8. Commitments and Contingencies

In December 2013, the Company entered into a three-year lease for 6,837 square feet of office space in Cambridge, Massachusetts. The lease has monthly payments of approximately $31,000 for the first twelve months, with annual rent escalation thereafter, and provides a rent abatement of approximately $31,000 for the first full calendar month of the lease term. The lease term commenced and rental payments began in January 2014. The Company records a deferred lease obligation which represents the cumulative difference between actual facility lease payments and lease expense recognized ratably over the lease period, which is included in other liabilities. In accordance with the lease, the Company entered into a cash-collateralized irrevocable standby letter of credit in the amount of $125,345, naming the landlord as beneficiary.

In December 2014, the Company entered into a First Amendment to Lease, or the First Amendment, for additional office space contiguous to its current office space in Cambridge, Massachusetts. The First Amendment included leasing an additional 8,530 square feet of office space, or the Expansion Space, with an occupancy date of March 13, 2015. The First Amendment provided for additional monthly lease payments of approximately $45,000 for 8,530 square feet for the first twelve months and provided for annual rent escalations thereafter. The monthly rent on the existing 6,837 square feet remained at approximately $32,000 through December 31, 2016, the expiration of the lease. The First Amendment included a contribution from the landlord for leasehold improvements in the amount of approximately $100,000 which was accounted for as a deferred lease incentive and reduction in monthly rent expense over the term of the lease. The Company recorded an additional deferred lease obligation for the Expansion Space which represented the cumulative difference between actual facility lease payments and lease expense recognized ratably over the lease period. In connection with the Amendment, the Company paid an additional cash security deposit to the landlord of $179,130.

In November 2015, the Company entered into a Second Amendment to Lease, or the Second Amendment, amending the Lease to extend its existing lease for 16,222 square feet on the 11^th floor, which was due to expire on December 31, 2016, and lease an additional 23,189 square feet of office space on the 11^th and 14^th floors. Monthly lease payments for the existing 16,222 square feet on the 11^th floor remain unchanged until December 31, 2016 and will be approximately $107,000 per month commencing on May 1, 2017. The new space leased by the Company under the Second Amendment includes (i) 3,066 square feet on the 14^th floor which was delivered on December 31, 2015 and additional monthly lease payments of approximately $20,000 commencing on April 1, 2016, (ii) 16,739 square feet on the 14^th floor which was delivered on April 11, 2016 and additional monthly lease payments of approximately $110,000 commencing September 11, 2016 and (iii) 3,384 square feet on the 11^th floor with an estimated delivery date of January 1, 2017 and additional monthly lease payments of approximately $23,000 commencing May 1, 2017. The above rents are subject to annual rent escalations, commencing on either February 1, 2017 or February 1, 2018 depending upon the delivery date of each respective suite. The Second Amendment includes a contribution from the landlord for leasehold improvements for both the new leased space and the Company’s existing premises. The contribution from the landlord is being accounted for as a deferred lease incentive and reduction in monthly rent expense over the term of the lease. The term of the lease, as amended, expires on the later of August 31, 2026 or 10 years after the landlord delivers the entirety of the 14^th floor to the Company. In connection with the Second Amendment, the Company paid an additional cash security deposit to the landlord of $976,382. Total cash security deposits of $1,280,857 and $304,475 are included in other assets in the Company’s condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015, respectively.

In July, 2016, the Company entered into a Third Amendment to Lease (see Note 12).

The Company recognizes rent expense for the space which it currently occupies under its initial lease, the First Amendment, and the Second Amendment, and records a deferred lease obligation representing the cumulative difference between actual facility lease payments and lease expense recognized ratably over the lease period, which is included in the Company’s condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015. The Company will begin recognizing rent expense for the additional space not yet available at June 30, 2016 subsequent to taking possession of the space.

The Company leases office equipment under three year capital leases with payments commencing in February 2014, April 2015 and February 2016, respectively. The capital lease amounts are included in accrued expenses and other liabilities.

At June 30, 2016, the Company’s future minimum payments required under these leases are as follows:

	Operating		Capital
	Lease		Lease			Total
	(in thousands)
2016	$	1,425	$	6		$	1,431
2017		3,117		9			3,126
2018		3,117		5			3,122
2019		3,117		—			3,117
2020		3,117		—			3,117
Thereafter		17,664		—			17,664
Total	$	31,557		20		$	31,577
Less amount representing interest				(1	)
Present value of minimum lease payments at June 30, 2016			$	19

The Company recorded approximately $0.7 million and $0.2 million in rent expense for the three months ended June 30, 2016 and 2015, respectively and $1.0 and $0.4 million in rent expense for the six months ended June 30, 2016 and 2015, respectively.

Under the Company’s agreement with Quintiles, Inc., or Quintiles, to provide services for the PRO₂TECT and INNO₂VATE programs, the total remaining contract costs as of June 30, 2016 were approximately $443.2 million. The estimated period of performance for the committed work with Quintiles is through the third quarter of 2019. The Company contracts with various other organizations to conduct research and development activities with remaining contract costs to the Company of approximately $13.9 million and $5.2 million at June 30, 2016 and December 31, 2015, respectively. The scope of the services under the research and development contracts can be modified and the contracts cancelled by the Company upon written notice. In some instances, the contracts may be cancelled by the third party upon written notice.

In September 2015, a purported securities class action lawsuit was filed against the Company, including its Chief Executive Officer, its Chief Financial Officer, and members of the Company’s Board of Directors, in the Business Litigation Section of the Suffolk County Superior Court of Massachusetts. The complaint is brought on behalf of an alleged class of those who purchased common stock of the Company pursuant or traceable to the Company’s initial public offering, and purports to allege claims arising under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended. The complaint generally alleges that the defendants violated the federal securities laws by, among other things, making material misstatements or omissions concerning the Phase 2b clinical study of vadadustat. The complaint seeks, among other relief, unspecified compensatory damages, rescission of certain stock purchases, attorneys’ fees, and costs. In October 2015, the Company removed the case to the United States District Court for the District of Massachusetts, and the plaintiff filed a motion to remand the case back to the Business Litigation Section of the Suffolk County Superior Court of Massachusetts. The plaintiff’s motion to remand was granted in April 2016. The Company believes such claims are without merit and will engage in a vigorous defense of such litigation.

The Company has had a number of positive developments in our opposition and invalidity proceedings against FibroGen, Inc., or FibroGen. With regard to the opposition that the Company filed in Europe against FibroGen’s European Patent No. 1463823, or the ’823 patent, an oral proceeding took place March 8 and 9, 2016. Following the oral proceeding, the European Opposition Division ruled that the patent as granted did not meet the requirements for patentability under the European Patent Convention and, therefore, revoked the patent in its entirety. FibroGen has appealed that decision. Likewise, with regard to the invalidity proceeding that the Company filed in Japan against certain claims of FibroGen’s Japanese Patent No. 4804131, or the ’131 patent, which is the Japanese counterpart to the ’823 patent, the Japan Patent Office, or JPO, issued a preliminary decision finding all of the challenged claims to be invalid. FibroGen subsequently amended the claims and the JPO accepted the amendments. The resulting FibroGen Japanese ’131 patent does not cover vadadustat or any pyridine carboxamide compounds. To date, FibroGen has been unsuccessful in its attempts to obtain a patent in the United States covering the same claim scope as it obtained initially in Europe and Japan in the ’823 and ’131 patents. In the event FibroGen were to obtain such a patent in the United States, the Company may decide to challenge them like the Company has done in Europe and Japan.

On May 13, 2015, May 20, 2015 and July 6, 2015 the Company filed oppositions to FibroGen’s European Patent Nos. 2322153, 2322155, and 1633333, or the ’153 patent, the ’155 patent, and the ’333 patent, respectively, requesting the patents be revoked in their entirety. These related patents claim, among other things, various compounds that either stabilize HIFα or inhibit a HIF hydroxylase or a HIF prolyl hydroxylase for treating or preventing various conditions, including, inter alia, iron deficiency, microcytosis associated with iron deficiency, anemia of chronic disease, anemia wherein the subject has a transferrin saturation of less than 20%, anemia refractory to treatment with exogenously administered erythropoietin, or EPO, and microcytosis in microcytic anemia. Oppositions to the ’155 patent and to the ’153 patent were also filed by Glaxo Group Limited and by Bayer Intellectual Property GmbH, Bayer Pharma Aktiengesellschaft, and Bayer Animal Health GmbH. While, for the reasons set forth in our oppositions, the Company believes that the ’153 patent, the ’155 patent, and the ’333 patent should be revoked in their entirety, the ultimate outcomes of the oppositions remains uncertain. If the European Patent Office decides not to revoke the ’153 patent, the ’155 patent, or the ’333 patent in their entirety, or only certain claims of those patents, and any surviving claims are determined to encompass the Company’s intended use of the Company’s lead product candidate, the Company may not be able to commercialize the Company’s lead product candidate in the European Union for its intended use, which could materially adversely affect the Company’s business, operating results and financial condition.

The Company’s policy is to record a liability if a loss in a significant legal dispute is considered probable and an amount can be reasonably estimated. The Company provides disclosure when a loss in excess of any reserve is reasonably possible, and the Company is in a position to estimate the potential loss or range of possible loss. Significant judgment is required to assess the likelihood of various potential outcomes and the quantification of loss in those scenarios. The Company’s estimates change as litigation progresses and new information comes to light. Changes in Company estimates could have a material impact on the Company’s results and financial position.