KUBOTA PHARMACEUTICAL HOLDINGS CO LTD - FORM 10-Q

KUBOTA PHARMACEUTICAL HOLDINGS CO LTD - FORM 10-Q - May 10, 2017

Attached files

Attached files

KUBOTA PHARMACEUTICAL HOLDINGS CO LTD Reports

file	filename
EX-10.3 - EXHIBIT 10.3 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	exhibit103-subxsubleasecom.htm
EX-32.2 - EXHIBIT 32.2 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	kph-20170331xexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	kph-20170331xexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	kph-20170331xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	kph-20170331xexhibit311.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

¨ 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 000-55133

Kubota Pharmaceutical Holdings Co., Ltd.

(Exact name of registrant as specified in its charter)



Japan		98-1295657
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4-20-3 Ebisu, Shibuya-ku Tokyo, Japan 150-6018
(Address of principal executive offices, including zip code)

+81 3-5789-5872

(Registrant's telephone number, including area code)

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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

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. þ

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

As of April 30, 2017, the registrant had outstanding 37,939,987 shares of common stock.

Table of Contents

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

FORM 10-Q

For the quarterly period ended March 31, 2017

INDEX



PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 6.	Exhibits	36

Signatures

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



	March 31,			December 31,
	2017			2016
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	12,237		$	8,949
Investments	102,173			113,365
Accounts receivable from collaborations	616			2,055
Prepaid expenses and other current assets	3,713			2,950
Total current assets	118,739			127,319
Property and equipment, net	728			770
Long-term investments	18,610			18,975
Other assets	513			319
Total assets	$	138,590		$	147,383
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	673		$	439
Accrued liabilities	1,384			1,726
Accrued compensation	1,138			2,295
Deferred rent and lease incentives	153			153
Total current liabilities	3,348			4,613
Commitments and contingencies
Long-term deferred rent, lease incentives, and others	1,042			953
Total long-term liabilities	1,042			953
Shareholders’ equity:
Common stock, no par value, 151,358 shares authorized as of March 31, 2017 and December 31, 2016; 37,921 and 37,878 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively	208,463			207,449
Accumulated other comprehensive loss	(110		)	(132		)
Accumulated deficit	(74,153		)	(65,500		)
Total shareholders’ equity	134,200			141,817
Total liabilities and shareholders’ equity	$	138,590		$	147,383

See accompanying notes to condensed consolidated financial statements.

Table of Contents

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three months ended March 31,
	2017			2016

Revenue from collaborations	$	—		$	3,756
Expenses:
Research and development	4,878			8,919
General and administrative	4,142			7,780
Total expenses	9,020			16,699
Loss from operations	(9,020		)	(12,943		)
Other income (expense), net:
Interest income	355			351
Other income, net	14			18
Total other income, net	369			369
Loss before income tax	(8,651		)	(12,574		)
Income tax expense	(2		)	(17		)
Net loss	$	(8,653	)	$	(12,591	)
Net loss per share
Basic	$	(0.23	)	$	(0.34	)
Diluted	$	(0.23	)	$	(0.34	)
Weighted average shares used to compute loss per share
Basic	37,838			36,891
Diluted	37,838			36,891

See accompanying notes to condensed consolidated financial statements.

Table of Contents

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)



	Three months ended March 31,
	2017			2016

Net loss	$	(8,653	)	$	(12,591	)
Other comprehensive income (loss):
Net unrealized gain on securities, net of tax	22			439
Comprehensive loss	$	(8,631	)	$	(12,152	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three months ended March 31,
	2017			2016

Cash flows from operating activities
Net loss	$	(8,653	)	$	(12,591	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	80			76
Stock-based compensation	990			2,705
Amortization, net, of premium/discount on marketable securities	93			434
Changes in operating assets and liabilities:
Accounts receivable from collaborations	1,439			4,630
Prepaid expenses and other current assets	(649		)	(184		)
Accounts payable	234			871
Accrued liabilities	(342		)	130
Accrued compensation	(1,157		)	(867		)
Deferred rent and lease incentives	89			(35		)
Deferred revenue from collaborations	—			(1,817		)
Other assets	(194		)	—
Net cash used in operating activities	(8,070		)	(6,648		)
Cash flows from investing activities
Purchases of marketable securities available for sale	(25,044		)	(21,658		)
Maturities of marketable securities available for sale	36,416			27,196
Additions to property and equipment	(38		)	(2		)
Net cash provided by investing activities	11,334			5,536
Cash flows from financing activities
Value of equity awards withheld for tax liability	—			(4,571		)
Proceeds from issuance of common stock	24			8,315
Net cash provided by financing activities	24			3,744
Increase in cash and cash equivalents	3,288			2,632
Cash and cash equivalents—beginning of period	8,949			5,088
Cash and cash equivalents—end of period	$	12,237		$	7,720

See accompanying notes to condensed consolidated financial statements.

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

1. Business and Basis of Presentation

Business

Kubota Pharmaceutical Holdings Co., Ltd., the Company or Kubota Holdings, is a clinical stage ophthalmology company that is committed to translating innovation into a diverse portfolio of drugs and devices to preserve and restore vision for millions worldwide. We have a broad product candidate portfolio of multiple technologies in the preclinical and clinical development stages intended to provide solutions to ophthalmic disorders affecting millions of people worldwide. We are pursuing development of our product candidates for debilitating diseases such as diabetic retinopathy/diabetic macular edema, cataract, retinitis pigmentosa, Stargardt disease, and age-related macular degeneration. As part of our mobile health application initiatives, we are also developing technologies intended to detect nascent disease progression to improve treatment outcome in patients with wet age-related macular degeneration, diabetic macular edema and other neovascular retinal diseases. References in this report to the "Company", "we", "our" and "us" refer to Kubota Pharmaceutical Holdings Co., Ltd. and its subsidiaries, including Acucela Inc.

Redomicile Transaction

On December 1, 2016 Japan Standard Time, we completed a corporate reorganization resulting in the change in corporate domicile, pursuant to which Kubota Holdings, a company organized under the laws of Japan, became the publicly traded parent company of Acucela Inc., a Washington corporation, or Acucela US. The change in domicile, or the Redomicile Transaction, was effected pursuant to an Agreement and Plan of Merger, dated as of August 9, 2016, by and among Acucela US, Acucela North America Inc., a Washington corporation and wholly-owned subsidiary of Kubota Holdings, or US Merger Co, and Kubota Holdings. At the effective time of the merger, (1) Acucela US was merged with US Merger Co, with US Merger Co surviving the merger as a wholly-owned subsidiary of Kubota Holdings and was renamed Acucela Inc., and (2) each issued and outstanding share of common stock of Acucela US, or Acucela US Common Stock, was cancelled and converted into the right to receive one share of Kubota Holdings common stock, or Kubota Holdings Common Stock. An aggregate of approximately 37.8 million shares of Kubota Holdings Common Stock was delivered pursuant to the Redomicile Transaction prior to the listing of Kubota Holdings Common Stock on the Mothers market of the Tokyo Stock Exchange, or TSE, under the code “4596.” Kubota Holdings is the successor registrant to Acucela US pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended.

Unaudited Interim Financial Information

We have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the SEC for interim financial reporting. The condensed consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements. The condensed consolidated financial statements as of March 31, 2017 and for the three-month periods ended March 31, 2017 and March 31, 2016 are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full 2017 fiscal year. Certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2016 Annual Report on Form 10-K.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Acucela Inc. and Kubota Ophthalmics Co., Ltd. Intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Segments

We operate in one segment, pharmaceutical product development. All of our significant assets are located in the United States. During the three months ended March 31, 2017 and 2016, all revenue was generated in the United States.

2. Significant Accounting Policies

Cash and Cash Equivalents and Investments

We consider investments in highly liquid instruments purchased with an original maturity at purchase of three months or less to be cash equivalents. The amounts are recorded at cost, which approximates fair value. Our cash equivalents consist of cash and money market funds.

We have classified our entire investment portfolio, which consists of corporate debt securities, commercial paper, securities issued by U.S. government agencies and certificates of deposit, as available-for-sale. Available-for-sale securities are stated at fair value as of each balance sheet date based on market quotes, and unrealized gains and losses are reflected as a net amount under the caption of accumulated other comprehensive loss. Premiums or discounts arising at acquisition are amortized into earnings.

We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as whether it is more likely than not that we will hold the investment until recovery of its amortized cost basis. Realized gains and losses are calculated using the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are recorded within the statements of income under the caption other income (expense).

We consider an investment with a maturity greater than 12 months from the balance sheet date as long-term and with a maturity less than 12 months from the balance sheet date as short-term.

Concentration of Credit Risk

Our accounts receivable as of March 31, 2017 and December 31, 2016, consist of amounts due from our collaborations with Otsuka Pharmaceutical Co., Ltd, or Otsuka. In June 2016, Otsuka terminated its collaboration agreements with us. There was no allowance for doubtful accounts for the periods presented, as we believe all outstanding amounts will be paid based on our contractual arrangements with Otsuka and history of successful collections thereunder and collateral is not required.

Fair Value

We measure and report at fair value our cash equivalents and investment securities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs.

The carrying amounts reflected in the balance sheets for accounts receivable and accounts payable approximate fair value due to their short-term nature.

Stock-Based Compensation

Stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized on a straight line basis as expense, less estimated forfeitures, over the requisite service period, which is generally the vesting period.

The fair value of stock options under our outstanding equity awards is calculated using the Black-Scholes option pricing model. This model requires us to make assumptions to determine expected risk-free interest rates, stock price volatility, dividend yield, and weighted-average option term. We recognize stock-based compensation expense over the period from the date of grant to the date when the award is no longer contingent on either the employee providing additional services to the Company or the market price of the Company’s common stock reaching a certain level, for a specified minimum period of time (the vesting period). Any unexercised options expire in five to ten years. We estimate the fair value of each grant as a single award and amortize that value on a straight-line basis into compensation expense over the option’s vesting period. The Company also utilizes a forfeiture

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

rate of 10% which is embedded in our compensation expense. Once terminations occurs, the Company records the actual forfeiture credits against expense incurred to date.

The fair value of restricted stock units and restricted stock awards is equal to the market price of Kubota Holdings' stock on the date of grant. We amortize that value on a straight line basis into compensation expense, over the restricted share’s vesting period.

Research and Development Costs

Research and development costs include salaries paid to clinical development staff and scientists, fees paid to external service providers and to contract research organizations to conduct research and development activities. Costs may also include laboratory supplies, license fees, consulting, travel, fees paid to third parties involved in research and development activities, and an allocated portion of certain general operating costs, including facility and information technology costs. These research and development costs are expensed as incurred.

Non-refundable advance payments related to research and development collaboration agreements are currently expensed as incurred as there is no assurance that the pre-clinical compounds will be used or rendered for future research and development. If collaboration projects have not yet begun to incur research and development expenses, we will record the non-refundable advance as a prepayment until such time as we may begin to expense as incurred. We will evaluate each reporting period whether non-refundable fees show characteristics that will be used or rendered for future research and development pursuant to an executory contractual arrangement. At such point, we may then decide to defer and capitalize these payments.

We expense payments to acquire contractual rights to licensed technology as incurred, when the future economic benefit may be foreseen, but cannot be measured with any degree of certainty.

Refundable advance payments are recorded as a refundable deposit. In the event the fee becomes nonrefundable, it is capitalized or expensed, based on the certainty of any future economic benefit.

Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have already been recognized in the financial statements or tax returns. Excess tax benefits associated with stock option exercises and other equity awards are credited to shareholders' equity. Deferred tax liabilities and assets are based on the difference between financial statement carrying amounts and the tax basis of assets and liabilities, operating loss, and tax credit carryforwards and are measured using enacted tax rates expected to be in effect in the years the differences or carryforwards are anticipated to be recovered or settled. A valuation allowance is established when we believe that it is more likely than not that benefits of the deferred tax assets will not be realized.

Foreign Currency Translation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Acucela Inc. and Kubota Ophthalmics Co., Ltd. The functional currency of the Company and Kubota Ophthalmics Co., Ltd. is the Japanese yen and the functional currency of Acucela Inc. is the U.S. dollar. The reporting currency for this quarterly report on the form 10-Q is the U.S. dollar.

3. Recent Accounting Pronouncements

We have adopted the provisions of Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), as of the beginning of the current fiscal year. ASU 2016-09 requires recognition through opening retained earnings of any pre-adoption date NOL carryforwards from employee share-based payments, as well as recognition of all related income tax effects arising on or after January 1, 2017 (our adoption date) in income tax expense. Due to a full valuation allowance at the end of December 31, 2016, we made no adjustment to opening retained earnings of pre-adoption date NOL carryforwards with remaining carryforward periods of more than 10 years. In addition, we realized no windfall tax benefits in the interim period of adoption due to our full valuation allowance.

Adoption of ASU 2016-09 allows companies to either elect to estimate the number of awards that are expected to vest and base initial accruals of compensation cost on the estimate or to recognize the effects of forfeitures in compensation cost when they occur. The Company has elected to continue to estimate the number of awards which are expected to vest and base initial accruals of compensation cost on this estimate.

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Adoption of ASU 2014-09 can be done using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In August 2015, FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date: Topic 606 (ASU 2015-14) that deferred the effective date of ASU 2014-09 by one year. In April 2016, FASB issued Accounting Standards Update No. 2016-10 Revenue from Contracts with Customers - Identifying Performance Obligations and Licenses: Topic 606 (ASU 2016-10) that clarified accounting for licenses of intellectual property as well as identification of the distinct performance obligations of a contract. In May 2016, FASB issued Accounting Standards Update No. 2016-12 Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients: Topic 606 (ASU 2016-12) which did not change core principles but clarified the guidance on assessing collectability, presenting sales taxes, measuring non cash consideration, and certain transition matters. Application of the new revenue standard, as amended, is required for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

Following termination of the Company's collaboration agreements with Otsuka and completion of the wind-down period, we do not anticipate recognizing any future revenues under the Otsuka collaboration agreements. Currently, the Company is pursuing various partnering efforts and may generate revenue through future collaborations with strategic partners. If we enter revenue-generating agreements, we will evaluate the impact of adopting ASU 2014-09.

In February 2016, FASB issued Accounting Standards Update No. 2016-02, Leases: Topic 842 (ASU 2016-02). The new guidance is intended to increase transparency and comparability for organizations by recognizing lease assets and liabilities on the balance sheet and requiring additional financial disclosure on leasing arrangements. This amendment is primarily designed to address lessee accounting for operating leases and require lessees to account for all leases as assets and liabilities on the balance sheet. Adoption of ASU 2016-02 is required for fiscal reporting periods beginning after December 15, 2018 including interim reporting periods within those fiscal years. We are currently evaluating the potential impact of the pending adoption of ASU 2016-02 on our consolidated financial statements.

Other than noted above, we do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

4. Fair Value Measurements

Under FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Quoted prices in active markets for identical assets and 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, and

Level 3—Unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.

Cash, cash equivalents and investments at March 31, 2017 and December 31, 2016 include all cash, money market funds, corporate debt securities, U.S. government agency securities, commercial paper and certificates of deposit. We measure the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. We consider our investments in corporate debt securities, U.S. government agency securities, commercial paper and certificates of deposit as available-for-sale. Available-for-sale securities are stated at fair value. Available for sale securities were valued either based on recent trades in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold any financial instruments categorized as Level 3 as of March 31, 2017 or December 31, 2016.

The following table presents information about our financial assets that have been measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):



	March 31, 2017
	Amortized Cost		Gross Unrealized								Fair Value
	Amortized Cost		Holding Gains		Holding Losses < 12 mos			Holding Losses > 12 mos			Fair Value
Cash	$	2,880	$	—	$	—		$	—		$	2,880
Level 1 Securities:
Money market funds	9,357		—		—			—			9,357
Level 2 Securities:
Commercial Paper	24,517		—		(8		)	—			24,509
U.S. government agencies	28,018		—		(38		)	—			27,980
Corporate debt securities	66,932		11		(61		)	(31		)	66,851
Certificates of deposit	1,440		3		—			—			1,443
	$	133,144	$	14	$	(107	)	$	(31	)	$	133,020

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016



	December 31, 2016
	Amortized Cost		Gross Unrealized								Fair Value
	Amortized Cost		Holding Gains		Holding Losses < 12 mos			Holding Losses > 12 mos			Fair Value
Cash	$	2,633	$	—	$	—		$	—		$	2,633
Level 1 Securities:
Money market funds	6,316		—		—			—			6,316
Level 2 Securities:
Commercial Paper	25,988		1		(9		)	—			25,980
U.S. government agencies	27,585		—		(19		)	(14		)	27,552
Corporate debt securities	77,459		6		(48		)	(52		)	77,365
Certificates of deposit	1,440		3		—			—			1,443
	$	141,421	$	10	$	(76	)	$	(66	)	$	141,289

As of March 31, 2017, $18.6 million of corporate debt securities mature in greater than one year, but less than two years. All other investment securities held as of March 31, 2017 mature within 12 months. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of our amortized cost basis, which may be maturity.

Market values were determined for each individual security in the investment portfolio. The declines in value of certain of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. We evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost, the financial condition of the issuer, and our intent to sell, or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2017.

5. Shareholders’ Equity and Share-Based Compensation

Changes in Accumulated Other Comprehensive Loss (in thousands):



	Three months ended March 31,
	2017			2016
Beginning balance	$	(132	)	$	(575	)
Current period other comprehensive income, net of tax	22			439
Ending balance	$	(110	)	$	(136	)

The changes in accumulated other comprehensive loss relate to unrealized holding gains and losses in available-for-sale securities.

Equity Awards

No equity awards were granted during the three months ended March 31, 2017.

6. Income Taxes

Due to our continuing losses, we had an effective tax rate of 0% for the three months ended March 31, 2017 and 2016, which differed from the U.S. federal statutory tax rate of 34%, due to a full valuation allowance against our deferred tax assets.

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

7. Collaboration and License Agreements

Collaboration with Otsuka

During the three months ended March 31, 2017 and 2016, we recognized zero and $3.8 million, respectively, of revenues in performance of our collaborative co-development agreement with Otsuka. For further detail on our collaboration with Otsuka, please see “Note 9: Collaboration and License Agreements” of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016.

Termination of the Emixustat Agreement with Otsuka Pharmaceutical

We received written notice from Otsuka on June 13, 2016, stating that Otsuka had elected to terminate in their entirety the Co-Development and Commercialization Agreement by and between the Company and Otsuka, dated September 4, 2008, or the Emixustat Agreement. In accordance with the terms of the agreement, the termination of the Emixustat Agreement was effective on June 27, 2016, or the Termination Date. Otsuka’s written notice stated that its decision to terminate was based on the announced trial results from our Phase 2b/3 study of Emixustat in patients with geographic atrophy secondary to dry age-related macular degeneration, or AMD. Otsuka’s termination of the Emixustat Agreement was in accordance with the terms of such agreements without modification or amendment thereto.

As of the Termination Date, rights granted by the Company to Otsuka pursuant to the Emixustat Agreement reverted to the Company. In addition, the Company and Otsuka have certain post-termination obligations as set forth in the Emixustat Agreement, including Otsuka’s responsibility for the cost of certain wind-down development activities for a six month period following the date of the termination notice. Effective on the Termination Date, Otsuka granted to the Company a perpetual, fully paid-up, non-exclusive license, with the right to grant sublicenses, under certain Otsuka intellectual property and data that are necessary or useful in the development, manufacture and commercialization of Emixustat. We did not recognize any revenues during the three month period ended March 31, 2017.

The Emixustat Agreement requires the Company to pay a low single-digit percentage royalty to Otsuka based on net sales of approved products resulting from the Company’s continued development and commercialization of Emixustat after the Termination Date. Such royalties will be capped at an amount equal to the total amount of the development costs and research costs funded by Otsuka prior to the Termination Date, with interest.

The foregoing is only a brief description of the material terms of the Emixustat Agreement, does not purport to be complete and is qualified in its entirety by reference to the Emixustat Agreement that was filed as Exhibit 10.9 to our Registration Statement on Form S-1, as amended (File No. 333-192900) filed with the SEC on December 17, 2013.

Collaboration Agreement with EyeMedics

In December 2016, we entered into the Collaboration Agreement, with EyeMedics. Pursuant to the terms of the Collaboration Agreement, we and EyeMedics will jointly conduct through human proof of concept the pre-clinical and clinical development of ACU-6151, a biomimetic small molecule covered by the license from the University of Southern California for the treatment, prevention and diagnosis of ophthalmic diseases, with an initial focus on diabetic macular edema. The agreement includes an exclusive option to acquire the global rights to ACU-6151, including an initial candidate molecule for ophthalmic use. We may exercise the option at any time prior to 120 days following the conclusion of a proof of concept trial and a meeting between EyeMedics and the FDA to discuss final results of Phase 2 trials.

The proprietary technology, licensed by EyeMedics from the University of Southern California, modulates endogenous factors released during the inflammatory process at the early pathogenic stages of age related macular degeneration, proliferative diabetic retinopathy, diabetic macular edema and other retinal neovascular conditions.

Acucela Inc. and EyeMedics established a Joint Development Committee, or JDC, to meet semi-annually to determine the budget for the following year. The Company is required to advance any funds, less any remaining unused funds from the prior calendar half-year, to EyeMedics within 30 days of the JDC meeting. As of March 31, 2017, research and development work has started under the Collaboration Agreement.

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

Pursuant to the terms of the agreement, we paid non-refundable fees of $0.9 million in 2016 and an additional $1.2 million in January 2017 to fund future collaboration efforts. We recognized these amounts as prepayments which we will expense as research and development costs are incurred.

Option and License Agreement with YouHealth Eyetech, Inc.

In March 2016, we entered into an exclusive option and license agreement with YouHealth Eyetech, Inc., or YouHealth. YouHealth’s parent company, Guangzhou Kang Rui Biological Pharmaceutical Technology Co., Ltd., is a party to the agreement as a guarantor of YouHealth’s performance of its obligations. Pursuant to the terms of the agreement, YouHealth granted us an option to obtain a royalty-bearing license, with the right to sub-license, certain YouHealth technology to develop and commercialize products containing lanosterol for the treatment of ophthalmological diseases in all territories excluding the People’s Republic of China, Taiwan and Hong Kong. Such excluded territories are referred to as the YouHealth Territory. We may exercise the option at any time before June 30, 2019, the option period, by providing written notice to YouHealth and a payment of $10.0 million.

During the option period, we granted YouHealth an exclusive, royalty-free, fully-paid license, without the right to sub-license, certain of our technology to develop products containing lanosterol in the YouHealth Territory. If we choose to exercise this option, the license granted by us to YouHealth will then permit sub-licensing and commercialization of products containing lanosterol by YouHealth in the YouHealth Territory.

Pursuant to the terms of the agreement, we paid a one-time upfront fee of $5.0 million to YouHealth during the first quarter of 2016. During the option period, YouHealth is eligible to receive up to an additional $5.0 million upon the achievement of certain near-term development and regulatory milestones establishing proof of concept. Upon our exercise of the option, YouHealth would then be eligible to receive up to an additional $300.0 million upon our achievement of certain regulatory milestones, such as initiation of Phase 3 clinical trials and approvals of new drug applications across multiple indications. YouHealth would be eligible to receive up to an additional $90.0 million upon our achievement of certain post-approval sales-based milestones. In addition to these potential one-time payments, YouHealth is eligible to receive a mid single-digit percentage of annual net sales, which may increase to a higher mid single-digit percentage if certain annual net sales figures are exceeded. Royalties would be payable on a product-by-product and country-by-country basis until the later of ten years from the date of first commercial sale in a particular country or the expiration of the last-to-expire valid claim of certain YouHealth patents covering the products. In the event no valid patent claim covers the Product, the royalty percentage would be subject to a 50% reduction in payment. In addition, the royalty may terminate at any time generic competition occurs.

Pursuant to the terms of the agreement, each party will be solely responsible for the development, manufacture and commercialization of Products in its respective territory, compliance with applicable regulatory requirements and related expenses. We agreed to use diligent efforts to achieve certain milestones applicable to an existing license between YouHealth and the Regents of the University of California. The license between YouHealth and the Regents of the University of California comprises part of the technology made available to us through this agreement.

Unless earlier terminated by the parties, our agreement with YouHealth expires on June 30, 2019, if we have not exercised our option or, if we do exercise our option, then upon the last to expire royalty term for any commercialized product. Either party may terminate the agreement upon the other party’s material breach, after provision of written notice and an opportunity to cure such breach. We have the right to terminate the agreement for any reason at any time upon 60 days prior written notice to YouHealth. If we decline to exercise the option, YouHealth would have the right of first negotiation to obtain an exclusive, worldwide license, with right to sub-license, under certain of our patents, to develop and commercialize products for the treatment of ophthalmic diseases.

8. Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares of the common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock include the exercise of outstanding stock options that are dilutive and restricted stock units.

For the three months ended March 31, 2017, equity awards with an aggregate of 110,402 shares were excluded from the calculation of diluted net loss per share because the impact was anti-dilutive. For the three months ended March 31, 2016, equity awards with an aggregate of 1,306,947 were excluded from the calculation of diluted net loss per share because the impact was anti-dilutive.

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

9. Commitments and Contingencies

Commitments

In addition to the contractual commitments, which consist of operating leases for corporate office and laboratory space, disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, we have not incurred any additional material contractual obligations or commitments outside of the normal course of business during the three months ended March 31, 2017 except the following:

Severance

During the three months ended March 31, 2017, the Company paid $0.5 million in severance to the former Chief Strategy Officer, Executive Vice President, General Counsel and other former employees.

Japan Office Leases

On August 17, 2016, we entered into an agreement with Servcorp to lease office space for Kubota Holdings' corporate headquarters in Tokyo, Japan, the Current Tokyo Premises. The term of the lease commenced on September 1, 2016 and will expire June 30, 2017. We do not intend to renew this lease.

On March 30, 2017, the Company and Tokyu Land Corporation entered into a new agreement relating to the lease of approximately 1,102 square feet of rentable office space located in 3-7-1 Kasumigaseki, Chiyoda-ku, Tokyo, Room 404, the New Tokyo Premises. The New Tokyo Premises will serve as the Company’s future headquarters. The term for the New Tokyo Premises commences on June 1, 2017 and expires on May 31, 2020. Annual base rent under the New Tokyo Premises is approximately ¥11 million, or approximately $0.1 million based on the rate of 1 USD = 112.19, which is the TTM rate quoted by The Bank of Tokyo-Mitsubishi UFJ, Ltd. on March 31, 2017. In connection with the move of the Company’s head office from Shibuya-ku, Tokyo to Chiyoda-ku, Tokyo, the Company’s shareholders will be asked to approve an amendment to the Company’s articles of incorporation at the annual shareholder meeting to be held on May 25, 2017 in Tokyo, Japan.

US Laboratory and Office Leases

We lease laboratory and corporate office space under operating leases. We sub-lease approximately 38,723 square feet of corporate office space in Seattle, Washington, the Current Seattle Premises, from The Boeing Company pursuant to the terms of the Sublease Agreement dated June 26, 2014, or the Acucela Sublease. Acucela Inc. uses the Current Seattle Premises for general and administrative purposes.

On January 12, 2017, Acucela Inc. entered into a Sub-Sublease Agreement, or the Zillow Sublease, pursuant to which Zillow, Inc., or Zillow, will sublease from Acucela Inc. the entire Current Seattle Premises. The term of the Zillow Sublease is scheduled to commence on June 1, 2017 and will continue until the expiration of the Acucela Sublease on February 28, 2022, unless Boeing earlier terminates the Acucela Sublease on November 30, 2021. For the first three months of the term, Acucela Inc. will remain responsible for payment of rent to the Boeing Company. Following such three month period, the base rent shall be payable monthly by Zillow to Acucela Inc. In addition to base rent, Zillow will also be responsible for operating and other expenses owed by Acucela Inc. to the Boeing Company pursuant to the terms of the Acucela Sublease. The Zillow Sublease is subject and subordinate to the Acucela Sublease and Boeing's lease with the landlord of the Current Seattle Premises. During the term of the Zillow Sublease, Acucela Inc.’s obligations under the Acucela Sublease will remain in force.

Acucela Inc. is evaluating alternative office space in Seattle, Washington and intends to relocate its operations currently occupying the Current Seattle Premises once satisfactory space is secured.

Acucela Inc. leases approximately 17,488 square feet of laboratory and office space in Bothell, Washington. On January 4, 2017, Acucela Inc. and Nexus Canyon Park LLC entered into an amendment to the lease. Pursuant to the terms of the amendment, the term of the lease was extended to February 29, 2020, subject to Acucela Inc.’s right to extend the term for one additional two year period by written notice to Nexus.

Litigation

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material legal proceedings, and to our knowledge none is threatened. There can be no assurance that future

KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017 and 2016

legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

In this document, unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Kubota Holdings” mean Kubota Pharmaceutical Holdings Co., Ltd., a Japanese corporation, and its subsidiaries, including Acucela Inc. All information is provided as of March 31, 2017, unless otherwise stated. “¥” refers to Japanese Yen, the lawful currency of Japan, and “$” refers to U.S. dollars.

This section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report. This discussion contains certain 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 identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “seek” and other similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:


•	our ability to identify additional products or product candidates;


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


•	our ability to advance product candidates into, and successfully complete, clinical trials;


•	our ability to recruit sufficient numbers of subjects for our current and future clinical trials;


•	our ability to achieve profitability;


•	our ability to obtain funding for our operations, including research funding;


•	the implementation of our business model and strategic initiatives;


•	our ability to satisfy milestone payment obligations and pay other fees and costs related to licensing transactions we enter into;


•	our ability to develop and commercialize our product candidates;


•	our commercialization, marketing and manufacturing capabilities and strategy;


•	our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;


•	our expectations regarding federal, state and foreign regulatory requirements;


•	the therapeutic benefits, effectiveness and safety of our product candidates;


•	the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates;


•	the rate and degree of market acceptance and clinical utility of our future products, if any;


•	the timing of, and our and our collaborators’ ability to obtain and maintain regulatory approvals for our product candidates;


•	our ability to maintain and establish collaborations;


•	our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;


•	the sufficiency of our cash, cash equivalents and investments to meet our needs for at least the next 12 months;


•	our ability to engage and retain the employees required to grow our business;


•	our future financial performance, projected expenditures, and needs for additional financing;


•	developments relating to our competitors and our industry, including the success of competing therapies that are or become available;


•	our ability to reduce overhead costs and improve administrative efficiencies; and


•	our ability to realize the expected benefits from the Redomicile Transaction.

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A - “Risk Factors,” and elsewhere in this report. Forward-looking

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statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments.

Overview

We are a clinical stage ophthalmology company that is committed to translating innovation into a diverse portfolio of drugs and devices to preserve and restore vision for millions worldwide. We have a broad product candidate portfolio of multiple technologies in the preclinical and clinical development stages intended to provide solutions to ophthalmic disorders affecting millions of people worldwide. We are pursuing development of our product candidates for debilitating diseases such as diabetic retinopathy/diabetic macular edema, cataract, retinitis pigmentosa, Stargardt disease, and age-related macular degeneration. As part of our mobile health application initiatives, we are also developing technologies intended to detect nascent disease progression to improve treatment outcome in patients with wet age-related macular degeneration, diabetic macular edema and other neovascular retinal diseases.

Our lead compound for Stargardt disease is Emixustat. It is administrated as a once-daily oral tablet and belongs to a novel class of drug candidates called visual cycle modulators, or VCM. Based on preclinical data, Emixustat is being evaluated clinically to potentially reduce toxins implicated in the pathogenesis of Stargardt disease and preserve the integrity of retinal tissue, thereby slowing disease progression. The U.S. FDA granted orphan drug designation to Emixustat for the treatment of Stargardt disease in January 2017. The compound may also have application in other retinal diseases including diabetic retinopathy. A multi-center Phase 2b/3 clinical trial evaluating Emixustat for geographic atrophy, or GA, has been recently completed and Emixustat failed to demonstrate a clinical benefit in GA patients. As a consequence, we announced in June 2016 that our co-development partner for Emixustat, Otsuka Pharmaceutical Co., Ltd., or Otsuka, had terminated the Emixustat collaboration agreement.

Our lead technology for neovascular retinal diseases such as wet age related macular degeneration, diabetic retinopathy / diabetic macular edema and retinal vein occlusion is ACU-6151. ACU-6151 is a small molecule found in animal studies to suppress vascular endothelial growth factor, or VEGF, driven vascular leakage and neovascularization while promoting homeostasis of healthy tissue. In December 2016, we entered into an R&D Collaboration Agreement, or the Collaboration Agreement, with EyeMedics LLC, or EyeMedics. Pursuant to the terms of the Collaboration Agreement, we and EyeMedics will jointly conduct through human proof of concept the pre-clinical and clinical development of ACU-6151.

Our lead compound for the treatment of cataract is lanosterol. Lanosterol has been found in animal studies to reverse lens opacification, the medical condition that defines cataracts. Lanosterol may reverse lens opacification in humans while maintaining the natural lens ability to accommodate, a process required to allow for reading and other activities that rely on near vision. We licensed the global rights, excluding Hong Kong, Taiwan and China, for lanosterol from YouHealth Eyetech, Inc., or YouHealth, in March 2016. We may also consider clinical development of lanosterol for presbyopia.

Our lead technology for retinitis pigmentosa, or RP, is an optogenetic therapy designed to make bipolar cells in the retina light sensitive. It is anticipated that this may restore some vision in advanced RP patients left with very limited visual function prior to therapy. We licensed the technology from the University of Manchester in April 2016.

In addition to a diverse portfolio of drug candidates for various ophthalmic indications, we have invested in mobile health application initiatives. The Patient Based Ophthalmology Suite, or PBOS, is being designed to detect nascent disease progression to improve treatment outcome in patients with wet age-related macular degeneration, or AMD, diabetic macular edema, or DME, and other neovascular retinal diseases.

Our long-term strategy is to commercialize drugs and devices that will benefit people living with debilitating ophthalmological conditions. We intend to leverage our internal research and development efforts to develop an innovative portfolio of ophthalmology products. As part of our strategic plan, we are pursuing external partnerships and in-licensing and M&A opportunities.

Description of Operating Accounts

Revenue from collaborations to date has been generated primarily by our research and development activities pursuant to our collaboration and licensing agreements with Otsuka. Our revenue consists of reimbursement from Otsuka for our fees paid to external service providers in connection with our collaboration agreements with Otsuka, payment from Otsuka for the development services provided by our personnel for services rendered as part of our collaborative research program, Otsuka’s funding of our portion of development costs under the Emixustat Agreement, an initial license fee as part of the Emixustat Agreement, and milestone payments. We began winding down our collaborations efforts with Otsuka following their notice to

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terminate their collaboration and licensing agreements with us in June 2016. We did not recognize any revenue for the three month period ended March 31, 2017 and do not anticipate recognizing any further revenues from Otsuka. In the absence of any new collaboration agreements, we do not expect revenue in 2017. We are required by the Tokyo Stock Exchange to generate revenue five years after our IPO in 2014. Currently, we are pursuing various partnering efforts and, if such partnering transactions are consummated, expect to generate revenue in the future through such strategic collaborations.

Research and development expenses incurred to date have substantially focused on developing potential therapies for sight-threatening diseases. Following entry into our collaboration agreements with Otsuka and prior to the termination of such agreements, our efforts had been principally directed towards fulfilling our commitments thereunder, particularly under the Emixustat Agreement. We recognize research and development expenses as they are incurred and these costs primarily consist of fees paid to consultants, contract research organizations, independent monitors of our clinical trials, and parties acquiring and evaluating data in conjunction with our clinical trials, including all related fees such as investigator fees, license fees, patient screening, lab work and data compilation and statistical analysis; costs related to production of clinical materials, including fees paid to contract manufacturers; costs related to compliance with the U.S. Food and Drug Administration and European Medicine Agency regulatory requirements; consulting fees paid to third parties involved in research and development activities; compensation and related expenses for personnel in research and development functions; and an allocated portion of certain general and administrative costs. We expect our research and development expenses to increase in absolute dollars as we pursue development of our product candidates in multiple indications and execute in-licensing transactions resulting in potential upfront and milestone payments.

General and administrative expenses consist primarily of compensation for employees in executive and administrative functions, including finance, accounting, legal and human resources. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents.

Interest income consists primarily of interest earned on our cash, cash equivalents and short-term and long-term investments.

Other income (expense) consists primarily of foreign exchange gains/losses incurred on transactions occurring in Japan, gain or losses from the disposal of fixed assets or other miscellaneous items.

Income tax expense consists of insignificant deferred income taxes in 2017 and 2016, in addition to the recording of a valuation allowance related to deferred tax assets for which we do not anticipate future realization. We did not record an income tax benefit for the periods ended March 31, 2017 or 2016, as the result of a full valuation allowance.

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RESULTS OF OPERATIONS

Comparison of three month periods ended March 31, 2017 and March 31, 2016

REVENUE FROM COLLABORATIONS

The following table presents revenues for clinical programs (in thousands, except percentages):



	Three Months Ended March 31,				2016 to 2017 $ Change			2016 to 2017 % Change
	2017		2016		2016 to 2017 $ Change			2016 to 2017 % Change
Emixustat	$	—	$	3,756	$	(3,756	)	(100.0	)%
Total	$	—	$	3,756	$	(3,756	)	(100.0	)%

The decrease in revenue from collaborations for the three months ended March 31, 2017 compared to the same period in 2016 was due to the completion of the Emixustat clinical trial during 2016 and wind-down activities related to Emixustat following the termination of our collaboration with Otsuka. Wind-down activities related to Emixustat were completed in December 2016.

Our Phase 2b/3 clinical trial results related to Emixustat for the treatment of geographic atrophy was completed in May 2016. We do not expect to generate any revenue from the terminated collaboration with Otsuka related to Emixustat in the future.

OPERATING EXPENSES

Research and development

We anticipate that potential product candidates developed under our strategic plan may be developed independently, and, in the absence of establishing new collaborations, our expenditures on such programs will not be funded by collaborative partners. As a consequence, we expect our total research and development expenses to increase in absolute dollars as we pursue development of our product candidates in multiple indications and potentially execute additional in-licensing transactions resulting in potential upfront and milestone payments.

By program, our research and development expenses were as follows (in thousands, except percentages):



	Three Months Ended March 31,				2016 to 2017 $ Change			2016 to 2017 % Change
	2017		2016		2016 to 2017 $ Change			2016 to 2017 % Change
Internal Research	$	3,407	$	5,442	$	(2,035	)	(37.4	)%
Emixustat	1,471		3,477		(2,006		)	(57.7	)%
Total	$	4,878	$	8,919	$	(4,041	)	(45.3	)%

Research and development expense decreased $4.0 million for the three months ended March 31, 2017, or 45.3%, as compared to the same period in 2016.

Research and development expenses incurred through our internal research activities decreased for the three months ended March 31, 2017 compared to same period in 2016, mainly due to a 2016 upfront non-refundable fee of $5.0 million paid to YouHealth in connection with the option and license agreement for lanosterol technology. In 2017, internal research expenses, excluding the YouHealth payment, increased due to new product development in connection with execution of our strategic plan.

Research and development expense related to clinical programs under the Emixustat Agreement decreased for the three months ended March 31, 2017 compared to same period in 2016, mainly due to the completion of the Phase 2b/3 clinical trial and related wind-down in activities related to such clinical trial following the termination of the Emixustat Agreement in 2016. In 2017, we incurred $1.5 million in research and development expense related to the Emixustat clinical programs for Stargardt disease and proliferative diabetic retinopathy.

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General and administrative



	Three Months Ended March 31,				2016 to 2017 $ Change			2016 to 2017 % Change
	2017		2016		2016 to 2017 $ Change			2016 to 2017 % Change
General and administrative	$	4,142	$	7,780	$	(3,638	)	(46.8	)%

General and administrative expenses decreased $3.6 million for the three months ended March 31, 2017 compared to same period in 2016 primarily due to the following:


•	we recognized less stock based compensation expense primarily due to market based awards which fully vested in the prior year in the amount of $1.9 million;


•	we paid $1.1 million less in corporate legal expenses and charges related to the Redomicile Transaction;


•	we incurred fewer charges in labor, taxes, and other benefits of $0.4 million due to having fewer employees in 2017; and


•	other expenses decreased by $0.2 million in the current year.

Income tax expense

Income tax expense for the three months ended March 31, 2017 and 2016 was immaterial, due to our having established a full valuation allowance against our deferred tax assets.

Liquidity and Capital Resources

Cash and cash equivalents include all short-term, highly liquid investments with an original maturity date of three months or less as of the date of purchase. Cash equivalents consist of money market funds. Investments with maturities between three months and one year at the date of purchase are classified as short-term investments. Short-term investments are comprised of corporate debt securities, commercial paper, U.S. government agency securities, and certificates of deposit.

As of March 31, 2017 and December 31, 2016, we had cash, cash equivalents and investments of $133.0 million and $141.3 million, respectively. Amounts on deposit with third-party financial institutions may exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable.

We believe that our existing cash, cash equivalents and investment balances will be sufficient to fund our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including the expansion of our research and development activities and our ability to successfully in-license or acquire additional technologies. Other than our exclusive option to purchase the assets related to our collaboration agreement with EyeMedics, which option has not been exercised, we are not currently a party to any agreement or letter of intent regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies. We may enter into these types of arrangements, which could require us to seek additional equity or debt financing.

The following table shows a summary of our cash flows for the three months ended March 31, 2017 and 2016 (in thousands):



	Three Months Ended March 31,
	2017			2016
Net cash used in operating activities	$	(8,070	)	$	(6,648	)
Net cash provided by investing activities	11,334			5,536
Net cash provided by financing activities	24			3,744

Cash Flows from Operating Activities

Net cash used in operating activities was $8.1 million and $6.6 million for the three months ended March 31, 2017 and 2016, respectively. The change in net cash used in operating activities is related to a decrease of $5.1 million in cash collections of accounts receivable from collaborations offset by a decrease of $3.7 million in cash payments for operating expenses.

Cash Flows from Investing Activities

Net cash provided by investing activities was $11.3 million and $5.5 million for the three months ended March 31, 2017 and 2016, respectively. Cash inflows increased primarily due to an increase of $9.2 million in net maturities of marketable securities held as available for sale offset by an increase of $3.4 million in purchases of marketable securities available for sale.

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Cash Flows from Financing Activities

Net cash provided by financing activities was less than $0.1 million and $3.7 million for the three months ended March 31, 2017 and 2016, respectively. During 2017, cash inflows from financing activities was due to proceeds from the issuance of common stock related to a former employee exercising their stock options. During 2016, cash inflows from financing activities related to proceeds from the issuance of common stock to current and former employees exercising their stock options offset by employee tax withholdings for equity awards.

Contractual Obligations and Commitments

Severance

During the three months ended March 31, 2017, the Company paid $0.5 million in severance to the former Chief Strategy Officer, Executive Vice President, General Counsel and other former employees.

Leases

On January 4, 2017, Acucela Inc entered into an amendment to the Lease Agreement by and between Acucela and Nexus dated February 13, 2006, or the Bothell Lease. Pursuant to the terms of the amendment, the term of the Bothell Lease was extended to February 29, 2020, subject to Acucela Inc.’s right to extend the term for one additional two year period by written notice to Nexus.

On January 12, 2017, Acucela Inc. entered into a Zillow Sublease pursuant to which Zillow will sublease from Acucela Inc. all 38,723 square feet of the Current Seattle Premises. The Zillow Sublease is scheduled to commence on June 1, 2017 and will continue until the expiration of the Acucela Sublease on February 28, 2022, unless Boeing earlier terminates the Acucela Sublease on November 30, 2021. For the first three months of the term of the Zillow Sublease, Acucela Inc. will remain responsible for payment of rent to the Boeing Company.

On March 30, 2017, the Company and Tokyu Land Corporation entered into a lease agreement, or the Tokyo Lease, relating to the lease of approximately 1,102 square feet of rentable office space located in 3-7-1 Kasumigaseki, Chiyoda-ku, Tokyo, Room 404, or the Tokyo Premises. The Tokyo Premises will serve as the Company’s headquarters. The term for the Tokyo Lease commences on June 1, 2017 and expires on May 31, 2020.

Contingently Repayable Advances

Pursuant to the terms of the Emixustat Agreement, Otsuka agreed to advance funds to us, which are secured by an interest in our net profits and royalty payments and in our entire interests in ownership of the related Emixustat compound and its backup compounds, certain pharmaceutical formulations developed under the Emixustat Agreement that contain one of those compounds, and the underlying intellectual property rights. Amounts previously had been advanced under this arrangement only to fund our share of development costs under the Emixustat Agreement, and such advances bear interest at the three month LIBOR rate plus three percent. These advances are exclusively payable out of:


•	50% of either our share of net profits, as described in the Emixustat Agreement, generated from collaboration product sales in North America or, if applicable, 50% of the royalty payable to us for those sales;


•	50% of the net profits, as described in the Emixustat Agreement, we generate from collaboration product sales outside North America and Otsuka’s sole territory; and


•	50% of the consideration, as described in the Emixustat Agreement, we receive from the sale or license of collaboration compounds and collaboration products developed under the agreement outside North America and Otsuka’s sole territory.

The percentages above will increase to 75%, if we have not repaid the advances within five years of the first commercial sale of a product based on Emixustat in North America. There are no financial covenant requirements under our arrangement with Otsuka. There were outstanding advances of $64.0 million as of both March 31, 2017 and December 31, 2016. There was accumulated interest of $7.8 million and $7.2 million under this arrangement as of March 31, 2017 and December 31, 2016, respectively.

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Off-Balance Sheet Transactions

Beginning in 2011, we shared the development costs under the Emixustat Agreement, with Otsuka funding our share of these development costs, subject to our agreement to repay them from our share of the profits, if any, or sale or licensing proceeds, if any, from the commercialization of Emixustat. Through March 31, 2017 and 2016, we have recognized cumulative revenue of approximately $64.6 million and $63.4 million, respectively, under the agreement as described above.

To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in the market values of our debt investments and interest rates.

Financial market risk: Our exposure to financial market risk results primarily from interest rate changes on our investments in debt securities. We do not invest in financial instruments or their derivatives for trading or speculative purposes. The three primary goals that guide our investment decisions, with the first being the most important, are: preservation of principal, fulfillment of liquidity needs, and balancing pre-tax return and portfolio risk. These objectives are achieved through specific guidelines around maturity parameters, credit quality and allowable investments. Our investment portfolio as of March 31, 2017 was well-diversified and included corporate debt securities, U.S. government agency securities, certificates of deposits and money market funds. We consider the market value, default, and liquidity risks of our investments to be low as of March 31, 2017.

Interest rate risk: We continually review our debt securities in order to ensure our portfolio is appropriately balanced as part of our overall interest rate risk management strategy, and through this process we consider both short-term and long-term factors in the U.S. and global financial markets in making adjustments to our tolerable exposure to interest rate risk. As of March 31, 2017, all of the debt securities that we held were fixed-rate earning instruments that carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. As of March 31, 2017, our cash and cash equivalents of $12.2 million were primarily held in money market funds; our short-term investment balances of $102.2 million were held in corporate debt securities and certificates of deposit; and our long-term investment balances of $18.6 million were held in certificates of deposit, corporate debt securities and U.S. government agency securities. We consider the interest rate risk for our cash equivalents and marketable fixed-income securities held as of March 31, 2017 to be low. A hypothetical increase in interest rates of 1% as of March 31, 2017 would result in an adverse change in the fair value of our investment portfolio of approximately $0.7 million. For further detail on our cash, cash equivalent and investment holdings, please see “Note 4: Fair Value Measurements” of the Notes to Consolidated Financial Statements in this quarterly report.

Foreign currency risk: Payments by Acucela US, the subsidiary, on behalf of Kubota Holdings, the parent company, may occasionally be made in U.S. dollars. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may result in unrealized foreign exchange losses when payments to vendors are re-measured into Japanese yen. We consider any foreign currency risk to be low. Unrealized foreign exchange losses are eliminated in consolidation.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of the design and operation of 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, or the Exchange Act, as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on its evaluation, our management, with the participation of our principal executive officer and principal financial officer concluded that, as of the period covered by this report, our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in the opinion of our management, would reasonably be expected to have a material adverse effect on our business, financial condition, operating results or cash flows if determined adversely to us. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. There can be no assurance that future legal proceedings, if any, arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, financial condition, operating results or cash flows.

ITEM 1A. Risk Factors

You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. This report on Form 10-Q 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 report.

Risks Related to Our Business and Industry

We do not have any products that are approved for commercial sale.

We are a clinical stage ophthalmology company with no products approved for commercial sale. All of the products we are developing or may develop in the future require additional research or development. None of our product candidates have received regulatory approval for marketing in any country and failure to receive such approvals could materially harm our business. To date, we have not generated any product revenue and have funded our operations through proceeds from our IPO, private sales of our equity and debt securities and from our collaboration agreements with Otsuka. In June 2016, our collaboration agreements with Otsuka were terminated and going forward we expect to fund all research and development activities from our available capital. We will not receive revenues from sales of any drug candidate unless we succeed, either independently or with third parties, in developing and obtaining regulatory approval and marketing drugs with commercial potential. We may never succeed in these activities, and may not generate sufficient revenues to continue our operations.

We plan to continue to move our research and development pipeline forward and explore the most optimal path to regulatory approval in the United States and globally. We are seeking to further expand our portfolio of product candidates beyond Emixustat, lanosterol, optogenetics, PBOS, and ACU-6151 through internal development and by licensing or partnering with other pharmaceutical, biotechnology or device companies, or universities. However, there are inherent uncertainties pertaining to the ability to demonstrate efficacy and safety of our product candidates in a clinical setting since these are unproven technologies. There also may be issues with third-party vendors, manufacturing constraints and regulatory and/or reimbursement challenges which may require additional clinical studies and impact timelines. We will not receive revenues from sales of any drug candidate or device unless we succeed, either independently or with third parties, in developing and obtaining regulatory approval and marketing approvals.

We cannot be certain that our product candidates or devices will achieve success in clinical trials, secure regulatory approval, or be successfully commercialized.

We have invested significant time and financial resources in the development of Emixustat, the lead investigational drug candidate emerging from our internally-developed VCM compounds. VCM is an emerging technology and its long-term safety and efficacy is unknown, and thus, there can be no assurance that our drug candidates will achieve regulatory approval. In May 2016, we announced the top-line results of our completed Phase 2b/3 study of Emixustat in patients with GA secondary to dry AMD. The study did not meet its primary endpoint and in June 2016, Otsuka terminated the Emixustat Agreement pertaining to our prior collaboration. We intend to continue development of Emixustat for the treatment of retinal disorders other than GA secondary to dry AMD. There can be no assurance that our development efforts will be successful. Clinical development is a long, expensive and uncertain process and subject to delays or additional requirements. We may also encounter delays or rejections based on our inability to enroll enough subjects to complete our clinical trials in a timely manner. It may take several years and require the expenditure of substantial resources to complete the testing of product candidates or devices, and failure can occur at any stage of testing. Interim results of clinical or non-clinical studies may not necessarily predict their final results, and product

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candidates that appear promising at early stages of development may ultimately fail. Even if clinical trials are successful, we believe the process of completing clinical trials and submitting a marketing application for regulatory agencies for approval will take several years and require the expenditure of substantial resources. We may not be able to obtain marketing approval or may obtain approval for indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize products. If we are unable to successfully develop, obtain regulatory approval, sell and distribute or recognize revenues from our product candidates, the results of our business operations will be adversely affected.

Revenues from research and development activities in collaboration with Otsuka represented all of our revenues during 2016, and the loss of these revenues will continue to adversely affect our business.

Revenues from research and development activities under our collaboration agreements with Otsuka were our only source of revenues in 2016. In June 2016, Otsuka terminated our existing collaboration agreements, including the Emixustat Agreement, due to Emixustat’s failure to meet its primary endpoints in the concluded Phase 2b/3 clinical trial in GA secondary to AMD. Following the expiration of a six month wind-down period under the Emixustat Agreement, our revenue significantly decreased and we had no revenue for the three months ended March 31, 2017. The loss of revenue derived from research and development activities on behalf of Otsuka will continue to have an adverse impact on our business. In addition, Otsuka’s termination of its relationship with us could harm our reputation.

We may face competition from alternative product offerings with superior risk-benefit profiles.

Ophthalmology is a fast growing market with many established and emerging companies heavily investing in research, development and commercialization of novel products. Those products may offer a superior risk-benefit profile, including but not limited to, a superior economic value to payers, such that their products will be preferred therapies over our future product offerings. This may negatively impact our future revenue from such product sales or impact our ability to commercialize the product in a specific market or geography.

We incurred losses in both the last fiscal year and the three months ended March 31, 2017, and will continue to incur losses in the future.

We incurred a net loss of $8.7 million during the three months ended March 31, 2017, and as of March 31, 2017, we had an accumulated deficit of $74.2 million, which includes a net loss of approximately $34.5 million for the fiscal year ended December 31, 2016. We expect to incur net losses for the next several years as we continue to develop our product candidates and over the long-term if we expand our research and development programs and acquire or in-license additional products, technologies or businesses that are complementary to our own. As a result of these losses, we may exhaust our financial resources and be unable to complete the development of our product candidates. Prior to Otsuka’s termination of the Emixustat Agreement, Otsuka funded a portion of our development costs and these advances were recorded as revenue in our financial statements. We are contingently obligated to repay these advances, plus interest, with a portion of any revenue we generate, if any, from the potential commercialization of products under the Emixustat Agreement. If we fail to raise capital as needed, we may curtail or cease operations in the future. There can be no assurances that there will be adequate financing available to us in the future on acceptable terms, or at all.

Exchange rate fluctuations may affect our operating results.

Our main business of research and development activities is currently based in our U.S. subsidiary, Acucela Inc. The functional currency of Acucela is the U.S. dollar, and its financial statements are also prepared in U.S. dollars. Therefore, since consolidated financial statements are translated into Japanese yen for Japanese reporting purposes, substantial exchange rate fluctuations may have a material impact on our business results and financial position of consolidated financial statements.

We have never generated any revenue from product sales and our ability to generate revenue from product sales and become profitable depends significantly on our success in executing on a number of factors.

We have no products approved for commercial sale, have not generated any revenue from product sales, and do not anticipate generating any revenue from product sales until sometime after we have received regulatory approval for the commercial sale of a product candidate. Our ability to generate revenue and achieve profitability depends significantly on our success in executing on many factors, including completing research and development of our product candidates, obtaining regulatory approvals and marketing authorizations for our product candidates, accessing a sustainable and scalable manufacturing process for our product candidates, launching and commercializing our product candidates, obtaining market acceptance of our product candidates, and protecting our portfolio of intellectual property rights.

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If we obtain approval for commercial sale of any of our product candidates, we anticipate incurring significant costs related to commercialization efforts. Our expenses could increase beyond expectations and if we are not able to generate sufficient revenue from product sales, we may never become profitable.

The pharmaceutical market is intensely competitive. Even if we are successful in obtaining approval of any of our drug candidates, we may be unable to compete effectively with other drugs, new treatment methods and technologies.

The pharmaceutical market is intensely competitive. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel therapies for the same indications that we are targeting or expect to target.

If any of our product candidates are approved for commercialization, we anticipate competition to vary depending on the approved indication. For example, currently there are no FDA approved treatments for Stargardt Disease or RP, though there are various low vision aids to assist the daily living of patients with these diseases. Although there are multiple FDA approved treatments for cataracts, there is no FDA approved pharmacological therapy to prevent, reverse or slow the progression of cataracts though various competitive products are in development. However in Japan, multiple therapies are approved for the treatment of wet AMD and diabetic retinopathy. Consequently, we will have to establish an improved risk/benefit, convenience or pricing profile for ACU-6151 to gain significant market acceptance, if marketing approval is obtained.

Many of our competitors have much greater financial, technical and human resources, more extensive experience in non-clinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing and marketing pharmaceutical products, drug candidates based on previously tested or accepted technologies, approved products or investigational drug candidates in late stages of development, and collaboration arrangements in our target markets.

Our competitors may obtain patent protection or receive regulatory approval for drugs or devices for the same indications before we do. Competing drugs or devices may be more effective or marketed and sold more effectively than products we develop. Moreover, physicians frequently prescribe therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and approved by regulatory authorities. These unapproved, or “off-label,” uses are common across medical specialties and may represent a potential source of competition to our drug candidates. Competitive therapies, including surgical procedures and medical devices, may make our drug candidates obsolete or noncompetitive before we can recover the expenses of development and commercialization.

Market acceptance of any potential product we develop in the future may be limited.

The commercial success of the products for which we may obtain marketing approval from regulatory authorities will depend upon the acceptance of these products by the medical community and third-party payors as clinically useful, cost-effective and safe. Even if a potential product displays a favorable efficacy and safety profile in clinical trials, market acceptance of the product will not be known until after it is commercially launched.

Our operating results may fluctuate in the future, which could cause our stock price to decline.

Our quarterly and annual results of operations may fluctuate in the future due to a variety of factors, many of which are outside of our control. The revenues we generate, if any, and our operating results will be affected by numerous factors, including, the terms of any future collaboration agreement, particularly, the timing of any milestone payments to be paid or received by us under such agreements, regulatory approvals, competing technologies and products, the timing and magnitude of internal development efforts, and general and industry specific economic conditions.

If our operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any fluctuations in our operating results and cash flows may cause the price of our stock to fluctuate substantially. Comparisons of our historical financial results may not be an indication of future results.

We have limited in-house sales and marketing capabilities and will need to invest significantly to develop these capabilities if our product candidates are successfully developed.

In order to exploit any potential future commercialization opportunities for our product candidates, we believe we will need to develop our own sales and marketing infrastructure. We cannot make assurances that we will be able to do this on a timely basis or at all. The failure to do so would harm our ability to generate product revenues. If we cannot or choose not to use internal resources for the marketing, sales or distribution of any product candidates, we intend to rely on collaboration partners or licensees. We may be unable to establish or maintain such relationships. If we work with collaboration partners or other third parties for marketing, sales and distribution, any revenues we receive will depend upon their efforts. Such efforts may not be successful, and

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we will not be able to control the amount and timing of resources that our licensees or collaborators or other third parties devote to our products.

We may not be successful in our efforts to expand our portfolio of product candidates.

We are seeking to further expand our portfolio of product candidates through internal development and by licensing or partnering with other pharmaceutical, biotechnology or device companies, or universities.

Our internal research programs involve unproven technologies. Identifying research programs for new disease targets and product candidates requires substantial technical, financial and human resources. Our research programs may initially show promise in identifying potential compounds, yet fail to yield product candidates.

We may attempt to license or acquire product candidates and be unable to do so for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is a competitive area. We may be unable to license or acquire the relevant intellectual property rights on terms that would allow us to earn an appropriate return. Companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us. If we are successful in expanding our portfolio of product candidates, we may be unable to successfully develop such candidates or find a suitable collaborator. Even if we identify suitable new product candidates, such product candidates may not achieve proof of concept in a cost-effective manner or at all. The occurrence of any of these risks could materially and adversely impact our business.

Relying on third-party manufacturers may result in delays in our clinical trials and product introductions.

We have limited experience in, and we do not own facilities for, manufacturing and we do not intend to develop facilities for the manufacture of product candidates for clinical trials or commercial purposes in the foreseeable future. While there are likely competitive sources available to manufacture our product candidates, entering into new arrangements may cause delays and additional expenditures, which we cannot estimate.

The risks inherent in pharmaceutical manufacturing could affect the ability of third-party manufacturers to meet our requirements or the requirements of regulators, which could result in delays. If we do not have adequate manufacturing capacity, our ability to develop and commercialize our products could be adversely impacted.

We are dependent on our management team and if we are unable to retain and motivate our key management and scientific staff, our development programs may be delayed and we may be unable to successfully develop or commercialize our product candidates.

We are dependent on our management team. The relationships and reputation that our management team has cultivated within the ophthalmology community are critical for our continued access to technologies and developments in this field.

Our success depends on our ability to attract, retain and motivate highly qualified management and scientific personnel. We face competition for experienced scientists and other professionals from numerous companies and academic and other research institutions. Additionally, our key management and scientific personnel may terminate their employment at any time. If we lose any key personnel, we may be unable to find suitable replacements, which would harm our business.

If any products we develop become subject to third-party reimbursement practices, unfavorable pricing regulations or healthcare reform initiatives, our business could be harmed.

Reimbursement by governmental and other third-party payors of healthcare services affect the market for our potential products. These payors continually attempt to limit or reduce the costs of healthcare by challenging the prices charged for medical products and services. We cannot be sure that reimbursement will be available for any future product candidates and reimbursement amounts, if any, may reduce the demand for, or the price of, our future products.

Obtaining approvals from governmental and other third-party payors of healthcare services is time-consuming and expensive. Because our product candidates are under development, we are unable at this time to determine the level or method of reimbursement. Our business would be materially adversely affected if we do not receive approval for adequate reimbursement of any product candidates that obtain marketing approval.

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

As we advance our product candidates through clinical development and develop our related commercialization plans and strategies, we may need to hire additional employees for managerial, operational, sales, marketing, financial, human resources and other functional areas. Competition for these employees is intense and we may be unable to hire additional qualified personnel in a timely manner and on reasonable terms. While we attempt to provide competitive compensation packages to attract and retain

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key personnel, many of our competitors are likely to have greater resources and more experience than we have, and we have had difficulty competing successfully for key personnel. Any future growth would impose added responsibilities on members of management, which may divert their attention from day to day activities.

We face the risk of product liability claims and may not be able to obtain insurance, and we may have exposure to significant contingent liabilities.

Our business exposes us to the risk of product liability claims. If our products harm people, we may be subject to costly and damaging product liability claims. We have product liability insurance for our clinical trials up to a $10 million annual aggregate limit. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of the products that we may develop. Insurance coverage is increasingly expensive and may not be available on reasonable terms, if at all. If we are unable to obtain insurance at an acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position.

We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our development programs and other operations.

As of March 31, 2017, we had cash, cash equivalents and investments of $133.0 million and working capital of $115.4 million. We believe that our cash, cash equivalents and investments will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. However, our future working capital and capital expenditure requirements will depend on many factors, including the success of our development efforts and commercialization of product candidates, the scope and results of our clinical trials, potential acquisitions or in-licensing transactions, the costs related to protecting our intellectual property portfolio, and our ability to raise additional funding through partnering, out-licensing and other means.

Additional financing may not be available to us on favorable terms when we need it. If we are unable to obtain adequate financing, we may be required to significantly curtail one or more of our development, licensing or acquisition programs. We could be required to seek funds through collaboration arrangements that may require us to relinquish rights to our technologies and product candidates. If we raise additional funds by issuing equity securities or securities convertible into equity, our then-existing shareholders will experience dilution and the terms of any new equity securities or securities convertible into equity may have preferences over our common stock. If we raise additional funds through the incurrence of indebtedness we would have payment obligations and, potentially be subjected to certain restrictive covenants, that could hinder our operational flexibility.

Our computer systems may fail or suffer security breaches.

Despite the implementation of security measures, our computer systems are vulnerable to damage from computer viruses and unauthorized access. Although to our knowledge we have not experienced a material system failure or security breach, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations.

We maintain confidential and proprietary information on our computer networks. Although we have employed security measures to protect this information from unauthorized access, security breaches may occur as a result of third-party action, including computer hackers, employee error, malfeasance or otherwise, that could result in someone obtaining unauthorized access. Because the techniques employed by hackers to obtain unauthorized access or to sabotage systems change frequently, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in disclosure of our trade secrets or disclosure of confidential supplier or employee data. Our systems and external backup measures may also be vulnerable to damage or breach due to natural disasters or other unexpected events. If this should happen, we could be exposed to potentially significant legal liability, remediation expense, harm to our reputation and other harm to our business.

If we use hazardous or biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities may involve potentially hazardous chemical and biological materials and our operations may produce hazardous waste products. We are subject to laws and regulations governing the use of hazardous materials. We believe that we comply with legally prescribed standards pertaining to these hazardous materials, however we may incur significant additional costs to comply with applicable laws in the future. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. Compliance

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with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, operating results and financial condition.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended, of the Securities Act, and, while we maintain such status, may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation. We could be an emerging growth company until the end of 2019 or until the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30th of any year. Investors may find our common stock less attractive if we choose to rely on these exemptions.

Risks Related to Our Recently Completed Redomicile Transaction

The anticipated benefits of the Redomicile Transaction may not be realized.

We may not realize the benefits we anticipate from the Redomicile Transaction, particularly as the realization of those benefits are in many important respects subject to factors that we do not control. These factors would include such things as the reactions of third parties with whom we enter into contracts and do business and the reactions of investors and analysts, the positions taken by Japanese and U.S. taxing authorities with respect to the Redomicile Transaction and the taxation of Kubota Holdings following the Redomicile Transaction, and other factors discussed in these risk factors. For example, the increased availability, quantity and prominence of information about our Company for Japanese investors and the increased number of Tokyo Stock Exchange-focused institutional investors that will be able to invest in us following the Redomicile Transaction may not lead to increased demand for our listed securities. Even if there is increased demand for our listed securities, we cannot assure investors that equity research analysts will initiate or maintain research coverage of Kubota Holdings. The failure to realize any of these anticipated benefits could have an adverse impact on the price of Kubota Holdings’ common stock.

Completion of the Redomicile Transaction may also fail to provide us with additional business opportunities in Japan, including initiation of new collaborations with Japanese pharmaceutical companies. Any such business opportunities will be significantly influenced by factors that will not be directly impacted by the Redomicile Transaction, including our technology, product candidates and the interests of Japanese pharmaceutical companies in pursuing collaborations with Kubota Holdings.

If any of these benefits or other anticipated business opportunities are not realized, our business, results of operation or financial condition could be adversely impacted.

The National Tax Agency may disagree with our conclusions on tax treatment of the Redomicile Transaction and the National Tax Agency has not provided (and we have not requested) a ruling on the Japanese tax aspects of the Redomicile Transaction.

We expect that the Redomicile Transaction will not result in any material Japanese tax liability to Japanese shareholders, as the Redomicile Transaction should be treated as a qualified merger for Japanese tax purposes. However, if the National Tax Agency, or NTA, disagrees with this view, it may take the position that material Japanese income or corporation tax liabilities or amounts on account thereof are payable by Japanese shareholders as a result of the Redomicile Transaction. The NTA has not provided (and we have not requested) a ruling on the Japanese tax aspects of the Redomicile Transaction. There can be no assurance that the NTA will agree with our interpretation of the tax aspects of the Redomicile Transaction or any related matters associated therewith.

We are subject to United States and Japanese corporation taxes following the Redomicile Transaction.

Following the Redomicile Transaction, Kubota Holdings is generally resident and subject to tax in both the United States and Japan. While we believe our dual status for tax purposes will not result in material amounts of additional corporation tax, tax authorities may challenge our application and/or interpretation of relevant tax laws, regulations or treaties, valuations and methodologies or other supporting documentation, and, if they are successful in doing so, we may experience adverse tax consequences. Even if we are successful in maintaining our tax positions, we may incur significant expense in contesting these positions or other claims made by tax authorities. In addition, the holding company structure of Kubota Holdings will introduce other operational issues, including a limited ability to transfer cash from Acucela US to Kubota Holdings without incurring a tax imposed by Japanese authorities on the value of the funds transferred in certain cases. In addition, changes in tax laws or increased rates of tax could have the effect of negatively impacting our anticipated effective tax rates. Our effective tax rates are also subject to a variety of other factors, many of which are beyond our ability to control, and we may be adversely affected by future changes in tax laws.

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Kubota Holdings’ dual tax status may adversely affect a future liquidity event.

In the event of an acquisition of Kubota Holdings, an acquirer would inherit Kubota Holdings’ dual tax status, which may decrease the likelihood that Kubota Holdings is acquired or may adversely affect the valuation of Kubota Holdings in the event of such an acquisition.

In the event of a sale of Acucela US by Kubota Holdings, the acquirer would not inherit Kubota Holdings’ dual tax status. However, in that case, Kubota Holdings would potentially be subject to both United States and Japanese corporation tax on any gain from the sale of Acucela US, and the holders of Kubota Holdings common stock would additionally be subject to tax on the distribution of proceeds from such a sale. Consequently, Kubota Holdings does not anticipate consummating any such sale of Acucela US, although it is impossible to predict the precise form of a future liquidity event.

Holders of Kubota Holdings common stock may be subject to double tax on dividends.

The gross amount of dividends paid to U.S. shareholders from Kubota Holdings on Kubota Holdings common stock generally will be included in gross income as dividend income for U.S. federal income tax purposes. Such dividends generally also will be subject to Japanese withholding tax. However, such dividends will not constitute foreign source income for U.S. foreign tax credit limitation purposes because Kubota Holdings, even though organized as a Japanese joint stock corporation, will be treated as a U.S. corporation for U.S. federal income tax purposes. Therefore, U.S. shareholders may not be able to claim a U.S. foreign tax credit for Japanese withholding tax on any dividends received from Kubota Holdings unless such U.S. shareholders have sufficient other foreign source income.

Also, the gross amount of dividends paid to Japanese shareholders from Kubota Holdings on Kubota Holdings common stock will generally be treated as taxable income for Japanese tax purposes, subject to certain exceptions for corporate shareholders. Such dividends generally also will be subject to U.S. withholding tax. However, the U.S. withholding tax may not be a creditable tax to offset against Japanese taxes because under the Japanese foreign tax credit system, only foreign taxes allowed to be levied by a contracting state under a tax treaty are creditable in principle. In addition, even if the U.S. withholding tax is considered a creditable tax, dividends paid by Kubota Holdings may not constitute foreign source income for Japanese tax credit purposes because Kubota Holdings is a Japanese corporation, so the U.S. withholding tax may not generally be creditable. Therefore, Japanese shareholders may not be able to claim a Japanese foreign tax credit for any U.S. withholding tax. The Japanese withholding tax should be creditable against a Japanese shareholder’s Japanese income tax in principle or be refundable to a Japanese shareholder in appropriate cases.

Holders of Kubota Holdings common stock who are not U.S. or Japanese shareholders will generally be subject to both U.S. and Japanese withholding tax.

If we decide to pay a dividend, we may attempt to take measures in advance to avoid double tax on dividends. However, there can be no assurance that such measures would eliminate such double tax with respect to any particular holder of shares of Kubota Holdings common stock.

The renaming and rebranding of our business may not be successful and our operating results and business prospects may suffer if we are unable to successfully transition our brand

In connection with the Redomicile Transaction, Kubota Pharmaceutical Holdings Co., Ltd. became the publicly traded parent company of Acucela Inc. Renaming our business has resulted in additional expenditures for updating our logos and graphics and increased marketing costs to inform our collaborators, suppliers, service providers and other third parties. In addition, challenges to our new brand could also result in incremental operating expenses. If these incremental expenses exceed customary and expected costs, there could be a material adverse impact on our business. In addition, following the renaming and rebranding, we may experience loss of goodwill and some of our existing and potential collaborators, suppliers, service providers and other third parties may not recognize our new corporate names. The renaming and rebranding also may negatively impact our ability to recruit qualified personnel due to lack of name recognition. We may need to expend significant resources to develop our new brand names in the marketplace, and if we fail to build strong brand recognition, our business relationships, recruiting efforts and business prospects may suffer.

Negative publicity resulting from the Redomicile Transaction could adversely affect our business and the price of Kubota Holdings common stock.

Reincorporations have generated significant press coverage in the United States, much of which has been negative. Negative publicity generated by the Redomicile Transaction could cause our employees, particularly those in the United States, to perceive uncertainty regarding their future opportunities. In addition, negative publicity could cause some of our vendors, collaborators and other third parties to be more reluctant to do business with us. Either of these events could have a significant

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adverse impact on our business. Negative publicity could also cause some Kubota Holdings shareholders to sell their shares or decrease the demand for new investors to purchase Kubota Holdings shares.

Regulatory Risks

We may not be able to obtain regulatory approval for any of the products resulting from our development efforts. Failure to obtain these approvals could materially harm our business.

None of our product candidates have received regulatory approval for marketing in the United States or elsewhere. We will be required to obtain an effective Investigational New Drug Application, or IND, or an Investigational Device Exemption, or IDE, prior to initiating new human clinical trials in the United States, and must submit a New Drug Application, or NDA, Premarket Approval, or PMA, or 510(k) application to obtain marketing approval prior to commercializing any product in the United States. This process is expensive, highly uncertain and lengthy, often taking years until a product is approved for marketing, if at all. Outside of the United States, approval procedures vary among countries and can involve additional product testing, administrative review periods and agreements with pricing authorities. Approval policies or regulations may change and the regulatory authorities have substantial discretion in the product approval process, including the ability to delay, limit, or deny approval of a product candidate for many reasons, including:


•	regulatory authorities may disagree with the design or implementation of our clinical trials;


•	we may be unable to demonstrate to the satisfaction of regulatory authorities that a product candidate is safe and effective;


•	regulatory authorities may not accept clinical data from trials conducted at facilities in other countries;


•	regulatory authorities may find deficiencies in the manufacturing processes or facilities we rely on for clinical or commercial supplies; and


•	approval policies or regulations may significantly change in a manner rendering our clinical trial data insufficient for approval.

Accordingly, there can be no assurance that regulatory authorities will approve any product that we develop.

Our products could be subject to “post-approval” restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience problems with our products, when and if any of them are approved.

Any product for which we obtain marketing approval will be subject to continual requirements, review and periodic inspections by applicable regulatory bodies. Even if regulatory approval is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed. The approval may contain conditions or requirements for costly post-marketing testing and surveillance to monitor product safety or efficacy. Post-approval discovery of previously unknown problems with our products or manufacturing processes, or failure to comply with regulatory requirements, may result in product recall or withdrawal from the market, manufacturing restrictions, suspension of product approval, or fines and penalties.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, physician payment transparency laws and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be directly or indirectly, through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs and it is possible that governmental authorities may conclude that our business practices violate applicable law.

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 negative impact on our business.

Risks Relating to Intellectual Property and Other Legal Matters

If our efforts to protect the proprietary nature of the intellectual property related to our product candidates are not adequate, we may be unable to compete effectively in our markets.

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The strength of our patents involves complex legal, scientific and bioengineering issues and can be uncertain. In addition to the rights we obtain from our collaborators or licensing partners, we rely upon our own intellectual property, including patents, patent applications and trade secrets. Our patent applications may be challenged, fail to result in issued patents, or be too narrow to prevent third parties from developing or designing around these patents. Further, there is no uniform, global policy regarding the subject matter and scope of claims allowable in pharmaceutical patents and the criteria applied by patent offices throughout the world to grant patents are not always predictable or uniform.

There is no guarantee that the patent applications we file or in-license will be granted or that the patents we hold would be found valid and enforceable if challenged. Third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. We may lose our rights to the patents and patent applications we license in the event of a breach or termination of any of our collaboration agreements. Moreover, as a licensee of third parties, we rely on these third parties to file and prosecute patent applications and maintain patents and otherwise protect the licensed intellectual property under some of our license agreements. We have not had and do not have primary control over these activities for certain of our patents or patent applications. We cannot be certain that such activities by third parties have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights. Manufacturers may also seek to obtain approval to sell generic or biosimilar versions, or similar designs of our product candidates prior to the expiration of the relevant licensed patents. If the sufficiency of the breadth or strength of protection provided by the patents we license with respect to our product candidates is threatened, it could dissuade others from collaborating with us to develop, and threaten our ability to commercialize, our other product candidates. Further, if we encounter delays in our clinical trials or our development activities are otherwise impeded, the period of time during which we could market our product candidates under patent protection would be reduced. Once the patent life has expired for a product, we may be subject to competition from generic, biosimilar or design knock-offs.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

We rely on a combination of patent, copyright and trade secret protection, nondisclosure agreements and licensing arrangements to establish, protect and enforce our proprietary information and rights. Trade secret protection and confidentiality agreements protect certain proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our development processes with respect to our product candidates that involve proprietary know-how, information and technology that is not covered by patent applications. While we maintain physical security of our premises and physical and electronic security of our information technology systems, security measures may be breached and we may not have adequate remedies to protect the confidentiality of our proprietary information and know-how. Our systems and external backup measures may also be vulnerable to damage or breach due to natural disasters or other unexpected events.

While we require all of our employees, consultants, advisors and any third-parties who have access to our proprietary information and technology to enter into confidentiality agreements, we cannot be certain that this information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. These agreements may be terminated or breached, and we may not have adequate remedies for any such termination or breach. Furthermore, to the extent we develop our operations in different countries, these agreements may not provide meaningful protection for our patents, trade secrets and know-how in the event of unauthorized use or disclosure as the laws of some countries do not adequately protect proprietary rights to the same extent as the laws of the United States. Additionally, to the extent we license certain proprietary information or technologies from third-parties, including our collaboration partners, we also rely on such third-parties to adopt and enforce policies to protect such proprietary know-how, information and technology.

Third-party claims of intellectual property infringement may prevent or delay our discovery, development and commercialization efforts with respect to our product candidates.

Our commercial success depends, in part, on avoiding infringement of the patents and proprietary rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement, the biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that our activities infringe their patents or that we are employing their proprietary technology without authorization. We may not have identified all the patents, patent applications or published literature that affect our business either by blocking our ability to commercialize our product, by preventing the patentability of one or more aspects of our products or those of our licensors or by covering the same or similar technologies that may affect our ability to market our product candidates. In addition, third parties may obtain patents in the future and claim that use of our product candidates or technologies infringes upon these patents. Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims,

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regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties, or we may be enjoined from further developing or commercializing our product candidates and technologies.

We may become involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To the extent we rely on third parties for our proprietary rights, we will have limited control over the protection and defense of such rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or enforceable, or may find that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees.

Because of the substantial amount of discovery required for intellectual property litigation, some of our confidential information could be compromised by disclosure during the litigation proceedings. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

Risks Related to Ownership of Our Common Stock

Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell shares of Kubota Holdings common stock at a particular price on any particular trading day, or at all.

Stock prices on the TSE, the main venue for trading of shares of Kubota Holdings’ common stock, are determined on a real-time basis by the balance between bids and offers. The TSE is an order-driven market without specialists or market makers to guide price formation. To prevent excessive volatility, the exchange sets daily upward and downward price range limitations for each listed stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit on the TSE may not be able to effect a sale at such price on a particular trading day, or at all.

Investors holding less than a full unit of shares of Kubota Holdings’ common stock will have limited rights as shareholders.

Pursuant to the Japanese Companies Act and certain related legislation, Kubota Holdings’ articles of incorporation provide that 100 shares of common stock constitute one unit of shares. Under the Japanese Companies Act, holders of shares constituting less than a full unit do not enjoy the right to vote. In addition, shares constituting less than a full unit are not tradable on Japanese stock exchanges on which they are listed. Under the unit share system, any holder of shares constituting less than a full unit has the right to request that Kubota Holdings purchase such shares.

Kubota Holdings’ stock price may fluctuate significantly and investors may not be able to sell their shares at a price that they consider reasonable.

The trading price of Kubota Holdings common stock may be highly volatile and could be subject to wide fluctuations in response to various factors that may impact the Company’s performance, some of which are described in this “Risk Factors” section and elsewhere in this annual report. Some of the factors that may impact our performance are beyond our control.

The stock market in general, and market prices for the securities of biotechnology companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

As the successor issuer to Acucela Inc., a United States public reporting company with shares previously listed on the Tokyo Stock Exchange, Kubota Holdings is subject to a variety of financial and other reporting and corporate governance requirements that may be difficult to satisfy, will raise our costs and may divert resources and management attention from operating our business.

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As a public company whose shares of common stock are both registered under the Exchange Act in the United States and listed for trading on the Mothers market of the Tokyo Stock Exchange, or the TSE, in Japan, we have incurred and will continue to incur significant legal, accounting and other expenses related to various financial reporting and corporate governance requirements in both the United States and Japan. Specifically, we are subject to the continued listing standards of the TSE in Japan as well as the disclosure requirements of the Exchange Act in the United States, which together impose significant compliance obligations upon us. These rules and regulations have increased and have made our legal, accounting and financial compliance efforts and costs more time-consuming and costly. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

We are required to test operating effectiveness of our internal control over financial reporting on a periodic basis in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we are unable to comply with Section 404, management might be unable to certify, and our independent registered public accounting firm might not be able to report on, the adequacy of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our financial information on a timely basis and might suffer adverse regulatory consequences or violate TSE listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

Any future issuance of equity or debt securities by us may adversely affect the rights or value of our previously issued common stock.

If we raise additional capital through the issuance of equity or securities convertible into equity, further dilution to our then existing shareholders will result and new investors could have rights superior to the rights of our existing shareholders. If we raise additional funds through the issuance of debt securities, these securities could have rights that are senior to holders of our common stock and could contain covenants that restrict our operations. In addition, the terms of future financings may restrict our ability to raise additional capital, which could delay or prevent the further development or commercialization of our product candidates. Our stock price could also decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur.

Because the principal trading market for our shares is the Mothers market of the TSE, the corporate governance rules of the major U.S. stock exchanges do not apply to us. As a result, our governance practices may differ from those of a company listed on such U.S. exchanges.

Our governance practices need not comply with certain New York Stock Exchange and NASDAQ corporate governance standards, including:


•	the requirement that a majority of our board of directors consists of independent directors;


•	the requirement that we have an audit committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and


•	the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Although the composition of our board of directors and its committees currently complies with the foregoing governance standards, there can be no assurance that we will continue to voluntarily comply with such requirements. Accordingly, our shareholders may not have the same protections afforded to shareholders of companies that are subject to such corporate governance requirements.

A limited number of shareholders have the ability to influence the outcome of director elections and other matters requiring shareholder approval.

As of March 31, 2017, Dr. Ryo Kubota, one of our largest shareholders, as an individual, and our directors and executive officers and their affiliates, as a group, beneficially owned approximately 28.1% and 28.7% of our outstanding common stock, respectively, and entities affiliated with SBI Holdings, Inc., collectively SBI Group, own approximately 38.1% of our outstanding common stock.

As a result of their significant holdings of our common stock, Dr. Ryo Kubota and SBI Group, or other future large shareholders, individually have the ability to exert substantial influence over matters requiring approval by our shareholders and can control the outcome of matters requiring approval by our shareholders if they vote together, including electing directors and approving mergers, acquisitions or other business combination or corporate restructuring transactions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other shareholders. Dr. Kubota acting alone or with these other shareholders, could

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exert substantial influence over matters requiring approval by Kubota Holdings’ shareholders, including electing directors and approving mergers, acquisitions or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change of control of the Company, which could deprive Kubota Holdings’ shareholders of an opportunity to receive a premium for their stock as part of a sale of the Company and might reduce Kubota Holdings’ stock price. These actions may be taken even if they are opposed by our other shareholders.

Under the Japanese Companies Act, certain material matters require approval of at least two thirds of the shares present or represented by proxy at a duly convened meeting of shareholders at which at least one third of the total number of shares entitled to vote are present or represented by a proxy. If SBI Group is present or represented by proxy at a meeting where matters requiring two-thirds voting requirement are addressed, SBI Group could block the approval of such action. For matters requiring approval of at least a majority of the shares present or represented by proxy at a duly convened meeting of shareholders, SBI Group may be able to prevent attainment of the requisite approvals depending on the level of shareholder participation in such a meeting. As a result of SBI Holdings’ ownership stake, future proposed actions requiring approval of Kubota Holdings’ shareholders may be blocked, which could have a material and adverse effect on Kubota Holdings’ stock price.

Our redomicile to Japan could discourage a takeover attempt, which may reduce or eliminate the likelihood of a change of control transaction and, therefore, the ability of Kubota Holdings’ shareholders to sell their shares for a premium.

Hostile takeovers are rarely attempted in Japan. While Japanese law does not have anti-takeover statutes and the Japan Articles do not include any specific protections against a hostile takeover, such as a shareholder rights plan, certain factors, such as negative social perception and the nature of shareholder bases for Japanese corporations, may make it difficult to complete a hostile takeover, which may reduce or eliminate the likelihood of a change of control transaction and the ability of Kubota Holdings’ shareholders to sell their shares for a potential premium.

Kubota Holdings does not expect to pay dividends in the foreseeable future. As a result, you must rely on stock appreciation for any return on your investment.

Kubota Holdings does not anticipate paying cash dividends on its common stock in the foreseeable future. Any payment of cash dividends will also depend on financial condition, results of operations, capital requirements and other factors and will be at the discretion of the board of directors of Kubota Holdings. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in Kubota Holdings common stock.

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ITEM 6. Exhibits



Exhibit Number		Description

10.1		Third Amendment to Lease Agreement between Nexus Canyon Park LLC and Acucela Inc. effective as of November 9, 2016 (incorporated herein by reference to Exhibit 10.12 to the Annual Report on Form 10-K (File No. 000-55133) filed on March 15, 2017).
10.2		Sub-Sublease Agreement by and between Acucela Inc. and Zillow, Inc. dated as of January 12, 2017 (incorporated herein by reference to Exhibit 10.16 to the Annual Report on Form 10-K (File No. 000-55133) filed on March 15, 2017).
10.3		Sub-Sublease Commencement Delay Letter Agreement by and between Acucela Inc. and Zillow, Inc. dated as of March 15, 2017.
31.1		Certification of Principal Executive Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 *		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
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

* The Certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Kubota Pharmaceutical Holdings Co., Ltd. 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 Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

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



KUBOTA PHARMACEUTICAL HOLDINGS CO., LTD.
Dated:	May 10, 2017
BY:		/s/ Dr. Ryo Kubota
		Dr. Ryo Kubota
		Chairman of the Board, Chief Executive Officer and President
		(Principal Executive Officer)




BY:		/s/ John E. Gebhart
		John E. Gebhart
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX



Exhibit Number		Description

10.1		Third Amendment to Lease Agreement between Nexus Canyon Park LLC and Acucela Inc. effective as of November 9, 2016 (incorporated herein by reference to Exhibit 10.12 to the Annual Report on Form 10-K (File No. 000-55133) filed on March 15, 2017).
10.2		Sub-Sublease Agreement by and between Acucela Inc. and Zillow, Inc. dated as of January 12, 2017 (incorporated herein by reference to Exhibit 10.16 to the Annual Report on Form 10-K (File No. 000-55133) filed on March 15, 2017).
10.3		Sub-Sublease Commencement Delay Letter Agreement by and between Acucela Inc. and Zillow, Inc. dated as of March 15, 2017.
31.1		Certification of Principal Executive Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 *		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
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

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