2. Asset Acquisition of Verio Therapeutics Inc.

On April 7, 2010, the Company acquired Verio Therapeutics Inc. (“Verio”), a development stage company headquartered in Ottawa, Ontario to gain access to its exclusively licensed intellectual property.

In connection with the asset acquisition of Verio, the stockholders of Verio received 900,000 non-voting shares of Fate Canada (the “Exchangeable Shares”) that were initially exchangeable into 138,462 shares of our common stock and, subject to the validation of certain scientific data and the achievement of certain preclinical, clinical, commercial and financial milestones, may be exchangeable for up to 884,605 shares of our common stock.

The Exchangeable Shares will be automatically redeemed and exchanged for shares of the Company’s common stock upon the earliest of: (i) April 13, 2017, (ii) the date immediately prior to an IPO of the Company’s common stock pursuant to a registration statement filed with and declared effective by the SEC, (iii) the effective date of certain change of control events, (iv) the date upon which holders of at least a majority of the then outstanding Exchangeable Shares approve the redemption and exchange of all of the outstanding Exchangeable Shares, (v) the date upon which there are less than 450,000 Exchangeable Shares outstanding or (vi) the date that the holders of the Exchangeable Shares can exchange for shares of the Company’s common stock on a tax-deferred basis.

As of September 30, 2013 and December 31, 2012, the Exchangeable Shares were exchangeable into 480,763 shares and 403,841 shares, respectively, of the Company’s common stock. As of September 30, 2013, the number of shares of the Company’s common stock to be issued upon exchange of the Exchangeable Shares is subject to further increase as follows: (i) 76,922 shares for the achievement of certain pre-clinical milestones, (ii) 211,539 shares for the achievement of certain clinical milestones and (iii) 115,381 shares for the achievement of certain commercialization milestones.

At the date of an increase in the number of shares of the Company’s common stock issuable upon any exchange of the Exchangeable Shares due to the achievement of a milestone as described above, the fair value of these additional shares of common stock is charged to research and development expense. At the end of each reporting period, any changes in the fair value of Exchangeable Shares resulting from changes in the fair value of the underlying common stock of the Company are recorded as a component of other income (expense).

As of September 30, 2013, the changes in the number of shares of the Company’s common stock issuable upon the exchange of the Exchangeable Shares and the initial fair value of the shares are summarized as follows (in thousands, except share and per share amounts):

	Exchangeable Shares	Fair Value Per Share of Underlying Common Stock		Initial Fair Value of Exchangeable Shares

April 2010	138,462	$	1.69	$	234
March 2011	92,308	1.69		156
May 2011	115,380	1.69		195
April 2012	57,691	1.37		78
July 2013	76,922	4.49		346
	480,763			$	1,009