10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2017

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: 001-36327

Aquinox Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

Delaware	98-0542593
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

450-887 Great Northern Way,

Vancouver, B.C., Canada V5T 4T5

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (604) 629-9223

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

Title of class	Name of each exchange on which registered
Common Stock, par value $0.000001	The Nasdaq Stock Market LLC

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

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if smaller reporting company)	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 the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $54.6 million as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on The Nasdaq Global Market reported for such date. Excludes an aggregate of 19,587,258 shares of the registrant’s common stock held as of such date by officers, directors and stockholders that the registrant has concluded are or were affiliates of the registrant. Exclusion of such shares should not be construed to indicate that the holder of any such shares possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

There were 23,490,859 shares of the registrant’s Common Stock issued and outstanding as of March 9, 2018.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, in connection with the registrant’s 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”).     

AQUINOX PHARMACEUTICALS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business		2
Item 1A.	Risk Factors		24
Item 1B.	Unresolved Staff Comments		61
Item 2.	Properties		61
Item 3.	Legal Proceedings		61
Item 4.	Mine Safety Disclosures		61
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		62
Item 6.	Selected Financial Data		63
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		65
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		75
Item 8.	Financial Statements and Supplementary Data		77
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		97
Item 9A.	Controls and Procedures		97
Item 9B.	Other Information		97
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		98
Item 11.	Executive Compensation		98
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		98
Item 13.	Certain Relationships and Related Transactions, and Director Independence		98
Item 14.	Principal Accounting Fees and Services		98
	PART IV
Item 15.	Exhibits, Financial Statement Schedules		99
Item 16.	Form 10-K Summary		101
	Signatures		102

Except as otherwise indicated herein or as the context otherwise requires, references in this report to “Aquinox,” “the company,” “we,” “us,” “our” and similar references refer to Aquinox Pharmaceuticals, Inc., a Delaware corporation, which we refer to in this report as Aquinox USA, and Aquinox Pharmaceuticals (Canada) Inc., a corporation under the Canada Business Corporations Act and a wholly owned subsidiary of Aquinox USA, which we refer to in this report as AQXP Canada. This report contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

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PART I

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Item 1A—Risk Factors.” We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Item 1. Business.

Overview

We are a clinical-stage pharmaceutical company developing novel therapeutics for chronic urological conditions marked by inflammation and pain. Our lead drug candidate, rosiptor, is in Phase 3 development (Leadership 301 trial) for the treatment of patients with interstitial cystitis/bladder pain syndrome (IC/BPS), a condition for which there are currently few FDA approved and/or effective treatment options. We are focused on leveraging our library of novel compounds that activate SHIP1 (SH2-containing inositol-5’-phosphatase 1) to develop therapeutics for application in inflammation, inflammatory pain, and blood cancers.

Rosiptor is a first-in-class, once-daily, oral treatment being studied for its effects on inflammation and inflammatory pain. Rosiptor has a novel mechanism of action, activating SHIP1, an enzyme that serves to down-regulate inflammation through its role in the PI3K signaling pathway. Rosiptor has been generally well tolerated in multiple completed clinical studies, with more than 395 subjects dosed. We retain full worldwide rights of rosiptor and hold patents with terms through 2024 in Europe and 2028 in the United States with the possibility of further patent term extension avenues available to us.

IC/BPS is a debilitating condition marked by chronic bladder pain and urinary symptoms. Patients may experience recurring pain, pressure, and/or discomfort perceived to be related to the urinary bladder as well as urinary frequency, urgency, and/or nocturia. The pain often worsens upon bladder filling and may be relieved upon bladder emptying. Many patients living with IC/BPS report that it takes a physical, emotional, and psychological toll, greatly impacting employment and social and intimate relationships. There are currently few FDA approved and/or effective treatment options for IC/BPS. Only about 1 million of the 5.5 million adults in the United States with symptoms of IC/BPS have been diagnosed or are receiving treatment.

In 2015, we completed and reported results from our Leadership 201 trial, a multicenter, randomized, double-blind, placebo-controlled, Phase 2 clinical trial investigating the ability of 200 mg oral, once daily rosiptor to reduce average daily bladder pain and urinary symptoms in 69 female patients with IC/BPS. Although we did not achieve statistical significance in the primary endpoint, the results demonstrated a positive trend and statistically significant changes on secondary endpoints.

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The Leadership 301 trial is a three-arm, multicenter, randomized, double-blind, placebo-controlled Phase 3 clinical trial assessing the effect of once-daily rosiptor 100 mg and 200 mg on bladder pain and urinary symptoms in female and male subjects with IC/BPS. The primary endpoint of the Leadership 301 trial is the change from baseline at week 12 in maximum daily bladder pain based on an 11-point numeric rating scale (NRS) compared to placebo, in female subjects, recorded by electronic diary. Additional endpoints include urinary symptoms as well as an evaluation of overall improvement with therapy. The Leadership 301 trial has a 52-week extension period, affording all participating subjects the opportunity for treatment with rosiptor. A total of 341 females and 92 males were enrolled in the trial and were randomized to receive one of two oral doses of once-daily rosiptor, 100 mg or 200 mg. Subjects were enrolled at clinical research centers in the United States, Canada, and Europe. Top-line data is anticipated in the third quarter of 2018.

SHIP1 and the PI3K Pathway

Role and Regulation of the PI3K Pathway

The PI3K pathway is a cellular signaling pathway that has been linked to a diverse group of cellular functions and biological processes such as cell activation and migration, which are related to inflammation, and cell growth, proliferation and survival, which are related to cancer. As a result, the PI3K pathway is being evaluated by the academic community as well as by pharmaceutical and biotechnology companies in the areas of immune disorders and oncology.

In the PI3K pathway, the key messenger molecule is phosphatidylinositiol-3,4,5-trisphosphate, or PIP3, which initiates the signaling pathway. In cells derived from bone marrow tissues (e.g. immune cells), key enzymes that control levels of PIP3 are the PI3 kinase, or PI3K, and the phosphatases, phosphatase and tensin homolog, or PTEN, and SH2-containing inositol-5’-phosphatase 1, or SHIP1. PI3K generates PIP3, thus initiating the signaling pathway. This signaling is reduced by degradation of PIP3 by PTEN and SHIP1. PTEN is generally considered to be constantly working in the pathway to control basal activity, whereas SHIP1 is engaged when the cell is stimulated. In preclinical studies, PTEN has been shown to suppress cancer by controlling cell proliferation, whereas SHIP1, has been demonstrated to control inflammation by reducing cell migration and activation.

If the PI3K pathway is overactive, immune cells can produce an abundance of pro-inflammatory signaling molecules and migrate to and concentrate in tissues, resulting in excessive or chronic inflammation. SHIP1 is predominantly expressed in cells derived from bone marrow tissues, which are mainly immune cells. Consequently, drugs that activate SHIP1 can reduce the function and migration of immune cells and have an anti-inflammatory effect.

SHIP1 as a Drug Target

We believe that inflammation can be reduced by activation of SHIP1, taking advantage of the natural modulation of the PI3K pathway. When activated, SHIP1 redirects signaling in immune cells to reduce their activation and migration, thereby reducing inflammation while still allowing these cells to maintain cell growth and survival. Our scientific founders, based at the University of British Columbia, were the first to discover SHIP1 and show that small molecules could activate it, thereby making it a potential target for a new class of anti-inflammatory drugs. Additionally, other academic scientists have shown that certain immune cell cancers have suppressed levels of SHIP1, making such cancers also potential targets for SHIP1 activators. SHIP1 is predominantly present in immune cells. Therefore, SHIP1 activators target immune cells to cause an anti-inflammatory effect while minimizing effects in other tissues.

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Rosiptor

Rosiptor is a SHIP1 activator that has demonstrated preliminary safety, broad anti-inflammatory potential and favorable drug properties in multiple preclinical studies. We have also completed eight clinical trials, exposing over 395 subjects to once daily oral administration of rosiptor. These trials have demonstrated that rosiptor is generally well-tolerated, with over 200 subjects receiving rosiptor in two Phase 2 trials for periods of 12 weeks. We believe rosiptor is the only SHIP1 activator currently in clinical trials and that no SHIP1 activator has yet received marketing approval as a treatment for disease in humans.

Rosiptor has Desirable Pharmaceutical Properties

In addition to demonstrating strong in vitro and in vivo activity, rosiptor was also selected as a lead candidate based on its many desirable pharmaceutical properties. It is highly water-soluble and does not require complex formulation for oral administration. Rosiptor has low plasma protein binding, is not appreciably metabolized in vitro and is excreted primarily as parent compound in both urine and feces. In humans, rosiptor has shown pharmacokinetic properties suitable for once-a-day oral dosing. In addition, the absorption of the drug candidate is equivalent whether taken with or without food.

Rosiptor Safety Profile

To date, safety data have been obtained from over 395 subjects from our eight completed clinical trials with doses of rosiptor ranging from 17 mg to 542 mg and duration of dosing of up to 12 weeks. The most frequent dose-related adverse events were gastrointestinal events, which were generally mild, intermittent and resolved without treatment or long-term effects. The frequency of gastrointestinal adverse events decreased with lower dose and with reduced fasting time, consistent with the adverse events being associated with irritation of the gastrointestinal lining from the rapid dissolution and absorption of rosiptor.

Our Phase 2 trials have demonstrated rosiptor to be generally well tolerated at a dose of 200 mg once daily for 6 or 12 weeks in over 200 patients. In all three completed Phase 2 trials utilizing 200 mg once daily, adverse event rates have been similar to placebo, with the most common being mild to moderate gastrointestinal events. The adverse events noted for rosiptor have been consistent across all trials completed to date.

Interstitial Cystitis/Bladder Pain Syndrome

IC/BPS is a chronic urinary bladder disease characterized by erosion of the interior bladder lining and chronic inflammation of the bladder wall, bladder and pelvic pain and increased urinary urgency and/or frequency. Stress or a change in diet has been known to trigger IC/BPS symptoms. IC/BPS affects men and women of all ages. Only approximately one million of the five and a half million adults in the United States with symptoms of IC/BPS have been diagnosed or are receiving treatment. IC/BPS is considered to be one of the most challenging urological conditions without effective therapy.

Chronic inflammation within the bladder wall can lead to damage and fibrotic changes in the bladder. There have been several studies linking allergic sensitivity to worsening IC/BPS symptoms. Furthermore, the inflammation leads to the release of mediators that irritate and trigger surrounding nerve tissue and causes radiating pain. For many IC/BPS sufferers, their symptoms of pain and urinary frequency are severe and adversely affect all major aspects of their lives, including overall physical and emotional health, employment, social and intimate relationships, and leisure activities.

The diagnosis of IC/BPS is often challenging and is based on exclusion of other diseases, including bladder cancer, kidney stones, vaginitis, endometriosis, sexually transmitted diseases and prostate infections. Currently, IC/BPS is more commonly diagnosed in women than men. Sometimes patients have to see a number of doctors and specialists over a period of several years to obtain a correct diagnosis. The reported diagnosis rate for IC/BPS is significantly lower than the number of people estimated to suffer from IC/BPS.

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IC/BPS Current Therapies

There is no known cure for IC/BPS, although a number of therapies have been reported to relieve symptoms. The only FDA approved oral therapy is an agent, pentosan polysulfate sodium (PPS) (Elmiron), first approved in 1996, which may help to temporarily restore the bladder lining but can take up to six months before any benefit is noted. Recent placebo controlled studies of PPS however have failed to demonstrate benefit. Other oral therapies used off-label include antihistamines, anticholinergics, antispasmodics, anti-infectives, analgesics and low dose antidepressants to block neurogenic pain. Many IC/BPS patients continue to suffer this debilitating condition, despite treatment with existing therapies.

In addition to oral therapies, direct instillation of drugs into the bladder via catheter (intravesical therapy) has been shown to provide temporary relief of symptoms. Dimethylsulfoxide (DMSO; RIMSO-50) is the only drug approved by the FDA for bladder instillation for IC/BPS. It offers anti-inflammatory, muscle relaxant and analgesic effects. DMSO is used alone or in combination with heparin, corticosteroids, bicarbonate and a local anesthetic (lidocaine) for intravesical administration. Instillations and cystoscopy with hydrodistension along with analgesics and pain medications are treatments used in Japan and certain European countries.

Instillation therapies are invasive and can be inconvenient. Oral therapies can offer significant potential advantages for IC/BPS patients. However, despite precedents for IC/BPS anti-inflammatory therapies, there are no satisfactory oral therapies currently available. We believe there is a significant medical need for new and innovative treatments that target the underlying inflammatory disease process.

The Leadership 201 Trial: Rosiptor in IC/BPS patients

During 2015 we completed and reported results from our Leadership 201 trial, a multicenter, randomized, double-blind, placebo-controlled, Phase 2 clinical trial investigating the ability of 200 mg oral, once daily rosiptor to reduce pain in female patients with IC/BPS. Primary and secondary endpoint results were announced in June 2015 and August 2015, respectively. The primary endpoint was to measure the difference in the change from baseline in the average daily bladder pain score based on an 11-point numeric rating scale (NRS) at six weeks recorded by electronic diary. The trial was conducted at investigative sites across Canada and the United States. A total of 69 subjects were enrolled.

While the top line trial results announced in June 2015 demonstrated a reduction in average daily bladder pain for patients on rosiptor as compared to those patients on placebo following six weeks of treatment, the difference did not reach statistical significance (p = 0.061). The mean change in pain score for patients on 200 mg oral, once daily rosiptor vs. placebo was a reduction of 2.4 vs. 1.4 points, respectively. Approximately 49% of patients receiving rosiptor demonstrated a 2-point or greater reduction in pain compared to 34% of patients receiving placebo. Subsequent results from secondary endpoints of the Leadership 201 trial announced in August 2015 and in subsequent disclosures, such as maximum daily pain, O’Leary-Sant symptom and problem indexes (both individually and combined), bladder pain interstitial cystitis symptom score (BPIC-SS) and urinary frequency, were all statistically significant in consistently favoring rosiptor, compared to placebo. We believe both the primary and secondary endpoint results support further development in IC/BPS. As with past trial results, rosiptor was generally well tolerated. No serious adverse events were recorded during the trial and the overall adverse event rate was similar between rosiptor 200 mg once daily and placebo. The most frequently reported adverse events were gastrointestinal disorders.

The Leadership 301 Trial: Rosiptor in IC/BPS Patients

The Leadership 301 trial, which completed enrollment in February 2018, is a three-arm, multi-center, randomized, double-blind, placebo-controlled Phase 3 clinical trial, with 12 weeks dosing followed by an extension period of 52 weeks, to assess the efficacy and safety of rosiptor in both female and male IC/BPS patients. The Leadership 301 trial enrolled 341 female and 92 male subjects at clinical research centers in the

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United States, Canada and Europe. The Leadership 301 trial is investigating the ability of 200 mg and 100 mg oral, once daily rosiptor to reduce bladder pain in patients with IC/BPS. Patients are randomized to receive one of the two potential doses of rosiptor or placebo. The primary endpoint of the Leadership 301 trial is to measure the difference in the change from baseline in the maximum daily bladder pain score based on an 11-point NRS at twelve weeks in female subjects recorded by electronic diary. Key secondary endpoints include measuring change from baseline at twelve weeks in voiding frequency and BPIC-SS as well as the subject’s Global Response Assessment at week twelve. The trial also includes an extension period of 52 weeks affording all participating patients the opportunity for treatment with rosiptor. Top-line data is anticipated in the third quarter of 2018.

We continue to engage with the FDA and other regulatory authorities to discuss the safety and efficacy trials and analyses required for approval of rosiptor in IC/BPS in the United States, Europe, and other targeted countries. We are also evaluating the design and number of additional trials that we will conduct in order to meet International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) patient exposure guidelines and demonstrate the safety and efficacy of rosiptor in support of a potential new drug application (NDA) filing. We expect the data from the Leadership 301 trial, as well as further discussion with regulatory authorities, will be fundamental in defining the number, design and size of these additional trials. Any increase in the number, size or duration of clinical trials for rospitor will increase our research and development expenses and may impact the timing of any NDA filing with respect to rosiptor.

Expanded Clinical Indications for Rosiptor

We have demonstrated preclinical efficacy with rosiptor in a broad range of relevant inflammatory and fibrotic models of inflammation. Our preclinical studies and Phase 2 trial have demonstrated high levels of unmetabolized rosiptor in the bladder. This biodistribution of the drug during elimination may have contributed to the observed activity in IC/BPS patients and may suggest potential application in other urinary disorders. Preclinical data suggested high rates of elimination via the bowel which may represent another target tissue for future consideration. In addition to the relevance of SHIP1 as a target, and the properties of rosiptor, each disease and patient population must also be considered based on its relative unmet medical need, market opportunity, the competitive environment and feasibility of clinical/regulatory pathway. We believe that there are multiple opportunities in further expanding the clinical indications for which rosiptor is being evaluated.

During the third quarter of 2017, we announced our plan to initiate a proof-of concept Phase 2 clinical trial with rosiptor in patients with Chronic Prostatitis/Chronic Pelvic Pain Syndrome (CP/CPPS). We expect patient enrollment to commence in the second quarter of 2018. This 12-week, randomized, double-blind, placebo-controlled clinical trial will evaluate the efficacy and safety of once-daily rosiptor in approximately 100 male subjects with CP/CPPS. Study sites will be located in the U.S. and Canada. CP/CPPS is characterized by pelvic pain, unrelated to urinary bladder filling or emptying, and lower urinary tract symptoms present for at least three months without evidence of urinary tract infection.

Next Generation SHIP1 Activators

Our Discovery Platform

Our initial discovery platform was based on the screening of a natural product library of compounds to identify potential SHIP1 activators. This platform included:

• a novel in vitro, high throughput assay to screen SHIP1 activators;

• a patented approach to screening drugs against the C2 binding domain;

• the use of the SHIP1 knockout mouse to produce cells for in vitro experiments or for in vivo studies to determine the selectivity and specificity of our compounds; and

• an extensive library of SHIP1 activating chemical compounds

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Chemical modification improved on the activity and drug-like properties of these initial compounds and resulted in the development of several classes of SHIP1 activating compounds and increased our knowledge of the structural characteristics for SHIP1 activation. We used this knowledge to identify additional compound classes in other libraries of interest, resulting in the acquisition of a proprietary library of interest from Biolipox AB, with all patents transferred to us without any future royalty obligations. The screening of compounds from this library confirmed the presence of additional SHIP1, including the compound which was the basis for rosiptor.

We continue to leverage our compound library to develop new lead compounds for application in inflammation, inflammatory pain and blood cancers. The next generation program is primarily focused on the generation of backup compounds for use in IC/BPS and new inflammatory indications.

In addition, we have initiated a preclinical program evaluating the potential for SHIP1 activators in blood cancers, such as chronic lymphocytic leukemia, and continue to mine our library for compounds have utility in this area.

Strategy

We intend to maintain and strengthen our leadership position in the development of small molecule drugs that target SHIP1. We intend to participate in the potential commercialization of rosiptor and other potential drug candidates that we develop with plans to build a targeted commercial infrastructure focusing on specialist physicians for the United States and Canada. For territories outside of the United States and Canada and to target primary care physicians globally, for which our potential drug candidates may have a market, it is our intention to identify a strategic partner to fully optimize the commercial potential of rosiptor and other potential drug candidates that we may develop. We have a management team with broad-based experience and expertise that span drug discovery through Phase 3 trials, regulatory filings and commercialization. We intend to add additional members to our management team to strengthen our overall expertise. The key components of our strategy are to:

• Focus on successfully developing rosiptor for IC/BPS. Our principal focus is on advancing rosiptor in Phase 3 trials with top line results of our Leadership 301 trial expected to be announced in the third quarter of 2018 with the prospective initiation of additional Phase 3 clinical trials thereafter.

• Complete supporting activities required by the FDA and other regulatory agencies. We will undertake additional work necessary for regulatory approval. Some of these activities are already underway and others will be undertaken in the future. These supportive activities are related to manufacturing, toxicology and additional clinical development.

• Examine requirements and rationale for additional clinical trials with rosiptor. In part to ensure ICH safety database requirements for patient exposure are met and also to explore the breadth of therapeutic potential of rosiptor, we will undertake additional clinical trials with rosiptor, including the planned initiation of a Phase 2 clinical trial in CP/CPPS.

• Advance our next generation compounds in indications not covered by rosiptor. We believe there are anti-inflammatory diseases that would be better addressed by our next generation SHIP1 activators that have different properties from rosiptor such as concentrating in different tissues, having a different duration of action or being more suitable for different routes of administration. We already have a significant library of candidate compounds and will advance these through additional preclinical evaluation. We also intend to explore the role of SHIP1 activators in the treatment of cancer.

• Evaluate on a selective basis strategic partnerships to maximize the commercial potential of rosiptor and actively pursue partnerships for our next generation and other non-core assets. From a commercialization strategy perspective, we have intentionally maintained full commercial rights to our product candidates to date. A decision on partnering will be made at the time when our available data supports a well-defined path to approval and market, as this timing will enable us to capture maximum

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value from our product candidates. We intend to explore a variety of alternatives for the potential commercialization of rosiptor on a global basis, including direct commercialization, co-promotion or selective territorial out-licensing of rights to a third party. It is our intention to participate in the potential commercialization of rosiptor in the United States and Canada and to evaluate strategic partnerships for other territories. By retaining worldwide rights to rosiptor through early development, we have maintained flexibility for any future commercialization of rosiptor. We intend to pursue a similar strategy for our next generation product candidates, except for those that require expertise outside our core-areas or require resources beyond those available to us. For non-core assets, as we advance our next generation product candidates, we intend to seek early partnerships to defray the cost, risk and infrastructure requirements in order to further their commercial development.

• Evaluate and consider obtaining rights to complementary products and technologies. Beyond our intention to participate in the potential commercialization of rosiptor in the United States and Canada, we will evaluate and consider licensing or acquiring commercial or development stage products and technologies in an opportunistic manner that would strategically fit with our potential future commercial organization.

Research and Development

Since commencing operations, we have dedicated a significant portion of our resources to the development of product candidates, particularly rosiptor. We incurred research and development expenses of $36.3 million, $28.4 million and $15.8 million during the years ended December 31, 2017, 2016 and 2015, respectively. We anticipate that a significant portion of our operating expenses will continue to be related to research and development as we continue to advance rosiptor and our future product candidates.

Intellectual Property

Our commercial success depends in part on our ability to obtain and maintain patent and other proprietary protection for rosiptor and our future product candidates, novel biological discoveries, screening and drug development technologies such as our SHIP1 discovery platform, manufacturing and process discoveries, and other inventions that are important to our business, as well as to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. We strive to protect our intellectual property through a combination of patent, copyright, trademark and trade secrets laws, as well as through confidentiality provisions in our contracts.

With respect to rosiptor and our future product candidates, we endeavor to obtain and maintain patent protection in the United States and internationally on all patentable aspects of rosiptor and our other pipeline products, as it is critical to our global business strategy. Our patenting strategy is initially to pursue patent protection covering both compositions of matter and methods of use of rosiptor and our future product candidates and then seek to obtain additional patent protection throughout the development process on other aspects of our technology that would potentially enhance our competitive exclusivity and commercial success. Such additional means of protection may include filing applications with claims to additional methods of use, processes of manufacture, methods of screening, biomarkers, and companion diagnostics. We also rely on continuing technological innovation, know-how and trade secrets relating to our discovery platform and product candidates and seek to protect and maintain the confidentiality of proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

The patent positions of biotechnology companies like ours are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted, or the patent held invalid after issuance. Consequently, we may not be able to obtain or maintain adequate patent protection for rosiptor or any of our future product candidates. We cannot predict whether the patent applications we are currently pursuing will issue

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as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient proprietary protection from competitors. Any patents that we hold may be challenged, circumvented or invalidated by third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see the section of this Annual Report captioned “Risk Factors—Risks Related to Intellectual Property.”

Our patent estate on a worldwide basis includes approximately 46 issued, allowed or granted patents and approximately 61 pending patent applications that we are actively prosecuting and/or maintaining. These figures include patents and patent applications to which we hold exclusive commercial rights under our licenses from third parties. Our solely owned issued patents include nine U.S. patents and 28 foreign patents and our solely owned patent applications include seven U.S. application and 54 foreign patent applications.

Intellectual Property Relating to Rosiptor

We are the sole owner of a patent portfolio that includes issued patents and pending patent applications covering compositions of matter, methods of use and other matters related to rosiptor. We acquired the initial series of patents and applications relating to rosiptor by way of an asset purchase from Biolipox AB in August 2009. Since that time additional patents have been filed based on work performed by Aquinox and/or its contractors on behalf of Aquinox. The rosiptor patent portfolio includes four issued United States patents and 23 foreign patents issued in Europe, Japan, Canada, China, Korea, Mexico, Norway, Russia, Australia and New Zealand.

Our issued patents acquired from Biolipox AB cover the composition of matter of both the class of compounds to which rosiptor belongs, and rosiptor specifically, as well as methods for using rosiptor. The foreign patents acquired from Biolipox AB will expire in 2024, while the U.S. patents will expire in 2024-28, excluding patent term extensions that may be available in the United States under the Hatch-Waxman Act or in foreign countries under similar statutes. The expiration dates of the issued U.S. patents include patent term adjustment (PTA) under the provisions of 35 U.S.C. §154; namely, we have received a PTA extension of 1,379 days for U.S. Patent 7,601,874, which covers the composition of matter of rosiptor, and a PTA extension of 58 days for U.S. Patent 8,084,503 which covers the methods of using rosiptor.

In addition to the original patent portfolio acquired from Biolipox AB Aquinox has filed a number of additional patents related to rosiptor based on work that was performed by Aquinox and/or its contractors on behalf of Aquinox. This includes one allowed patents and approximately 11 pending patent applications that we are actively prosecuting and/or maintaining.

Patent Terms

The term of individual patents and patent applications listed in previous sections will depend upon the legal term of the patents in the countries in which they are obtained. In most countries, the patent term is 20 years from the date of filing of the patent application (or parent application, if applicable). For example, if an international Patent Cooperation Treaty, or PCT, application is filed, any patent issuing from the PCT application in a specific country expires 20 years from the filing date of the PCT application.

In the United States, the Hatch-Waxman Act permits the patent term of a patent that covers an FDA-approved drug to be eligible for patent term extension, or PTE, of up to five years beyond the original expiration of the patent. This patent term restoration acts as compensation for the patent term lost during product development and the FDA regulatory review process if approval of the application for the product is the first permitted commercial marketing of a drug or biological product containing the active ingredient. The length of the patent term extension is related to the length of time the drug is under regulatory review, and is generally one-half the time between the effective date of an Investigational New Drug application (IND) and the submission date of a New Drug Application (NDA) plus the time between the submission date of a NDA and the approval of that application. Patent term extension under the Hatch-Waxman Act cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug

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may be extended. Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our products receive FDA approval, we anticipate applying for patent term extensions on patents covering those products. We intend to seek patent term extensions to any of our issued patents in any jurisdiction where these are available, however there is no guarantee that the applicable authorities, including the FDA in the United States, will agree with our assessment of whether such extensions should be granted, and if granted, the length of such extensions.

Trade Secrets

In addition to patents, we also rely upon proprietary know-how (including trade secrets) to protect our technology and maintain and develop our competitive position. In some situations, maintaining information as a trade secret may be more appropriate to protect the type of technology than filing a patent application. We seek to protect our confidential and proprietary information in part by confidentiality agreements and it is our policy to require employees, consultants, scientific advisors, outside scientific collaborators, sponsored researchers, and contractors to execute such agreements upon the commencement of a relationship with us. These agreements provide that all confidential information concerning our business or financial affairs developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. We also employ invention assignment clauses in our agreements to grant us ownership of technologies that are developed through a relationship with a third party. Our agreements with employees also provide that all inventions conceived by the employee in the course of employment with us or from the employee’s use of our confidential information are our exclusive property. We also seek to preserve our trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems.

While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. Although we take steps to protect our proprietary information and trade secrets, third parties may independently develop substantially equivalent proprietary information or otherwise gain access to, or disclose, our trade secrets. To the extent that our employees, consultants, scientific advisors, contractors, or any future collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For this and more comprehensive risks related to our proprietary technology and processes, please see the section of this Annual Report captioned “Risk Factors—Risks Related to Intellectual Property.”

Contractual Obligations Related to Intellectual Property

In August 2009, AQXP Canada entered into an asset purchase agreement with Biolipox AB of Sweden, or Biolipox, for the purchase of all assets, including patent rights and know-how, relating exclusively or principally to a compound library from which we ultimately identified and selected rosiptor. Under the terms of the agreement, AQXP Canada paid Biolipox CAD $50,000 immediately upon closing. An additional CAD $250,000 payment by way of issuance of 19,762 shares of our common stock was made in June 2014 upon the first submission to the FDA of an IND for a compound from the acquired class. In November 2016 we made a one-time CAD $3.0 million milestone payment as a result of the advancement of rosiptor into a Phase 3 clinical trial. We will also be required to make certain other milestone payments totaling up to CAD $1.5 million in the aggregate upon the first commercial sale of the first compound covered by the acquired patent rights (which we expect will be triggered by the first commercial sale of rosiptor) in each of the United States, Europe and Japan.

In June 2006, AQXP Canada entered into an exclusive license agreement with the University of British Columbia, or UBC, for certain patent rights and technology relating to small molecule compounds and pharmaceutical compositions as modulators of SHIP1 activity. This agreement was amended and restated in June 2007, and subsequently amended in October 2006, June 2007, September 2008 and April 2010. This agreement will expire on the expiry of the last issued patent covering the licensed technology. The agreement will terminate automatically upon our insolvency or may be terminated by either party for material breach by the other party.

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The terms of the agreement required AQXP Canada to pay an initial license fee of CAD $50,000, all of which was paid by the issuance of shares of our common stock. We do not currently have any product candidates under development that are covered by the agreement, nor have we sublicensed our rights under the licensed patents. However, if we develop products covered by the UBC technology in the future, we will be required to pay certain development and regulatory milestones up to an aggregate of CAD $2.2 million for the first drug product developed under the license and up to CAD $1.5 million for each subsequent drug product, which may be paid in cash or by issue of our shares. We must also pay UBC low single-digit royalties based on aggregate worldwide net sales of products covered by the licensed patents and a percentage of sublicensing revenue ranging from the low single digits to the mid double digits based on the stage of development at which such sublicense is granted. We are also required to reimburse costs incurred by UBC related to the prosecution and maintenance of the licensed patents, and to pay an annual license maintenance fee in the amount of CAD $1,000.

In May 2005, AQXP Canada entered into an assignment agreement, which was subsequently amended in December 2005 and March 2006, with the British Columbia Cancer Agency (“BCCA”) and StemCell Technologies, Inc. (“STI”), for the assignment to AQXP Canada of the 2002 exclusive license agreement between BCCA and STI to certain patents relating to technology relating to SHIP1. The license agreement between AQXP Canada and BCCA was amended and restated in August 2006 and in June 2007. This agreement has subsequently been amended in June 2008 to revise the schedule of the technology licensed under this agreement, and further amended in February 2013. Pursuant to this agreement, as amended, BCCA has granted us an exclusive worldwide license to certain of its intellectual property relating to core SHIP1 technology, and screening of compounds for activity using SHIP1, including the C2 binding domain. The agreement is to expire at the later of 20 years from the effective date of the agreement or upon the expiration of the last patent covered by the license. The terms of the assignment agreement among STI, BCCA and AQXP Canada required AQXP Canada to pay an assignment license fee of CAD $150,000 paid in stages beginning May 2005 and ending March 2006. We do not currently have any product candidates under development that are covered by the BCCA license agreement, nor have we sublicensed our rights under the licensed patents. However, if we develop products covered by the BCCA technology in the future, we will be required to pay BCCA low single-digit royalties based on aggregate worldwide net sales of products covered by the licensed patents, and if we sublicense any rights to the technology, a low double digit percentage of sublicensing revenue. We are also required to reimburse BCCA’s patent costs incurred in relation to the licensed technology, and pay an annual maintenance fee in the amount of CAD $5,000. Our license with BCCA will terminate automatically upon our insolvency, and may be terminated by either party for material breach by the other party.

General Considerations

As with other biotechnology and pharmaceutical companies, our ability to maintain and solidify a proprietary position for our product candidates will depend upon our success in obtaining effective patent claims and enforcing those claims once granted.

Our commercial success will depend in part upon not infringing upon the proprietary rights of third parties. It is uncertain whether the issuance of any third-party patent would require us to alter our development or commercial strategies, or our product candidates or processes, obtain licenses or cease certain activities. The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. If a third party commences a patent infringement action against us, or our future collaborators, it could consume significant financial and management resources, regardless of the merit of the claims or the outcome of the litigation.

Competition

The biotechnology and pharmaceutical industries are characterized by rapid innovation, intense competition and a strong emphasis on proprietary products. While we believe that our SHIP1 and related technologies, product candidates, intellectual property, knowledge, experience and scientific resources provide us with competitive advantages, we face competition from other pharmaceutical and biotechnology companies, academic institutions,

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governmental agencies, and public and private research institutions, among others. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

Key product features that would affect our ability to effectively compete with other therapeutics include the efficacy, safety and convenience of our products and the ease of use and effectiveness of any companion diagnostics. The level of generic competition and the availability of reimbursement from government and other third-party payors will also significantly affect the pricing and competitiveness of our products.

Few treatments exist for IC/BPS and the treatments used vary considerably by region. In the United States, the only FDA approved oral treatment for IC/BPS is Janssen Pharmaceuticals Inc.’s pentosan polysulfate sodium (PPS), marketed in the United States as Elmiron, which is off-patent. In addition to Elmiron, alternative oral treatments consist predominately of various pain medications and off-label use of antispasmodics, antihistamines, anticholinergics and antidepressants. Other treatments employed include intravesical instillations, pelvic floor physical therapy, and more invasive procedures such as neuromodulation.

Outside the United States, IC/BPS treatments varies widely by country. Instillations and cystoscopy with hydrodistension along with analgesics and pain medications are treatments used in Japan and certain European countries. Generic PPS is available in multiple jurisdictions outside of the United States.

We are aware of several other companies developing competing therapies that are in various stages of development for the treatment of IC/BPS. Companies competing in this space include Pfizer (tanezumab), Merck (MK-7264), Allergan (Botugel, LiRis, Botox), Urigen (URG101), Lipella (LP-08, LP-09), Grunenthal (GRT6010), Astellas (ASP-6294), Mylan (CR3465) and Ironwood (Linaclotide).

Manufacturing

We conduct our manufacturing activities for our clinical development of our product candidates under individual purchase orders with third-party contract manufacturing organizations (CMOs) as we currently have no manufacturing facilities and do not intend to develop one. We have in place quality agreements with our key CMOs. We have also established an internal quality management system, which audits and qualifies CMOs. Our third-party manufacturers, their facilities and all lots of drug substance and drug products used in our clinical trials are required to be in compliance with current Good Manufacturing Practices (cGMP).

Rosiptor is a small molecule capable of being manufactured in reliable, reproducible, and scalable synthetic processes from readily available starting materials. A bioequivalence study was completed in 2015 demonstrating no difference between rosiptor capsules and tablets and we have selected tablets as our preferred dosage form going forward due to favorable manufacturing and related considerations. We believe the chemistry used to manufacture rosiptor is amenable to scale up and does not require unusual equipment in the manufacturing process. One of our CMOs is currently manufacturing active pharmaceutical ingredient (API) on multi-kilogram scale, for use in preclinical and clinical development of rosiptor. A second CMO produces rosiptor final drug product for use in our ongoing clinical trials. We believe that the manufacturing processes for rosiptor API and final drug product have been developed to adequately support current development. For future development and commercial demands, additional CMO activities will be required for API process development, API manufacturing validation, and final drug product formulation and validation. We believe that our existing suppliers of rosiptor API and drug products would be capable of providing sufficient quantities of the rosiptor API and drug products to meet anticipated commercial demands.

The FDA and other health authorities worldwide regulate and inspect equipment, facilities and processes used in manufacturing pharmaceutical products prior to approval. If we fail to comply with applicable cGMP requirements and conditions of product approval, the FDA may seek sanctions, including fines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDA approval, seizure

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or recall of products and criminal prosecution. Although we periodically monitor the FDA compliance of our third-party CMOs, we cannot be certain that our present or future third-party CMOs will consistently comply with cGMP and other applicable FDA regulatory requirements.

Commercial Operations

We do not currently have an organization for the sales, marketing and distribution of pharmaceutical products. We may rely on licensing and co-promotion agreements with strategic partners for the commercialization of our products in the United States and other territories. If we choose to build a commercial infrastructure to support marketing in the United States and Canada, such commercial infrastructure could be expected to include a targeted sales force supported by sales management, internal sales support, an internal marketing group and distribution support. To develop the appropriate commercial infrastructure internally, we would have to invest financial and management resources, some of which would have to be deployed prior to any confirmation that rosiptor will be approved.

Government Regulation

As a pharmaceutical company that operates and anticipates seeking approval for pharmaceutical product candidates in the United States, we are subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, and other federal, state, and local regulatory agencies. The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and its implementing regulations set forth, among other things, requirements for the research, testing, development, manufacture, quality control, safety, effectiveness, approval, labeling, storage, record keeping, reporting, distribution, import, export, advertising and promotion of our products. Our pharmaceutical product candidates must be approved by the FDA before we can commence clinical trials or market those products in the United States.

Although the discussion below focuses on regulation in the United States, we conduct research activities and anticipate seeking approval for, and marketing of, our products in other countries and regions, such as Canada and Europe. Generally, our activities in other countries will be subject to regulation that is similar in nature and scope as that imposed in the United States, although there can be important differences. Additionally, some significant aspects of regulation in Europe are addressed in a centralized way through the EMA, but country-specific regulation remains essential in many respects. The process of obtaining regulatory marketing approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

FDA Regulation

The FDA is the main regulatory body that controls pharmaceuticals in the United States, and its regulatory authority is based in the FDC Act. Pharmaceutical products are also subject to other federal, state and local statutes. A failure to comply with any requirements during the product development, approval, or post-approval periods, may lead to administrative or judicial sanctions. These sanctions could include the imposition by the FDA or an institutional review board, or IRB, of a hold on clinical trials, refusal to approve pending marketing applications or supplements, withdrawal of approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution.

The steps required before a new drug may be marketed in the United States generally include:

• completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s Good Laboratory Practices regulations;

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

• approval by an IRB at each clinical site before each trial may be initiated;

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• performance of adequate and well-controlled clinical trials in accordance with federal regulations and with current good clinical practices, or GCPs, to establish the safety and efficacy of the investigational drug product for each targeted indication;

• submission of New Drug Application, or NDA, to the FDA;

• satisfactory completion of an FDA Advisory Committee review, if applicable;

• satisfactory completion of an FDA inspection of the manufacturing facilities at which the investigational product is produced to assess compliance with cGMP, and to assure that the facilities, methods and controls are adequate; and

• FDA review and approval of the NDA.

Clinical Trials

An IND is a request for authorization from the FDA to administer an investigational drug product to humans. This authorization is required before interstate shipping and administration of any new drug product to humans that is not the subject of an approved NDA. A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin. Clinical trials involve the administration of the investigational drug to patients under the supervision of qualified investigators following GCPs, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors. Clinical trials are conducted under protocols that detail the parameters to be used in monitoring safety, and the efficacy criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND. The informed written consent of each participating subject is required. The clinical investigation of an investigational drug is generally divided into three phases. Although the phases are usually conducted sequentially, they may overlap or be combined. The three phases of an investigation are generally described as follows:

• Phase 1 — Phase 1 includes the initial introduction of an investigational drug into humans. Phase 1 clinical trials may be conducted in patients with the target disease or condition or healthy volunteers. These trials are designed to evaluate the safety, metabolism, pharmacokinetics and pharmacologic actions of the investigational drug in humans, the side effects associated with increasing doses, and if possible, to gain early evidence on effectiveness. During Phase 1 clinical trials, sufficient information about the investigational product’s pharmacokinetics and pharmacological effects may be obtained to permit the design of Phase 2 clinical trials.

• Phase 2 — Phase 2 includes controlled clinical trials conducted to evaluate the effectiveness of the investigational product for a particular indication(s) in patients with the disease or condition under study, to determine dosage tolerance and optimal dosage, and to identify possible adverse side effects and safety risks associated with the drug. Phase 2 clinical trials are typically well-controlled, closely monitored, and conducted in a limited patient population.

• Phase 3 — Phase 3 clinical trials are controlled clinical trials conducted in an expanded patient population at geographically dispersed clinical trial sites. They are performed after preliminary evidence suggesting effectiveness of the investigational product has been obtained, and are intended to further evaluate dosage, clinical effectiveness and safety, to establish the overall benefit-risk relationship of the product, and to provide an adequate basis for product approval. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the trial is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.

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Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events. Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within any specified period, if at all. The decision to terminate development of an investigational drug product may be made by either a health authority body, such as the FDA, or by a company for various reasons. The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. In some cases, clinical trials are overseen by an independent group of qualified experts organized by the trial sponsor, for example, the data safety monitoring board (DSMB). This group provides authorization for whether or not a trial may move forward at designated check points. These decisions are based on the limited access to data from the ongoing trial. The suspension or termination of development can occur during any phase of clinical trials if it is determined that the participants or patients are being exposed to an unacceptable health risk. In addition, there are requirements for the registration of ongoing clinical trials of drugs on public registries and the disclosure of certain information pertaining to the trials as well as clinical trial results after completion.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, detailed investigational drug product information is submitted to the FDA in the form of a NDA to request market approval for the product in specified indications.

New Drug Applications

In order to obtain approval to market a drug in the United States, a marketing application must be submitted to the FDA that provides data establishing the safety and effectiveness of the drug product for the proposed indication. The application includes all relevant data available from pertinent preclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a product, or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational drug product to the satisfaction of the FDA.

In most cases, the NDA must be accompanied by a substantial user fee; there may be some instances in which the user fee is waived. The FDA will initially review the NDA for completeness before it accepts the NDA for filing. The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. After the NDA submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs. Most such applications for standard review drug products are reviewed within ten to 12 months of submission. The FDA can extend this review by three months to consider certain late-submitted information or information intended to clarify information already provided in the submission. The FDA does not always achieve its performance goal and its review of NDAs can take significantly longer. The FDA reviews the NDA to determine, among other things, whether the proposed product

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is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP. The FDA may refer applications for novel drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect the sponsor and one or more clinical sites to assure compliance with GCP. After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, time or information in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. The approval process is lengthy and difficult and notwithstanding the submission of any requested additional information, the FDA ultimately may refuse to approve an NDA if applicable regulatory criteria are not satisfied or if the FDA believes additional clinical data or other data and information are required. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than a company interprets the same data.

An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. FDA’s approval of a product may be significantly limited to specific disease and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings, or precautions be included in the product labeling. In addition, as a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, restricted distribution, special monitoring, and the use of patient registries. The requirement for REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Changes to some of the conditions established in an approved application, including changes in indications, labeling, manufacturing processes or facilities, or modification to a REMS, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.

Advertising and Promotion

The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs through, among other things, standards and regulations for direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving the Internet. A product cannot be commercially promoted before it is approved. After approval, product promotion can include only those claims relating to safety and effectiveness that are consistent with the labeling approved by the FDA. Healthcare providers are permitted to prescribe drugs for “off-label” uses—that is, uses not approved by the FDA and therefore not described in the drug’s labeling—because the FDA does not regulate the practice of medicine. However, FDA regulations impose stringent restrictions on manufacturers’ communications regarding off-label uses. Broadly speaking, a manufacturer may not promote a drug for off-label

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use, but may engage in non-promotional, balanced communication regarding off-label use under specified conditions. Failure to comply with applicable FDA requirements and restrictions in this area may subject a company to adverse publicity and enforcement action by the FDA, the U.S. Department of Justice (DOJ), or the Office of the Inspector General of HHS, as well as state authorities. This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes drug products.

Post-Approval Regulations

After regulatory approval of a drug is obtained, a company is required to comply with a number of post-approval requirements. For example, as a condition of approval of an NDA, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization. In addition, as a holder of an approved NDA, a company would be required to report adverse reactions and production problems to the FDA, to provide updated safety and efficacy information, and to comply with requirements concerning advertising and promotional labeling for any of its products. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval to assure and preserve the long term stability of the drug or biological product. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing, sterilization, packaging, labeling, storage and shipment of the drug product. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes extensive procedural and substantive record keeping requirements. In addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon a company and any third-party manufacturers that a company may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our product candidates. Future FDA and state inspections may identify compliance issues at our facilities or at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct.

The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.

Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our products under development.

Compliance

During all phases of development (pre- and post-marketing), failure to comply with applicable regulatory requirements may result in administrative or judicial sanctions. These sanctions could include the FDA’s

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imposition of a clinical hold on trials, refusal to approve pending applications, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, product detention or refusal to permit the import or export of products, injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse effect on us.

Comparable European, Canadian and Other International Government Regulation

In addition to FDA regulations in the United States, we will be subject to a variety of comparable regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries.

Some countries outside of the United States have a similar process that requires the submission of a clinical trial application, or CTA, much like the IND prior to the commencement of human clinical trials. In Europe, for example, a CTA must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed. To obtain regulatory approval to commercialize a new drug under European Union regulatory systems, we must submit a marketing authorization application, or MAA. The MAA is similar to the NDA, with the exception of, among other things, country-specific document requirements and environmental impact assessments.

In Canada, biopharmaceutical product candidates are regulated by the Food and Drugs Act and the rules and regulations promulgated thereunder, which are enforced by the Therapeutic Products Directorate of Health Canada, or TPD. Before commencing clinical trials in Canada, an applicant must complete preclinical studies and file a CTA with the TPD. After filing a CTA, the applicant must receive different clearance authorizations to proceed with Phase 1 clinical trials, which can then lead to Phase 2 and Phase 3 clinical trials. To obtain regulatory approval to commercialize a new drug in Canada, a new drug submission, or NDS, must be filed with the TPD. If the NDS demonstrates that the product was developed in accordance with the regulatory authorities’ rules, regulations and guidelines and demonstrates favorable safety and efficacy and receives a favorable risk/benefit analysis, the TPD issues a notice of compliance which allows the applicant to market the product.

For other countries outside of the European Union and Canada, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

Other Healthcare Laws and Compliance Requirements

In the United States, our activities are potentially subject to additional regulation and oversight under other healthcare laws by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, or CMS, other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the DOJ, and individual U.S. Attorney offices within the DOJ, and state and local governments. These laws include the federal Anti-Kickback Statute, which prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for either the referral of an individual, or purchasing, leasing, ordering or arranging for the purchase, lease or order of any good, facility, item or service reimbursable, in whole or part, under Medicare, Medicaid or another federal healthcare program. The term remuneration has been interpreted broadly to include anything of value. The federal Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. There are a

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number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exception or safe harbor. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor from federal Anti-Kickback Statute liability. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor, however, does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. In addition, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, further strengthened these laws by amending the intent standard under the federal Anti-Kickback Statute and the criminal health care fraud statutes (discussed below), such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law 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 civil False Claims Act (discussed below).

Federal civil and criminal false claims laws, including the False Claims Act, and civil monetary penalties laws prohibit, among other things, any person or entity from knowingly presenting, or causing to be presented, a false claim for payment to, or approval by, the federal government, including the Medicare and Medicaid programs, or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government, including the Medicare and Medicaid programs. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for off-label, and thus, non-covered, uses.

The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody of, any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, imposes requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes certain HIPAA standards directly applicable to business associates—independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

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Additionally, the federal Physician Payments Sunshine Act within the Affordable Care Act, and its implementing regulations, require that certain manufacturers of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) report annually to CMS information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals, and applicable manufacturers and group purchasing organizations to report annually certain ownership and investment interests held by physicians and their immediate family members and payments or other “transfers of value” to such physician owners and their immediate family members.

In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in some states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several local, state and foreign governments have enacted legislation requiring pharmaceutical companies to, among other things, establish compliance programs, file periodic reports with the state or foreign government, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/ or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing specified physician prescribing data to pharmaceutical companies for use in sales and marketing, and to prohibit other specified sales and marketing practices. In addition, our future commercial activities may also be subject to federal and state consumer protection and unfair competition laws.

If our operations are found to be in violation of any of the federal and state healthcare laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including without limitation, civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from participation in government programs, such as Medicaid and Medicare, integrity obligations, injunctions, as well as reputational harm, administrative burdens, diminished profits and future earnings and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.

Coverage, Reimbursement and Pricing

Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtain regulatory approval. In the United States and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend, in part, on the extent that third-party payors provide coverage, and establish adequate reimbursement levels for such drug products. In the United States, third-party payors include federal healthcare programs, state healthcare programs, managed care providers, private health insurers and other organizations. The process for determining whether a third-party payor will provide coverage for a drug product may be separate from the process for setting the price of a drug product or for establishing the reimbursement rate that such a payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the FDA-approved drugs for a particular indication. Third-party payors are increasingly challenging the price, examining the medical necessity and reviewing the cost-effectiveness of drug products and medical services, in addition to questioning their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain FDA approvals. Rosiptor or our future product candidates may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does

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not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a drug product does not assure that other payors will also provide coverage for the drug product. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. If a drug product is reimbursed under a governmental healthcare program, such as Medicare, Medicaid or TRICARE, additional laws and program requirements will apply.

Different pricing and reimbursement schemes exist in other countries. In the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed upon. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for drugs, but monitor and control company profits. The downward pressure on healthcare costs in general, particularly prescription drugs, has become more intense. As a result, increasingly high barriers are being erected to the entry of new products. The European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. We may face competition for our product candidates from lower-priced products in foreign countries that have placed price controls on pharmaceutical products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United States has increased and will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Healthcare Reform

In March 2010, President Obama signed the Affordable Care Act, which substantially changed healthcare financing and the delivery by both governmental and private insurers, and significantly impacted the pharmaceutical industry. The Affordable Care Act impacts existing government healthcare programs and requires the development of new programs. For example, the Affordable Care Act provides for Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.

Among the Affordable Care Act’s provisions of importance to the pharmaceutical industry are the following:

• an annual, nondeductible fee on any entity that manufactures or imports certain specified branded prescription drugs and biologic agents apportioned among these entities according to their market share in some government healthcare programs, that began in 2011;

• an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively and capped the total rebate amount for innovator drugs at 100% of AMP;

• 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;

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• a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D;

• extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

• expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the Federal Poverty Level, thereby potentially increasing manufacturers’ Medicaid rebate liability;

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

• new requirements to report annually specified financial arrangements with physicians and teaching hospitals, as defined in the Affordable Care Act and its implementing regulations, including reporting information related to “payments or other transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members and payments or other “transfers of value” to such physician owners and their immediate family members; a new requirement to annually report drug samples that manufacturers and distributors provide to licensed practitioners, pharmacies of hospitals and other healthcare entities; 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.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reductions to several government programs. These reductions include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will stay in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further 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. Furthermore, there has been heightened governmental scrutiny recently over the manner in which manufacturers set prices for their marketed products. For example, there have been several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. These new laws and initiatives may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our future customers and accordingly, our financial operations.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of Affordable Care Act, as well as efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act, or ACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Congress may consider other legislation to repeal or replace elements of the ACA.

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The potential impact of these efforts to repeal or defer and delay enforcement of Affordable Care Act on our business remains unclear. Congress also could consider subsequent legislation to replace elements of Affordable Care Act that are repealed. Because of the continued uncertainty about the implementation of the Affordable Care Act, including the potential for further legal challenges or repeal of Affordable Care Act, we cannot quantify or predict with any certainty the likely impact of the Affordable Care Act or its repeal on our business, prospects, financial condition or results of operations.

We cannot predict what healthcare reform initiatives may be adopted in the future. However, we anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare delivery system. We also expect ongoing initiatives to increase pressure on drug pricing. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products. In addition, it is possible that there will be further legislation or regulation that could harm our business, financial condition, and results of operations.

Anti-Corruption Legislation

The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring us to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.

The Corruption of Foreign Public Officials Act, or CFPOA, prohibits Canadian businesses and individuals from giving or offering to give a benefit of any kind to a foreign public official, or any other person for the benefit of the foreign public official, where the ultimate purpose is to obtain or retain a business advantage. Under the CFPOA, companies may be liable for the actions of their employees or third-party agents, even if such persons operate outside of Canada.

Employees

As of December 31, 2017, we had 51 employees, of whom 10 hold Ph.D. degrees or M.D. degrees. We have no collective bargaining agreements with our employees and have not experienced any work stoppages. We believe that relations with our employees are good.

Corporate Information

We commenced operations as 6175813 Canada Inc., a corporation formed in December 2003 under the Canada Business Corporations Act. In May 2014, after a corporate restructuring, we changed the name of such entity to Aquinox Pharmaceuticals (Canada) Inc. We incorporated Aquinox Pharmaceuticals (USA) Inc., a corporation under the laws of the State of Delaware, in May 2007. We subsequently changed the name of this corporation in January 2014 to Aquinox Pharmaceuticals, Inc. AQXP Canada is a wholly owned subsidiary of Aquinox USA. Our primary executive offices are located at 450-887 Great Northern Way, Vancouver, B.C., Canada V5T 4T5 and our telephone number is (604) 629-9223. Our website address is www.aqxpharma.com. The information contained in, or that can be accessed through, our website is not part of this Annual Report.

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Item 1A. Risk Factors.

You should carefully consider the following risk factors, in addition to the other information contained in this Annual Report on Form 10-K and the information incorporated by reference herein. If any of the events described in the following risk factors occurs, our business, operating results and financial condition could be seriously harmed.

This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Annual Report on Form 10-K.

Risks Related to Our Financial Position and Capital Needs

We have incurred significant losses in every quarter since our inception and anticipate that we will continue to incur significant losses in the future.

We are a clinical-stage pharmaceutical company with a limited operating history. Investment in pharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval or become commercially viable. We do not have any products approved by regulatory authorities for marketing or commercial sale and have not generated any revenue from product sales, or otherwise, to date, and we continue to incur significant research, development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in every reporting period since our inception in 2003. For the years ended December 31, 2017, 2016 and 2015, we reported a net loss of $50.2 million, $37.0 million and $21.9 million, respectively. As of December 31, 2017, we had an accumulated deficit since inception of $198.5 million.

We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate these losses to increase as we continue the research and development of, and seek regulatory approvals for, rosiptor and any of our future product candidates, and potentially begin to commercialize any products that may achieve regulatory approval. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our financial condition. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If rosiptor or any future product candidate fails in clinical trials or does not gain regulatory approval, or if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

We have a limited operating history, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

Our operations to date have been primarily limited to organizing and staffing our company, acquiring product and technology rights, discovering and developing novel small molecule drug candidates and undertaking preclinical studies and clinical trials of rosiptor. We have not yet obtained regulatory approval for rosiptor or any product candidate. Consequently, evaluating our performance, viability or possibility of future success will be more difficult than if we had a longer operating history or approved products on the market.

We currently have no source of product revenue and may never become profitable.

To date, we have not generated any revenues from commercial product sales, or otherwise. Our ability to generate revenue from product sales and achieve profitability will depend upon our ability, alone or with any future collaborators, to successfully commercialize products, including rosiptor or any future product candidates that we may develop, in-license or acquire in the future. Even if we are able to successfully achieve regulatory

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approval for rosiptor or any future product candidates, we do not know when any of these products will generate revenue from product sales for us, if at all. Our ability to generate revenue from product sales from rosiptor, or any of our future product candidates, also depends on a number of additional factors, including our or any future collaborators’ ability to:

• complete development activities, including the necessary clinical trials;

• complete and submit new drug applications, or NDAs, to the U.S. Food and Drug Administration, or FDA, and obtain regulatory approval for indications for which there is a commercial market;

• complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities;

• set a commercially viable price for our products;

• establish and maintain supply and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;

• develop a commercial organization capable of sales, marketing and distribution for any products for which we obtain marketing approval and intend to sell ourselves in the markets in which we choose to commercialize on our own;

• find suitable distribution partners to help us market, sell and distribute our approved products in other markets;

• obtain coverage and adequate reimbursement from third-party payors, including government and private payors;

• achieve market acceptance for our products, if any;

• establish, maintain and protect our intellectual property rights; and

• attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development, including that rosiptor, or any future product candidates, may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide, or are required by the FDA or foreign regulatory authorities, to perform studies or trials in addition to those that we currently anticipate. Even if we are able to complete the development and regulatory process for rosiptor or any future product candidates, we anticipate incurring significant costs associated with commercializing these products.

Even if we are able to generate revenues from the sale of rosiptor or any future product candidates that may be approved, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

Our operating results may fluctuate significantly on a quarterly and annual basis, which may make our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.

Our quarterly and annual operating results have varied significantly in the past and may continue to fluctuate significantly in the future from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control, which may make it difficult for us to predict our future operating results. Factors that may contribute to these fluctuations include the following, as well as other factors described elsewhere in this report:

• our ability to obtain additional funding for research and development and manufacturing activities relating to rosiptor or any of our future product candidates;

• the timing and cost of research and development activities relating to rosiptor or any of our future product candidates, which may change from time to time, including the number, size and duration of clinical trials required to demonstrate safety and efficacy;

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• the cost of manufacturing rosiptor or any of our future product candidates, which may vary depending on the quantity of production and the terms of our agreements with manufacturers;

• expenditures that we will or may incur to acquire or develop additional product candidates and technologies;

• the level of demand for rosiptor or any of our future product candidates, should they receive approval, which may vary significantly;

• our ability to enroll patients in clinical trials;

• the success or failure of clinical trials through all phases of clinical development for rosiptor or any of our future product candidates or competing product candidates, including our Leadership 301 clinical trial and any other Phase 3 trials of rosiptor, or any other change in the competitive landscape of our industry;

• any delays in regulatory review and approval of rosiptor or any of our future product candidates;

• potential side effects of rosiptor or our future product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;

• the ability of patients or healthcare providers to obtain coverage of, or sufficient reimbursement for, rosiptor or our future product candidates and our ability to achieve acceptance among patients and physicians;

• competition from existing and potential future drugs that compete with rosiptor or our future product candidates;

• our ability to receive approval and commercialize rosiptor or our future product candidates outside of the United States;

• our dependency on third-party manufacturers to supply or manufacture our rosiptor or our future product candidates;

• our ability to establish or maintain collaborations, licensing or other arrangements;

• our ability and third parties’ abilities to protect intellectual property rights;

• costs related to, and outcomes of, potential intellectual property litigation;

• costs associated with recently enacted healthcare legislation;

• our ability to adequately support future growth;

• our ability to attract and retain key personnel to manage our business effectively;

• our ability to build our finance infrastructure and improve our accounting systems and controls;

• potential product liability claims;

• potential liabilities associated with hazardous materials;

• fluctuations in foreign currency exchange rates;

• our ability to use potential future operating losses and our federal and state net operating loss carryforwards to offset taxable income;

• potential unforeseen business disruptions that increase our costs or expenses;

• our ability to maintain adequate insurance policies; and

• the changing and volatile U.S., European and global economic environments.

Investors should not rely on our quarterly or annual results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially.

We are likely to require additional capital to finance our operations which may not be available to us on acceptable terms, or at all. If we fail to obtain necessary financing, we may be unable to complete the development and potential commercialization of rosiptor or develop future product candidates.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. Our operations have consumed substantial amounts of cash since inception. We expect research and clinical development expenses to increase substantially in connection with our ongoing activities, particularly as we

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advance rosiptor or future product candidates in clinical trials and launch and commercialize any product candidates for which we receive regulatory approval, including potentially building our own commercial organization. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operating requirements for at least the next 12 months. However, circumstances may cause us to consume capital more rapidly than we anticipate. We will likely require additional capital for the further development and potential commercialization of rosiptor or future product candidates and may also need to raise additional funds sooner to pursue a more accelerated development of rosiptor or future product candidates.

If we need to secure additional financing, fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize rosiptor or future product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we do not raise additional capital when required or on acceptable terms, we may need to:

• significantly delay, scale back or discontinue clinical trials related to the development or commercialization of rosiptor or any of our future product candidates or cease operations altogether;

• seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available; or

• relinquish, or license on unfavorable terms, our rights to rosiptor or any future product candidates that we otherwise would seek to develop or commercialize ourselves.

If we need to conduct additional fundraising activities and we do not raise additional capital in sufficient amounts or on terms acceptable to us, we may be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could spend our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

• the initiation, progress, timing, costs and results of clinical trials for rosiptor and any future product candidates;

• the clinical development plans we establish for rosiptor or any future product candidates;

• the achievement of milestones and our obligation to make milestone payments under our present or any future in-licensing agreements;

• the number and characteristics of product candidates that we discover, or in-license and develop;

• the outcome, timing and cost of regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than those that we currently expect;

• the cost to establish, maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patent claims and maintaining and enforcing other intellectual property rights;

• the effect of competing technological and market developments;

• the costs and timing of the implementation of commercial-scale outsourced manufacturing activities; and

• the costs and timing of establishing sales, marketing, distribution and pharmacovigilance capabilities for any product candidates for which we may receive regulatory approval in territories where we choose to commercialize products on our own.

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If we are unable to expand our operations or otherwise capitalize on our business opportunities due to a lack of capital, our business, results of operations, financial condition and cash flows and future prospects could be materially adversely affected.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies, rosiptor or any future product candidates.

Until we can generate substantial revenue from product sales, if ever, we expect to finance future cash needs through a combination of private and public equity offerings, debt financings, strategic collaborations and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Additional capital may not be available on reasonable terms, if at all. If we raise additional funds through the issuance of additional debt or equity securities that could result in dilution to our stockholders, and/or increased fixed payment obligations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that include restrictive covenants limiting our ability to take important actions and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, make capital expenditures, acquire, sell or license intellectual property rights or declare dividends. If we raise additional funds through strategic collaborations and alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, rosiptor or our future product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our ability to use our U.S. net operating loss to offset future taxable income may be subject to certain limitations.

As of December 31, 2017, we had U.S. net operating loss carryforwards, or NOLs, of $23.2 million, for which we have recorded a full valuation allowance, which may be used to offset future taxable income. These NOLs and tax credit carryforwards expire in various years beginning in 2028, if not utilized. Utilization of the NOLs may be subject to an annual limitation due to historical or future ownership change rules pursuant to Sections 382 of the Internal Revenue Code, or the Code. If we have experienced an ownership change in the past or will experience an ownership change as a result of future changes in our stock ownership, some of which changes are outside our control, the tax benefits related to the NOLs may be limited or lost. Any such disallowances may result in greater tax liabilities than we would incur in the absence of such a limitation and any increased liabilities could adversely affect our business, results of operations, financial condition and cash flow and future prospects

The recently passed comprehensive tax reform legislation could adversely affect our business and financial condition.

On December 22, 2017, President Trump signed into law new tax legislation, the Tax Act, that significantly changes the Code. The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Any federal net operating loss carryovers created in 2018 and thereafter will be carried forward indefinitely pursuant to the Tax Act. We continue to examine the impact this tax legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. The impact of this Tax Act on holders of our common stock is also uncertain and could be adverse. This

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Annual Report on Form 10-K does not discuss any such tax legislation or the manner in which it might affect us or holders of our common stock. We urge investors to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.

The acquisition of control of AQXP Canada could result in adverse Canadian tax consequences, including limitations on AQXP Canada’s ability to use non-capital loss carryforwards and other similar tax attributes to offset taxable income for Canadian tax purposes.

We underwent a reorganization immediately prior to the closing of our initial public offering in March 2014 which resulted in AQXP Canada becoming a wholly owned subsidiary of Aquinox USA through an exchange of shares. Under the Income Tax Act (Canada), referred to herein as the Tax Act, in connection with the exchange of shares of AQXP Canada for shares of Aquinox USA, there may be limitations on AQXP Canada’s ability to use its non-capital loss carryforwards and other similar tax attributes following the acquisition of control. In general, an acquisition of control would result in AQXP Canada losing its net capital loss carryforwards, if any, and AQXP Canada’s non-capital loss carryforwards and other similar tax attributes only being “useable” to offset income, excluding capital gains, derived from the business operated by AQXP Canada that generated such tax attributes or a business “similar” to such business and provided the business that generated the tax attributes continues to be carried on by AQXP Canada for profit or with a reasonable expectation of profit. We expect that we will continue to carry on the business of AQXP Canada for profit or with a reasonable expectation of profit and that, accordingly, its non-capital loss carryforwards and other similar tax attributes should be available to offset future income for Canadian tax purposes to the extent of income from that business or “similar” businesses, subject to expiry of such loss carryforwards over time pursuant to the provisions of the Tax Act. If our use of these non-capital loss carryforwards or other similar tax attributes is restricted as a result of an acquisition of control or otherwise, our Canadian federal income tax liability may be materially increased, which could adversely affect our business, results of operations, financial condition and cash flow and future prospects.

Fluctuations in foreign currency exchange rates could result in changes in our reported financial results.

We currently incur significant expenses denominated in foreign currencies, specifically in connection with our operations in Canada. In addition, we utilize numerous clinical trial sites as part of our clinical trials for rosiptor, many of which are located in various countries outside of the United States. These clinical trial sites invoice us in the local currency of the site. We do not engage in foreign currency hedging arrangements for our accounts payable, and, consequently, foreign currency fluctuations may adversely affect our earnings. We may decide to manage this risk by hedging our foreign currency exposure, principally through derivative contracts. Even if we decide to enter into such hedging transactions, we cannot be sure that such hedges will be effective or that the costs of such hedges will not exceed their benefits. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Canadian dollar, could result in material amounts of cash being required to settle the hedge transactions or could adversely affect our financial results.

Risks Related to Our Business and Industry

Our future success is dependent primarily on the regulatory approval and commercialization of rosiptor and any of our future product candidates.

We do not have any products that have gained regulatory approval. Currently, our only clinical-stage product candidate is rosiptor, which has completed three Phase 2 clinical trials. In September 2016, we initiated dosing in our Leadership 301 Phase 3 clinical trial of rosiptor for the treatment of IC/BPS.

As a result, our near-term prospects, including our ability to finance our operations and generate revenue, are substantially dependent on our ability to obtain regulatory approval for, and, if approved, to successfully commercialize rosiptor in a timely manner. Our near-term prospects are largely dependent on our ability to obtain favorable results from our Leadership 301 clinical trial in IC/BPS, as well as our anticipated additional

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clinical trials with rosiptor. We cannot commercialize rosiptor or our future product candidates in the United States without first obtaining regulatory approval for the product from the FDA; similarly, we cannot commercialize rosiptor or our future product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. The FDA review process for an NDA typically takes more than a year to complete and approval is never guaranteed. Before obtaining regulatory approvals for the commercial sale of rosiptor or our future product candidates for a target indication, we must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical trials, generally including at least two well-controlled Phase 3 trials, and, with respect to approval in the United States, to the satisfaction of the FDA, that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. We continue to engage with the FDA, and other regulatory authorities to discuss the safety and efficacy trials and analyses required for approval of rosiptor in IC/BPS in the United States, Europe, and other targeted countries. We are also evaluating the design and number of additional trials that we will conduct in order to meet ICH patient exposure guidelines and demonstrate the safety and efficacy of rospitor in support of a potential NDA filing. We expect the data from the Leadership 301 trial, as well as further discussion with regulatory authorities, will be fundamental in defining the number, design and size of these additional trials. We may be required to conduct more clinical trials, or clinical trials of a greater size and/or duration than currently contemplated, in order to receive regulatory approval. Obtaining regulatory approval for marketing of rosiptor or our future product candidates in one country does not ensure we will be able to obtain regulatory approval in other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries.

Even if rosiptor or any of our future product candidates were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for specified age groups, gender or subpopulation of target indication, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If we are unable to obtain regulatory approval for rosiptor in one or more jurisdictions, or any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue the development of any of our future product candidate that we may discover, in-license, develop or acquire in the future. Also, any regulatory approval of any of rosiptor or our future product candidates, once obtained, may be withdrawn. Furthermore, even if we obtain regulatory approval for rosiptor, the commercial success of rosiptor will depend on a number of factors, including the following:

• development of a commercial organization or establishment of a commercial collaboration with a commercial infrastructure;

• establishment of commercially viable pricing and adequate reimbursement from third-party and government payors;

• the ability of our third-party manufacturers to manufacture quantities of rosiptor using commercially sufficient processes and at a scale sufficient to meet anticipated demand and enable us to reduce our cost of manufacturing;

• our success in educating physicians and patients about the benefits, administration and use of rosiptor;

• the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

• the effectiveness of our own or our potential strategic collaborators’ marketing, sales and distribution strategy and operations;

• acceptance of rosiptor as safe and effective by patients and the medical community; and

• a continued acceptable safety profile of rosiptor following approval.

Many of these factors are beyond our control. If we, or our potential commercialization collaborators, are unable to successfully commercialize rosiptor, we may not be able to earn sufficient revenues to continue our business.

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Because the results of preclinical testing or earlier clinical trials are not necessarily predictive of future results, rosiptor or any future product candidate we advance into clinical trials, may not have favorable results in later clinical trials or receive regulatory approval.

Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of an investigational drug. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience, have suffered significant setbacks in clinical trials, even after seeing promising results in earlier clinical trials. Despite the results reported in earlier clinical trials for rosiptor, we do not know whether the Leadership 301 clinical trial, or any other clinical trials we may conduct, will demonstrate adequate efficacy and safety to result in regulatory approval to market rosiptor or any of our future product candidates in any particular jurisdiction. For example, our Phase 2 Leadership 201 clinical trial in IC/BPS, the results of which were announced in June 2015, failed to demonstrate statistically significant results in its primary endpoint. In addition, despite showing positive results in our chronic obstructive pulmonary disease, or COPD, proof-of-concept trial following a lipopolysaccharide (LPS) challenge in healthy subjects, our Phase 2 Flagship clinical trial with rosiptor, the results of which we announced in July 2015, failed to demonstrate efficacy in COPD patients with a history of frequent exacerbations. Our Phase 2 Kinship clinical trial, the results for which we announced in November 2015, failed to demonstrate efficacy in patients with mild to moderate atopic dermatitis. Even if we believe that we have adequate data to support an application for regulatory approval to market our product candidates, FDA or other applicable foreign regulatory authorities may not agree and may require we conduct additional clinical trials. If later-stage clinical trials do not produce favorable results, our ability to achieve regulatory approval for any of our product candidates may be adversely impacted.

We have not yet established the optimal dose for rosiptor. There can be no guarantee that the 200 mg dose studied in our Phase 2 clinical trial will be efficacious or, if it is, whether it will be the optimal dose to continue development with. It is possible that we may need to conduct additional clinical trials to evaluate additional dose levels of rosiptor. There cannot be any guarantee that any of these trials will be successful in determining a dose of rosiptor suitable for marketing approval.

SHIP1 has not been validated as a target for the treatment of any disease.

Our primary focus is small molecule anti-inflammatory product candidates targeting SHIP1, which is a key regulator of an important cellular signaling pathway in immune cells. To date, no drug which specifically targets SHIP1 has been demonstrated to provide clinical benefit or been approved by any regulatory authority for the treatment of disease. Therefore, SHIP1 has not been validated as a target. We are therefore pursuing development of rosiptor against a novel and unproven target. We believe rosiptor is the only SHIP1 activator currently in clinical trials. SHIP1 activators as a class of drug, including rosiptor, may ultimately prove unsuitable for treatment of human diseases, or if approved for treatment of human diseases, may be commercially unsuccessful, either of which could cause our business to fail.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

Clinical testing is expensive, can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and early clinical trials.

We have experienced delays in site initiation and were behind our initial anticipated schedule in our ongoing Leadership 301 clinical trial and may experience delays in future clinical trials. We will not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned or will be completed on schedule, if at all. There can be no assurance that the FDA or other comparable foreign regulatory authority will

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not put clinical trials of rosiptor or any other of our product candidates on clinical hold in the future. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

• delay or failure in reaching agreement with the FDA or a comparable foreign regulatory authority on a trial design that we are able to execute;

• delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;

• delay or failure in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

• delay or failure in obtaining institutional review board (IRB) or ethics committee approval or the approval of other reviewing entities, including comparable foreign regulatory authorities, to conduct a clinical trial at each site;

• withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

• delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

• delay or failure in subjects completing a trial or returning for post-treatment follow-up;

• clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

• inability to identify and maintain a sufficient number of trial sites, many of which may be engaged in other clinical trial programs, including some that may be for the same indication;

• failure of our third parties, such as CROs, to satisfy their contractual duties or meet expected deadlines;

• delay or failure in adding new clinical trial sites;

• ambiguous or negative interim results or results that are inconsistent with earlier results;

• feedback from the FDA, the IRB, data safety monitoring boards, or a comparable foreign regulatory authority, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol for the trial;

• decision by the FDA or a comparable foreign regulatory authority to impose a clinical hold following an inspection of our clinical trial operations or trial sites, or recommendation by a data safety monitoring board, the IRB or us, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

• unacceptable risk-benefit profile, unforeseen safety issues or adverse side effects;

• failure to demonstrate a benefit from using a drug;

• delays in the testing, validation, manufacturing and delivery of the investigational or placebo products to the clinical sites;

• lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical trials or increased expenses associated with the services of our CROs and other third parties; or

• changes in governmental regulations or administrative actions.

As an organization, we have never completed a Phase 3 pivotal clinical trial or submitted an NDA to the FDA or other marketing applications to comparable foreign regulatory authorities before, and may be unable to do so for rosiptor or any product candidate we are developing.

The conduct of pivotal clinical trials and the submission of a successful marketing application is a complicated process. As an organization, we have not completed a Phase 3 pivotal clinical trial before, have limited experience in preparing, submitting and prosecuting regulatory filings, and have not submitted an NDA to the FDA or any other marketing application to a foreign regulatory authority before. We also have had limited interactions with the FDA and comparable foreign authorities. We may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to marketing application submission and approval of rosiptor or any other product candidate we are developing. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of products that we

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develop. Failure to commence or complete, or delays in, our Leadership 301 clinical trial or any other planned clinical trials, would prevent us from, or delay us in, commercializing rosiptor or any other product candidate we are developing.

If we are unable to enroll subjects in clinical trials, we will be unable to complete these trials in a timely fashion.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of subjects to clinical sites, local standard of care, the number of clinical sites and the rate at which they can be initiated, the eligibility criteria for the trial, the design of the clinical trial, delays or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial, ability to obtain and maintain patient consents, risk that enrolled subjects will drop out before completion, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials, and while we have agreements governing their committed activities, we have limited influence over their actual performance. For example, in our Phase 1b LPS challenge proof-of-concept trial of rosiptor, a large number of data points were lost for one part of the trial through error, rendering an analysis for efficacy uninterpretable for that part. In our Leadership 301 clinical trial, we have experienced delays in initiating clinical sites.

If we experience delays in the completion or termination of, any clinical trial of rosiptor or any future product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, and jeopardize our ability to commence product sales, which would impair our ability to generate revenues and may harm our business, results of operations, financial condition and cash flows and future prospects. In addition, many of the factors that could cause a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of rosiptor or our future product candidates.

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

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable, but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate, and it is possible that neither rosiptor nor any future product candidates we may discover, in-license or acquire and seek to develop will ever obtain regulatory approval.

Our product candidates could fail to receive regulatory approval from the FDA or a comparable foreign regulatory authority for many reasons, including:

• disagreement over the design, implementation or number of clinical trials, including the phase 3 clinical trials required for rosiptor;

• failure to demonstrate that a product candidate is safe and effective for its proposed indication;

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• failure of clinical trials to meet the level of statistical significance or clinical meaningfulness required for approval;

• failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

• disagreement over our interpretation of data from preclinical studies or clinical trials;

• disagreement over whether to accept efficacy results from clinical trial sites outside the United States where the standard of care is potentially different from that in the United States;

• the insufficiency of data collected from clinical trials of rosiptor or our future product candidates to support the submission and filing of an NDA or other submission or to obtain regulatory approval;

• disapproval of the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; or

• changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval.

The FDA or a comparable foreign regulatory authority may require more information, including additional preclinical or clinical data to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program altogether. Even if we do obtain regulatory approval, rosiptor or our future product candidates may be approved for fewer or more limited indications than we request, approval may be granted but contingent on the performance of costly post-marketing clinical trials, or approval with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. In addition, if rosiptor, or our future product candidates, produce undesirable side effects or safety issues, the FDA may require the establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or a comparable foreign regulatory authority may require the establishment of a similar strategy, that may restrict distribution of our products and impose burdensome implementation requirements on us. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

Approval by the FDA does not ensure approval by comparable foreign regulatory authorities and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. We may not be able to file for regulatory approvals and even if we file we may not receive the necessary approvals to commercialize our products in any market.

We are conducting, and may in the future conduct, clinical trials for rosiptor or any future product candidates in sites outside the United States and the FDA may not accept data from trials conducted in such locations.

We are conducting, and may in the future choose to conduct, one or more of our clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical trials conducted outside of the United States must be representative of the population for whom we intend to label the product in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside the United States. If the FDA does not accept the data from our clinical trials conducted outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of rosiptor or any future product candidates.

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Rosiptor or our future product candidates 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 any marketing approval.

Undesirable side effects caused by rosiptor or our future product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority. Rosiptor administered orally has generally been well tolerated by patients in our clinical trials with limited adverse events, the most frequent of which were gastrointestinal disorders. However, in our animal toxicity studies certain side-effects, including severe ulcerations to the gastrointestinal tract of dogs and adverse effects to the ocular lens of some animals occurred. There can be no assurance that these toxicities in animals will not occur in humans. If these toxicities do occur in our future clinical trials they could cause delay or even discontinuance of further development of rosiptor or future product candidates, which would impair our ability to generate revenues and would have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

To date, the most common side-effect of rosiptor noted in clinical trials is mild gastrointestinal upset including mild diarrhea, nausea and gastric pain. There can be no assurance that side-effects from rosiptor in future clinical trials will not prompt the discontinued development of rosiptor or future product candidates. As a result of these side effects or further safety or toxicity issues that we may experience in our clinical trials in the future, we may not receive approval to market rosiptor or any future product candidates, which could prevent us from ever generating revenues or achieving profitability. Results of our trials could reveal an unacceptably high severity and prevalence of side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of, or deny approval of, our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

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

• we may be forced to suspend marketing of such product;

• regulatory authorities may withdraw their approvals of such product;

• regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of such products;

• the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such product;

• the FDA may require the establishment or modification of a REMS or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and impose burdensome implementation requirements on us;

• we may be required to change the way the product is administered or conduct additional clinical trials;

• we could be sued and held liable for harm caused to subjects or patients;

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

• our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved.

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Even if rosiptor or our future product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if we obtain regulatory approval for rosiptor or a future product candidate, it would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of any product will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If the FDA or comparable foreign regulatory authorities become aware of new safety information after approval of rosiptor or any future product candidate, they may require labeling changes or establishment of a REMS or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the label ultimately approved for rosiptor, if it achieves marketing approval, may include restrictions on use.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practice (cGMP), requirements and other regulations. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates, fail to comply with applicable regulatory requirements, a regulatory agency may:

• issue warning letters or untitled letters;

• impose restrictions on the marketing or manufacturing of the product candidates;

• mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

• require us or any future collaborator to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific remediation actions and penalties for noncompliance;

• seek an injunction or impose civil or criminal penalties or monetary fines;

• suspend or withdraw regulatory approval;

• suspend any ongoing clinical trials;

• refuse to approve pending applications or supplements to applications filed by us;

• suspend or impose restrictions on operations, including costly new manufacturing requirements; or

• seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.

The occurrence of any event or penalty described above may inhibit our ability to commercialize rosiptor or any future product candidates and generate revenue.

The FDA strictly regulates the advertising and promotion of drug products, and drug products may only be marketed or promoted for their FDA approved uses, consistent with the product’s approved labeling. Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the DOJ, the Office of Inspector General of the Department of Health and Human Services, state attorneys general, members of Congress and the public. Violations, including promotion of our products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations, and civil, criminal and/or administrative sanctions by the FDA and other enforcement authorities. Additionally, advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by relevant foreign regulatory authorities.

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In the United States, engaging in impermissible promotion of our future products for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to numerous actions, including civil, criminal and/or administrative penalties and fines and agreements that materially restrict the manner in which we promote or distribute our drug products. These false claims statutes include the federal False Claims Act, which allows the federal government, or any individual relator or whistleblower on behalf of the federal government to bring a lawsuit against a pharmaceutical company alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government prevails in the lawsuit, the individual relator may share in any fines or settlement funds. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements based on certain sales practices promoting off-label drug uses. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from the Medicare, Medicaid and other federal and state healthcare programs. If we do not lawfully promote our products once they have received regulatory approval, we may become subject to such litigation and, if we are not successful in defending against such actions, those actions could have a material adverse effect our business, results of operations, financial condition and cash flows and future prospects.

Existing government regulations may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of rosiptor or any future product candidates. 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/or be subject to fines or enhanced government oversight and reporting obligations, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

Failure to obtain regulatory approval in international jurisdictions would prevent rosiptor or any future product candidates from being marketed outside the United States.

In order to market and sell our products in the European Union and other jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. A failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval of rosiptor or any of our future product candidates by regulatory authorities in the European Union or another jurisdiction, the commercial prospects of that product candidate may be significantly diminished and our business prospects could decline.

Recently enacted and future legislation, including potentially unfavorable pricing regulations or other healthcare reform initiatives, may increase the difficulty and cost for us to obtain marketing approval of, and commercialization of, rosiptor or our future product candidates and affect the prices we may obtain.

The regulations that govern, among other things, marketing approvals, coverage, pricing and reimbursement for new drug products vary from country to country. In the United States and some foreign jurisdictions, there have

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been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of rosiptor or our future product candidates, restrict or regulate post-approval activities and affect our ability to successfully sell any product candidates for which we obtain marketing approval.

In the United States in recent years, Congress has considered reductions in Medicare reimbursement for drugs administered by physicians. CMS, the agency that administers the Medicare program, also has the authority to revise reimbursement rates and to implement coverage restrictions for drugs. Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of, and reimbursement for, any approved products, which in turn could affect the price we can receive for those products. While Medicare regulations apply only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in establishing their own coverage polices and reimbursement rates. Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private payors.

In March 2010, President Obama signed into law the Affordable Care Act in an effort to, among other things, broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and impose additional health policy reforms. The Affordable Care Act, among other things, also expanded manufacturers’ rebate liability to include covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, increased the minimum rebate due for innovator drugs from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and capped the total rebate amount for innovator drugs at 100% of AMP. The Affordable Care Act and subsequent legislation and regulation also revised the definition of AMP for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices. This could increase the amount of Medicaid drug rebates to states. Furthermore, the Affordable Care Act imposes a significant annual, nondeductible fee on companies that manufacture or import certain branded prescription drug products. Substantial provisions affecting compliance were enacted, which may affect our business practices with healthcare practitioners, and a significant number of provisions are not yet, or have only recently become, effective. Some of the provisions of the Affordable Care Act have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges, as well as efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Congress may consider other legislation to repeal or replace elements of the ACA. Because of the continued uncertainty about the implementation of Affordable Care Act, including the potential for further legal challenges or repeal of Affordable Care Act, we cannot quantify or predict with any certainty the likely impact of the Affordable Care Act or its repeal on our business, prospects, financial condition or results of operations.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year that went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to

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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, which could have a material adverse effect on our customers and accordingly, our financial operations. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. Furthermore, there has been heightened governmental scrutiny recently over the manner in which manufacturers set prices for their marketed products. For example, there have been several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer’s patient programs, and reform government program reimbursement methodologies for drug products. We cannot be sure whether additional legislative changes will be enacted, or whether existing regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of rosiptor or our future product candidates, if any, may be.

In the United States, the European Union and other potentially significant markets for rosiptor and our future product candidates, government authorities and third-party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices. Furthermore, the increased emphasis on managed healthcare in the United States and on country and regional coverage, pricing and reimbursement controls in the European Union will put additional pressure on product coverage, pricing, reimbursement and utilization, which may adversely affect our business, results of operations, financial condition and cash flows and future prospects. These pressures can arise from various sources, including but not limited to, rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.

Some countries require approval of the sale price of a drug 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 product candidate in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of the product in that particular 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.

Laws and regulations governing international operations may preclude us from developing, manufacturing and selling certain product candidates outside of the United States and Canada and require us to develop and implement costly compliance programs.

As we expand our operations outside of the United States and Canada, we must comply with numerous laws and regulations in each jurisdiction in which we plan to operate. We must also comply with U.S. laws applicable to the foreign operations of U.S. businesses and individuals, such as the Foreign Corrupt Practices Act, or FCPA, and Canadian laws applicable to the foreign operations of Canadian businesses and individuals, such as the Corruption of Foreign Public Officials Act, or CFPOA. The creation and implementation of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.

The FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring us to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate

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system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the DOJ. The SEC is involved with enforcement of the books and records provisions of the FCPA.

Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

Various laws, regulations and executive orders also restrict the use and dissemination outside the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. Our expanding presence outside the United States will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside the United States, which could limit our growth potential and increase our development costs.

The failure to comply with laws governing international business practices may result in substantial penalties, including suspension or debarment from government contracting. Violation of the FCPA can result in significant civil and criminal penalties. Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved. Conviction of a violation of the FCPA can result in long-term disqualification as a government contractor. The termination of a government contract or relationship as a result of our failure to satisfy any of our obligations under laws governing international business practices would have a negative impact on our operations and harm our reputation and ability to procure government contracts. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

The CFPOA prohibits Canadian businesses and individuals from giving or offering to give a benefit of any kind to a foreign public official, or any other person for the benefit of the foreign public official, where the ultimate purpose is to obtain or retain a business advantage. Furthermore, a company may be found liable for violations by not only its employees, but also by its third-party agents. Any failure to comply with the CFPOA, as well as applicable laws and regulations in foreign jurisdictions, could result in substantial penalties or restrictions on our ability to conduct business in certain foreign jurisdictions, which may have a material adverse impact on us and our share price.

Even if we are able to commercialize rosiptor or our future product candidates, the products may not receive coverage and adequate reimbursement from third-party payors, which could harm our business.

Our ability to commercialize any products successfully will depend, in part, on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government authorities, private health insurers, health maintenance organizations and third-party payors. Patients who are prescribed medications for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Coverage and adequate reimbursement from government healthcare programs, such as Medicare and Medicaid, and private health insurers are critical to new product acceptance. Patients are unlikely to use rosiptor, or our future product candidates, unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. As a result, government authorities and other 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. Third-party payors may also seek additional clinical evidence, beyond the data required to obtain marketing approval, demonstrating clinical benefits and value in specific patient populations before covering our products for those

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patients. We cannot be sure that coverage and adequate reimbursement will be available for any product that we commercialize and, if reimbursement is available, what that level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and reimbursement are not available or are available only at limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, obtaining coverage does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sales and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may only be temporary. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based in part on existing reimbursement amounts for lower cost drugs or may be bundled into the payments for other services. Net prices for drugs 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 drugs from countries where they may be sold at lower prices than in the United States. Coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage and reimbursement determination process is often a time-consuming and costly process with no assurance that coverage and adequate reimbursement will be obtained or applied consistently. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

We have never marketed a drug before, and if we are unable to establish an effective sales force and marketing infrastructure, or enter into acceptable third-party sales and marketing or licensing arrangements, we may be unable to generate any revenue.

We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical drug products and the cost of establishing and maintaining such an infrastructure may exceed the cost-effectiveness of doing so. In order to market any products that may be approved by the FDA and comparable foreign regulatory authorities, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable. We will be competing with many companies that have extensive and well-funded sales and marketing operations. Without an internal commercial organization or the support of a third party to perform sales and marketing functions, we may be unable to compete successfully against these more established companies.

Rosiptor and our future product candidates, if approved, may not achieve adequate market acceptance among physicians, patients, and healthcare payors and others in the medical community necessary for commercial success.

Even if we obtain regulatory approval for rosiptor or any of our product candidates that we may develop or acquire in the future, the product may not gain market acceptance among physicians, healthcare payors, patients or the medical community. In addition, the reported diagnosis rate for IC/BPS is significantly lower than the number of people estimated to suffer from IC/BPS, which could limit our commercial opportunities for that indication. Our commercial success also depends on coverage and adequate reimbursement of our product candidates by third-party payors, including government payors, generally, which may be difficult or

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time-consuming to obtain, may be limited in scope and may not be obtained in all jurisdictions in which we may seek to market our products. Market acceptance of any of our product candidates for which we receive approval depends on a number of factors, including:

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

• the clinical indications for which the product candidate is approved;

• acceptance by physicians and patients of the product candidate as a safe and effective treatment;

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

• the safety of product candidates seen in a broader patient group, including a product candidate’s use outside the approved indications;

• the prevalence and severity of any side effects;

• product labeling or product insert requirements of the FDA or other regulatory authorities;

• the timing of market introduction of our products as well as competitive products;

• the cost of treatment in relation to alternative treatments;

• the availability of coverage and adequate reimbursement and pricing by third-party payors and government authorities;

• relative convenience and ease of administration;

• the effectiveness of our sales and marketing efforts and those of any future collaborators; and

• unfavorable publicity relating to the product candidate.

If any of our product candidates are approved but fail to achieve market acceptance among physicians, patients, or healthcare payors, we will not be able to generate significant revenues, which would compromise our ability to become profitable.

Our relationships with healthcare professionals, principal investigators, consultants, customers (actual and potential) and third-party payors are and will be subject, directly and indirectly, to applicable anti-kickback, fraud and abuse, privacy, transparency and other healthcare laws and regulations, which could expose us to penalties, including without limitation, civil, criminal and administrative sanctions, civil penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, integrity obligations, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings and the curtailment or restructuring of our operations.

As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our future arrangements with third-party payors and customers who are in a position to purchase, recommend and/or prescribe our product candidates for which we obtain marketing approval. These broadly applicable fraud and abuse and other healthcare laws and regulations may constrain our future business or financial arrangements and relationships with healthcare professionals, principal investigators, consultants, customers, and third-party payors and other entities, including our marketing practices, educational programs and pricing policies. Restrictions under applicable federal and state healthcare laws and regulations that may affect our ability to operate include, but are not limited to, the following:

• the federal Anti-Kickback Statute, which, among other things, prohibits persons from knowingly and willfully soliciting, offering, receiving or providing paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, 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 Medicare and Medicaid;

• federal civil and criminal false claims laws, including the federal civil False Claims Act, and civil monetary penalty laws impose criminal and civil penalties, including through civil whistleblower or qui tam actions, among other things, prohibits individuals or entities from knowingly presenting, or

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causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

• HIPAA, which, among other things, imposes criminal liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to 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 HITECH, and its implementing regulations, which also imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information without the appropriate authorization by entities subject to the law, such as health plans, healthcare clearinghouses and healthcare providers;

• the federal Physician Payments Sunshine Act, created under Section 6002 of the Affordable Care Act and its implementing regulations, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS, information related to “payments or other transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members and payments or other “transfers of value” to such physician owners and their immediate family members; and

• analogous local, state and foreign laws and regulations, including: state anti-kickback and false claims laws which may apply to our business practices, including, but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by state governmental and non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government; local, state and foreign laws that require drug manufacturers to track gifts and other remuneration and items of value provided to healthcare professionals and entities and file reports relating to pricing and marketing information and/or register their pharmaceutical sales representatives; and local, state and foreign laws that govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our internal operations and business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. Recent healthcare reform legislation has also strengthened these laws. For example, the Affordable Care Act, among other things, amends the intent requirement of the federal Anti-Kickback Statute, such that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim that includes items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, agency guidance, or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply to us, we may be subject to penalties, including without limitation, significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, integrity obligations, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings, and the curtailment or restructuring of our operations. If any physicians or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicable laws,

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they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. Moreover, we expect there will continue to be federal, state, local and foreign laws and regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to healthcare fraud abuse laws or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain.

We may form strategic alliances in the future, and we may not realize the benefits of such alliances.

We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business. These relationships or those like them may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for rosiptor or any future drug candidates and programs because our research and development pipeline may be insufficient, our drug candidates and programs may be deemed to be at too early a stage of development for collaborative effort and third parties may not view our drug candidates and programs as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our drug candidates could also delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the market.

Our employees, independent contractors, principal investigators, CROs, consultants, vendors and collaboration partners may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk of fraud or other misconduct by our employees, independent contractors, principal investigators, CROs, consultants, vendors and collaboration partners, including intentional failures 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 manufacturing standards we have established, comply with federal and state data privacy and security, fraud and abuse and other healthcare laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use or misrepresentation of information obtained in the course of clinical trials or creating fraudulent data in our pre-clinical studies or clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct for our directors, officers and employees, but it is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from 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 have a significant impact on our business, results of operations, financial condition and cash flows from future prospects, including the imposition of significant fines or other sanctions.

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We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully than, we do.

The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidate, rosiptor, and will face competition with respect to any future product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing or may develop rosiptor or our future product candidates for. Some of these competitive products and therapies may be based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

More established companies may have a competitive advantage over us due to their greater size, cash flows and institutional experience. Compared to us, many of our competitors may have significantly greater financial, technical and human resources.

As a result of these factors, our competitors may obtain regulatory approval of their products before we do, which will limit our ability to develop or commercialize rosiptor or any of our future product candidates. Although there are no approved therapies that specifically target SHIP1, there are currently approved therapies for treating the same diseases or indications for which our product candidates may be useful. In addition, many companies are developing new therapeutics, and we cannot predict what the standard of care will be as our product candidates progress through clinical development.

If rosiptor were approved for the treatment of IC/BPS, it could face competition from currently approved and marketed products, including Janssen Pharmaceuticals Inc.’s pentosan polysulfate sodium, marketed in the United States as Elmiron, which is off patent. In addition, many companies are developing product candidates directed to IC/BPS. Such companies include Pfizer, Merck, Allergan, Urigen, Lipella, Grunenthal, Astellas, Mylan and Ironwood. Also, we believe that GlaxoSmithKline, Novartis and UCB are developing drugs in immunology that target the delta and/or gamma isoforms of PI3K.

We believe that our ability to successfully compete will depend on, among other things:

• the efficacy and safety profile of rosiptor, including relative to marketed products and product candidates in development by third parties;

• the time it takes for rosiptor or any of our future product candidates to complete clinical development and receive marketing approval;

• the ability to commercialize rosiptor and future product candidates that receive regulatory approval;

• whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;

• the ability to establish, maintain and protect intellectual property rights related to our product candidates;

• the ability to manufacture commercial quantities of rosiptor and future product candidates that receive regulatory approval; and

• acceptance of rosiptor and future product candidates that receive regulatory approval by physicians and other healthcare providers.

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Our failure to successfully identify, acquire, develop and commercialize additional product candidates or approved products other than rosiptor could impair our ability to grow.

Although a substantial amount of our efforts will focus on the continued clinical testing and potential approval of rosiptor, a key element of our growth strategy is to acquire, develop and/or market additional products and product candidates. All of our other potential product candidates remain in the discovery and preclinical study stages. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select and acquire promising pharmaceutical product candidates and products. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. Any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products that we develop or approved products that we acquire will be manufactured profitably or achieve market acceptance.

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

We face an inherent risk of product liability exposure related to the testing of rosiptor and any future product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. Product liability claims may be brought against us by subjects enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

• decreased demand for any product candidates or products that we may develop;

• termination of clinical trial sites or entire trial programs;

• injury to our reputation and significant negative media attention;

• withdrawal of clinical trial participants;

• significant costs to defend the related litigation;

• substantial monetary awards to trial subjects or patients;

• loss of revenue;

• diversion of management and scientific resources from our business operations; and

• the inability to commercialize our product candidates.

We currently have product liability insurance coverage, which is limited to $10 million per occurrence and $10 million in the aggregate. This coverage may not be adequate to cover all liabilities that we may incur. Insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for rosiptor or our future product candidates, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been

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awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

We will need to expand our operations and grow the size of our organization, and we may experience difficulties in managing this growth.

As of December 31, 2017, we had 51 employees. As our development and commercialization plans and strategies develop, or as a result of any future acquisitions, we will need additional managerial, operational, sales, marketing, scientific, and financial headcount and other resources. Our management, personnel and systems currently in place may not be adequate to support this future growth. Future growth would impose significant added responsibilities on members of management, including:

• managing our clinical trials effectively, which we anticipate being conducted at numerous clinical sites;

• identifying, recruiting, maintaining, motivating and integrating additional employees with the expertise and experience we will require;

• managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors and other third parties;

• manage additional relationships with various strategic partners, suppliers and other third parties;

• improving our managerial, development, operational and finance reporting systems and procedures; and

• expanding our facilities.

Our failure to accomplish any of these tasks could prevent us from successfully growing our company.

Our future success depends on our ability to attract, retain and motivate qualified personnel.

We may not be able to attract or retain qualified managerial, operational, sales, marketing, scientific and financial personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

We are highly dependent on the development, regulatory, commercialization and business development expertise of our executive officers. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. Replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel. Many of the other pharmaceutical companies that we compete with for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer. Further, we do not maintain “key person” insurance for any of our executives or other employees. Our failure to retain key personnel could impede the achievement of our research, development and commercialization objectives.

We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, results of operations, financial condition and cash flows and future prospects.

While we currently have no specific plans to acquire any other businesses, we may, in the future, make acquisitions of, or investments in, companies that we believe have products or capabilities that are a strategic or

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commercial fit with rosiptor or our future product candidates and business or otherwise offer opportunities for our company. In connection with these acquisitions or investments, we may:

• issue stock that would dilute our stockholders’ percentage of ownership;

• incur debt and assume liabilities; and

• incur amortization expenses related to intangible assets or incur large and immediate write-offs.

We may not be able to complete acquisitions on favorable terms, if at all. If we do complete an acquisition, we cannot assure you that it will ultimately strengthen our competitive position or that it will be viewed positively by customers, financial markets or investors. Furthermore, future acquisitions could pose numerous additional risks to our operations, including:

• problems integrating the purchased business, products or technologies;

• increases to our expenses;

• the failure to discover undisclosed liabilities of the acquired asset or company;

• diversion of management’s attention from their day-to-day responsibilities;

• harm to our operating results or financial condition;

• entrance into markets in which we have limited or no prior experience; and

• potential loss of key employees, particularly those of the acquired entity.

We may not be able to complete any acquisitions or effectively integrate the operations, products or personnel gained through any such acquisition.

Our business and operations would suffer in the event of computer system failures or security breaches.

In the ordinary course of our business, we collect, store and transmit confidential information, including intellectual property, proprietary business information and personal information. Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, cyberattacks, natural disasters, fire, terrorism, war and telecommunication and electrical failures. Cyberattacks are increasing in their frequency, sophistication and intensity. Cyberattacks could include the deployment of harmful malware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. Significant disruptions of our information technology systems or security breaches could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and could result in financial, legal, business and reputational harm to us. If such disruptions were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of rosiptor or our future product candidates could be delayed.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We do not carry insurance for all categories of risk that our business may encounter. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party

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manufacturers to produce our product candidates. Our ability to obtain clinical supplies of product candidates could be disrupted, if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. The ultimate impact on us, our significant suppliers and our general infrastructure of being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster. Further, any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our business, results of operations, financial condition and cash flows from future prospects.

Risks Related to Our Dependence on Third Parties

We rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, this could substantially harm our business because we may not be able to obtain regulatory approval for or commercialize rosiptor or our future product candidates in a timely manner or at all.

We have extensively relied upon, and plan to continue to extensively rely upon, third-party CROs and other consultants to monitor and manage data for our ongoing preclinical and clinical programs. We rely on these parties for execution of our preclinical studies and clinical trials, and we control only some aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies and clinical trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We also rely on third parties to assist in conducting our preclinical studies in accordance with Good Laboratory Practices, or GLP, and the Animal Welfare Act requirements. We and our CROs are required to comply with federal regulations and current Good Clinical Practices, or GCP, which are international standards meant to protect the rights and health of patients that are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs or consultants fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP requirements. In addition, our clinical trials must be conducted with product produced under cGMP requirements. Failure to comply with these regulations may require us to repeat preclinical studies and clinical trials, which would delay the regulatory approval process.

Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize rosiptor or our future product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely affected. Though we carefully manage our relationships with our CROs and consultants, there can be

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no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, results of operations, financial condition and cash flows and future prospects.

If our relationships with CROs terminate, our drug development efforts could be delayed.

We rely on third-party vendors and CROs for preclinical studies and clinical trials related to our drug development efforts. Switching or adding additional CROs would involve additional cost and requires management time and focus. Our CROs have the right to terminate their agreements with us in the event of an uncured material breach. In addition, some of our CROs have an ability to terminate their respective agreements with us if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated. If any of our relationships with our third-party CROs terminate, we could experience a significant delay in identifying, qualifying and managing performance of a comparable third-party service provider, which could adversely affect our development programs. In addition, there is a natural transition period when a new CRO commences work and the new CRO may not provide the same type or level of services as the original provider. We may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms.

We have no experience manufacturing our product candidates on a large clinical or commercial scale and have no manufacturing facility. As a result, we are dependent on third-party manufacturers for the manufacture of rosiptor, as well as on third parties for our supply chain, and if we experience problems with any third parties, or the actual demand for rosiptor exceeds our forecasts, the manufacture of adequate supplies of rosiptor or our future product candidates or products could be delayed.

We do not own or operate facilities for the manufacture of our product candidates. We currently have no plans to build our own manufacturing facilities for clinical or commercial operations. We currently rely on a single source contract manufacturing organization, or CMO, for the chemical manufacture of active pharmaceutical ingredient for rosiptor, and another CMO for the production of rosiptor final product formulation and packaging for clinical trials. To meet our projected needs for clinical supplies to support our activities through regulatory approval and commercial manufacturing, the CMOs with whom we currently work will need to increase the scale of production. We may need to identify additional CMOs for continued production of supply for our product candidates. We have not yet identified alternate suppliers in the event the current CMOs we utilize are unable to scale production, or if we otherwise experience any problems with them. Although alternative third-party suppliers with the necessary manufacturing and regulatory expertise and facilities exist, it could be expensive and take a significant amount of time to arrange for alternative suppliers. We may encounter technical difficulties or delays in the transfer of rosiptor manufacturing on a commercial scale to additional third-party manufacturers. We may be unable to enter into agreements for commercial supply with third-party manufacturers, or may be unable to do so on acceptable terms. If we are unable to arrange for alternative third-party manufacturing sources, or to do so on commercially reasonable terms or in a timely manner, we may not be able to complete development of our product candidates, or market or distribute them.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control, including a failure to synthesize and manufacture our product candidates or any products we may eventually commercialize in accordance with our specifications, and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our product candidates and any products that we may eventually commercialize be manufactured according to cGMP and similar foreign standards. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a

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delay in, or failure to obtain, regulatory approval of any of our product candidates and could cause us to incur higher costs and prevent us from commercializing our product candidates successfully. In addition, such failure could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure of outside supplies of the product candidate, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention of products, refusal to permit the import or export of products, injunction, or imposing civil and criminal penalties.

Any significant disruption in our supplier relationships could harm our business. Any significant delay in the supply of a product candidate or its key materials for an ongoing clinical trial could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these key materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates. If our CMOs cannot manufacture sufficient quantity to meet the demand for our product candidates after regulatory approval, there would be a shortage in supply which would negatively impact our revenue from the sale of our product candidates. It may take several years to establish an alternative source of supply for our product candidates and to have any such new source approved by the FDA.

Risks Related to Intellectual Property

If we are unable to obtain or protect intellectual property rights, our competitive position could be harmed.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection. Our commercial success will depend in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. Where we have the right to do so under our license agreements, we seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business. The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patents, including those patent rights licensed to us by third parties, are highly uncertain.

The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the United States. The rights already granted under any of our currently issued patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking. If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

With respect to patent rights, we do not know whether any of the pending patent applications for any of our discovered or licensed compounds will result in the issuance of patents that protect our technology or products, or if any of our issued patents will effectively prevent others from commercializing competitive technologies and products. Our pending applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Further, the examination process may require us or our future potential licensor(s) to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. Because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, issued patents that we own or have licensed from third parties may be challenged in the courts or patent offices in the United States and abroad.

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Such challenges may result in the loss of patent protection, the narrowing of claims in such patents or the invalidity or unenforceability of such patents, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection for our technology and products. Protecting against the unauthorized use of our patented technology, trademarks and other intellectual property rights is expensive, difficult and may in some cases not be possible. In some cases, it may be difficult or impossible to detect third-party infringement or misappropriation of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.

We could be required to incur significant expenses to strengthen our intellectual property rights, and our intellectual property rights may be inadequate to protect our competitive position.

The patent prosecution process is expensive and time-consuming, and we or our future potential licensors 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 or our future potential licensors will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Further, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we are prosecuting patents. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the expiration of the patent. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and these foreign laws may also be subject to change. For example, methods of treatment and manufacturing processes may not be patentable in certain jurisdictions. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or in some cases not at all. Therefore we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

Our patent applications and the enforcement or defense of our issued patents may be impacted by the application of or changes in U.S. and foreign standards.

The standards that the U.S. Patent and Trademark Office and foreign patent offices use to grant patents are not always applied predictably or uniformly and can change. Consequently, our pending patent applications may not be allowed and, if allowed, may not contain the type and extent of patent claims that will be adequate to conduct our business as planned. Additionally, any issued patents we currently own or obtain in the future may have a shorter patent term than expected or may not contain claims that will permit us to stop competitors from using our technology or similar technology or from copying our product candidates. Similarly, the standards that courts use to interpret patents are not always applied predictably or uniformly and may evolve, particularly as new technologies develop. In addition, changes to patent laws in the United States or other countries may be applied retroactively to affect the validation enforceability, or term of our patent. For example, the U.S. Supreme Court has recently modified some legal standards applied by the U.S. Patent and Trademark Office in examination of U.S. patent applications, which may decrease the likelihood that we will be able to obtain patents and may increase the likelihood of challenges to patents we obtain or license. In addition, changes to the U.S. patent

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system have come into force under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, which was signed into law in September 2011. The Leahy-Smith Act included a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office, or the USPTO, and may become involved in opposition, derivation, reexamination, inter-partes review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position.

While we cannot predict with certainty the impact the Leahy-Smith Act or any potential future changes to the U.S. or foreign patent systems will have on the operation of our business, the Leahy-Smith Act and such future changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our future potential licensors fail to maintain the patents and patent applications covering rosiptor or our future product candidates, our competitive position would be adversely affected.

We may be subject to claims by third parties claiming ownership of what we regard as our own intellectual property.

Many of our employees, including our senior management, were previously employed at universities or at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, including members of our senior management, executed proprietary rights, non-disclosure and non-competition agreements, in connection with such previous employment. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we, or these employees, have used or disclosed confidential information or intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. We are not aware of any threatened or pending claims related to these matters or concerning the agreements with our senior management, but in the future litigation may be necessary to defend against such claims. In addition, third parties may from time to time make claims over what we regard as our intellectual property, or we may get into disputes with licensors or licensees of our intellectual property rights over the interpretation of the license terms. Our licensors may have the right to terminate their license agreements with us or pursue damages or other legal remedies. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology

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or products. Such a license may not be available on commercially reasonable terms or at all. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, CMOs, consultants, advisors and other third parties. We also generally enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.

Although we expect all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all.

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

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

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in

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foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful.

The requirements for patentability may differ in certain countries, particularly developing countries. For example, unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In India, unlike the United States, there is no link between regulatory approval of a drug and its patent status. Furthermore, generic or biosimilar drug manufacturers or other competitors may challenge the scope, validity or enforceability of our or our licensors’ or collaborators’ patents, requiring us or our licensors or collaborators to engage in complex, lengthy and costly litigation or other proceedings. Generic or biosimilar drug manufacturers may develop, seek approval for, and launch biosimilar versions of our products. In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors or collaborators may have limited remedies if patents are infringed or if we or our licensors or collaborators are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our and our licensors’ or collaborators’ efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.

Intellectual property rights do not necessarily 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 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 rosiptor or our 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 patent or pending patent application 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.

• It is possible that our pending patent applications will not lead to issued patents.

• Issued 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.

• 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 certain research and development activities, as well as in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

• We may not develop additional proprietary technologies that are patentable.

• The patents of others may have an adverse effect on our business.

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Risks Related to Ownership of Our Common Stock

Our stock price has been and will likely continue to be volatile and may decline regardless of our operating performance, resulting in substantial losses for investors.

The trading price of our common stock has been, and is likely to continue to be, volatile for the foreseeable future. For example, in the year ended December 31, 2017, our common stock’s sales price on The Nasdaq Global Market ranged from a low of $10.02 to a high of $19.97. The trading price of our common stock could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, these factors include:

• the success of competitive products or technologies;

• regulatory actions with respect to our products or our competitors’ products;

• actual or anticipated changes in our growth rate relative to our competitors;

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

• results of clinical trials, including both safety and efficacy, of rosiptor or any of our future product candidates or those of our competitors;

• regulatory or legal developments in the United States and other countries;

• developments or disputes concerning patent applications, issued patents or other proprietary rights;

• the recruitment or departure of key personnel;

• the level of expenses related to rosiptor or any of our future product candidates or clinical development programs;

• the results of our efforts to in-license or acquire additional product candidates or products;

• actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

• variations in our financial results or those of companies that are perceived to be similar to us;

• fluctuations in the valuation of companies perceived by investors to be comparable to us;

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

• announcement or expectation of additional financing efforts;

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

• changes in the structure of healthcare payment systems;

• market conditions in the pharmaceutical and biotechnology sectors; and

• general economic, industry and market conditions.

In addition, the stock market in general, and pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of these risks or any of a broad range of other risks, including those described in this “Risk Factors” section and elsewhere in this report, could have a dramatic and material adverse impact on the market price of our common stock.

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

The trading price of our common stock has been and will continue to be volatile. For example, on July 8, 2015, the closing price of our common stock on The Nasdaq Global Market was $6.55, and on July 9, 2015, following our announcement of negative results from our Phase 2 Flagship clinical trial in COPD, the closing price was $2.13. Similarly, on August 6, 2015, the closing price of our common stock on The Nasdaq Global Market was $1.79 and on August 7, 2015, following our announcement of positive results from secondary endpoints in our Phase 2 Leadership 201 clinical trial in IC/BPS, the closing price was $10.42 and increased to $22.13 on August 14, 2015. 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.

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

Our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates together beneficially own a majority of our outstanding voting stock. In particular, based on information available to us, entities affiliated with Baker Bros. Advisors LP, or the Baker Entities, which together are our largest stockholders, collectively beneficially owned approximately 46.6% of our common stock as of March 1, 2018. These stockholders are able to determine the outcome of all matters requiring stockholder approval. For example, these stockholders are 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. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we have taken advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our common stock being less attractive to investors and adversely affect the market price of our common stock or make it more difficult to raise capital as and when we need it.

We are an “emerging growth company” as that term is used in the JOBS Act, and we are taking advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and exemptions from any rules that the Public Company Accounting Oversight Board may adopt requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. We have taken and currently intend to take advantage of some, but not all, of the reduced regulatory and reporting requirements that are available to us under the JOBS Act, so long as we qualify as an “emerging growth company.” For example, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certain circumstances could be for up to five years.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our business, results of operations, financial condition and cash flows and future prospects may be materially and adversely affected.

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If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our business, results of operations, financial condition and cash flows and future prospects, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures and that we furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment needs to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.

Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we fail to identify and to remediate any significant deficiencies or material weaknesses that may be identified, or encounter problems or delays in the implementation of internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

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

We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.

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

As a public company, we have incurred and will incur significant legal, accounting and other expenses that we did not incur as a private company, and these expenses may increase even more after we are no longer an “emerging growth company.” We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and Nasdaq Stock Market. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have substantially increased our legal and financial compliance costs and made some activities more time-consuming and costly. The increased costs will increase our consolidated net loss. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

We have in the past and may in the future grant rights to some of our stockholders that require us to register the resale of our common stock or other securities on behalf of these stockholders and/or facilitate public offerings of our securities held by these stockholders, including in connection with potential future acquisition or capital-raising transactions. For example, in connection with our public offering of common stock on September 19, 2016, we entered into a registration rights agreement with the Baker Entities that together, based on information available to us, collectively beneficially owned approximately 45.1% of our common stock as of September 19, 2016. Under the registration rights agreement, we agree that, if at any time and from time to time after December 19, 2016, the Baker Entities demand that we register their shares of our common stock for resale under the Securities Act, we would be obligated to effect such registration. On January 6, 2017, pursuant to the registration rights agreement, we registered for resale, from time to time, up to 10,536,092 shares of our common stock held by the Baker Entities. Our registration obligations under this registration rights agreement cover all shares now held or hereafter acquired by the Baker Entities, would be in effect for up to ten years, and would include our obligation to facilitate certain underwritten public offerings of our common stock by the Baker Entities in the future. If the Baker Entities or any other holders of registration rights with respect to our common stock, by exercising their registration and/or underwriting rights or otherwise, sell a large number of our shares, or the market perceives that the Baker Entities or such holders intend to sell a large number of our shares, this could adversely affect the market price of our common stock. We have registered all currently reserved shares of common stock that we may issue under our equity compensation plans and intend to register in the future any additional reserved or issued shares of common stock. These registered shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates. We have also filed registration statements covering the sale of up to $124.6 million (remaining following the sale of $75.4 million of common stock in September 2016) and $52.0 million (remaining following the sale of $98.0 million of common stock in September 2015) of any combination of our common stock, preferred stock, debt securities or warrants and may conduct one or more sales of securities pursuant to such registration statement, from time to time.

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Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations. To raise capital, we may sell substantial amounts of common stock or securities convertible into or exchangeable for common stock. These future issuances of common stock or common stock-related securities, including the exercise of outstanding options and any additional shares issued in connection with acquisitions, if any, may result in material dilution to our stockholders. New investors could also gain rights, preferences and privileges senior to those of holders of our common stock.

Pursuant to our 2014 Equity Incentive Plan, our compensation committee is authorized to grant equity-based incentive awards to our directors, executive officers and other employees and service providers, including officers, employees and service providers of our subsidiaries and affiliates. Future option grants and issuances of common stock under our 2014 Equity Incentive Plan may have an adverse effect on the market price of our common stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation, or certificate of incorporation, and amended and restated bylaws, or bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management. These include provisions that:

• permit our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;

• provide that all vacancies on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

• require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

• provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder’s notice;

• not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and

• provide that special meetings of our stockholders may be called only by the board of directors or by such person or persons requested by a majority of the board of directors to call such meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, or our business. If one or more of the securities or industry analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters are located at 450-887 Great Northern Way, Vancouver, B.C., Canada, V5T 4T5, where we lease approximately 10,946 square feet of office space pursuant to a lease agreement that expires on October 31, 2021, with the option to extend the lease to October 31, 2026.

We also lease approximately 9,539 square feet of office space in San Bruno, California pursuant to leases that expire on December 31, 2018. This facility houses some of our clinical, regulatory and commercial personnel.

We believe that our existing facilities are adequate for our near-term needs. We believe that suitable additional or alternative space would be available if required in the future on commercially reasonable terms.

Item 3. Legal Proceedings.

We are not currently subject to any material legal proceedings.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

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

Price Range of Our Common Stock

Our common stock is traded on The Nasdaq Global Market under the symbol “AQXP.” As of March 9, 2018, there were 23,490,859 shares of our common stock outstanding, which were held by six holders of record of our common stock, including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners. As of March 9, 2018, the closing price of our common stock as reported on The Nasdaq Global Market was $16.55 per share.

The following table sets forth, for the periods indicated, the reported high and low sales prices per share of our common stock as reported on The Nasdaq Global Market:

	High		Low
2016
First Quarter	$	13.30	$	7.64
Second Quarter		11.10		6.01
Third Quarter		15.76		6.61
Fourth Quarter		18.35		9.83
2017
First Quarter	$	19.97	$	14.75
Second Quarter		16.95		12.28
Third Quarter		15.59		12.74
Fourth Quarter		14.48		10.02

Dividend Policy

We have not paid any cash dividends on our common stock since our inception. We do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business operations.

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Stock Performance Graph

Our common stock began trading on The Nasdaq Global Market on March 7, 2014. The graph and table below shows the cumulative total return to our stockholders during the period from March 7, 2014 through December 31, 2017 in comparison to the cumulative return on the Nasdaq Composite Index and the Nasdaq Biotechnology Index during that same period. The results assume that $100 was invested on March 7, 2014 in our common stock and each of the indexes listed above, including reinvestment of dividends, if any.

For the period March 7, 2014 to December 31, 2017

Aquinox Pharmaceuticals, Inc.	$	98.41
Nasdaq Composite Index	$	159.20
Nasdaq Biotechnology Index	$	123.88

This information under “Stock Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings 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 Annual Report on Form 10-K and irrespective of any general incorporation language in those filings.

Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Annual Report on Form 10-K. The selected Consolidated Statements of Operations data for the years ended December 31, 2017, 2016 and 2015 and Consolidated Balance Sheet data as of December 31, 2017 and 2016 have been derived from our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The selected Consolidated Statements of Operations data for the years ended December 31, 2014 and 2013 and Consolidated Balance Sheet data as of December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements prepared in accordance with U.S. GAAP which are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of future results.

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Consolidated Statement of Operations Data (In thousands of U.S. dollars, except per share and share amounts)
	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015			Year Ended December 31, 2014			Year Ended December 31, 2013
Operating expenses:
Research and development	$	36,267		$	28,382		$	15,799		$	18,079		$	7,599
General and administrative		14,852			9,263			5,541			4,296			1,777
Total operating expenses	$	51,119		$	37,645		$	21,340		$	22,375		$	9,376
Net loss	$	(50,183	)	$	(37,002	)	$	(21,860	)	$	(24,027	)	$	(8,729	)
Total loss attributable to common stockholders	$	(50,183	)	$	(37,002	)	$	(21,860	)	$	(23,821	)	$	(14,941	)
Net loss per common stock - basic and diluted	$	(2.14	)	$	(1.96	)	$	(1.73	)	$	(2.75	)	$	(49.52	)
Basic and diluted weighted average common stock outstanding		23,450,315			18,893,515			12,637,839			8,667,387			301,745
Consolidated Balance Sheet Data(1) (In thousands of U.S. dollars)
	December 31, 2017			December 31, 2016			December 31, 2015			December 31, 2014			December 31, 2013
Cash, cash equivalents and short-term investments	$	108,085		$	103,059		$	74,482		$	39,097		$	13,827
Working capital		97,869			93,966			70,004			34,098			12,676
Total assets		110,329			154,380			113,343			41,422			15,649
Total liabilities		11,442			9,716			4,923			5,275			7,484
Redemption option on preferred stock		—			—			—			—			800
Accrued tax payable on preferred stock		—			—			—			—			1,797
Bank loan		—			—			—			—			2,286
Redeemable convertible preferred stock		—			—			—			—			73,859
Total stockholders’ equity (deficit)		98,887			144,664			108,420			36,147			(65,694	)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity		110,329			154,380			113,343			41,422			15,649

⁽¹⁾  The 2016 Consolidated Balance Sheet Data reflect $70.7 million in net proceeds received from an underwritten public offering of our common stock that was completed in September 2016. The 2015 Consolidated Balance Sheet Data reflect $91.8 million in net proceeds received from an underwritten public offering of our common stock that was completed in September 2015. The 2014 Consolidated Balance Sheet Data reflect $47.3 million in net proceeds received from the initial public offering that was completed in March 2014.

The following table contains selected financial data for each quarter of 2017 and 2016. The information should be read in conjunction with our financial statements and related notes included in the quarterly filings with the SEC in our Quarterly Report on Form 10-Q. We believe that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

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Quarterly Financial Data (In thousands of U.S. dollars except per share information)
	THREE MONTHS ENDED
	MARCH 31			JUNE 30			SEPTEMBER 30			DECEMBER 31
2017
Total operating expenses	$	8,522		$	13,995		$	12,070		$	16,532
Net loss	$	(8,316	)	$	(13,766	)	$	(11,833	)	$	(16,268	)
Net loss attributable to common stockholders	$	(8,316	)	$	(13,766	)	$	(11,833	)	$	(16,268	)
Net loss per common stock - basic and diluted	$	(0.36	)	$	(0.59	)	$	(0.50	)	$	(0.69	)
	THREE MONTHS ENDED
	MARCH 31			JUNE 30			SEPTEMBER 30			DECEMBER 31
2016
Total operating expenses	$	6,834		$	11,065		$	8,283		$	11,463
Net loss	$	(6,711	)	$	(10,901	)	$	(8,146	)	$	(11,244	)
Net loss attributable to common stockholders	$	(6,711	)	$	(10,901	)	$	(8,146	)	$	(11,244	)
Net loss per common stock - basic and diluted	$	(0.39	)	$	(0.63	)	$	(0.46	)	$	(0.48	)

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

Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Item 1A—Risk Factors.” We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We are a clinical-stage pharmaceutical company developing novel therapeutics for chronic urological conditions marked by inflammation and pain. Our lead drug candidate, rosiptor, is in Phase 3 development (Leadership 301 trial) for the treatment of patients with interstitial cystitis/bladder pain syndrome (IC/BPS), a condition for which there are currently few FDA approved and/or effective treatment options. We are focused on leveraging our library of novel compounds that activate SHIP1 (SH2-containing inositol-5’-phosphatase 1) to develop therapeutics for application in inflammation, inflammatory pain, and blood cancers.

Rosiptor is a first-in-class, once-daily, oral treatment being studied for its effects on inflammation and inflammatory pain. Rosiptor has a novel mechanism of action, activating SHIP1, an enzyme that serves to down-regulate inflammation through its role in the PI3K signaling pathway. Rosiptor has been generally well tolerated in multiple completed clinical studies, with more than 395 subjects dosed. We retain full worldwide rights of rosiptor and hold patents with terms through 2024 in Europe and 2028 in the United States with the possibility of further patent term extension avenues available to us.

IC/BPS is a debilitating condition marked by chronic bladder pain and urinary symptoms. Patients may experience recurring pain, pressure, and/or discomfort perceived to be related to the urinary bladder as well as urinary frequency, urgency, and/or nocturia. The pain often worsens upon bladder filling and may be relieved upon bladder emptying. Many patients living with IC/BPS report that it takes a physical, emotional, and psychological toll, greatly impacting employment and social and intimate relationships. There are currently few FDA approved and/or effective treatment options for IC/BPS. Only about 1 million of the 5.5 million adults in the United States with symptoms of IC/BPS have been diagnosed or are receiving treatment.

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In 2015, we completed and reported results from our Leadership 201 trial, a multicenter, randomized, double-blind, placebo-controlled, Phase 2 clinical trial investigating the ability of 200 mg oral, once daily rosiptor to reduce average daily bladder pain and urinary symptoms in 69 female patients with IC/BPS. Although we did not achieve statistical significance in the primary endpoint, the results demonstrated a positive trend and statistically significant changes on secondary endpoints.

The Leadership 301 trial is a three-arm, multicenter, randomized, double-blind, placebo-controlled Phase 3 clinical trial assessing the effect of once-daily rosiptor 100 mg and 200 mg on bladder pain and urinary symptoms in female and male subjects with IC/BPS. The primary endpoint of the Leadership 301 trial is the change from baseline at week 12 in maximum daily bladder pain based on an 11-point numeric rating scale (NRS) compared to placebo, in female subjects, recorded by electronic diary. Additional endpoints include urinary symptoms as well as an evaluation of overall improvement with therapy. The Leadership 301 trial has a 52-week extension period, affording all participating subjects the opportunity for treatment with rosiptor. A total of 341 females and 92 males were enrolled in the trial and were randomized to receive one of two oral doses of once-daily rosiptor, 100 mg or 200 mg. Subjects were enrolled at clinical research centers in the United States, Canada, and Europe. Top-line data is anticipated in the third quarter of 2018.

We commenced operations in Canada in December 2003. Aquinox Pharmaceuticals (Canada) Inc., a corporation formed under the Canada Business Corporations Act, is a wholly owned subsidiary of Aquinox Pharmaceuticals, Inc., a Delaware corporation formed in May 2007. We currently have operations in Vancouver, British Columbia and San Bruno, California.

Since commencing operations, we have dedicated a significant portion of our resources to development efforts for our clinical-stage product candidate rosiptor. We anticipate that we will continue to incur significant operating expenses related to research and development as we continue to advance rosiptor and other clinical and preclinical programs. We have funded our operations primarily through the sale of common stock and preferred stock. As of December 31, 2017, we had $108.1 million in cash, cash equivalents and short-term investments in liquid, high-quality securities.

Since inception, we have incurred significant operating losses. Our net loss for the year ended December 31, 2017 was $50.2 million, compared to $37.0 million for the year ended December 31, 2016. As of December 31, 2017, we had an accumulated deficit of $198.5 million, compared to $148.3 million as of December 31, 2016. We expect to incur significant expenses and operating losses for the foreseeable future as we continue the development and clinical trials of, and, if successful, to potentially seek regulatory approval for rosiptor and any future product candidates we advance to clinical development. If we are able to obtain regulatory approval for rosiptor or any of our product candidates, we expect to incur significant commercialization expenses. For example, we do not currently have the infrastructure for the sales, marketing, manufacture and distribution of any products. We may enter into licensing and co-promotion agreements with strategic or collaborative partners for the commercialization of our products in the United States and other territories, but have not currently entered into any such arrangements. To develop a commercial infrastructure, we would have to invest considerable financial and management resources, some of which would have to be deployed prior to having any certainty of marketing approval.

Unless and until we generate sufficient revenue to be profitable, we will seek to fund our operations through public or private equity or debt financings or other sources. Additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed could have a material adverse effect on our business, results of operations, financial condition, cash flows and future prospects.

Results of Operations

Revenue

To date, we have not generated any revenue. In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and royalties from the sale of products developed under licenses of our intellectual property.

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Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2017, 2016 and 2015:

	YEAR ENDED DECEMBER 31, (in thousands of U.S. dollars)
	2017		2016		2015
Research and development	$	36,267	$	28,382	$	15,799
General and administrative		14,852		9,263		5,541
Total operating expenses	$	51,119	$	37,645	$	21,340

Research and Development Expenses

We are currently developing rosiptor as a treatment for IC/BPS in our Leadership 301 trial. The Leadership 301 trial is a three-arm, multicenter, randomized, double-blind, placebo-controlled Phase 3 clinical trial assessing the effect of once-daily rosiptor 100 mg and 200 mg on bladder pain and urinary symptoms in female and male subjects with IC/BPS. The primary endpoint of the Leadership 301 trial is the change from baseline at week 12 in maximum daily bladder pain based on an 11-point numeric rating scale (NRS) compared to placebo, in female subjects, recorded by electronic diary. Additional endpoints include urinary symptoms as well as an evaluation of overall improvement with therapy. The Leadership 301 trial has a 52-week extension period, affording all participating subjects the opportunity for treatment with rosiptor. A total of 341 females and 92 males are enrolled in the trial and are randomized to receive one of two oral doses of once-daily rosiptor, 100 mg or 200 mg. Subjects were enrolled at clinical research centers in the United States, Canada, and Europe. Top-line data is anticipated in the third quarter of 2018.

We continue to engage with the FDA and other regulatory authorities to discuss the safety and efficacy trials and analyses required for approval of rosiptor in IC/BPS in the United States, Europe, and other targeted countries. We are also evaluating the design and number of additional trials that we will conduct in order to meet International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) patient exposure guidelines and demonstrate the safety and efficacy of rosiptor in support of a potential new drug application (NDA) filing. We expect the data from the Leadership 301 trial, as well as further discussion with regulatory authorities, will be fundamental in defining the number, design and size of these additional trials. Any increase in the number, size or duration of our clinical trials will increase our research and development expenses and may impact the timing of any NDA filing with respect to rosiptor.

Our research and development expenses consist primarily of costs incurred for the development of rosiptor and other future product candidates. Research and development expenses include:

• costs associated with research, development and regulatory activities;

• employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

• expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials and preclinical studies;

• the cost of acquiring and manufacturing our products, for preclinical studies and clinical trials;

• cost incurred in relation to purchase of technology licenses and patent rights; and

• facilities, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization of equipment and leasehold improvements, insurance and supplies.

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The following table summarizes the nature of our research and development expenses for the years ended December 31, 2017, 2016 and 2015:

	YEAR ENDED DECEMBER 31, (in thousands of U.S. dollars)
	2017		2016		2015
Clinical development	$	16,875	$	11,358	$	6,004
Personnel related		5,051		3,232		2,107
Manufacture and formulation		7,226		6,799		4,168
Preclinical research		3,896		3,015		2,008
Regulatory and quality		822		327		213
Patents and licenses		373		2,656		549
Facility and overhead		885		352		216
Stock-based compensation		1,139		643		537
Total research and development expenses	$	36,267	$	28,382	$	15,799

Research and development expenses for the year ended December 31, 2017 were $36.3 million compared to $28.4 million for the year ended December 31, 2016. Higher expenditure during the year ended December 31, 2017 was primarily driven by increased clinical activities as we continued our Leadership 301 clinical trial of rosiptor in IC/BPS.

Research and development expenses for the year ended December 31, 2016 were $28.4 million compared to $15.8 million for the year ended December 31, 2015. Higher expenditure during the year ended December 31, 2016 was primarily driven by increased clinical activities as we initiated the Leadership 301 clinical trial of rosiptor in IC/BPS. In addition, during the third quarter of 2016, we made a milestone payment of $2.3 million (CAD $3.0 million) to Biolipox AB, or Biolipox, pursuant to the terms of an asset purchase agreement with Biolipox.

As we continue our development of rospitor, particularly in IC/BPS, we expect to incur progressively higher research and development expenses in the foreseeable future. However, it is difficult to determine with certainty the duration and completion costs of our clinical trials of rosiptor or any of our future product candidates we may advance, or if, when or to what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical trials and preclinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time with respect to the development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel related costs (including stock-based compensation and travel expenses), facility-related costs, insurance, public company expenses and professional fees for consulting, legal and accounting services.

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For the year ended December 31, 2017, general and administrative expenses of $14.9 million were higher compared to $9.3 million for the year ended December 31, 2016. The increase was primarily the result of higher personnel related costs and pre-commercial and market assessment activities.

For the year ended December 31, 2016, general and administrative expenses of $9.3 million were higher compared to $5.5 million incurred for the year ended December 31, 2015. The increase was primarily the result of higher personnel related costs and the establishment of an office in San Bruno, California.

Other income (expenses)

(in thousands)	DECEMBER 31, 2017			DECEMBER 31, 2016			DECEMBER 31, 2015
Change in fair value of derivative liability	$	—		$	81		$	(52	)
Foreign exchange losses		(19	)		(13	)		(476	)
Interest income		998			619			108
Miscellaneous expenses		(39	)		(43	)		(100	)
	$	940		$	644		$	(520	)

There was no change in fair value of derivative liability for the year ended December 31, 2017, as we did not have any derivative liability as of December 31, 2017 or December 31, 2016. The change in fair value of derivative liability for the years ended December 31, 2016 and 2015 resulted from the change in fair value of a warrant issued to Silicon Valley Bank, or SVB, under the terms of a loan agreement. The warrant was being re-measured at each balance sheet date. In September 2016, SVB exercised the warrant on a cashless basis as provided for under the warrant agreement, and as a result we issued 3,001 shares of common stock to SVB as net settlement for the exercise of the warrant.

Foreign exchange losses for the years ended December 31, 2017 and 2016 were insignificant as the net effect of change in foreign exchange rates on our foreign currency holdings was offset by the net effect on our foreign currency liabilities. Foreign exchange losses for the year ended December 31, 2015 were primarily a result of losses on our foreign currency holdings as the U.S. dollar strengthened during that period against our Canadian dollar and Euro holdings.

Interest income increased during the year ended December 31, 2017 compared to 2016 as a result of higher cash and investment balances during the year ended December 31, 2017. Similarly, in comparison to the year ended December 31, 2015, interest income also increased as a result of higher cash and investment balance during 2016.

Miscellaneous expenses for the years ended December 31, 2017, 2016 and 2015 were primarily normal recurring bank charges.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations and relied upon the issuance of common and preferred stock to fund our operations. Our operating activities used $44.7 million, $30.2 million and $20.3 million of cash flows during the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, we had an accumulated deficit of $198.5 million, working capital of $97.9 million, and cash, cash equivalents and short-term investments of $108.1 million. We believe that our existing capital resources will be sufficient to fund our operations for at least the next 12 months.

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Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2017, 2016 and 2015:

	YEAR ENDED DECEMBER 31, (in thousands of U.S. dollars)
	2017			2016			2015
Net cash (used in) provided by:
Operating activities	$	(44,718	)	$	(30,226	)	$	(20,268	)
Investing activities		64,011			(48,058	)		(47,533	)
Financing activities		423			71,112			92,948
		19,716			(7,172	)		25,147
Effect of exchange rate changes		15			(53	)		(527	)
Net change in cash and cash equivalents	$	19,731		$	(7,225	)	$	24,620

Net cash used in operating activities

Net cash used in operating activities for the year ended December 31, 2017 increased compared to the year ended December 31, 2016 due to higher operating expenses as described above. Net cash used in operating activities for the year ended December 31, 2016 increased compared to the year ended December 31, 2015 due to higher operating expenses as described above.

Net cash provided by (used in) investing activities

Net cash provided by investing activities for the year ended December 31, 2017 resulted from the maturity of short and long-term investments. Net cash used in investing activities for the year ended December 31, 2016 resulted from the investment of the cash proceeds received from the public offering of common shares in September 2016. Net cash used in investing activities for the year ended December 31, 2015 resulted from the investment of the cash proceeds received from the public offering of common shares in September 2015. Net cash used in investing activities for 2016 and 2015 included the purchase and sale of short and long-term investments as we invested the proceeds from our financing activities into liquid, high quality securities in accordance to our investment policy, which focuses on the preservation of principal and maintenance of liquidity.

Net cash provided by financing activities

Net cash provided by financing activities for the year ended December 31, 2017 resulted from the proceeds from the exercise of stock options of $0.4 million. Net cash provided by financing activities for the year ended December 31, 2016 resulted from the public offering of common shares in September 2016 for gross proceeds of $75.4 million, before underwriting discounts and commissions and offering expenses of $4.7 million, and proceeds from the exercise of stock options of $0.4 million. Net cash provided by financing activities for the year ended December 31, 2015 resulted from the public offering of common shares in September 2015 for gross proceeds of $98.0 million, before underwriting discounts and commissions and offering expense of $6.2 million, and proceeds from the exercise of stock options of $1.1 million.

Operating and Capital Expenditure Requirements

We have not generated product revenue or achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. We expect our cash expenditures to increase as we continue our development of rosiptor in IC/BPS, as well as other clinical and preclinical activities. We believe that our existing capital resources will be sufficient to fund our operations for at least the next 12 months and we anticipate that we will need to raise substantial financing in the future to fund our operations. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may

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result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on our business, results of operations, financial condition, cash flows and future prospects. Our future capital requirements will depend on many factors, including:

• our Phase 3 Leadership 301 trial of rosiptor in IC/BPS and any other future clinical trials;

• the number and characteristics of any future product candidates we develop or may acquire;

• the scope, progress, results and costs of researching and developing our product candidates or any future product candidates, and conducting preclinical studies and clinical trials;

• the timing of, and the costs involved in, obtaining regulatory approvals for rosiptor or any future product candidates;

• the cost of manufacturing rosiptor and our future product candidates and any products that may achieve regulatory approval;

• the cost of commercialization activities if rosiptor or any future product candidates are approved for sale, including marketing, sales and distribution costs;

• the timing, receipt and amount of sales of, or royalties on, future approved products, if any;

• our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

• any product liability or other lawsuits related to our products;

• the expenses needed to attract and retain skilled personnel;

• the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation.

Please see Item 1A of this Annual Report titled “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

The following is a summary of our long-term contractual cash obligations as of December 31, 2017:

(in thousands)	TOTAL		2018		2019		2020		2021
Operating lease obligations(1)	$	1,973	$	883	$	403	$	375	$	312
Capital lease obligations		55		19		19		17		—
	$	2,028	$	902	$	422	$	392	$	312

1. We have a lease agreement for approximately 10,946 square feet of office space in Canada which was effective on November 1, 2016 and expires October 31, 2021, with the option to extend the lease to October 31, 2026. On December 22, 2016, we took over a lease agreement for an additional 2,500 square feet of office space in Canada. The lease for the additional 2,500 square feet expires June 30, 2019. The dollar amounts shown in these columns reflect the U.S. dollar equivalent of the obligations. The amounts were converted to U.S. dollars from CAD dollars using the December 31, 2017 daily noon exchange rate of US$0.7971.

We have a lease agreement for approximately 3,520 square feet of office space in San Bruno, California which commenced on January 1, 2016 and expires on December 31, 2018. On January 7, 2017, we signed a

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lease agreement to expand the San Bruno, California office space by an additional 6,019 square feet which is effective February 1, 2017 and expires December 31, 2018. In addition to the basic rent, we are obligated to pay for taxes, operating costs, utilities, additional services and other amounts.

Purchase Commitments

We have no material non-cancelable purchase commitments with contract manufacturers or service providers as we have generally contracted on a cancelable purchase order basis.

Milestone, Royalty-Based and Other Commitments

In August 2009, AQXP Canada entered into an asset purchase agreement with Biolipox AB of Sweden, or Biolipox, for the purchase of all assets, including patent rights and know-how, relating exclusively or principally to a compound library from which we ultimately identified and selected rosiptor. Under the terms of the agreement, AQXP Canada paid Biolipox CAD $50,000 immediately upon closing. An additional CAD $250,000 by way of issuance of our common stock was made in June 2014 upon the first submission to the FDA of an IND for a compound from the acquired class. In November 2016 we made a one-time CAD $3.0 million milestone payment to Biolipox as a result of the advancement of rosiptor into a Phase 3 clinical trial. We will also be required to make certain other milestone payments totaling up to CAD $1.5 million in the aggregate upon the first commercial sale of the first compound covered by the acquired patent rights (which we expect will be triggered by the first commercial sale of rosiptor) in each of the United States, Europe and Japan. There are no royalty payments due under this agreement.

In June 2006, AQXP Canada entered into an exclusive license agreement with the University of British Columbia, or UBC, for certain patent rights and technology relating to small molecule compounds and pharmaceutical compositions as modulators of SHIP1 activity. This agreement was amended and restated in June 2007, and subsequently amended in October 2006, June 2007, September 2008 and April 2010. This agreement will expire on the expiry of the last issued patent covering the licensed technology. The agreement will terminate automatically upon our insolvency or may be terminated by either party for material breach by the other party. The terms of the agreement required AQXP Canada to pay an initial license fee of CAD $50,000 all of which was paid by the issuance of shares of our common stock. We do not currently have any product candidates under development that are covered by the agreement, nor have we sublicensed our rights under the licensed patents. However, if we develop products covered by the UBC technology in the future, we will be required to pay certain development and regulatory milestones up to an aggregate of CAD $2.2 million for the first drug product developed under the license and up to CAD $1.5 million for each subsequent drug product, which may be paid in cash or by issue of our shares. We must also pay UBC low single-digit royalties based on aggregate worldwide net sales of products covered by the licensed patents and a percentage of sublicensing revenue ranging from the low single digits to the mid double digits based on the stage of development at which such sublicense is granted. We are also required to reimburse costs incurred by UBC related to the prosecution and maintenance of the licensed patents, and to pay an annual license maintenance fee in the amount of CAD $1,000.

In May 2005, AQXP Canada entered into an assignment agreement, which was subsequently amended in December 2005 and March 2006, with the British Columbia Cancer Agency (BCCA) and StemCell Technologies, Inc. (STI) for the assignment to AQXP Canada of the 2002 exclusive license agreement between BCCA and STI to certain patents relating to technology relating to SHIP1. The license agreement between AQXP Canada and BCCA was amended and restated in August 2006 and June 2007. This agreement has subsequently been amended in June 2008 to revise the schedule of the technology licensed under this agreement, and further amended in February 2013. Pursuant to this agreement, as amended, BCCA has granted us an exclusive worldwide license to certain of its intellectual property relating to core SHIP1 technology, and screening of compounds for activity using SHIP1, including the C2 binding domain. The agreement is to expire at the later of 20 years from the effective date of the agreement or upon the expiration of the last patent covered

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by the license. The terms of the assignment agreement among STI, BCCA and AQXP Canada required AQXP Canada to pay an assignment license fee of CAD $150,000 paid in stages beginning May 2005 and ending March 2006. We do not currently have any product candidates under development that are covered by the BCCA license agreement, nor have we sublicensed our rights under the licensed patents. However, if we develop products covered by the BCCA technology in the future, we will be required to pay BCCA low single-digit royalties based on aggregate worldwide net sales of products covered by the licensed patents, and if we sublicense any rights to the technology, a low double digit percentage of sublicensing revenue. We are also required to reimburse BCCA’s patent costs incurred in relation to the licensed technology, and pay an annual maintenance fee in the amount of CAD $5,000. Our license with BCCA will terminate automatically upon our insolvency, and may be terminated by either party for material breach by the other party.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of these financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued liabilities, stock-based compensation and derivative liabilities. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Expenses

Research and development costs are charged to expense as incurred and include, but are not limited to, employee-related expenses, including salaries and benefits, expenses incurred under agreements with CROs and investigative sites that conduct clinical trials and preclinical studies, the cost of acquiring, developing and manufacturing clinical trial materials, cost incurred in relation to purchase of technology licenses and patent rights, facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, and other supplies and costs associated with clinical trials, preclinical activities, and regulatory operations.

Development costs are expensed in the period incurred unless we believe a development project meets generally accepted accounting criteria for deferral and amortization. No product development expenditures have been deferred to date. We record costs for certain development activities, such as clinical trials, based on our evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued liabilities, as the case may be.

Stock-Based Compensation

We measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant-date fair values.

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We estimate the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that required us to make significant estimates and judgments, including the expected forfeiture rate and expected term of the options. (See Recent Accounting Pronouncements.) We also make decisions regarding the method of calculating the expected stock price volatility and the risk free interest rate used in the model. Prior to our IPO in March 2014 our common stock was not publicly traded. As a result, the expected volatility assumption is based on industry peer information due to insufficient trading history of our common stock. Additionally, because we have no significant history to calculate the expected term, the simplified method calculation is used.

There is inherent uncertainty in our forecasts and projections and, if we had made different assumptions and estimates than those described previously, the amount of our stock-based compensation expense, net loss and net loss per common stock amounts could have been materially different.

Recent Accounting Pronouncements

We adopted FASB ASU 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” effective January 1, 2017 which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The previous guidance required entities to separately present deferred tax assets and deferred tax liabilities as current or noncurrent in a classified balance sheet. This change did not have a material impact on our financial statements as a full valuation allowance has been applied against the deferred tax assets.

We adopted FASB ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017 which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We have elected to change our accounting policy to account for forfeitures as they occur instead of on an estimated basis as this will more accurately reflect the cost of forfeitures. The change has been applied on a modified retrospective approach with a cumulative-effect adjustment to retained deficit of an immaterial amount as of January 1, 2017. The provisions relating to the accounting for income taxes has no significant impact on the consolidated financial statements as we apply a full valuation allowance against our deferred tax assets.

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted under certain circumstances. We do not anticipate a material impact to our financial statements as a result of this adoption.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires the recognition of right-of-use assets and lease liabilities by lessees for those leases with a lease term of greater than 12 months. Upon the adoption of ASU 2016-02, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact of ASU 2016-02 on our financial statements and whether to elect to apply the optional practical expedients under the modified retrospective approach.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as of December 31, 2017.

Segment Reporting

We view our operations and manage our business in one segment, which is the identification and development of therapeutics in disease areas of inflammation, inflammatory pain, and blood cancers.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act (“JOBS Act”) was enacted. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” We are an “emerging growth company,” as defined in the JOBS Act and for as long as we remain an “emerging growth company”, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions provide for, but are not limited to, relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, less extensive disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and an extended transition period for complying with new or revised accounting standards. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of (a) December 31, 2019 which is the last day of the fiscal year following the fifth anniversary of the completion of our IPO, (b) when we have total annual gross revenue of at least $1.07 billion, (c) when we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

This annual report does not include an attestation report of the company’s registered public accounting firm due to rules of the Securities and Exchange Commission for “emerging growth companies”. Our independent registered public accounting firm has not performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. It is possible that, had our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, material weaknesses and significant control deficiencies may have been identified. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the requirement that our independent registered public accounting firm provide an attestation on the effectiveness of our internal control over financial reporting.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.

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Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. As of December 31, 2017, we had holdings in U.S. government securities of $95.5 million. We have estimated the effect on our investment portfolio of a hypothetical increase in interest rates by one percent (100 basis points) to be a reduction of $0.1 million in the fair value of our investment portfolio as of December 31, 2017.

Our exposure to foreign currency risk relates primarily to our Canadian operations, including payments we make to vendors and suppliers. We currently do not hedge against foreign currency risk. If the Canadian dollar strengthens against the U.S. dollar, it can result in higher expenditures and have a negative impact on our financial results. We also maintain bank balances in foreign currencies such as the Canadian dollar and the Euro. If these foreign currencies decline against the U.S. dollar, it can have a negative impact on our financial positions.

Foreign exchange losses for the years ended December 31, 2017 and 2016 were insignificant as the impact of changes in foreign exchange rates on our foreign currency portfolio was offset by its impact on our foreign currency liabilities. For the year ended December 31, 2015, foreign exchange losses of $0.5 million, were primarily due to the impact of the significant decline in the Canadian dollar and Euro versus the U.S. dollar on our foreign currency portfolio.

We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Aquinox Pharmaceuticals, Inc.
Report of Independent Registered Public Accounting Firm		78
Consolidated balance sheets		79
Consolidated statements of operations and comprehensive loss		80
Consolidated statements of cash flow		81
Consolidated statements of stockholders’ equity		82
Notes to the consolidated financial statements		83

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Deloitte LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada

www.deloitte.ca

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Aquinox Pharmaceuticals, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Aquinox Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, cash flows and changes in stockholder’s equity for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte LLP

Chartered Professional Accountants

Vancouver, Canada

March 12, 2018

We have served as the Company’s auditor since 2007.

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AQUINOX PHARMACEUTICALS, INC.

Consolidated balance sheets

(In thousands of U.S. dollars, except share amounts)

	DECEMBER 31, 2017			DECEMBER 31, 2016
Assets
Current assets
Cash and cash equivalents (Note 3)	$	52,032		$	32,301
Short-term investments (Note 11)		56,053			70,758
Receivables, prepayments and deposits		740			426
Total current assets		108,825			103,485
Property and equipment, net (Note 4)		905			849
Long-term prepayments and deposits		599			—
Long-term investments (Note 11)		—			50,046
Total assets	$	110,329		$	154,380
Liabilities
Current liabilities
Accounts payable and other liabilities (Note 5)	$	10,956		$	9,519
Total current liabilities		10,956			9,519
Other liabilities (Note 6)		486			197
Total liabilities		11,442			9,716
Commitments and contingencies (Note 13)
Stockholders’ equity
Share capital:
Common stock - $0.000001 par value - authorized, 50,000,000 as of December 31, 2017 and 2016; issued and outstanding, 23,472,430 as of December 31, 2017 (December 31, 2016 – 23,423,150) (Note 7(a))		—			—
Preferred stock - $0.000001 par value – authorized, 5,000,000 as of December 31, 2017 and 2016; nil issued and outstanding as of December 31, 2017 and 2016 (Note 7(b))		—			—
Additional paid-in capital		297,459			293,111
Accumulated deficit		(198,502	)		(148,278	)
Accumulated other comprehensive loss		(70	)		(169	)
Total stockholders’ equity		98,887			144,664
Total liabilities and stockholders’ equity	$	110,329		$	154,380

The accompanying notes form an integral part of these consolidated financial statements

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AQUINOX PHARMACEUTICALS, INC.

Consolidated statements of operations and comprehensive loss

(In thousands of U.S. dollars, except per share and share amounts)

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Operating expenses
Research and development	$	36,267		$	28,382		$	15,799
General and administrative		14,852			9,263			5,541
Total operating expenses		51,119			37,645			21,340
Other income (expenses)
Interest expense		(4	)		(1	)		—
Other income (expenses) (Note 8)		940			644			(520	)
		936			643			(520	)
Net loss	$	(50,183	)	$	(37,002	)	$	(21,860	)
Net loss per common stock - basic and diluted (Note 9)	$	(2.14	)	$	(1.96	)	$	(1.73	)
Basic and diluted weighted average number of common stock outstanding (Note 9)		23,450,315			18,893,515			12,637,839
Comprehensive loss:
Net loss	$	(50,183	)	$	(37,002	)	$	(21,860	)
Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale securities		99			121			(286	)
Comprehensive loss	$	(50,084	)	$	(36,881	)	$	(22,146	)

The accompanying notes form an integral part of these consolidated financial statements

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AQUINOX PHARMACEUTICALS, INC.

Consolidated statements of cash flows

(In thousands of U.S. dollars)

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Operating activities
Net loss	$	(50,183	)	$	(37,002	)	$	(21,860	)
Non-cash items and reclassifications:
Change in fair value of derivative liability (Note 8)		—			(81	)		52
Stock-based compensation (Note 7(e))		3,839			1,966			1,506
Unrealized foreign exchange loss and others		709			185			580
Changes in operating assets and liabilities:
Receivable, prepayments and deposits		(905	)		(109	)		(96	)
Accounts payable and other liabilities		1,822			4,815			(450	)
Cash used in operating activities		(44,718	)		(30,226	)		(20,268	)
Investing activities
Purchase of investments		(5,995	)		(106,442	)		(60,703	)
Proceeds from maturity of investments		70,500			59,097			13,196
Purchase of property and equipment		(494	)		(713	)		(26	)
Cash provided by (used in) investing activities		64,011			(48,058	)		(47,533	)
Financing activities
Proceeds from exercise of stock options		438			440			1,120
Payment on capital lease obligations		(15	)		(4	)		—
Public offering of common stock (Note 7(c))		—			75,368			98,038
Public offering costs (Note 7(c))		—			(4,692	)		(6,210	)
Cash provided by financing activities		423			71,112			92,948
Effect of exchange rate changes on cash and cash equivalents		15			(53	)		(527	)
Net change in cash and cash equivalents during the year		19,731			(7,225	)		24,620
Cash and cash equivalents, beginning of year		32,301			39,526			14,906
Cash and cash equivalents, end of year	$	52,032		$	32,301		$	39,526
Supplemental disclosure of cash flow information:
Interest paid	$	4		$	1		$	—
Interest received		1,342			695			325
Non-cash investing and financing activities:
Accrued purchase of property & equipment	$	(77	)	$	77		$	—
Accrued offering costs		(30	)		—			35
Assets acquired through capital leases		—			65			11
Exercise of warrants on a net settlement basis		—			43			—

The accompanying notes form an integral part of these consolidated financial statements

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AQUINOX PHARMACEUTICALS, INC.

Consolidated statements of stockholders’ equity

(In thousands of U.S. dollars, except share amounts)

	COMMON STOCK				ADDITIONAL PAID-IN CAPITAL		ACCUMULATED DEFICIT			ACCUMULATED OTHER COMPREHENSIVE LOSS			TOTAL STOCKHOLDERS’ EQUITY
	NUMBER		AMOUNT
Balances, December 31, 2014		10,695,108	$	—	$	125,567	$	(89,416	)	$	(4	)	$	36,147
Issuance of common stock, net of share issuance costs of $6,245 (Note 7(c))		6,325,000		—		91,793		—			—			91,793
Options exercised		191,878		—		1,120		—			—			1,120
Stock-based compensation		—		—		1,506		—			—			1,506
Other comprehensive loss		—		—		—		—			(286	)		(286	)
Net loss		—		—		—		(21,860	)		—			(21,860	)
Balances, December 31, 2015		17,211,986		—		219,986		(111,276	)		(290	)		108,420
Issuance of common stock, net of share issuance costs of $4,692 (Note 7(c))		6,152,500		—		70,676		—			—			70,676
Options exercised		55,663		—		440		—			—			440
Exercise of warrants		3,001		—		43		—			—			43
Stock-based compensation		—		—		1,966		—			—			1,966
Other comprehensive income		—		—		—		—			121			121
Net loss		—		—		—		(37,002	)		—			(37,002	)
Balances, December 31, 2016		23,423,150		—		293,111		(148,278	)		(169	)		144,664
Cumulative effect of adoption of new accounting standard (Note 2(p))		—		—		41		(41	)		—			—
Balances January 1, 2017		23,423,150		—		293,152		(148,319	)		(169	)		144,664
Options exercised		49,280		—		468		—			—			468
Stock-based compensation		—		—		3,839		—			—			3,839
Other comprehensive income		—		—		—		—			99			99
Net loss		—		—		—		(50,183	)		—			(50,183	)
Balances, December 31, 2017		23,472,430	$	—	$	297,459	$	(198,502	)	$	(70	)	$	98,887

The accompanying notes form an integral part of these consolidated financial statements

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AQUINOX PHARMACEUTICALS, INC.

Notes to the consolidated financial statements

1. Nature of operations

Aquinox Pharmaceuticals, Inc. and its subsidiary, Aquinox Pharmaceuticals (Canada) Inc., (consolidated, the “Company”) is a clinical stage pharmaceutical company developing novel therapeutics for chronic urological conditions marked by inflammation and pain. The Company is focused on leveraging its library of novel compounds that activate SHIP1 (SH2 containing inositol 5’ phosphatase 1) to develop therapeutics for application in inflammation, inflammatory pain, and blood cancers.

Aquinox Pharmaceuticals, Inc. was originally incorporated under the name of Aquinox Pharmaceuticals (USA) Inc. on May 31, 2007 in the State of Delaware, United States. On January 27, 2014, Aquinox Pharmaceuticals (USA) Inc. changed its name to Aquinox Pharmaceuticals, Inc. (“Aquinox USA”).

Aquinox Pharmaceuticals (Canada) Inc. (“AQXP Canada”) was originally incorporated under the name of 6175813 Canada Inc. on December 26, 2003 under the Canada Business Corporations Act. In May 2014, after a corporate restructuring, the name was changed to Aquinox Pharmaceuticals (Canada) Inc.

The Company operates in Vancouver, British Columbia, Canada and San Bruno, California.

2. Basis of presentation and summary of significant accounting policies

(a) Basis of presentation

The accompanying consolidated financial statements are presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial results are presented on a consolidated basis. All intercompany transactions are eliminated on consolidation.

(b) Capital requirements

The Company operates in a capital intensive business. To finance its operations, the Company is likely to require additional capital. The Company may seek to raise funds through equity or debt financing. There is no assurance that financing will be available to the Company or at terms acceptable to the Company. Failure to obtain sufficient funds on acceptable terms can have a negative impact on the Company’s business, results of operations, financial condition, cash flows and future prospects.

(c) Foreign currency translation and transactions

The functional currency of the Company and its subsidiary is the U.S. dollar. Monetary assets and liabilities of the Company’s operations denominated in a currency other than the U.S. dollar are re-measured into U.S. dollars at the exchange rate prevailing as at the balance sheet date. Non-monetary assets and liabilities acquired in a currency other than U.S. dollars are translated at historical exchange rates prevailing at each transaction date.

Income and expenses are translated at the exchange rates prevailing at each transaction date, with the exception of amortization which is translated at historical exchange rates. Exchange gains and losses on translation are included in the consolidated statements of operations and comprehensive loss.

(d) Use of estimates and assumptions

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets

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and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant areas requiring management estimates include valuation of stock options, amortization and depreciation, accrual of expenses, valuation allowance for deferred income taxes, and contingencies. Actual results could differ from those estimates.

(e) Cash and cash equivalents

All highly liquid investments with maturities of three months or less at the date of acquisition are considered to be cash equivalents.

(f) Short and long-term investments

Short-term investments consist of bank term deposits and U.S. government securities with initial maturities of less than a year. Long-term investments consist of U.S. government securities with initial maturities of greater than a year. Short-term investments and long-term investments are both classified as available-for-sale and carried at their estimated fair value with unrealized gains and losses recorded as a component of other comprehensive loss. Realized gains and losses are recorded in net loss. The Company periodically reviews its investments for impairment and when a decline in market value is deemed to be other than temporary, the loss is recognized in net loss.

(g) Property and equipment

Property and equipment are recorded at cost and are amortized using the straight-line basis over a range of three to five years.

Expenditures for improvements to the Company’s office spaces are capitalized and expenditures for maintenance and repairs are expensed as incurred. Tenant improvement allowances and rent holidays are included in deferred rent and recognized as a reduction in deferred rent over the term of the lease. Leasehold improvements are amortized over the lesser of useful life and term of the lease.

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on management’s assessment there were no indicators of impairment of property and equipment as at December 31, 2017 and 2016.

(h) Clinical trial accruals

As part of the process of preparing its consolidated financial statements, the Company is required to estimate expenses resulting from its obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company reflects the appropriate clinical trial expenses in the financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial.

During the course of a clinical trial, the Company adjusts the rate of clinical trial expense recognition if actual results differ from estimates. The Company prepares estimates of accrued expenses as of each balance sheet date

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in the financial statements based on facts and circumstances known at that time. Although the Company does not expect the estimates to be materially different from amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.

(i) Taxes

The Company accounts for income taxes using ASC 740, Income Taxes which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. In estimating future tax consequences, ASC 740 generally considers all expected future events other than enactments of and changes in the tax law or rates. The measurement of deferred tax assets is reduced, if necessary, by the extent of the valuation allowance. ASC 740 clarifies the criteria that must be met prior to recognition of the financial statement benefit of a position taken in a tax return. ASC 740 provides a benefit recognition model with a two-step approach consisting of a “more-likely-than-not” recognition criteria, and a measurement attribute that measures a given tax position as the largest amount of tax benefits that are more than 50% likely of being realized upon ultimate settlement. ASC 740 also requires the recognition of liabilities created by differences between tax positions taken in a tax return and amounts recognized in the financial statements.

Investment tax credits relating to scientific research and experimental development are accounted for as a reduction in operating expenses. To the extent there is reasonable assurance the credits will be realized, they are recorded in the period the related expenditure is made. If investment tax credit amounts subsequently received are less or more than originally recorded, the difference is treated as a change in estimate.

(j) Research and development costs

Research and development costs are charged to expense as incurred and include items such as: employee related expenses, including salaries and benefits, expenses incurred under agreements with contract research organizations and investigative sites that conduct clinical trials and preclinical studies, the cost of acquiring, developing and manufacturing clinical trial materials, facilities, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, and other supplies and costs associated with clinical trials, preclinical activities, and regulatory operations.

Development costs are expensed in the period incurred unless management believes a development project meets generally accepted accounting criteria for deferral and amortization. No product development expenditures have been deferred to date. The Company records costs for certain development activities, such as clinical trials, based on management’s evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued expense.

(k) Accounting for stock-based compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant date fair values.

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The Company estimates the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that requires management to make significant estimates and judgments. Prior to the completion of the Company’s initial public offering (“IPO”) in March 2014, the Company’s common stock was not publicly traded. As a result, the expected volatility assumption is based on industry peer information due to insufficient trading history of the Company’s common stock. Additionally, because the Company has no significant history to calculate the expected term, the simplified method calculation is used.

(l) Segment reporting

The Company operates in one segment, the identification and development of therapeutics for chronic urological conditions marked by inflammation and pain. The Company has significant Canadian operations but its assets are mostly held in the United States, comprising primarily of cash and cash equivalents, short-term investments and long-term investments of $96,230 as of December 31, 2017 (December 31, 2016 - $149,796), with an immaterial amount of long-lived assets in Canada.

(m) Net loss per common stock

Basic net loss per common stock is computed by dividing loss by the weighted-average number of common stock outstanding during the period. Diluted net loss per common stock is determined using the weighted-average number of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

(n) Fair value of financial instruments

ASC 820, Fair Value Measurements requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value. ASC 820 defines fair value as the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value of the Company’s financial instruments are determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the hierarchy are as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

(o) Concentration of credit risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents, short-term investments and long-term investments. Cash, cash equivalents and investments are invested in accordance with the Company’s investment policy. The primary

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objective for the Company’s investment portfolio is the preservation of capital and maintenance of liquidity and includes guidelines on the quality of financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk.

(p) Recently issued and recently adopted accounting standards

The Company adopted FASB ASU 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” effective January 1, 2017 which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The previous guidance required entities to separately present deferred tax assets and deferred tax liabilities as current or noncurrent in a classified balance sheet. This change did not have a material impact on the Company’s financial statements as a full valuation allowance has been applied against the deferred tax assets.

The Company adopted FASB ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017 which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company has elected to change its accounting policy to account for forfeitures as they occur instead of on an estimated basis as this will more accurately reflect the cost of forfeitures. The change has been applied on a modified retrospective approach with a cumulative-effect adjustment to retained deficit of an immaterial amount as of January 1, 2017. The provisions relating to the accounting for income taxes has no significant impact on the consolidated financial statements as the Company applies a full valuation allowance against its deferred tax assets.

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company does not anticipate a material impact to the Company’s financial statements as a result of this adoption.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires the recognition of right-of-use assets and lease liabilities by lessees for those leases with a lease term of greater than 12 months. Upon the adoption of ASU 2016-02, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of ASU 2016-02 on the Company’s financial statements and whether to elect to apply the optional practical expedients under the modified retrospective approach.

(q) Risks and uncertainties

The Company is subject to numerous risks and uncertainties. These risks, among others, included the following:

• the Company has no source of revenue, has an accumulated deficit of $198.5 million as of December 31, 2017, may never become profitable and may incur substantial and increasing net losses for the foreseeable future as it continues development of, seeks regulatory approvals for, and potentially begins to commercialize rosiptor, its lead product candidate, and any future product candidates;

• the Company is likely to require additional capital to finance its operations which may not be available to it on acceptable terms, or at all;

• the Company’s success is primarily dependent on the successful development, regulatory approval and commercialization of rosiptor, its lead product candidate, and any future product candidates;

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• SHIP1 has not been validated as a target for the treatment of any disease;

• the Company is subject to regulatory approval processes that are lengthy, time consuming and inherently unpredictable; the Company may not be able to obtain approval for rosiptor or any future product candidates from the U.S. Food and Drug Administration, or FDA, or foreign regulatory authorities;

• the Company’s intellectual property rights may be subject to claims by third parties and can be difficult and costly to protect;

• the Company may not be able to recruit or retain key employees, including its senior management team;

• the Company depends on the performance of third parties, including contract research organizations and third-party manufacturers; and

• the Company faces competition from other pharmaceutical and biotechnology companies, academic institutions, governmental agencies, and public and private research institutions, among others.

3. Cash and cash equivalents

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Cash	$	12,583	$	3,726
Cash equivalents		39,449		28,575
	$	52,032	$	32,301

4. Property and equipment

	DECEMBER 31, 2017
(in thousands)	COST		ACCUMULATED AMORTIZATION		NET BOOK VALUE
Leasehold improvements	$	715	$	259	$	456
Office furniture, equipment and systems		725		276		449
	$	1,440	$	535	$	905
	DECEMBER 31, 2016
(in thousands)	COST		ACCUMULATED AMORTIZATION		NET BOOK VALUE
Leasehold improvements	$	490	$	77	$	413
Office furniture, equipment and systems		534		98		436
	$	1,024	$	175	$	849

5. Accounts payable and other liabilities

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Trade accounts payable	$	6,016	$	6,860
Accrued clinical/preclinical expenses		2,667		1,381
Accrued compensation and vacation		1,553		1,024
Other liabilities		720		254
	$	10,956	$	9,519

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6. Other liabilities

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Capital lease obligations (a)	$	33	$	47
Deferred rent liability		453		150
	$	486	$	197

(a) Capital lease obligations

The Company leases office equipment under capital leases with interest rates ranging from 6.94% to 8.56% per annum. At December 31, 2017, the future payments under the Company’s capital leases were as follows:

(in thousands)	AMOUNT
2018	$	19
2019		19
2020		17
Total minimum lease payments		55
Less: amount representing interest		(6	)
Present value of future minimum lease payments		49
Less: current portion		(16	)
Capital lease obligations, net of current portion - December 31, 2017	$	33

The net book value of the office equipment under capital leases as of December 31, 2017 and 2016 was $0.1 million and $0.1 million, respectively, with an immaterial amount related to accumulated depreciation.

7. Stockholders’ equity

(a) Common stock

Aquinox USA is authorized to issue 50,000,000 shares of common stock with a par value of $0.000001 per share (December 31, 2016 – 50,000,000). As of December 31, 2017, total number of shares of common stock issued and outstanding was 23,472,430 (December 31, 2016 – 23,423,150).

(b) Preferred stock

Aquinox USA is authorized to issue 5,000,000 shares of preferred stock with a par value of $0.000001 per share (December 31, 2016 – 5,000,000). As of December 31, 2017 and December 31, 2016, no shares of preferred stock were issued or outstanding.

(c) Public offerings

On September 15, 2015, the Company completed an underwritten public offering of 6,325,000 shares of its common stock at a price to the public of $15.50 per share. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and offering costs of approximately $6.2 million, were $91.8 million.

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On September 23, 2016, the Company completed an underwritten public offering of 6,152,500 shares of its common stock at a price to the public of $12.25 per share. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and offering costs of approximately $4.7 million, were $70.7 million.

(d) Stock option plan

On January 27, 2014, the stockholders of Aquinox USA approved a 2014 Equity Incentive Plan (“2014 Plan”). The 2014 Plan became effective on the date of the prospectus for the IPO, March 6, 2014. The 2014 Plan is the successor to and continuation of the Joint Canadian Stock Option Plan (the “2006 Plan”). No further grants will be made under the 2006 Plan. The 2014 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of equity awards to employees, directors, and consultants.

As of December 31, 2017, the maximum number of shares of common stock that may be issued under the 2014 Plan was 2,856,403. The number of shares of common stock reserved for issuance under the 2014 Plan will increase by the number of shares subject to stock options granted under the 2006 Plan that would have otherwise returned to the 2006 Plan, such as upon the expiration or termination of a stock award prior to vesting. As of December 31, 2017, there were 323,310 shares subject to stock options granted under the 2006 Plan. Additionally, the number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year for a period of up to 10 years, beginning on January 1, 2015 and ending on and including January 1, 2024, by 4% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the board of directors.

At December 31, 2017, the number of shares available to be granted under the 2014 Plan was 1,110,546 (December 31, 2016—913,720).

Stock option transactions and the number of stock options outstanding are summarized below:

	NUMBER OF SHARES			WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
Outstanding at December 31, 2016		1,378,352		$	9.38	7.81	$9,829
Options granted		837,540			16.63
Options exercised		(49,280	)		9.10
Options forfeited		(97,445	)		12.29
Outstanding at December 31, 2017		2,069,167		$	12.18	7.76	$3,187
Exercisable as of December 31, 2017		912,098		$	9.52	6.35	$2,248

During the year ended December 31, 2017, the Company granted 756,540 stock options to employees and 81,000 stock options to non-employee directors. The stock options granted to employees during the year ended December 31, 2017 have exercise prices per share ranging from $10.91 to $17.35 and vest 25% one year after the beginning of the vesting period and thereafter ratably each month over the following thirty-six months. The stock options granted to non-employee directors during the year ended December 31, 2017 have an exercise price per share of $13.74 and have a vesting period of one year in equal monthly installments from the beginning of the vesting period for certain grants and a vesting period of three years in equal annual installments from the beginning of the vesting period for other grants. All stock options under the 2014 Plan are subject to a 10-year expiration period.

During the year ended December 31, 2017, 49,280 shares of common stock were issued upon exercise of options with an aggregate intrinsic value of $0.2 million.

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(e) Stock-based compensation

The fair value of stock options granted is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Expected volatility		84	%		82	%		97	%
Expected dividends		0	%		0	%		0	%
Expected terms (years)		6.00			6.00			6.00
Risk free rate		1.90	%		1.24	%		1.48	%
Weighted average grant-date fair value of stock options	$	11.85		$	6.11		$	8.91

Stock options are granted with exercise prices as determined by the Board of Directors at the date of grant. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. As prior to the completion of the IPO in March 2014, the Company was a private company, the Company does not have sufficient historical experience for determining the expected term of the stock option awards granted. The Company has based its expected term for awards issued to employees on the simplified method, which represents the average period from vesting to the expiration of the stock option. In addition, the Company does not have sufficient trading history for the Company’s common stock, and therefore, the expected stock price volatility for the Company’s common stock was estimated by taking the average historical price volatility for industry peers. The Company has never declared or paid any cash dividends to common stockholders and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero. The risk-free interest rate was based on the yields of treasury securities with maturities similar to the expected term of the options for each option group.

The Company amortizes the fair value of the stock options on a straight-line basis over the applicable requisite service periods of the awards, which is generally the vesting period. Stock-based compensation expense charged to operating expenses was $3.8 million, $2.0 million and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $10.1 million and $4.6 million as of December 31, 2017 and December 31, 2016, respectively, which is expected to be recognized over a weighted-average period of 2.72 years (December 31, 2016 – 2.82 years).

8. Other income (expenses)

	YEARS ENDED DECEMBER 31,
(in thousands)	2017			2016			2015
Change in fair value of derivative liability	$	—		$	81		$	(52	)
Foreign exchange losses		(19	)		(13	)		(476	)
Interest income		998			619			108
Miscellaneous expenses		(39	)		(43	)		(100	)
	$	940		$	644		$	(520	)

9. Net loss per common stock

Basic and diluted net loss per common stock is computed by dividing net loss by the weighted average number of common stock outstanding. The Company excluded outstanding stock options and common stock warrants from the calculation of basic and diluted net loss per common stock as the effect would have been antidilutive for all periods presented.

91

The following have been excluded from the computation of basic and diluted net loss per common stock as their effect would have been antidilutive:

	DECEMBER 31, 2017		DECEMBER 31, 2016		DECEMBER 31, 2015
Outstanding stock options		2,069,167		1,378,352		865,457
Common stock warrants		—		—		11,363
Total		2,069,167		1,378,352		876,820

10. Income taxes

Income tax recovery varies from the amounts that would be computed by applying the expected Canadian income tax rate (26%) and U.S. income tax rates (40.75%). The combined Canadian and U.S. income tax rates of 27.89% (2016 – 27.28%; 2015 –27.4%) was applied to loss before income taxes as shown in the following table:

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Computed taxes at combined Canadian and U.S. tax rates		(27.9	)%		(27.3	)%		(27.4	)%
Change in tax rate		(3.6	)		—			0.1
Non-deductible expenses		2.2			1.8			2.0
Research and development credits		(0.9	)		(3.5	)		—
Change in valuation allowance		25.4			28.4			25.3
Effect of the U.S. Tax Cuts and Jobs Act		4.6			—			—
Other		0.2			0.6			—
Income tax recovery		—			—			—

On December 22, 2017, the U.S. passed into law H.R.1 (originally known as the “Tax Cuts and Jobs Act”), or the Act, which significantly overhaul the U.S. tax system. Significant changes to the Internal Revenue Code include a reduction in the U.S. federal corporate tax rate from 35% to 21%. The Company’s accounting for the provisions of the Act, based on the Company’s understanding of the Act and the latest guidance available, resulted in a $2.3 million reduction in its net deferred income tax assets as of December 31, 2017 to reflect the new statutory tax rate. This reduction to the net deferred income tax assets was fully offset by a corresponding reduction in the valuation allowance.

(in thousands)	YEARS ENDED DECEMBER 31,
Net loss before taxes:		2017			2016			2015
Canada	$	(43,758	)	$	(31,737	)	$	(18,382	)
U.S.		(6,425	)		(5,265	)		(3,478	)
Total	$	(50,183	)	$	(37,002	)	$	(21,860	)

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Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes. The significant components of the deferred income tax assets are as follows:

(in thousands)	DECEMBER 31, 2017			DECEMBER 31, 2016
Canadian net operating losses	$	35,605		$	24,049
U.S. net operating losses		3,749			3,889
Research and development deductions and credits		8,234			7,331
Other		1,810			1,389
Less: valuation allowance		(49,398	)		(36,658	)
Net deferred income tax assets	$	—		$	—

At December 31, 2017, the Company had Canadian net operating losses carried forward for tax purposes which were available to reduce taxable income of future years of approximately $131.9 million (December 31, 2016—approximately $92.5 million) expiring commencing in 2025 through 2037, and U.S. net operating losses carried forward for tax purposes which were available to reduce taxable income of future years of approximately $23.2 million (December 31, 2016—approximately $11.1 million).

The Company also had unclaimed Canadian tax deductions with no expiry for scientific research and experimental development expenditures of approximately $16.8 million at December 31, 2017 (December 31, 2016–approximately $15.6 million). In addition, at December 31, 2017, the Company had approximately $4.5 million (December 31, 2016—approximately $4.0 million) of investment tax credits available to offset Canadian federal and provincial taxes payable expiring commencing in 2019 through 2036.

Under ASC 740, the benefit of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of the benefit of an uncertain tax position may be recognized if the position has less than a 50% likelihood of being sustained. The Company currently does not have any unrecognized tax benefits of uncertain tax positions. The Company does not expect any significant increases to its unrecognized tax benefits within twelve months of the reporting date.

The Company currently files income tax returns in the United States and Canada, the jurisdictions in which the Company believes that it is subject to tax. Further, while the statute of limitations in each jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carry-forwards, the limitation period for examination generally does not expire until several years after the loss carry-forwards are utilized. Other than routine audits by tax authorities for tax credits and tax refunds that the Company has claimed, the Company is not aware of any other material income tax examination currently in progress by any taxing jurisdiction.

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11. Financial instruments

Securities classified as available for sale

The Company’s short-term and long-term investments consist of available-for-sale securities as follows:

(in thousands) December 31, 2017	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Short-term investments:
U.S. treasury securities	$	56,123	$	—	$	(70	)	$	56,053
Contractual maturities:
Due within one year	$	56,123						$	56,053
December 31, 2016	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Short-term investments:
U.S. treasury securities	$	70,819	$	—	$	(61	)	$	70,758
Long-term investments:
U.S. treasury securities	$	50,155	$	—	$	(109	)	$	50,046
Contractual maturities:
Due within one year	$	70,819						$	70,758
Due after one year through two years		50,155							50,046

The aggregate estimated fair value of the Company’s investments with unrealized losses are as follows:

	Period of continuous unrealized loss
(in thousands)	12 months or less					Greater than 12 months
	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
December 31, 2017
U.S. treasury securities	$	15,983	$	(27	)	$	40,070	$	(43	)
December 31, 2016
U.S. treasury securities	$	120,804	$	(170	)		N/A		N/A

Fair value of financial instruments

The fair value of the Company’s financial instruments are determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The carrying amounts of certain of the Company’s financial instruments including cash, cash equivalents, receivables, accounts payable and other liabilities, approximate their fair values because of their nature and/or short maturities. The Company holds short and long-term investments that are classified as available-for-sale securities, which are measured at fair value determined on a recurring basis according to the fair value hierarchy.

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The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:

(in thousands)	QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UN-OBSERVABLE INPUTS (LEVEL 3)		TOTAL
BALANCES – December 31, 2017
Short-term investments – U.S. treasury securities	$	56,053	$	—	$	—	$	56,053
	$	56,053	$	—	$	—	$	56,053
BALANCES – December 31, 2016
Short-term investments – U.S. treasury securities	$	70,758	$	—	$	—	$	70,758
Long-term investments – U.S. treasury securities		50,046		—		—		50,046
	$	120,804	$	—	$	—	$	120,804

Level 1 instruments, which include investments that are valued based on quoted market prices in active markets, consisted of U.S. treasury securities.

Level 2 instruments include investments for which all significant inputs are observable. The Company had no Level 2 investments at December 31, 2017 and December 31, 2016.

Level 3 instruments include investments for which significant inputs to the fair value of the assets or liabilities are unobservable and are supported by little or no market activity. The Company had no Level 3 investments at December 31, 2017 and December 31, 2016. There were no transfers between Levels 1, 2, and 3 during the years ended December 31, 2017 and December 31, 2016.

At December 31, 2017, the Company had short-term investments consisting of available-for-sale securities of $56.1 million. Total gains for securities were $0.9 million, $0.6 million and $0.1 million for the years ending December 31, 2017, 2016 and 2015, respectively.

12. License and patent agreements

The Company has an agreement with Biolipox AB of Sweden for patent rights relating exclusively or principally to a specific class of compounds, which include rosiptor. The terms of the agreement required the Company to pay CAD $50,000 immediately, CAD $250,000 in shares of common stock upon the first submission to the FDA of an Investigational New Drug (IND) for a compound from the acquired class of compounds, and CAD $3.0 million upon the advancement of one of the compounds from the acquired class of compounds into a Phase 3 clinical trial. Certain other milestone payments, totaling CAD $1.5 million are payable upon the first commercial sale following regulatory approval of the first compound in each of the United States, Europe and Japan. There are no royalty payments due under this agreement. In June 2014, the Company issued 19,762 shares of common stock to Biolipox AB as payment for achievement of the milestone related to the first submission to the FDA of an IND for rosiptor. A CAD $3.0 million milestone payment was paid in November 2016 as a result of the advancement of rosiptor into a Phase 3 clinical trial. The development of the technology is actively proceeding.

95

The Company has an exclusive license agreement with the University of British Columbia for a worldwide license to certain small molecule compounds and pharmaceutical compositions that are modulators of SHIP1 activity. The agreement expires at the earlier of the last expiry of any patent obtained related to the technology or through enactment of one of the termination clauses stipulated in the agreement. The Company paid annual maintenance fees of CAD $1,000 related to this agreement for the year ended December 31, 2017 (December 31, 2016 – CAD $1,000) and have contingent payments totaling up to CAD $2.2 million for the first drug product and CAD $1.5 million for each subsequent drug product plus low single-digit royalties. The Company does not currently have any product candidates under development that are covered by the UBC license agreement.

The Company has an agreement with the British Columbia Cancer Agency and StemCell Technologies, Inc. for the assignment to the Company of certain patents to technology relating to SHIP1 in return for low single-digit royalty payment on product sales or low double-digit percentage of sublicense revenue. The agreement is to expire at the later of 20 years from the effective date of the agreement or upon the expiration of the last patent covered by the license. The Company incurred maintenance fees of CAD $5,000 related to this agreement during the years ended December 31, 2017, 2016 and 2015. The Company does not currently have any product candidates under development that are covered by this agreement.

13. Commitments and contingencies

As at December 31, 2017, the Company has obligations to make future minimum payments with respect to operating leases for office space.

The Company has a lease agreement for approximately 10,946 square feet of office space in Canada which commenced on November 1, 2016 and expires October 31, 2021, with the option to extend the lease to October 31, 2026. On December 22, 2016, the Company signed a lease agreement for an additional 2,500 square feet of office space in Canada. The lease for the additional 2,500 square feet expires June 30, 2019. In addition to the basic rent, the Company is obligated to pay for taxes, operating costs, utilities, additional services and other amounts. These leases are denominated in Canadian dollars and are included in the table below at their U.S. dollar equivalent.

The Company has a lease agreement for approximately 3,520 square feet of office space in San Bruno, California which commenced on January 1, 2016 and expires on December 31, 2018. On January 7, 2017, the Company signed a lease agreement to expand the San Bruno, California office space by an additional 6,019 square feet which is effective February 1, 2017 and expires December 31, 2018. In addition to the basic rent, the Company is obligated to pay for taxes, operating costs, utilities, additional services and other amounts.

The lease agreements contain scheduled rent increases, rent holidays and tenant improvement allowance. As such, the Company has recorded a deferred rent liability of $0.5 million as at December 31, 2017.

The minimum lease payments under the non-cancelable operating leases are payable in the following amounts over the following years.

	2018		2019		2020		2021		Total
Operating lease obligations	$	883	$	403	$	375	$	312	$	1,973
	$883		$403		$375		$312		$1,973

During the years ended December 31, 2017, 2016 and 2015, the Company incurred operating lease costs of $0.7 million, $0.4 million and $0.2 million, respectively.

In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. Although the Company cannot predict with assurance the outcome of any litigation, it does not believe there are currently any such actions that, if resolved unfavorable, would have a material impact on the Company’s financial condition, results of operations or cash flows.

96

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

None.

Item 9A. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this annual report. Based on that evaluation, they have concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were, in design and operation, effective at a reasonable assurance level.

(b) Changes in internal control over financial reporting. There have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.

(d) Inherent limitation on the effectiveness of internal control. The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting

Item 9B. Other Information.

On March 9, 2018, our Board of Directors, on the recommendation of the Compensation Committee, approved increases in the 2018 base salaries for our named executive officers: David Main, our Chief Executive Officer and President (USD $535,000), Kamran Alam, our Chief Financial Officer and Vice President, Finance (USD $365,000), and Abigail Jenkins, our Chief Commercial Officer (USD $356,000).

97

PART III

The information required by Part III is omitted from this report because we will file a definitive proxy statement within 120 days after the end of our 2017 fiscal year pursuant to Regulation 14A for our 2018 Annual Meeting of Stockholders, or the 2018 Proxy Statement, and the information to be included in the 2018 Proxy Statement is incorporated herein by reference.

Item 10. Directors, Executive Officers and Corporate Governance.

(1) The information required by this Item concerning our executive officers and our directors and nominees for director, including information with respect to our audit committee and audit committee financial expert, may be found under the section entitled “Proposal No. 1 Election of Directors,” “Information Regarding the Board of Directors and Corporate Governance,” and “Executive Officers” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

(2) The information required by this Item concerning our code of ethics may be found under the section entitled “Information Regarding the Board of Directors and Corporate Governance” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

(3) The information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 may be found in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

Item 11. Executive Compensation.

The information required by this Item may be found under the sections entitled “Director Compensation,” “Executive Compensation” and “Equity Compensation Plan Information” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

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

(1) The information required by this Item with respect to security ownership of certain beneficial owners and management may be found under the section entitled “Security Ownership of Certain Beneficial Owners and Management” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

(2) The information required by this Item with respect to securities authorized for issuance under our equity compensation plans may be found under the sections entitled “Equity Compensation Plan Information” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

(1) The information required by this Item concerning related party transactions may be found under the section entitled “Transactions with Related Persons” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

(2) The information required by this Item concerning director independence may be found under the sections entitled “Information Regarding the Board of Directors and Corporate Governance—Independence of the Board of Directors” and “Information Regarding the Board of Directors and Corporate Governance – Information Regarding Committees of the Board of Directors” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by this Item may be found under the section entitled “Proposal No. 2 Ratification of Appointment of Independent Registered Public Accounting Firm” appearing in the 2018 Proxy Statement. Such information is incorporated herein by reference.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report:

(1) Financial Statements and Report of Independent Registered Public Accounting Firm

(2) Financial Statement Schedules

Financial Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

(3) Exhibits are incorporated herein by reference or are filed with this report as indicated below (numbered in accordance with Item 601 of Regulation S-K).

(b) Exhibits

The exhibits listed below on the Exhibit Index are filed herewith or are incorporated by reference to exhibits previously filed with the SEC.

EXHIBIT INDEX

Exhibit Number	Description	Incorporated by Reference
		Form	File No.	Exhibit	Filing Date	Filed Herewith
3.1	Amended and Restated Certificate of Incorporation of Aquinox Pharmaceuticals, Inc.	8-K	001-36327	3.1	March 12, 2014
3.2	Amended and Restated Bylaws of Aquinox Pharmaceuticals, Inc.	S-1	333-193615	3.6	February 28, 2014
4.1	Specimen Common Stock Certificate of Aquinox Pharmaceuticals, Inc.	10-Q	001-36327	4.1	May 13, 2014
4.2	Registration Rights Agreement, dated September  19, 2016, by and between Aquinox Pharmaceuticals, Inc. and the persons listed on Schedule A attached thereto.	8-K	001-36327	10.1	September 20, 2016
10.1+	Joint Canadian Stock Option Plan.	S-1	333-193615	10.1	January 28, 2014
10.2+	Forms of Option Agreement for Registrant’s Joint Canadian Stock Option Plan.	S-1	333-193615	10.2	January 28, 2014
10.3+	2014 Equity Incentive Plan	S-1	333-193615	10.3	January 28, 2014
10.4+	Forms of Option Agreement and Option Grant Notice for Registrant’s 2014 Equity Incentive Plan	S-1	333-193615	10.4	January 28, 2014
10.5+	Form of Executive Employment Agreement (AQXP Canada)	10-Q	001-36327	10.1	November 4, 2014
10.6+	Form of Agreement Regarding Executive Compensation in U.S. dollars	10-K	001-36327	10.6	March 14, 2016

99

Exhibit Number	Description	Incorporated by Reference
		Form	File No.	Exhibit	Filing Date	Filed Herewith
10.7+	Form of Executive Employment Agreement (AQXP USA)	10-K	001-36327	10.7	March 14, 2016
10.8	Form of Indemnity Agreement entered into between the Registrant and each of its directors and its executive officers.	S-1	333-193615	10.5	January 28, 2014
10.9†	Asset Purchase Agreement by and between the Registrant and Biolipox AB, dated August 19, 2009.	S-1	333-193615	10.12	February 28, 2014
10.15	Office Space Lease between 560677 B.C. Ltd. and Aquinox Pharmaceuticals (Canada), Inc. dated February 5, 2016.	8-K	001-36327	10.1	February 10, 2016
10.16	Office Space Lease between CCF RPP Bayhill, LLC, and Aquinox Pharmaceuticals, Inc. dated December 10, 2015.					X
10.17	First Amendment to Lease between Google Inc. and Aquinox Pharmaceuticals, Inc. dated January 9, 2017					X
21.1	List of subsidiaries of the Registrant.	S-1	333-193615	21.1	January 28, 2014
23.1	Consent of Deloitte LLP, Independent Registered Public Accounting Firm.					X
31.1	Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.					X
31.2	Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.					X
32.1*	Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.					X

100

Exhibit Number	Description	Incorporated by Reference
		Form	File No.	Exhibit	Filing Date	Filed Herewith
32.2*	Certification of Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.					X
101.INS	Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

+ Indicates a management contract or compensatory plan.

† Pursuant to a request for confidential treatment, portions of this exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934.

* Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

Item 16. Form 10-K Summary.

N/A

101

SIGNATURES

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

	Aquinox Pharmaceuticals, Inc.
Date: March 12, 2018	By:	/S/David J. Main
		David J. Main President & Chief Executive Officer (Principal Executive Officer)

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

Signature	Title	Date
/s/ David J. Main David J. Main	Director, President & CEO (Principal Executive Officer)	March 12, 2018
/s/ Kamran Alam Kamran Alam	Chief Financial Officer (Principal Financial and Accounting Officer)	March 12, 2018
/s/ Gary Bridger Gary Bridger	Director	March 12, 2018
/s/ Daniel Levitt Daniel Levitt	Director	March 12, 2018
/s/ Richard Levy Richard Levy	Director	March 12, 2018
/s/ Kelvin Neu Kelvin Neu	Director	March 12, 2018
/s/ Sean Nolan Sean Nolan	Director	March 12, 2018
/s/ Robert Pelzer Robert Pelzer	Director	March 12, 2018
/s/ Todd Simpson Todd Simpson	Director	March 12, 2018

102

EX-10.16

EXHIBIT 10.16

• THE LAKES AT BAYHILL •

• 1150, 1200, AND 1250 BAYHILL DRIVE •

• OFFICE BUILDING LEASE •

BASIC LEASE INFORMATION

Date of Lease:	December 10, 2015
Landlord:	CCF RPP BAYHILL, LLC, a Delaware limited liability company
Landlord’s Address for Notices:	100 Montgomery Street Suite 1760 San Francisco, California 94104 Attn: Razmig Boladian
Tenant:	AQUINOX PHARMACEUTICALS, INC., a Delaware corporation
Tenant’s Address for Notices:	Suite 450 – 887 Great Northern Way, Vancouver, British Columbia, Canada, V5T 4T5 Attn: Kamran Alam, VP Finance & CFO
Building:	1150 Bayhill Drive, San Bruno, California
Leased Premises:	Approximately 3,520 rentable square feet located in Suite 200
Rentable Area:
Leased Premises:	Approximately 3,520 rentable square feet
Building:	Approximately 48,768 rentable square feet
Project:	Approximately 147,762 rentable square feet
Term Commencement Date:	The later of (i) January 1, 2016, or (ii) the date that the Tenant Improvements (as defined in Exhibit B) are Substantially Complete (as defined in Exhibit B).
Term Expiration Date:	The last day of the thirty-sixth (36th) full calendar month after the Term Commencement Date (meaning if the Term Commencement Date shall occur on a date other than the first day of a calendar month, the Term shall be thirty-six (36) full calendar months plus a partial month).
Option to Extend:	Number of Option Terms:	One (1)
	Year(s) per Option Term:	Three (3)
Base Rent:	Month	Base Rent Per Month
	Term Commencement
	Date through the last
	day of the 12th full
	calendar month after
	the Term Commencement
	Date:	$12,848.00

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	Notwithstanding the foregoing, so long as Tenant is not in breach or continuous default under this Lease, Base Rent for the first two (2) months after the Term Commencement Date (the “Base Rent Abatement Period”) shall be abated (the collective Base Rent abatement during the Base Rent Abatement Period is equivalent to $25,696.00). Notwithstanding the foregoing, in the event this Lease is terminated prior to the expiration of the Term in connection with a breach or default by Tenant, Tenant shall, in addition to any and all amounts payable by Tenant, repay the entire amount of abated Base Rent to Landlord immediately upon such termination. For clarity, Tenant’s sub-lease or permitted assignment of Lease does not constitute a termination of Lease for purposes of repaying the abated Base Rent.
	Month 13 through
	Month 24:	$13,233.44
	Month 25 through
	Month 36:	$13,630.44
Base Year:	Calendar year 2016 (subject to Section 3.4(a))
Tenant’s Proportionate
Share:	Approximately 7.2% of the Building and 2.38% of the Project
Parking Spaces:	Eleven (11) unreserved, surface parking spaces (based on 3.1 parking spaces per 1,000 rentable square feet of Rentable Area of the Leased Premises).
Security Deposit:	$13,630.44, which shall be paid upon execution of this Lease.
Guarantor:	None.
Landlord’s Broker:	Simon Clark and Matthew Mulry of CBRE, Inc.
Tenant’s Broker:	Rick Friday of CBRE, Inc.

EXHIBITS:

Exhibit A -	Floor Plan of the Leased Premises
Exhibit A-1 -	Site Plan of the Project
Exhibit B -	Initial Improvement of the Leased Premises
Exhibit C -	Confirmation of Term of Lease
Exhibit D -	Building Rules and Regulations

The foregoing BASIC LEASE INFORMATION is incorporated herein and made a part of the LEASE to which it is attached. If there is any conflict between the BASIC LEASE INFORMATION and the LEASE, the BASIC LEASE INFORMATION shall control.

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OFFICE BUILDING LEASE

THIS LEASE is made as of the date specified in the BASIC LEASE INFORMATION sheet, by and between the landlord specified in the BASIC LEASE INFORMATION sheet (“Landlord”) and the tenant specified in the BASIC LEASE INFORMATION sheet (“Tenant”).

Article 1.

Definitions

1.1 Definitions: Terms used herein shall have the following meanings:

1.2 “Additional Rent” shall mean all monetary obligations of Tenant under this Lease other than the obligation for payment of Gross Rent.

1.3 Intentionally deleted.

1.4 “Base Rent” shall mean the minimum monthly rental amounts set forth in the Basic Lease Information due from time to time as rental for the Leased Premises.

1.5 “Base Year” shall mean the calendar year specified on the Basic Lease Information sheet.

1.6 “Basic Operating Costs” shall have the meaning given in Section 3.5.

1.7 “Building” shall mean the building and other improvements associated therewith identified on the Basic Lease Information sheet.

1.8 “Building Standard Improvements” shall mean the standard materials ordinarily used by Landlord in the improvement of the Leased Premises.

1.9 “Common Areas” shall mean, as applicable, (a) the areas of the Building devoted to non-exclusive uses such as common corridors, lobbies, fire vestibules, elevator foyers, stairways, elevators, electric and telephone closets, restrooms, mechanical closets, janitor closets, loading docks, and other similar facilities for the benefit of all tenants (and invitees), and (b) other areas of the Project available for the non-exclusive use and benefit of all tenants (and invitees).

1.10 “Computation Year” shall mean a fiscal year consisting of the calendar year commencing January 1st of the Base Year and continuing through the Term with a short or stub fiscal year in (i) the Base Year for the period between the Term Commencement Date and December 31 of such year and (ii) any partial year in which the Lease expires or is terminated for the period between January 1 of such year and the date of lease termination or expiration.

1.11 “Gross Rent” shall mean the total of Base Rent and Tenant’s Proportionate Share of Basic Operating Costs and Tenant’s Proportionate Share of Property Taxes.

1.12 “Landlord’s Broker” shall mean the individual or corporate broker identified on the Basic Lease Information sheet as the broker for Landlord.

1.13 Intentionally deleted.

1.14 Intentionally deleted.

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1.15 “Leased Premises” shall mean the floor area more particularly shown on the floor plan attached hereto as Exhibit A, containing the Rentable Area (as such term is defined in Section 1.19 below) specified on the Basic Lease Information sheet.

1.16 “Permitted Use” shall mean general office and other ancillary office use, subject to the provisions set forth in this Lease; provided, however, that Permitted Use shall not include (a) offices or agencies of any foreign government or political subdivision thereof; (b) offices of any agency or bureau of any state, county or city government; (c) offices of any health care professionals; (d) schools or other training facilities which are not ancillary to corporate, executive or professional office use; (e) retail, restaurant, church or worship uses; or (f) telephone call centers, data centers, internet service provider facilities.

1.17 “Project” shall mean the three (3) buildings with an address of 1150 Bayhill Drive, 1200 Bayhill Drive, and 1250 Bayhill Drive, San Bruno, California, the parking and Common Areas affiliated therewith, and the real property on which the buildings and the parking and Common Areas are located.

1.18 “Rent” shall mean Gross Rent plus Additional Rent.

1.19 “Rentable Area” shall mean the number of rentable square feet included within the Building as calculated in accordance with the methods of measuring rentable square feet, as that method is described in the American National Institute Publication ANSI Z65.1-1996, as promulgated by the Building Owners and Managers Association (the “BOMA Standard”). The number of rentable square feet in the Leased Premises may also be calculated by measuring the number of usable square feet within the Leased Premises calculated in accordance with the BOMA Standard and increasing the number of usable square feet by fifteen percent (15%), and the rentable square footage of the Leased Premises is agreed for all purposes of this Lease to be the amount stated on the Basic Lease Information sheet; accordingly, neither Landlord nor Tenant shall have the right to remeasure the Leased Premises.

1.20 “Security Deposit” shall mean the amount specified on the Basic Lease Information sheet to be paid by Tenant to Landlord and held and applied pursuant to Section 5.14.

1.21 Intentionally deleted.

1.22 Intentionally deleted.

1.23 “Tenant Improvements” shall have the meaning given in Exhibit B, if any.

1.24 “Tenant’s Broker” shall mean the individual or corporate broker identified on the Basic Lease Information sheet as the broker for Tenant.

1.25 Intentionally deleted.

1.26 “Tenant’s Proportionate Share” is specified on the Basic Lease Information sheet and is based on the percentage which the Rentable Area of the Leased Premises bears to the total Rentable Area of either the Building or the Project (at Landlord’s election from time to time). Landlord shall have the right to (i) adjust Tenant’s Proportionate Share from time to time in accordance with the provisions herein relating to Cost Pools (as hereinafter defined) and (ii) recalculate Tenant’s Proportionate Share from time to time in any reasonable manner as a result of a physical change in the size of the Building, as determined by Landlord.

1.27 “Term” shall mean the period commencing with the Term Commencement Date and ending at midnight on the Term Expiration Date. If Tenant has the right to any Options (as expressly set forth in this Lease), all references in this Lease to the “Term” shall be deemed to mean the initial Term as extended by the Option Terms, as applicable.

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1.28 “Term Commencement Date” shall be the date set forth on the Basic Lease Information sheet.

1.29 “Term Expiration Date” shall be the date set forth on the Basic Lease Information sheet, unless sooner terminated pursuant to the terms of this Lease or unless extended pursuant to the provisions of Section 8.1.

1.30 Other Terms. Other terms used in this Lease and on the Basic Lease Information sheet shall have the meanings given to them herein and thereon.

Article 2.

Leased Premises

2.1 Lease. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Leased Premises upon all of the terms, covenants and conditions set forth in this Lease. If more than one person or entity is named as Tenant, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as Tenant.

2.2 Acceptance of Leased Premises. Tenant acknowledges that: (a) it has been advised by Landlord, Landlord’s Broker and Tenant’s Broker, if any, to satisfy itself with respect to the condition of the Leased Premises (including, without limitation, the HVAC, electrical, plumbing and other mechanical installations, fire sprinkler systems, security, environmental aspects, and compliance with applicable laws, ordinances, rules and regulations) and the present and future suitability of the Leased Premises for Tenant’s intended use; (b) Tenant has made such inspection and investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Tenant’s occupancy of the Leased Premises and the term of this Lease; and (c) neither Landlord nor Landlord’s Broker nor any of Landlord’s agents has made any oral or written representations or warranties with respect to the condition, suitability or fitness of the Leased Premises other than as may be specifically set forth in this Lease. Tenant accepts the Leased Premises in its AS IS condition existing on the date Tenant executes this Lease, subject to all matters of record (including, but not limited to, the CC&R’s) and applicable laws, ordinances, rules and regulations. Tenant acknowledges that neither Landlord nor Landlord’s Broker nor any of Landlord’s agents has agreed to undertake any alterations or additions or to perform any maintenance or repair of the Leased Premises except for the routine maintenance and janitorial work specified herein and except as may be expressly set forth in Exhibit B. If Landlord, for any reason whatsoever, cannot deliver possession of the Leased Premises to Tenant on the estimated commencement date in the condition specified in this Section 2.2, Landlord shall neither be subject to any liability nor shall the validity of this Lease be affected; provided, the Term and the obligation to pay Rent shall commence on the date possession is actually tendered to Tenant and the Term Expiration Date shall be extended commensurately. If the commencement date and/or the expiration date of this Lease is other than the Term Commencement Date and Term Expiration Date specified in the Basic Lease Information, the parties shall execute a written amendment to this Lease, substantially in the form of Exhibit C hereto specifying the actual commencement date, expiration date and the date on which Tenant is to commence paying Rent. Tenant shall execute and return such amendment to Landlord within fifteen (15) days after Tenant’s receipt thereof.

2.3 Right To Relocate Leased Premises. At any time during the Term, Landlord shall have the right to relocate Tenant to other premises within the Project which have the same approximate area and quality as the Leased Premises, materially equivalent fixtures (but not any furniture or personal property), and the same rental rate per square foot as the Leased Premises, upon no less than ninety (90) days prior notice to Tenant. Landlord or an affiliate of Landlord shall lease the new premises to Tenant on the same terms and conditions as set forth in this Lease, provided that if the Rentable Area of the new premises is not the same as the Rentable Area of the Lease Premises, there shall be a proportionate adjustment of Gross Rent based on the revised Rentable Area. Landlord shall reimburse Tenant for Tenant’s reasonable out of pocket costs to relocate Tenant’s inventory, furniture, trade fixtures, and equipment, and to install Tenant’s fixtures (or provide new fixtures (but not any

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furniture or personal property) of the same quality, nature and extent as those in the Leased Premises if, in Landlord’s judgment, it is not economically feasible to relocate Tenant’s fixtures), within ten (10) business days after the later of (a) Tenant’s submission to Landlord of an itemized list of such out of pocket expenses (accompanied by copies of paid receipts for each itemized cost) and (b) Tenant’s conducting business in such new premises. The new premises thereafter shall be the “Leased Premises” under this Lease for all purposes and Tenant agrees to execute an amendment to this Lease memorializing such relocation and modifying this Lease to reflect any change in Rent or other terms.

2.4 Reservation of Rights. Landlord reserves the right from time to time, to install, use, maintain, repair, relocate and/or replace pipes, conduits, wires and equipment within and around the Building and the Common Areas and to do and perform such other acts and make such other changes, additions, improvements, repairs and/or alterations in, to or with respect to the Building and the Project (including without limitation with respect to the driveways, parking areas, walkways and entrances to the Project) as Landlord may, in the exercise of sound business judgment, deem to be appropriate, and such change, addition, improvement, repair and/or alteration shall not entitle Tenant to any abatement of rent or other claim against Landlord. In connection therewith, Landlord shall have the right to close temporarily any of the Common Areas while engaged in making any such repairs, improvements or alterations.

Article 3.

Term, Use and Rent

3.1 Term. Except as otherwise provided in this Lease, the Term shall commence upon the Term Commencement Date, and unless sooner terminated, shall end on the Term Expiration Date. Subject to factors entirely beyond the reasonable control of Landlord and the rules and regulations of the Project, Tenant shall have access to the Leases Premises twenty-four (24) hours per day, seven (7) days per week.

3.2 Use. Tenant shall use the Leased Premises solely for the Permitted Use and for no other use or purpose. Tenant shall not commit waste, overload the Building’s structure or the Building’s systems or subject the Leased Premises to any use that would damage the Leased Premises. Tenant shall maintain a ratio of not more than one Occupant (as defined below) for each one hundred seventy-five (175) rentable square foot of the Leased Premises or less, as may be required by applicable laws. Upon request by Landlord, Tenant shall maintain on a daily basis an accurate record of the number of employees, visitors, contractors and other people that visit the Leased Premises (collectively “Occupants”). Landlord shall have the right to audit Tenant’s Occupant record and, at Landlord’s option, Landlord shall have the right to periodically visit the Leased Premises without advance notice to Tenant in order to track the number of Occupants arriving at the Leased Premises. For purposes of this Section 3.2, “Occupants” shall not include people not employed by Tenant that deliver or pick up mail or other packages at the Leased Premises, employees of Landlord or employees of Landlord’s agents or contractors. Tenant acknowledges that increased numbers of Occupants causes additional wear and tear on the Leased Premises and the Common Areas, additional use of electricity, water and other utilities, and additional demand for other Building services. Tenant’s failure to comply with the requirements of this Section 3.2 shall constitute an event of default under Section 7.8 and Landlord shall have the right, in addition to any other remedies it may have at law or equity, to specifically enforce Tenant’s obligations under this Section.

3.3 Base Rent.

(a) Tenant shall pay the Base Rent to Landlord in accordance with the schedule set forth on the Basic Lease Information sheet and in the manner described below. Tenant shall prepay the last month’s Base Rent upon execution of this Lease. Tenant shall pay the Gross Rent (consisting of Base Rent plus, when applicable in accordance with Section 3.4 below, Tenant’s Proportionate Share of Basic Operating Costs and/or Tenant’s Proportionate Share of Property Taxes) in monthly installments on or before the first day of each calendar month during the Term and any extensions or renewals thereof, in advance without demand and without any reduction,

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abatement, counterclaim or setoff, in lawful money of the United States at Landlord’s address specified on the Basic Lease Information sheet or at such other address as may be designated by Landlord in the manner provided for giving notice under Section 9.11 hereof. Tenant shall pay first month’s Base Rent and Security Deposit to Landlord on the date Tenant signs this Lease.

(b) If the Term commences on other than the first day of a month, then the Base Rent provided for such partial month shall be prorated based upon a thirty (30)-day month and the prorated installment shall be paid on the first day of the calendar month next succeeding the Term Commencement Date together with the other amounts payable on that day. If the Term terminates on other than the last day of a calendar month, then the Gross Rent provided for such partial month shall be prorated based upon a thirty (30)-day month and the prorated installment shall be paid on the first day of the calendar month in which the date of termination occurs.

3.4 Tenant’s Proportionate Share of Basic Operating Costs and Property Taxes.

(a) Commencing on the first day of the first Computation Year after the Base Year (i.e. the first January 1^st immediately following the Base Year) and continuing through the remainder of the Term, Tenant shall pay to Landlord (i) Tenant’s Proportionate Share of the total dollar increase, if any, in Basic Operating Costs attributable to each Computation Year over Base Year Basic Operating Costs, and (ii) Tenant’s Proportionate Share of the total dollar increase, if any, in Property Taxes attributable to each Computation Year over Base Year Property Taxes.

(b) During the first Computation Year after the Base Year (and each Computation Year thereafter during the Term), on or before the first day of each month during such Computation Year, Tenant shall pay to Landlord one-twelfth (1/12th) of Landlord’s estimate of the amount payable by Tenant under Section 3.4(a) as set forth in Landlord’s written notice to Tenant. During the last month of each Computation Year (or as soon thereafter as practicable), Landlord shall give Tenant notice of Landlord’s estimate of the amount payable by Tenant under Section 3.4(a) for the following Computation Year. On or before the first day of each month during the following Computation Year, Tenant shall pay to Landlord one-twelfth (1/12) of such estimated amount, provided that if Landlord fails to give such notice in the last month of the prior year, then Tenant shall continue to pay on the basis of the prior year’s estimate until the first day of the calendar month next succeeding the date such notice is given by Landlord; and from the first day of the calendar month following the date such notice is given, Tenant’s payments shall be adjusted so that the estimated amount for that Computation Year will be fully paid by the end of that Computation Year. If at any time or times Landlord determines that the amount payable under Section 3.4(a) for the current Computation Year will vary from its estimate given to Tenant, Landlord, by notice to Tenant, may revise its estimate for such Computation Year, and subsequent payments by Tenant for such Computation Year shall be based upon such revised estimate.

(c) Following the end of each Computation Year, Landlord shall deliver to Tenant a statement of amounts payable under Section 3.4(a) for such Computation Year. If such statement shows an amount owing by Tenant that is less than the payments for such Computation Year previously made by Tenant, and if no event of default (as defined below) is outstanding at the time such statement is delivered, Landlord shall credit such amount to the next payment(s) of Gross Rent falling due under this Lease. If such statement shows an amount owing by Tenant that is more than the estimated payments for such Computation Year previously made by Tenant, Tenant shall pay the deficiency to Landlord within fifteen (15) days after delivery of such statement. The respective obligations of Landlord and Tenant under this Section 3.4(c) shall survive the Term Expiration Date, and, if the Term Expiration Date is a day other than the last day of a Computation Year, the adjustment in Tenant’s Proportionate Share of Basic Operating Costs and in Tenant’s Proportionate Share of Property Taxes pursuant to this Section 3.4(c) for the Computation Year in which the Term Expiration Date occurs shall be prorated in the proportion that the number of days in such Computation Year preceding the Term Expiration Date bears to three hundred sixty-five (365).

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(d) Landlord shall have the same remedies for a default in the payment of Tenant’s Proportionate Share of Basic Operating Costs or for a default in the payment of Tenant’s Proportionate Share of Property Taxes as for a default in the payment of Base Rent.

(e) Tenant’s Right to Audit Basic Operating Costs. Provided that (i) no Event of Default is then occurring hereunder, nor (ii) is any event occurring which with the giving of notice or the passage of time, or both, would constitute an Event of Default, then in the event that Basic Operating Costs allocated to the Building increases by more than ten percent (10%) in any Computation Year as compared to the immediately preceding Computation Year (or the Base Year in the case of the initial Computation Year) Tenant, at its sole expense, shall have the right, exercisable within sixty (60) days after the end of the Computation Year or the receipt of a reconciliation statement for the Computation Year (if applicable), to review and audit Landlord’s books and records regarding such increase in Basic Operating Costs with respect to such Computation Year for the sole purpose of determining the accuracy thereof. Such review or audit shall be performed by a nationally recognized accounting firm that calculates its fees with respect to hours actually worked (as opposed to a calculation based upon percentage of recoveries or other incentive or contingency fee arrangement), shall take place during business hours in the office of Landlord or Landlord’s property manager and shall be completed within sixty (60) days after Tenant’s delivery to Landlord of notice of its election to conduct such audit. If Tenant does not so review or audit Landlord’s books and records, the Basic Operating Costs for a particular Computation Year shall be final and binding upon Tenant. In the event that such audit of Landlord’s books and records reveals that the amount of Basic Operating Costs paid by Tenant pursuant to Section 3.4, as adjusted pursuant to Section 3.4 above, for the period covered by such audit is less than or greater than the actual amount properly payable by Tenant under the terms of this Lease, Tenant shall promptly pay any deficiency to Landlord or, if Landlord concurs with the results of such audit, Landlord shall promptly refund any excess payment to Tenant, as the case may be. Without limiting the foregoing, in the event that such audit reveals an overstatement of Basic Operating Costs charged to Tenant in excess of seven percent (7%), then subject to Landlord’s right to review and/or contest the audit results, Landlord shall reimburse Tenant for the reasonable cost of said audit in addition to refunding any excess payment to Tenant as provided above. Tenant shall keep any information gained from its review of Landlord’s books and records confidential and shall not disclose it to any other party, except as required by any laws. Prior to being permitted access to Landlord’s books and records to conduct any audit permitted by the terms of this Section 3.4, Tenant’s accounting firm shall execute a confidentiality agreement, in a form reasonably acceptable to Landlord, pursuant to which Tenant’s accounting firm shall agree (i) to keep any information gained from its review of Landlord’s books and records confidential, (ii) not disclose such information to any other party, except as required by any laws, and (iii) such other terms and conditions as Landlord may reasonably require.

3.5 Basic Operating Costs.

(a) Basic Operating Costs shall mean all expenses, fees, disbursements and costs (but not specific costs which are separately billed to and paid by particular tenants of the Project) of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the management, ownership, maintenance, insurance, repair, replacement, preservation and operation of the Leased Premises, the Building, the Project and its supporting facilities directly servicing the Building and/or the Project (determined in accordance with generally accepted accounting principles, consistently applied) including, but not limited to, the following:

(1) Wages, salaries and related expenses and benefits of all on-site and off-site employees and personnel engaged in the operation, maintenance, repair and security of the Project.

(2) Costs of Landlord’s office (including the property management office) to the extent providing for the management of the Project and office operation in the Project, as well as the costs of operation of a room for delivery and distribution of mail to tenants of the Building.

(3) All supplies, materials, equipment and equipment rental used in the operation, maintenance, repair, replacement and preservation of the Project.

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(4) Utilities, including water, sewer and power, telephone, communication and cable television facilities, lighting, heating, air conditioning and ventilating the entire Project.

(5) All maintenance, janitorial and service agreements for the Project and the equipment therein, including, without limitation, alarm and/or security service, window cleaning, elevator maintenance, sidewalks, landscaping, Building exterior and service areas.

(6) A property management fee in an amount not to exceed five percent (5%) of all Rent derived from the Project.

(7) Legal and accounting services for the Project, including the costs of audits by certified public accountants; provided, however, that legal expenses shall not include the cost of lease negotiations, termination of leases, extension of leases or legal costs incurred in proceedings by or against any specific tenant, or for the defense of Landlord’s legal title to the Project.

(8) All insurance premiums and costs, including, but not limited to, the cost of property and liability coverage and rental income and earthquake and flood insurance applicable to the Project and Landlord’s personal property used in connection therewith, as well as deductible amounts applicable to such insurance; provided, however, that Landlord may, but shall not be obligated to, carry earthquake or flood insurance.

(9) Repairs, replacements and general maintenance (except to the extent paid by proceeds of insurance or by Tenant or other tenants of the Project).

(10) Costs incurred (capital or otherwise) on a regular recurring basis every two (2) or more years for certain maintenance projects (e.g. parking lot slurry coat or replacement of lobby and elevator cab carpeting).

(11) Amortized costs (together with reasonable financing charges) of capital improvements and expenditures made to the Project and/or Building subsequent to the Term Commencement Date which are designed or intended to maintain the quality, appearance or safety of the Building and/or Project, improve the operating efficiency of the Building and/or Project, achieve energy or carbon reduction, or which may be required by governmental authorities, regulations, laws, or ordinances, including, but not limited to, those improvements required for the benefit of individuals with disabilities pursuant to Title III of the Americans with Disabilities Act of 1990, as amended (the “ADA”), or other similar statutes (“ADA Improvements”), such amortization to be taken in accordance with generally accepted accounting principles.

(b) Notwithstanding anything to the contrary in this Lease, in the event any of the Basic Operating Costs are not allocable solely to the Building or are not provided on a uniform basis, Landlord shall make an appropriate and equitable adjustment, in Landlord’s discretion reasonably exercised, to the relevant cost allocations to the Building and Tenant shall pay its proportionate share of such Basic Operating Costs allocable solely to the Building and one hundred percent (100%) of such Basic Operating Costs allocable solely to the Leased Premises. Landlord shall also have the right to establish cost pools for the components of Basic Operating Costs relating to certain elements (but not all) of the Project, Building and/or the Common Area serving certain elements of the Project, Building and/or the Common Area serving the entire Project or Building, and to reasonably in good faith allocate Basic Operating Costs among such cost pools.

(c) Notwithstanding any other provision of this Lease to the contrary, in the event that the Project is not fully occupied during any year of the Term, an adjustment shall be made in computing Basic Operating Costs for such year so that Basic Operating Costs shall be computed as though the Project had been one hundred percent (100%) occupied during such year.

(d) The following items shall be excluded from Basic Operating Costs: (i) depreciation on the Building and the Project; (ii) debt service on any mortgages of the Landlord; (iii) rental under any ground or underlying

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lease; (iv) attorneys’ fees and expenses incurred in connection with lease negotiations with prospective Project tenants or alleged defaults with other Project tenants; (v) the cost of any improvements or equipment which would be properly classified as capital expenditures to the extent the same constitute upgrades as opposed to repairs or replacements (except for any capital expenditures expressly included in Section 3.5(a), including, without limitation, Section 3.5(a)(11)); (vi) the cost of decorating, improving for tenant occupancy, painting or redecorating portions of the Building or Project to be demised to tenants; (vii) advertising expenses relating to vacant space; or (viii) real estate brokers’ or other leasing commissions.

3.6 Property Taxes. “Property Taxes” shall mean all real estate or personal property taxes, possessory interest taxes, business or license taxes or fees, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, housing fund assessments, open space charges, assessments, bonds, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project (or any portion or component thereof), its operations, this Lease, or the Rent due hereunder (or any portion or component thereof), except: (i) inheritance or estate taxes imposed upon or assessed against the Project, or any part thereof or interest therein, and (ii) Landlord’s personal or corporate income, gift or franchise taxes.

Article 4.

Landlord’s Covenants

4.1 Basic Services. Landlord shall provide the following basic services during the Term, subject to any limitations imposed by applicable law and governmental authorities:

(a) Hot and cold water at those points of supply provided for general use of other tenants in the Project; heat and air conditioning in season, during the Building hours of operation specified in the rules and regulations for the Project adopted pursuant to Section 5.17 and at such temperatures and in such amounts as are considered by Landlord to be standard for the comfortable use and occupancy of the Leased Premises or, in all events, as may be permitted or controlled by applicable laws, ordinances, rules and regulations.

(b) Structural and exterior maintenance (including exterior glass and glazing) and routine maintenance, repairs and electric lighting service for all public areas and service areas of the Project in the manner and to the extent deemed by Landlord to be standard.

(c) Janitorial service on a five (5) day per week basis, excluding holidays.

(d) Electric lighting service throughout the Leased Premises and electrical facilities to provide sufficient power for copy machines, facsimile machines, standard size personal computers and other standard office machines of similar low electrical consumption, but not including electricity required for special lighting in excess of Building standards, and any other item of electrical equipment which consumes electricity in amounts in excess of standard office equipment (“Extra Electrical Service”).

(e) Building Standard lamps, bulbs, starters and ballasts used in the Leased Premises.

(f) Public elevator service serving the floors on which the Leased Premises are situated, including freight elevator service when prearranged with Landlord, subject to such rules and regulations as Landlord shall promulgate from time to time.

Tenant shall cooperate fully with Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the HVAC, electrical, mechanical and plumbing systems. Landlord shall not be liable for damages to either person or property, nor shall Landlord be deemed to have evicted Tenant, nor shall there be any abatement of Rent, nor shall Tenant be

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relieved from performance of any covenant on its part to be performed under this Lease by reason of any (i) deficiency in the provision of basic services; (ii) breakdown of equipment or machinery utilized in supplying services; or (iii) curtailment or cessation of services due to causes or circumstances beyond the reasonable control of Landlord or by the making of the necessary repairs or improvements, unless such deficiency, breakdown, curtailment or cessation is due to the active gross negligence or willful misconduct of Landlord. Landlord shall use reasonable diligence to make such repairs as may be required to machinery or equipment within the Project to provide restoration of services and, where the cessation or interruption of service has occurred due to circumstances or conditions beyond Project boundaries, to cause the same to be restored, by diligent application or request to the provider thereof. In no event shall any mortgagee or the beneficiary under any deed of trust referred to in Section 5.12 be or become liable for any default of Landlord under this Section 4.1.

4.2 Extra Services. Landlord shall provide to Tenant at Tenant’s sole cost and expense (and subject to the limitations hereinafter set forth) the following extra services:

(a) Such extra cleaning and janitorial services if requested by Tenant;

(b) Intentionally deleted;

(c) Heating, ventilation, air conditioning or Extra Electrical Service, subject to the provisions of Section 4.2(g) hereof, provided by Landlord to Tenant (i) during hours other than the Building hours of operation specified in the rules and regulations for the Project adopted pursuant to Section 5.17, which shall provide for Building hours of operation of 8:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 1:00 p.m., Saturday (excluding holidays) or (ii) on Saturdays (before 8:00 a.m. and after 1:00 p.m.), Sundays, or holidays, all said heating, ventilation, lighting and air conditioning or extra electrical service to be furnished solely upon the prior written request of Tenant submitted during business hours to Landlord at least 24 hours in advance of the time such service is needed, or pursuant to such other procedures (which may permit less than 24 hours notice) as may be established from time to time by Landlord for the Building or the Project;

(d) Maintaining and replacing non-Building Standard lamps, bulbs, starters and ballasts (whether or not the light fixtures were installed by Landlord as part of the Tenant Improvements);

(e) Repair and maintenance service which is the obligation of Tenant under this Lease;

(f) Repair, maintenance or janitorial service to the Leased Premises, the Common Areas or the Project parking area which is required as a result of the acts or omissions of Tenant, its agents, employees, contractors, invitees or licensees; and

(g) Any basic service in amounts determined by Landlord to exceed the amounts required to be provided under Section 4.1, including without limitation, Extra Electrical Service, but only if Landlord elects to provide such additional or excess service.

For the purposes of this Section 4.2, if, in Landlord’s reasonable opinion, Tenant’s use of electrical and/or water service at the Leased Premises is excessive, Landlord may install a separate meter(s) at the Leased Premises to measure the amount of electricity and/or water consumed by Tenant therein. The cost of such installation and of such excess electricity and/or water (at the rates charged for such services by the local public utility) shall be paid by Tenant to Landlord upon receipt by Tenant of a bill therefor.

The cost chargeable to Tenant for all extra services shall constitute Additional Rent and, except for extra utility costs, shall include a management fee payable to Landlord of five percent (5%). Additional Rent shall be paid monthly by Tenant to Landlord concurrently with the payment of Base Rent.

4.3 Window Coverings. All window coverings for the Leased Premises shall be those approved by Landlord. Tenant shall not place or maintain any window coverings, blinds, curtains or drapes other than those

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approved by Landlord on any exterior window without Landlord’s prior written approval, which Landlord shall have the right to grant or withhold in its absolute and sole discretion.

4.4 Graphics and Signage. Landlord shall provide Building standard identification of Tenant’s name and suite numerals (i) on a building directory in the Building lobby, and (ii) at the main entrance door to the Leased Premises. Landlord reserves the right to exclude any other names from the building directory. All signs, notices, advertisements and graphics of every kind or character, visible in or from the Common Areas or the exterior of the Leased Premises shall be subject to the CC&R’s and Landlord’s prior written approval, which Landlord shall have the right to withhold in its absolute and sole discretion. Landlord may remove, without notice to and at the expense of Tenant, any sign, notice, advertisement or graphic of any kind inscribed, displayed or affixed in violation of the foregoing requirement. All approved signs, notices, advertisements or graphics shall be printed, affixed or inscribed at Tenant’s expense by a sign company selected by or approved by Landlord. Landlord shall be entitled to revise the Project graphics and signage standards at any time.

4.5 Intentionally deleted.

4.6 Repair Obligation. Landlord’s obligation under this Lease with respect to maintenance, repair, and replacement shall be limited to (i) the structural portions of the Building; (ii) the exterior walls of the Building, including exterior glass and glazing; (iii) the exterior roof; (iv) mechanical, electrical, plumbing and life safety systems serving the Project (other than such systems installed by Tenant); (v) the Common Areas; (vi) the Project parking area; and (vii) landscaped areas. However, Landlord shall not have any obligation to repair damage caused by Tenant, its agents, employees, contractors, invitees or licensees. Landlord shall have the right, but not the obligation, to undertake work of repair which Tenant is required to perform under this Lease and which Tenant fails or refuses to perform in a timely and efficient manner after Tenant’s receipt of written notice. Tenant shall reimburse Landlord upon demand, as Additional Rent, for all costs incurred by Landlord in performing any such repair for the account of Tenant, together with an amount equal to ten percent (10%) of such costs to reimburse Landlord for its administration and managerial effort. Except as specifically set forth in this Lease, Landlord shall have no obligation whatsoever to maintain or repair the Leased Premises or the Project. The parties intend that the terms of this Lease govern their respective maintenance and repair obligations. Tenant expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to such obligations or which affords Tenant the right to make repairs at the expense of Landlord or terminate this Lease by reason of the condition of the Leased Premises or any needed repairs.

Article 5.

Tenant’s Covenants

5.1 Payments by Tenant. Tenant shall pay Rent at the times and in the manner provided in this Lease. All obligations of Tenant hereunder to make payments to Landlord shall constitute Rent and failure to pay the same when due shall give rise to the rights and remedies provided for in Section 7.8. If Tenant consists of more than one person or entity, the obligations imposed under this Lease upon all such persons or entities shall be joint and several.

5.2 Tenant Improvements. Any initial tenant improvements to be made by Tenant, if any, shall be installed and constructed pursuant to Exhibit B and all applicable terms under this Lease.

5.3 Taxes on Personal Property. In addition to, and wholly apart from its obligation to pay Tenant’s Proportionate Share of Basic Operating Costs and Tenant’s Proportionate Share of Property Taxes, Tenant shall be responsible for, and shall pay prior to delinquency, all taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, and any other charges imposed upon, levied with respect to, or assessed against Tenant’s personal property, and on its interest pursuant to this Lease. To the extent that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord.

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5.4 Repairs by Tenant. Tenant shall be obligated to maintain and repair, at Tenant’s sole cost and expense, the Leased Premises (including Tenant’s personal property, trade fixtures and any equipment, systems, improvements or alterations installed by or on behalf of Tenant) and every part thereof (other than elements of the Leased Premises to be maintained and repaired by Landlord as expressly set forth in this Lease), to keep the same at all times in good order, condition and repair, and, upon expiration of the Term, to surrender the same to Landlord in the same condition as on the Term Commencement Date, reasonable wear and tear, taking by condemnation, and damage by casualty not caused by Tenant, its agents, employees, contractors, invitees and licensees excepted. Tenant’s obligations shall include, without limitation, the obligation to maintain and repair all walls, floors, ceilings and fixtures and to repair all damage caused by Tenant, its agents, employees, contractors, invitees and others using the Leased Premises with Tenant’s expressed or implied permission. At Landlord’s option, but without obligation to do so, Landlord may perform the work of maintenance and repair constituting Tenant’s obligation under this Section 5.4 at Tenant’s sole cost and expense and as an extra service to be rendered pursuant to Section 4.2(e). Any work of repair and maintenance performed by or for the account of Tenant by persons other than Landlord shall be performed by contractors or subcontractors approved by Landlord and in accordance with procedures Landlord shall from time to time reasonably establish. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part of the Building’s mechanical, electrical, plumbing, life safety or other system servicing, located in or passing through the Leased Premises.

5.5 Waste. Tenant shall not commit or allow any waste or damage to be committed in any portion of the Leased Premises or the Project.

5.6 Assignment or Sublease.

(a) Except as expressly provided in this Section 5.6(a) below, Tenant shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively “Transfer”) or sublet all or any part of Tenant’s interest in this Lease or in the Leased Premises without Landlord’s prior written consent given under and subject to the terms of this Section 5.6. Notwithstanding anything to the contrary in this Lease, Tenant may, without Landlord’s prior written consent and without constituting an assignment or sublease hereunder, sublet the Premises or assign this Lease to (a) an entity controlling, controlled by or under common control with Tenant, (b) an entity related to Tenant by merger, consolidation or reorganization, or (c) a purchaser of substantially all of Tenant’s assets (each, a “Permitted Transferee”); provided that: (i) at least thirty (30) days prior to such assignment or sublease, Tenant delivers to Landlord a reasonably detailed description of the Permitted Transferee and the financial statements and other financial and background information of the Permitted Transferee; (ii) in the case of an assignment, the Permitted Transferee assumes, in full, the obligations of Tenant under this Lease (or in the case of a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion) pursuant to an assignment and assumption agreement (or a sublease, as applicable) reasonably acceptable to Landlord, a fully executed copy of which is delivered to Landlord within thirty (30) days following the effective date of such assignment or subletting; (iii) Tenant remains fully liable under this Lease; (iv) the use of the Premises is pursuant to Section 1.16 of this Lease; (v) such transaction is not entered into as a subterfuge to avoid the restrictions and provisions of this Section 5.6 and will not violate any exclusive use covenant to which Landlord is bound; (vi) with respect to a subletting only, Tenant and such Permitted Transferee execute Landlord’s standard consent to sublease form; and (vii) Tenant is not in default under this Lease.

(b) If Tenant desires to Transfer this Lease or any interest herein or sublet the Leased Premises or any part thereof, Tenant shall give Landlord a request for consent to such transaction, in writing. Tenant’s written request for consent shall specify the date the proposed Transfer or sublease would be effective and be accompanied by information pertinent to Landlord’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or subtenant, including, without limitation, its name, business and financial condition, financial details of the proposed transfer, the intended use (including any modification) of the Leased Premises, and exact copies of all of the proposed agreement(s) between Tenant and the proposed assignee or subtenant. Tenant shall promptly provide Landlord with (i) such other or additional

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information or documents reasonably requested (within ten (10) days after receiving Tenant’s consent request) by Landlord, and (ii) an opportunity to meet and interview the proposed assignee or subtenant, if requested by Landlord.

(c) Landlord shall have a period of thirty (30) days following such interview and receipt of all such additional information (or thirty (30) days from the date of Tenant’s original notice if Landlord does not request additional information or an interview) within which to notify Tenant in writing that Landlord elects either (i) to terminate this Lease as to the space so affected as of the effective date of the proposed Transfer or sublease specified by Tenant, in which event Landlord and Tenant will be relieved of all further obligations hereunder as to such space as of such date, other than those obligations which survive termination of the Lease, (ii) refuse consent (provided, if Landlord should fail to notify Tenant in writing of such election within such 30-day period, Landlord shall be deemed to have elected to refuse consent), or (iii) to permit Tenant to Transfer this Lease or sublet such space to the proposed transferee. Landlord’s consent to the proposed Transfer or sublease shall not be unreasonably withheld, conditioned or delayed so long as the use of the Leased Premises by such proposed assignee or subtenant would be a Permitted Use, the proposed assignee or subtenant is of sound and sufficient financial condition and has an acceptable credit history as determined by Landlord in its absolute and sole discretion, the business experience and quality of business operations of the proposed assignee or subtenant is comparable to Tenant, the reputation of the proposed assignee or subtenant (including any principals, members, partners or shareholders of such assignee or subtenant) is acceptable to Landlord in its absolute and sole discretion, the proposed assignee or subtenant executes such reasonable assumption documentation as Landlord shall require, and the proposed assignee or subtenant is not (x) already a tenant in the Building or (y) a party with whom Landlord has been discussing the leasing of space in the Building. In the event all or any one of the foregoing conditions are not satisfied (without limiting other factors that may be imposed by Landlord in connection with a requested Transfer or sublease), Landlord shall be considered to have acted reasonably if it withholds its consent. Without in any manner limiting the rights of Landlord, following any such termination by Landlord as permitted above, Landlord may lease the affected portion of the Leased Premises to the prospective assignee or subtenant proposed by Tenant, without liability to Tenant. Failure by Landlord to approve a proposed subtenant or assignee shall not cause a termination of this Lease. Tenant acknowledges and agrees that the provision of this Section 5.6 are not unreasonable standards or conditions for purposes of Section 1951.4 of the California Civil Code, as amended from time to time, under bankruptcy laws, or for any other purpose.

(d) In the event Tenant shall request the consent of Landlord to any Transfer or subletting hereunder, Tenant shall pay Landlord a non-refundable processing fee of $1,250.00 and shall reimburse Landlord for all of Landlord’s reasonable out-of-pocket costs and expenses, including attorneys’ fees, incurred in connection therewith. All such fees shall be deemed Additional Rent under this Lease.

(e) Any rent or other consideration realized by Tenant under any such Transfer or sublease in excess of the Rent payable hereunder paid by Tenant, shall be divided and paid as follows: fifty percent (50%) to Landlord and fifty percent (50%) to Tenant.

(f) A change in the control of Tenant shall constitute an assignment requiring Landlord’s consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Tenant or of the beneficial ownership of Tenant shall constitute a change in control for this purpose.

(g) The consent of Landlord to any Transfer or subletting shall not constitute a consent to any subsequent Transfer or subletting by Tenant or to any subsequent or successive Transfer or subletting by the assignee or subtenant.

(h) No Transfer or subletting by Tenant shall relieve Tenant of any obligation under this Lease. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Any Transfer or subletting made without Landlord’s consent or

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which conflicts with the provisions hereof shall be void and, at Landlord’s option, shall constitute a default under this Lease.

5.7 Alterations, Additions and Improvements.

(a) Tenant shall not make or allow to be made any alterations, additions or improvements in or to the Leased Premises without first obtaining the written consent of Landlord. Landlord’s consent will not be unreasonably withheld with respect to proposed alterations, additions and/or improvements which (i) comply with the CC&R’s and all applicable laws, ordinances, rules and regulations; (ii) are compatible with and does not adversely affect the Building and its mechanical, telecommunication, electrical, HVAC and life safety systems; (iii) will not affect the structural or exterior portions of the Building; (iv) will not interfere with the use and occupancy of any other portion of the Building by any other tenant, its employees or invitees; (v) will not trigger any additional costs to Landlord, and (vi) cost less than Ten Thousand Dollars ($10,000.00). Specifically, but without limiting the generality of the foregoing, Landlord’s right of consent shall encompass plans and specifications for the proposed alterations or additions, construction means and methods, the identity of any contractor or subcontractor to be employed on the work of alterations or additions, and the time for performance of such work. Tenant shall supply to Landlord any additional documents and information requested by Landlord in connection with Tenant’s request for consent hereunder.

(b) Any consent given by Landlord under this Section 5.7 shall be deemed conditioned upon: (i) Tenant’s acquiring all applicable permits required by governmental authorities; (ii) Tenant’s furnishing to Landlord copies of such permits, together with copies of the approved plans and specifications, prior to commencement of the work thereon; and (iii) the compliance by Tenant with the conditions of all applicable permits and approvals in a prompt and expeditious manner. Tenant shall pay all reasonable out-of-pocket costs incurred by Landlord in the evaluation of the plans and specifications, including, but not limited to, Landlord’s general contractor’s, architects’ and engineers’ fees. In addition, as a condition to Landlord’s granting of its consent to any alterations, additions, or improvements, Landlord shall have the right to (1) require that such work be performed by Landlord’s designated contractors and subcontractors, or (if Landlord does not so require that such work be performed by Landlord’s designated contractors and subcontractors) Landlord shall have the right to approve the contractor and subcontractors performing such alterations, additions, or improvements, such approval not to be unreasonably withheld or delayed (provided that in any event Building standard subcontractors shall be used for work on Building roof, exterior, mechanical and utility systems), and (2) require that Tenant furnish assurances satisfactory to Landlord that all contractors and subcontractors who will perform such work have in force all insurance required under Section 7.3, and such other insurance as Landlord reasonably deems necessary to supplement the insurance coverage provided for in Section 7.3. In the event Landlord elects to have any alterations, additions, or improvements to the Leased Premises performed by Landlord’s designated contractors and subcontractors, Landlord shall be entitled to charge Tenant a five percent (5%) administration fee in addition to the actual costs of labor and materials provided. Such costs and fees shall be deemed Additional Rent under this Lease, and may be charged and payable prior to commencement of the work.

(c) Tenant shall provide Landlord with not less than fifteen (15) days prior written notice of commencement of the work so as to enable Landlord to post and record appropriate notices of non-responsibility. All alterations and additions permitted hereunder shall be made and performed by Tenant without cost or expense to Landlord and in strict accordance with plans and specifications approved by Landlord. Tenant shall pay the contractors, subcontractors and suppliers all amounts due to them when due and keep the Leased Premises and the Project free from any and all mechanics’, materialmen’s and other liens and claims arising out of any work performed, materials furnished or obligations incurred by or for Tenant. Landlord may require, at its sole option, that Tenant provide to Landlord, at Tenant’s expense, a lien and completion bond in an amount equal to the total estimated cost of any alterations, additions or improvements to be made in or to the Leased Premises, to protect Landlord against any liability for mechanics’, materialmen’s and other liens and claims, and to ensure timely completion of the work. Any mechanics’ liens filed against the Leased Premises or against the Building or the Project for work claimed to have been done for, or materials claimed to have been furnished to, Tenant will be

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discharged by Tenant, by bond or otherwise, within thirty (30) days after the filing thereof, at Tenant’s sole cost and expense.

(d) Any and all alterations, additions or improvements made to the Leased Premises by Tenant shall become the property of Landlord upon installation and shall be surrendered to Landlord without compensation to Tenant upon the termination of this Lease by lapse of time or otherwise unless (i) Landlord conditioned its approval of such alterations, additions or improvements on Tenant’s agreement to remove them, or (ii) if Tenant did not provide a Removal Determination Request (as defined below), Landlord notifies Tenant prior to (or promptly after) the Term Expiration Date that the alterations, additions and/or improvements must be removed, in which case Tenant shall, by the Term Expiration Date, remove such alterations, additions and improvements, repair any damage resulting from such removal and restore the Leased Premises to their condition existing prior to the date of installation of such alterations, additions and improvements, ordinary wear and tear excepted. Prior to making any alterations, additions or improvements to the Leased Premises, Tenant may make a written request that Landlord determine in advance whether or not Tenant must remove such alterations, additions or improvements on or prior to the Term Expiration Date or any earlier termination of this Lease (“Removal Determination Request”). Notwithstanding anything to the contrary set forth above, this clause shall not apply to movable equipment or furniture owned by Tenant. Tenant shall repair at its sole cost and expense all damage caused to the Leased Premises and the Project by removal of Tenant’s movable equipment or furniture and such other alterations, additions and improvements as Tenant shall be required or allowed by Landlord to remove from the Leased Premises.

(e) All alterations, additions and improvements permitted under this Section 5.7 shall be constructed diligently, in a good and workmanlike manner with new, good and sufficient materials and in compliance with the CC&R’s and all applicable laws, ordinances, rules and regulations (including, without limitation, building codes and those related to accessibility and use by individuals with disabilities, including, but not limited to the ADA). Tenant shall, promptly upon completion of the work, furnish Landlord with “as built” drawings for any alterations, additions or improvements performed under this Section 5.7.

(f) Tenant shall have the right to install a wireless intranet, internet, and communications network (also known as “Wi-Fi”) within the Leased Premises for the use of Tenant and its employees (the “Network”) subject to this subsection and all the other clauses of this Lease as are applicable. Tenant shall not solicit, suffer, or permit other tenants or occupants of the Building to use the Network or any other communications service, including, without limitation, any wired or wireless internet service that passes through, is transmitted through, or emanates from the Leased Premises. Tenant agrees that Tenant’s communications equipment and the communications equipment of Tenant’s service providers located in or about the Leased Premises, including, without limitation, any antennas, switches, or other equipment (collectively, “Tenant’s Communications Equipment”) shall be of a type and, if applicable, a frequency that will not cause radio frequency, electromagnetic, or other interference to any other party or any equipment of any other party including, without limitation, Landlord, other tenants, or occupants of the Building or any other party. In the event that Tenant’s Communications Equipment causes or is believed to cause any such interference, upon receipt of notice from Landlord of such interference, Tenant will take all steps necessary, at Tenant’s sole cost and expense, to correct and eliminate the interference. If the interference is not eliminated within 24 hours (or a shorter period if Landlord believes a shorter period to be appropriate) then, upon request from Landlord, Tenant shall shut down the Tenant’s Communications Equipment pending resolution of the interference, with the exception of intermittent testing upon prior notice to and with the approval of Landlord.

5.8 Compliance With Laws and Insurance Standards. Tenant shall not occupy or use, or permit any portion of the Leased Premises to be occupied or used in a manner that violates any applicable law, ordinance, rule, regulation, order, permit, covenant, easement or restriction of record, or the recommendations of Landlord’s engineers or consultants, relating in any manner to the Project, or for any business or purpose which is disreputable, objectionable or productive of fire hazard. Tenant shall not do or permit anything to be done which would result in the cancellation, or in any way increase the cost, of the property insurance coverage on the

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Project and/or its contents. If Tenant does or permits anything to be done which increases the cost of any insurance covering or affecting the Project, then Tenant shall reimburse Landlord, upon demand, as Additional Rent, for such additional costs. Landlord shall deliver to Tenant a written statement setting forth the amount of any such insurance cost increase and showing in reasonable detail the manner in which it has been computed. Tenant shall, at Tenant’s sole cost and expense, comply with all laws, ordinances, rules, regulations and orders (state, federal, municipal or promulgated by other agencies or bodies having or claiming jurisdiction) related to the use, condition or occupancy of the Leased Premises now in effect or which may hereafter come into effect including, but not limited to, (a) accessibility and use by individuals with disabilities, and (b) environmental conditions in, on or about the Leased Premises. If anything done by Tenant in its use or occupancy of the Leased Premises shall create, require or cause imposition of any requirement by any public authority for structural or other upgrading of or alteration or improvement to the Project, Tenant shall, at Landlord’s option, either perform the upgrade, alteration or improvement at Tenant’s sole cost and expense or reimburse Landlord upon demand, as Additional Rent, for the cost to Landlord of performing such work. The judgment of any court of competent jurisdiction or the admission by Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance, rule, regulation, order, permit, covenant, easement or restriction shall be conclusive of that fact as between Landlord and Tenant.

5.9 No Nuisance; No Overloading. Tenant shall use and occupy the Leased Premises, and control its agents, employees, contractors, subcontractors, invitees and visitors in such manner so as not to create any nuisance, or interfere with, annoy or disturb (whether by noise, odor, vibration or otherwise) any other tenant or occupant of the Project or Landlord in its operation of the Project. Tenant shall not place or permit to be placed any loads upon the floors, walls or ceilings in excess of the maximum designed load specified by Landlord or which might damage the Leased Premises, the Building, or any portion thereof.

5.10 Furnishing of Financial Statements; Tenant’s Representations. In order to induce Landlord to enter into this Lease, Tenant agrees that it shall promptly furnish Landlord, from time to time, within ten (10) business days of receipt of Landlord’s written request therefor, with financial statements in form and substance reasonably satisfactory to Landlord reflecting Tenant’s current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all material respects.

5.11 Entry by Landlord. Landlord, its employees, agents and consultants, shall have the right to enter the Leased Premises at any time, in cases of an emergency, and otherwise at reasonable times after reasonable advance notice to Tenant (which notice may be telephonic, via email, or in person) to inspect the same, to clean, to perform such work as may be permitted or required under this Lease, to make repairs to or alterations of the Leased Premises or other portions of the Project or other tenant spaces therein, to deal with emergencies, to post such notices as may be permitted or required by law to prevent the perfection of liens against Landlord’s interest in the Project, to show the Leased Premises to prospective tenants, purchasers, encumbrancers or others, or for any other purpose as Landlord may deem reasonably necessary or desirable. Tenant shall not be entitled to any abatement of Rent or damages by reason of the exercise of any such right of entry or performance of any such work by Landlord.

5.12 Nondisturbance and Attornment.

(a) This Lease and the rights of Tenant hereunder shall be subject and subordinate to the lien of any deed of trust, mortgage, ground lease or other hypothecation or security instrument (collectively, “Security Device”) now or hereafter placed upon, affecting or encumbering the Building, Project or any part thereof or interest therein, and to any and all advances made thereunder, interest thereon or costs incurred and any modifications, renewals, supplements, consolidations, replacements and extensions thereof. Without the consent of Tenant, the holder of any such Security Device or the beneficiary thereunder shall have the right to elect to be subject and subordinate to this Lease, such subordination to be effective upon such terms and conditions as such holder or beneficiary may direct which are not inconsistent with the provisions hereof. Tenant agrees to attorn to

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and recognize as the Landlord under this Lease the holder or beneficiary under a Security Device or any other party that acquires ownership of the Leased Premises by reason of a foreclosure or sale under any Security Device (or deed in lieu thereof). The new owner following such foreclosure, sale or deed shall not be (i) liable for any act or omission of any prior landlord or with respect to events occurring prior to acquisition of ownership; (ii) subject to any offsets or defenses which Tenant might have against any prior landlord; (iii) bound by prepayment of more than one (1) month’s Rent; or (iv) liable to Tenant for any security deposit not actually received by such new owner. Tenant covenants and agrees to execute (and acknowledge if required by Landlord, any lender or ground lessor) and deliver, within ten (10) days of a written demand or request by Landlord and in the form reasonably requested by Landlord, ground lessor, mortgagee or beneficiary, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust.

(b) Tenant shall not unreasonably withhold its consent to changes or amendments to this Lease requested by the holder of a Security Device so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of Tenant hereunder. If, within ten (10) days after notice from Landlord, Tenant fails or refuses to execute with Landlord the amendment(s) to this Lease accomplishing the change(s) or amendment(s) which are requested by such holder, Landlord, at its sole option, shall have the right to immediately terminate this Lease.

5.13 Estoppel Certificate. Within ten (10) days following Landlord’s request, Tenant shall execute, acknowledge and deliver written estoppel certificates addressed to (i) any mortgagee or prospective mortgagee of Landlord, or (ii) any purchaser or prospective purchaser of all or any portion of, or interest in, the Project, on a form specified by Landlord, certifying as to such facts (if true) and agreeing to such notice provisions and other matters as such mortgagee(s) or purchaser(s) may reasonably require, including, without limitation, the following: (a) that this Lease is unmodified and in full force and effect (or in full force and effect as modified, and stating the modifications); (b) the amount of, and date to which Rent and other charges have been paid in advance; (c) the amount of any Security Deposit; and (d) acknowledging that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating the nature of the alleged default). Any such estoppel certificate may be relied upon by any such mortgagee or purchaser. Failure by Tenant to execute and deliver any such estoppel certificate within the time requested shall, at Landlord’s election, constitute a default hereunder and shall be conclusive upon Tenant that (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) not more than one month’s Rent has been paid in advance; and (3) Landlord is not in default under this Lease.

5.14 Security Deposit. Concurrently with the execution hereof, Tenant shall pay to Landlord the agreed upon Security Deposit as security for the full and faithful performance of Tenant’s obligations under this Lease. If at any time during the Term, Tenant shall be in default in the payment of Rent or in default for any other reason, Landlord may use, apply or retain all or part of the Security Deposit for payment of any amount due to Landlord or to cure such default or to reimburse or compensate Landlord for any liability, loss, cost, expense or damage (including attorneys’ fees) which Landlord may suffer or incur by reason of Tenant’s defaults. If Landlord uses or applies all or any part of the Security Deposit, Tenant shall, on demand, pay to Landlord a sum sufficient to restore the Security Deposit to the full amount required by this Lease. Upon expiration of the Term or earlier termination of this Lease and after Tenant has vacated the Leased Premises, Landlord shall return the Security Deposit to Tenant, reduced by such amounts as may be required by Landlord to remedy defaults on the part of Tenant in the payment of Rent, to repair damages to the Leased Premises caused by Tenant and to clean the Leased Premises. The portion of the deposit not so required shall be paid over to Tenant (or, at Landlord’s option, to the last assignee of Tenant’s interest in this Lease) within thirty (30) days after expiration of the Term or earlier termination hereof. Landlord shall hold the Security Deposit for the foregoing purposes; provided, however, that Landlord shall have no obligation to segregate the Security Deposit from its general funds or to pay interest in respect thereof. No part of the Security Deposit shall be considered to be held in trust, or to be prepayment of any monies to be paid by Tenant under this Lease. Tenant hereby waives (i) the protections of Section 1950.7 of the California Civil Code, as it may hereafter be amended and any and all other laws, rules and

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regulations applicable to security deposits in the commercial context (“Security Deposit Laws”), and (ii) any and all rights, duties and obligations either party may now or, in the future, will have relating to or arising from the Security Deposit Laws. Notwithstanding anything to the contrary herein, the Security Deposit may be retained and applied by Landlord (a) to offset Rent which is unpaid either before or after termination of this Lease, and (b) against other damages suffered by Landlord before or after termination of this Lease. If Landlord sells its interest in the Project (or any portion thereof) during the Term hereof and deposits with the purchaser thereof the then unappropriated funds deposited by Tenant as aforesaid, Landlord shall be discharged from any further liability with respect to such Security Deposit.

5.15 Surrender.

(a) Subject to the provisions of Section 5.7 hereof, on the Term Expiration Date (or earlier termination of this Lease), Tenant shall quit and surrender possession of the Leased Premises to Landlord in as good order and condition as they were in on the Term Commencement Date, reasonable wear and tear, casualty damage, taking by condemnation and damage by casualty not caused by Tenant, its agents, employees, contractors, subcontractors, invitees and licensees excepted. Reasonable wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Tenant performing all of its obligations under this Lease. Tenant shall, without cost to Landlord, remove all furniture, equipment, trade fixtures, debris and articles of personal property owned by Tenant in the Leased Premises, and shall repair any damage to the Project resulting from such removal. Any such property not removed by Tenant by the Term Expiration Date (or earlier termination of this Lease) shall be considered abandoned, and Landlord may remove any or all of such items and dispose of same in any lawful manner or store same in a public warehouse or elsewhere for the account and at the expense and risk of Tenant. If Tenant shall fail to pay the cost of storing any such property after storage for thirty (30) days or more, Landlord may sell any or all of such property at public or private sale, in such manner and at such times and places as Landlord may deem proper, without notice to or demand upon Tenant. Landlord shall apply the proceeds of any such sale as follows: first, to the costs of such sale; second, to the costs of storing any such property; third, to the payment of any other sums of money which may then or thereafter be due to Landlord from Tenant under any of the terms of this Lease; and fourth, the balance, if any, to Tenant.

(b) In addition, on the Term Expiration Date (or earlier termination of this Lease), Tenant shall remove, at its sole cost and expense, all of Tenant’s telecommunications lines and cabling installed by Tenant, including, without limitation, any such lines and cabling installed in the plenum or risers of the Building in compliance with the National Electrical Code (collectively, “Wires”) and repair all damage caused thereby and restore the Leased Premises or the Building, as the case may be, to their condition existing prior to the installation of the Wires (“Wire Restoration Work”). Landlord, at its option, may perform such Wire Restoration Work at Tenant’s sole cost and expense. In the event that Tenant fails to perform the Wire Restoration Work or refuses to pay all costs of the Wire Restoration Work (if performed by Landlord) within ten (10) days of Tenant’s receipt of Landlord’s notice requesting Tenant’s reimbursement for or payment of such costs or otherwise fails to comply with the provisions of this Section, Landlord may apply all or any portion of the Security Deposit toward the payment of any costs or expenses relative to the Wire Restoration Work or Tenant’s obligations under this Section. The retention or application of such Security Deposit (if any) by Landlord pursuant to this Section does not constitute a limitation on or waiver of Landlord’s right to seek further remedy under law or equity. The provisions of this Section shall survive the expiration or sooner termination of this Lease.

5.16 Tenant’s Remedies. Landlord shall not be deemed in breach of this Lease unless Landlord fails within a reasonable time to perform an obligation required to be performed by Landlord. For purposes of this Section 5.16, a reasonable time shall in no event, be less than thirty (30) days after receipt by Landlord, and by the holders of any ground lease, deed of trust or mortgage covering the Leased Premises whose name and address shall have been furnished Tenant in writing for such purpose, of written notice specifying wherein such obligation of Landlord has not been performed; provided, however, that if the nature of Landlord’s obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Landlord

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shall not be in breach of this Lease if performance is commenced within said thirty (30)-day period and thereafter diligently pursued to completion. If Landlord fails to cure such default within the time provided for in this Lease, the holder of any such ground lease, deed of trust or mortgage shall have an additional thirty (30) days to cure such default; provided that if such default cannot reasonably be cured within that thirty (30) day period, then such holder shall have such additional time to cure the default as is reasonably necessary under the circumstances. Tenant shall look solely to Landlord’s interest in the Project for recovery of any judgment from Landlord. Neither Landlord nor any of its trustees, shareholders, members, partners (whether general or limited), asset managers, property managers, beneficiaries, directors, officers, agents, employees, contractors or representatives shall ever be personally liable for any such judgment. Any lien obtained to enforce any such judgment and any levy of execution thereon shall be subject and subordinate to any lien, deed of trust or mortgage to which Section 5.12 applies or may apply. Notwithstanding any contrary provision contained in this Lease, neither Landlord nor any of its trustees, shareholders, members, partners (whether general or limited), asset managers, property managers, beneficiaries, directors, officers, agents, employees, contractors or representatives shall be liable under any circumstances for any indirect or consequential damages or any injury or damage to, or interference with, Tenant’s business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring. Tenant shall not have the right to terminate this Lease or withhold, reduce or offset any amount against any payments of Rent due and payable under this Lease by reason of a breach of this Lease by Landlord.

5.17 Rules and Regulations. Tenant shall comply with the rules and regulations for the Project attached as Exhibit D and such reasonable amendments thereto as Landlord may adopt from time to time with prior notice to Tenant.

5.18 CC&R’s. Tenant acknowledges that the Leased Premises and the Project are subject and subordinate to all matters of record as of the date of this Lease including, but not limited to that certain Declaration of Establishment of Covenants, Conditions and Restrictions on Bayhill: The San Francisco Airport Office Center recorded on December 20, 1971 at Book 6064, Page 710 as Instrument No. 73645-AE, as amended by that certain First Amendment to Declaration of Establishment of Covenants, Conditions and Restrictions on Bayhill: The San Francisco Airport Office Center recorded on February 13, 1996 as Instrument No. 96016416, and as amended by that certain Second Amendment to Declaration of Establishment of Covenants, Conditions and Restrictions on Bayhill: The San Francisco Airport Office Center recorded on March 26, 1998 as Instrument No. 98040836, all in the official records of San Mateo County, California (collectively, the “CC&R’s”). Landlord may modify the CC&R’s in accordance with the terms of the CC&R’s without Tenant’s prior written approval, except that no such modification shall materially increase any of Tenant’s obligations or materially decrease any of Tenant’s rights or Landlord’s obligations under this Lease or the CC&R’s.

Article 6.

Environmental Matters

6.1 Hazardous Materials Prohibited.

(a) Tenant shall not cause or permit any Hazardous Material (as defined in Section 6.1(c) below) to be brought, kept, used, generated, released or disposed in, on, under or about the Leased Premises or the Project by Tenant, its agents, employees, contractors, subcontractors, licensees or invitees (collectively, “Tenant’s Representatives”); provided, however, that Tenant may use, store and dispose of, in accordance with applicable Laws, limited quantities of standard office and janitorial supplies, but only to the extent reasonably necessary for Tenant’s operations in the Leased Premises. Tenant hereby indemnifies Landlord from and against (i) any breach by Tenant of the obligations stated in the preceding sentence, (ii) any breach of the obligations stated in Section 6.1(b) below, or (iii) any claims or liability resulting from Tenant’s use of Hazardous Materials. Tenant hereby agrees to defend and hold Landlord harmless from and against any and all claims, liability, losses, damages, costs and/or expenses (including, without limitation, diminution in value of the Project, or any portion

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thereof, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Project, damages arising from any adverse impact on marketing of space in the Project, and sums paid in settlement of claims, fines, penalties, attorneys’ fees, consultants’ fees and experts’ fees) which arise during or after the Term as a result of any breach of the obligations stated in Sections 6.1(a) or 6.1(b) or otherwise resulting from Tenant’s use of Hazardous Materials. This indemnification of Landlord by Tenant includes, without limitation, death of or injury to person, damage to any property or the environment and costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state or local governmental agency or political subdivision because of any Hazardous Material present in, on, under or about the Leased Premises or the Project (including soil and ground water contamination) which results from such a breach. Without limiting the foregoing, if the presence of any Hazardous Material in, on, under or about the Leased Premises or the Project caused or permitted by Tenant results in any contamination of the Leased Premises or the Project, Tenant shall promptly take all actions at its sole expense as are necessary to return the same to the condition existing prior to the introduction of such Hazardous Material; provided that Landlord’s approval of such actions, and the contractors and/or subcontractors to be used by Tenant in connection therewith, shall first be obtained. This indemnification of Landlord by Tenant shall survive the expiration or sooner termination of this Lease.

(b) Tenant covenants and agrees that Tenant shall at all times be responsible and liable for, and be in compliance with, all federal, state, local and regional laws, ordinances, rules, codes and regulations, as amended from time to time (“Governmental Requirements”), relating to health and safety and environmental matters, arising, directly or indirectly, out of the use of Hazardous Materials (as defined in Section 6.1(c) below) in the Project. Health and safety and environmental matters for which Tenant is responsible under this paragraph include, without limitation (i) notification and reporting to governmental agencies, (ii) the provision of warnings of potential exposure to Hazardous Materials to Landlord and Tenant’s agents, employees, licensees, contractors, subcontractors and others, (iii) the payment of taxes and fees, (iv) the proper off-site transportation and disposal of Hazardous Materials, and (v) all requirements, including training, relating to the use of equipment. Immediately upon discovery of a release of Hazardous Materials, Tenant shall give written notice to Landlord, whether or not such release is subject to reporting under Governmental Requirements. The notice shall include information on the nature and conditions of the release and Tenant’s planned response. Tenant shall be liable for the cost of any clean-up of the release of any Hazardous Materials by Tenant or Tenant’s Representatives on the Project.

(c) As used in this Lease, the term “Hazardous Material” means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term “Hazardous Material” includes, without limitation, any substance, material or waste which is (i) defined as a “hazardous waste” or similar term under the laws of the jurisdiction where the Project is located; (ii) designated as a “hazardous substance” pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. § 1317); (iii) defined as a “hazardous waste” pursuant to Section 1004 of the Federal Resource, Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. (42 U.S.C. § 6903); (iv) defined as a “hazardous substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. (42 U.S.C. § 9601); (v) hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof; or (vi) asbestos in any form or condition.

(d) As used in this Article 6, the term “Laws” means any applicable federal, state or local laws, ordinances, rules or regulations relating to any Hazardous Material affecting the Project, including, without limitation, the specific laws, ordinances and regulations referred to in Section 6.1(c) above. References to specific Laws shall also be references to any amendments thereto and to any applicable successor Laws.

6.2 Limitations on Assignment and Subletting. In addition to the provisions of Section 5.6 above, it shall not be unreasonable for Landlord to withhold its consent to any proposed Transfer or subletting of the Leased Premises if (i) the proposed transferee’s anticipated use of the Leased Premises involves the generation, storage, use, treatment, or disposal of Hazardous Material (excluding standard office and janitorial supplies; in limited

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quantities as hereinabove provided); (ii) the proposed transferee has been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such transferee’s actions or use of the property in question; or (iii) the proposed transferee is subject to an enforcement order issued by any governmental authority in connection with the generation, storage, use, treatment or disposal of a Hazardous Material.

6.3 Right of Entry. In addition to the provisions of Section 5.11 above, Landlord, its employees, agents and consultants, shall have the right to enter the Leased Premises at any time, in case of an emergency, and otherwise during reasonable hours and upon reasonable notice to Tenant, in order to conduct periodic environmental inspections and tests to determine whether any Hazardous Materials are present. The costs and expenses of such inspections shall be paid by Landlord unless a default or breach of this Lease, violation of Laws or contamination caused or permitted by Tenant and/or any of Tenant’s Representatives is found to exist or Landlord has reason to believe such a default exists. In such event, Tenant shall reimburse Landlord upon demand, as Additional Rent, for the costs and expenses of such inspections.

6.4 Notice to Landlord. Tenant shall immediately notify Landlord in writing of: (i) any enforcement, clean-up, removal or other governmental or regulatory action instituted or threatened regarding the Leased Premises or the Project pursuant to any Laws; (ii) any claim made or threatened by any person against Tenant or the Leased Premises relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Material; and (iii) any reports made to or received from any governmental agency arising out of or in connection with any Hazardous Material in or removed from the Leased Premises or the Project, including any complaints, notices, warnings or asserted violations in connection therewith. Tenant shall also supply to Landlord as promptly as possible, and in any event within three (3) business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings, asserted violations or other communications relating in any way to the Leased Premises or Tenant’s use thereof.

6.5 Disclosure as to Hazardous Materials. Landlord hereby discloses to Tenant that previous occupants or others possessed and used or may have possessed and used office supplies, cleaning products, construction and decorating materials and other substances in or about the Leased Premises or portions thereof and which may contain or may have contained Hazardous Materials. In addition: (i) portions of the Project (including, without limitation, the equipment rooms and emergency generator areas, if applicable) contain Hazardous Materials of the kind ordinarily employed in such areas; and (ii) automobiles and other vehicles operated or parked in the parking and loading dock areas emit substances which may contain Hazardous Materials. As part of Tenant’s obligations under this Lease, Tenant agrees to comply with the California “Connelly Act” and other applicable laws.

Article 7.

Insurance, Indemnity, Condemnation, Damage and Default

7.1 Landlord’s Insurance. Landlord shall secure and maintain policies of insurance for the Project covering loss of or damage to the Project, including the Tenant Improvements, if any, but excluding all subsequent alterations, additions and improvements to the Leased Premises, with loss payable to Landlord and to the holders of any deeds of trust, mortgages or ground leases on the Project. Landlord shall not be obligated to obtain insurance for Tenant’s trade fixtures, equipment, furnishings, machinery or other property. Such policies shall provide protection against fire and extended coverage perils and such additional perils as Landlord deems suitable, and with such deductible(s) as Landlord shall deem reasonably appropriate. Landlord shall further secure and maintain commercial general liability insurance with respect to the Project in such amount as Landlord shall determine, such insurance to be in addition to, and not in lieu of, the liability insurance required to be maintained by Tenant. Landlord may elect to self-insure for the coverages required under this Section 7.1. If the annual cost to Landlord for any such insurance exceeds the standard rates because of the nature of Tenant’s operations, Tenant shall, upon receipt of appropriate invoices, reimburse Landlord for such increases in cost,

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which amounts shall be deemed Additional Rent hereunder. Tenant shall not be named as an additional insured on any policy of insurance maintained by Landlord.

7.2 Tenant’s Liability Insurance. Tenant (with respect to both the Leased Premises and the Project) shall secure and maintain, at its own expense, at all times during the Term (including any early access period), a policy or policies of commercial general liability insurance with the premiums thereon fully paid in advance, protecting Tenant and naming Landlord, the holders of any deeds of trust, mortgages or ground leases on the Project, and Landlord’s representatives (which term, whenever used in this Article 7, shall be deemed to include Landlord’s partners, members, asset managers, property managers, trustees, ancillary trustees, officers, directors, shareholders, beneficiaries, agents, employees and independent contractors) as additional insureds by endorsement(s) acceptable to Landlord, in the form specified under Section 7.3(c) below, providing coverage for claims for bodily injury, personal injury, advertising injury and property damage (including attorneys’ fees) based upon, involving or arising out of Tenant’s operations, assumed liabilities or Tenant’s use, occupancy or maintenance of the Leased Premises and the Common Areas of the Project. Such insurance shall provide for a minimum amount of Two Million Dollars ($2,000,000.00) for property damage or injury, bodily injury, or death of one or more than one person in any one accident or occurrence, with an annual aggregate limit of at least Three Million Dollars ($3,000,000.00). The coverage required to be carried shall include fire legal liability, blanket contractual liability, personal injury liability (libel, slander, false arrest and wrongful eviction), property damage, medical payments, products liability and completed operations coverage (as well as owned, non-owned and hired automobile liability if an exposure exists) and the policy shall contain an exception to any pollution exclusion which insures damage or injury arising out of heat, smoke or fumes from a hostile fire. Such insurance shall be written on an occurrence basis and contain a separation of insureds provision or cross-liability endorsement acceptable to Landlord. Tenant shall provide Landlord with a certificate evidencing such insurance coverage. The certificate shall indicate that the insurance provided specifically recognizes the liability assumed by Tenant under this Lease and that Tenant’s insurance is primary to and not contributory (and Tenant shall provide Landlord with evidence of a primary and non-contributory endorsement) with any other insurance maintained by Landlord, whose insurance shall be considered excess insurance only. Not more frequently than every two (2) years, if, in the opinion of any mortgagee of Landlord or of the insurance broker retained by Landlord, the amount of liability insurance coverage at that time is not adequate, then Tenant shall increase its liability insurance coverage as required by either any mortgagee of Landlord or Landlord’s insurance broker. Whenever, in Landlord’s reasonable judgment, good business practice or change in conditions indicate a need for additional or different types of insurance (but in no event greater than the coverage being required of comparable tenants by comparable landlords of Comparable Buildings [as defined in Section 8.1]), Tenant shall, within fifteen (15) days of receipt of Landlord’s request therefor, obtain the insurance at its own expense.

7.3 Tenant’s Additional Insurance Requirements.

(a) Tenant shall secure and maintain, at Tenant’s expense, at all times during the Term (including any early access period), a commercial property policy, covering risks of direct physical loss (known as Special Form coverage) including a replacement cost provision, on all of Tenant’s fixtures, furnishings, equipment, machinery, merchandise and personal property in the Leased Premises and on any alterations, additions or improvements made by or for Tenant upon the Leased Premises, all for the full replacement cost thereof without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance. Such insurance shall insure against those risks customarily covered in an “all risk” policy of insurance covering physical loss or damage. Tenant shall use the proceeds from such insurance for the replacement of fixtures, furnishings, equipment and personal property and for the restoration of any alterations, additions or improvements to the Leased Premises. In addition, Tenant shall secure and maintain, at all times during the Term, loss of income, business interruption and extra expense insurance in such amounts as will reimburse Tenant for direct or indirect loss of earnings and incurred costs for a minimum period of twelve (12) months attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Leased Premises or to the Building as a result of such perils; such insurance shall be maintained with Tenant’s property insurance carrier. Further, Tenant shall secure and maintain at all times during the Term

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workers’ compensation insurance in such amounts as are required by law, employer’s liability insurance in the amount of One Million Dollars ($1,000,000.00) per occurrence, and all such other insurance as may be required by applicable law. In the event Tenant makes any alterations, additions or improvements to the Leased Premises, prior to commencing any work in the Leased Premises, Tenant shall secure “builder’s all risk” insurance which shall be maintained throughout the course of construction, such policy being an all risk builder’s risk completed value form, in an amount approved by Landlord, but not less than the total contract price for the construction of such alterations, additions or improvements and covering the construction of such alterations, additions or improvements, and such other insurance as Landlord may reasonably require, it being understood and agreed that all of such alterations, additions or improvements shall be insured by Tenant pursuant to this Section 7.3 immediately upon completion thereof. Tenant shall provide Landlord with certificates of all such insurance. The property insurance certificate shall confirm that the waiver of subrogation required to be obtained pursuant to Section 7.5 is permitted by the insurer. Tenant shall, at least thirty (30) days prior to the expiration of any policy of insurance required to be maintained by Tenant under this Lease, furnish Landlord with an “insurance binder” or other satisfactory evidence of renewal thereof.

(b) All policies required to be carried by Tenant under this Lease shall be issued by and binding upon a reputable insurance company of good financial standing licensed to do business in the State of California with a rating of at least A-IX or such other rating as may be required by a lender having a lien on the Project, as set forth in the most current issue of “Best’s Insurance Reports.” Tenant shall not do or permit anything to be done that would invalidate the insurance policies referred to in this Article 7. All policies required to be carried by Tenant under this Article 7 shall contain a waiver of subrogation endorsement, in favor of Landlord and its affiliated entities, the property manager for the Building, and the asset manager for the Building, and shall contain an endorsement or endorsements providing that (i) Landlord and its affiliated entities, the property manager for the Building, the asset manager for the Building, and any lender with a deed of trust encumbering the Project or any part thereof, of whom Landlord has notified Tenant, are included as additional insureds, (ii) the insurer agrees not to cancel or alter the policy without at least thirty (30) days’ prior written notice to Landlord and all named and additional insureds, and (iii) all such insurance maintained by Tenant is primary, with any other insurance available to Landlord or any other named or additional insured being excess and non-contributing.

(c) Tenant shall provide evidence of each of the policies of insurance which Tenant is required to obtain and maintain pursuant to this Lease on or before the Term Commencement Date (or any early access period, if applicable) and at least thirty (30) days prior to the expiration of any policy, which evidence shall be binding upon the insurance carrier, shall be accompanied by a copy of the ISO Additional Insured Endorsement CG 1185 (or equivalent form(s) acceptable to Landlord, and affording additional insureds coverage for liability arising out of both ongoing and completed operations) and, as applicable, and, as to property insurance, shall be in the form of an “ACORD 28 (10/2003)” evidence of insurance or other form reasonably acceptable to Landlord. In the event that Tenant fails to provide evidence of insurance required to be provided by Tenant under this Lease, prior to commencement of the Term, and thereafter during the Term, within ten (10) days following Landlord’s written request therefor, and thirty (30) days prior to the expiration date of any such coverage, Landlord shall be authorized (but not required) to procure such coverage in the amounts stated with all costs thereof (plus a fifteen percent (15%) administrative fee) to be chargeable to Tenant and payable upon written invoice therefor, which amounts shall be deemed Additional Rent hereunder.

(d) The minimum limits of insurance required by this Lease, or as carried by Tenant, shall not limit the liability of Tenant nor relieve Tenant of any obligation hereunder.

7.4 Indemnity and Exoneration.

(a) To the extent not prohibited by law, Landlord and Landlord’s representatives, partners, shareholders, members, agents, employees, directors, officers, property managers, asset managers, trustees, successors and assigns (“Landlord’s Representatives”) shall not be liable for any loss, injury or damage to person

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or property of Tenant, Tenant’s agents, employees, contractors, subcontractors, invitees or any other person, whether caused by theft, fire, act of God, acts of the public enemy, riot, strike, insurrection, war, court order, requisition or order of governmental body or authority or which may arise through repair, alteration or maintenance of any part of the Project or failure to make any such repair or from any other cause whatsoever, except as expressly otherwise provided in Sections 7.6 and 7.7. Landlord and Landlord’s Representatives shall not be liable for any loss, injury or damage arising from any act or omission of any other tenant or occupant of the Project, nor shall Landlord or Landlord’s Representatives be liable under any circumstances for damage or inconvenience to Tenant’s business or for any loss of income or profit therefrom.

(b) Tenant shall indemnify, protect, defend and hold the Project, Landlord and Landlord’s Representatives, harmless of and from any and all claims, liability, costs, penalties, fines, damages, injury, judgments, forfeiture, losses (including without limitation diminution in the value of the Leased Premises) or expenses (including without limitation attorneys’ fees, consultant fees, testing and investigation fees, expert fees and court costs) arising out of or in any way related to or resulting directly or indirectly from (i) the use or occupancy of the Leased Premises, (ii) the activities of Tenant or Tenant’s Representatives in or about the Leased Premises or the Project, (iii) any failure to comply with any applicable law, and (iv) any default or breach by Tenant in the performance of any obligation of Tenant under this Lease; provided, however, that the foregoing indemnity shall not be applicable to claims arising by reason of the active gross negligence or willful misconduct of Landlord.

(c) Tenant shall indemnify, protect, defend and hold the Project, Landlord and Landlord’s Representatives, harmless of and from any and all claims, liability, costs, penalties, fines, damages, injury, judgments, forfeiture, losses (including without limitation diminution in the value of the Leased Premises) or expenses (including without limitation attorneys’ fees, consultant fees, testing and investigation fees, expert fees and court costs) arising out of or in any way related to or resulting directly or indirectly from work or labor performed, materials or supplies furnished to or at the request of Tenant or in connection with obligations incurred by or performance of any work done for the account of Tenant in the Leased Premises or the Project.

(d) Notwithstanding the foregoing, Tenant shall not have an obligation to indemnify, protect, defend and hold the Project, Landlord and Landlord’s Representatives, harmless of and from any and all claims, liability, costs, penalties, fines, damages, injury, judgments, forfeiture, losses (including without limitation diminution in the value of the Leased Premises) or expenses (including without limitation attorneys’ fees, consultant fees, testing and investigation fees, expert fees and court costs) to the extent such claims, liability, costs, penalties, fines, damages, injury, judgments, forfeiture, losses (including without limitation diminution in the value of the Leased Premises) or expenses (including without limitation attorneys’ fees, consultant fees, testing and investigation fees, expert fees and court costs) is caused by the willful misconduct or grossly negligent acts or omissions of Landlord.

(e) The provisions of this Section 7.4 shall survive the expiration or sooner termination of this Lease. TENANT ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THE PROVISIONS SET FORTH IN THIS SECTION 7.4 AND FURTHER ACKNOWLEDGES THAT SUCH PROVISIONS WERE SPECIFICALLY NEGOTIATED.

7.5 Waiver of Subrogation. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each waives all rights of recovery, claim, action or cause of action against the other, its agents (including partners, both general and limited), trustees, officers, shareholders, members, directors, asset managers, property managers, and employees, for any loss or damage that may occur to the Leased Premises, or any improvements thereto, or the Project or any personal property of such party therein, by reason of any cause required to be insured against under this Lease to the extent of the coverage required, regardless of cause or origin, including negligence of the other party hereto; and each party covenants that, to the fullest extent permitted by law, no insurer shall hold any right of subrogation against such other party. Tenant shall advise its insurers of the foregoing and such waiver shall be a part of each policy maintained by Tenant which applies to the Leased Premises, any part of the Project or Tenant’s use and occupancy of any part thereof.

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7.6 Condemnation.

(a) If the Leased Premises are taken under the power of eminent domain or sold under the threat of the exercise of such power (all of which are referred to herein as “condemnation”), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs (the “date of taking”). If the Leased Premises or any portion of the Project is taken by condemnation to such an extent as to render the Leased Premises untenantable as reasonably determined by Landlord, this Lease shall, at the option of either party to be exercised in writing within thirty (30) days after receipt of written notice of such taking, forthwith cease and terminate as of the date of taking. All proceeds from any condemnation of the Leased Premises without deduction for any estate or interest of Tenant (including, without limitation, any award attributable to the value of the remaining Term of this Lease) shall belong and be paid to Landlord, subject to the rights of any mortgagee of Landlord’s interest in the Project or the beneficiary of any deed of trust which constitutes an encumbrance thereon; provided that Tenant shall be entitled to any compensation separately awarded to Tenant for Tenant’s relocation expenses or, loss of Tenant’s trade fixtures. If this Lease continues in effect after the date of taking pursuant to the provisions of this Section 7.6(a), Landlord shall, to the extent of proceeds received, proceed with reasonable diligence to repair, at its expense, the remaining parts of the Project and the Leased Premises to substantially their former condition to the extent that the same is feasible (subject to reasonable changes which Landlord shall deem desirable) and so as to constitute a complete and tenantable Project and Leased Premises. Following a taking, Gross Rent shall thereafter be equitably adjusted according to the remaining Rentable Area of the Leased Premises and the Building. Except as hereinafter provided, in the event of any taking, Landlord shall have the right to all compensation, damages, income, rent or awards made with respect thereto (collectively an “award”), including any award for the value of the leasehold estate created by this Lease. No award to Landlord shall be apportioned and, subject to Tenant’s rights hereinafter specified, Tenant hereby assigns to Landlord any right of Tenant in any award made for any taking. So long as such claim will not reduce any award otherwise payable to Landlord under this Section 7.6, Tenant may seek to recover, at its cost and expense, as a separate claim, any damages or awards payable on a taking of the Leased Premises to compensate for the unamortized cost paid by Tenant for the alterations, additions or improvements, if any, made by Tenant during the initial improvement of the Leased Premises and for any alterations, or for Tenant’s personal property taken, or for interference with or interruption of Tenant’s business (including goodwill), or for Tenant’s removal and relocation expenses.

(b) In the event of a temporary taking of all or a portion of the Leased Premises, there shall be no abatement of Rent and Tenant shall remain fully obligated for performance of all of the covenants and obligations on its part to be performed pursuant to the terms of this Lease. Landlord and Tenant hereby waive the provisions of any statutes (including, without limitation, Section 1265.130 of the California Code of Civil Procedure) or court decisions which provide a party to a lease with a right to abatement of rent or termination of the lease when leased property is condemned or taken and agree that such event shall be exclusively governed by the terms of this Lease.

7.7 Damage or Destruction. In the event of a fire or other casualty in the Leased Premises, Tenant shall immediately give notice thereof to Landlord. The following provisions shall then apply:

(a) If the damage is limited solely to the Leased Premises and the Leased Premises can, in Landlord’s reasonable opinion, be made tenantable with all damage repaired (excluding Tenant’s personal property, trade fixtures, equipment and any tenant improvements or alterations installed by or on behalf of Tenant) within six (6) months from the date of damage, then Landlord shall, to the extent of available insurance proceeds plus any funds delivered by Tenant to Landlord for purposes of performing such repairs (as hereinafter provided), be obligated to rebuild the same to substantially their former condition to the extent that the same is feasible (subject to reasonable changes which Landlord shall deem desirable and such changes as may be required by applicable law) and shall proceed with reasonable diligence to do so and this Lease shall remain in full force and effect.

(b) If portions of the Project outside the boundaries of the Leased Premises are damaged or destroyed (whether or not the Leased Premises are also damaged or destroyed) and the Leased Premises and the Project can, in Landlord’s opinion, both be made tenantable with all damage repaired (excluding Tenant’s personal property, trade fixtures, equipment and any tenant improvements or alterations installed by or on behalf of

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Tenant) within six (6) months from the date of damage or destruction, and provided that Landlord determines that it is economically feasible, then Landlord shall, to the extent of available insurance proceeds plus any funds delivered by Tenant to Landlord for purposes of performing such repairs (as hereinafter provided), be obligated to rebuild the same to substantially their former condition to the extent that the same is feasible (subject to reasonable changes which Landlord shall deem desirable and such changes as may be required by applicable law) and shall proceed with reasonable diligence to do so and this Lease shall remain in full force and effect.

(c) Notwithstanding anything to the contrary contained in Sections 7.7(a) or 7.7(b) above, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Leased Premises if (i) the cost to repair and restore the Building is twenty-five percent (25%) or more of the replacement cost of the entire Building prior to such damage or destruction, or (ii) when any damage thereto or to the Building occurs during the last eighteen (18) months of the Term. Under such circumstances, Landlord shall notify Tenant of its decision not to rebuild within ninety (90) days of such damage, whereupon the Lease shall terminate as of the date of such notice.

(d) If neither Section 7.7(a) nor 7.7(b) above applies, Landlord shall so notify Tenant within ninety (90) days after the date of the damage or destruction and Landlord may terminate this Lease within thirty (30) days after the date of such notice, such termination notice to be immediately effective; provided, however, that if Landlord elects to reconstruct the Project and the Leased Premises, such election to be made at Landlord’s sole option, in which event (i) Landlord shall notify Tenant of such election within said ninety (90) day period, and (ii) Landlord shall, to the extent of available insurance proceeds plus any funds delivered by Tenant to Landlord for purposes of performing such repairs (as hereinafter provided), proceed with reasonable diligence to rebuild the Project and the Leased Premises to substantially their former condition to the extent that the same is feasible (subject to reasonable changes which Landlord shall deem desirable and such changes as may be required by applicable law) but excluding Tenant’s personal property, trade fixtures, equipment and any tenant improvements or alterations installed by or on behalf of Tenant.

(e) During any period when Tenant’s use of the Leased Premises is significantly impaired by damage or destruction, Base Rent shall abate in proportion to the degree to which Tenant’s use of the Leased Premises is impaired and Tenant does not actually use the Leased Premises until such time as the Leased Premises are made tenantable as reasonably determined by Landlord; provided that no such rental abatement shall be permitted if the casualty is the result of the negligence or willful misconduct of Tenant or Tenant’s Representatives.

(f) The proceeds from any insurance paid by reason of damage to or destruction of the Project or any part thereof insured by Landlord shall belong to and be paid to Landlord, subject to the rights of any mortgagee of Landlord’s interest in the Project or the beneficiary of any deed of trust which constitutes an encumbrance thereon. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of (i) its fixtures, furnishings, equipment, machinery, merchandise and personal property in the Leased Premises, and (ii) its alteration, additions and improvements. In the event of any damage or destruction of all or any part of the Leased Premises, Tenant agrees to immediately deliver to Landlord all property insurance proceeds received by Tenant with respect to any alterations, additions or improvements, but excluding proceeds for Tenant’s furniture, fixtures, equipment and other personal property, whether or not this Lease is terminated as permitted in this Section 7.7, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. If, for any reason (including Tenant’s failure to obtain insurance for the full replacement cost of any alterations, additions or improvements from any and all casualties), Tenant fails to receive insurance proceeds covering the full replacement cost of any alterations, additions or improvements which are damaged, Tenant will be deemed to have self-insured the replacement cost of such items, and upon any damage or destruction thereto, Tenant agrees to immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord’s or Tenant’s insurance with respect to such items.

(g) Landlord’s repair and restoration obligations under this Section 7.7 shall not impair or otherwise affect the rights and obligations of the parties set forth elsewhere in this Lease. Subject to Section 7.7(e), Landlord shall not be liable for any inconvenience or annoyance to Tenant, its employees, agents, contractors,

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subcontractors or invitees, or injury to Tenant’s business resulting in any way from such damage or the repair thereof. Landlord and Tenant agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Leased Premises or the Project with respect to the termination of this Lease and hereby waive the provisions of any present or future statute or law to the extent inconsistent therewith.

(h) Tenant shall promptly replace or repair, at Tenant’s cost and expense, Tenant’s movable furniture, equipment, trade fixtures and other personal property in the Leased Premises which Tenant shall be responsible for insuring during the Term of this Lease.

(i) [intentionally deleted].

(j) The respective rights and obligations of Landlord and Tenant in the event of any damage to or destruction of the Leased Premises, or any other portion of the Building or the Project, are governed exclusively by this Lease. Accordingly, Tenant hereby waives the provisions of any law to the contrary, including California Civil Code Sections 1932(2), 1933(4), 1941 and 1942 and any similar or successor laws and any other laws providing for the termination of a lease upon destruction of the leased property.

7.8 Default by Tenant.

(a) Events of Default. The occurrence of any of the following shall constitute an event of default on the part of Tenant:

(1) Abandonment. Vacating the Leased Premises without the intention to reoccupy same, or abandonment of the Leased Premises for a continuous period in excess of fifty (50) days;

(2) Nonpayment of Rent. Failure to pay any installment of Rent due and payable hereunder on the date when payment is due; furthermore, if Tenant shall be served with a demand for the payment of past due Rent, any payment(s) tendered thereafter to cure any default by Tenant shall be made only by cashier’s check, wire-transfer or direct deposit of immediately available funds;

(3) Other Obligations. Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subsections 7.8(a)(1), 7.8(a)(2) or 7.8(a)(12), such failure continuing for a period of fifteen (15) days after written notice of such failure (or such longer period as is reasonably necessary to remedy such default (not to exceed sixty (60) days), provided that Tenant commences the remedy within such fifteen (15)-day period and continuously and diligently pursues such remedy at all times until such default is cured);

(4) General Assignment. Any general arrangement or assignment by Tenant for the benefit of creditors;

(5) Bankruptcy. The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition against Tenant, which involuntary petition remains undischarged for a period of sixty (60) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, within such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant’s obligations under this Lease;

(6) Receivership. The appointment of a trustee or receiver to take possession of all or substantially all of Tenant’s assets or the Leased Premises, where possession is not restored to Tenant within ten (10) business days;

(7) Attachment. The attachment, execution or other judicial seizure of all or substantially all of Tenant’s assets or the Leased Premises, if such attachment or other seizure remains undismissed or undischarged for a period of ten (10) business days after the levy thereof;

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(8) Insolvency. The admission by Tenant in writing of its inability to pay its debts as they become due; the filing by Tenant of a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation; the filing by Tenant of an answer admitting or failing timely to contest a material allegation of a petition filed against Tenant in any such proceeding; or, if within sixty (60) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed;

(9) Guarantor. If the performance of Tenant’s obligations under this Lease is guaranteed: (i) the death of a guarantor; (ii) the termination of a guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a guarantor’s becoming insolvent or the subject of a bankruptcy filing; (iv) a guarantor’s refusal to honor the guaranty; or (v) a guarantor’s breach of its guaranty obligation on an anticipatory breach basis, and Tenant’s failure, within sixty (60) days following written notice by or on behalf of Landlord to Tenant of any such event, to provide Landlord with written alternative assurance or security, which, when coupled with the then existing resources of Tenant, equals or exceeds the combined financial resources of Tenant and the guarantor(s) that existed at the time of execution of this Lease;

(10) Partner. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or any person or entity constituting Tenant is involved in any of the events or acts described in subsections 7.8(a)(4) through (8);

(11) Misrepresentation. The discovery by Landlord that any representation, warranty or financial statement given to Landlord by Tenant or any guarantor of Tenant’s obligations under this Lease was materially false or misleading; or

(12) Estoppel/SNDA. Failure to deliver the documents required to be delivered by Tenant under Sections 5.12 and/or 5.13 within the applicable time period set forth in such sections.

(b) Remedies Upon Default:

(1) Termination. If an event of default occurs, Landlord shall have the right, with or without notice or demand, immediately (after expiration of any applicable grace period specified herein) to terminate this Lease, and at any time thereafter recover possession of the Leased Premises or any part thereof and expel and remove therefrom Tenant and any other person occupying the same, by any lawful means, and again repossess and enjoy the Leased Premises without prejudice to any of the remedies that Landlord may have under this Lease, or at law or in equity by reason of Tenant’s default or of such termination. In addition to the foregoing, if at any time, Tenant is in default of any term, condition or provision of this Lease, to the fullest extent permitted by law, any express or implicit waiver by Landlord of Tenant’s requirement to pay Base Rent shall be null and void and Tenant shall immediately pay to Landlord all Base Rent so expressly or implicitly waived by Landlord.

(2) Continuation After Default. Even though Tenant has breached this Lease and/or abandoned the Leased Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant’s right to possession under subsection 7.8(b)(1) hereof in writing, and Landlord may enforce all of its rights and remedies under this Lease, including (but without limitation) the right to recover Rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a landlord under Section 1951.4 of the Civil Code of the State of California or any amended or successor code section, provided Tenant has the right to sublet or assign the Lease Premises, subject only to reasonable limitations. See Sections 5.6 and 6.2 for the limitations on assignment and subletting which limitations Tenant and Landlord agree are reasonable. Acts of maintenance or preservation, efforts to relet the Leased Premises or the appointment of a receiver upon application of Landlord to protect Landlord’s interest under this Lease shall not constitute an election to terminate Tenant’s right to possession. If Landlord elects to relet the Leased Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of

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any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Leased Premises; fourth, to the payment of Rent due and unpaid hereunder; and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Leased Premises, which are not covered by the rent received from the reletting.

(c) Damages Upon Termination. Should Landlord terminate this Lease pursuant to the provisions of subsection 7.8(b)(1) hereof, Landlord shall have all the rights and remedies of a landlord provided by Section 1951.2 of the Civil Code of the State of California. Upon such termination, in addition to any other rights and remedies to which Landlord may be entitled under applicable law, Landlord shall be entitled to recover from Tenant: (i) the worth at the time of award of the unpaid Rent and other amounts which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom. The “worth at the time of award” of the amounts referred to in clauses (i) and (ii) shall be computed with interest at the lesser of eighteen percent (18%) per annum or the maximum rate then allowed by law. The “worth at the time of award” of the amount referred to in clause (iii) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%).

(d) Computation of Rent for Purposes of Default. For purposes of computing unpaid Rent which would have accrued and become payable under this Lease pursuant to the provisions of Section 7.8(c), unpaid Rent shall consist of the sum of:

(1) the total Base Rent for the balance of the Term, plus

(2) a computation of Tenant’s Proportionate Share of Basic Operating Costs and of Tenant’s Proportionate Share of Property Taxes for the balance of the Term, the assumed amount for the Computation Year of the default and each future Computation Year in the Term to be equal to Tenant’s Proportionate Share of Basic Operating Costs and Tenant’s Proportionate Share of Property Taxes, respectively, for the Computation Year immediately prior to the year in which default occurs, compounded at a per annum rate equal to the mean average rate of inflation for the preceding five (5) calendar years as determined by the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index (All Urban Consumers, all items (1982-84=100)) for the Metropolitan Area or Region in which the Project is located. If such Index is discontinued or revised, the average rate of inflation shall be determined by reference to the index designated as the successor or substitute index by the government of the United States.

(e) Late Charge. If any payment required to be made by Tenant under this Lease is not received by Landlord on or before the date the same is due, Tenant shall pay to Landlord an amount equal to ten percent (10%) of the delinquent amount. The parties agree that Landlord would incur costs not contemplated by this Lease by virtue of such delinquencies, including without limitation administrative, collection, processing and accounting expenses, the amount of which would be extremely difficult to compute, and the amount stated herein represents a reasonable estimate thereof. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant’s breach or default with respect to such delinquency, or prevent Landlord from exercising any of Landlord’s other rights and remedies. Notwithstanding the foregoing, Landlord will not assess a late charge

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until Landlord has given written notice of such late payment for the first late payment in any calendar year and after Tenant has not cured such late payment within five (5) business days from receipt of such notice. After Landlord has given written notice of one (1) late payment in any calendar year, no other notices will be required during the remainder of the applicable calendar year for a late charge to be assessed to Tenant.

(f) Interest on Past-Due Obligations. Except as expressly otherwise provided in this Lease, any Rent due Landlord hereunder, other than late charges, which is not received by Landlord on the date on which it was due, shall bear interest from the day after it was due at the lesser of fifteen percent (15%) per annum or the maximum rate then allowed by law, in addition to the late charge provided for in Section 7.8(e).

(g) Landlord’s Right to Perform. Notwithstanding anything to the contrary set forth elsewhere in this Lease, in the event Tenant fails to perform any affirmative duty or obligation of Tenant under this Lease, then Landlord may (but shall not be obligated to) perform such duty or obligation on Tenant’s behalf without waiving any of Landlord’s rights in connection therewith or releasing Tenant from any of its obligations or such default, including, without limitation, the obtaining of insurance policies or governmental licenses, permits or approvals. Tenant shall reimburse Landlord upon demand for the costs and expenses of any such performance (including penalties, interest and attorneys’ fees incurred in connection therewith). Such costs and expenses incurred by Landlord shall be deemed Additional Rent hereunder.

(h) Remedies Cumulative. All rights, privileges and elections or remedies of Landlord are cumulative and not alternative with all other rights and remedies at law or in equity to the fullest extent permitted by law.

(i) Waiver. Tenant waives any right of redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179 and California Civil Code Section 3275, or under any other present or future law in the event Tenant is evicted and Landlord takes possession of the Leased Premises by reason of a default.

Article 8.

Tenant Options

8.1 Option to Renew.

(a) Landlord hereby grants to Tenant one (1) option (the “Option”) to extend the term of this Lease for an additional period of three (3) years (the “Option Term”), all on the following terms and conditions:

(1) The Option must be exercised, if at all, by written notice irrevocably exercising the Option (“Option Notice”) delivered by Tenant to Landlord not later than six (6) months and not earlier than twelve (12) months prior to the commencement of the applicable Option Term. Further, at Landlord’s option, the Option shall not be deemed to be properly exercised if, as of the date of the Option Notice or at or prior to the commencement of the applicable Option Term, (i) Tenant is in default under this Lease, (ii) Tenant has assigned this Lease or sublet any portion of the Leased Premises (other than to an affiliate or subsidiary of Tenant), (iii) Tenant, or Tenant’s affiliate or subsidiary, is in possession of less than all of the square footage of the Leased Premises, or (iv) Tenant has been in default beyond all applicable notice and cure periods at any time during the applicable Term. Provided Tenant has properly and timely exercised the Option, the term of this Lease shall be extended for the period of the applicable Option Term, and all terms, covenants and conditions of this Lease shall remain unmodified and in full force and effect, except that (i) the Tenant Improvements set forth in Exhibit B shall not apply to the Option Term (Tenant shall accept the Leased Premises in its AS IS condition existing prior to Option Term), and (ii) the Base Rent shall be modified as set forth in subsection 8.1(a)(2) below.

(2) The Base Rent payable for the initial year of each Option Term shall be the then-current rental rate per rentable square foot (as further defined below, “FMRR”) being agreed to (with annual market increases)

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in new and renewal leases by the Landlord and other landlords of buildings in the San Bruno, California area which are comparable in quality, location and prestige to the Building (“Comparable Buildings”) and tenants leasing space in the Building or Comparable Buildings. Thereafter, Base Rent shall increase by three percent (3%), on a compounding basis, on each anniversary of the Term Commencement Date during the Option Term. As used herein, “FMRR” shall mean the rental rate per rentable square foot for which Landlord and/or other landlords are entering into new leases with new tenants leasing from Landlord and other landlords office space in the Building and/or Comparable Buildings (“Comparative Transactions”), taking into consideration fair market annual increases, all free rent and other out-of-pocket concessions generally being granted at such time for comparable space, including the value of existing tenant improvements in the Leased Premises. To the extent such other Comparable Buildings have historically received lower or higher rents from the rents in the Building, then for the purpose of arriving at the FMRR, such rates when used to establish the FMRR in the Building shall be increased or decreased as appropriate to reflect such historical differences. Landlord shall provide its determination of the FMRR to Tenant within twenty (20) days after Landlord receives the Option Notice. Tenant shall have ten (10) days (“Tenant’s Review Period”) after receipt of Landlord’s notice of the FMRR within which to accept such FMRR or to reasonably object thereto in writing. In the event Tenant objects to the FMRR submitted by Landlord, Landlord and Tenant shall attempt to agree upon such FMRR. If Landlord and Tenant fail to reach agreement on such FMRR within ten (10) days following Tenant’s Review Period (the “Outside Agreement Date”), then each party shall place in a separate sealed envelope its final proposal as to FMRR and such determination shall be submitted to arbitration in accordance with subparagraph 8.1(b) below.

(b) Landlord and Tenant shall meet with each other within three (3) business days of the Outside Agreement Date and exchange the sealed envelopes and then open such envelopes in each other’s presence. If Landlord and Tenant do not mutually agree upon the FMRR within one (1) business day of the exchange and opening of envelopes, then, within ten (10) business days of the exchange and opening of envelopes, Landlord and Tenant shall agree upon and jointly appoint one arbitrator who shall be, by profession, a real estate appraiser or broker who shall have been active over the ten (10) year period ending on the date of such appointment in the leasing of comparable commercial properties in the vicinity of the Building. Neither Landlord nor Tenant shall consult with such broker or appraiser as to his or her opinion as to FMRR prior to the appointment. The determination of the arbitrator shall be limited solely to the issue of whether Landlord’s or Tenant’s submitted FMRR for the Leased Premises is the closer to the actual rental rate per rentable square foot for new leases for Comparative Transactions. Such arbitrator may hold such hearings and require such briefs as the arbitrator, in his or her sole discretion, determines is necessary. In addition, Landlord or Tenant may submit to the arbitrator with a copy to the other party within two (2) business days after the appointment of the arbitrator any data and additional information that such party deems relevant to the determination by the arbitrator (“Data”) and the other party may submit a reply in writing within two (2) business days after receipt of such Data.

(1) The arbitrator shall, within thirty (30) days of his or her appointment, reach a decision as to whether the parties shall use Landlord’s or Tenant’s submitted FMRR, and shall notify Landlord and Tenant of such determination.

(2) The decision of the arbitrator shall be binding upon Landlord and Tenant.

(3) If Landlord and Tenant fail to agree upon and appoint such arbitrator, then the appointment of the arbitrator shall be made by the American Arbitration Association.

(4) The cost of arbitration shall be paid by the losing party.

(5) The arbitration proceeding and all evidence given or discovered pursuant thereto shall be maintained in confidence by all parties.

(c) Each Option granted to Tenant in this Lease is personal to the original Tenant named in the Basic Lease Information sheet, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity

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other than said original Tenant while the original Tenant is in full and actual possession of the Leased Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Tenant are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise.

(d) In the event that Tenant has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised.

8.2 Right of First Offer.

1. Tenant shall have a continuous right of first offer to lease (the “Right of First Offer”) any separately-demised contiguous space on the second (2nd) floor of the Building (the “ROFO Space”). For ROFO Space that is not currently leased to a third party (“Vacant ROFO Space”), promptly following written request (“Tenant Request”) by Tenant (which may not be given more than twice in any twelve (12) consecutive month period), Landlord will give Tenant written notice of the availability of any Vacant ROFO Space (“Landlord’s Availability Notice”). The term “ROFO Space,” as used in the portion of this Section that follows this sentence, shall mean and refer to either the ROFO Space or the Vacant ROFO Space, as applicable. Tenant’s Right of First Offer shall be exercised as follows: at any time after Landlord has determined that the existing tenant in such ROFO Space will not extend or renew the term of its lease for such ROFO Space (but prior to leasing such ROFO Space to a party other than the existing tenant), or within five (5) business days following delivery of Landlord’s Availability Notice for Vacant ROFO Space, as applicable, Landlord shall deliver written notice to Tenant (the “ROFO Notice”) of the terms under which Landlord is prepared to lease the ROFO Space to Tenant for the remainder of the Term, which terms shall reflect the Prevailing Market (hereinafter defined) rate for such ROFO Space as reasonably determined by Landlord and taking into account the then remaining length of the Term. Tenant may lease such ROFO Space in its entirety only, under such terms, by delivering written notice of exercise to Landlord (the “Notice of Exercise”) within five (5) business days after the date of the ROFO Notice, except that Tenant shall have no such Right of First Offer and Landlord need not provide Tenant with a ROFO Notice, if:

a. Tenant is in default under the Lease beyond any applicable cure periods at the time that Landlord would otherwise deliver the ROFO Notice; or

b. Tenant has sublet the Premises prior to the date Landlord would otherwise deliver the ROFO Notice; or

c. Tenant is not occupying any portion of the Premises on the date Landlord would otherwise deliver the ROFO Notice; or

e. Tenant does not intend to use the ROFO Space for Tenant’s exclusive use during the Term; or

f. The existing tenant in the ROFO Space is interested in extending or renewing its lease for the ROFO Space or entering into a new lease for such ROFO Space.

2. Terms for ROFO Space.

a. The term for the ROFO Space shall commence upon the commencement date stated in the ROFO Notice (which shall provide for a reasonable period of time for construction of improvements) and thereupon such ROFO Space shall be considered a part of the Premises, provided that all of the terms stated in the ROFO Notice shall govern Tenant’s leasing of the ROFO Space and only to the extent that they do not conflict with the ROFO Notice, the terms and conditions of this Lease shall apply to the ROFO Space.

b. Tenant shall pay Base Rent and Additional Rent for the ROFO Space in accordance with the terms and conditions of the ROFO Notice, which terms and conditions shall reflect the Prevailing Market rate for the ROFO Space as determined in Landlord’s reasonable judgment.

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c. The ROFO Space (including improvements and personalty, if any) shall be accepted by Tenant in its condition and as-built configuration existing on the earlier of the date Tenant takes possession of the ROFO Space or as of the date the term for such ROFO Space commences, unless the ROFO Notice specifies any work to be performed by Landlord in the ROFO Space, in which case Landlord shall perform such work in the ROFO Space; provided, however, that Landlord shall deliver same with the structure and systems serving the ROFO Space in good condition and operating order. If Landlord is delayed delivering possession of the ROFO Space due to the holdover or unlawful possession of such space by any party, Landlord shall use reasonable efforts to obtain possession of the space, and the commencement of the term for the ROFO Space shall be postponed until the date Landlord delivers possession of the ROFO Space to Tenant free from occupancy by any party.

3. Lease of ROFO Space to Third Party. If Tenant fails to timely elect to lease the ROFO Space on the terms set forth in the ROFO Notice as set forth in Paragraph 1 of this Section 8.2, then Landlord shall thereafter be entitled to lease the ROFO Space to a third party or any other person or entity; provided, however, that if Landlord intends to lease the ROFO Space on terms economically more favorable to the third party than the terms offered to Tenant, then Landlord shall be obligated to reoffer the right to lease the ROFO Space in accordance with the terms and conditions of this Section 8.2 by delivering to Tenant a new ROFO Notice in accordance with the terms and conditions of Paragraph 1 of this Section 8.2. For purposes of this Paragraph 3, terms shall be considered to be “economically more favorable” if the effective Rent payable by the third party is greater than five percent (5%) less than the effective Rent payable by Tenant under the ROFO Notice.

4. ROFO Amendment. If Tenant exercises its Right of First Offer, Landlord shall prepare an amendment (the “ROFO Amendment”) adding the ROFO Space to the Premises on the terms set forth in the ROFO Notice and reflecting the changes in the Base Rent, Rentable Square Footage of the Premises, Tenant’s Percentage and other appropriate terms. A copy of the ROFO Amendment shall be sent to Tenant within a reasonable time after Landlord’s receipt of the Notice of Exercise executed by Tenant, and Tenant shall execute and return the ROFO Amendment to Landlord as soon as reasonably possible thereafter, but an otherwise valid exercise of the Right of First Offer shall be fully effective whether or not the ROFO Amendment is executed.

5. Definition of Prevailing Market. For purposes of this Right of First Offer provision, “Prevailing Market” shall mean the annual rental rate per square foot for space comparable to the ROFO Space in the Building and office buildings comparable to the Building in the San Bruno, California area under leases and renewal and expansion amendments being entered into at or about the time that Prevailing Market is being determined, giving appropriate consideration to tenant concessions, brokerage commissions, tenant improvement allowances, existing improvements in the space in question, and the method of allocating operating expenses and taxes. Notwithstanding the foregoing, space leased under any of the following circumstances shall not be considered to be comparable for purposes hereof: (i) the lease term is for less than the lease term of the ROFO Space, (ii) the space is encumbered by the option rights of another tenant, or (iii) the space has a lack of windows and/or an awkward or unusual shape or configuration. The foregoing is not intended to be an exclusive list of space that will not be considered to be comparable.

6. Subordination. Notwithstanding anything herein to the contrary, Tenant’s Right of First Offer is subject and subordinate to the expansion rights (whether such rights are designated as a right of first offer, right of first refusal, expansion option or otherwise) of any tenant of the Building existing on the date hereof.

Article 9.

Miscellaneous Matters

9.1 Parking.

(a) Provided Tenant is not in default of any term or provision of this Lease, Landlord agrees to provide Tenant for use by the employees, agents, customers and invitees of Tenant the number of parking spaces

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designated on the Basic Lease Information sheet on an unreserved and unassigned basis on those portions of the Project designated by Landlord for parking. Tenant shall not use more parking spaces than said number of parking spaces. The parking spaces will not be separately identified and Landlord shall have no obligation to monitor the use of the parking area. If a parking density problem occurs during the Term, Landlord may address the problem, in its reasonable discretion, which solution may include initiating a parking permit system or a reserved parking system and any costs associated therewith (including, without limitation, costs of patrolling the parking lot for compliance with the parking system) shall constitute Basic Operating Costs. All parking shall be subject to any and all rules and regulations adopted by Landlord in its discretion from time to time. Only automobiles no larger than full size passenger automobiles or pick-up trucks or standard business use vehicles (which do not require parking spaces larger than full size passenger automobiles) may be parked in the Project parking area. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, agents, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. A failure by Tenant or any of its employees, agents, customers or invitees to comply with the foregoing provisions shall afford Landlord the right, but not the obligation, without notice, in addition to any other rights and remedies available under this Lease, to remove and to tow away the vehicles involved and to charge the cost to Tenant, which cost shall be immediately due and payable upon demand by Landlord. If Tenant relinquishes in writing (or by nonpayment, if a parking fee is charged) any of such parking rights during the Term, Tenant shall no longer have a right to the parking relinquished and may obtain future parking solely on a space-available basis.

(b) Landlord reserves the right to charge a per-car parking fee during the Term if such parking fees are mandated or otherwise imposed by applicable law.

9.2 Intentionally Omitted

9.3 No Waiver. No waiver by either party of the default or breach of any term, covenant or condition of this Lease by the other shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent default or breach by the other of the same or of any other term, covenant or condition hereof. Landlord’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Landlord’s consent to, or approval of, any subsequent or similar act by Tenant, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Landlord’s knowledge of a default or breach at the time of accepting Rent, the acceptance of Rent by Landlord shall not be a waiver of any preceding default or breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular Rent so accepted. Any payment given Landlord by Tenant may be accepted by Landlord on account of monies or damages due Landlord, notwithstanding any qualifying statements or conditions made by Tenant in connection therewith, which statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Landlord at or before the time of deposit of such payment.

9.4 Recording. Neither this Lease nor a memorandum thereof shall be recorded without the prior written consent of Landlord, which consent may be withheld in Landlord’s sole discretion.

9.5 Holding Over. If Tenant holds over after expiration or termination of this Lease without the written consent of Landlord, Tenant shall pay for each month of hold-over tenancy one hundred fifty (150%) times the Gross Rent which Tenant was obligated to pay for the month immediately preceding the end of the Term for each month or any part thereof of any such hold-over period, together with such other amounts as may become due hereunder. No holding over by Tenant after the Term shall operate to extend the Term. In the event of any unauthorized holding over, Tenant shall indemnify, defend and hold Landlord harmless from and against all claims, demands, liabilities, losses, costs, expenses (including attorneys’ fees), injury and damages including any lost profits incurred by Landlord as a result of Tenant’s delay in vacating the Leased Premises.

9.6 Transfers by Landlord. The term “Landlord” as used in this Lease shall mean the owner(s) at the time in question of the fee title to the Leased Premises or, if this is a sublease, of the Tenant’s interest in the master

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lease. If Landlord transfers, in whole or in part, its rights and obligations under this Lease or in the Project, upon its transferee’s assumption of Landlord’s remaining obligations under this Lease, no further liability or obligations shall thereafter accrue against the transferring or assigning party as Landlord hereunder and such transferring or assigning party shall automatically be freed and relieved from the performance of any covenants or obligations on part of Landlord contained in this Lease. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Landlord shall be binding only upon the Landlord as defined in this Section 9.6.

9.7 Attorneys’ Fees. In the event either party places the enforcement of this Lease, or any part of it, or the collection of any Rent due, or to become due, hereunder, or recovery of the possession of the Leased Premises, in the hands of an attorney, or files suit upon the same, the prevailing party shall recover its reasonable attorneys’ fees, costs and expenses as a cost of suit incurred and not as damages, including those which may be incurred on appeal. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not suit is filed or any suit that may be filed is pursued to decision or judgment. The term “prevailing party” shall include, without limitation, a party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other party of its claim or defense. The attorneys’ fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition to the foregoing, in the event Tenant requires Landlord’s consent or signature with respect to an agreement or other matter not provided for in this Lease (e.g., an agreement requested by Tenant’s lender), Tenant shall reimburse Landlord for its reasonable attorneys’ fees or other consultant fees incurred in connection with the review and/or negotiation of such agreement or matter.

9.8 Termination; Merger. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Leased Premises, shall constitute an acceptance of the surrender of the Leased Premises by Tenant before the scheduled Term Expiration Date. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Leased Premises and accomplish a termination of this Lease. Unless specifically stated otherwise in writing by Landlord, the voluntary or other surrender of this Lease by Tenant, the mutual termination or cancellation hereof, or a termination hereof by Landlord for default by Tenant, shall automatically terminate any sublease or lesser estate in the Leased Premises; provided, however, Landlord shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Landlord’s failure within thirty (30) days following any such event to make any written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Landlord’s election to have such event constitute the termination of such interest.

9.9 Amendments; Interpretation. This Lease may not be altered, changed or amended, except by an instrument in writing signed by the parties in interest at the time of the modification. The captions of this Lease are for convenience only and shall not be used to define or limit any of its provisions.

9.10 Severability. If any term or provision of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and shall be enforceable to the fullest extent permitted by law.

9.11 Notices. All notices, demands, consents and approvals which are required or permitted by this Lease to be given by either party to the other shall be in writing and shall be deemed to have been fully given by personal delivery or by recognized same day or overnight courier service or when deposited in the United States mail, certified or registered, with postage prepaid, and addressed to the party to be notified at the address for such party specified on the Basic Lease Information sheet, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days’ notice to the notifying party given in accordance with this Section 9.11, except that upon Tenant’s taking possession of the Leased Premises, the Leased Premises shall constitute Tenant’s address for notice purposes. A copy of all notices given to Landlord under this Lease shall be concurrently transmitted to such party or parties at such addresses as Landlord may from time to time hereafter

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designate by notice to Tenant. A copy of all notices given under this Lease shall be concurrently transmitted to Tenant at the Tenant’s Address for Notices as specified on the Basic Lease Information sheet.

Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. Notices delivered by recognized overnight courier shall be deemed given on the next business day after the business day upon which delivery of the same was made to the courier. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. Tenant hereby appoints as its agent to receive the service of all default notices and notice of commencement of unlawful detainer proceedings the person in charge of or apparently in charge of or occupying the Leased Premises at the time, and, if there is no such person, then such service may be made by attaching the same on the main entrance of the Leased Premises.

9.12 Force Majeure. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Section 9.12 shall excuse or delay Tenant’s obligation to pay Rent or other charges due under this Lease.

9.13 Guarantor. Tenant’s obligations under this Lease shall be guaranteed by the guarantor(s) set forth under the Basic Lease Information sheet pursuant to a form of guaranty provided by Landlord, and each such guarantor shall have the same obligations as Tenant under this Lease, including, but not limited to, the obligation to provide the estoppel certificate and information called for by Section 5.13. Tenant shall deliver to Landlord, concurrently with the execution and delivery of this Lease, the original guaranty executed by each guarantor. It shall constitute a default of Tenant under this Lease if any such guarantor fails or refuses, upon reasonable request by Landlord, to give: (a) evidence of the due execution of the guarantee called for by this Lease, including the authority of the guarantor (and of the party signing on guarantor’s behalf) to obligate such guarantor on said guarantee, and including, in the case of a corporate guarantor, a certified copy of a resolution of the board of directors of guarantor authorizing the making of such guarantee, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf; (b) current financial statements of guarantor as may, from time to time, be requested by Landlord; (c) an estoppel certificate; or (d) written confirmation that the guarantee is still in effect.

9.14 Successors and Assigns. This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns (subject to the provisions hereof, including, without limitation, Section 5.15), and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent assignment or subletting, which may be approved by Landlord hereunder, Tenant’s assigns or subtenants.

9.15 Further Assurances. Landlord and Tenant each agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease.

9.16 Incorporation of Prior Agreements. This Lease, including the exhibits and addenda attached to it, contains all agreements of Landlord and Tenant with respect to any matter referred to herein. No prior agreement or understanding pertaining to such matters shall be effective.

9.17 Applicable Law. This Lease shall be governed by, construed and enforced in accordance with the laws of the State of California.

9.18 Time of the Essence. Time is of the essence of each and every covenant of this Lease. Each and every covenant, agreement or other provision of this Lease on Tenant’s part to be performed shall be deemed and construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease or on any other covenant or agreement set forth herein.

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9.19 No Joint Venture. This Lease shall not be deemed or construed to create or establish any relationship of partnership or joint venture or similar relationship or arrangement between Landlord and Tenant hereunder.

9.20 Authority. If Tenant is a corporation, limited liability company, trust or general or limited partnership, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on Tenant’s behalf and that this Lease is binding upon Tenant in accordance with its terms. If Tenant is a corporation, limited liability company, trust or partnership, Tenant shall, upon request by Landlord, deliver to Landlord evidence satisfactory to Landlord of such authority.

9.21 Landlord Renovations. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Leased Premises, Building, Project, or any part thereof and that no representations or warranties respecting the condition of the Leased Premises, the Building or the Project have been made by Landlord to Tenant, except as specifically set forth in this Lease. However, Tenant acknowledges that Landlord may from time to time, at Landlord’s sole option, renovate, improve, alter, or modify (collectively, the “Renovations”) the Building, Leased Premises, and/or Project, common areas, systems and equipment, roof, and structural portions of the same, which Renovations may include, without limitation, (i) modifying the common areas and tenant spaces to comply with applicable laws, including regulations relating to the physically disabled, seismic conditions, and building safety and security, and (ii) installing new carpeting, lighting, and wall coverings in the Building common areas, and in connection with such Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Building, limit or eliminate access to portions of the Project, including portions of the common areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building. Tenant hereby agrees that such Renovations and Landlord’s actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant’s business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Leased Premises or of Tenant’s personal property or improvements resulting from the Renovations or Landlord’s actions in connection with such Renovations, or for any inconvenience or annoyance occasioned by such Renovations or Landlord’s actions in connection with such Renovations. Notwithstanding the foregoing, Landlord shall use commercially reasonable efforts to minimize interference with Tenant’s business operations in the Leased Premises as a result of Landlord’s performance of the Renovations.

9.22 Landlord Exculpation. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to the actual interest of Landlord and its present or future partners or members in the Building, and Tenant agrees to look solely to Landlord’s interest in the Building for satisfaction of any liability and shall not look to other assets of Landlord nor seek any recourse against the assets of the individual partners, members, trustees, directors, officers, shareholders, agents or employees of Landlord, including without limitation, any property management or asset management company of Landlord (collectively, the “Landlord Parties”). It is the parties’ intention that Landlord and the Landlord Parties shall not in any event or circumstance be personally liable, in any manner whatsoever, for any judgment or deficiency hereunder or with respect to this Lease. Landlord shall not be liable for any loss, injury or damage arising from any act or omission of any other tenant or occupant of the Project, nor shall Landlord be liable under any circumstances for damage or inconvenience to Tenant’s business or for any loss of income or profit therefrom. The liability of Landlord under this Lease is limited to its actual period of ownership of title to the Building.

9.23 Offer. Preparation of this Lease by Landlord or Landlord’s agent and submission of same to Tenant shall not be deemed an offer to lease to Tenant. This Lease is not intended to be binding and shall not be effective until fully executed by both Landlord and Tenant.

9.24 Security. Landlord shall not be required to provide, operate or maintain alarm or surveillance systems or services for the Leased Premises or the Common Areas. Tenant shall provide such security services and shall install within the Leased Premises such security equipment, systems and procedures as may reasonably be required for the protection of its employees and invitees, provided that Tenant shall coordinate such services and

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equipment with Landlord and the Building rules and regulations. The determination of the extent to which such security equipment, systems and procedures are reasonably required shall be made in the sole judgment, and shall be the sole responsibility, of Tenant. Tenant acknowledges that it has neither received nor relied upon any representation or warranty made by or on behalf of Landlord with respect to the safety or security of the Leased Premises or the Project or any part thereof, and further acknowledges that Tenant has made its own independent determinations with respect to all such matters.

9.25 No Easement For Light, Air and View. This Lease conveys to Tenant no rights for any light, air or view. No diminution of light, air or view, or any impairment of the visibility of the Leased Premises from inside or outside the Building, by any structure or other object that may hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of Rent under this Lease, constitute an actual or constructive eviction of Tenant, result in any liability of Landlord to Tenant, or in any other way affect this Lease or Tenant’s obligations hereunder.

9.26 OFAC Compliance.

(a) Tenant represents and warrants that (i) Tenant and each person or entity owning an interest in Tenant is (A) not currently identified on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) and/or on any other similar list maintained by OFAC pursuant to any authorizing statute, executive order or regulation (collectively, the “List”), and (B) not a person or entity with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States, (ii) none of the funds or other assets of Tenant constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person (as hereinafter defined), (iii) no Embargoed Person has any interest of any nature whatsoever in Tenant (whether directly or indirectly), (iv) none of the funds of Tenant have been derived from any unlawful activity with the result that the investment in Tenant is prohibited by law or that the Lease is in violation of law, and (v) Tenant has implemented procedures, and will consistently apply those procedures, to ensure the foregoing representations and warranties remain true and correct at all times. The term “Embargoed Person” means any person, entity or government subject to trade restrictions under U.S. law, including but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. §1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated thereunder with the result that the investment in Tenant is prohibited by law or Tenant is in violation of law.

(b) Tenant covenants and agrees (i) to comply with all requirements of law relating to money laundering, anti-terrorism, trade embargos and economic sanctions, now or hereafter in effect, (ii) to immediately notify Landlord in writing if any of the representations, warranties or covenants set forth in this paragraph or the preceding paragraph are no longer true or have been breached or if Tenant has a reasonable basis to believe that they may no longer be true or have been breached, (iii) not to use funds from any “Prohibited Person” (as such term is defined in the September 24, 2001 Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism) to make any payment due to Landlord under the Lease and (iv) at the request of Landlord, to provide such information as may be requested by Landlord to determine Tenant’s compliance with the terms hereof.

(c) Tenant hereby acknowledges and agrees that Tenant’s inclusion on the List at any time during the Term shall be a material default of the Lease. Notwithstanding anything herein to the contrary, Tenant shall not permit the Leased Premises or any portion thereof to be used or occupied by any person or entity on the List or by any Embargoed Person (on a permanent, temporary or transient basis), and any such use or occupancy of the Leased Premises by any such person or entity shall be a material default of the Lease.

(d) Simultaneously with the execution of the Lease, Tenant will provide to Landlord the names of the persons holding an ownership interest in Tenant, for purposes of compliance with Presidential Executive Order 13224 (issued September 24, 2001).

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(e) Landlord represents and warrants as of the date of this Lease that (i) Landlord and each person or entity owning an interest in Landlord is (A) not currently identified on the Specially Designated Nationals and Blocked Persons List maintained by OFAC and/or on any other similar List, and (B) not a person or entity with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States, (ii) none of the funds or other assets of Landlord constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person, (iii) no Embargoed Person has any interest of any nature whatsoever in Landlord (whether directly or indirectly), and (iv) none of the funds of Landlord have been derived from any unlawful activity with the result that the investment in Landlord is prohibited by law or that the Lease is in violation of law.

9.27 Mortgagee Protection. Upon any default on the part of Landlord, Tenant will give written notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Leased Premises who has provided Tenant with notice of their interest together with an address for receiving notice, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. If such default cannot be cured within such time period, then such additional time as may be necessary will be given to such beneficiary or mortgagee to effect such cure so long as such beneficiary or mortgagee has commenced the cure within the original time period and thereafter diligently pursues such cure to completion, in which event this Lease shall not be terminated while such cure is being diligently pursued. Tenant agrees that each lender to whom this Lease has been assigned by Landlord is an express third party beneficiary hereof. Tenant shall not make any prepayment of Rent more than one (1) month in advance without the prior written consent of each such lender. Tenant waives the collection of any deposit from each such lender or purchaser at a foreclosure sale unless said lender or purchaser shall have actually received and not refunded the deposit. Tenant agrees to make all payments under this Lease to the lender with the most senior encumbrance upon receiving a direction, in writing, to pay said amounts to such lender. Tenant shall comply with such written direction to pay without determining whether an event of default exists under such lender’s loan to Landlord. If, in connection with obtaining financing for the Leased Premises or any other portion of the Project, Landlord’s lender shall request reasonable modification(s) to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not materially and adversely affect Tenant’s rights hereunder, including Tenant’s use, occupancy or quiet enjoyment of the Leased Premises.

9.28 Confidentiality. Landlord and Tenant each agree that the terms of this Lease are confidential and constitute proprietary information of the parties hereto. Disclosure of the terms hereof could adversely affect the ability of Landlord to negotiate with other tenants. Each of the parties hereto agrees that such party, and its respective partners, officers, directors, employees, agents, real estate brokers and sales persons and attorneys, shall not disclose the terms and conditions of this Lease to any other person without the prior written consent of the other party hereto except pursuant to an order of a court of competent jurisdiction. Provided, however, that Landlord may disclose the terms hereof to any lender now or hereafter having a lien on Landlord’s interest in the Project or any portion thereof, and either party may disclose the terms hereof to its respective independent accountants who review its respective financial statements or prepare its respective tax returns, to any prospective transferee of all or any portions of their respective interests hereunder, to any lender or prospective lender to such party, to any governmental entity, agency or person to whom disclosure is required by applicable law, regulation or duty of diligent inquiry and in connection with any action brought to enforce the terms of this Lease, on account of the breach or alleged breach hereof or to seek a judicial determination of the rights or obligations of the parties hereunder. Tenant acknowledges that any breach by Tenant of the agreements set forth in this Section shall cause Landlord irreparable harm. The terms and provisions of this Section shall survive the termination of the Lease (whether by lapse of time or otherwise).

9.29 Waiver of Jury Trial. To the extent permitted by applicable law, Landlord and Tenant each hereby waive trial by jury in any action, proceeding or counterclaim brought by either party against the other on any

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matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant created hereby, Tenant’s use or occupancy of the Leased Premises or any claim or injury or damage.

9.30 Counterparts; Signatures. This Lease may be executed in counterparts. All executed counterparts shall constitute one agreement, and each counterpart shall be deemed an original. The parties hereby acknowledge and agree that facsimile signatures or signatures transmitted by electronic mail in so-called “pdf” format shall be legal and binding and shall have the same full force and effect as if an original of this Lease had been delivered. Landlord and Tenant (i) intend to be bound by the signatures on any document sent by facsimile or electronic mail, (ii) are aware that the other party will rely on such signatures, and (iii) hereby waive any defenses to the enforcement of the terms of this Lease based on the foregoing forms of signature.

9.31 Accessibility Inspection Disclosure. Pursuant to California Civil Code Section 1938, Landlord hereby advises Tenant that Landlord has not had the Building or the Leased Premises inspected by a Certified Access Specialist. Tenant acknowledges that it will be wholly responsible for any accommodations or alterations which need to be made to the Leased Premises to accommodate disabled employees and customers of Tenant, including without limitation, the requirements under the accessibility laws. If a complaint is received by Landlord from either a private or government complainant regarding accessibility access to the Common Areas, Landlord reserves the right to mediate, contest, comply with or otherwise respond to such complaint as Landlord deems to be reasonably prudent under the circumstances. If Landlord decides to make alterations to the Common Areas in response to any such complaints or in response to legal requirements Landlord considers to be applicable to the Common Areas, the cost of such alterations shall be included in Basic Operating Costs. In the event Landlord is required to take action to effectuate compliance with the accessibility laws, Landlord shall have a reasonable period of time to make the improvements and alterations necessary to effectuate such compliance.

9.32 Energy Usage Reporting. Tenant agrees to reasonably cooperate with Landlord to the extent required by Landlord to comply with California Public Resources Code Section 25402.10 including, without limitation, providing or consenting to any utility company providing Tenant’s energy consumption information for the Premises to Landlord.

9.33 Project/Building Remodeling. Landlord shall have the right, at any time and from time to time during the Term, upon not less than sixty (60) days’ prior written notice to Tenant, to remodel, renovate, reduce or expand, in any manner, the Project, Building or any portion thereof, which work may include the addition or removal of office spaces and/or the addition or removal of buildings, including the Building, to, or from, the Project. If such remodel, renovation or expansion will materially and adversely affect Tenant’s operations from the Leased Premises, as reasonably determined by Landlord, or if Landlord shall need to utilize the Leased Premises in connection with the remodel, renovation or expansion, Landlord shall have the following options: (a) cause Tenant to vacate the Leased Premises during the period necessary for Landlord to effect the remodel, renovation or expansion, or during the period during which Tenant will be unable to reasonably operate from the Leased Premises, during which period Tenant shall have no obligation to pay Rent, or (b) terminate this Lease, in which event Landlord shall pay to Tenant, within sixty (60) days following the date Tenant vacates the Leased Premises, the unamortized cost of all permanently affixed leasehold improvements (the cost of which shall be evidenced by invoices and proofs of payment of same) installed in the Leased Premises by Tenant (and paid for by Tenant without any contribution or reimbursement from Landlord), which amortization shall be determined on a straight line basis over the Term, and upon payment by Landlord, Tenant shall provide Landlord with a bill of sale for said permanently affixed leasehold improvements.

9.34 Exhibits; Addenda. The following Exhibits and addenda are attached to, incorporated in and made a part of this Lease: Exhibit A Floor Plan of the Leased Premises; Exhibit A-1 Site Plan of the Project; Exhibit B Initial Improvement of the Leased Premises; Exhibit C Confirmation of Term of Lease; and Exhibit D Building Rules and Regulations.

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IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first written above.

“LANDLORD”:
CCF RPP BAYHILL, LLC, a Delaware limited liability company
By:	CCF Rubicon, LLC, a Delaware limited liability company, its Sole Member
	By:	Rubicon Manager II, LLC, a California limited liability company, its Administrative Member

By:

Printed Name:

Title:

“TENANT”:

AQUINOX PHARMACEUTICALS, INC.,

a Delaware corporation

By:

Printed Name: Kamran Alam

Title: Vice President Finance & CFO

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EXHIBIT A

FLOOR PLAN

OF THE

LEASED PREMISES

[TO BE ADDED.]

Exhibit A – Page 1

EXHIBIT A-1

SITE PLAN OF THE

PROJECT

Exhibit A-1 – Page 1

EXHIBIT B

INITIAL IMPROVEMENT OF THE LEASED PREMISES

1. Tenant Improvements. Landlord shall deliver the Leased Premises with the following improvements: (i) new Building standard paint, and (ii) new Building standard carpet (collectively, the “Tenant Improvements”). Except for the foregoing, Tenant accepts the Leased Premises in its AS IS condition existing on the date Tenant executes this Lease and agrees that Landlord shall have no obligation to perform any other tenant improvements in the Leased Premises and Landlord shall have no obligation to make any tenant improvement allowance available to Tenant. Except for the foregoing, Tenant, at its sole cost, shall be responsible for all improvement of the Leased Premises.

2. Requirements for Work Performed by Tenant. All work (including, without limitation, all fit-up work, phone and data cabling, installation of telephone conduits, furniture, fixtures, and equipment, and any specialized improvements) performed at the Building or in the Project by Tenant or Tenant’s contractor or subcontractors prior to the Term Commencement Date (“Tenant’s Work”) shall be subject to the following additional requirements:

(a) Such work shall not proceed until Landlord has approved in writing (which approval shall not be unreasonably withheld, conditioned or delayed): (i) the amount and coverage of public liability and property damage insurance, with Landlord named as an additional insured, on such liability coverage carried by Tenant’s contractor and subcontractors, (ii) complete and detailed plans and specifications for such work, and (iii) a schedule for the work.

(b) All work shall be done in conformity with a valid permit when required, a copy of which shall be furnished to Landlord before such work is commenced. In any case, all such work shall be performed in accordance with all applicable laws. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no responsibility for Tenant’s failure to comply with applicable laws.

(c) Tenant shall be responsible for cleaning the Leased Premises, the Building and the Project and removing all debris in connection with its work. All completed work shall be subject to inspection and acceptance by Landlord. Tenant shall reimburse Landlord for the actual out-of pocket cost for all extra expenses incurred by Landlord by reason of faulty work done by Tenant or Tenant’s contractor or subcontractors or by reason of inadequate cleanup by Tenant or Tenant’s contractor or subcontractors.

(d) Tenant (and Tenant’s contractors, subcontractors, vendors, agents, and employees) performing Tenant’s Work shall not disrupt or delay the performance of the Tenant Improvements.

3. Substantial Completion. “Substantial Completion” shall mean (and the Tenant Improvements shall be deemed “Substantially Complete”) when performance of the Tenant Improvements by the Landlord’s contractor has occurred in accordance with the provisions of this Exhibit B. Substantial Completion shall be deemed to have occurred notwithstanding a requirement to complete punchlist items or similar corrective work.

4. Early Access. Tenant shall be given access to the Leased Premises starting approximately fourteen (14) days prior to the Term Commencement Date in order for Tenant to install Tenant’s furniture, trade fixtures, equipment, telephone networks and computer networks, and to perform general set-up for Tenant’s business operations. From the date Tenant is given early access to the Leased Premises as set forth above through the Term Commencement Date, Tenant shall be subject to all of the covenants in the Lease, except that Tenant’s obligation to pay Rent shall commence in accordance with the Basic Lease Information of the Lease; provided, however (i) Tenant shall exercise such right of access in a manner that comports with the requirements of all relevant insurance policies, (ii) Tenant (and Tenant’s contractors, subcontractors, vendors, agents, and employees) shall not disrupt or delay the performance of the Tenant Improvements, and (iii) Tenant (and Tenant’s contractors, subcontractors, vendors, agents, and employees) shall in no event give directions to (or otherwise interfere with) Landlord’s contractor or others performing the Tenant Improvements. Tenant shall indemnify and hold the Landlord free and harmless from any and all liens, costs, and liabilities or expenses incurred in connection with any early access of Tenant.

Exhibit B – Page 1

EXHIBIT C

CONFIRMATION OF TERM OF LEASE

This Confirmation of Term of Lease is made by and between                 , a                 , as Landlord, and                 , a                 , as Tenant, who agree as follows:

1. Landlord and Tenant entered into a Lease dated                 ,                  (the “Lease”), in which Landlord leased to Tenant and Tenant leased from Landlord the Leased Premises described in the Basic Lease Information sheet of the Lease (the “Leased Premises”).

2. Pursuant to Section 3.1 of the Lease, Landlord and Tenant hereby confirm as follows:

a.             ,              is the Term Commencement Date;

b.             ,              is the Term Expiration Date; and

c.             ,              is the commencement date of Rent under the Lease.

3. Tenant hereby confirms that the Lease is in full force and effect and:

a. It has accepted possession of the Leased Premises as provided in the Lease;

b. The improvements and space required to be furnished by Landlord under the Lease have been furnished;

c. Landlord has fulfilled all its duties of an inducement nature;

d. The Lease has not been modified, altered or amended, except as follows:                                                                                                             and

e. There are no setoffs or credits against Rent and no security deposit has been paid except as expressly provided by the Lease.

4. The provisions of this Confirmation of Term of Lease shall inure to the benefit of, or bind, as the case may require, the parties and their respective successors, subject to the restrictions on assignment and subleasing contained in the Lease.

///signature page follows///

Exhibit C – Page 1

///continued from previous page///

DATED:                                 ,         

“LANDLORD”:

                                                                                    ,

By:

Printed Name:

Title:

“TENANT”:

                                                                                    ,

By:

Printed Name:

Title:

Exhibit C – Page 2

EXHIBIT D

BUILDING RULES AND REGULATIONS

1. The sidewalks, doorways, halls, stairways, vestibules and other similar areas shall not be obstructed by Tenant or used by it for any purpose other than ingress to and egress from the Leased Premises, and for going from one part of the Building to another part. Corridor doors, when not in use, shall be kept closed. Before leaving the Building, Tenant shall ensure that all doors to the Leased Premises are securely locked and all water faucets and electricity are shut off.

2. Plumbing fixtures shall be used only for their designated purpose, and no foreign substances of any kind shall be deposited therein. Damage to any such fixtures resulting from misuse by Tenant or any employee or invitee of Tenant shall be repaired at the expense of Tenant.

3. Nails, screws and other attachments to the Building require prior written consent from Landlord, except for the routine hanging of pictures and diplomas or certifications. Tenant shall not mar or deface the Leased Premises in any way. Tenant shall not place anything on or near the glass of any window, door or wall which may appear unsightly from outside the Leased Premises.

4. All contractors and technicians rendering any installation service to Tenant shall be subject to Landlord’s approval and supervision prior to performing services. This applies to all work performed in the Building, including, but not limited to, installation of telephones, telegraph equipment, wiring of any kind, and electrical devices, as well as all installations affecting floors, walls, woodwork, windows, ceilings and any other physical portion of the Building.

5. Movement in or out of the Building of furniture, office equipment, safes or other bulky material which requires the use of elevators, stairways, or the Building entrance and lobby shall be restricted to hours established by Landlord. All such movement shall be under Landlord’s supervision, and the use of an elevator for such movements shall be restricted to the Building’s freight elevator. Arrangements shall be made at least 24 hours in advance with Landlord regarding the time, method, and routing of such movements. Tenant shall pay for the services of the employees of the elevator service company employed when safes and other heavy articles are moved into or from the Building, and Tenant shall assume all risks of damage and pay the cost of repairing or providing compensation for damage to the Building, to articles moved and injury to persons or property resulting from such moves. Landlord shall not be liable for any acts or damages resulting from any such activity.

6. Landlord shall have the right to limit the weight and size of, and to designate the location of, all safes and other heavy property brought into the Building.

7. Tenant shall cooperate with Landlord in maintaining the Leased Premises. Tenant shall not employ any person for the purpose of cleaning the Leased Premises other than the Building’s cleaning and maintenance personnel. Window cleaning shall be done only by Landlord’s agents at such times and during such hours as Landlord shall elect. Janitorial services will not be furnished on nights when rooms are occupied after 7:00 P.M.

8. Deliveries of water, soft drinks, newspapers or other such items to the Leased Premises shall be restricted to hours established by Landlord and made by use of the freight elevator if Landlord so directs.

9. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds, fish or animals of any kind shall be brought into or kept in, on or about the Leased Premises, with the exception of guide dogs where necessary.

10. No cooking shall be done in the Leased Premises except in connection with a convenience lunch room for the sole use of employees and guests (on a non-commercial basis) in a manner which complies with all of the provisions of the Lease and which does not produce fumes or odors.

Exhibit D – Page 1

11. Food, soft drink or other vending machines shall not be placed within the Leased Premises without Landlord’s prior written consent.

12. Tenant shall not install or operate on the Leased Premises any electric heater, stove or similar equipment without Landlord’s prior written consent. Tenant shall not use or keep on the Leased Premises any kerosene, gasoline, or inflammable or combustible fluid or material other than limited quantities reasonably necessary for the operation and maintenance of office equipment utilized at the Leased Premises. No explosives shall be brought onto the Project at any time.

13. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building’s heating and air conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. Tenant shall not tamper with or attempt to adjust temperature control thermostats in the Leased Premises; Landlord shall make reasonable adjustments in thermostats upon request from Tenant.

14. The Building air conditioning system is designed for operation only with all outside Building windows closed; accordingly, Tenant shall not open or allow any outside window to be opened at any time.

15. Tenant, its employees, agents and invitees shall each comply with all requirements necessary for the security of the Leased Premises, including, if implemented by Landlord, the use of service passes issued by Landlord for after-hours movement of office equipment/packages, and the signing of a security register in the Building lobby after hours. Landlord reserves the right to refuse entry to the Building after normal business hours to Tenant, its employees, agents or invitees, or any other person without satisfactory identification showing his or her right of access to the Building at such time. Landlord shall not be liable for any damages resulting from any error in regard to any such identification or from such admission to or exclusion from the Building. Landlord shall not be liable to Tenant for losses due to theft or burglary, or for damage by unauthorized persons in, on or about the Project, and Tenant assumes full responsibility for protecting the Leased Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry closed.

16. Landlord will furnish Tenant with a reasonable number of initial keys for entrance doors into the Leased Premises, and may charge Tenant for additional keys thereafter. All such keys shall remain the property of Landlord. No additional locks are allowed on any door of the Leased Premises without Landlord’s prior written consent and Tenant shall not make any duplicate keys. Upon termination of this Lease, Tenant shall surrender to Landlord all keys to the Leased Premises, and give to Landlord the combination of all locks for safes and vault doors, if any, in the Leased Premises.

17. Tenant shall not bring into (or permit to be brought into) the Building any bicycle or other type of vehicle.

18. Landlord retains the right at any time, without liability to Tenant, to change the name and street address of the Building, except as otherwise expressly provided in the Lease with respect to signage.

19. Canvassing, peddling, soliciting, and distribution of handbills in or at the Project are prohibited and Tenant will cooperate to prevent these activities.

20. The Building hours of operation are 8:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 1:00 p.m., Saturday excluding holidays. Landlord reserves the right to close and keep locked all entrance and exit doors of the Building on Saturdays (before 8:00 a.m. and after 1:00 p.m.), Sundays and legal holidays, and between the hours of 6:01 p.m. of any day and 7:59 a.m. of the following day, and during such other hours as Landlord may deem advisable for the protection of the Building and the tenants thereof.

Exhibit D – Page 2

21. The requirements of Tenant will be attended to only upon application to the Project manager. Employees will not perform any work or do anything outside of their regular duties unless under specific instruction from the Project manager.

22. Tenant shall cooperate fully with the life safety program of the Building as established and administered by Landlord. This shall include participation by Tenant and its employees in exit drills, fire inspections, life safety orientations and other programs relating to fire and life safety that may be established by Landlord.

23. No smoking shall be permitted in the Building.

24. Landlord reserves the right to rescind any of these rules and regulations and to make future rules and regulations required for the safety, protection and maintenance of the Project, the operation and preservation of the good order thereof, and the protection and comfort of the tenants and their employees and visitors. Such rules and regulations, when made and written notice thereof given to Tenant, shall be binding as if originally included herein. Landlord shall not be responsible to Tenant for the non-observance or violation of these rules and regulations by any other tenant of the Building. Landlord reserves the right to exclude or expel from the Project any person who, in Landlord’s judgment, is under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these rules and regulations.

Exhibit D – Page 3

EX-10.17

Exhibit 10.17

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (this “Amendment”) is made and entered into effective as of January     9        , 2017 (the “Effective Date”), by and between GOOGLE INC., a Delaware corporation (“Landlord” or “Lessor”), and AQUINOX PHARMACEUTICALS, INC., a Delaware corporation (“Tenant” or “Lessee”).

R E C I T A L S :

A. Landlord and Tenant are parties to that certain Office Building Lease dated December 10, 2015 (the “Lease”), pursuant to which Landlord is currently leasing to Tenant, and Tenant is currently leasing from Landlord, certain space containing approximately 3,520 rentable square feet, commonly known as Suite 200 and located on the second (2nd) floor of that certain building addressed as 1150 Bayhill Drive, San Bruno, California (the “Building”).

B. Landlord and Tenant now desire to amend the Lease (i) to expand the Leased Premises, and (ii) to modify various terms and provisions of the Lease, all as hereinafter provided.

A G R E E M E N T :

NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Capitalized Terms. All capitalized terms when used herein shall have the same meanings given such terms in the Lease unless expressly superseded by the terms of this Amendment.

2. Expansion and Effective Date. Effective as of February 1, 2017 (the “Expansion Effective Date”), the Leased Premises, as defined in the Lease, is increased from 3,520 rentable square feet on the second (2nd) floor of the Building (the “Original Premises”) to include an additional 6,019 rentable square feet on the first (1st) floor of the Building commonly known as Suite 100 (the “Expansion Space”), and from and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Leased Premises, as defined in the Lease. The Term for the Expansion Space shall commence on the Expansion Effective Date and end on December 31, 2018 (the “Termination Date”), unless sooner terminated in accordance with the Lease. The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and except that Tenant shall not be entitled to receive any allowances, abatements or other financial concessions granted with respect to the Original Premises unless such concessions are expressly provided for herein with respect to the Expansion Space.

3. Rent. In addition to Tenant’s obligation to pay Base Rent for the Original Premises, Tenant shall pay Landlord Base Rent for the Expansion Space as follows:

Term	Monthly Installment of Base Rent
2/1/2017 – 1/31/2018	$	22,571.25	*
2/1/2018 – 12/31/2018	$	23,248.39

* Provided Tenant is not in default and has fully performed the provisions of the Lease, as hereby amended, Tenant shall have no obligation to pay Base Rent with respect to the Expansion Space for the period

commencing on February 1, 2017 and ending on March 31, 2017 (the “Abatement Period”). If Tenant shall be in default under the Lease, and shall fail to cure such default within the time, if any, provided for cure pursuant to the Lease, then, in addition to any other remedies Landlord may have under the Lease, Landlord, at its option, may elect any or all of the following remedies: (i) Tenant shall immediately become obligated to pay to Landlord the amount of all Base Rent previously abated hereunder during the Abatement Period, together with interest on such amounts as provided in the Lease from the date such Base Rent would have otherwise been due but for the Base Rent abatement provided herein; or (ii) Tenant shall immediately be obligated to begin paying Base Rent at the full amounts of the monthly installments therefor set forth above. In no event shall there be any rent abatement for the Original Premises.

Upon the mutual execution of this Amendment, Tenant shall deliver to Landlord the third (3rd) month’s Base Rent in the amount of $22,571.25 (the “Prepaid Rent”).

4. Condition of Expansion Space. Tenant has inspected the Expansion Space, and Tenant agrees that it shall accept and occupy the Expansion Space and the Building in their current “AS IS” condition as of the Effective Date and the Expansion Effective Date without any agreements, representations, understandings or obligations on the part of Landlord to perform or pay for any alterations, repairs or improvements to the Expansion Space, except as otherwise expressly set forth in the Lease, as hereby amended. Notwithstanding the foregoing, Landlord agrees to deliver the Expansion Space and Building Systems in good working condition, including the roof in watertight condition, and mechanical, electrical and plumbing in good working condition and operable.

5. Responsibility for Improvements to Expansion Space. Any construction, alterations or improvements to the Expansion Space shall be performed by Tenant at its sole cost and expense using contractors selected by Tenant and approved by Landlord and shall be governed in all respects by the terms of the Lease, as amended hereby. In any and all events, the Expansion Effective Date shall not be postponed or delayed if the initial improvements to the Expansion Space are incomplete on the Expansion Effective Date for any reason whatsoever. Any delay in the completion of initial improvements to the Expansion Space shall not subject Landlord to any liability for any loss or damage resulting therefrom. In furtherance of the foregoing, Landlord will provide Tenant with access to the Expansion Space following the mutual execution of this Amendment so long as Tenant has delivered to Landlord the Prepaid Rent and Additional Security Deposit and is otherwise in compliance with the insurance requirements set forth in the Lease. During such early occupancy period, Tenant shall comply with all terms, covenants and conditions set forth in the Lease, and Tenant shall not be obligated to pay Base Rent for the Expansion Space unless Tenant commences operations from the Expansion Space prior to the Expansion Effective Date.

6. Additional Security Deposit. Upon Tenant’s execution hereof, Tenant shall pay Landlord the sum of $23,248.39 (the “Additional Security Deposit”), which shall be added to and become part of the Security Deposit held by Landlord as provided in the Lease as security for payment of Rent and the performance of the other terms and conditions of the Lease by Tenant. Accordingly, simultaneous with the execution hereof, the Security Deposit is increased from $13,630.44 to $36,878.83.

7. Tenant’s Proportionate Share. For the period commencing with the Expansion Effective Date and ending on the Termination Date, Tenant’s Proportionate Share for the Expansion Space is approximately 12.34% for the Building, and approximately 4.10% for the Project.

8. Basic Operating Costs and Property Taxes. For the period commencing with the Expansion Effective Date and ending on the Termination Date, Tenant shall pay for Tenant’s Pro Rata Share of Basic Operating Costs and Property Taxes applicable to the Expansion Space in accordance with the terms of the Lease; it being agreed that the Base Year for the Expansion Space shall be 2016.

9. Parking Spaces. From and after the Expansion Effective Date until the Termination Date, Tenant shall be permitted to use eighteen (18) surface parking spaces (based on 3.1 parking spaces per 1,000 rentable square feet of the Expansion Space) for the Expansion Space.

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10. Signage. Tenant, at Tenant’s sole cost, shall be permitted to install standard directory signage and suite entry identification, so long as all such signage is approved by Landlord and is otherwise in compliance with the Lease.

11. Landlord’s Address for Notices. Effective as of the Effective Date, all notices, consents, demands and other communications delivered by Tenant to Landlord pursuant to and in accordance with the Lease must be addressed to the following addresses:

Originals sent to:

Google Inc.

1600 Amphitheatre Parkway

Mountain View, California 94043

Attention: Lease Administration

and

Google Inc.

1600 Amphitheatre Parkway

Mountain View, California 94043

Attention: Legal Department / RE Matters

12. California Accessibility Disclosure. For purposes of Section 1938 of the California Civil Code, Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, that the Premises have not undergone inspection by a Certified Access Specialist (CASp). As required by Section 1938(e) of the California Civil Code, Landlord 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, Landlord and Tenant hereby agree as follows: (a) any CASp inspection requested by Tenant shall be conducted, at Tenant’s sole cost and expense, by a CASp designated by Landlord; and (b) Tenant, at its sole cost and expense, shall be responsible for making any improvements or repairs within the Premises to correct violations of construction-related accessibility standards; and, if anything done by or for Tenant in its use or occupancy of the Premises shall require any improvements or repairs to the Building (outside the Premises) to correct violations of construction-related accessibility standards, then Tenant shall, at Landlord’s option, either (i) perform such improvements or repairs at Tenant’s sole cost and expense, or (ii) reimburse Landlord upon demand, as Additional Rent, for the cost to Landlord of performing such improvements or repairs.

13. Brokers. Landlord and Tenant each hereby represents and warrants to the other that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Amendment, other than CBRE, Inc. (Jon Moeller and Payam Tabar) (“Landlord’s Broker”), representing Landlord, and CBRE, Inc. (Richard Friday) (“Tenant’s Broker,” and, together with Landlord’s Broker, collectively, the “Brokers”), representing Tenant, and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Amendment. Landlord shall be solely responsible for paying any commission owed to the Brokers in connection with this Amendment pursuant to the terms and conditions set forth in a separate written agreement. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including, without limitation, reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any breach of the foregoing representation and warranty by the indemnifying party in connection with this Amendment. The provisions of this Section 9 shall survive the expiration or earlier termination of the Lease.

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14. Authority. If Tenant is a corporation, trust, limited liability company or partnership, each individual executing this Amendment on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Amendment and that each person signing on behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten (10) days after Landlord’s written request, deliver to Landlord satisfactory evidence of such authority, and, upon demand by Landlord, Tenant shall also deliver to Landlord satisfactory evidence of: (i) good standing in Tenant’s state of formation; and (ii) qualification to do business in California.

15. Counterparts. This Amendment may be executed in any number of counterparts, which may be delivered electronically, via facsimile or by other means. Each party may rely upon signatures delivered electronically or via facsimile as if such signatures were originals. Each counterpart of this Amendment shall be deemed to be an original, and all such counterparts (including those delivered electronically or via facsimile), when taken together, shall be deemed to constitute one and the same instrument.

16. No Options. Notwithstanding anything to the contrary contained in the Lease, as hereby amended, Tenant hereby acknowledges and agrees that: (i) Tenant has no (A) options to extend or renew the Lease, (B) early termination options, (C) options or rights to expand the Premises or to lease additional space in the real property of which the Premises are a part, (D) rights of first offer and/or rights of first refusal to lease any space in the real property of which the Premises are a part, and (E) options or preferential rights to purchase all or any portion of the Premises or the real property of which the Premises are a part nor any other rights or interests with respect to the Premises or the real property of which the Premises are a part, other than as “Tenant” under the Lease; and (ii) Tenant is not entitled to any improvement allowance, free or abated rent or any other concessions under the Lease, except as expressly provided in this Amendment. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that the provisions of Sections 8.1 and 8.2 of the Lease are hereby deleted in their entirety and shall be of no further force and effect.

17. No Further Modification. Except as set forth in this Amendment, all of the terms and provisions of the Lease are hereby ratified and confirmed and shall remain unmodified and in full force and effect. In the event of any conflict between the terms and conditions of the Lease and the terms and conditions of this Amendment, the terms and conditions of this Amendment shall prevail.

IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed by their duly authorized representatives as of the date first above written.

“LANDLORD”:	“TENANT”:
GOOGLE INC.,	AQUINOX PHARMACEUTICALS, INC.,
a Delaware corporation	a Delaware corporation
By:	By:
Name:	Name:
Title:	Title:

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements Nos.333-194490, 333-203179, 333-210172 and 333-216572 on Form S-8 and Nos. 333-203180, 333-208651 and 333-215457 on Form S-3 of our report dated March 12, 2018, relating to the consolidated financial statements of Aquinox Pharmaceuticals, Inc. and subsidiary appearing in this Annual Report on Form 10-K of Aquinox Pharmaceuticals, Inc. for the year ended December 31, 2017.

/s/ Deloitte LLP

Chartered Professional Accountants

Vancouver, Canada

March 12, 2018

1

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, David J. Main, certify that:

1. I have reviewed this Annual Report on Form 10-K of Aquinox Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2018

/s/ David J. Main

David J. Main

Chief Executive Officer

1

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Kamran Alam, certify that:

1. I have reviewed this Annual Report on Form 10-K of Aquinox Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2018

/s/ Kamran Alam

Kamran Alam

Chief Financial Officer

1

EX-32.1

Exhibit 32.1

AQUINOX PHARMACEUTICALS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aquinox Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David J. Main, Chief Executive Officer of the Company, certify, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

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

/s/ David J. Main

David J. Main

Chief Executive Officer

March 12, 2018

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Aquinox Pharmaceuticals, 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 the Form 10-K), irrespective of any general incorporation language contained in such filing.

1

EX-32.2

Exhibit 32.2

AQUINOX PHARMACEUTICALS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aquinox Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kamran Alam, Chief Financial Officer of the Company, certify, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

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

/s/ Kamran Alam

Kamran Alam

Chief Financial Officer

March 12, 2018

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Aquinox Pharmaceuticals, 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 the Form 10-K), irrespective of any general incorporation language contained in such filing.

1

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Document and Entity Information - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2017	Mar. 09, 2018	Jun. 30, 2017
Document And Entity Information [Abstract]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	FY
Trading Symbol	AQXP
Entity Registrant Name	AQUINOX PHARMACEUTICALS, INC
Entity Central Index Key	0001404644
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		23,490,859
Entity Public Float			$ 54.6

XML

Consolidated balance sheets - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Current assets
Cash and cash equivalents (Note 3)	$ 52,032	$ 32,301
Short-term investments (Note 11)	56,053	70,758
Receivables, prepayments and deposits	740	426
Total current assets	108,825	103,485
Property and equipment, net (Note 4)	905	849
Long-term prepayments and deposits	599
Long-term investments (Note 11)		50,046
Total assets	110,329	154,380
Current liabilities
Accounts payable and other liabilities (Note 5)	10,956	9,519
Total current liabilities	10,956	9,519
Other liabilities (Note 6)	486	197
Total liabilities	11,442	9,716
Commitments and contingencies (Note 13)
Share capital:
Common stock	0
Preferred stock	0
Additional paid-in capital	297,459	293,111
Accumulated deficit	(198,502)	(148,278)
Accumulated other comprehensive loss	(70)	(169)
Total stockholders' equity	98,887	144,664
Total liabilities and stockholders' equity	$ 110,329	$ 154,380

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Consolidated balance sheets (Parenthetical) - $ / shares	Dec. 31, 2017	Dec. 31, 2016
Statement of Financial Position [Abstract]
Common stock, par value	$ 0.000001	$ 0.000001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	23,472,430	23,423,150
Common stock, shares outstanding	23,472,430	23,423,150
Preferred stock, par value	$ 0.000001	$ 0.000001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0

XML

Consolidated statements of operations and comprehensive loss - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Operating expenses
Research and development	$ 36,267	$ 28,382	$ 15,799
General and administrative	14,852	9,263	5,541
Total operating expenses	51,119	37,645	21,340
Other income (expenses)
Interest expense	(4)	(1)
Other income (expenses) (Note 8)	940	644	(520)
Total Other income (expenses)	936	643	(520)
Net loss	$ (50,183)	$ (37,002)	$ (21,860)
Net loss per common stock - basic and diluted (Note 9)	$ (2.14)	$ (1.96)	$ (1.73)
Basic and diluted weighted average number of common stock outstanding (Note 9)	23,450,315	18,893,515	12,637,839
Comprehensive loss:
Net loss	$ (50,183)	$ (37,002)	$ (21,860)
Other comprehensive income (loss) - unrealized gain (loss) on available-for-sale securities	99	121	(286)
Comprehensive loss	$ (50,084)	$ (36,881)	$ (22,146)

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Consolidated statements of cash flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Operating activities
Net loss	$ (50,183)	$ (37,002)	$ (21,860)
Non-cash items and reclassifications:
Change in fair value of derivative liability (Note 8)		(81)	52
Stock-based compensation (Note 7(e))	3,839	1,966	1,506
Unrealized foreign exchange loss and others	709	185	580
Changes in operating assets and liabilities:
Receivable, prepayments and deposits	(905)	(109)	(96)
Accounts payable and other liabilities	1,822	4,815	(450)
Cash used in operating activities	(44,718)	(30,226)	(20,268)
Investing activities
Purchase of investments	(5,995)	(106,442)	(60,703)
Proceeds from maturity of investments	70,500	59,097	13,196
Purchase of property and equipment	(494)	(713)	(26)
Cash provided by (used in) investing activities	64,011	(48,058)	(47,533)
Financing activities
Proceeds from exercise of stock options	438	440	1,120
Payment on capital lease obligations	(15)	(4)
Public offering of common stock (Note 7(c))		75,368	98,038
Public offering costs (Note 7(c))		(4,692)	(6,210)
Cash provided by financing activities	423	71,112	92,948
Effect of exchange rate changes on cash and cash equivalents	15	(53)	(527)
Net change in cash and cash equivalents during the year	19,731	(7,225)	24,620
Cash and cash equivalents, beginning of year	32,301	39,526	14,906
Cash and cash equivalents, end of year	52,032	32,301	39,526
Supplemental disclosure of cash flow information:
Interest paid	4	1
Interest received	1,342	695	325
Non-cash investing and financing activities:
Accrued purchase of property & equipment	(77)	77
Accrued offering costs	$ (30)		35
Assets acquired through capital leases		65	$ 11
Exercise of warrants on a net settlement basis		$ 43

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Consolidated statements of stockholders equity - USD ($) $ in Thousands	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Loss [Member]
Beginning balance at Dec. 31, 2014	$ 36,147		$ 125,567	$ (89,416)	$ (4)
Beginning balance, shares at Dec. 31, 2014		10,695,108
Issuance of common stock, net share issuance costs	91,793		91,793
Issuance of common stock, net share issuance costs, shares		6,325,000
Options exercised	1,120		1,120
Options exercised, shares		191,878
Stock-based compensation	1,506		1,506
Other comprehensive income (loss)	(286)				(286)
Net loss	(21,860)			(21,860)
Ending balance at Dec. 31, 2015	108,420		219,986	(111,276)	(290)
Ending balance, shares at Dec. 31, 2015		17,211,986
Issuance of common stock, net share issuance costs	70,676		70,676
Issuance of common stock, net share issuance costs, shares		6,152,500
Options exercised	440		440
Options exercised, shares		55,663
Exercise of warrants	43		43
Exercise of warrants, shares		3,001
Stock-based compensation	1,966		1,966
Other comprehensive income (loss)	121				121
Net loss	(37,002)			(37,002)
Ending balance at Dec. 31, 2016	$ 144,664		293,111	(148,278)	(169)
Ending balance, shares at Dec. 31, 2016	23,423,150	23,423,150
Cumulative effect of adoption of new accounting standard (Note 2(p)) at Dec. 31, 2016			41	(41)
Beginning balance at Dec. 31, 2016	$ 144,664		293,152	(148,319)	(169)
Options exercised	$ 468		468
Options exercised, shares	49,280	49,280
Stock-based compensation	$ 3,839		3,839
Other comprehensive income (loss)	99				99
Net loss	(50,183)			(50,183)
Ending balance at Dec. 31, 2017	$ 98,887		$ 297,459	$ (198,502)	$ (70)
Ending balance, shares at Dec. 31, 2017	23,472,430	23,472,430

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Consolidated statements of stockholders equity (Parenthetical) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Statement of Stockholders' Equity [Abstract]
Common stock share issuance costs	$ 4,692	$ 6,245

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Nature of operations

12 Months Ended

Dec. 31, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Nature of operations

1. Nature of operations

Aquinox Pharmaceuticals, Inc. and its subsidiary, Aquinox Pharmaceuticals (Canada) Inc., (consolidated, the “Company”) is a clinical stage pharmaceutical company developing novel therapeutics for chronic urological conditions marked by inflammation and pain. The Company is focused on leveraging its library of novel compounds that activate SHIP1 (SH2 containing inositol 5’ phosphatase 1) to develop therapeutics for application in inflammation, inflammatory pain, and blood cancers.

Aquinox Pharmaceuticals, Inc. was originally incorporated under the name of Aquinox Pharmaceuticals (USA) Inc. on May 31, 2007 in the State of Delaware, United States. On January 27, 2014, Aquinox Pharmaceuticals (USA) Inc. changed its name to Aquinox Pharmaceuticals, Inc. (“Aquinox USA”).

Aquinox Pharmaceuticals (Canada) Inc. (“AQXP Canada”) was originally incorporated under the name of 6175813 Canada Inc. on December 26, 2003 under the Canada Business Corporations Act. In May 2014, after a corporate restructuring, the name was changed to Aquinox Pharmaceuticals (Canada) Inc.

The Company operates in Vancouver, British Columbia, Canada and San Bruno, California.

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Basis of presentation and summary of significant accounting policies

12 Months Ended

Dec. 31, 2017

Accounting Policies [Abstract]

Basis of presentation and summary of significant accounting policies

2. Basis of presentation and summary of significant accounting policies

(a) Basis of presentation

The accompanying consolidated financial statements are presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial results are presented on a consolidated basis. All intercompany transactions are eliminated on consolidation.

(b) Capital requirements

The Company operates in a capital intensive business. To finance its operations, the Company is likely to require additional capital. The Company may seek to raise funds through equity or debt financing. There is no assurance that financing will be available to the Company or at terms acceptable to the Company. Failure to obtain sufficient funds on acceptable terms can have a negative impact on the Company’s business, results of operations, financial condition, cash flows and future prospects.

(c) Foreign currency translation and transactions

The functional currency of the Company and its subsidiary is the U.S. dollar. Monetary assets and liabilities of the Company’s operations denominated in a currency other than the U.S. dollar are re-measured into U.S. dollars at the exchange rate prevailing as at the balance sheet date. Non-monetary assets and liabilities acquired in a currency other than U.S. dollars are translated at historical exchange rates prevailing at each transaction date.

Income and expenses are translated at the exchange rates prevailing at each transaction date, with the exception of amortization which is translated at historical exchange rates. Exchange gains and losses on translation are included in the consolidated statements of operations and comprehensive loss.

(d) Use of estimates and assumptions

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant areas requiring management estimates include valuation of stock options, amortization and depreciation, accrual of expenses, valuation allowance for deferred income taxes, and contingencies. Actual results could differ from those estimates.

(e) Cash and cash equivalents

All highly liquid investments with maturities of three months or less at the date of acquisition are considered to be cash equivalents.

(f) Short and long-term investments

Short-term investments consist of bank term deposits and U.S. government securities with initial maturities of less than a year. Long-term investments consist of U.S. government securities with initial maturities of greater than a year. Short-term investments and long-term investments are both classified as available-for-sale and carried at their estimated fair value with unrealized gains and losses recorded as a component of other comprehensive loss. Realized gains and losses are recorded in net loss. The Company periodically reviews its investments for impairment and when a decline in market value is deemed to be other than temporary, the loss is recognized in net loss.

(g) Property and equipment

Property and equipment are recorded at cost and are amortized using the straight-line basis over a range of three to five years.

Expenditures for improvements to the Company’s office spaces are capitalized and expenditures for maintenance and repairs are expensed as incurred. Tenant improvement allowances and rent holidays are included in deferred rent and recognized as a reduction in deferred rent over the term of the lease. Leasehold improvements are amortized over the lesser of useful life and term of the lease.

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on management’s assessment there were no indicators of impairment of property and equipment as at December 31, 2017 and 2016.

(h) Clinical trial accruals

As part of the process of preparing its consolidated financial statements, the Company is required to estimate expenses resulting from its obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company reflects the appropriate clinical trial expenses in the financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial.

During the course of a clinical trial, the Company adjusts the rate of clinical trial expense recognition if actual results differ from estimates. The Company prepares estimates of accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known at that time. Although the Company does not expect the estimates to be materially different from amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.

(i) Taxes

The Company accounts for income taxes using ASC 740, Income Taxes which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. In estimating future tax consequences, ASC 740 generally considers all expected future events other than enactments of and changes in the tax law or rates. The measurement of deferred tax assets is reduced, if necessary, by the extent of the valuation allowance. ASC 740 clarifies the criteria that must be met prior to recognition of the financial statement benefit of a position taken in a tax return. ASC 740 provides a benefit recognition model with a two-step approach consisting of a “more-likely-than-not” recognition criteria, and a measurement attribute that measures a given tax position as the largest amount of tax benefits that are more than 50% likely of being realized upon ultimate settlement. ASC 740 also requires the recognition of liabilities created by differences between tax positions taken in a tax return and amounts recognized in the financial statements.

Investment tax credits relating to scientific research and experimental development are accounted for as a reduction in operating expenses. To the extent there is reasonable assurance the credits will be realized, they are recorded in the period the related expenditure is made. If investment tax credit amounts subsequently received are less or more than originally recorded, the difference is treated as a change in estimate.

(j) Research and development costs

Research and development costs are charged to expense as incurred and include items such as: employee related expenses, including salaries and benefits, expenses incurred under agreements with contract research organizations and investigative sites that conduct clinical trials and preclinical studies, the cost of acquiring, developing and manufacturing clinical trial materials, facilities, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, and other supplies and costs associated with clinical trials, preclinical activities, and regulatory operations.

Development costs are expensed in the period incurred unless management believes a development project meets generally accepted accounting criteria for deferral and amortization. No product development expenditures have been deferred to date. The Company records costs for certain development activities, such as clinical trials, based on management’s evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued expense.

(k) Accounting for stock-based compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant date fair values.

The Company estimates the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that requires management to make significant estimates and judgments. Prior to the completion of the Company’s initial public offering (“IPO”) in March 2014, the Company’s common stock was not publicly traded. As a result, the expected volatility assumption is based on industry peer information due to insufficient trading history of the Company’s common stock. Additionally, because the Company has no significant history to calculate the expected term, the simplified method calculation is used.

(l) Segment reporting

The Company operates in one segment, the identification and development of therapeutics for chronic urological conditions marked by inflammation and pain. The Company has significant Canadian operations but its assets are mostly held in the United States, comprising primarily of cash and cash equivalents, short-term investments and long-term investments of $96,230 as of December 31, 2017 (December 31, 2016 - $149,796), with an immaterial amount of long-lived assets in Canada.

(m) Net loss per common stock

Basic net loss per common stock is computed by dividing loss by the weighted-average number of common stock outstanding during the period. Diluted net loss per common stock is determined using the weighted-average number of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

(n) Fair value of financial instruments

ASC 820, Fair Value Measurements requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value. ASC 820 defines fair value as the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value of the Company’s financial instruments are determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the hierarchy are as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

(o) Concentration of credit risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents, short-term investments and long-term investments. Cash, cash equivalents and investments are invested in accordance with the Company’s investment policy. The primary objective for the Company’s investment portfolio is the preservation of capital and maintenance of liquidity and includes guidelines on the quality of financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk.

(p) Recently issued and recently adopted accounting standards

The Company adopted FASB ASU 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” effective January 1, 2017 which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The previous guidance required entities to separately present deferred tax assets and deferred tax liabilities as current or noncurrent in a classified balance sheet. This change did not have a material impact on the Company’s financial statements as a full valuation allowance has been applied against the deferred tax assets.

The Company adopted FASB ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017 which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company has elected to change its accounting policy to account for forfeitures as they occur instead of on an estimated basis as this will more accurately reflect the cost of forfeitures. The change has been applied on a modified retrospective approach with a cumulative-effect adjustment to retained deficit of an immaterial amount as of January 1, 2017. The provisions relating to the accounting for income taxes has no significant impact on the consolidated financial statements as the Company applies a full valuation allowance against its deferred tax assets.

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company does not anticipate a material impact to the Company’s financial statements as a result of this adoption.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires the recognition of right-of-use assets and lease liabilities by lessees for those leases with a lease term of greater than 12 months. Upon the adoption of ASU 2016-02, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of ASU 2016-02 on the Company’s financial statements and whether to elect to apply the optional practical expedients under the modified retrospective approach.

(q) Risks and uncertainties

The Company is subject to numerous risks and uncertainties. These risks, among others, included the following:

• the Company has no source of revenue, has an accumulated deficit of $198.5 million as of December 31, 2017, may never become profitable and may incur substantial and increasing net losses for the foreseeable future as it continues development of, seeks regulatory approvals for, and potentially begins to commercialize rosiptor, its lead product candidate, and any future product candidates;

• the Company is likely to require additional capital to finance its operations which may not be available to it on acceptable terms, or at all;

• the Company’s success is primarily dependent on the successful development, regulatory approval and commercialization of rosiptor, its lead product candidate, and any future product candidates;

• SHIP1 has not been validated as a target for the treatment of any disease;

• the Company is subject to regulatory approval processes that are lengthy, time consuming and inherently unpredictable; the Company may not be able to obtain approval for rosiptor or any future product candidates from the U.S. Food and Drug Administration, or FDA, or foreign regulatory authorities;

• the Company’s intellectual property rights may be subject to claims by third parties and can be difficult and costly to protect;

• the Company may not be able to recruit or retain key employees, including its senior management team;

• the Company depends on the performance of third parties, including contract research organizations and third-party manufacturers; and

• the Company faces competition from other pharmaceutical and biotechnology companies, academic institutions, governmental agencies, and public and private research institutions, among others.

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Cash and cash equivalents

12 Months Ended

Dec. 31, 2017

Cash and Cash Equivalents [Abstract]

Cash and cash equivalents

3. Cash and cash equivalents

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Cash	$	12,583	$	3,726
Cash equivalents		39,449		28,575
	$	52,032	$	32,301

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Property and equipment

12 Months Ended

Dec. 31, 2017

Property, Plant and Equipment [Abstract]

Property and equipment

4. Property and equipment

	DECEMBER 31, 2017
(in thousands)	COST		ACCUMULATED AMORTIZATION		NET BOOK VALUE
Leasehold improvements	$	715	$	259	$	456
Office furniture, equipment and systems		725		276		449
	$	1,440	$	535	$	905
	DECEMBER 31, 2016
(in thousands)	COST		ACCUMULATED AMORTIZATION		NET BOOK VALUE
Leasehold improvements	$	490	$	77	$	413
Office furniture, equipment and systems		534		98		436
	$	1,024	$	175	$	849

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Accounts payable and other liabilities

12 Months Ended

Dec. 31, 2017

Payables and Accruals [Abstract]

Accounts payable and other liabilities

5. Accounts payable and other liabilities

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Trade accounts payable	$	6,016	$	6,860
Accrued clinical/preclinical expenses		2,667		1,381
Accrued compensation and vacation		1,553		1,024
Other liabilities		720		254
	$	10,956	$	9,519

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Other liabilities

12 Months Ended

Dec. 31, 2017

Other Liabilities Disclosure [Abstract]

Other liabilities

6. Other liabilities

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Capital lease obligations (a)	$	33	$	47
Deferred rent liability		453		150
	$	486	$	197

(a) Capital lease obligations

The Company leases office equipment under capital leases with interest rates ranging from 6.94% to 8.56% per annum. At December 31, 2017, the future payments under the Company’s capital leases were as follows:

(in thousands)	AMOUNT
2018	$	19
2019		19
2020		17
Total minimum lease payments		55
Less: amount representing interest		(6	)
Present value of future minimum lease payments		49
Less: current portion		(16	)
Capital lease obligations, net of current portion - December 31, 2017	$	33

The net book value of the office equipment under capital leases as of December 31, 2017 and 2016 was $0.1 million and $0.1 million, respectively, with an immaterial amount related to accumulated depreciation.

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Stockholders' equity

12 Months Ended

Dec. 31, 2017

Equity [Abstract]

Stockholders' equity

7. Stockholders’ equity

(a) Common stock

Aquinox USA is authorized to issue 50,000,000 shares of common stock with a par value of $0.000001 per share (December 31, 2016 – 50,000,000). As of December 31, 2017, total number of shares of common stock issued and outstanding was 23,472,430 (December 31, 2016 – 23,423,150).

(b) Preferred stock

Aquinox USA is authorized to issue 5,000,000 shares of preferred stock with a par value of $0.000001 per share (December 31, 2016 – 5,000,000). As of December 31, 2017 and December 31, 2016, no shares of preferred stock were issued or outstanding.

(c) Public offerings

On September 15, 2015, the Company completed an underwritten public offering of 6,325,000 shares of its common stock at a price to the public of $15.50 per share. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and offering costs of approximately $6.2 million, were $91.8 million.

On September 23, 2016, the Company completed an underwritten public offering of 6,152,500 shares of its common stock at a price to the public of $12.25 per share. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and offering costs of approximately $4.7 million, were $70.7 million.

(d) Stock option plan

On January 27, 2014, the stockholders of Aquinox USA approved a 2014 Equity Incentive Plan (“2014 Plan”). The 2014 Plan became effective on the date of the prospectus for the IPO, March 6, 2014. The 2014 Plan is the successor to and continuation of the Joint Canadian Stock Option Plan (the “2006 Plan”). No further grants will be made under the 2006 Plan. The 2014 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of equity awards to employees, directors, and consultants.

As of December 31, 2017, the maximum number of shares of common stock that may be issued under the 2014 Plan was 2,856,403. The number of shares of common stock reserved for issuance under the 2014 Plan will increase by the number of shares subject to stock options granted under the 2006 Plan that would have otherwise returned to the 2006 Plan, such as upon the expiration or termination of a stock award prior to vesting. As of December 31, 2017, there were 323,310 shares subject to stock options granted under the 2006 Plan. Additionally, the number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year for a period of up to 10 years, beginning on January 1, 2015 and ending on and including January 1, 2024, by 4% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the board of directors.

At December 31, 2017, the number of shares available to be granted under the 2014 Plan was 1,110,546 (December 31, 2016—913,720).

Stock option transactions and the number of stock options outstanding are summarized below:

	NUMBER OF SHARES			WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
Outstanding at December 31, 2016		1,378,352		$	9.38	7.81	$9,829
Options granted		837,540			16.63
Options exercised		(49,280	)		9.10
Options forfeited		(97,445	)		12.29
Outstanding at December 31, 2017		2,069,167		$	12.18	7.76	$3,187
Exercisable as of December 31, 2017		912,098		$	9.52	6.35	$2,248

During the year ended December 31, 2017, the Company granted 756,540 stock options to employees and 81,000 stock options to non-employee directors. The stock options granted to employees during the year ended December 31, 2017 have exercise prices per share ranging from $10.91 to $17.35 and vest 25% one year after the beginning of the vesting period and thereafter ratably each month over the following thirty-six months. The stock options granted to non-employee directors during the year ended December 31, 2017 have an exercise price per share of $13.74 and have a vesting period of one year in equal monthly installments from the beginning of the vesting period for certain grants and a vesting period of three years in equal annual installments from the beginning of the vesting period for other grants. All stock options under the 2014 Plan are subject to a 10-year expiration period.

During the year ended December 31, 2017, 49,280 shares of common stock were issued upon exercise of options with an aggregate intrinsic value of $0.2 million.

(e) Stock-based compensation

The fair value of stock options granted is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Expected volatility		84	%		82	%		97	%
Expected dividends		0	%		0	%		0	%
Expected terms (years)		6.00			6.00			6.00
Risk free rate		1.90	%		1.24	%		1.48	%
Weighted average grant-date fair value of stock options	$	11.85		$	6.11		$	8.91

Stock options are granted with exercise prices as determined by the Board of Directors at the date of grant. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. As prior to the completion of the IPO in March 2014, the Company was a private company, the Company does not have sufficient historical experience for determining the expected term of the stock option awards granted. The Company has based its expected term for awards issued to employees on the simplified method, which represents the average period from vesting to the expiration of the stock option. In addition, the Company does not have sufficient trading history for the Company’s common stock, and therefore, the expected stock price volatility for the Company’s common stock was estimated by taking the average historical price volatility for industry peers. The Company has never declared or paid any cash dividends to common stockholders and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero. The risk-free interest rate was based on the yields of treasury securities with maturities similar to the expected term of the options for each option group.

The Company amortizes the fair value of the stock options on a straight-line basis over the applicable requisite service periods of the awards, which is generally the vesting period. Stock-based compensation expense charged to operating expenses was $3.8 million, $2.0 million and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $10.1 million and $4.6 million as of December 31, 2017 and December 31, 2016, respectively, which is expected to be recognized over a weighted-average period of 2.72 years (December 31, 2016 – 2.82 years).

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Other income (expenses)

12 Months Ended

Dec. 31, 2017

Other Income and Expenses [Abstract]

Other income (expenses)

8. Other income (expenses)

	YEARS ENDED DECEMBER 31,
(in thousands)	2017			2016			2015
Change in fair value of derivative liability	$	—		$	81		$	(52	)
Foreign exchange losses		(19	)		(13	)		(476	)
Interest income		998			619			108
Miscellaneous expenses		(39	)		(43	)		(100	)
	$	940		$	644		$	(520	)

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Net loss per common stock

12 Months Ended

Dec. 31, 2017

Earnings Per Share [Abstract]

Net loss per common stock

9. Net loss per common stock

Basic and diluted net loss per common stock is computed by dividing net loss by the weighted average number of common stock outstanding. The Company excluded outstanding stock options and common stock warrants from the calculation of basic and diluted net loss per common stock as the effect would have been antidilutive for all periods presented.

The following have been excluded from the computation of basic and diluted net loss per common stock as their effect would have been antidilutive:

	DECEMBER 31, 2017		DECEMBER 31, 2016		DECEMBER 31, 2015
Outstanding stock options		2,069,167		1,378,352		865,457
Common stock warrants		—		—		11,363
Total		2,069,167		1,378,352		876,820

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Income taxes

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

Income taxes

10. Income taxes

Income tax recovery varies from the amounts that would be computed by applying the expected Canadian income tax rate (26%) and U.S. income tax rates (40.75%). The combined Canadian and U.S. income tax rates of 27.89% (2016 – 27.28%; 2015 –27.4%) was applied to loss before income taxes as shown in the following table:

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Computed taxes at combined Canadian and U.S. tax rates		(27.9	)%		(27.3	)%		(27.4	)%
Change in tax rate		(3.6	)		—			0.1
Non-deductible expenses		2.2			1.8			2.0
Research and development credits		(0.9	)		(3.5	)		—
Change in valuation allowance		25.4			28.4			25.3
Effect of the U.S. Tax Cuts and Jobs Act		4.6			—			—
Other		0.2			0.6			—
Income tax recovery		—			—			—

On December 22, 2017, the U.S. passed into law H.R.1 (originally known as the “Tax Cuts and Jobs Act”), or the Act, which significantly overhaul the U.S. tax system. Significant changes to the Internal Revenue Code include a reduction in the U.S. federal corporate tax rate from 35% to 21%. The Company’s accounting for the provisions of the Act, based on the Company’s understanding of the Act and the latest guidance available, resulted in a $2.3 million reduction in its net deferred income tax assets as of December 31, 2017 to reflect the new statutory tax rate. This reduction to the net deferred income tax assets was fully offset by a corresponding reduction in the valuation allowance.

(in thousands)	YEARS ENDED DECEMBER 31,
Net loss before taxes:		2017			2016			2015
Canada	$	(43,758	)	$	(31,737	)	$	(18,382	)
U.S.		(6,425	)		(5,265	)		(3,478	)
Total	$	(50,183	)	$	(37,002	)	$	(21,860	)

Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes. The significant components of the deferred income tax assets are as follows:

(in thousands)	DECEMBER 31, 2017			DECEMBER 31, 2016
Canadian net operating losses	$	35,605		$	24,049
U.S. net operating losses		3,749			3,889
Research and development deductions and credits		8,234			7,331
Other		1,810			1,389
Less: valuation allowance		(49,398	)		(36,658	)
Net deferred income tax assets	$	—		$	—

At December 31, 2017, the Company had Canadian net operating losses carried forward for tax purposes which were available to reduce taxable income of future years of approximately $131.9 million (December 31, 2016—approximately $92.5 million) expiring commencing in 2025 through 2037, and U.S. net operating losses carried forward for tax purposes which were available to reduce taxable income of future years of approximately $23.2 million (December 31, 2016—approximately $11.1 million).

The Company also had unclaimed Canadian tax deductions with no expiry for scientific research and experimental development expenditures of approximately $16.8 million at December 31, 2017 (December 31, 2016–approximately $15.6 million). In addition, at December 31, 2017, the Company had approximately $4.5 million (December 31, 2016—approximately $4.0 million) of investment tax credits available to offset Canadian federal and provincial taxes payable expiring commencing in 2019 through 2036.

Under ASC 740, the benefit of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of the benefit of an uncertain tax position may be recognized if the position has less than a 50% likelihood of being sustained. The Company currently does not have any unrecognized tax benefits of uncertain tax positions. The Company does not expect any significant increases to its unrecognized tax benefits within twelve months of the reporting date.

The Company currently files income tax returns in the United States and Canada, the jurisdictions in which the Company believes that it is subject to tax. Further, while the statute of limitations in each jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carry-forwards, the limitation period for examination generally does not expire until several years after the loss carry-forwards are utilized. Other than routine audits by tax authorities for tax credits and tax refunds that the Company has claimed, the Company is not aware of any other material income tax examination currently in progress by any taxing jurisdiction.

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Financial instruments

12 Months Ended

Dec. 31, 2017

Investments, All Other Investments [Abstract]

Financial instruments

11. Financial instruments

Securities classified as available for sale

The Company’s short-term and long-term investments consist of available-for-sale securities as follows:

(in thousands) December 31, 2017	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Short-term investments:
U.S. treasury securities	$	56,123	$	—	$	(70	)	$	56,053
Contractual maturities:
Due within one year	$	56,123						$	56,053
December 31, 2016	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Short-term investments:
U.S. treasury securities	$	70,819	$	—	$	(61	)	$	70,758
Long-term investments:
U.S. treasury securities	$	50,155	$	—	$	(109	)	$	50,046
Contractual maturities:
Due within one year	$	70,819						$	70,758
Due after one year through two years		50,155							50,046

The aggregate estimated fair value of the Company’s investments with unrealized losses are as follows:

	Period of continuous unrealized loss
(in thousands)	12 months or less					Greater than 12 months
	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
December 31, 2017
U.S. treasury securities	$	15,983	$	(27	)	$	40,070	$	(43	)
December 31, 2016
U.S. treasury securities	$	120,804	$	(170	)		N/A		N/A

Fair value of financial instruments

The fair value of the Company’s financial instruments are determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The carrying amounts of certain of the Company’s financial instruments including cash, cash equivalents, receivables, accounts payable and other liabilities, approximate their fair values because of their nature and/or short maturities. The Company holds short and long-term investments that are classified as available-for-sale securities, which are measured at fair value determined on a recurring basis according to the fair value hierarchy.

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:

(in thousands)	QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UN-OBSERVABLE INPUTS (LEVEL 3)		TOTAL
BALANCES – December 31, 2017
Short-term investments – U.S. treasury securities	$	56,053	$	—	$	—	$	56,053
	$	56,053	$	—	$	—	$	56,053
BALANCES – December 31, 2016
Short-term investments – U.S. treasury securities	$	70,758	$	—	$	—	$	70,758
Long-term investments – U.S. treasury securities		50,046		—		—		50,046
	$	120,804	$	—	$	—	$	120,804

Level 1 instruments, which include investments that are valued based on quoted market prices in active markets, consisted of U.S. treasury securities.

Level 2 instruments include investments for which all significant inputs are observable. The Company had no Level 2 investments at December 31, 2017 and December 31, 2016.

Level 3 instruments include investments for which significant inputs to the fair value of the assets or liabilities are unobservable and are supported by little or no market activity. The Company had no Level 3 investments at December 31, 2017 and December 31, 2016. There were no transfers between Levels 1, 2, and 3 during the years ended December 31, 2017 and December 31, 2016.

At December 31, 2017, the Company had short-term investments consisting of available-for-sale securities of $56.1 million. Total gains for securities were $0.9 million, $0.6 million and $0.1 million for the years ending December 31, 2017, 2016 and 2015, respectively.

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License and patent agreements

12 Months Ended

Dec. 31, 2017

Text Block [Abstract]

License and patent agreements

12. License and patent agreements

The Company has an agreement with Biolipox AB of Sweden for patent rights relating exclusively or principally to a specific class of compounds, which include rosiptor. The terms of the agreement required the Company to pay CAD $50,000 immediately, CAD $250,000 in shares of common stock upon the first submission to the FDA of an Investigational New Drug (IND) for a compound from the acquired class of compounds, and CAD $3.0 million upon the advancement of one of the compounds from the acquired class of compounds into a Phase 3 clinical trial. Certain other milestone payments, totaling CAD $1.5 million are payable upon the first commercial sale following regulatory approval of the first compound in each of the United States, Europe and Japan. There are no royalty payments due under this agreement. In June 2014, the Company issued 19,762 shares of common stock to Biolipox AB as payment for achievement of the milestone related to the first submission to the FDA of an IND for rosiptor. A CAD $3.0 million milestone payment was paid in November 2016 as a result of the advancement of rosiptor into a Phase 3 clinical trial. The development of the technology is actively proceeding.

The Company has an exclusive license agreement with the University of British Columbia for a worldwide license to certain small molecule compounds and pharmaceutical compositions that are modulators of SHIP1 activity. The agreement expires at the earlier of the last expiry of any patent obtained related to the technology or through enactment of one of the termination clauses stipulated in the agreement. The Company paid annual maintenance fees of CAD $1,000 related to this agreement for the year ended December 31, 2017 (December 31, 2016 – CAD $1,000) and have contingent payments totaling up to CAD $2.2 million for the first drug product and CAD $1.5 million for each subsequent drug product plus low single-digit royalties. The Company does not currently have any product candidates under development that are covered by the UBC license agreement.

The Company has an agreement with the British Columbia Cancer Agency and StemCell Technologies, Inc. for the assignment to the Company of certain patents to technology relating to SHIP1 in return for low single-digit royalty payment on product sales or low double-digit percentage of sublicense revenue. The agreement is to expire at the later of 20 years from the effective date of the agreement or upon the expiration of the last patent covered by the license. The Company incurred maintenance fees of CAD $5,000 related to this agreement during the years ended December 31, 2017, 2016 and 2015. The Company does not currently have any product candidates under development that are covered by this agreement.

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Commitments and contingencies

12 Months Ended

Dec. 31, 2017

Commitments and Contingencies Disclosure [Abstract]

Commitments and contingencies

13. Commitments and contingencies

As at December 31, 2017, the Company has obligations to make future minimum payments with respect to operating leases for office space.

The Company has a lease agreement for approximately 10,946 square feet of office space in Canada which commenced on November 1, 2016 and expires October 31, 2021, with the option to extend the lease to October 31, 2026. On December 22, 2016, the Company signed a lease agreement for an additional 2,500 square feet of office space in Canada. The lease for the additional 2,500 square feet expires June 30, 2019. In addition to the basic rent, the Company is obligated to pay for taxes, operating costs, utilities, additional services and other amounts. These leases are denominated in Canadian dollars and are included in the table below at their U.S. dollar equivalent.

The Company has a lease agreement for approximately 3,520 square feet of office space in San Bruno, California which commenced on January 1, 2016 and expires on December 31, 2018. On January 7, 2017, the Company signed a lease agreement to expand the San Bruno, California office space by an additional 6,019 square feet which is effective February 1, 2017 and expires December 31, 2018. In addition to the basic rent, the Company is obligated to pay for taxes, operating costs, utilities, additional services and other amounts.

The lease agreements contain scheduled rent increases, rent holidays and tenant improvement allowance. As such, the Company has recorded a deferred rent liability of $0.5 million as at December 31, 2017.

The minimum lease payments under the non-cancelable operating leases are payable in the following amounts over the following years.

	2018		2019		2020		2021		Total
Operating lease obligations	$	883	$	403	$	375	$	312	$	1,973
	$883		$403		$375		$312		$1,973

During the years ended December 31, 2017, 2016 and 2015, the Company incurred operating lease costs of $0.7 million, $0.4 million and $0.2 million, respectively.

In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. Although the Company cannot predict with assurance the outcome of any litigation, it does not believe there are currently any such actions that, if resolved unfavorable, would have a material impact on the Company’s financial condition, results of operations or cash flows.

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Basis of presentation and summary of significant accounting policies (Policies)

12 Months Ended

Dec. 31, 2017

Accounting Policies [Abstract]

Basis of presentation

(a) Basis of presentation

The accompanying consolidated financial statements are presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial results are presented on a consolidated basis. All intercompany transactions are eliminated on consolidation.

Capital requirements

(b) Capital requirements

The Company operates in a capital intensive business. To finance its operations, the Company is likely to require additional capital. The Company may seek to raise funds through equity or debt financing. There is no assurance that financing will be available to the Company or at terms acceptable to the Company. Failure to obtain sufficient funds on acceptable terms can have a negative impact on the Company’s business, results of operations, financial condition, cash flows and future prospects.

Foreign currency translation and transactions

(c) Foreign currency translation and transactions

The functional currency of the Company and its subsidiary is the U.S. dollar. Monetary assets and liabilities of the Company’s operations denominated in a currency other than the U.S. dollar are re-measured into U.S. dollars at the exchange rate prevailing as at the balance sheet date. Non-monetary assets and liabilities acquired in a currency other than U.S. dollars are translated at historical exchange rates prevailing at each transaction date.

Income and expenses are translated at the exchange rates prevailing at each transaction date, with the exception of amortization which is translated at historical exchange rates. Exchange gains and losses on translation are included in the consolidated statements of operations and comprehensive loss.

Use of estimates and assumptions

(d) Use of estimates and assumptions

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant areas requiring management estimates include valuation of stock options, amortization and depreciation, accrual of expenses, valuation allowance for deferred income taxes, and contingencies. Actual results could differ from those estimates.

Cash and cash equivalents

(e) Cash and cash equivalents

All highly liquid investments with maturities of three months or less at the date of acquisition are considered to be cash equivalents.

Short and long-term investments

(f) Short and long-term investments

Short-term investments consist of bank term deposits and U.S. government securities with initial maturities of less than a year. Long-term investments consist of U.S. government securities with initial maturities of greater than a year. Short-term investments and long-term investments are both classified as available-for-sale and carried at their estimated fair value with unrealized gains and losses recorded as a component of other comprehensive loss. Realized gains and losses are recorded in net loss. The Company periodically reviews its investments for impairment and when a decline in market value is deemed to be other than temporary, the loss is recognized in net loss.

Property and equipment

(g) Property and equipment

Property and equipment are recorded at cost and are amortized using the straight-line basis over a range of three to five years.

Expenditures for improvements to the Company’s office spaces are capitalized and expenditures for maintenance and repairs are expensed as incurred. Tenant improvement allowances and rent holidays are included in deferred rent and recognized as a reduction in deferred rent over the term of the lease. Leasehold improvements are amortized over the lesser of useful life and term of the lease.

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on management’s assessment there were no indicators of impairment of property and equipment as at December 31, 2017 and 2016.

Clinical trial accruals

(h) Clinical trial accruals

As part of the process of preparing its consolidated financial statements, the Company is required to estimate expenses resulting from its obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company reflects the appropriate clinical trial expenses in the financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial.

During the course of a clinical trial, the Company adjusts the rate of clinical trial expense recognition if actual results differ from estimates. The Company prepares estimates of accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known at that time. Although the Company does not expect the estimates to be materially different from amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.

Taxes

(i) Taxes

The Company accounts for income taxes using ASC 740, Income Taxes which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. In estimating future tax consequences, ASC 740 generally considers all expected future events other than enactments of and changes in the tax law or rates. The measurement of deferred tax assets is reduced, if necessary, by the extent of the valuation allowance. ASC 740 clarifies the criteria that must be met prior to recognition of the financial statement benefit of a position taken in a tax return. ASC 740 provides a benefit recognition model with a two-step approach consisting of a “more-likely-than-not” recognition criteria, and a measurement attribute that measures a given tax position as the largest amount of tax benefits that are more than 50% likely of being realized upon ultimate settlement. ASC 740 also requires the recognition of liabilities created by differences between tax positions taken in a tax return and amounts recognized in the financial statements.

Investment tax credits relating to scientific research and experimental development are accounted for as a reduction in operating expenses. To the extent there is reasonable assurance the credits will be realized, they are recorded in the period the related expenditure is made. If investment tax credit amounts subsequently received are less or more than originally recorded, the difference is treated as a change in estimate.

Research and development costs

(j) Research and development costs

Research and development costs are charged to expense as incurred and include items such as: employee related expenses, including salaries and benefits, expenses incurred under agreements with contract research organizations and investigative sites that conduct clinical trials and preclinical studies, the cost of acquiring, developing and manufacturing clinical trial materials, facilities, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, and other supplies and costs associated with clinical trials, preclinical activities, and regulatory operations.

Development costs are expensed in the period incurred unless management believes a development project meets generally accepted accounting criteria for deferral and amortization. No product development expenditures have been deferred to date. The Company records costs for certain development activities, such as clinical trials, based on management’s evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued expense.

Accounting for stock-based compensation

(k) Accounting for stock-based compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant date fair values.

The Company estimates the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that requires management to make significant estimates and judgments. Prior to the completion of the Company’s initial public offering (“IPO”) in March 2014, the Company’s common stock was not publicly traded. As a result, the expected volatility assumption is based on industry peer information due to insufficient trading history of the Company’s common stock. Additionally, because the Company has no significant history to calculate the expected term, the simplified method calculation is used.

Segment reporting

(l) Segment reporting

The Company operates in one segment, the identification and development of therapeutics for chronic urological conditions marked by inflammation and pain. The Company has significant Canadian operations but its assets are mostly held in the United States, comprising primarily of cash and cash equivalents, short-term investments and long-term investments of $96,230 as of December 31, 2017 (December 31, 2016 - $149,796), with an immaterial amount of long-lived assets in Canada.

Net loss per common stock

(m) Net loss per common stock

Basic net loss per common stock is computed by dividing loss by the weighted-average number of common stock outstanding during the period. Diluted net loss per common stock is determined using the weighted-average number of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

Fair value of financial instruments

(n) Fair value of financial instruments

ASC 820, Fair Value Measurements requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value. ASC 820 defines fair value as the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value of the Company’s financial instruments are determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the hierarchy are as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Concentration of credit risk

(o) Concentration of credit risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents, short-term investments and long-term investments. Cash, cash equivalents and investments are invested in accordance with the Company’s investment policy. The primary objective for the Company’s investment portfolio is the preservation of capital and maintenance of liquidity and includes guidelines on the quality of financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk.

Recently issued and recently adopted accounting standards

(p) Recently issued and recently adopted accounting standards

The Company adopted FASB ASU 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” effective January 1, 2017 which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The previous guidance required entities to separately present deferred tax assets and deferred tax liabilities as current or noncurrent in a classified balance sheet. This change did not have a material impact on the Company’s financial statements as a full valuation allowance has been applied against the deferred tax assets.

The Company adopted FASB ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017 which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company has elected to change its accounting policy to account for forfeitures as they occur instead of on an estimated basis as this will more accurately reflect the cost of forfeitures. The change has been applied on a modified retrospective approach with a cumulative-effect adjustment to retained deficit of an immaterial amount as of January 1, 2017. The provisions relating to the accounting for income taxes has no significant impact on the consolidated financial statements as the Company applies a full valuation allowance against its deferred tax assets.

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company does not anticipate a material impact to the Company’s financial statements as a result of this adoption.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires the recognition of right-of-use assets and lease liabilities by lessees for those leases with a lease term of greater than 12 months. Upon the adoption of ASU 2016-02, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of ASU 2016-02 on the Company’s financial statements and whether to elect to apply the optional practical expedients under the modified retrospective approach.

Risks and uncertainties

(q) Risks and uncertainties

The Company is subject to numerous risks and uncertainties. These risks, among others, included the following:

• the Company has no source of revenue, has an accumulated deficit of $198.5 million as of December 31, 2017, may never become profitable and may incur substantial and increasing net losses for the foreseeable future as it continues development of, seeks regulatory approvals for, and potentially begins to commercialize rosiptor, its lead product candidate, and any future product candidates;

• the Company is likely to require additional capital to finance its operations which may not be available to it on acceptable terms, or at all;

• the Company’s success is primarily dependent on the successful development, regulatory approval and commercialization of rosiptor, its lead product candidate, and any future product candidates;

• SHIP1 has not been validated as a target for the treatment of any disease;

• the Company is subject to regulatory approval processes that are lengthy, time consuming and inherently unpredictable; the Company may not be able to obtain approval for rosiptor or any future product candidates from the U.S. Food and Drug Administration, or FDA, or foreign regulatory authorities;

• the Company’s intellectual property rights may be subject to claims by third parties and can be difficult and costly to protect;

• the Company may not be able to recruit or retain key employees, including its senior management team;

• the Company depends on the performance of third parties, including contract research organizations and third-party manufacturers; and

• the Company faces competition from other pharmaceutical and biotechnology companies, academic institutions, governmental agencies, and public and private research institutions, among others.

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Cash and cash equivalents (Tables)

12 Months Ended

Dec. 31, 2017

Cash and Cash Equivalents [Abstract]

Schedule of Cash and Cash Equivalents

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Cash	$	12,583	$	3,726
Cash equivalents		39,449		28,575
	$	52,032	$	32,301

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Property and equipment (Tables)

12 Months Ended

Dec. 31, 2017

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

	DECEMBER 31, 2017
(in thousands)	COST		ACCUMULATED AMORTIZATION		NET BOOK VALUE
Leasehold improvements	$	715	$	259	$	456
Office furniture, equipment and systems		725		276		449
	$	1,440	$	535	$	905
	DECEMBER 31, 2016
(in thousands)	COST		ACCUMULATED AMORTIZATION		NET BOOK VALUE
Leasehold improvements	$	490	$	77	$	413
Office furniture, equipment and systems		534		98		436
	$	1,024	$	175	$	849

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Accounts payable and other liabilities (Tables)

12 Months Ended

Dec. 31, 2017

Payables and Accruals [Abstract]

Schedule of Accounts Payable and Other Liabilities

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Trade accounts payable	$	6,016	$	6,860
Accrued clinical/preclinical expenses		2,667		1,381
Accrued compensation and vacation		1,553		1,024
Other liabilities		720		254
	$	10,956	$	9,519

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Other liabilities (Tables)

12 Months Ended

Dec. 31, 2017

Other Liabilities Disclosure [Abstract]

Schedule of Other Liabilities

(in thousands)	DECEMBER 31, 2017		DECEMBER 31, 2016
Capital lease obligations (a)	$	33	$	47
Deferred rent liability		453		150
	$	486	$	197

Summary of Future Payments under Capital Leases

At December 31, 2017, the future payments under the Company’s capital leases were as follows:

(in thousands)	AMOUNT
2018	$	19
2019		19
2020		17
Total minimum lease payments		55
Less: amount representing interest		(6	)
Present value of future minimum lease payments		49
Less: current portion		(16	)
Capital lease obligations, net of current portion - December 31, 2017	$	33

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Stockholders' equity (Tables)

12 Months Ended

Dec. 31, 2017

Equity [Abstract]

Schedule of Stock Option Transactions and Number of Stock Options Outstanding

Stock option transactions and the number of stock options outstanding are summarized below:

	NUMBER OF SHARES			WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
Outstanding at December 31, 2016		1,378,352		$	9.38	7.81	$9,829
Options granted		837,540			16.63
Options exercised		(49,280	)		9.10
Options forfeited		(97,445	)		12.29
Outstanding at December 31, 2017		2,069,167		$	12.18	7.76	$3,187
Exercisable as of December 31, 2017		912,098		$	9.52	6.35	$2,248

Schedule of Weighted Average Assumptions

The fair value of stock options granted is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Expected volatility		84	%		82	%		97	%
Expected dividends		0	%		0	%		0	%
Expected terms (years)		6.00			6.00			6.00
Risk free rate		1.90	%		1.24	%		1.48	%
Weighted average grant-date fair value of stock options	$	11.85		$	6.11		$	8.91

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Other income (expenses) (Tables)

12 Months Ended

Dec. 31, 2017

Other Income and Expenses [Abstract]

Schedule of Other Income (Expenses)

	YEARS ENDED DECEMBER 31,
(in thousands)	2017			2016			2015
Change in fair value of derivative liability	$	—		$	81		$	(52	)
Foreign exchange losses		(19	)		(13	)		(476	)
Interest income		998			619			108
Miscellaneous expenses		(39	)		(43	)		(100	)
	$	940		$	644		$	(520	)

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Net loss per common stock (Tables)

12 Months Ended

Dec. 31, 2017

Earnings Per Share [Abstract]

Schedule of Antidilutive Securities Excluded from Computation of Basic and Diluted Net Loss Per Share

The following have been excluded from the computation of basic and diluted net loss per common stock as their effect would have been antidilutive:

	DECEMBER 31, 2017		DECEMBER 31, 2016		DECEMBER 31, 2015
Outstanding stock options		2,069,167		1,378,352		865,457
Common stock warrants		—		—		11,363
Total		2,069,167		1,378,352		876,820

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Income taxes (Tables)

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

Schedule of Income tax Recovery

Income tax recovery varies from the amounts that would be computed by applying the expected Canadian income tax rate (26%) and U.S. income tax rates (40.75%). The combined Canadian and U.S. income tax rates of 27.89% (2016 – 27.28%; 2015 –27.4%) was applied to loss before income taxes as shown in the following table:

	YEARS ENDED DECEMBER 31,
	2017			2016			2015
Computed taxes at combined Canadian and U.S. tax rates		(27.9	)%		(27.3	)%		(27.4	)%
Change in tax rate		(3.6	)		—			0.1
Non-deductible expenses		2.2			1.8			2.0
Research and development credits		(0.9	)		(3.5	)		—
Change in valuation allowance		25.4			28.4			25.3
Effect of the U.S. Tax Cuts and Jobs Act		4.6			—			—
Other		0.2			0.6			—
Income tax recovery		—			—			—

Schedule of Net (Loss) Income Before Taxes

(in thousands)	YEARS ENDED DECEMBER 31,
Net loss before taxes:		2017			2016			2015
Canada	$	(43,758	)	$	(31,737	)	$	(18,382	)
U.S.		(6,425	)		(5,265	)		(3,478	)
Total	$	(50,183	)	$	(37,002	)	$	(21,860	)

Components of Deferred Income Tax Assets

Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes. The significant components of the deferred income tax assets are as follows:

(in thousands)	DECEMBER 31, 2017			DECEMBER 31, 2016
Canadian net operating losses	$	35,605		$	24,049
U.S. net operating losses		3,749			3,889
Research and development deductions and credits		8,234			7,331
Other		1,810			1,389
Less: valuation allowance		(49,398	)		(36,658	)
Net deferred income tax assets	$	—		$	—

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Financial instruments (Tables)

12 Months Ended

Dec. 31, 2017

Investments, All Other Investments [Abstract]

Summary of Short-Term and Long-Term Investments of Available-for-Sale Securities

The Company’s short-term and long-term investments consist of available-for-sale securities as follows:

(in thousands) December 31, 2017	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Short-term investments:
U.S. treasury securities	$	56,123	$	—	$	(70	)	$	56,053
Contractual maturities:
Due within one year	$	56,123						$	56,053
December 31, 2016	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Short-term investments:
U.S. treasury securities	$	70,819	$	—	$	(61	)	$	70,758
Long-term investments:
U.S. treasury securities	$	50,155	$	—	$	(109	)	$	50,046
Contractual maturities:
Due within one year	$	70,819						$	70,758
Due after one year through two years		50,155							50,046

Aggregate Estimated Fair Value of Investments with Unrealized Losses

The aggregate estimated fair value of the Company’s investments with unrealized losses are as follows:

	Period of continuous unrealized loss
(in thousands)	12 months or less					Greater than 12 months
	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
December 31, 2017
U.S. treasury securities	$	15,983	$	(27	)	$	40,070	$	(43	)
December 31, 2016
U.S. treasury securities	$	120,804	$	(170	)		N/A		N/A

Fair Value of Financial Instruments Measured At Fair Value on a Recurring Basis

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:

(in thousands)	QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UN-OBSERVABLE INPUTS (LEVEL 3)		TOTAL
BALANCES – December 31, 2017
Short-term investments – U.S. treasury securities	$	56,053	$	—	$	—	$	56,053
	$	56,053	$	—	$	—	$	56,053
BALANCES – December 31, 2016
Short-term investments – U.S. treasury securities	$	70,758	$	—	$	—	$	70,758
Long-term investments – U.S. treasury securities		50,046		—		—		50,046
	$	120,804	$	—	$	—	$	120,804

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Commitments and contingencies (Tables)

12 Months Ended

Dec. 31, 2017

Commitments and Contingencies Disclosure [Abstract]

Schedule of Minimum Lease Payments Under Non-cancelable Operating Leases

The minimum lease payments under the non-cancelable operating leases are payable in the following amounts over the following years.

	2018		2019		2020		2021		Total
Operating lease obligations	$	883	$	403	$	375	$	312	$	1,973
	$883		$403		$375		$312		$1,973

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Nature of operations - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2017
Entity Information [Line Items]
Date of incorporation	May 31, 2007
Aquinox Pharmaceuticals (Canada) Inc. [Member]
Entity Information [Line Items]
Date of incorporation	Dec. 26, 2003

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Basis of presentation and summary of significant accounting policies - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2017 USD ($) Segment	Dec. 31, 2016 USD ($)
Significant Accounting Policies [Line Items]
Operating segment | Segment	1
Total Assets	$ 110,329,000	$ 154,380,000
Accumulated deficit	198,502,000	148,278,000
United States [Member]
Significant Accounting Policies [Line Items]
Total Assets	$ 96,230	$ 149,796
Minimum [Member]
Significant Accounting Policies [Line Items]
Estimated useful lives of property and equipment	3 years
Maximum [Member]
Significant Accounting Policies [Line Items]
Estimated useful lives of property and equipment	5 years

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Cash and cash equivalents - Schedule of Cash and Cash Equivalents (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Cash and Cash Equivalents [Abstract]
Cash	$ 12,583	$ 3,726
Cash equivalents	39,449	28,575
Cash and cash equivalents	$ 52,032	$ 32,301	$ 39,526	$ 14,906

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Property and Equipment - Schedule of Property and Equipment (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Property and equipment, cost	$ 1,440	$ 1,024
Property and equipment, accumulated amortization	535	175
Property and equipment, net book Value	905	849
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, cost	715	490
Property and equipment, accumulated amortization	259	77
Property and equipment, net book Value	456	413
Office Furniture, Equipment and Systems [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, cost	725	534
Property and equipment, accumulated amortization	276	98
Property and equipment, net book Value	$ 449	$ 436

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Accounts Payable and Other Liabilities - Schedule of Accounts Payable and Other Liabilities (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Payables and Accruals [Abstract]
Trade accounts payable	$ 6,016	$ 6,860
Accrued clinical/preclinical expenses	2,667	1,381
Accrued compensation and vacation	1,553	1,024
Other liabilities	720	254
Accounts payable and other liabilities	$ 10,956	$ 9,519

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Other Liabilities - Schedule of Other Liabilities (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Other Liabilities [Abstract]
Capital lease obligations	$ 33	$ 47
Deferred rent liability	453	150
Other liabilities	$ 486	$ 197

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Other Liabilities - Additional Information (Detail) - Office Furniture, Equipment and Systems [Member] - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Other Liabilities [Line Items]
Net book value of capital leases	$ 0.1	$ 0.1
Minimum [Member]
Other Liabilities [Line Items]
Interest rate on capital leases	6.94%
Maximum [Member]
Other Liabilities [Line Items]
Interest rate on capital leases	8.56%

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Other Liabilities - Summary of Future Payments under Capital Leases (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Capital Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
2018	$ 19
2019	19
2020	17
Total minimum lease payments	55
Less: amount representing interest	(6)
Present value of future minimum lease payments	49
Less: current portion	(16)
Capital lease obligations, net of current portion - December 31, 2017	33	$ 47
Present value of future minimum lease payments	$ 49

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Stockholders' equity - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands			12 Months Ended
	Sep. 23, 2016	Sep. 15, 2015	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Equity Transactions And Share Based Compensation [Line Items]
Common stock, shares authorized			50,000,000	50,000,000
Common stock, par value			$ 0.000001	$ 0.000001
Common stock, shares issued			23,472,430	23,423,150
Common stock, shares outstanding			23,472,430	23,423,150
Preferred stock, shares authorized			5,000,000	5,000,000
Preferred stock, par value			$ 0.000001	$ 0.000001
Preferred stock, shares issued			0	0
Preferred stock, shares outstanding			0	0
Underwriting commissions and offering costs				$ 4,692	$ 6,245
Aggregate net proceeds from public offering, net of underwriting commissions				$ 70,676	91,793
Shares of common stock reserved for issuance description			Additionally, the number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year for a period of up to 10 years, beginning on January 1, 2015 and ending on and including January 1, 2024, by 4% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the board of directors.
Shares of common stock reserved for issuance percentage			4.00%
Years of increase in shares of common stock reserved for issuance			10 years
Stock options outstanding			2,069,167	1,378,352
Stock options granted			837,540
Stock options granted, exercise price per share			$ 16.63
Common stock issued upon exercise of options			49,280
Common stock issued upon exercise of options aggregate intrinsic value			$ 200
Stock-based compensation expense			3,800	$ 2,000	$ 1,500
Unrecognized stock-based compensation cost			$ 10,100	$ 4,600
Unrecognized stock-based compensation cost, weighted-average period recognized			2 years 8 months 19 days	2 years 9 months 25 days
Common Stock [Member]
Equity Transactions And Share Based Compensation [Line Items]
Common stock, shares outstanding			23,472,430	23,423,150	17,211,986	10,695,108
Sale of shares under public offering	6,152,500	6,325,000		6,152,500	6,325,000
Sale of shares under public offering, price per share	$ 12.25	$ 15.50
Underwriting commissions and offering costs	$ 4,700	$ 6,200
Aggregate net proceeds from public offering, net of underwriting commissions	$ 70,700	$ 91,800
Common stock issued upon exercise of options			49,280	55,663	191,878
Employees [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options granted			756,540
Employees [Member] | Minimum [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options granted, exercise price per share			$ 10.91
Employees [Member] | Maximum [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options granted, exercise price per share			$ 17.35
Employees [Member] | One Year after the Beginning of the Vesting Period [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options, vesting percentage			25.00%
Employees [Member] | Condition (i) [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options, vesting period			1 year
Employees [Member] | Condition (ii) [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options, vesting period			3 years
Non-Employee Directors [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options granted			81,000
Stock options granted, exercise price per share			$ 13.74
Non-Employee Directors [Member] | Condition (i) [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options, vesting period			1 year
Non-Employee Directors [Member] | Condition (ii) [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options, vesting period			3 years
Equity Incentive Plan 2014 [Member]
Equity Transactions And Share Based Compensation [Line Items]
Maximum number of shares of common stock that may be issued			2,856,403
Shares available to be granted			1,110,546	913,720
Stock options, expiration period			10 years
Equity Incentive Plan 2006 [Member]
Equity Transactions And Share Based Compensation [Line Items]
Stock options outstanding			323,310

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Stockholders' equity - Schedule of Stock Option Transactions and Number of Stock Options Outstanding (Detail) - USD ($) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Options Outstanding, Number of Shares, beginning balance	1,378,352
Options granted, Number of Shares	837,540
Options exercised, Number of Shares	(49,280)
Options forfeited, Number of Shares	(97,445)
Options Outstanding, Number of Shares, ending balance	2,069,167	1,378,352
Exercisable, Number of Shares, ending balance	912,098
Options Outstanding, Weighted Average Exercise Price, beginning balance	$ 9.38
Options granted, Weighted Average Exercise Price	16.63
Options exercised, Weighted Average Exercise Price	9.10
Options forfeited, Weighted Average Exercise Price	12.29
Options Outstanding, Weighted Average Exercise Price, ending balance	12.18	$ 9.38
Exercisable, Weighted Average Exercise Price, ending balance	$ 9.52
Options Outstanding, Weighted Average Remaining Contractual Life (Years), ending balance	7 years 9 months 3 days	7 years 9 months 22 days
Exercisable, Weighted Average Remaining Contractual Life (Years), ending balance	6 years 4 months 6 days
Options Outstanding, Aggregate Intrinsic Value	$ 3,187	$ 9,829
Exercisable, Aggregate Intrinsic Value	$ 2,248

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Stockholders' equity - Schedule of Weighted Average Assumptions (Detail) - $ / shares	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Expected volatility	84.00%	82.00%	97.00%
Expected dividends	0.00%	0.00%	0.00%
Expected terms (years)	6 years	6 years	6 years
Risk free rate	1.90%	1.24%	1.48%
Weighted average grant-date fair value of stock options	$ 11.85	$ 6.11	$ 8.91

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Other Income - Schedule of Other Income Net (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Other Income and Expenses [Abstract]
Change in fair value of derivative liability		$ 81	$ (52)
Foreign exchange losses	$ (19)	(13)	(476)
Interest income	998	619	108
Miscellaneous expenses	(39)	(43)	(100)
Other income (expenses)	$ 940	$ 644	$ (520)

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Net loss per common stock - Schedule of Antidilutive Securities Excluded from Computation of Basic and Diluted Net Loss Per Share (Detail) - shares	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from the computation of basic and diluted net loss per share	2,069,167	1,378,352	876,820
Outstanding Stock Options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from the computation of basic and diluted net loss per share	2,069,167	1,378,352	865,457
Warrants to Purchase Common Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from the computation of basic and diluted net loss per share			11,363

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Income Taxes - Additional Information (Detail) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Income Taxes Disclosure [Line Items]
Expected Canadian income tax rate		26.00%
Expected U.S. income tax rates		40.75%
Combined Canadian and US expected income tax rates		(27.90%)	(27.30%)	(27.40%)
Reduction in net deferred tax assets as per Tax Cuts and Jobs Act		$ 2,300,000
Uncertain tax position		Less than a 50%
Unrecognized tax benefits		$ 0
Income tax examination, description		The Company currently files income tax returns in the United States and Canada, the jurisdictions in which the Company believes that it is subject to tax. Further, while the statute of limitations in each jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carry-forwards, the limitation period for examination generally does not expire until several years after the loss carry-forwards are utilized. Other than routine audits by tax authorities for tax credits and tax refunds that the Company has claimed, the Company is not aware of any other material income tax examination currently in progress by any taxing jurisdiction.
Domestic Tax Authority [Member]
Income Taxes Disclosure [Line Items]
Net operating losses carried forward for tax purposes		$ 23,200,000	$ 11,100,000
Tax Cuts and Jobs Act [Member]
Income Taxes Disclosure [Line Items]
Federal corporate tax		35.00%
Tax Cuts and Jobs Act [Member] | Scenario, Plan [Member]
Income Taxes Disclosure [Line Items]
Federal corporate tax	21.00%
CANADA | Minimum [Member]
Income Taxes Disclosure [Line Items]
Operating loss carryforwards, expiration dates		2025
CANADA | Maximum [Member]
Income Taxes Disclosure [Line Items]
Operating loss carryforwards, expiration dates		2037
CANADA | Foreign Tax Authority [Member]
Income Taxes Disclosure [Line Items]
Net operating losses carried forward for tax purposes		$ 131,900,000	92,500,000
Tax deductions for scientific research and experimental development		16,800,000	15,600,000
CANADA | Foreign Tax Authority [Member] | Investment Tax Credit Carryforward [Member]
Income Taxes Disclosure [Line Items]
Investment tax credits available to offset Canadian federal		$ 4,500,000	$ 4,000,000
CANADA | Foreign Tax Authority [Member] | Investment Tax Credit Carryforward [Member] | Minimum [Member]
Income Taxes Disclosure [Line Items]
Investment tax credits available to offset Canadian taxes, expiration dates		2019
CANADA | Foreign Tax Authority [Member] | Investment Tax Credit Carryforward [Member] | Maximum [Member]
Income Taxes Disclosure [Line Items]
Investment tax credits available to offset Canadian taxes, expiration dates		2036

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Income Taxes - Schedule of Income tax Recovery (Detail)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Income Tax Disclosure [Abstract]
Computed taxes at combined Canadian and U.S. tax rates	(27.90%)	(27.30%)	(27.40%)
Change in tax rate	(3.60%)		0.10%
Non-deductible expenses	2.20%	1.80%	2.00%
Research and development credits	(0.90%)	(3.50%)
Change in valuation allowance	25.40%	28.40%	25.30%
Effect of the U.S. Tax Cuts and Jobs Act	4.60%
Other	0.20%	0.60%
Income tax recovery	0.00%	0.00%	0.00%

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Income Taxes - Schedule of Net (Loss) Income Before Taxes (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Net loss before taxes:
Canada	$ (43,758)	$ (31,737)	$ (18,382)
U.S.	(6,425)	(5,265)	(3,478)
Total	$ (50,183)	$ (37,002)	$ (21,860)

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Income Taxes - Components of Deferred Income Tax Assets (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Deferred Tax Assets, Net [Abstract]
Canadian net operating losses	$ 35,605	$ 24,049
U.S. net operating losses	3,749	3,889
Research and development deductions and credits	8,234	7,331
Other	1,810	1,389
Less: valuation allowance	(49,398)	(36,658)
Net deferred income tax assets	$ 0	$ 0

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Financial instruments - Summary of Short-Term and Long-Term Investments of Available-for-Sale Securities (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Due within one year, Amortized cost	$ 56,123	$ 70,819
Due within one year, Fair value	56,053	70,758
Due after one year through two years, Amortized cost		50,155
Due after one year through two years, Fair value		50,046
Short-term Investments [Member] | U.S. Treasury Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized cost	56,123	70,819
Gross unrealized gains	0	0
Gross unrealized losses	(70)	(61)
Fair value	$ 56,053	70,758
Long-term Investments [Member] | U.S. Treasury Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized cost		50,155
Gross unrealized gains		0
Gross unrealized losses		(109)
Fair value		$ 50,046

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Financial instruments - Aggregate Estimated Fair Value of Investments with Unrealized Losses (Detail) - U.S. Treasury Securities [Member] - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Period of continuous unrealized loss, 12 months or less, Fair value	$ 15,983	$ 120,804
Period of continuous unrealized loss, 12 months or less, Gross unrealized losses	(27)	$ (170)
Period of continuous unrealized loss, Greater than 12 months, Fair value	40,070
Period of continuous unrealized loss, Greater than 12 months, Gross unrealized losses	$ (43)

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Financial instruments - Fair Value of Financial Instruments Measured At Fair Value on a Recurring Basis (Detail) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Short-term investments	$ 56,053	$ 70,758
Long-term investments		50,046
Fair Value of Financial instruments	56,053	120,804
U.S. Treasury Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Short-term investments	56,053	70,758
Long-term investments		50,046
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value of Financial instruments	56,053	120,804
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Fair Value, Measurements, Recurring [Member] | U.S. Treasury Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Short-term investments	$ 56,053	70,758
Long-term investments		$ 50,046

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Financial instruments - Additional Information (Detail) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value of Financial instruments	$ 56,053,000	$ 120,804,000
Short term investments consisting of available for sale securities	56,053,000	70,758,000
Net realized gains for securities	900,000	600,000	$ 100,000
Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value of Financial instruments	$ 0	$ 0

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License and Patent Agreements - Additional Information (Detail)	1 Months Ended			12 Months Ended
	Nov. 30, 2016 CAD ($)	Jun. 30, 2014 shares	Aug. 31, 2009 CAD ($)	Dec. 31, 2017 USD ($)	Dec. 31, 2017 CAD ($)	Dec. 31, 2016 CAD ($)	Dec. 31, 2015 CAD ($)
Biolipox AB [Member]
Patent Licenses [Line Items]
License fee			$ 50,000
Value of common stock shares issued for license fee			250,000
Payment of milestone	$ 3,000,000
Amount of development milestones payment			3,000,000
Additional milestone payment payable			$ 1,500,000
Royalty payments				$ 0
Biolipox AB [Member] | Goods and Services Exchanged for Equity Instrument [Member]
Patent Licenses [Line Items]
Number of common stock issued for payment for achievement of milestone | shares		19,762
SHIP1 Product Candidates [Member]
Patent Licenses [Line Items]
License agreement, maintenance fees					$ 1,000	$ 1,000
SHIP1 Product Candidates [Member] | First Drug Product [Member]
Patent Licenses [Line Items]
Amount of development milestones payment					2,200,000
SHIP1 Product Candidates [Member] | Subsequent Drug Product [Member]
Patent Licenses [Line Items]
Amount of development milestones payment					1,500,000
SHIP1 Enzyme and Screening of Product Candidates [Member]
Patent Licenses [Line Items]
License agreement, maintenance fees					$ 5,000	$ 5,000	$ 5,000
License agreement expiration period				20 years	20 years

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Commitments and Contingencies - Additional Information (Detail) $ in Thousands					12 Months Ended
	Jan. 07, 2017 ft²	Dec. 22, 2016 ft²	Nov. 01, 2016 ft²	Jan. 01, 2016 ft²	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)
Contingencies And Commitments [Line Items]
Deferred rent liability | $					$ 453	$ 150
Operating lease costs | $					$ 700	$ 400	$ 200
CANADA
Contingencies And Commitments [Line Items]
Lease agreement, commencement date		Dec. 22, 2016	Nov. 01, 2016
Lease agreement, expiration date		Jun. 30, 2019	Oct. 31, 2021
Lease agreement extended period			Oct. 31, 2026
Square feet of office space leased | ft²		2,500	10,946
CALIFORNIA
Contingencies And Commitments [Line Items]
Lease agreement, commencement date	Feb. 01, 2017			Jan. 01, 2016
Lease agreement, expiration date	Dec. 31, 2018			Dec. 31, 2018
Square feet of office space leased | ft²	6,019			3,520

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Commitments and contingencies - Schedule of Minimum Lease Payments Under Non-cancelable Operating Leases (Detail) $ in Thousands	Dec. 31, 2017 USD ($)
Commitments and Contingencies Disclosure [Abstract]
2018	$ 883
2019	403
2020	375
2021	312
Total	$ 1,973