandlord to provide Subtenant with visibility”. All signage of Sub-Subtenant, and the right of Sub-Subtenant to install such signage, shall (i) be subject to the terms of the Sublease and the Master Lease, Sublandlord’s reasonable approval, Sub-Sublandlord’s reasonable approval and Master Landlord’s approval, including, without limitation, as to design, composition, size and location (as and to the extent set forth in the Sublease, Master Lease, the Sublandlord Consent or the Master Landlord Consent), (ii) comply with all restrictions and requirements of applicable law and of any covenants, conditions and restrictions or other written agreements now or hereafter applicable to the 331 Building and (iii) be undertaken at Sub-Subtenant’s sole cost and expense, including, without limitation, all costs of installation, maintenance, repair, restoration and removal. Should the signage constructed pursuant to this Section 6.1 (the “Signage”) require maintenance or repairs as determined in Sub-Sublandlord’s reasonable judgment, Sub-Sublandlord shall have the right to provide written notice thereof to Sub-Subtenant and Sub-Subtenant shall cause such repairs and/or maintenance to be performed within sixty (60) days after receipt of such notice from Sub-Sublandlord at Sub-Subtenant’s sole cost and expense. Should Sub-Subtenant fail to perform such maintenance and repairs within the period described in the immediately preceding sentence, Sub-Sublandlord shall have the right to cause such work to be performed and to charge Sub-Subtenant, as “Additional Rent,” for the cost of such work. Upon the expiration or earlier termination of this Sub-Sublease, Sub-Subtenant shall, at Sub-Subtenant’s sole cost and expense, cause the Signage to be removed from the exterior of the 331 Building and shall cause the exterior of the 331 Building to be restored to its condition existing prior to the placement of such Signage (normal wear and tear excepted). If Sub-Subtenant fails to remove such Signage or fails to restore the exterior of the 331 Building as provided in the immediately preceding sentence within thirty (30) days following the expiration or earlier termination of this Sub-Sublease, then Sub-Sublandlord may perform such work, and all costs and expenses incurred by Sub-Sublandlord in so performing such work shall be reimbursed by Sub-Subtenant to Sub-Sublandlord within ten (10) business days after Sub-Subtenant’s receipt of invoice therefor. The immediately preceding sentence shall survive the expiration or earlier termination of this Sub-Sublease. As of the Effective Date, Master Landlord has approved the installation of only one (1) sign on the exterior of the 331 Building. Nothing in this Section 6.1 shall require Sub-Sublandlord to modify or remove Sub-Sublandlord’s signage located on the 331 Building as of the Effective Date so as to permit Sub-Subtenant to install signage on the 331 Building.

 

6.2           Other Permits. Sub-Subtenant will be responsible for obtaining its own permits with respect to any new building systems or any improvements to existing building

 

 -13-331 OYSTER POINT BOULEVARD.
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systems serving the Premises exclusively or which are required for operation of Sub-Subtenant’s business or occupancy of the Premises, including without limitation, certificates of occupancy, fire protection system permits and any necessary permits allowing use of chemicals in the Premises, except for any such permits that may have already been obtained by Sub-Sublandlord and which are freely transferable to Sub-Subtenant without the payment of any transfer fee and without any requirement to obtain the consent of any regulatory, governmental, or quasi-governmental agency with respect to such transfer. Sub-Sublandlord will be responsible for obtaining the Decommissioning Approval and all necessary permits with respect to the Stair Closure Work.

 

7.            Broker Commissions. Each Party represents and warrants that it has dealt with no broker in connection with this Sub-Sublease and the transactions contemplated herein, except that Sub-Sublandlord has been represented by Savills Studley (the “Primary Broker”) and Sub-Subtenant has been represented by Newmark Cornish & Carey (the “Secondary Broker”). Following full execution and delivery of this Sub-Sublease and the Consents, Sub-Sublandlord shall pay the commission payable to the Primary Broker as a result of or in connection with this Sub-Sublease (the “Commission”) pursuant to, and in accordance with, the terms of a separate agreement between the Primary Broker and Sub-Sublandlord (the “Primary Broker Agreement”), and neither Sub-Sublandlord nor Sub-Subtenant shall have any obligation to pay any portion of the Commission or any other commission to the Secondary Broker. It is Sub-Sublandlord’s and Sub-Subtenant’s understanding that the Primary Broker will share the Commission with the Secondary Broker pursuant to the Primary Broker Agreement. Each Party shall indemnify, defend and hold the other Party free and harmless from and against any claim, loss, damage, liability, obligation, cost or expense, including reasonable attorneys’ fees suffered, incurred or asserted arising from the breach of the indemnifying Party’s representations and warranties set forth in this Section 7. Under no circumstances will the Primary Broker, the Secondary Broker or any other broker or agent be deemed to be a third party beneficiary of this Sub-Sublease.

 

8.            Condition Of Premises.

 

8.1           AS IS. Subject to Sub-Sublandlord’s obligation to perform the Stair Closure Work and to demise the First Floor Premises, Sub-Subtenant has inspected the Premises and all improvements located therein, and has agreed to accept the Premises in their “AS-IS” condition, existing as of the Effective Date, and subject to all applicable municipal, county, state and federal laws, ordinances and regulations governing and regulating the use and occupancy of the Premises. Sub-Subtenant hereby agrees that the Stair Closure Work and Sub-Sublandlord’s actions in connection therewith shall in no way constitute a constructive eviction of Sub-Subtenant nor entitle Sub-Subtenant to any abatement of Rent. Sub-Sublandlord shall have no responsibility or for any reason be liable to Sub-Subtenant for any direct or indirect injury to or interference with Sub-Subtenant’s business arising from the Stair Closure Work, nor shall Sub-Subtenant be entitled to any compensation or damages from Sub-Sublandlord for (i) loss of the use of the whole or any part of the Premises or of Sub-Subtenant’s personal property or improvements resulting from the Stair Closure Work or Sub-Sublandlord’s actions in connection therewith or (ii) any inconvenience or annoyance occasioned by such Stair Closure Work or Sub-Sublandlord’s actions in connection

 

 -14-331 OYSTER POINT BOULEVARD.
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therewith, all provided Sub-Sublandlord makes commercially reasonable efforts not to interfere with Sub-Subtenant’s access to or use of the Premises.

 

9.           Sublease and Master Lease.

 

9.1           Compliance With The Sublease and The Master Lease. The terms of this Section 9.1 (including, without limitation, subsections 9.1.1, and 9.1.2 below) shall govern incorporation of any provisions into this Sub-Sublease and such provisions are collectively referred to herein as the “Incorporation Provisions.” Sub-Subtenant shall not cause a breach of the Master Lease or the Sublease, as more particularly set forth in Section 9.1.3 below. Except as otherwise expressly provided hereunder, or as the context of this Sub-Sublease directly indicates otherwise, all of the rights and obligations granted to or imposed on the “Tenant” under the Master Lease with respect to the Premises are hereby granted to or imposed on Sub-Subtenant and all of the rights and granted to the “Landlord” under the Master Lease with respect to the Premises are hereby granted to Sub-Sublandlord. All of the terms and conditions contained in the Master Lease are incorporated herein, except as specifically provided below or in the Sublease, and shall together with the terms and conditions specifically set forth in this Sub-Sublease constitute the complete terms and conditions of this Sub-Sublease. Subject to the following sentence, capitalized terms used but not defined herein have the meanings given thereto in the Master Lease. To the extent the Master Lease terms are incorporated herein, the following defined terms in the Master Lease shall be deemed to have the respective meanings set forth below for purposes of this Sub-Sublease:

 

Defined Term in Master Lease   Definition Under This Sub-Sublease
Building(s)   331 Building (as defined herein), provided, that, if it is clear from the context of the applicable use that references to the “Buildings” should refer to more than just the 331 Building (such as for purposes of calculating the allocation of costs or responsibilities among the 331 Building and other buildings), the reference shall be adjusted as appropriate to equitably allocate such costs or responsibilities to the 331 Building.
Landlord   Sub-Sublandlord (as defined herein)
Lease   Sub-Sublease (as defined herein)
Minimum Rental   Base Rent (as defined herein)
Phase II Building(s)   331 Building (as defined herein), provided, that, if it is clear from the context of the applicable use that references to the “Phase II Buildings” should refer to more than just the 331 Building (such as for purposes of calculating the allocation of costs or responsibilities among the 331 Building and other buildings), the reference shall be adjusted as

 

 -15-331 OYSTER POINT BOULEVARD.
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Defined Term in Master Lease   Definition Under This Sub-Sublease
  appropriate to equitably allocate such costs or responsibilities to the 331 Building.
Phase II Rent Commencement Date   Rent Commencement Date (as defined herein)
Property   The Phase II site shown on the Phase II Site Plan attached to the Master Amendment as Exhibit A.
Rent Commencement Date   Rent Commencement Date (as defined herein)
Tenant   Sub-Subtenant (as defined herein)

 

Subtenant acknowledges that it has read the attached copies of the Sublease and the Master Lease and agrees that this Sub-Sublease is in all respects subject and subordinate to any mortgage, deed, deed of trust, ground lease or other instrument now or hereafter encumbering the Premises or the land on which it is located, to the terms and conditions of the Sublease and the Master Lease and to the matters to which the Sublease or the Master Lease, including, in each case, any amendments thereto, is or shall be subordinate. Sub-Sublandlord agrees that Sub-Sublandlord shall not subordinate its interest in the Sublease or the Master Lease to any future ground Lessor, mortgagee, trustee, beneficiary or leaseback lessor without first receiving a Non-Disturbance Agreement in accordance with Section 19.1 of the Master Lease. Sub-Sublandlord represents and warrants to Sub-Subtenant that (i) the copy of the Sublease attached hereto as Exhibit A-2 is a true and correct copy, (ii) the Sublease is in full force and effect, and, to Sub-Sublandlord’s knowledge, there does not exist any uncured default or event or circumstance which, with the passage of time, would become a default thereunder by either Sub-Sublandlord or Sublandlord, (iii) the redacted copy of each of the Original Master Lease and Master Amendment attached hereto as Exhibit A-1 is a true and correct copy of the redacted version of such document that Sub-Sublandlord received from Sublandlord, (iv) to Sub-Sublandlord’s knowledge, the Master Lease is in full force and effect, and, to Sub-Sublandlord’s knowledge, there does not exist any uncured default or event or circumstance which, with the passage of time, would become a default thereunder by either Sublandlord or Master Landlord, and (v) to Sub-Sublandlord’s knowledge, the expiration date of the Sublease and the Master Lease with respect to the Premises is December 31, 2023. As used herein, the phrase “to Sub-Sublandlord’s knowledge” or similar phrases will be deemed to refer exclusively to matters (i) of which Sub-Sublandlord has received written notice pursuant to the requirements of Section 10.1 of the Sublease or Section 21.1 of the Master Lease, or (ii) within the current actual (as opposed to constructive or imputed) knowledge of Chi Johnson, Senior Manager, Facilities, Prothena Biosciences Inc or Chi Johnson’s successor (“Sub-Sublandlord’s Representative”). No duty of inquiry or investigation on the part of Sub-Sublandlord or Sub-Sublandlord’s Representative will be required or implied and in no event shall Sub-Sublandlord’s Representative have any personal liability therefor.

 

Notwithstanding anything to the contrary set forth herein:

 

9.1.1           Sub-Sublandlord Has No Duty to Perform Sublandlord’s Obligations or Master Landlord’s Obligations.

 

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(a)               Sub-Sublandlord shall have no duty to perform any obligations of Sublandlord. The Parties contemplate that Sublandlord will perform such obligations under the Sublease to the extent required therein and in the event of any default or failure of such performance by Sublandlord, Sub-Sublandlord agrees that it will, upon written request from Sub-Subtenant detailing the nature of such failure, exercise Sub-Sublandlord’s right under the Sublease to require Sublandlord to perform its obligations under the Sublease for the benefit of Sub-Subtenant, including, without limitation, (i) to obtain, at Sub-Subtenant’s sole cost and expense, the consent of Sublandlord whenever the consent of Sublandlord is required under the Sublease, (ii) to make any permitted claims for rent abatement from Sublandlord under the terms of the Sublease, and (iii) upon Sub-Subtenant’s written request, to promptly notify Sublandlord of its nonperformance under the Sublease and request that Sublandlord perform its obligations under the Sublease. Except as specifically provided in Section  13 below, under no circumstances shall Sub-Subtenant be entitled to any free rent period, construction allowance, tenant improvements, or any other such economic incentives provided to Sub-Sublandlord as set forth in the Sublease.

 

(b)               Sub-Sublandlord shall have no duty to perform any obligations of Master Landlord which are, by their nature, the obligation of an owner or manager of real property, except to the extent that Sub-Sublandlord elects to do so pursuant to Section 8 hereof. For example, Sub-Sublandlord shall not be required to (i) provide services, utilities, repairs, maintenance or other tasks which the Master Landlord is required to provide under the Master Lease, (ii) construct any improvements, (iii) procure or maintain the insurance which the Master Landlord is required to procure and maintain under the Master Lease, (iv) develop or implement the Transportation Demand Management Plan (as defined in the Master Lease) or perform its related obligations and activities, or (v) provide any non-disturbance protection in connection with any mortgage, deed, deed of trust, ground lease or other instrument now or hereafter encumbering the Premises. The Parties contemplate that Master Landlord will perform such obligations under the Master Lease to the extent required therein and in the event of any default or failure of such performance by Master Landlord, Sub-Sublandlord agrees that it will, upon written request from Sub-Subtenant detailing the nature of such failure, use good faith, commercially reasonable efforts to require Sublandlord to exercise Sublandlord’s right under the Master Lease to cause Master Landlord to perform its obligations under the Master Lease for the benefit of Sub-Subtenant, and such good faith, commercially reasonable efforts shall include, without limitation, efforts to cause Sublandlord (i) to cause Master Landlord to perform its obligations under the Master Lease for the benefit of Sub-Subtenant, (ii) to obtain, at Sub-Subtenant’s sole cost and expense, the consent of Master Landlord whenever the consent of Master Landlord is required under the Master Lease, (iii) to make any permitted claims for rent abatement from Master Landlord under the terms of the Master Lease, and (iv) upon Sub-Subtenant’s written request, to promptly notify Master Landlord of its nonperformance under the Master Lease and request that Master Landlord perform its obligations under the Master Lease. Except as specifically provided in Section 13 below, under no circumstances shall Sub-Subtenant be entitled to any free rent period, construction allowance, tenant improvements, or any other such economic incentives provided to Sublandlord as set forth in the Master Lease.

 

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9.1.2           Time Periods for Performance; Approvals by Master Landlord, Sublandlord and Sub-Sublandlord. Whenever any provision of the Master Lease specifies a time period in connection with the performance of any liability or obligation by Sub-Subtenant or any notice period or other time condition to the exercise of any right or remedy by Sublandlord or Sub-Sublandlord, such time period shall be shortened in each instance by five (5) business days for the purposes of incorporation into this Sub-Sublease, but in no case shall such period be less than two (2) days or the actual time period for performance set forth in the Master Lease, if shorter. Any default notice or other notice of any obligations (including any billing or invoice for any rent or any other expense or charge due under the Master Lease) from Master Landlord which is received by Sub-Subtenant (whether directly or as a result of being forwarded by Sublandlord or Sub-Sublandlord) shall constitute such notice from Sub-Sublandlord to Sub-Subtenant under this Sub-Sublease without the need for any additional notice from Sub-Sublandlord. Whenever any provision of the Master Lease requires Sub-Subtenant to pay the costs and expenses of “Landlord,” Sub-Subtenant shall pay the costs and expenses of Master Landlord, Sublandlord and Sub-Sublandlord to the extent arising out of this Sub-Sublease (other than costs incurred in connection with obtaining the Consents, which shall be Sub-Sublandlord’s responsibility) or Sub-Subtenant’s use or occupancy of the Premises. Whenever any provision of the Master Lease requires Sub-Subtenant to submit evidence, certificates or other documents or materials, Sub-Subtenant shall submit such items to Sub-Sublandlord, Sublandlord and Master Landlord, and whenever any provision of the Master Lease requires Sub-Subtenant to obtain the approval or consent of “Landlord,” Sub-Subtenant shall be required to obtain the approval or consent of Sub-Sublandlord, Sublandlord and Master Landlord; provided however, that if Master Landlord and Sublandlord provide such consent, Sub-Sublandlord shall not unreasonably withhold, condition or delay consent. In the event of a conflict between the express provisions of this Sub-Sublease and the incorporated provisions of the Master Lease, as between Sub-Sublandlord and Sub-Subtenant, the express provisions of this Sub-Sublease shall control.

 

9.1.3           Sub-Subtenant Shall Not Cause a Breach of Sublease or Master Lease.

 

(a)               Sub-Subtenant shall not do, permit or suffer any act, occurrence or omission which if done, permitted or suffered by Sublandlord or Sub-Sublandlord would be (with notice, the passage of time or both) in violation of or a default by the “Tenant” under the Master Lease or could lead in any respect to the termination of the Master Lease. If Sub-Subtenant shall default in the performance of any of its obligations under this Sub-Sublease, other than its obligation to pay rent to Sub-Sublandlord, Sub-Sublandlord, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of Sub-Subtenant, without notice in a case of emergency and, in all other cases, if the default continues after three (3) business days from the date of written notice thereof from Sub-Sublandlord. Sub-Subtenant shall defend, indemnify and hold Sublandlord and Sub-Sublandlord harmless from any and all third-party claims, suits, judgments, losses, costs, obligations, damages, expenses, or liabilities (collectively, “Claims”), including reasonable attorneys’ fees and costs, arising out of or in connection with any acts or failures to act by Sub-

 

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Subtenant, or its agents, employees or contractors that causes Sublandlord or Sub-Sublandlord to be in a default under the Master Lease or otherwise increases Sublandlord’s or Sub-Sublandlord’s liability or responsibilities under the Master Lease, provided, that, Sub-Subtenant shall not be required to indemnify or defend Sublandlord or Sub-Sublandlord for any Claims to the extent resulting from the negligence or willful misconduct of Sublandlord or Sub-Sublandlord, as applicable.

 

(b)              Sub-Subtenant shall not do, permit or suffer any act, occurrence or omission which if done, permitted or suffered by Sub-Sublandlord would be (with notice, the passage of time or both) in violation of or a default by the “Subtenant” under the Sublease or could lead in any respect to the termination of the Sublease. If Sub-Subtenant shall default in the performance of any of its obligations under this Sub-Sublease, other than its obligation to pay rent to Sub-Sublandlord, Sub-Sublandlord, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of Sub-Subtenant, without notice in a case of emergency and, in all other cases, if the default continues after five (5) business days from the date of written notice thereof from Sub-Sublandlord. Sub-Subtenant shall defend, indemnify and hold Sub-Sublandlord harmless from any and all Claims, including reasonable attorneys’ fees and costs, arising out of or in connection with any acts or failures to act by Sub-Subtenant, or its agents, employees or contractors that causes Sub-Sublandlord to be in a default under the Sublease or otherwise increases Sub-Sublandlord’s liability or responsibilities under the Sublease, provided, that, Sub-Subtenant shall not be required to indemnify or defend Sub-Sublandlord for any Claims to the extent resulting from the negligence or willful misconduct of Sub-Sublandlord.

 

9.1.4           Sub-Sublandlord Shall Not Cause a Breach of the Sublease or the Master Lease. So long as Sub-Subtenant is not in default under this Sub-Sublease beyond the expiration of any applicable notice and cure periods, Sub-Sublandlord shall fully perform all Sub-Sublandlord’s covenants, obligations and agreements set forth in the Sublease and Master Lease (except to the extent they are the corresponding covenants, obligations or agreements of Sub-Subtenant hereunder that Sub-Subtenant has failed to comply with pursuant to the terms hereof), including without limitation, the payment of rent and all other sums payable by Sub-Sublandlord thereunder. Sublandlord shall be a third party beneficiary of the previous sentence.

 

9.2           Excluded Provisions. Notwithstanding any provision of this Sub-Sublease to the contrary, the following provisions of the Master Lease shall not be incorporated into this Sub-Sublease:

 

Provisions in the Original Master Lease

 

Section 1.1(a), except for the definitions of “Improvements” and “Common Areas”

Section 1.1(c)

Section 1.2, except as referenced in Section 9.8 of this Sub-Sublease.

 

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Sections 2.1 through 2.6

Section 3.1(a) through (e)

Section 5.1

Section 5.2

Section 5.3

Article 6

Section 9.1 through 9.5, except as referenced in Section 3.3 above

Unless otherwise agreed by Master Landlord in the Master Landlord Consent, the last portion of the first sentence in Section 11.1 beginning with “except that Tenant shall not be required…”

The fifth sentence of Section 11.2, beginning with “Tenant shall also be responsible…”

Section 10.1

Section 12.1(b)

Section 12.2(a)

The second sentence of Section 12.2(c)

Section 14.6

The second sentence and parenthetical third sentence of Section 19.1

Article 20

Section 21.1, except as referenced in Section 10.1 of this Sub-Sublease.

Section 21.2

Section 21.3

Section 21.5

Section 21.8

Section 21.9

Section 21.15

Section 21.16

Section 21.17

Section 21.18

Section 21.19

The fourth sentence (which begins with “The monthly fee”) and the last parenthetical sentence of Section 21.20(b)

Exhibits A, B, C, D and E (in each case except to the extent expressly referenced in any portion of the Master Lease affirmatively incorporated herein)

 

Provisions in the Master Amendment

 

Recitals

Sections 1(a) through (d), including the paragraph that precedes (a)

Section 1(e), except as referenced in Section 3.3 of this Sub-Sublease.

Section 1(f)

 

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Clause (ii) of Section 1(g)

Section 1(h)

The second, third and fourth sentences of Section 2

The first sentence of Section 2(b)

Section 2(a)

The first two (2) sentences of Section 2(c)

Section 2(d)

Sections 3 through 4

The last sentence of Section 5

Sections 6 through 8

Exhibit B

Schedule C-1

Schedule C-2

 

9.3           Inapplicable Amendments. Except for provisions of this Sub-Sublease that refer to the Amended Master Lease, the following amendments to the Original Master Lease are inapplicable to the Premises and are not part of the Master Lease for purposes of this Sub-Sublease:

 

(a)          First Amendment to Build-to-Suit Lease dated January 22, 2003;

 

(b)          Second Amendment to Build-to-Suit Lease dated March 26, 2004;

 

(c)          Third Amendment to Build-to-Suit Lease dated August 12, 2004;

 

(d)          Fourth Amendment to Build-to-Suit Lease and First Amendment to Workletter dated June 19, 2006;

 

(e)          Sixth Amendment to Build-to-Suit Lease and Third Amendment to Workletter dated November 21, 2006; and

 

(f)          Seventh Amendment to Build-to-Suit Lease and Fourth Amendment to Workletter dated February 21, 2008.

 

As used in this Sub-Sublease, the term “Amended Master Lease” shall mean the Original Master Lease as amended by all amendments thereto (whether on, before or after the Effective Date), including the aforementioned inapplicable amendments.

 

9.4           Termination Of Sublease or Master Lease.

 

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9.4.1           If for any reason the term of the Master Lease is terminated prior to the Expiration Date of this Sub-Sublease, this Sub-Sublease shall thereupon terminate and Sub-Sublandlord shall not be liable to Sub-Subtenant by reason thereof for damages or otherwise unless and to the extent such termination is due to Sub-Sublandlord’s default under this Sub-Sublease. In the event of any such early termination, Sub-Sublandlord shall return to Sub-Subtenant that portion of any rent paid in advance by Sub-Subtenant, if any, which is applicable to the period following the date of such termination.

 

9.4.2           If for any reason the term of the Sublease is terminated prior to the Expiration Date of this Sub-Sublease, this Sub-Sublease shall thereupon terminate and Sub-Sublandlord shall not be liable to Sub-Subtenant by reason thereof for damages or otherwise unless and to the extent such termination is due to Sub-Sublandlord’s default under this Sub-Sublease (including, without limitation, a default under Section 9.1.4). In the event of any such early termination, Sub-Sublandlord shall return to Sub-Subtenant that portion of any rent paid in advance by Sub-Subtenant, if any, which is applicable to the period following the date of such termination. Notwithstanding the foregoing, so long as Sub-Subtenant is not in default after the expiration of applicable notice and cure periods hereunder, Sub-Sublandlord agrees that, except in the event of a casualty or condemnation where Sub-Sublandlord is entitled under this Sub-Sublease or the Sublease to terminate the Sublease with respect to the Subleased Premises, Sub-Sublandlord shall not voluntarily terminate the Sublease with respect to all of or any portion of the Complete Premises without Sub-Subtenant’s consent, in its sole discretion, unless Sublandlord agrees to recognize this Sub-Sublease as a direct agreement with Sub-Subtenant upon substantially the same terms set forth in this Sub-Sublease, or Sub-Subtenant otherwise has the right to continue to occupy all of or any portion of the Complete Premises pursuant to a direct agreement with Sublandlord or, with the consent of Sublandlord, Master Landlord upon terms satisfactory to Sub-Subtenant, in its sole discretion. Nothing herein shall prevent Sub-Sublandlord from terminating the Sublease with respect to spaces other than the Complete Premises. Sub-Sublandlord agrees not to modify the Sublease in any manner that materially affects the Complete Premises or Sub-Subtenant’s rights or obligations under the Sublease, without obtaining Sub-Subtenant’s prior written consent, to be provided in Sub-Subtenant’s sole discretion. Sub-Sublandlord shall not do or omit to do anything that shall interfere with or impair Sub-Subtenant’s expansion rights under Section 14.16 of this Sub-Sublease or right of first refusal under Section 14.17 of this Sub-Sublease.

 

9.5           Holding Over. If Sub-Subtenant holds possession of the Premises or any portion thereof after the expiration or earlier termination of this Sub-Sublease, then Sub-Subtenant shall become a tenant at sufferance only, at a sublease base rental rate equal to one hundred fifty percent (150%) of the Base Rent in effect upon the date of such expiration or termination, plus all additional rent payable by Sub-Subtenant hereunder (pro-rated on a daily basis) (such amounts, collectively, the “Holdover Rent Payments”). Acceptance by Sub-Sublandlord of rent after such expiration or termination date shall not result in a renewal of this Sub-Sublease and shall not waive or modify Sub-Sublandlord’s rights to pursue any and all legal remedies available to Sub-Sublandlord under applicable law with respect to such holding over by Sub-Subtenant. It is acknowledged that if Sub-Subtenant holds over after the expiration or earlier termination of this Sub-Sublease, Sub-Sublandlord may be subject to holdover rent with respect to the Subleased Premises. Accordingly, (i) Sub-Sublandlord expressly reserves the right to require Sub-Subtenant to surrender possession of the Premises upon the expiration of the Term or upon the earlier termination hereof and the right to assert any remedy at law or in equity to evict Sub-Subtenant and/or collect damages in connection with any such holding over, and (ii) Sub-Subtenant shall indemnify, defend and hold Sub-Sublandlord harmless from and against any and all Claims, including, without limitation, attorneys’ fees incurred or suffered by Sub-Sublandlord by reason of Sub-Subtenant’s failure to surrender the Premises on the expiration or earlier

 

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termination of this Sub-Sublease in accordance with the provisions of this Sub-Sublease (including, without limitation, the cost of all rent and holdover amounts payable by, and all indemnification and other obligations of, Sub-Sublandlord (including, without limitation, under the Sublease and the Master Lease) that are caused by or result from Sub-Subtenant’s holdover) to the extent greater than the Holdover Rent Payments, unless Sub-Subtenant has vacated the Premises in accordance with the terms hereof and such holdover rent with respect to the Premises is due to the negligence or willful misconduct of Sub-Sublandlord. Notwithstanding the foregoing, Sub-Subtenant shall be entitled to make separate arrangements with Sublandlord or, with the consent of Sublandlord, Master Landlord permitting Sub-Subtenant to remain in the Premises after expiration of the Term, provided, that, (a) Sub-Sublandlord is released from its obligation to surrender the Premises to Sublandlord under the terms of the Sublease, and (b) the Sublease terminates with respect to the Premises for all purposes on the Expiration Date.

 

9.6           Compliance with Law. Sub-Subtenant warrants to Sub-Sublandlord that any improvements constructed by Sub-Subtenant on the Premises from time to time shall not violate any applicable law, building code, regulations or ordinance in effect on the earliest Rent Commencement Date or at the time such improvements are placed in service. If it is determined that such warranty has been violated, then Sub-Subtenant shall, upon written notice from Sub-Sublandlord, promptly correct such violation, at Sub-Subtenant’s sole cost and expense. Sub-Subtenant acknowledges that neither Sub-Sublandlord nor any agent of Sub-Sublandlord has made any representation or warranty as to the present of future suitability of the Premises for the conduct of Sub-Subtenant’s business or proposed business therein.

 

9.7           Definitions. Subject to the Incorporation Provisions, the definitions of “Improvements” and “Common Areas” set forth in Section 1.1(a) of the Original Master Lease are hereby incorporated by reference; provided however, that the phrase “in the Center” of the definition of “Common Areas” is hereby deleted and replaced with “on the Property”.

 

9.8           Use of Common Areas. Subject to the Incorporation Provisions, Section 1.1(b) of the Original Master Lease is hereby incorporated by reference; provided however, that the phrase “pursuant to Section 1.1(a)” is hereby deleted therefrom. Sub-Subtenant acknowledges Master Landlord’s reserved rights set forth in Section 1.2 of the Original Master Lease.

 

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9.9           Personal Property. Subject to the Incorporation Provisions, Section 8.1 of the Original Master Lease is hereby incorporated by reference.

 

9.10         Real Property. Subject to the Incorporation Provisions, Section 8.2 of the Original Master Lease is hereby incorporated by reference.

 

9.11         Intentionally Omitted.

 

9.12         Alterations; Surrender Obligations. Subject to the Incorporation Provisions, Sections 11.1 through 11.4 of the Original Master Lease are hereby incorporated by reference, except for (i) the first sentence in Section 11.1 and (ii) the fifth sentence of Section 11.2 (which begins with “Tenant shall also be responsible”). Sub-Subtenant shall make no alterations, additions or improvements to the Premises or the Property without the prior written consent of Sub-Sublandlord, which consent shall not be unreasonably withheld, conditioned, or delayed. Further, notwithstanding anything to the contrary herein, Sub-Subtenant’s removal and restoration obligations hereunder shall include any removal and restoration obligations of Sub-Sublandlord under the Sublease with respect to the Premises (including, without limitation, removal and restoration obligations with respect to improvements installed by Sub-Sublandlord prior to this Sub-Sublease if so required). Sub-Subtenant shall not be required to remove any alterations or improvements made by or for the account of Sub-Sublandlord unless the Sublandlord or the Master Landlord requires the removal of the same. Sub-Sublandlord may require Sub-Subtenant, at Sub-Subtenant’s expense, to remove, upon the expiration or earlier termination of this Sub-Sublease, any alterations installed by Sub-Subtenant and to repair any damage to the Premises and the 331 Building caused by such removal and return the affected portion of the Premises to a building standard condition as reasonably determined by Sub-Sublandlord.

 

9.13         Maintenance and Repairs. Subject to the Incorporation Provisions, Section 12.1(a) and Section 12.2(b) of the Original Master Lease are hereby incorporated by reference, except for (i) the phrase “pursuant to the indemnification provided in Section 14.6 hereof” of Section 12.1(a) and (ii) the phrase “except to the extent expressly set forth in Section 12.1(b),” of Section 12.1(a). Except as set forth in the preceding sentence, Sub-Subtenant at its sole cost and expense shall keep and maintain in good and sanitary order, condition and repair the Premises (from and after the Commencement Date) and every part thereof, including but not limited to the signs, interiors, ceilings, electrical systems and plumbing systems that exclusively serve the Premises, telephone and communications systems that serve the Premises, the HVAC equipment and related mechanical systems that exclusively serve the Premises (for which equipment and systems Sub-Subtenant shall enter into a service contract with a person or entity designated or approved by Sub-Sublandlord), all doors, door checks, windows, plate glass, door fronts, those exposed plumbing and sewage and other utility facilities that exclusively serve the Premises, fixtures, lighting, wall surfaces, floor surfaces and ceiling surfaces of the Premises and all other interior repairs, foreseen and unforeseen, with respect to the Premises, as required; provided, however, that Sub-Subtenant’s ordinary repair obligation with respect to building systems in Premises shall be limited to building systems or portions thereof that serve only the

 

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Premises and shall not include Building Common Systems. “Building Common Systems” means (i) building systems or portions thereof that serve, in common, the Premises and any other areas in the 331 Building (such as the elevator systems in the 331 Building, and the electrical system, plumbing system, exposed plumbing and sewage and other utility facilities, and the HVAC equipment and related mechanical systems that serve, in common, the Premises and any other areas in the 331 Building) or that serve the Building Common Areas and (ii) to the extent not maintained by Master Landlord or Sublandlord, the roofs, exterior walls (other than interior faces of exterior walls that are not in the Building Common Areas) and any demising walls in the 331 Building. “Building Common Areas” means the areas depicted on Exhibit B-3 attached hereto. Sub-Sublandlord shall repair and maintain, or cause to be repaired and maintained, the Building Common Systems and the Building Common Areas, and the cost of such work shall be included as Building Operating Expenses hereunder.

 

9.14         Use; No Nuisance, Compliance with Laws, Liquidation Sales, & Environmental Matters. Subject to the Incorporation Provisions, Sections 13.1 through 13.6 of the Original Master Lease are hereby incorporated by reference; provided however, that notwithstanding anything to the contrary contained in this Sub-Sublease, under no circumstances shall Sub-Subtenant ever have any responsibility for any breach or default of these provisions existing on or prior to the Effective Date or first arising after the expiration of the Term (unless actually caused by Sub-Subtenant); further provided, that (i) the reference to “Landlord” in the first line of Section 13.4(b) hereby refers to Master Landlord, (ii) the reference to “14.6” in the last line of Section 13.6(b)(xi) is hereby deleted, and (iii) Section 13.6(d) is hereby deleted in its entirety.

 

9.15         Insurance. Subject to the Incorporation Provisions, Sections 14.1 through 14.5 of the Original Master Lease and Section 14.7 of the Original Master Lease are hereby incorporated by reference, except Sections 14.1(c) and 14.1(e) are hereby deleted. Without limiting the generality of the foregoing, Sub-Subtenant acknowledges and agrees that Sub-Subtenant shall carry (a) the same insurance that Sublandlord is obligated to carry under the Original Master Lease and (b) without duplication of the preceding clause (a), the same insurance that Sub-Sublandlord is obligated to carry under the Sublease, provided, however, that Sub-Subtenant shall name Sub-Subtenant, Sub-Sublandlord, Sublandlord and Master Landlord (and any other third parties identified by Sub-Sublandlord, Sublandlord or Master Landlord) as insureds or additional insureds under such insurance policies as their interests may appear.

 

9.16         Sublease and Assignment. Subject to the Incorporation Provisions, Article 15 of the Original Master Lease, as amended by Section 1(i) of the Master Amendment, is hereby incorporated by reference and shall govern any such assignment or subletting, except as set forth in this Section 9.16. Sub-Subtenant shall not voluntarily or involuntarily, by operation of law or otherwise, assign, sublet, mortgage or otherwise encumber all or any portion of its interest in this Sub-Sublease or in the Premises without obtaining the prior written consent of Sub-Sublandlord, Sublandlord and Master Landlord with respect thereto. So long as Master Landlord’s consent and Sublandlord’s Consent is obtained, Sub-Sublandlord shall

 

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not unreasonably withhold, condition, or delay its consent to any proposed assignment or sublease; provided, however, that Sub-Sublandlord, Sublandlord or Master Landlord, as the case may be, may require as a condition of granting any such consent that (i) the proposed transferee demonstrate that its financial resources and tangible net worth are at least equal to Sub-Subtenant’s financial resources and tangible net worth as of the Effective Date, (ii) the nature of the transferee’s proposed use of the Premises and the transferee’s reputation shall be reasonably satisfactory to Sub-Sublandlord and (iii) Sub-Subtenant reaffirms, in form satisfactory to Sub-Sublandlord, its continuing liability under this Sub-Sublease. Notwithstanding the foregoing, Sub-Sublandlord confirms that Sub-Subtenant is entitled to complete a Permitted Transfer (as defined in Section 15.1 of the Original Master Lease) without Sub-Sublandlord’s consent, but with prior or concurrent notice by Sub-Subtenant to Sub-Sublandlord (a “Sub-Subtenant Permitted Transfer”). Any assignment, subletting, mortgage or other encumbrance attempted by Sub-Subtenant to which Sub-Sublandlord, Sublandlord and/or Master Landlord has not consented in writing pursuant to the provisions hereof (unless such consent is not required) shall be null and void and of no effect. Sub-Sublandlord hereby agrees to reimburse Sublandlord at its own expense for any fees due to the Sublandlord under the Sublease or the Master Landlord under the Master Lease in connection with the subletting of the Premises to Sub-Subtenant.

 

9.17         Right of Entry and Quiet Enjoyment. Subject to the Incorporation Provisions, Article 16 of the Original Master Lease is hereby incorporated by reference.

 

9.18         Casualty and Taking. Subject to the Incorporation Provisions, Article 17 of the Original Master Lease is hereby incorporated by reference, provided, that, Sub-Sublandlord shall have no right to terminate this Sub-Sublease as a result of damage, destruction or taking, unless (i) such damage, destruction or taking affects the 331 Building, and is of such a magnitude that the Sub-Sublandlord has the right to terminate the Sublease with respect to the 331 Building as a result, provided, that, without limiting clauses (ii) and (iii) below, Sub-Sublandlord shall not exercise such termination right with respect to the Premises if Sub-Subtenant certifies to Sub-Sublandlord in writing that Sub-Subtenant (1) will fully perform and indemnify Sub-Sublandlord for (x) all restoration obligations of Sub-Sublandlord under the Sublease with respect to the 331 Building and (y) all restoration obligations of Sublandlord under the Master Lease with respect to the 331 Building and (2) can reasonably demonstrate to Sub-Sublandlord that Sub-Subtenant has the financial ability to perform such restoration; (ii) the damage, destruction or taking (A) affects spaces other than the Subleased Premises, (B) is of such magnitude that Sub-Sublandlord has the right to terminate the Sublease, and (C) Sub-Sublandlord is not entitled to terminate the Sublease with respect to the affected spaces without also terminating the Sub-Sublease with respect to the Premises; or (iii) Sublandlord or Master Landlord have terminated the Sublease or the Master Lease.

 

9.19         Default. Subject to the Incorporation Provisions, Article 18 of the Original Master Lease is hereby incorporated by reference, except that “Abandonment of one or more Buildings” shall be replaced with “Abandonment of the Premises.”

 

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9.20         Subordination. Subject to the Incorporation Provisions (except as provided below), Section 19.1 of the Original Master Lease is hereby incorporated by reference, except for the second and parenthetical third sentence. Notwithstanding anything to the contrary in the Incorporation Provisions, it is acknowledged and agreed that references in Section 19.1 of the Original Master Lease to any assignee, ground lessor, mortgagee, trustee, beneficiary or sale/leaseback lessor or other party with an interest in the Buildings, the Property, the Center or any of them, are deemed to be references to Master Landlord’s (as opposed to Sub-Sublandlord’s) assignee, ground lessor, mortgagee, trustee, beneficiary or sale/leaseback lessor. This Sub-Sublease is subordinate to the Master Lease, the Sublease and any ground lease, mortgage, deed of trust or other instrument to which the Master Lease or the Sublease is subordinate.

 

9.21         Sale of Sublandlord’s Interest. Subject to the Incorporation Provisions, Section 19.2 of the Original Master Lease is hereby incorporated by reference, provided however, that, (i) references to “interest in the Buildings and the Property” are hereby deemed to be references to “interest in the Master Lease,” and (ii) the phrase “, except as otherwise expressly provided in Section 21.2 hereof” is hereby deleted.

 

9.22          Estoppel Certificate. Subject to the Incorporation Provisions, Section 19.3 of the Original Master Lease is hereby incorporated by reference, provided however, that, notwithstanding anything to the contrary in the Incorporation Provisions, references therein to the term “Landlord” shall be deemed to refer to Master Landlord, Sublandlord and Sub-Sublandlord; provided, however, that Sub-Subtenant shall be entitled to request and receive any such certificate only from Sub-Sublandlord.

 

9.23        Subordination to CC&Rs. Subject to the Incorporation Provisions, Section 19.4 of the Original Master Lease is hereby incorporated by reference, provided however that (i) references to “sublease” therein are hereby replaced with “sub-sublease”, (ii) the phrase “(including any buildings occupied by or leased to Tenant pursuant to Tenant’s exercise of any of the rights contained in Article 6 of this Lease)” therein is hereby deleted, (iii) the phrase “or, if Tenant exercises its rights under Section 6.3 of this Lease, on the Expansion Property” therein is hereby deleted, and (iv) the reference to “Tenant” in the first proviso therein is hereby replaced with “Sublandlord”.

 

9.24         Mortgagee Protection. Subject to the Incorporation Provisions, Section 19.5 of the Original Master Lease is hereby incorporated by reference, provided that, notwithstanding anything to the contrary in the Incorporation Provisions, references therein to the term “Landlord” are hereby deemed to refer to Master Landlord.

 

9.25         Severability. Subject to the Incorporation Provisions, Section 21.4 of the Original Master Lease is hereby incorporated by reference.

 

9.26         Surrender; No Merger. Subject to the Incorporation Provisions, Section 21.6 of the Original Master Lease is hereby incorporated by reference.

 

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9.27         Interpretation. Subject to the Incorporation Provisions, Section 21.7 of the Original Master Lease is hereby incorporated by reference.

 

9.28         No Partnership. Subject to the Incorporation Provisions, Section 21.10 of the Original Master Lease is hereby incorporated by reference.

 

9.29         Financial Information. Subject to the Incorporation Provisions, Section 21.11 of the Original Master Lease is hereby incorporated by reference. Notwithstanding the foregoing, Sub-Subtenant confirms that, as of the Effective Date, Sub-Sublandlord may access true, correct and complete, consolidated financial statements for Sub-Subtenant at www.asssemblybio.com.

 

9.30         Costs. Subject to the Incorporation Provisions, Section 21.12 of the Original Master Lease is hereby incorporated by reference, and Sub-Subtenant acknowledges that the costs referred to in Section 21.12 of the Original Master Lease include costs to be incurred by Master Landlord, Sublandlord and Sub-Sublandlord.

 

9.31        Time. Subject to the Incorporation Provisions, Section 21.13 of the Original Master Lease is hereby incorporated by reference.

 

9.32         Rules and Regulations. Subject to the Incorporation Provisions, Section 21.14 of the Original Master Lease is hereby incorporated by reference.

 

9.33         Parking and Traffic. Subject to the Incorporation Provisions, Section 21.20 of the Original Master Lease (as amended by Section 1(g) of the Master Amendment) is hereby incorporated by reference, except for the following provisions which require payment of a monthly fee for parking: (A) the fourth sentence of Section 21.20(b) of the Original Master Lease, which begins with the phrase “The monthly fee”, (B) the last parenthetical sentence of Section 21.20(b) of the Original Master Lease, and (C) clause (ii) of Section 1(g) of the Master Amendment. Without limiting the generality of the Incorporation Provisions, it is acknowledged that the TDMP program and the administration and management thereof are obligations of the Master Landlord and Sub-Sublandlord shall have no responsibility with respect thereto.

 

9.34         Site Plan. Subject to the Incorporation Provisions, the Site Plan attached to the Master Amendment as Exhibit A is hereby incorporated by reference.

 

10.          Additional Provisions.

 

10.1         Notices. In the event that (i) Sub-Sublandlord or Sub-Subtenant shall receive any notice or documentation from Sublandlord or Master Landlord for any reason pertaining to the Premises or this Sub-Sublease (it being agreed that Sublandlord has no obligation to deliver to Sub-Subtenant notices under the Sublease or the Master Lease that relate solely to spaces other than the Premises leased by Sub-Sublandlord under the Sublease, unless such notice

 

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could adversely impact Sub-Subtenant’s rights or obligations hereunder (such as a notice of Sub-Sublandlord’s breach or default under the Sublease)), or (ii) Sub-Sublandlord or Sub-Subtenant send any notice or documentation to Sublandlord or the Master Landlord for any reason pertaining to the Premises or this Sub-Sublease (it being agreed that Sub-Sublandlord has no obligation to deliver to Sub-Subtenant notices to Sublandlord or Master Landlord under the Sublease or the Master Lease that relate solely to spaces other than the Complete Premises leased by Sub-Sublandlord under the Sublease, unless such notice could adversely impact Sub-Subtenant’s rights or obligations hereunder (such as a notice of Sublandlord’s breach or default under the Sublease)), then, within three (3) business days from the date of such receipt or delivery (as applicable), such Party shall send a copy of such notice or document to the other Party. All notices, demands, consents and approvals which may or are required to be given by either Party to the other hereunder shall be given in the manner provided in Section 21.1 of the Original Master Lease at the addresses shown below (or such other addresses as the Parties may designate in writing and delivered in compliance with this Section 10.1). Subject to the Sublandlord Consent, notices to the Sublandlord shall be given in accordance with Section 10.1 of the Sublease. Subject to the Master Landlord Consent, notices to the Master Landlord shall be given in accordance with Section 21.1 of the Master Lease.

 

Notices to Sub-Sublandlord:

 

 

Prothena Biosciences Inc

331 Oyster Point Boulevard

South San Francisco, CA 94080

Attention: Chief Financial Officer

     

With a Copy to:

 

Prothena Biosciences Inc

331 Oyster Point Boulevard South San

Francisco, CA 94080

Attention: Chief Legal Officer

     
Notices To Sub-Subtenant:  

Assembly Biosciences, Inc.

Before Rent Commencement Date:

409 Illinois Street

San Francisco, CA 94158

Attention: Chief Financial Officer

 

After Rent Commencement Date:

331 Oyster Point Boulevard

Fourth Floor

South San Francisco, CA 94080

Attention: Chief Financial Officer

 

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With a copy to:  

Assembly Biosciences, Inc.

11711 N. Meridian Street, Suite 310

Carmel, IN 46032

Attention: General Counsel

 

10.2         [Intentionally Omitted]

 

10.3         [Intentionally Omitted]

 

10.4         Furniture. During the Term, Sub-Subtenant shall have the right to use the furniture that is located within the Fourth Floor Premises as of the Delivery Date with respect to the first Delivery Portion thereof (the “Leased Furniture”). Sub-Subtenant shall accept the Leased Furniture in its “as-is” condition as of such Delivery Date, without any representation or warranty from Sub-Sublandlord, express or implied (including, without limitation, any warranty of merchantability, warranty of quality, warranty of fitness for a particular purpose, warranty against interference, or warranty against infringement of any patent, copyright, trademark, trade secret or other proprietary rights of a third party). Sub-Subtenant shall maintain the Leased Furniture in the condition received as of the Delivery Date (reasonable wear and tear excepted). Sub-Sublandlord shall have no obligation to maintain, repair or replace the Leased Furniture. Upon the expiration or earlier termination of this Sub-Sublease: (a) Sub- Subtenant shall return to Sub-Sublandlord the items of Leased Furniture to be described by Sub-Sublandlord on or before the Delivery Date with respect to the first Delivery Portion of the Fourth Floor Premises (the “Returned Leased Furniture”) in the condition received as of such Delivery Date, reasonable wear and tear excepted, and shall repair or replace any Returned Leased Furniture to the extent necessary to return the Returned Leased Furniture to Sub-Sublandlord in such condition and (b) Sub-Subtenant shall dispose of all Leased Furniture other than the Returned Leased Furniture in compliance with applicable law.

 

10.5         Removal of Personal Property. All articles of personal property, and all business and trade fixtures, machinery and equipment (installed by Sub-Subtenant and that can be removed without damage to the 331 Building or negatively impacting building systems unless Sub-Subtenant repairs any such damage or mitigates any negative impact), cabinet work, furniture and movable partitions (collectively, the “Sub-Subtenant’s Property’), if any, owned or installed by Sub-Subtenant at its expense in the Premises shall be and remain the property of Sub-Subtenant and may be removed by Sub-Subtenant at any time, provided that Sub-Subtenant, at its expense, shall repair any damage to the Premises caused by such removal or by the original installation. Any articles of personal property, or all business and trade fixtures, machinery and equipment, cabinet work, furniture (including the Leased Furniture) and movable partitions provided by Sub-Sublandlord shall remain the property of Sub-Sublandlord, and Sub-Subtenant shall not remove any of them from the Premises without the prior written consent of Sub-Sublandlord; provided, that upon the expiration of this Sub-Sublease on the Expiration Date, (i) the Leased Furniture that is not Returned Furniture shall become the property of Sub-Subtenant

 

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and (ii) Sub-Subtenant shall, at Sub-Subtenant’s expense, remove such Leased Furniture that is not Returned Furniture from the Premises.

 

10.6         Waiver. The waiver of either Party of any agreement, condition or provision contained herein or any provision incorporated herein by reference shall not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision, nor shall any custom or practice which may evolve between the Parties in the administration of the terms hereof be construed to waive or to lessen the right of a Party to insist upon the performance by the other Party in strict accordance with said terms. The subsequent acceptance of Rent hereunder by Sub-Sublandlord shall not be deemed to be a waiver of any preceding breach by Sub-Subtenant of any agreement or condition of this Sub-Sublease or the same incorporated herein by reference, other than the failure of Sub-Subtenant to pay the particular Rent so accepted, regardless of Sub-Sublandlord’s knowledge of such preceding breach at the time of acceptance of such Rent.

 

10.7         Complete Agreement. Except for the Consents and that certain Mutual Non- Disclosure Agreement by and between Sub-Subtenant and Sub-Sublandlord dated as of June 20, 2018 (the “Confidentiality Agreement”), this written Sublease, together with all exhibits hereto, contains all the representations and the entire understanding between the Parties with respect to the subject matter hereof. There are no oral agreements between Sub-Sublandlord and Sub-Subtenant affecting this Sub-Sublease, and this Sub-Sublease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between Sub-Sublandlord and Sub-Subtenant or displayed by Sub-Sublandlord, its agents or real estate brokers to Sub-Subtenant with respect to the subject matter of this Sub-Sublease, the Premises or the 331 Building. There are no representations between Sub-Sublandlord and Sub-Subtenant other than those contained in or incorporated by reference into this Sub-Sublease.

 

11.         Indemnification; Exculpation.

 

11.1         Non-Liability Of Sub-Sublandlord. None of Master Landlord, Sublandlord and Sub-Sublandlord shall be liable to Sub-Subtenant, and Sub-Subtenant hereby waives and releases all Claims against Master Landlord, Sublandlord and Sub-Sublandlord and each of their respective partners, officers, directors, employees, trustees, successors, assigns, agents, servants, affiliates, representatives, and contractors (collectively, herein “Released Affiliates”) for injury or damage to any person or property occurring or incurred in connection with the use of the Premises by Sub-Subtenant or any invitees, sub-sublessees, licensees, assignees, agents, employees or contractors of Sub-Subtenant. Without limiting the foregoing, none of Master Landlord, Sublandlord, Sub-Sublandlord nor any of the Released Affiliates shall be liable for and there shall be no abatement of Rent, except to the extent (i) – (iii) was caused by the negligence or willful misconduct of Master Landlord, Sublandlord or Sub-Sublandlord in the performance of their respective obligations under this Sub-Sublease, the Sublease, or the Master Lease, for: (i) any damage to Sub-Subtenant’s property stored with or entrusted to Master Landlord, Sublandlord, Sub-Sublandlord or any of the Released Affiliates, or (ii) loss of or damage to any property by theft or any other wrongful or illegal act, or (iii) any injury or damage to persons

 

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or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Premises or from the pipes, appliances, appurtenances or plumbing works therein or from the roof, street or sub-surface or from any other place or resulting from dampness or any other cause whatsoever or from the acts or omissions of other sublessees, occupants or other visitors to the Premises or from any other cause whatsoever, or (iv) any latent or other defect in the Premises. Notwithstanding anything to the contrary set forth herein, in the Sublease or in the Master Lease, in no event shall Sub-Sublandlord ever be liable to Sub-Subtenant for (and Sub-Subtenant hereby waives any right to recover from Sub-Sublandlord for) any lost profits, business interruption or any form of consequential, special or punitive damages.

 

11.2         Non-Liability of Sub-Subtenant. Notwithstanding anything to the contrary set forth herein, in the Sublease or in the Master Lease, in no event shall Sub-Subtenant ever be liable to Sub-Sublandlord for (and Sub-Sublandlord hereby waives any right to recover from Sub-Subtenant for) any lost profits, business interruption or any form of consequential, special or punitive damages, except arising out of a holdover by Sub-Subtenant after expiration or earlier termination of the Sub-Sublease, as described in Section 9.5 hereof.

 

11.3         Indemnification of Sublandlord; Indemnification of Master Landlord. Sub-Subtenant shall indemnify, defend, protect and hold Sub-Sublandlord, Sublandlord, Master Landlord’s managing agent, Master Landlord and their respective members, partners, shareholders, officers, directors, agents, employees and contractors (collectively, the “Indemnified Parties”), harmless from and against any and all liability for all Claims, including, without limitation, reasonable attorneys’ fees and costs, incurred by Sub-Sublandlord or asserted against Sub-Sublandlord and occurring within the Premises or arising in connection with (i) the use of, or activities in or about, the Premises (including, without limitation, the use, occupancy and enjoyment of the Property) by Sub-Subtenant or any invitees, sublessees, licensees, assignees, agents, employees or contractors of Sub-Subtenant or holding under Sub-Subtenant, (ii) the act, negligence, fault or omission (with respect to omissions, of any act required under this Sub-Sublease) of Sub-Subtenant, its agents, servants, contractors, employees, representatives, licensees or invitees, or (iii) Sub-Subtenant’s actions under this Sub-Sublease or material breach of this Sub-Sublease, including, without limitation, Claims arising out of (1) Sub-Subtenant’s direct communications with Master Landlord or Sublandlord (provided Sub-Sublandlord has satisfied its obligations under this Sub-Sublease regarding communication with Master Landlord or Sublandlord for the benefit of Sub-Subtenant) or (2) Sub-Subtenant’s breach of Section 5.2. Notwithstanding any provision of this Section 11.3 to the contrary, the indemnification contained in this Section 11.3 shall not apply to Claims to the extent resulting from the negligence or willful misconduct or negligent omission of the party claiming indemnification or its agents, employees or contractors. Sub-Subtenant will give Sub-Sublandlord prompt notice of any casualty or accident in, on or about the Premises. The provisions of this Section 11.3 shall survive the expiration or earlier termination of this Sub-Sublease.

 

11.4         Indemnification of Sub-Subtenant. Sub-Sublandlord shall indemnify, defend and hold Sub-Subtenant and its members, partners, shareholders, officers,

 

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directors, agents, employees and contractors harmless from and against any and all liability for all Claims, including, without limitation, reasonable attorneys’ fees and costs, incurred by Sub-Subtenant or asserted against Sub-Subtenant to the extent solely arising out of the negligence or willful misconduct or negligent omission by Sub-Sublandlord or its agents, employees or contractors. Notwithstanding any provision of this Section 11.4 to the contrary, the indemnification contained in this Section 11.4 shall not apply to Claims to the extent resulting from the negligence or willful misconduct or negligent omission of the Sub-Subtenant, the party claiming indemnification or any of their respective agents, employees or contractors. The provisions of this Section 11.4 shall survive the expiration or earlier termination of this Sub-Sublease.

 

11.5         Sublandlord Default; Refusal of Consents. Notwithstanding any provision of this Sub-Sublease to the contrary, but subject to Sections 9.1.1(a) and 9.1.3(b) and 9.1.4 above, (a) Sub-Sublandlord shall not be liable or responsible in any way for any loss, damage, cost, expense, obligation or liability suffered by Sub-Subtenant by reason or as the result of any breach, default or failure to perform by the Sublandlord under the Sublease (provided the same do not arise from the failure of Sub-Sublandlord to perform Sub-Sublandlord’s covenants, agreements, terms, provisions or conditions set forth in the Sublease or Sub-Subtenant’s failure to perform Sub-Subtenant’s covenants, agreements, terms, provisions or conditions set forth in this Sub-Sublease), and (b) if Sublandlord does not to grant Sub-Subtenant its consent or approval for any action or circumstances requiring Sublandlord’s approval, Sub-Sublandlord shall be released from any obligation to grant its consent or approval with respect thereto.

 

11.6         Master Landlord Default; Refusal of Consents. Notwithstanding any provision of this Sub-Sublease to the contrary, but subject to Sections 9.1.1(b) and 9.1.3(a), (a) Sub-Sublandlord shall not be liable or responsible in any way for any loss, damage, cost, expense, obligation or liability suffered by Sub-Subtenant by reason or as the result of any breach, default or failure to perform by the Master Landlord under the Master Lease (provided the same do not arise from Sub-Subtenant’s failure to perform Sub-Subtenant’s covenants, agreements, terms, provisions or conditions set forth in this Sub-Sublease), including without limitation, in any case where services, utilities, repairs, maintenance or other performance is to be rendered by Master Landlord with respect to the Premises under the Master Lease and Master Landlord either fails to do so or does so in an improper, negligent, inadequate or otherwise defective manner, and (b) if Master Landlord does not to grant Sub-Subtenant its consent or approval for any action or circumstances requiring Master Landlord’s approval, Sub-Sublandlord shall be released from any obligation to grant its consent or approval with respect thereto.

 

12.         Security Deposit. Concurrent with Sub-Subtenant’s execution of this Sub-Sublease, Sub-Subtenant shall deposit with Sub-Sublandlord a security deposit (the “Security Deposit”) in the amount of Five Hundred Fifty-Two Thousand Nine Hundred Eighty-Six and 74/100 Dollars ($552,986.74). The Security Deposit shall be held by Sub-Sublandlord as security for the faithful performance by Sub-Subtenant of all the terms, covenants, and conditions of this Sub-Sublease to be kept and performed by Sub-Subtenant during the Term. If Sub-Subtenant

 

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defaults with respect to any provisions of this Sub-Sublease, including, but not limited to, the provisions relating to the payment of Rent, Sub-Sublandlord may, but shall not be required to, use, apply or retain all or any part of the Security Deposit for the payment of any Rent or any other sum in default, or for the payment of any amount that Sub-Sublandlord may spend or become obligated to spend by reason of Sub-Subtenant’s default, or to compensate Sub-Sublandlord for any other loss or damage that Sub-Sublandlord may suffer by reason of Sub-Subtenant’s default. If any portion of the Security Deposit is so used or applied, Sub-Subtenant shall, within five (5) business days after written demand therefor, deposit cash with Sub-Sublandlord in an amount sufficient to restore the Security Deposit to its original amount, and Sub-Subtenant’s failure to do so shall be a default under this Sub-Sublease. Except with respect to any amount of the Security Deposit that Sub-Sublandlord reasonably expects to spend to remedy any failure by Sub-Subtenant to fully perform its obligations under this Sub-Sublease, the Security Deposit, or any balance thereof, shall be returned to Sub-Subtenant, or, at Sub-Sublandlord’s option, to the last assignee of Sub-Subtenant’s interest hereunder, within sixty (60) days following the expiration of the Term. Sub-Subtenant shall not be entitled to any interest on the Security Deposit. Sub-Subtenant hereby waives the provisions of Section 1950.7 of the California Civil Code. Sub-Subtenant also waives all other provisions of law, now or hereafter in force, which provide that Sub-Sublandlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by Sub-Subtenant or to clean the Premises, it being agreed that Sub-Sublandlord may, in addition, claim those sums reasonably necessary to compensate Sub-Sublandlord for any other loss or damage, foreseeable or unforeseeable, caused by the acts or omissions of Sub-Subtenant or any officer, employee, agent, contractor or invitee of Sub-Subtenant.

 

13.         Abatement for Failure of Services. If and to the extent that Sub-Sublandlord receives abatement of the rent or other charges required to be paid by Sub-Sublandlord under the Sublease with respect to the Premises in accordance with the Sublease, Sub-Sublandlord will abate the same proportion of Sub-Subtenant’s Rent hereunder. This provision shall not reduce or mitigate the obligation of Sub-Sublandlord to make good faith, commercially reasonable efforts to cause (a) Sublandlord to comply with its obligations under the Sublease as set forth in Section 9.1.1(a) hereof and (b) Master Landlord to comply with its obligations under the Master Lease as set forth in Section 9.1.1(b) hereof.

 

14.         Miscellaneous.

 

14.1         Counterparts. This Sub-Sublease may be executed in one or more counterparts by the Parties. All counterparts shall be construed together and shall constitute one agreement and delivery of PDF or other electronic versions thereof shall have the same force and effect as delivery of originals. However, notwithstanding any such exchange of electronic signatures, each of Sub-Sublandlord and Sub-Subtenant agree promptly to deliver original hard copies of this Sub-Sublease and the Consents to the other Party, the Sublandlord or Master Landlord upon request.

 

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14.2         Modification. This Sub-Sublease may not be modified in any respect except by a document in writing executed by both Parties or their respective successors or assigns.

 

14.3         Attorneys’ Fees. If either Party brings an action or other proceeding against the other to enforce, protect, or establish any right or remedy created under or arising out of this Sub-Sublease, the prevailing Party shall be entitled to recover from the other Party, all costs, fees and expenses, including, without limitation, reasonable attorneys’ fees, accounting fees, expenses, and disbursements, incurred or sustained by such prevailing Party in connection with such action or proceeding (including, but not limited to, any appellate proceedings relating thereto) or in connection with the enforcement of any judgment or award rendered in such proceeds. The prevailing Party’s rights to recover its costs, fees and expenses, and any award thereof, shall be separate from, shall survive, and shall not be merged with any judgment.

 

14.4         Binding Effect. The obligations of this Sub-Sublease shall be binding on and inure to the benefit of the Parties and their respective heirs, successors and assigns.

 

14.5         Time Is Of Essence. Time is of essence in respect of each and every term, covenant and condition of this Sub-Sublease.

 

14.6         Governing Law. This Sub-Sublease shall be governed by, and construed in accordance with, the laws of the State of California (without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of California).

 

14.7         Representations And Warranties Regarding Authority. Sub-Subtenant and Sub-Sublandlord hereby represent and warrant to the other Party that (i) each person signing this Sub-Sublease on their behalf is duly authorized to execute and deliver this Sub-Sublease on their behalf, (ii) the execution, delivery and performance of this Sub-Sublease has been duly and validly authorized in accordance with the articles of incorporation, bylaws and other organizational documents of such Party, (iii) such Party is duly organized and in good standing under the laws of their State of incorporation and (iv) upon the execution and delivery of this Sub-Sublease, this Sub-Sublease shall be binding and enforceable against such Party in accordance with its terms.

 

14.8         Confidentiality. Sub-Sublandlord and Sub-Subtenant hereby agree that the information contained in this Sub-Sublease shall be held in strict confidence and none of the terms or conditions contained herein shall be disclosed to any person or entity, other than Master Landlord, Sublandlord and Sub-Sublandlord’s and Sub-Subtenant’s respective current or prospective attorneys, accountants, consultants, brokers, lenders, investors, acquirers, assignees and subtenants, all of whom (except the Master Landlord and Sublandlord) shall agree to the confidentiality of this Sub-Sublease. Sub-Subtenant and its agents shall avoid discussing with, or

 

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disclosing to, any third parties (except those specifically listed above) any of the terms, conditions or particulars contained herein. This provision shall not be deemed breached if disclosure is required by applicable law or otherwise consented to in writing by the non-disclosing party.

 

14.9         Securities Filings. Notwithstanding anything to the contrary in this Sub-Sublease or the Confidentiality Agreement (but expressly subject to Sublandlord’s and Master Landlord’s prior written acknowledgment and consent), in the event either Party or any of its affiliates (such party, a “Filing Party”) proposes to file with the Securities and Exchange Commission or the securities regulators of any state or other jurisdiction a registration statement or any other disclosure document which describes or refers to this Sub-Sublease under the Securities Act of 1933, as amended, the Securities Exchange Act, of 1934, as amended, any other applicable securities law or the rules of any national securities exchange, the Filing Party shall be entitled to file (i) a copy of this Sub-Sublease with those redactions reasonably required by the other Party, (ii) a copy of the Sublease with those redactions reasonably required by Sub-Sublandlord or Sublandlord and (iii) an unredacted copy of the Original Master Lease and a copy of the Master Amendment with those redactions of the Master Amendment reflected on Exhibit A-1 attached hereto. For the avoidance of doubt, no Sub-Sublandlord, Sublandlord or Master Landlord consent is required in connection with a filing of a current report on Form 8-K with the Securities and Exchange Commission that summarizes the terms of this Sub-Sublease; provided, that Sub-Subtenant shall provide Sub-Sublandlord with a reasonable opportunity to review and comment on such summary, and Sub-Subtenant shall consider in good faith Sub-Sublandlord’s comments thereto.

 

14.10         Publicity. Subject to the Incorporation Provisions, Section 5 of the Master Amendment is hereby incorporated herein by reference, except for the sixth (6th) and seventh (7th) sentences thereof. In addition, Sub-Subtenant and Sub-Sublandlord each hereby acknowledges and agrees that, except as may be necessary to implement or otherwise effectuate the terms of this Sub-Sublease including but not limited to Section 14.9, (i) Sub-Subtenant shall not use, without Sub-Sublandlord’s prior written approval, which may be withheld in Sub-Sublandlord’s sole discretion, the name of Sub-Sublandlord, Sublandlord or Master Landlord, their respective affiliates, trade names, trademarks or trade dress, products, or any signs, markings, or symbols from which a connection to Sub-Sublandlord, Sublandlord or Master Landlord, in Sub-Sublandlord’s absolute and sole discretion, may be reasonably inferred or implied, in any manner whatsoever, including, without limitation, press releases, marketing materials, or advertisements; and (ii) Sub-Sublandlord shall not use, without Sub-Subtenant’s prior written approval, which may be withheld in Sub-Subtenant’s sole discretion, the name of Sub-Subtenant, its affiliates, trade names, trademarks or trade dress, products, or any signs, markings, or symbols from which a connection to Sub-Subtenant, in Sub-Subtenant’s absolute and sole discretion, may be reasonably inferred or implied, in any manner whatsoever, including, without limitation, press releases, marketing materials, or advertisements.

 

14.11         Consents.

 

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14.11.1         Consent of Sublandlord. This Sub-Sublease is conditioned upon, and shall not take effect until, the first business day following the date after which both the written consent of the Sublandlord hereto (the “Sublandlord Consent”) and the Master Landlord Consent (the “Master Landlord Consent”, as provided in subsection 14.11.2 below, and together with the Sublandlord Consent, the “Consents”) have been received in each case by Sub-Sublandlord and Sub-Subtenant, whichever is later. Sub-Subtenant hereby agrees for the benefit of Sub-Sublandlord and Sublandlord (as an express intended third party beneficiary) that (a) other than as expressly and specifically agreed to in writing by Sublandlord (in the Sublandlord Consent or other written agreement), no act, consent, approval or omission of Sublandlord pursuant to this Sub-Sublease shall (i) constitute any form of recognition of Sub-Subtenant as the direct tenant of Sublandlord, (ii) create any form of contractual duty or obligation on the part of Sublandlord in favor of Sub-Subtenant or (iii) waive, affect or prejudice in any way Sublandlord’s right to treat this Sub-Sublease and Sub-Subtenant’s rights to the Premises as being terminated upon any termination of the Sublease, (b) Sublandlord shall have the absolute right to evict Sub-Subtenant, and all parties holding under Sub-Subtenant, from the Premises upon any termination of the Sublease, and (c) without limiting the generality of (a) and (b) above (or Sub-Sublandlord’s obligations to maintain the Sublease pursuant to this Sub-Sublease), a voluntary or other surrender of the Sublease or a termination of the Sublease shall not result in a merger but shall, at the option of Sublandlord, operate either as an assignment to Sublandlord of this Sub-Sublease, or a termination of this Sub-Sublease. Notwithstanding the foregoing, Sub-Sublandlord agrees to request recognition and non-disturbance protection for Sub-Subtenant’s benefit from Sublandlord. Further, it is acknowledged that Sub-Subtenant may wish to obtain certain additional rights directly from Sublandlord with respect to Sub-Subtenant’s use and occupancy of the Premises. Any such agreement with Sublandlord that would bind Sub-Sublandlord or otherwise modify or affect Sub-Sublandlord’s rights under the Sublandlord or this Sub-Sublease shall be subject to Sub-Sublandlord’s prior written consent. Notwithstanding anything to the contrary in this Sub-Sublease, Sub-Subtenant shall have the right to terminate this Sub-Sublease if the Sublandlord Consent is not executed and delivered by the date that is ninety (90) days after the date of full execution and delivery of this Sub-Sublease. Sub-Sublandlord shall make commercially reasonable efforts to obtain the Sublandlord Consent from Sublandlord.

 

14.11.2         Consent of Master Landlord. Sub-Subtenant hereby agrees for the benefit of Sub-Sublandlord and Master Landlord (as an express intended third party beneficiary) that (a) other than as expressly and specifically agreed to in writing by Master Landlord (in the Master Landlord Consent or other written agreement), no act, consent, approval or omission of Master Landlord pursuant to this Sub-Sublease shall (i) constitute any form of recognition of Sub-Subtenant as the direct tenant of Master Landlord, (ii) create any form of contractual duty or obligation on the part of Master Landlord in favor of Sub-Subtenant or (iii) waive, affect or prejudice in any way Master Landlord’s right to treat this Sub-Sublease and Sub-Subtenant’s rights to the Premises as being terminated upon any termination of the Master Lease, (b) Master Landlord shall have the absolute right to evict Sub-Subtenant, and all parties holding under Sub-Subtenant, from the Premises upon any termination of the Master Lease, and (c) without limiting the generality of (a) and (b) above (or Sub-Sublandlord’s obligations to maintain the

 

 -37-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

Master Lease pursuant to this Sub-Sublease), a voluntary or other surrender of the Master Lease or a termination of the Master Lease shall not result in a merger but shall, at the option of Master Landlord, operate either as an assignment to Master Landlord of this Sub-Sublease, or a termination of this Sub-Sublease. Notwithstanding the foregoing, Sub-Sublandlord agrees to request recognition and non-disturbance protection for Sub-Subtenant’s benefit from Master Landlord. Further, it is acknowledged that Sub-Subtenant may wish to obtain certain additional rights directly from Master Landlord with respect to Sub-Subtenant’s use and occupancy of the Premises. Any such agreement with Master Landlord that would bind Sub-Sublandlord or otherwise modify or affect Sub-Sublandlord’s rights under the Master Lease, the Sublease or this Sub-Sublease shall be subject to Sub-Sublandlord’s prior written consent. Notwithstanding anything to the contrary in this Sub-Sublease, Sub-Subtenant shall have the right to terminate this Sub-Sublease if the Master Landlord Consent is not executed and delivered by the date that is ninety (90) days after the date of full execution and delivery of this Sub-Sublease. Sub-Sublandlord shall make commercially reasonable efforts to obtain the Master Landlord Consent from Master Landlord.

 

14.12         Cooperation. Each Party shall reasonably cooperate with the other Party with respect to seeking any necessary approvals from the Sublandlord and the Master Landlord, including without limitation approval of this Sub-Sublease. Sub-Subtenant and Sub-Sublandlord each agree to complete and return any and all forms requested by Sub-Sublandlord, Sublandlord or Master Landlord, as applicable, from time to time for administrative purposes related to this Sub-Sublease within five (5) business days of such Party’s written request.

 

14.13         Certified Access Specialist. For purposes of Section 1938 of the California Civil Code, Sub-Sublandlord hereby discloses to Sub-Subtenant, and Sub-Subtenant hereby acknowledges, that the Real Property, the 331 Building and the Premises have not undergone inspection by a Certified Access Specialist. As required by Section 1938(e) of the California Civil Code, Sub-Sublandlord hereby states as follows: “A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.” In furtherance of the foregoing, Sub-Sublandlord and Sub-Subtenant hereby agree as follows: (a) any CASp inspection requested by Sub-Subtenant shall be conducted at Sub-Subtenant's sole cost and expense by a CASp approved in advance by Sub-Sublandlord; (b) pursuant to this Section 14.13, if as a result of anything done by

 

 -38-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

or for Sub-Subtenant in its use or occupancy of the Premises, repairs to the Premises are required to correct violations of construction-related accessibility standards, then Sub-Subtenant, at its cost, shall be responsible for making such repairs; and (c) pursuant to this Section 14.13, if as a result of anything done by or for Sub-Subtenant in its use or occupancy of the Premises, repairs to the 331 Building (outside the Premises) to correct violations of construction-related accessibility standards, then Sub-Subtenant shall, at Sub-Sublandlord's option, either perform such repairs at Sub-Subtenant's sole cost and expense or reimburse Sub-Sublandlord upon demand, as additional rent payable hereunder, for the cost to Sub-Sublandlord of performing such repairs.

 

14.14         Nonresidential Building Energy Use Disclosure Requirement Compliance. Sub-Subtenant hereby acknowledges that Sub-Sublandlord may be required to disclose to utility providers and other third parties certain information concerning the energy performance of the Premises' recent historical energy use data pursuant to California Public Resources Code Section 25402.10 and the regulations adopted pursuant thereto (collectively, the “Energy Disclosure Requirements”). Sub-Sublandlord shall not be liable to Sub-Subtenant for the accuracy or content of the information provided by or to utility providers or third parties pursuant to the Energy Disclosure Requirements. Sub-Subtenant acknowledges and agrees that (i) Sub-Sublandlord makes no representation or warranty regarding the energy performance of the Premises, and (ii) the energy performance of the Premises may vary depending on future condition, occupancy and/or use of the Premises. Further, Sub-Subtenant hereby releases Sub-Sublandlord from any and all losses, costs, damages, expenses and/or liabilities relating to, arising out of and/or resulting from the Energy Disclosure Requirements. Sub-Subtenant hereby agrees that, upon request from Sub-Sublandlord, Sub-Subtenant shall provide Sub-Sublandlord with any energy usage data for the Premises, including, without limitation, copies of utility bills for the Premises that are in Sub-Subtenant’s possession.

 

14.15         Survival. Without limiting survival provisions which would otherwise be implied or construed under applicable law, the provisions of Sections 3.3.3, 3.3.4, 7, 9.1.3, 9.5, 9.12, 9.14, 9.33, 11.1, 11.2, 11.3, 11.4, 11.5, 11.6, and 14.14 hereof shall survive the expiration or earlier termination of this Sub-Sublease with respect to matters occurring or liabilities accruing prior to the expiration or earlier termination of this Sub-Sublease. This Section 14.15 shall survive the expiration or earlier termination of this Sub-Sublease.

 

14.16         Expansion Option.

 

   14.16.1          Expansion Option; Expansion Space. Sub-Sublandlord grants to Sub-Subtenant the option (the “Expansion Option”) to expand the Premises in accordance with and subject to the provisions of this Section 14.16. The Expansion Option shall apply to the second (2nd) floor of the 331 Building (the “Expansion Space”) consisting of approximately 33,137 rentable square feet.

 

   14.16.2         Exercise of Expansion Option. Sub-Subtenant may exercise the Expansion Option only by giving unconditional, unequivocal and irrevocable written notice of such exercise (the “Expansion Notice”) to Sub-Sublandlord no later than December 31, 2019. Time is of the essence for the delivery of the Expansion Notice by December 31, 2019.

 

 -39-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

   14.16.3         Terms and Conditions Applicable to Exercise of Expansion Option. The Expansion Option shall be personal to the originally named Sub-Subtenant and shall be exercisable only by the originally named Sub-Subtenant (and not any assignee, sublessee, or other transferee of Sub-Subtenant’s interest in this Sub-Sublease). The originally named Sub-Subtenant may exercise the Expansion Option only if that Sub-Subtenant occupies the entire Premises as of the last date on which that Sub-Subtenant may properly exercise the Expansion Option. Sub-Subtenant shall not have the right to exercise the Expansion Option if Tenant is in default under this Sub-Sublease as of the date of the attempted exercise or (at Sub-Sublandlord’s option) as of the Expansion Space Delivery Date.

 

   14.16.4         Delivery of Expansion Space. If Sub-Subtenant timely and validly exercises the Expansion Option, Sub-Sublandlord shall deliver the Expansion Space to Sub-Subtenant on a date selected by Sublandlord (the “Expansion Space Delivery Date”) that is no later than sixty (60) days after the date of the Expansion Notice.

 

   14.16.5         Terms and Conditions Applicable to Expansion Space. If Sub-Subtenant timely and validly exercises the Expansion Option, then, beginning on the Expansion Space Delivery Date and continuing for the balance of the Term, the Expansion Space shall be part of the Premises under this Sub-Sublease (so that the term “Premises” in this Sub-Sublease shall refer to the space in the original Premises, as originally described in this Sub-Sublease, plus the Expansion Space). Sub-Subtenant’s lease of the Expansion Space shall be on the same terms and conditions as affect the original Premises. Sub-Subtenant’s obligation to pay Rent with respect to the Expansion Space shall begin on the Expansion Space Delivery Date.

 

   14.16.6         As-Is Condition. If Sub-Subtenant timely and validly exercises the Expansion Option, Sub-Subtenant shall lease the Expansion Space in its “as-is” condition as of the Expansion Space Delivery Date.

 

   14.16.7         Confirmation of Terms. If Sub-Subtenant timely and validly exercises the Expansion Option, Sub-Sublandlord and Sub-Subtenant shall, within ten (10) days after Sub-Sublandlord’s delivery of the Expansion Space to Sub-Subtenant, confirm in writing the addition of the Expansion Space to the Premises on the terms and conditions set forth in this Section 14.16. The written confirmation shall confirm: (i) the actual Expansion Space Delivery Date, (ii) the rentable square footage of the Premises (including the Expansion Space), (iii) the Base Rent and (iv) any other term that either Party reasonably requests be confirmed with respect to the Expansion Space.

 

   14.16.8         Adjustment for Lease of Expansion Space to Third Party. If the Expansion Option terminates or expires and Sub-Sublandlord sub-subleases the Expansion Space to any person or entity other than Sub-Subtenant, the rentable square feet of the Complete Premises shall be deemed to be decreased by 2,397 rentable square feet for as long as the Expansion Space is sub-subleased to such other person or entity.

 

 -40-331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – ASSEMBLY BIOSCIENCES

 

 

14.17         Right of First Refusal.

 

   14.17.1         Right of First Refusal. Subject to the receipt of any consents required pursuant to the Master Lease, including the Master Landlord Consent, and the Sublease, including the Sublandlord Consent, Sub-Sublandlord hereby grants to the originally named Sub-Subtenant a right of first refusal with respect to any sub-sublease of any portion of the Subleased Premises located in the 331 Building (collectively, the “First Refusal Space”).

 

   14.17.2         Procedure. Sub-Sublandlord shall notify Sub-Subtenant (the “First Refusal Notice”) from time to time when Sub-Sublandlord has entered into a letter of intent with a bona-fide prospective sub-subtenant that incorporates all of the basic terms of the transaction that Sub-Sublandlord is willing to accept and is for the sublease of any First Refusal Space (a “LOI”). The First Refusal Notice shall describe the space which is the subject of the LOI and shall set forth the material economic terms and conditions (including the proposed sublease term) set forth in the LOI (collectively, the “LOI Terms”).

 

   14.17.3         Procedure for Acceptance. If Sub-Subtenant wishes to exercise Sub-Subtenant’s right of first refusal with respect to the space described in the First Refusal Notice, then within seven (7)  days after delivery of the First Refusal Notice to Sub-Subtenant (the “Election Date”), Sub-Subtenant shall deliver written notice to Sub-Sublandlord (“Sub-Subtenant’s Election Notice”) pursuant to which Sub-Subtenant shall elect either to (i) lease the entire space described in the First Refusal Notice upon the LOI Terms set forth in the First Refusal Notice or (ii) refuse to lease such space identified in the First Refusal Notice, in which event Sub-Sublandlord may lease such space to any person or entity on any terms that Sublandlord desires; provided, that (1) the space leased to such person or entity shall not be materially different than the space identified in the First Refusal Notice and (2) the rental rate is not less than ninety percent (90%) of the rental rate listed in the First Refusal Notice (such terms, the “Permitted Leasing Terms”). If Sub-Subtenant does not so respond in writing to Sub-Sublandlord's First Refusal Notice by the Election Date, Sub-Subtenant shall be deemed to have elected the option described in clause (ii) above. Notwithstanding anything herein to the contrary, Sub-Subtenant may only exercise its right of first refusal with respect to all of the space described in the First Refusal Notice, and not a portion thereof. Time is of the essence for the delivery of the Sub-Subtenant’s Election Notice within seven (7) days after delivery of the First Refusal Notice to Sub-Subtenant.

 

   14.17.4         Lease of First Refusal Space. If Sub-Subtenant timely exercises Sub-Subtenant's right to lease the First Refusal Space as set forth herein, Sub-Sublandlord and Sub-Subtenant shall execute at Sub-Sublandlord's sole election, an amendment to this Sub-Sublease incorporating into this Sub-Sublease the LOI Terms applicable to such First Refusal Space.

 

   14.17.5         Termination of Right of First Refusal. If Sub-Subtenant elects not to lease the First Refusal Space (or is deemed to have elected not to lease the First

 

 -41-331 OYSTER POINT BOULEVARD.
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Refusal Space), then the Sub-Sublandlord will have 180 days to execute a lease with a prospective tenant. Sub-Sublandlord shall have no obligation to reoffer the First Refusal Space to Tenant during the 180-day period so long as, during the negotiation of the lease with any prospective tenant, the terms of such lease are consistent with the Permitted Leasing Terms. However, if a lease is not executed within 180 days or if the terms of such lease negotiated within the 180-day period are inconsistent with the Permitted Leasing Terms, then the space shall be reoffered to Sub-Subtenant under this right of first refusal. The right of first refusal granted herein shall terminate as to a particular offer of First Refusal Space upon the execution of a sub-sublease with a third party pursuant to the Permitted Leasing Terms. The right of first refusal shall remain in effect for any subsequent availability of all or any portion of the First Refusal Space not subject to a prior First Refusal Notice and an executed sub-sublease. Sub-Sublandlord shall not have any obligation to deliver the First Refusal Notice if, as of the date Sub-Sublandlord would otherwise deliver the First Refusal Notice to Sub-Subtenant, an Event of Default has occurred and is continuing or Sub-Subtenant does not physically occupy the entire Premises. In addition, at Sub-Sublandlord's option, if Sub-Subtenant has previously delivered Sub-Subtenant's Election Notice in accordance with Section 14.7.3 and, as of the scheduled date of delivery of such First Refusal Space to Sub-Subtenant, an Event of Default has occurred and is continuing or Sub-Subtenant does not physically occupy the entire Premises Sub-Subtenant shall not have the right to lease the First Refusal Space.

 

[Remainder of page intentionally left blank; signatures on next page]

 

 -42-331 OYSTER POINT BOULEVARD.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their hand on the date first above written.

 

  SUB-SUBLANDLORD:
   
  PROTHENA BIOSCIENCES INC,
  a Delaware corporation
   
  By:  /s/ Karin Walker _______________
   
  Name: Karin Walker________________
   
  Its: CAO _________________________
   
  By:  _____________________________
   
  Name: ___________________________
   
  Its: ______________________________
   
  SUB-SUBTENANT:
   
  ASSEMBLY BIOSCIENCES, INC.,
  a Delaware corporation
   
  By:  /s/ Graham Cooper _____________
   
  Name: Graham Cooper______________
   
  Its: CFO/COO_____________________
   
  By:  /s/ Derek Small________________
   
  Name: Derek Small_________________
   
  Its: CEO__________________________

 

 S-1331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – PROTHENA BIOSCIENCES

 

 

EXHIBIT A-1

 

MASTER LEASE

 

(to be attached)

 

 A-1331 OYSTER POINT BOULEVARD.
SUB-SUBLEASE – PROTHENA BIOSCIENCES

 

 

BUILD-TO-SUIT LEASE

 

Landlord: Slough BTC, LLC
   
Tenant: Tularik Inc.
   
Date: December  20, 2001

 

TABLE OF CONTENTS

 

1.      PROPERTY 1
1.1 Lease of Buildings 1
1.2 Landlord’s Reserved Rights 2
2.      TERM 3
2.1 Term; Rent Commencement Dates 3
2.2 Early Possession 5
2.3 Delay In Possession 6
2.4 Acknowledgment Of Rent Commencement Dates 6
2.5 Holding Over 7
2.6 Option To Extend Term 7
3.      RENTAL 8
3.1 Minimum Rental 8
3.2 Late Charge 11
4.      [Omitted] 12
5.      CONSTRUCTION 12
5.1 Construction of Improvements 12
5.2 Condition of Property 12
5.3 Compliance with Law 12
6.      EXPANSION RIGHTS 13
6.1 First Refusal Right to Lease 13
6.2 Right of First Offer to Lease 13
6.3 Expansion Option 14
7.      [OMITTED] 16
8.      TAXES 16
8.1 Personal Property 16
8.2 Real Property 16
9.      OPERATING EXPENSES 16
9.1 Liability For Operating Expenses 16
9.2 Definition Of Operating Expenses 18
9.3 Determination and Payment of Operating Expenses 19
9.4 Final Accounting For Lease Year 20
9.5 Proration 20
10.      UTILITIES 20
10.1 Payment 20
10.2 Interruption 21
11.      ALTERATIONS; SIGNS 21
11.1 Right To Make Alterations 21
11.2 Title To Alterations 21
11.3 Tenant Trade Fixtures 22
11.4 No Liens 22
11.5 Signs 23
12.      MAINTENANCE AND REPAIRS 23
12.1 Landlord’s Work 23
12.2 Tenant’s Obligation For Maintenance 23
13.      USE OF PROPERTY 24
13.1 Permitted Use 24
13.2 [Omitted.] 24
13.3 No Nuisance 24
13.4 Compliance With Laws 25
13.5 Liquidation Sales 25
13.6 Environmental Matters 25

 

 

 i 

 

 

 

14.      INSURANCE AND INDEMNITY 29
14.1 Liability and Property Insurance 29
14.2 Quality Of Policies And Certificates 31
14.3 Workers’ Compensation 31
14.4 Waiver Of Subrogation 31
14.5 Increase In Premiums 31
14.6 Indemnification 31
14.7 Blanket Policy 32
15.      SUBLEASE AND ASSIGNMENT 32
15.1 Assignment And Sublease Of Building(s) 32
15.2 Rights Of Landlord 32
16.      RIGHT OF ENTRY AND QUIET ENJOYMENT 33
16.1 Right Of Entry 33
16.2 Quiet Enjoyment 33
17.      CASUALTY AND TAKING 33
17.1 Damage or Destruction 33
17.2 Condemnation 35
17.3 Reservation Of Compensation 36
17.4 Restoration Of Improvements 36
18.      DEFAULT 36
18.1 Events Of Default 36
18.2 Remedies Upon Tenant’s Default 37
18.3 Remedies Cumulative 38
19.      SUBORDINATION, ATTORNMENT AND SALE 38
19.1 Subordination To Mortgage 38
19.2 Sale Of Landlord’s Interest 38
19.3 Estoppel Certificates 39
19.4 Subordination to CC&R’s 39
19.5 Mortgagee Protection 39
20.      SECURITY 40
20.1 Deposit 40
21.      MISCELLANEOUS 42
21.1 Notices 42
21.2 Successors And Assigns 43
21.3 No Waiver 43
21.4 Severability 43
21.5 Litigation Between Parties 43
21.6 Surrender 43
21.7 Interpretation 43
21.8 Entire Agreement 43
21.9 Governing Law 43
21.10 No Partnership 44
21.11 Financial Information 44
21.12 Costs 44
21.13 Time 44
21.14 Rules and Regulations 44
21.15 Brokers 44
21.16 Memorandum of Lease 45
21.17 Corporate Authority 45
21.18 Execution and Delivery 45
21.19 Survival 45
21.20 Parking and Traffic 45

 

 ii 

 

 

BUILD-TO-SUIT LEASE

 

THIS BUILD-TO-SUIT LEASE (“Lease”) is made and entered into as of December 20, 2001, by and between SLOUGH BTC, LLC, a Delaware limited liability company (“Landlord”), and TULARIK INC., a Delaware corporation (“Tenant”).

 

THE PARTIES AGREE AS FOLLOWS:

 

1.       PROPERTY

 

1.1Lease of Buildings.

 

(a)          Landlord leases to Tenant and Tenant hires and leases from Landlord, on the terms, covenants and conditions hereinafter set forth, the buildings (individually, a “Building” and collectively, the “Buildings”) to be constructed pursuant to Article 5 hereof and Exhibit C attached hereto on a portion of the real property described in Exhibit A attached hereto (the “Property”), as follows: (i) a three-story office and laboratory building containing approximately 103,000 square feet (the “Phase IA Building”), to be located on the Property substantially as shown for the building designated “Building A” on the site plan attached hereto as Exhibit B (the “Site Plan”); (ii) a three-story office and laboratory building containing approximately 84,000 square feet (the “Phase IB Building”), to be located on the Property substantially as shown for the building designated “Building B” on the Site Plan; (iii) a four-story building containing approximately 93,200 square feet (and in no event less than 90,000 square feet) of office and laboratory space and approximately 5,000 square feet of ground-floor retail space (the “Phase II Building”), to be located on the Property substantially as shown for the building designated “Building E” on the Site Plan; and (iv) subject to final design and to receipt of all required governmental approvals, an enclosed connector bridge connecting the Phase IA Building to the Phase IB Building at the second-story level (the “Connector Bridge” ). With respect to the governmental approvals described in clause (iv) of the preceding sentence, Landlord has advised Tenant that the additional square footage created by construction of the Connector Bridge will cause the Project to exceed the maximum square footage amount for which the Project is presently entitled and that, without limiting any other governmental approvals that may be required, a modification of the maximum square footage amount under the existing Project entitlements will therefore be necessary in order to permit construction of the Connector Bridge. Landlord shall pursue diligently and reasonably the design of the Connector Bridge and the securing of all governmental approvals and permits necessary for the construction of the Connector Bridge (other than the interior improvements therein, which shall be Tenant’s responsibility as part of the Tenant Improvements), and Tenant shall cooperate diligently and reasonably with Landlord, in any respects reasonably requested by Landlord, in connection with the design and authorization of the Connector Bridge. For purposes of this Lease, the Connector Bridge shall generally be considered to be a part of the Phase IB Building, and the square footage of the Connector Bridge (which is not presently included in the estimated square footage figure used in this Lease for the Phase IB Building), determined in accordance with Section 1.1(d) of this Lease, shall be included in the square footage of the Phase IB Building for purposes of calculating Tenant’s Minimum Rent, additional rent and Operating Expense obligations with respect to the Phase IB Building and the Tenant Improvement Allowance with respect to the Phase IB Building; provided, however, that the square footage of the Connector Bridge shall not be taken into account in determining the number of parking spaces allocated to Tenant or required to be paid for by Tenant pursuant to Section 21.20(b) of this Lease. All references in this Lease to the Phase II Building as being leased to Tenant hereunder shall be construed to refer solely to the office and laboratory portion of the Phase II Building and not to the ground-floor retail portion of such building. The Phase IA Building and the Phase IB Building (including the Connector Bridge) are sometimes hereinafter collectively referred to as the “Phase I Buildings.” The Property is commonly known as Britannia Oyster Point (the “Center”) and is located at Oyster Point Boulevard and Veterans Boulevard in the City of South San Francisco, County of San Mateo, State of California. The Buildings and the other improvements to be constructed on the Property pursuant to Article 5 hereof and Exhibit C attached hereto are sometimes referred to collectively herein as the “Improvements.” The parking areas, driveways, sidewalks, landscaped areas and other portions of the Center that lie outside the exterior walls of the Buildings and of the other buildings to be constructed in the Center, as depicted on the Site

 

 

 

 

Plan and as hereafter modified by Landlord from time to time in accordance with the provisions of this Lease, are sometimes referred to herein as the “Common Areas.”

 

(b)          As an appurtenance to Tenant’s leasing of the Buildings pursuant to Section 1.1(a), Landlord hereby grants to Tenant, for the benefit of Tenant and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, (i) those portions of the Common Areas improved from time to time for use as parking areas, driveways, sidewalks, landscaped areas, or for other common purposes, and (ii) all easements, access rights and similar rights and privileges relating to or appurtenant to the Center and created or existing from time to time under any easement agreements, declarations of covenants, conditions and restrictions, or other written agreements now or hereafter of record with respect to the Center, subject however to any limitations applicable to such rights and privileges under applicable law, under this Lease and/or under the written agreements creating such rights and privileges.

 

(c)          Tenant shall be entitled to install, in areas of the Property adjacent to one or more of the Buildings, in what would otherwise constitute Common Areas, at Tenant’s sole expense and for the exclusive use of Tenant and its employees and invitees, subject to all of the conditions set forth in this paragraph (c), (1) a half-court basketball court and (2) an equipment yard. In no event shall Tenant be obligated to pay rent for the use of such areas, nor shall such areas be considered part of the Buildings or premises leased by Tenant for purposes of any calculations of rent or of Tenant’s Operating Cost Share under this Lease, but for all other purposes (including, but not limited to, the purposes specifically identified in this paragraph (c)), such areas shall be considered part of the Buildings leased by Tenant under this Lease. Without limiting the generality of the foregoing, Tenant’s construction and use of such basketball court and equipment yard shall be subject to the following requirements and restrictions: (i) the locations in which such basketball court and equipment yard are to be constructed shall be subject to Landlord’s prior written consent, in Landlord’s sole discretion; (ii) the plans and specifications for construction of all improvements constituting such basketball court and equipment yard shall be subject to Landlord’s prior written consent, in Landlord’s sole discretion, and such improvements shall otherwise be constructed in full compliance with the requirements applicable to Tenant’s Work under Exhibit C attached hereto; (iii) the liability insurance to be carried by Tenant pursuant to Section 14.1(a) of this Lease shall cover, to Landlord’s satisfaction, any claims and liabilities arising out of the use of such basketball court and equipment yard; (iv) Tenant shall ensure that the construction and use of such basketball court and equipment yard do not interfere with the use of any parking or driveway areas on the Property and do not create any visual or noise interference with the use and enjoyment of the Property by the other tenants thereof; (v) Tenant shall be solely responsible for the maintenance and repair of such basketball court and equipment yard, at Tenant’s sole expense, as part of Tenant’s maintenance obligations under Section 12.2 of this Lease; and (vi) Tenant shall take all such steps as Landlord in its reasonable discretion may require in order to restrict access to and use of such basketball court and equipment yard to Tenant’s employees and invitees.

 

(d)          All measurements of building areas under this Lease shall be made by Landlord’s architect in accordance with the same formula applied by Landlord to the building areas for the other leased buildings in the Center, which formula consists of measurement from the exterior faces of exterior walls, from the dripline of any overhangs and, where applicable, from the centerline of any demising walls. In measuring interior space (relevant only to the determination of space actually being used or occupied by Tenant in the Phase II Building during the phase-in of Tenant’s occupancy thereof), measurements involving any demising walls separating space actually used or occupied by Tenant from space not used or occupied by Tenant shall be made to the centerline of the demising wall.

 

1.2          Landlord’s Reserved Rights.   To the extent reasonably necessary to permit Landlord to exercise any rights of Landlord and discharge any obligations of Landlord under this Lease, Landlord shall have, in addition to the right of entry set forth in Section 16.1 hereof, the following rights: (i) to make changes to the Common Areas, including, without limitation, changes in the location, size or shape of any portion of the Common Areas, and to construct and/or relocate parking structures and/or parking spaces in the Center, but not materially decrease the number of parking spaces in the Center; (ii) to close temporarily any of the Common Areas for maintenance or other reasonable purposes, provided that reasonable parking and reasonable access to the Buildings remain available; (iii) to construct, alter or add to other buildings or improvements in the Center; (iv) to build in areas adjacent to the Center and to add

 

 2 - 

 

 

such areas to the Center; (v) to use the Common Areas while engaged in making additional improvements, repairs or alterations to the Center or any portion thereof; and (vi) to do and perform such other acts with respect to the Common Areas and the Center as may be necessary or appropriate; provided, however, that notwithstanding anything to the contrary in this Section 1.2, Landlord’s exercise of its rights hereunder (x) shall not cause any material diminution of Tenant’s rights, nor any material increase of Tenant’s obligations, under this Lease, and (y) shall be conducted in such a manner as to minimize, to the extent reasonably possible, any adverse effect on Tenant’s business operations in the Buildings (including, but not limited to, reasonable prior notice to Tenant of any pile-driving or other activities of Landlord that will cause significant noise or vibration in the Buildings).

 

2.       TERM

 

2.1          Term; Rent Commencement Dates.   The term of this Lease shall commence upon mutual execution of this Lease by Landlord and Tenant.

 

(a)          Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to the Phase I Buildings shall commence on the earlier to occur of (i) the date which is one hundred eighty (180) days after the date Landlord delivers to Tenant a Structural Completion Certificate for each of the Phase I Buildings (or, if the Structural Completion Certificates for the two Phase I Buildings are delivered on different dates, the date Landlord delivers to Tenant the Structural Completion Certificate for the second of the two Phase I Buildings) pursuant to the Workletter attached hereto as Exhibit C (the “Workletter”), subject to any adjustments in such time period to the extent authorized or required under the provisions of such Workletter, or (ii) the date Tenant takes occupancy of and commences operation of its business in either of the Phase I Buildings, the earlier of such dates being herein called the “Phase I Rent Commencement Date”; provided, however, that in no event shall the Phase I Rent Commencement Date occur earlier than May 1, 2003, unless determined pursuant to clause (ii) of this sentence or unless an earlier date is hereafter mutually agreed upon in writing by Landlord and Tenant; and provided further, however, that if the Phase I Rent Commencement Date is determined pursuant to clause (ii) of this sentence as a result of Tenant’s occupancy of and commencement of business operations in one of the two Phase I Buildings, then notwithstanding any other provisions of this Lease to the contrary, Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to the second of the Phase I Buildings and with respect to the Connector Bridge (regardless of whether the Phase IB Building is the first Phase I Building to be occupied by Tenant) shall not commence until the earlier to occur of the date described in clause (i) of this sentence or the date Tenant takes occupancy of and commences operation of its business in the second Phase I Building. Based on the estimated construction schedules attached hereto as Exhibit D, the parties presently estimate that the Phase I Rent Commencement Date shall occur on May 1, 2003.

 

(b)          Tenant shall be entitled to occupy the Phase II Building in up to four (4) successive phases. The first such phase (“Phase IIA”) shall consist of a minimum of 23,300 square feet of the Phase II Building. The second such phase (“Phase IIB”) shall consist of at least that amount of space which, when added to the Phase IIA space, shall equal a minimum of 46,600 square feet of the Phase II Building. The third such phase (“Phase IIC”) shall consist of at least that amount of space which, when added to the Phase IIA and Phase IIB spaces, shall equal a minimum of 69,900 square feet of the Phase II Building. The fourth such phase (“Phase IID”) shall consist of the remainder, if any, of the non-retail portion of the Phase II Building. As to any of such phases, Tenant shall have the right to take and occupy a larger portion of the Phase II Building than the minimum space required for the applicable phase, in which event the space for the applicable phase shall be deemed to consist of the greater of the minimum required amount of space for such phase or the amount of space actually occupied by Tenant. Tenant shall not be deemed to be occupying any portion of the Phase II Building solely by reason of constructing interior improvements in such portion in connection with Tenant’s intended future use and occupancy of such portion or by reason of maintaining insurance on or performing maintenance or repair work in such portion, but use of any portion of the Phase II Building for any other purpose by Tenant (including, but not limited to, any storage uses other than storage or staging of materials on a temporary basis in the course of construction) shall be deemed to constitute occupancy of such portion by Tenant. At least thirty (30) days prior to the applicable Rent Commencement Date for each phase of Tenant’s occupancy of the Phase II Building as set forth in subparagraphs (i) through (iv) below, Tenant shall notify Landlord in

 

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writing of the portion of the Phase II Building that Tenant intends to actually use and occupy during such phase. Tenant acknowledges, however, that if Tenant in fact uses a greater portion of the Phase II Building than specified in Tenant’s notice to Landlord with respect to the applicable phase, then Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to Tenant’s occupancy of the Phase II Building during such phase shall be controlled by the amount of space actually used or occupied by Tenant. Landlord shall have the right to inspect the Phase II Building from time to time prior to the Phase IID Rent Commencement Date, on not less than one (1) business day’s prior notice to Tenant, to confirm and measure the amount of space actually being occupied by Tenant in the Phase II Building, and the measurement and calculation of such space actually being occupied by Tenant shall be made by Landlord’s architect as contemplated in Section 1.1(d) of this Lease. On the Phase IIA Rent Commencement Date as hereinafter defined, all of Tenant’s obligations under this Lease shall become applicable and effective in full with respect to all of the Phase II Building, except that the following obligations with respect to each phase of Tenant’s occupancy of the Phase II Building shall become effective only on the respective Rent Commencement Date for such phase: (A) Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to such phase; (B) Tenant’s obligations under Section 8.2 of this Lease with respect to real property taxes and assessments upon Improvements constructed by Landlord and located within such phase; (C) Tenant’s obligation under Section 10.1 of this Lease to pay for utilities or services supplied to or consumed in or with respect to such phase, but only to the extent such utilities or services are consumed by or supplied at the request of Landlord or its agents, employees or contractors and the cost thereof can reasonably be segregated from the cost of utilities or services furnished to the portions of the Phase II Building occupied by Tenant; (D) Tenant’s maintenance and repair obligations under Section 12.2 of this Lease with respect to any Improvements constructed or installed in such phase by Landlord as part of Landlord’s Work under the Workletter, except that Tenant shall be responsible for any such maintenance or repairs required as a result of the negligent or willful acts or omissions of Tenant or its agents, employees, contractors or invitees; and (E) Tenant’s obligation to cause the applicable phase to comply with any applicable Requirements under Section 13.4(a) of this Lease, except to the extent the applicability of such Requirements is triggered by Tenant’s actual use of any portion of the Building or by Tenant’s construction of Improvements in any portion of the Building. The Rent Commencement Dates for the respective phases of the Phase II Building shall be as follows:

 

(i)       Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to Phase IIA shall commence on the earlier to occur of (A) the date which is one hundred eighty (180) days after the date Landlord delivers to Tenant a Structural Completion Certificate for the Phase II Building pursuant to the Workletter, subject to any adjustments in such time period to the extent authorized or required under the provisions of such Workletter, or (B) the date Tenant takes occupancy of and commences operation of its business in any portion of the Phase II Building, the earlier of such dates being herein called the “Phase IIA Rent Commencement Date”; provided, however, that in no event shall the Phase IIA Rent Commencement Date occur earlier than May 1, 2004, unless determined pursuant to clause (B) of this sentence or unless an earlier date is hereafter mutually agreed upon in writing by Landlord and Tenant. Based on the foregoing provisions and on the estimated construction schedules attached hereto as Exhibit D, the parties presently estimate that the Phase IIA Rent Commencement Date shall occur on May 1, 2004.

 

(ii)       Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to Phase IIB shall commence on the earlier to occur of (A) the date which is six (6) months after the Phase IIA Rent Commencement Date (as extended for any Landlord Delays occurring after the Phase IIA Rent Commencement Date in connection with Tenant’s construction of Tenant Improvements in Phase IIB) or (B) the date Tenant takes occupancy of and commences operation of its business in any portion of Phase IIB of the Phase II Building, the earlier of such dates being herein called the “Phase IIB Rent Commencement Date”; provided, however, that in no event shall the Phase IIB Rent Commencement Date occur earlier than November 1, 2004, unless determined pursuant to clause (B) of this sentence or unless an earlier date is hereafter mutually agreed upon in writing by Landlord and Tenant.

 

(iii)       Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to Phase IIC shall commence on the earlier to occur of (A) the date which is six (6) months after the Phase IIB Rent Commencement Date (as extended for any

 

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Landlord Delays occurring after the Phase IIB Rent Commencement Date in connection with Tenant’s construction of Tenant Improvements in Phase IIC) or (B) the date Tenant takes occupancy of and commences operation of its business in any portion of Phase IIC of the Phase II Building, the earlier of such dates being herein called the “Phase IIC Rent Commencement Date”; provided, however, that in no event shall the Phase IIC Rent Commencement Date occur earlier than May 1, 2005, unless determined pursuant to clause (B) of this sentence or unless an earlier date is hereafter mutually agreed upon in writing by Landlord and Tenant.

 

(iv)       Tenant’s Minimum Rental, additional rent and Operating Expense obligations with respect to Phase IID shall commence on the earlier to occur of (A) the date which is six (6) months after the Phase IIC Rent Commencement Date (as extended for any Landlord Delays occurring after the Phase IIC Rent Commencement Date in connection with Tenant’s construction of Tenant Improvements in Phase IID) or (B) the date Tenant takes occupancy of and commences operation of its business in any portion of Phase IID of the Phase II Building, the earlier of such dates being herein called the “Phase IID Rent Commencement Date”; provided, however, that in no event shall the Phase IID Rent Commencement Date occur earlier than November 1, 2005, unless determined pursuant to clause (B) of this sentence or unless an earlier date is hereafter mutually agreed upon in writing by Landlord and Tenant.

 

(c)          Notwithstanding any other provisions of this Section 2.1 or of Section 2.3 below, if Landlord has not delivered a Final Completion Certificate under the Workletter with respect to the Building Shell of a Building or phase of a Building, as applicable, and completed all Building Shell work that must be completed as a condition of delivery of such Final Completion Certificate for the applicable Building or phase, by the date the Rent Commencement Date for such Building or phase would otherwise occur under this Section 2.1, and if the incomplete elements of such Building Shell work materially impair Tenant’s ability to occupy and commence operation of its business in the applicable Building or phase, then the Rent Commencement Date for the applicable Building or phase, to the extent it is determined by the passage of time since delivery of the Structural Completion Certificate and not by actual occupancy, shall be extended, day for day, for a period equal to the lesser of (i) the number of days from the date the Rent Commencement Date for such Building or phase would otherwise have occurred under this Section 2.1 until the date Landlord has completed all Building Shell work that must be completed as a condition of delivery of the Final Completion Certificate for the applicable Building or phase to such an extent that Tenant’s ability to occupy and commence operation of its business in the applicable Building or phase is no longer materially impaired by any remaining incomplete elements of Landlord’s Building Shell work in the applicable Building or phase, or (ii) the number of days by which Landlord’s delay (beyond the date the applicable Rent Commencement Date would otherwise have occurred pursuant to this Section 2.1) in completing all Building Shell work that must be completed as a condition of delivery of the Final Completion Certificate for the applicable Building or phase has actually delayed Tenant’s ability to occupy and commence operation of its business in the applicable Building or phase; provided, however, that the period (if any) for which any Rent Commencement Date is extended pursuant to this paragraph (c) shall be reduced, day for day, for a period equal to the length of any delays in Landlord’s completion of the Building Shell work that must be completed as a condition of delivery of the Final Completion Certificate for the applicable Building or phase to the extent such delays are caused by any Tenant Delays (as defined in the Workletter). Nothing in this paragraph (c) is intended to imply or require that Landlord’s Site Improvements relating to a Building or phase shall be completed by the Rent Commencement Date for such Building or phase; in fact, the parties expressly contemplate that completion of various elements of the Site Improvements may be deferred by Landlord, in its discretion, until after completion of Tenant’s Work under the Workletter in order to avoid the risk of damage to such Site Improvements in the course of Tenant’s Work, and Landlord agrees to complete such Site Improvements with reasonable diligence following completion of Tenant’s Work under the Workletter, subject to the effects of any Tenant Delays and/or Unavoidable Delays (as defined in the Workletter).

 

(d)          The term of this Lease shall end on the day (the “Termination Date”) immediately preceding the fifteenth (15th ) anniversary of the last of the Phase II Rent Commencement Dates to occur, unless sooner terminated or extended as hereinafter provided.

 

2.2          Early Possession.   Tenant shall have the nonexclusive right to occupy and take possession of the respective Buildings from and after the date of Landlord’s delivery of the

 

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Structural Completion Certificate described in the applicable portion of Section 2.1 for the applicable Building, even though Landlord will be continuing to construct the balance of Landlord’s Work as contemplated in the Workletter, for the purpose of constructing Tenant’s Work as contemplated in the Workletter and for the purpose of installing fixtures and furniture, laboratory equipment, computer equipment, telephone equipment, low voltage data wiring and personal property and other similar work related to the construction of Tenant’s Work and/or preparatory to the commencement of Tenant’s business in the applicable Building. Such occupancy and possession, and any early access under the next sentence of this Section 2.2, shall be subject to and upon all of the terms and conditions of this Lease and of the Workletter (including, but not limited to, conditions relating to the maintenance of required insurance), except that Tenant shall have no obligation to pay Minimum Rental or Operating Expenses for any period prior to the applicable Rent Commencement Date as determined under Section 2.1; such early possession shall not advance or otherwise affect the respective Rent Commencement Dates or the Termination Date determined under Section 2.1. Tenant shall also be entitled to have early access to the respective Buildings and the Property at all appropriate times prior to Landlord’s delivery of the Structural Completion Certificate for the applicable Building, subject to the approval of Landlord and its general contractor (which approval shall not be unreasonably withheld or delayed) and to all other provisions of this Section 2.2 and of the Workletter (including, but not limited to, conditions relating to the maintenance of required insurance), solely for the purpose of installing fixtures and equipment and other similar work preparatory to the construction of Tenant’s Work and the commencement of Tenant’s business on the Property, and Tenant shall not be required to pay Minimum Rental or Operating Expenses by reason of such early access until the applicable Rent Commencement Date otherwise occurs; without limiting the generality of the preceding portion of this sentence, Tenant shall be entitled to have early access to the Property and the respective Buildings as soon as the roof metal decking of the applicable Building is in place, to begin hanging electrical, mechanical and plumbing services from the overhead structure, subject to all of the provisions of this Section 2.2.

 

2.3          Delay In Possession.  Landlord agrees to use its best reasonable efforts to complete Landlord’s Work (as defined in the Workletter) promptly, diligently and within the respective time periods set forth in the respective estimated construction schedules attached hereto as Exhibit D and incorporated herein by this reference, as such schedules may be modified from time to time by mutual written agreement of Landlord and Tenant, and subject to any Tenant Delays and Unavoidable Delays (as respectively defined in the Workletter); provided, however, that Landlord shall not be liable for any damages caused by any delay in the completion of such work, nor shall any such delay affect the validity of this Lease or the obligations of Tenant hereunder. Notwithstanding any other provision of this Section 2.3, however, unless Landlord delivers a Structural Completion Certificate for at least one of the two Phase I Buildings and tenders possession of those completed structural portions of the Building Shell for such Building that must be completed as a condition of delivery of the Structural Completion Certificate by the date which is one hundred twenty (120) days after the date specified for structural completion as to such Phase I Building in the applicable Estimated Construction Schedule attached hereto as Exhibit D, Tenant shall have the right to terminate this Lease without further liability hereunder by written notice delivered to Landlord at any time prior to Landlord’s delivery of a Structural Completion Certificate for at least one Phase I Building and tender of possession of the completed structural portions of the Building Shell for such Phase I Building to Tenant; provided, however, that the applicable date on which Tenant’s termination right becomes exercisable pursuant to this sentence shall be extended, day for day, for a period equal to the length of any delays in Landlord’s design and construction of the respective Phase I Building Shells that are caused by any Unavoidable Delays or Tenant Delays (as respectively defined in the Workletter). If such a termination right arises in favor of Tenant and is properly exercised by Tenant, then Landlord shall reimburse Tenant for all of Tenant’s out-of-pocket fees and costs incurred prior to the date of such termination for design, space planning, architectural, engineering and construction management services in connection with this Lease and the Workletter, which reimbursement shall be paid by Landlord to Tenant within thirty (30) days after Landlord’s receipt of Tenant’s written request for such reimbursement, accompanied by copies of such invoices and other supporting documentation as Landlord may reasonably request to evidence the nature and amount of the fees and costs for which such reimbursement is requested.

 

2.4          Acknowledgment Of Rent Commencement Dates.   Promptly following the respective Rent Commencement Date for each Building or portion thereof, Landlord and Tenant

 

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shall execute a written acknowledgment of such Rent Commencement Date, the square footage of the Building or portion thereof (in the case of the Phase II Rent Commencement Dates) as to which the Rent Commencement Date applies, the Termination Date (if then determined) and related matters, substantially in the form attached hereto as Exhibit E (with appropriate insertions), which acknowledgment shall be deemed to be incorporated herein by this reference. Notwithstanding the foregoing requirement, the failure of either party to execute such a written acknowledgment shall not affect the determination of the applicable Rent Commencement Date, the applicable minimum rental and Operating Expense obligations, the Termination Date and related matters in accordance with the provisions of this Lease.

 

2.5          Holding Over.   If Tenant holds possession of the Property or any portion thereof after the term of this Lease with Landlord’s written consent, then except as otherwise specified in such consent, Tenant shall become a tenant from month to month at one hundred twenty-five percent (125%) of the rental and otherwise upon the terms herein specified for the period immediately prior to such holding over and shall continue in such status until the tenancy is terminated by either party upon not less than thirty (30) days prior written notice. If Tenant holds possession of the Property or any portion thereof after the term of this Lease without Landlord’s written consent, then Landlord in its sole discretion may elect (by written notice to Tenant) to have Tenant become a tenant either from month to month or at will, at one hundred fifty percent (150%) of the rental (prorated on a daily basis for an at-will tenancy, if applicable) and otherwise upon the terms herein specified for the period immediately prior to such holding over, or may elect to pursue any and all legal remedies available to Landlord under applicable law with respect to such unconsented holding over by Tenant. Tenant shall indemnify and hold Landlord harmless from any loss, damage, claim, liability, cost or expense (including reasonable attorneys’ fees) resulting from any delay by Tenant in surrendering the Property (except with Landlord’s prior written consent), including but not limited to any claims made by a succeeding tenant by reason of such delay. Acceptance of rent by Landlord following expiration or termination of this Lease shall not constitute a renewal of this Lease.

 

2.6          Option To Extend Term.  Tenant shall have the option to extend the term of this Lease with respect to any one or more of the Buildings, on a Building by Building basis (provided, however, that notwithstanding any other provisions of this Section 2.6, if the Connector Bridge is constructed as contemplated in Section 1.1(a) of this Lease and if Tenant elects to exercise this extension option with respect to one but not both of the Phase I Buildings, then Landlord’s election regarding removal of the Connector Bridge by Landlord at Tenant’s expense, as provided in Section 12.2(c) of this Lease, shall be exercisable in Landlord’s discretion either at the expiration of this Lease with respect to the Phase I Building for which the extension option was not exercised or at the expiration of this Lease with respect to the Phase I Building for which the extension option was exercised), at the Minimum Rental set forth in Section 3.1(b) and (c) (as applicable) and otherwise upon all the terms and provisions set forth herein with respect to the initial term of this Lease, for up to two (2) additional periods of five (5) years each, the first commencing upon the expiration of the initial term hereof and the second (applicable only to the Building or Buildings as to which a first extended term has been duly elected) commencing upon the expiration of such first extended term, if any. Exercise of such option with respect to the first such extended term shall be by written notice to Landlord at least nine (9) months and not more than twelve (12) months prior to the expiration of the initial term hereof; exercise of such option with respect to the second extended term, if the first extension option has been duly exercised, shall be by like written notice to Landlord at least nine (9) months and not more than twelve (12) months prior to the expiration of the first extended term hereof. If Tenant is in default hereunder on the date of such notice or on the date any extended term is to commence, then the exercise of the option shall be of no force or effect, the extended term shall not commence and this Lease shall expire at the end of the then current term hereof (or at such earlier time as Landlord may elect pursuant to the default provisions of this Lease). If Tenant properly exercises one or more extension options under this Section, then all references in this Lease (other than in this Section 2.6) to the “term” of this Lease shall be construed to include the extension term(s) thus elected by Tenant. Except as expressly set forth in this Section 2.6, Tenant shall have no right to extend the term of this Lease beyond its prescribed term.

 

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3.       RENTAL

 

3.1          Minimum Rental.

 

(a)          Rental Amounts.   Tenant shall pay to Landlord as minimum rental for the respective Buildings or applicable portions thereof, in advance, without deduction, offset (except as specifically authorized under Paragraph 4(c) of the Workletter, if applicable), notice or demand, on or before the applicable Rent Commencement Date for the respective Building and on or before the first day of each subsequent calendar month of the initial term of this Lease, the following amounts per month (the “Minimum Rental”), subject to adjustment in accordance with the terms of this Section 3.1:

 

(i)         For the Phase IA Building, beginning on the Phase I Rent Commencement Date, an amount equal to the applicable amount per square foot from the following table multiplied by the square footage of the Phase IA Building as determined pursuant to Section 3.1(d):

 

Months   Monthly Minimum Rental
001 - 012   $4.0500/sq ft
013 - 024   $4.1715/sq ft
025 - 036   $4.2966/sq ft
037 - 048   $4.4255/sq ft
049 - 060   $4.5583/sq ft
061 - 072   $4.6951/sq ft
073 - 084   $4.8359/sq ft
085 - 096   $4.9810/sq ft
097 - 108   $5.1304/sq ft
109 - 120   $5.2843/sq ft
121 - 132   $5.4429/sq ft
133 - 144   $5.6061/sq ft
145 - 156   $5.7743/sq ft
157 - 168   $5.9476/sq ft
169 - 180   $6.1260/sq ft
181 - 192   $6.3098/sq ft
193 - 204   $6.4991/sq ft
205 - 216 (if applicable)   $6.6940/sq ft
217 and after (if applicable), continued 3.0% annual escalations

 

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(ii)        For the Phase IB Building, beginning on the Phase I Rent Commencement Date, an amount equal to the applicable amount per square foot from the following table multiplied by the square footage of the Phase IB Building as determined pursuant to Section 3.1(d):

 

Months   Monthly Minimum Rental
001 - 012   $4.0500/sq ft
013 - 024   $4.1715/sq ft
025 - 036   $4.2966/sq ft
037 - 048   $4.4255/sq ft
049 - 060   $4.5583/sq ft
061 - 072   $4.6951/sq ft
073 - 084   $4.8359/sq ft
085 - 096   $4.9810/sq ft
097 - 108   $5.1304/sq ft
109 - 120   $5.2843/sq ft
121 - 132   $5.4429/sq ft
133 - 144   $5.6061/sq ft
145 - 156   $5.7743/sq ft
157 - 168   $5.9476/sq ft
169 - 180   $6.1260/sq ft
181 - 192   $6.3098/sq ft
193 - 204   $6.4991/sq ft
205 - 216 (if applicable)   $6.6940/sq ft
217 and after (if applicable), continued 3.0% annual escalations

 

(iii)       For the Phase II Building, beginning on the Phase IIA Rent Commencement Date (with each successive phase of Tenant’s occupancy of the Phase II Building being brought under the following table as of the applicable Rent Commencement Date for such phase at the rental rate determined under the following table by counting from the Phase IIA Rent Commencement Date), an amount equal to the applicable amount per square foot from the following table multiplied by the aggregate square footage of all then applicable phases of the Phase II Building as determined pursuant to Section 3.1(d):

 

Months   Monthly Minimum Rental
001 - 012   $4.1715/sq ft
013 - 024   $4.2966/sq ft
025 - 036   $4.4255/sq ft
037 - 048   $4.5583/sq ft
049 - 060   $4.6951/sq ft
061 - 072   $4.8359/sq ft
073 - 084   $4.9810/sq ft
085 - 096   $5.1304/sq ft
097 - 108   $5.2843/sq ft
109 - 120   $5.4429/sq ft
121 - 132   $5.6061/sq ft
133 - 144   $5.7743/sq ft
145 - 156   $5.9476/sq ft
157 - 168   $6.1260/sq ft
169 - 180   $6.3098/sq ft

 

(iv)       If the obligation to pay Minimum Rental or additional rent hereunder commences on other than the first day of a calendar month or if the term of this Lease terminates on other than the last day of a calendar month, the Minimum Rental and any additional rent for such first or last month of the term of this Lease, as the case may be, shall be prorated based on the number of days the term of this Lease is in effect during such month. If an increase in Minimum Rental or additional rent becomes effective on a day other than the first day of a calendar month, the Minimum Rental or additional rent, as applicable, for that month shall be the sum of the two applicable rates, each prorated for the portion of the month during which such rate is in effect.

 

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(b)          Rental Amounts During First Extended Term.  If Tenant properly exercises its right to extend the term of this Lease pursuant to Section 2.6 hereof, the Minimum Rental for each Building as to which Tenant has elected to extend during the first year of the first extended term shall be equal to the initial fair market rental (as defined below) for the applicable Building, determined as of the commencement of such extended term in accordance with this Section 3.1(b), and as of the beginning of each subsequent year of the first extended term such Minimum Rental shall be increased by an amount equal to the greater of (i) three percent (3%) of the Minimum Rental in effect during the immediately preceding lease year or (ii) the fair market rental escalation percentage (as defined below) for the applicable Building, determined as of the commencement of such extended term in accordance with this Section 3.1(b). Upon Landlord’s receipt of a timely notice of Tenant’s exercise of its option to extend the term of this Lease, the parties shall have sixty (60) days in which to agree on the initial fair market rental and the applicable rental escalation percentage for the Buildings as of the commencement of the first extended term for the uses permitted hereunder. If the parties agree on such initial fair market rental and rental escalation percentage, they shall execute an amendment to this Lease stating the amount of the Minimum Rental during the first year of the extended term (determined in accordance with this Section 3.1(b)) and the annually increased Minimum Rental for the balance of the first extended term. If the parties are unable to agree on such initial fair market rental and/or applicable rental escalation percentage within such sixty (60) day period, then within fifteen (15) days after the expiration of such period each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser who is a member of the American Institute of Real Estate Appraisers, or any other similar organization, and has at least five (5) years experience appraising similar commercial properties in northeastern San Mateo County, to determine the initial fair market rental and applicable rental escalation percentage for the Buildings as of the commencement of the first extended term in accordance with the provisions of this Section 3.1(b). If either party fails to appoint an appraiser within the allotted time, the single appraiser appointed by the other party shall be the sole appraiser. If an appraiser is appointed by each party and the two appraisers so appointed are unable to agree upon the initial fair market rental and/or the applicable rental escalation percentage within thirty (30) days after the appointment of the second, the two appraisers shall appoint a third similarly qualified appraiser within ten (10) days after expiration of such 30-day period; if they are unable to agree upon a third appraiser, then either party may, upon not less than five (5) days notice to the other party, apply to the Presiding Judge of the San Mateo County Superior Court for the appointment of a third similarly qualified appraiser. Each party shall bear its own legal fees in connection with appointment of the third appraiser and shall bear one-half of any other costs of appointment of the third appraiser and of such third appraiser’s fee. The third appraiser, however selected, shall be a person who has not previously acted for either party in any capacity. Within thirty (30) days after the appointment of the third appraiser, a majority of the three appraisers shall set the initial fair market rental and the applicable rental escalation percentage for the first extended term and shall so notify the parties. If a majority are unable to agree within the allotted time, (i) the three appraised initial fair market rentals shall be added together and divided by three and the resulting quotient shall be the initial fair market rental for the first extended term, and (ii) the three appraised fair market rental escalation percentages shall be added together and divided by three and the resulting quotient shall be the fair market rental escalation percentage used in determining the applicable rental escalation percentage for purposes of clause (ii) of the first sentence of this Section 3.1(b), which determinations shall be binding on the parties and shall be enforceable in any further proceedings relating to this Lease. For purposes of this Section 3.1(b), the “fair market rental” and “fair market rental escalation percentage” for the respective Buildings shall be determined as follows: (x) in the case of a renewal term for any of the Buildings, with reference to the then prevailing market rental rates for properties in northeastern San Mateo County with shell and standard office, research and development improvements and site (common area) improvements comparable to those then existing in the applicable Building and on the Property, provided that no equipment or laboratory improvements shall be taken into account in determining such fair market rental; and (y) in the case of a lease or renewal term for any other building leased by Tenant under terms based on the terms of this Lease (for example, any building leased by Tenant pursuant to any of the provisions of Article 6 hereof, except to the extent any different basis of determination is specified in Landlord’s First Refusal Notice or First Offer Notice, if applicable, under such Article 6), with reference to the then prevailing market rental rates and then prevailing market rental escalation provisions for leases of comparable length of properties in the South San Francisco market with shell and office, research and development improvements and site (common area) improvements comparable to those then existing in the applicable building and on the Property, taking into account for such

 

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determination all tenant improvements then existing in the applicable building (including, but not limited to, equipment and laboratory improvements installed as part of the initial construction of tenant improvements in such building).

 

(c)          Rental Amounts During Second Extended Term.   If Tenant properly exercises its right to a second extended term of this Lease pursuant to Section 2.6 hereof, the Minimum Rental during such second extended term shall be determined in the same manner provided in the preceding paragraph for the first extended term (initial fair market rental followed by subsequent annual escalations equal to the greater of 3% or fair market rental escalation percentage during the balance of the term), except that the determination shall be made as of the commencement of the second extended term.

 

(d)          Determination of Square Footage for Rent Calculation Purposes.   After completion of the Building Shell of each respective Building, Landlord shall cause the square footage of the respective Building (including, in the case of the Phase IB Building, the Connector Bridge if constructed as contemplated in Section 1.1(a) hereof) to be measured by Landlord’s architect, and at the commencement of each phase of Tenant’s occupancy of the Phase II Building, Landlord shall cause the square footage of the space actually used or occupied by Tenant in the Phase II Building to be measured by Landlord’s architect, in each case in accordance with the measurement formula specified in Section 1.1(d) of this Lease, which measurements by Landlord’s architect shall be subject to approval (not unreasonably withheld or delayed) by Tenant’s architect. Upon mutual approval of such measurement by Landlord’s and Tenant’s respective architects, the applicable square footages shall be set forth in the applicable Acknowledgment of Rent Commencement Date under Section 2.4 hereof and shall be used for calculation of Minimum Rental under Section 3.1(a), additional rent under Section 3.1(e) and Tenant’s Operating Cost Share under Section 9.1 for all applicable periods.

 

(e)          Additional Rent for Tenant Improvement Costs.   In consideration of Landlord’s willingness to provide the Tenant Improvement Allowance to Tenant in accordance with the provisions of the Workletter, Tenant agrees to pay to Landlord as additional rent hereunder, which additional rent shall be due with respect to each Building or phase thereof on the same dates and in the same manner as Minimum Rental for such Building or phase thereof, beginning on the applicable Rent Commencement Date for the applicable Building or phase thereof, an amount calculated separately for each such Building or phase thereof as follows: (i) for each of the Phase I Buildings, for the first one hundred twenty (120) months after the applicable Rent Commencement Date for the applicable Building, an amount equal to $0.72 per square foot per month multiplied by the applicable square footage for such Building as determined for purposes of Section 3.1(d) above, (ii) for each of the Phase I Buildings, for months one hundred twenty-one (121) through one hundred eighty (180) after the applicable Rent Commencement Date for the applicable Building, an amount equal to $0.33 per square foot per month multiplied by the applicable square footage for such Building as determined for purposes of Section 3.1(d) above, and (iii) for each phase of the Phase II Building, for the first one hundred eighty (180) months after the applicable Rent Commencement Date for such phase, an amount equal to $0.13 per square foot per month multiplied by the applicable square footage for such phase as determined for purposes of Section 3.1(d) above.

 

3.2          Late Charge.   If Tenant fails to pay when due rental or other amounts due Landlord hereunder, such unpaid amounts shall bear interest for the benefit of Landlord at a rate equal to the lesser of fifteen percent (15%) per annum or the maximum rate permitted by law, from the date due to the date of payment. In addition to such interest, Tenant shall pay to Landlord a late charge in an amount equal to six percent (6%) of any installment of minimum rental and any other amounts due Landlord if not paid in full on or before the fifth (5th) day after such rental or other amount is due. Tenant acknowledges that late payment by Tenant to Landlord of rental or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, including, without limitation, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any loan relating to the Property. Tenant further acknowledges that it is extremely difficult and impractical to fix the exact amount of such costs and that the late charge set forth in this Section 3.2 represents a fair and reasonable estimate thereof. Acceptance of any late charge by Landlord shall not constitute a waiver of Tenant’s default with respect to overdue rental or other amounts, nor shall such acceptance prevent Landlord from exercising any other rights and remedies available to it. Acceptance of rent or other payments by Landlord shall not constitute a waiver of late charges or interest accrued with respect to such rent or other payments or any prior installments thereof, nor

 

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of any other defaults by Tenant, whether monetary or non-monetary in nature, remaining uncured at the time of such acceptance of rent or other payments.

 

4.       [OMITTED]

 

5.       CONSTRUCTION

 

5.1          Construction of Improvements.

 

(a)          Landlord shall, at Landlord’s cost and expense (except as otherwise provided herein and in the Workletter), construct Landlord’s Work as defined in and in accordance with the terms and conditions of the Workletter. Landlord shall use its best efforts to complete such construction promptly, diligently and within the applicable time periods set forth in the estimated construction schedules attached hereto as Exhibit D and incorporated herein by this reference, as such schedules may be modified or revised from time to time in accordance with the Workletter, subject to Tenant Delays and Unavoidable Delays as defined in the Workletter.

 

(b)          Tenant shall, at Tenant’s cost and expense (except as otherwise provided herein and in the Workletter), construct Tenant’s Work as defined in and in accordance with the terms and conditions of the Workletter.

 

5.2          Condition of Property.   Landlord shall deliver the Building Shell for each Building and the other Improvements constructed by Landlord to Tenant clean and free of debris, promptly upon completion of construction thereof, and Landlord warrants to Tenant that each Building Shell and the other Improvements constructed by Landlord (i) shall be free from material structural defects and (ii) shall be constructed in compliance in all material respects with the plans and specifications developed pursuant to the Workletter and mutually approved (to the extent required thereunder) by Landlord and Tenant, subject to any changes implemented in such plans and specifications in accordance with the procedures set forth in the Workletter. If it is determined that this warranty has been violated in any respect, then it shall be the obligation of Landlord, after receipt of written notice from Tenant setting forth with specificity the nature of the violation, to correct promptly, at Landlord’s sole cost, the condition(s) constituting such violation. Tenant’s failure to give such written notice to Landlord within ninety (90) days after the Rent Commencement Date for the applicable Building shall give rise to a conclusive presumption that Landlord has complied with all Landlord’s obligations under this Section 5.2 with respect to the applicable Building, except with respect to latent defects (as to which such 90-day limit shall not apply). Without limiting the scope of Landlord’s obligations under the foregoing provisions of this Section 5.2, Landlord also agrees to either (x) use its best reasonable efforts to enforce when and as necessary, for the benefit of Tenant and the Improvements, any and all contractor’s and/or manufacturer’s warranties with respect to any of Landlord’s Work or, at Tenant’s request, (y) assign any or all of such warranties to Tenant for enforcement purposes (provided, however, that Landlord may reserve joint enforcement rights under such warranties to the extent of Landlord’s continuing obligations or warranties hereunder), and shall cooperate with Tenant in all reasonable respects in any enforcement of such assigned warranties. TENANT ACKNOWLEDGES THAT THE WARRANTIES CONTAINED IN THIS SECTION ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PHYSICAL CONDITION OF THE IMPROVEMENTS TO BE CONSTRUCTED BY LANDLORD AND THAT LANDLORD MAKES NO OTHER WARRANTIES EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE.

 

5.3          Compliance with Law.   Landlord warrants to Tenant that the Building Shells and other Improvements constructed by Landlord (when constructed), as they exist on the respective applicable Rent Commencement Dates, but without regard to the use for which Tenant will occupy the Buildings, shall not violate any covenants or restrictions of record or any applicable law, building code, regulation or ordinance in effect on the applicable Rent Commencement Date. Tenant warrants to Landlord that the Tenant Improvements and any other improvements constructed by Tenant from time to time shall not violate any applicable law, building code, regulation or ordinance in effect on the applicable Rent Commencement Date or at the time such improvements are placed in service. If it is determined that any of these warranties has been violated, then it shall be the obligation of the warranting party, after written notice from the other

 

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party, to correct the condition(s) constituting such violation promptly, at the warranting party’s sole cost and expense. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty as to the present or future suitability of the Property for the conduct of Tenant’s business or proposed business thereon.

 

6.       EXPANSION RIGHTS

 

6.1          First Refusal Right to Lease.

 

(a)          The building commonly known as Building C in the Center, also commonly known as 1140 Veterans Boulevard and designated as “First Refusal Building” on the Site Plan (the “First Refusal Building”), is presently leased to Raven Biotechnologies, Inc. pursuant to a Build-to-Suit Lease dated as of May 1, 2001 (the “Existing Raven Lease”). Landlord shall not lease all or any portion of the First Refusal Building at any time during the term of this Lease (as extended, if applicable), except in compliance with this Section 6.1; provided, however, that the foregoing restriction shall not apply during any period in which Tenant is in default under this Lease, beyond any applicable notice and cure periods, and provided further, however, that Tenant’s rights pursuant to this Section 6.1 are subordinate to the rights of Raven Biotechnologies, Inc. and its successors in interest (collectively, “Raven”) pursuant to the Existing Raven Lease, as the same may be amended from time to time.

 

(b)          If, at any time during the term of this Lease (as extended, if applicable), Landlord receives and wishes to accept a bona fide written offer from a person or entity (an “Offeror,” provided , however, that the term “Offeror” shall not include Tenant itself, nor shall it include Raven with respect to any rights or negotiations under the Existing Raven Lease, as the same may be amended from time to time) to lease all or any portion of the First Refusal Building and if Tenant is not then in default under this Lease (beyond any applicable notice and cure periods), then Landlord shall give written notice of such bona fide written offer to Tenant (the “First Refusal Notice”), specifying the material terms on which the Offeror proposes to lease the First Refusal Building or applicable portion thereof (the “First Refusal Space”), and shall offer to Tenant the opportunity to lease the First Refusal Space on the terms specified in the First Refusal Notice. For purposes of this Section 6.1(b), an offer shall be considered bona fide if it is contained in a letter of intent or other writing signed by the Offeror and specifies the material terms of the proposed lease. Tenant shall have ten (10) business days after the date of giving of the First Refusal Notice in which to accept such offer by written notice to Landlord. Upon such acceptance by Tenant, the First Refusal Space shall be leased to Tenant on the terms set forth in the First Refusal Notice and on the additional terms and provisions set forth in this Lease (except to the extent inconsistent with the terms set forth in the First Refusal Notice), excluding Article 6 hereof, and the parties shall promptly (and in all events within ten (10) business days after delivery of Tenant’s acceptance) execute a lease amendment or other written agreement containing the terms of the First Refusal Notice and all other terms and provisions of this Lease not inconsistent with the terms of said First Refusal Notice, except Article 6 hereof and except as the parties may otherwise mutually agree. If Tenant does not accept Landlord’s offer within the allotted time or if the parties fail to enter into such a lease amendment or other written agreement in a timely manner, Landlord shall thereafter have the right to lease the First Refusal Space to the Offeror, at any time within one hundred eighty (180) days thereafter, at a minimum rental and on other terms and conditions not more favorable to the Offeror than the minimum rental and other terms offered to Tenant in the First Refusal Notice. If Landlord does not lease the First Refusal Space to the Offeror pursuant to the preceding sentence within such one hundred eighty (180) days, or if Landlord desires to lease the First Refusal Space to another third party within such one hundred eighty (180) days, this First Refusal Right shall reattach to the First Refusal Space on all of the same terms set forth above.

 

6.2          Right of First Offer to Lease.

 

(a)          Landlord has advised Tenant that Buildings F and G in the Center, designated as “First Offer Buildings” on the Site Plan (collectively, the “First Offer Buildings”), are presently leased to Rigel Pharmaceuticals, Inc. pursuant to a Build-to-Suit Lease dated as of May 16, 2001 (the “Existing Rigel Lease”). Landlord shall not lease all or any portion of the First Offer Buildings at any time during the term of this lease (as extended, if applicable), except in compliance with this Section 6.2; provided, however, that the foregoing restriction shall not apply during any period in which Tenant is in default under this Lease, beyond any