424B4 1 v440665_424b4.htm 424B4

Filed pursuant to Rule 424(b)(4)
Registration No. 333-210811

PROSPECTUS

1,021,525 SHARES

[GRAPHIC MISSING]

Common Stock



 

This prospectus relates to the offer for sale of 1,021,525 shares of common stock, par value $0.0001 per share, by certain stockholders named in this prospectus, referred to as selling stockholders throughout this prospectus. The selling stockholders are investors who made term loans to us in December 2015 in the aggregate principal amount of $4.0 million, which, together with accrued and unpaid interest thereon, will, on May 23, 2015, automatically convert into the shares of common stock being offered by the selling stockholders. We will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholders named in this prospectus.

The distribution of securities offered hereby may be effected in one or more transactions that may take place on The NASDAQ Capital Market, including ordinary brokers’ transactions, privately negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling stockholders. No sales of the shares covered by this prospectus shall occur until the shares of common stock sold in our initial public offering begin trading on The NASDAQ Capital Market. Currently, there is no public market for our common stock. Our common stock has been approved for listing on The NASDAQ Capital Market under the symbol “PZRX”.

The selling stockholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended, with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. We have agreed to indemnify the selling stockholders against certain liabilities, including liabilities under the Securities Act of 1933, as amended.

On May 17, 2016, a registration statement under the Securities Act of 1933, as amended, with respect to our initial public offering underwritten by Laidlaw & Company (UK) Ltd. and Roth Capital Partners, LLC, as the underwriters, of $18.5 million of our common stock (or 3,700,000 shares of common stock at the $5.00 per share initial public offering price) was declared effective by the Securities and Exchange Commission. We estimate that the net proceeds from our initial public offering will be approximately $16.4 million (assuming no exercise of the underwriters’ over-allotment option) after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 13 of this prospectus for a discussion of information that should be considered in connection with an investment in our common stock.

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.



 

The date of this prospectus is May 17, 2016.


 
 

TABLE OF CONTENTS

TABLE OF CONTENTS

 
PROSPECTUS SUMMARY     1  
THE OFFERING     10  
SUMMARY FINANCIAL DATA     12  
RISK FACTORS     13  
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS     44  
USE OF PROCEEDS     45  
DIVIDEND POLICY     45  
CAPITALIZATION     46  
SELECTED HISTORICAL FINANCIAL DATA     48  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     49  
BUSINESS     64  
MANAGEMENT     95  
EXECUTIVE COMPENSATION     101  
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS     109  
PRINCIPAL STOCKHOLDERS     112  
DESCRIPTION OF CAPITAL STOCK     117  
SHARES ELIGIBLE FOR FUTURE SALE     123  
SHARES REGISTERED FOR RESALE     126  
SELLING STOCKHOLDERS     128  
PLAN OF DISTRIBUTION     131  
LEGAL MATTERS     133  
EXPERTS     133  
WHERE YOU CAN FIND MORE INFORMATION     133  
INDEX TO FINANCIAL STATEMENTS     F-1  

We have not authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus or in any free writing prospectus that we may authorize to be delivered or made available to you. Neither the delivery of this prospectus nor the sale of our common stock means that the information contained in this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy the shares of common stock in any circumstances under which the offer or solicitation is unlawful.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those

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described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Cautionary Note Regarding Forward-Looking Statements.”

This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section of this prospectus and the financial statements and related notes appearing at the end of this prospectus before making an investment decision.

Unless the context provides otherwise, all references in this prospectus to “PhaseRx,” “we,” “us,” “our,” the “Company,” or similar terms, refer to PhaseRx, Inc. and its directly and indirectly owned subsidiaries on a consolidated basis.

Overview

We are a preclinical biopharmaceutical company developing a portfolio of products for the treatment of inherited enzyme deficiencies in the liver using intracellular enzyme replacement therapy, or i-ERT, and expect to generate clinical safety and efficacy data in 2018. We are not aware of any other enzyme replacement therapies for intracellular enzyme deficiencies currently being marketed for inherited enzyme deficiencies in the liver, and believe that the commercial potential for i-ERT is completely untapped and similar to the large and growing $4 billion worldwide market for conventional enzyme replacement therapy, or ERT, which includes drugs such as Cerezyme®. Our i-ERT approach is enabled by our proprietary Hybrid messenger RNA, or mRNA, TechnologyTM platform, which allows synthesis of the missing enzyme inside the cell. Our initial product portfolio targets the three urea cycle disorders ornithine transcarbamylase deficiency, or OTCD, argininosuccinate lyase deficiency, or ASL deficiency, and argininosuccinate synthetase deficiency, or ASS1 deficiency. We have preclinical proof of concept in a mouse model of a urea cycle disorder showing significant reductions in the level of blood ammonia, which is the approvable endpoint by the Food and Drug Administration, or the FDA, for the demonstration of efficacy in human clinical trials of the urea cycle disorders. To our knowledge, there are no ERT products on the market to treat these diseases, because the urea cycle reaction occurs inside the cell and is inaccessible to the administered enzyme. In contrast, we expect delivery of the missing enzyme using i-ERT with our Hybrid mRNA Technology to be a promising approach to treat these patients. Beyond the urea cycle disorders, we believe there are a significant number of inherited disorders of metabolism in the liver that are candidates for our therapeutic approach and that proof of concept for the treatment of one inherited liver disorder with our Hybrid mRNA Technology can be adapted to develop mRNA therapeutics for the treatment of other inherited liver disorders using our platform.

Our i-ERT approach is accomplished by delivering normal copies of the mRNA that make the missing enzyme inside the liver cell, thereby reinstating the normal physiology and correcting the disease. A key challenge with mRNA therapeutics historically has been their satisfactory delivery into the patients’ cells. We believe that our Hybrid mRNA Technology addresses these difficulties and also directs synthesis of the desired protein to the hepatocyte, which is the chief functional cell type in the liver harboring the metabolic cycles that need to be corrected in metabolic liver diseases. We believe our technology is superior to alternative technologies because, based upon peer-reviewed journal articles and presentations of our competitors and our internal preclinical studies, it results in high-level synthesis of the desired protein in the hepatocyte, has better tolerability and can be repeat-dosed without loss of effectiveness, thus enabling treatment of chronic conditions.

We are focused on inherited, single-gene disorders of metabolism in the liver that result in deficiency of an intracellular enzyme and thus have been unable to be treated with conventional ERT. Some inherited orphan liver diseases, such as the lysosomal storage disorders, can be successfully treated with conventional ERT. However, this approach does not work for many of the inherited orphan liver diseases, including the urea cycle disorders, because the missing enzyme is inside the cell, and the administered enzyme is unable to get inside the target cell where it is needed to be therapeutically active. Our approach is to deliver mRNA encoding the missing enzyme into the cell using our Hybrid mRNA Technology, such that the mRNA makes the missing enzyme inside the cell, restores the intracellular enzyme function and corrects the disease.

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As noted above, our initial focus is on urea cycle disorders, which are a group of rare genetic diseases generally characterized by the body’s inability to remove ammonia from the blood. The urea cycle consists of several enzymes, including ornithine transcarbamylase, or OTC, argininosuccinate lyase, or ASL, and argininosuccinate synthetase, or ASS1. Since the urea cycle reactions occur inside the cell, conventional ERT does not work as a treatment for these disorders. Urea cycle disorders are caused by a genetic mutation that results in a deficiency of one of the enzymes of the urea cycle that is responsible for removing ammonia from the bloodstream, causing elevated levels of ammonia in the blood. The elevated ammonia then reaches the brain through the circulation, where it causes cumulative and irreversible neurological damage, and can result in coma and death. While currently marketed ammonia scavengers such as Ravicti® (glycerol phenylbutyrate) and Buphenyl® (sodium phenylbutyrate) provide palliative care of the symptoms, liver transplant is the only currently available cure for urea cycle disorders. Our goal is to treat the urea cycle disorders by intravenous delivery of mRNA that makes the relevant missing urea cycle enzyme inside the cell, thus reinstating normal control of blood ammonia. We believe that anticipated improvements in newborn screening and the availability of corrective therapy will lead to improved diagnosis and survival rates among patients with urea cycle disorders.

We have three therapeutic urea cycle disorder programs under development: PRX-OTC to treat OTCD, PRX-ASL to treat ASL deficiency and PRX-ASS1 to treat ASS1 deficiency. Preclinical efficacy has been established for PRX-OTC with two biological measures, including normalization of the level of ammonia in the blood. Lowering the level of ammonia in the blood is an approvable endpoint by the FDA for the treatment of urea cycle disorders, since it was the basis for the approval of Ravicti by the FDA in 2013. We expect to achieve preclinical proof of concept for the treatment of a second urea cycle disorder and select a urea cycle disorder product candidate for further development and eventual commercialization in the first half of 2016. We also plan to scale up the manufacturing of this product candidate and conduct further preclinical studies in the second half of 2016. In addition, we plan to test the safety and efficacy of the Hybrid mRNA Technology in large animals by the end of 2016. We intend to initiate Investigational New Drug-enabling, or IND-enabling, studies in the first half of 2017 and plan to start manufacturing clinical supplies of the lead urea cycle disorder product candidate consistent with current good manufacturing practices, or cGMP, in the third quarter of 2017. We expect to file an IND application with the FDA in the fourth quarter of 2017 for this candidate and to conduct Phase 2a/2b single- and repeat-dose clinical proof of concept studies in urea cycle disorder patients that are expected to generate Phase 2a safety and efficacy data in the first half of 2018 and Phase 2b safety and efficacy data in the second half of 2018, including measurement of reduction in blood ammonia.

We are engaged in discussions with a number of prospective biopharmaceutical companies regarding partnership opportunities focused on our product pipeline, the use of our Hybrid mRNA Technology for the delivery of potential partners’ mRNAs and the use of Hybrid mRNA Technology for in vivo gene editing. In vivo gene editing is a type of in vivo genetic engineering in which DNA is inserted, deleted or replaced in the genome of an organism using proteins called nucleases. Gene editing requires the delivery of mRNA and/or DNA into cells, which can be accomplished by several methods, the two most common of which are using engineered viruses as gene delivery vehicles, or viral vectors, and those that use naked DNA/RNA or DNA/RNA complexes, or non-viral methods. Gene editing companies are interested in our Hybrid mRNA Technology for its potential to express nucleases-encoding mRNAs in the hepatocyte, providing a non-viral delivery platform for in vivo gene editing, ultimately correcting the genetic defects in the liver of patients. We believe that our approach offers advantages over viral vectors for in vivo gene editing, which can persist in the patient over the long term, and thus may cause continued modification of the genome after the intended change to the desired gene has been made. If successful, we believe that our technology would enable genes to be added, repaired or deleted in a patient’s hepatocytes for therapeutic benefit. To date, we have not entered into any partnerships or collaborations for our current product candidates.

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Our pipeline includes our most advanced mRNA therapeutic program for the treatment of OTCD, for which we have shown preclinical proof of concept, and programs for ASL deficiency and ASS1 deficiency which are under development as summarized in the table below:

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Our Strategy

Our strategy is to use our proprietary Hybrid mRNA Technology to develop mRNA therapeutics for the treatment of orphan liver diseases. We believe that our focus on urea cycle disorders maximizes the leverage of our know-how and proprietary technology and allows us to build value through our programs by moving them forward into development in a cost-efficient manner with the goal of promptly delivering safe and effective therapies to urea cycle disorder patients in need of effective treatment.

Our business strategy includes the following:

Rapidly develop a portfolio of mRNA therapeutics to treat orphan liver diseases that are intractable to ERT, with initial focus on the urea cycle disorders.  We have achieved preclinical proof of concept for our OTCD program, with additional data in ASL and/or ASS1 programs expected to follow in the first half of 2016. We intend to initiate IND-enabling studies in the first half of 2017, file an IND in the fourth quarter of 2017 and expect to generate clinical proof of concept in urea cycle disorder patients in the first half of 2018.
Leverage our Hybrid mRNA Technology across a broad range of additional orphan liver diseases.  There are many other orphan liver diseases beyond the urea cycle disorders that we believe would be good candidates for mRNA replacement therapy. Given that the delivery system will be the same across the programs, once the Hybrid mRNA Technology is successful with one mRNA and orphan liver disease, we anticipate that the costs and risks associated with developing new mRNA therapeutics for other orphan liver diseases will be relatively low.
Pursue and form strategic collaborations that leverage our Hybrid mRNA Technology.  We are engaged in discussions with potential partners for developing mRNA programs in various disease indications. We intend to pursue partnerships in order to accelerate the development and maximize the market potential of our Hybrid mRNA Technology platform. In particular, we intend to partner with larger biopharmaceutical companies that possess market know-how and marketing capabilities to complete the development and commercialization of mRNA therapeutics. Our Hybrid mRNA Technology also enables us to deliver nuclease-encoding mRNAs to the liver. The combination of our Hybrid mRNA Technology and gene editing technology has the potential to enable in vivo gene editing, to either add or delete gene function in humans, which, if successful, could have a variety of important potential medical applications. For example, deleting gene function could be used for lowering cholesterol, and adding gene function could be used to correct certain types of hemophilia.

Our Competitive Strengths

With our proprietary Hybrid mRNA Technology, intellectual property portfolio and experienced management team, we believe we are well positioned to advance our development candidates and partner our

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technology platform to expand future development and commercial opportunities. Although our technology is at a preclinical stage of development and will require substantial resources and clinical and regulatory validation of efficacy, we believe that our delivery technology will provide opportunities to create value with therapeutic mRNAs for the treatment of orphan liver diseases in a cost-effective way.

We believe that our competitive strengths include:

Specific production of desired proteins in hepatocytes.  Based on the internal preclinical studies we have conducted, the Hybrid mRNA Technology enables protein production specifically in hepatocytes in the liver with minimal impact in other major organs and tissues. This outcome is accomplished by attaching the hepatocyte-specific targeting ligand molecule N-acetyl galactosamine, or GalNAc, to the polymer used in our Hybrid mRNA Technology, which results in hepatocyte-specific expression of the desired protein. GalNAc targeting of mRNA expression is a notable aspect of our technology and we are not aware of any competitor that is using GalNAc to target expression of mRNA therapeutics. This specificity limits off-target effects that may occur by producing proteins in tissues outside the liver.
Ability to repeat dose.  Our preclinical data shows that the Hybrid mRNA Technology enables repeat dosing at therapeutically efficacious doses without loss of protein production. This ability enables treatment of chronic indications that require multi-dose treatment regimens.
Better tolerability relative to other nucleic acid delivery systems.  In our preclinical studies, the Hybrid mRNA Technology has demonstrated better tolerability relative to other nucleic acid delivery systems, as demonstrated by the lack of an immune system response evidenced by the low levels of a number of cytokines observed in mice. Moreover, at doses well above those needed for a therapeutic effect, liver enzyme levels, a measure of liver damage, remained within normal ranges in mice. This ability to dose at high mRNA levels in combination with the ability to multi-dose without loss of expression upon subsequent dosing represents one of the significant strengths of the Hybrid mRNA Technology.
Potential for rapid development of follow-on products with unusually low cost and risk.  There are many single-gene inherited metabolic disorders of the liver which may be candidates for our mRNA therapeutic approach. Once proof of concept has been established for one orphan liver disease with the Hybrid mRNA Technology, we believe that the same delivery platform may be used to deliver many different mRNAs. Because our delivery technology platform is largely complete and the sequence of all mRNAs is widely known and in public domain, once we successfully develop an mRNA therapeutic for one of the single-gene inherited metabolic disorders of the liver, we believe that development of an mRNA therapeutic targeting other single-gene inherited metabolic disorders of the liver can be made in a significantly shorter amount of time and at less cost relative to a conventional drug discovery process, which generally takes several years to discover new drugs. In addition, we believe that the precise specificity of mRNA for its target minimizes off-target risks associated with conventional drug development, which we believe will contribute to lower cost and risks. For these reasons, while not mitigating potential future regulatory or clinical risks, and not shortening regulatory or clinical timelines for drug approval, we believe our approach can lead to the generation of new drugs more rapidly and with lower risk compared to conventional drug development.
Ability to develop high-barrier to entry products.  Due to our propriety know-how in nucleic acid therapeutics and their delivery, we expect to develop high barrier to entry therapeutics which we believe will result in our products being subject to relatively less competition in the market.
Experienced team.  Our management team has an extensive track record and experience in the research, development and delivery of RNA therapeutics. Our management team has over 50 years of combined experience in RNA delivery technologies and RNA therapeutics, and our team is well placed to further develop the Hybrid mRNA Technology for orphan liver disease therapeutics and for gene editing applications.

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Patent protection for our Hybrid mRNA Technology.  In order to protect our innovations, we have aggressively built upon our extensive and enabling intellectual property estate worldwide. Our portfolio of patents and patent applications includes multiple families and is primarily focused on synthetic polymers and related compositions, the use of polymer and polymer-lipid nanoparticle, or LNP, compositions for delivery of mRNA and other therapeutic agents, including the use of polymer-LNP compositions in our core platform technology, and methods for treating protein deficiency diseases such as orphan diseases characterized by single-gene metabolic defects in the liver, including OTCD. As of May 17, 2016, we own or have in-licensed 12 issued U.S. patents, 20 issued foreign patents, and over 35 pending U.S. and foreign patent applications.

While future manufacturing, regulatory and clinical challenges have not yet been addressed by us, our Hybrid mRNA Technology has proven highly effective in internal preclinical testing. However, to date, none of the above described studies involved human subjects. As such, there can be no assurance that we will achieve the same results upon the commencement of human clinical trials. Should we fail to achieve similar results in human clinical trials, it could result in a material adverse effect on our business and operations. Establishing the efficacy of our technology in human subjects will require substantial funds and could take multiple years. In addition, our successful development is subject to many risks, both known and unknown that may impede our ability to ever bring this technology to market or to generate revenue. See “Risk Factors” beginning on page 13.

The main competitive technologies to provide treatment for our target diseases are adeno-associated virus, or AAV, vectors, and mRNA delivery using conventional LNPs. AAV vectors offer the potential of longer-term correction of the liver disease by gene therapy. These vectors are in clinical development to treat orphan liver diseases such as hemophilia. However, triggering of multiple types of immune response to the virus represents a major challenge facing development of these viral vectors and can make repeat dosing ineffective. So if the therapy wanes over time, or if the cells targeted by a first AAV treatment turnover or die, then a repeat administration may be ineffective. mRNAs may also be delivered by conventional LNPs. We believe at least one mRNA/LNP formulation may have been reviewed by the FDA to enter clinical trials for an orphan liver disease indication. While LNPs are effective in delivering mRNA cargo into the liver, and hence, if successfully developed, could become a significant competitive technology for us, LNPs generally contain fusogenic lipids that can activate the innate immune system and result in dose-limiting toxicities.

Risk Factors

Investing in our common stock involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 13 before making a decision to invest in our common stock. The following is a summary of some of the principal risks we face:

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.
As of March 31, 2016, we had an accumulated deficit of $51.6 million. In addition, because of our recurring operating losses and negative cash flows from operations, there is substantial doubt regarding our ability to continue as a going concern.
We are dependent on technologies we have licensed and we may need to license in the future, and if we fail to obtain licenses we need, or fail to comply with our payment obligations in the agreements under which we in-license intellectual property and other rights from third parties, we could lose our ability to develop our product candidates.
Following our initial public offering, we will require substantial additional funding to bring our planned products through clinical trials, regulatory approval, manufacturing and marketing and to become profitable. Failure to obtain this necessary capital when needed may force us to delay, limit, or terminate our product development efforts or other operations.
The Hybrid mRNA Technology has not previously been tested in beyond our preclinical studies, and mRNA-based drug development is unproven and may never lead to marketable products.

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As all of our programs are in preclinical studies or early stage research, we cannot predict how these results will translate into the results in humans, nor can we be certain that any of our product candidates will receive regulatory approval or be commercialized. If we are unable to receive regulatory approval or commercialize our product candidates, our business will be adversely affected.
The development of our product candidates including clinical trials utilizing our technologies will be expensive and time-consuming, and if the development of our product candidates does not produce favorable results or commencement or completion of clinical trials are delayed, we and our potential collaborators may be unable to commercialize these products.
We expect to continue to incur significant research and development expenses, which may make it difficult for us to attain profitability.
We believe that one of our opportunities is to partner with gene editing companies, but gene editing technology is relatively new, and if we are unable to use our technology in gene editing applications, our revenue opportunities from such partnerships will be limited.
We are dependent on technologies we license, and if we lose the right to license such technologies or we fail to license new technologies in the future, our ability to develop new products would be harmed.
We may become dependent on our collaborative arrangements with third parties for a substantial portion of our revenue, and our development and commercialization activities may be delayed or reduced if we fail to initiate, negotiate or maintain successful collaborative arrangements.
If we are unable to adequately protect our proprietary technology from legal challenges, infringement or alternative technologies, our competitive position may be hurt and our operating results may be negatively impacted.
We license patent rights from third-party owners or licensees. If such owners or licensees do not properly or successfully obtain, maintain or enforce the patents underlying such licenses, or if they retain or license to others any competing rights, our competitive position and business prospects may be adversely affected.
Even if we are successful in developing and commercializing a product candidate, it is possible that the commercial opportunity for mRNA-based therapeutics will be limited.
The biotechnology and pharmaceutical industries are intensely competitive. If we are unable to compete effectively with existing drugs, new treatment methods and new technologies, we may be unable to commercialize successfully any drugs that we develop.

Common Stock Issuances Upon the Consummation of our Initial Public Offering

On December 11, 2015, we issued a promissory note to Titan Multi-Strategy Fund I, LTD. in exchange for $500,000. On December 21, 2015, we entered into a loan and security agreement with 17 investors, which was subsequently amended on April 6, 2016, pursuant to which Titan Multi-Strategy Fund I, LTD. converted its note and certain investors made new term loans to us in the aggregate principal amount of $4.0 million. The term loans closed on December 21, 2015, and we received from the escrow agent net proceeds of approximately $3.2 million, after deducting certain fees and expenses. Interest accrues on the term loans at the rate of 5% per annum. The maturity date of the term loans is December 21, 2016, unless earlier converted into equity or otherwise repaid. The repayment of the term loans is subject to acceleration upon the occurrence of certain customary events of default contained in the loan and security agreement. On the closing date of our initial public offering, the aggregate outstanding principal amount of the term loans, plus all accrued and unpaid interest thereon, will be approximately $4.1 million.

The entire outstanding principal amount of the term loans together with all accrued and unpaid interest thereon will automatically convert into shares of our common stock upon the closing of a qualified offering and compliance with all components of the qualified offering as set forth in the loan and security agreement, at a conversion price equal to 80% of the price which shares of common stock are sold for in the qualified offering. We agreed to use our reasonable best efforts to consummate a qualified offering on or prior to June 5, 2016. Among other things, a qualified offering under the loan and security agreement requires a firm

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commitment underwritten initial public offering of our common stock not later than June 5, 2016 at a pre-offering valuation of at least $24 million (exclusive of the term loans and their subsequent conversion) and which results in gross proceeds to us of at least $16.9 million. Our initial public offering constitutes a qualified offering under the terms of the loan and security agreement, and therefore, upon the closing of our initial public offering, we will issue an aggregate of 1,021,525 shares of common stock to the investors under the loan and security agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Loan and Security Agreement”. Based on the aggregate outstanding principal amount of the term loans, plus all accrued and unpaid interest thereon, of approximately $4.1 million on the closing date of our initial public offering, 480,001 shares issuable upon conversion of the term loans will be subject to lock-up agreements of 90 days. See “Shares Eligible for Future Sale — Lock-up Agreements” and in section titled “Shares Registered for Resale — Lock-up Agreements”. Laidlaw & Company (UK) Ltd. may, in its sole discretion, and at any time without notice, release all or any portion of the shares subject to the lock-up agreements. The remaining shares issuable upon conversion of the term loans are not subject to any lock-up periods.

In addition, in connection with our initial public offering, we issued:

an aggregate of 1,843,369 shares of common stock upon the conversion of $12.6 million of convertible notes and related accrued interest into Series A preferred stock and then into our common stock in accordance with the terms of such notes and, with respect to Series A preferred stock, our third amended and restated certificate of incorporation, as amended;
an aggregate of 945,511 shares of common stock upon the conversion of $3.6 million of convertible notes and related accrued interest into our common stock in accordance with the terms of such notes;
an aggregate of 3,229,975 shares of common stock upon the conversion of 25,716,583 outstanding shares of preferred stock under the terms of our third amended and restated certificate of incorporation, as amended; and
an aggregate of 308,001 shares of common stock issuable upon the exercise of outstanding warrants to purchase 2,452,242 shares of preferred stock at an exercise price of $0.01 per share and the conversion of the preferred stock issuable upon exercise of such warrants into common stock under the terms of our third amended and restated certificate of incorporation, as amended.

Upon consummation of our initial public offering, an aggregate of 8,714,894 shares of common stock are subject to lock-up agreements of at least 180 days and an aggregate of 480,001 shares of common stock are subject to lock-up agreements of 90 days. See “Shares Eligible for Future Sale — Lock-up Agreements” and in section titled “Shares Registered for Resale — Lock-up Agreements”. Each of we, Laidlaw & Company (UK) Ltd. or Titan Multi-Strategy Fund I, LTD., as applicable, may, in our or their sole discretion, and at any time without notice, release all or any portion of the shares subject to the corresponding lock-up agreements.

Sale of our Common Stock by Our Stockholders

In December 2015, we engaged Palladium Capital Advisors, LLC to serve as a non-exclusive agent in connection with a bridge loan financing and as a non-exclusive advisor in connection with our initial public offering and for the provision of general capital markets advice. Prior to consummation of the bridge loan financing, we determined, following discussions with Palladium Capital Advisors, LLC, to request certain of our stockholders to transfer an aggregate of 1,393,880 shares of our common stock to Titan Multi-Strategy Fund I, LTD. and certain of its third-party designees at a nominal purchase price in order to induce Titan Multi-Strategy Fund I, LTD. to serve as the initial committed investor in the bridge financing and also in expectation of receiving other support from Titan Multi-Strategy Fund I, LTD., Palladium Capital Advisors, LLC and their respective contacts in connection with our proposed initial public offering, including introductions to certain prospective underwriters.

As a result of this request, certain of our existing investors that collectively beneficially own the majority of our common stock entered into stock purchase agreements with Titan Multi-Strategy Fund I, LTD. and certain of its third-party designees, pursuant to which, concurrently with the closing of our initial public offering, our existing investors agreed to transfer an aggregate of 1,393,880 shares of our common stock to

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Titan Multi-Strategy Fund I, LTD. and certain of its third-party designees at a nominal purchase price. Such shares transferred to Titan Multi-Strategy Fund I, LTD. and certain of its third-party designees are subject to lock-up agreements, each of which, subject to limited exceptions, restricts transfer of the investor’s shares of common stock for a period of 180 days following our initial public offering without our prior written consent; provided, that, we may unilaterally waive any term of the lock-up agreement.

Recent Developments

Promissory Note

On May 2, 2016, we issued an original issuance discount promissory note in the aggregate amount of $440,000 payable to Barry Honig in exchange for a $400,000 loan. The note matures on the earlier of (1) December 21, 2016, (2) us completing a financing pursuant to which we receive gross proceeds of at least $3.0 million or (3) upon an event of default under such note. We will receive gross proceeds of more than $3.0 million from our initial public offering and intend to use $440,000 of the net proceeds of our initial public offering to pay off the note.

Anticipated Incurrence of Additional Debt upon Consummation of our Initial Public Offering

We are in advanced discussions with Hercules Technology II, L.P. regarding a secured term loan in the principal amount of $6 million to $8 million, and upon consummation of our initial public offering, we intend to enter into a loan and security agreement with Hercules Technology II, L.P. and other financial institutions or entities parties to that agreement from time to time. We cannot assure you that we will enter into this loan and security agreement on terms acceptable to us or at all, or that if we do so that we will be able to borrow all or any of the amounts committed to be advanced to us thereunder. The closing of our initial public offering is not conditioned upon our entry into the loan and security agreement. We intend to use the proceeds under the loan and security agreement, together with the net proceeds from our initial public offering, to meet the milestones with respect to our current urea cycle disorder therapeutic programs and for general corporate purposes. The term loan will be secured by substantially all of our assets other than our intellectual property or non-assignable licenses or contracts, which by their terms require the consent of the licensor thereof or another party. We expect the term loan to bear interest at a floating per annum rate equal to the greater of either (a) 9.25% or (b) the sum of (i) 9.25% plus (ii) the prime rate as reported in The Wall Street Journal minus 3.50%. We anticipate the loan and security agreement will include affirmative and negative covenants applicable to us that are usual and customary for similar transactions reflecting our operational and strategic requirements in light of our size, industries, practices and our proposed business plan, including:

limiting our ability to pay future dividends;
limiting our ability to incur new debt or liens; and
limiting our ability to sell assets and conduct certain corporate transactions.

Reverse Stock Split

On May 17, 2016, we effected a reverse stock split of our shares of common stock at a ratio of 1-for-10.656096. No fractional shares of common stock were issued in connection with the reverse stock split, and all such fractional interests were rounded up to the nearest whole number. Issued and outstanding stock options were split on the same basis and exercise prices were adjusted accordingly. Unless noted otherwise, all information presented in this prospectus reflects the 1-for-10.656096 reverse stock split of our outstanding shares of common stock, stock options and warrants.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

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not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;
reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an “emerging growth company” before the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than the information you might receive from other public reporting companies in which you hold equity interests.

To the extent that we continue to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, after we cease to qualify as an “emerging growth company,” certain of the exemptions available to us as an “emerging growth company” may continue to be available to us as a smaller reporting company, including: (1) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; (2) scaled executive compensation disclosures; and (3) the ability to provide only two years of audited financial statements, instead of three years.

Company Information

We were incorporated on March 9, 2006 as a Delaware corporation. Our principal executive office is located at 410 W. Harrison Street, Suite 300, Seattle, Washington 98119. Our telephone number is 206-805-6300. Our website address is www.phaserx.com. Information contained in, or accessible through, our website does not constitute a part of this prospectus or any prospectus supplement.

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THE OFFERING

The following summary of the offering contains basic information about the offering and the common stock and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the common stock, please refer to the section of this prospectus entitled “Description of Capital Stock.”

Common stock offered by the selling stockholders    
    1,021,525 shares of our common stock to be offered by the selling stockholders upon the conversion of $4.0 million principal amount of term loans together with all accrued and unpaid interest thereon.
Common stock outstanding after our initial public offering    
    11,583,234 shares.
Use of proceeds    
    We will not receive any of the proceeds from the sale of the shares of common stock issuable upon conversion of the term loans by the selling stockholders named in this prospectus. See “Use of Proceeds” on page 45 of this prospectus.
Offering price    
    All or part of the shares of common stock offered hereby may be sold from time to time in amounts and on terms to be determined by the selling stockholders at the time of sale.
Dividend policy    
    We do not anticipate paying any cash dividends on our common stock. In addition, we may incur indebtedness in the future, including the term loan financing we intend to enter into upon consummation of our initial public offering that may restrict our ability to pay dividends. See “Dividend Policy” on page 45.
Risk Factors    
    See the section entitled “Risk Factors” beginning on page 13 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
NASDAQ Capital Market symbol    
    PZRX

The number of shares of our common stock to be outstanding after our initial public offering is based on 534,853 shares of our common stock outstanding as of March 31, 2016. However, it does not include, as of March 31, 2016, the following:

688,329 shares of our common stock issuable upon the exercise of stock options as of March 31, 2016, with a weighted average exercise price of $1.26 per share;
an estimated 146,013 shares of our common stock issuable upon exercise of the outstanding preferred stock warrants and conversion of the preferred stock issuable upon exercise of such warrants as of March 31, 2016, at an estimated weighted average exercise price of $1.00 per share, of which preferred stock warrants to purchase 131,880 shares of common stock (as calculated on a fully diluted basis) will terminate upon the consummation of our initial public offering;
any shares of our common stock issuable upon exercise of the underwriters’ over-allotment option;
the issuance of shares of our common stock to Palladium Capital Advisors, LLC as consideration for serving as a non-exclusive advisor, equal to the lesser of (i) 112,000 shares of our common stock or (ii) 1% of our fully diluted outstanding common stock following our initial public offering; and
other shares of our common stock reserved for future issuance under the PhaseRx, Inc. 2016 Long-Term Incentive Plan, or the 2016 Plan.

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In addition, unless otherwise noted, the information in this prospectus reflects:

the conversion of $12.6 million of convertible notes and related accrued interest into Series A preferred stock and then into 1,843,369 shares of our common stock in accordance with the terms of such notes and, with respect to Series A preferred stock, our third amended and restated certificate of incorporation, as amended;
the conversion of $3.6 million of convertible notes and related accrued interest into 945,511 shares of our common stock in accordance with the terms of such notes;
the conversion of $4.0 million principal amount of term loans together with all accrued and unpaid interest thereon into 1,021,525 shares of common stock at a conversion price equal to 80% of the initial public offering price in this our initial public offering in accordance with the terms of the loan and security agreement, dated December 21, 2015;
the conversion of 25,716,583 outstanding shares of preferred stock into 3,229,975 shares of common stock under the terms of our third amended and restated certificate of incorporation, as amended;
the exercise of warrants to purchase 2,452,242 shares of preferred stock at an exercise price of $0.01 per share and the conversion of the preferred stock issuable upon exercise of such warrants into 308,001 shares of common stock under the terms of our third amended and restated certificate of incorporation, as amended; and
the 1-for-10.656096 reverse stock split of our outstanding shares of common stock that was effected on May 17, 2016.

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SUMMARY FINANCIAL DATA

The following tables set forth a summary of our historical financial data at, and for the period ended on, the dates indicated. We have derived the statements of operations data for the years ended December 31, 2014 and 2015 from our audited financial statements included in this prospectus. We have derived the statements of operations data for the three month periods ended March 31, 2015 and 2016, and the balance sheet data as of March 31, 2016 from our unaudited financial statements included in this prospectus. The unaudited financial data includes, in the opinion of our management, all adjustments, consisting of normal recurring adjustments that are necessary for a fair statement of our financial position and results of operations for these periods. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results to be expected for a full fiscal year. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the sections in this prospectus entitled “Capitalization,” “Selected Historical Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

       
  Years Ended
December 31,
  Three Months Ended March 31,
     2014   2015   2015   2016
     (in thousands, except per share data)
Statement of Operations Data:
                                   
Total revenue   $ 1,200     $ 375     $ 375     $  
Total operating expenses     6,791       6,182       1,566       2,114  
Loss from operations     (5,591 )      (5,807 )      (1,191 )      (2,114 ) 
Total other expenses     (1,258 )      (1,570 )      (229 )      (120 ) 
Net Loss   $ (6,849 )    $ (7,377 )    $ (1,420 )    $ (2,234 ) 
Basic and diluted net loss per common share   $ (15.68 )    $ (14.22 )    $ (2.96 )    $ (4.19 ) 
Shares used in computation of basic and diluted net loss per common share     437       519       479       533  
Pro forma net loss   $ (6,849 )    $ (7,377 )    $ (1,420 )    $ (3,286 ) 
Pro forma basic and diluted net loss per common share   $ (1.16 )    $ (1.12 )    $ (0.23 )    $ (0.42 ) 
Shares used in computation of pro forma basic and diluted net loss per common share     5,895       6,575       6,259       7,882  

     
  March 31, 2016
     Actual   Pro Forma   Pro Forma
As Adjusted
     (in thousands)
Balance Sheet Data:
                          
Cash and cash equivalents   $ 905     $ 930     $ 17,370  
Total assets     2,058       2,083       18,523  
Accrued interest of convertible debt     3,249              
Convertible notes, net of debt discount     19,992              
Preferred stock warrant liability     3,082       644       644  
Convertible preferred stock     25,714              
Accumulated deficit     (51,577 )      (52,629 )      (59,585 ) 
Total stockholders' deficit     (51,105 )      312       16,753  

The pro forma balance sheet data give effect to the conversion of all outstanding shares of our preferred stock, convertible notes and term loans and exercise of certain preferred stock warrants into an aggregate of 7,348,381 shares of our common stock in connection with our initial public offering.

The pro forma as adjusted balance sheet data give further effect to our issuance and sale of 3,700,000 shares of our common stock in our initial public offering at the initial public offering price of $5.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following risks actually occur, we may be unable to conduct our business as currently planned and our financial condition and results of operations could be seriously harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.

Risks Relating to Our Financial Condition and Capital Requirements

We are a development-stage company and have a limited operating history on which to assess our business, have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a development-stage biotechnology company with a limited operating history. Our business does not generate the cash necessary to finance our operations. We incurred net losses of approximately $6.8 million in 2014 and $7.4 million in 2015. We incurred net losses of approximately $1.4 million and $2.2 million in the three months ended March 31, 2015 and 2016, respectively. As of March 31, 2016, we had an accumulated deficit of $51.6 million.

We have devoted substantially all of our financial resources to identify, acquire, license and develop our technology and product candidates, including conducting early stage research and preclinical studies and providing general and administrative support for these operations. To date, we have financed our operations primarily through the sale of debt and equity securities. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, strategic collaborations or grants. Biopharmaceutical product development, which includes research and development, preclinical studies and human clinical trials, is a time-consuming, expensive and highly speculative process that takes years to complete and involves a substantial degree of risk. Our product candidates are in the early stages of preclinical development. We have established a preclinical proof of concept for one of our product candidates, and it may be several years, if ever, before we have a product candidate approved for commercialization. Even if we obtain regulatory approval to market a product candidate, our future revenue will depend upon the size of any markets in which our product candidates may receive approval, and our ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for our product candidates in those markets.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We will require significant additional capital to:

continue our research and preclinical and clinical development of our product candidates;
expand the scope of our current preclinical studies for our product candidates;
advance our programs into more expensive clinical studies;
initiate additional preclinical, clinical or other studies for our product candidates;
obtain, change or add additional manufacturers or suppliers;
seek regulatory and marketing approvals for our product candidates that successfully complete clinical studies;
establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
seek to identify, assess, acquire, license, and/or develop other product candidates;
make milestone or other payments under any license agreements;
seek to maintain, protect, and expand our intellectual property portfolio;
seek to attract and retain skilled personnel;

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create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and
address any delays or issues with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges that require longer follow-up of existing studies, additional major studies or additional supportive studies in order to pursue marketing approval.

Further, the net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. If we fail to achieve or maintain profitability, it would adversely affect the value of our common stock.

We are dependent on technologies we have licensed and we may need to license in the future, and if we fail to obtain licenses we need, or fail to comply with our payment obligations in the agreements under which we in-license intellectual property and other rights from third parties, we could lose our ability to develop our product candidates.

We currently are dependent on licenses from third parties for certain of our key technologies relating to mRNA delivery, including the licenses from the University of Washington, or UW, and the Commonwealth Scientific and Industrial Research Organisation, or CSIRO. Under the license agreement with UW, we are required pay all ongoing patent expenses. In addition, we are required to pay UW an annual license maintenance fee, certain milestone payments, and, following regulatory approval from the FDA to market licensed therapeutic products, royalty payments. Under the license agreement with CSIRO, we are required to pay annual royalties and product based royalties. No assurance can be given that we will generate sufficient revenue or raise additional financing to meet our payment obligations in the license agreements with UW or CSIRO or other license agreements we enter into with third parties in the future. Any failure to make the payments required by the license agreements may permit the licensor to terminate the license. If we were to lose or otherwise be unable to maintain these licenses, it would halt our ability to develop our product candidates, which would have an immediate material adverse effect on our business.

We have never generated any revenue from product sales and may never be profitable.

We have experienced significant operating losses since inception. We have no products approved for commercialization and have never generated any revenue from product sales. We are currently developing products based on delivery of mRNAs to correct genetic metabolic defects in the liver. The process of developing such products requires significant research and development efforts, including basic research, preclinical and clinical development, and regulatory approval. These activities, together with our general and administrative expenses, have resulted in operating losses in the past, and there can be no assurance that we can achieve profitability in the future. Our ability to achieve profitability depends on our ability to develop product candidates, conduct preclinical development and clinical trials, obtain necessary regulatory approvals and manufacture, distribute, market and sell our therapeutics. We cannot assure you of the success of any of these activities or predict if or when we will ever become profitable.

Following our initial public offering, we will require substantial additional funding to bring our planned products through clinical trials, regulatory approval, manufacturing and marketing and to become profitable. This additional financing may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit, or terminate our product development efforts or other operations.

We are currently advancing our mRNA therapeutic candidates through preclinical development. Developing our product candidates is expensive, and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates through clinical studies.

As of March 31, 2016, we had cash and cash equivalents of $905,000. Based upon our current expectations, we believe that our currently available cash and cash equivalents and the $400,000 we received pursuant to the $440,000 original issue discount promissory note we issued on May 2, 2016, excluding the anticipated proceeds from our initial public offering and the anticipated term loan under the proposed loan and security agreement we intend to enter into upon consummation of our initial public offering, will finance our

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planned operations through May 2016. We intend to supplement the anticipated proceeds from our initial public offering with a combination of debt financing and strategic partnerships to further finance our operations. However, we cannot assure you that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate, and we expect that we will require substantial additional capital to continue the research and development and conduct significant preclinical and clinical activities for our lead mRNA product candidates and to support our other ongoing activities beyond the 12 months following the completion of our initial public offering.

Our future funding requirements will depend on many factors, including but not limited to:

the scope, rate of progress, results and cost of our clinical studies, preclinical testing, and other related activities;
the cost of manufacturing clinical supplies, and establishing commercial supplies of our product candidates and any products that we may develop;
the number and characteristics of product candidates that we pursue;
competing technological developments;
our proprietary patent position, if any, in our products;
the regulatory approval process for our products;
the cost and timing of establishing sales, marketing, and distribution capabilities; and
the terms and timing of any collaborative, licensing, and other arrangements that we may establish, including any required milestone and royalty payments thereunder.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness could result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell, or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results, and prospects.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay, or discontinue one or more of our research or development programs or the commercialization of any product candidates or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition, and results of operations.

Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Our financial statements included elsewhere in this prospectus include a note describing the conditions which raise this substantial doubt. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2015 referring to our recurring losses and expressing substantial doubt in our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our ability to continue as a going concern may make it

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more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

Risks Related to the Development and Regulatory Approval of Our Product Candidates

The Hybrid mRNA Technology and mRNA-based drug development is unproven and may never lead to marketable products.

Our future success depends on the successful development, by us or together with our future partners, of mRNA-based products and technologies as therapeutic agents. The scientific discoveries that form the basis for our efforts to discover and develop the Hybrid mRNA Technology and mRNA-based therapeutics are relatively new. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited.

Relatively few mRNA-based therapeutic product candidates have ever been tested in animals or humans, and we are not aware of any mRNA-based therapeutic product receiving marketing approval. We currently have only limited preclinical data suggesting that we can deliver mRNA molecules to hepatocytes in the liver using our Hybrid mRNA Technology, as our business plan contemplates, resulting in the intended expression of proteins to treat orphan liver diseases. In addition, mRNA-based compounds delivered using our Hybrid mRNA Technology may not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or harmful ways. We may make significant expenditures developing mRNA-based therapeutics without success. In addition, our Hybrid mRNA Technology polymer-LNP-based delivery system has never been tested in humans and may not be effective. Our mRNA technology may result in unanticipated side effects that may prevent the further development of our products. As a result, we may never develop a marketable product utilizing our technologies. If we, independently or together with potential future partners, do not develop and commercialize drugs based upon our technologies, our operations will not become profitable, and we may cease operations.

As all of our programs are in preclinical studies or early stage research, we cannot be certain that any of our product candidates will receive regulatory approval or be commercialized. If we are unable to receive regulatory approval or commercialize our product candidates, our business will be adversely affected.

Our key strategy is to discover, develop and commercialize a portfolio of novel proprietary mRNA therapeutics for the treatment of inherited orphan liver diseases through internal efforts and through those of our future strategic partnerships. Our future results of operations depend, to a significant degree, upon our and our collaborators’ ability to successfully develop and commercialize our product candidates. To date, no pivotal clinical trials of mRNA therapeutics designed to provide clinically and statistically significant proof of efficacy, or to provide sufficient evidence of safety to justify approval, have been completed. All of our product candidates are in the early stages of development and will require additional preclinical and clinical development and studies to evaluate their toxicology, carcinogenicity and optimize their formulation, management of nonclinical, clinical, and manufacturing activities, regulatory approval, obtaining adequate manufacturing supply, building of a commercial organization, and significant marketing efforts before we generate any revenue from product sales. The development and commercialization process, particularly with respect to innovative products, is both time-consuming and costly and involves a high degree of business risk. Successful product development in the pharmaceutical industry is highly uncertain, and very few research and development projects result in a commercial product. Positive results obtained during early development do not necessarily mean later development will succeed or that regulatory clearances will be obtained. Our development efforts may not lead to commercialization, or even if we ultimately receive regulatory approval for any of these product candidates, we or our potential future partners, if any, may be unable to commercialize them successfully for a variety of reasons, including the following:

a product candidate may, after additional studies, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective;
a product candidate may not receive necessary regulatory approvals in a timely manner, if at all;
competitors may develop alternatives that render our product candidates (or those of our future partners) obsolete;
a product candidate may not have a sustainable intellectual property position in major markets;

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a product candidate may not be able to be successfully and profitably produced and marketed; or
a product candidate may not be accepted by patients, the medical community or third-party payors.

If any of our product candidates fail to demonstrate safety or efficacy at any time or during any phase of development, we would experience potentially significant delays in, or be required to abandon, development of the product candidate.

To date, we have invested substantially all of our efforts and financial resources to identify, acquire, license, and develop our technology and lead compounds, including conducting preclinical studies and providing general and administrative support for these operations. We currently have one product candidate with a preclinical proof of concept and are currently evaluating programs for two other subtypes of urea cycle disorders for a second potential product candidate. None of our product candidates has been approved by the FDA or any foreign regulatory authority, and we do not anticipate that any of our current product candidates will be eligible to receive regulatory approval from the FDA or comparable foreign authorities and begin commercialization for a number of years, if ever. There can be no assurance that any of our product candidates that have entered, or may enter, research or development will ever be successfully commercialized, and delays in any part of the process or the inability to obtain regulatory approval could adversely affect our operating results. If we fail to commercialize one or more of our current product candidates in a timely manner or at all, we may be unable to generate sufficient revenues to attain or maintain profitability, and our financial condition and stock price may decline.

Our data from the OTCD program is limited and may not be indicative of future results.

We have conducted a limited number of experiments in our OTCD program with the hyperammonemia model, and there is significant uncertainty as to whether the early results from our preclinical studies on mice will translate into a successful therapeutic product candidate. Our OTCD program may fail to reach clinical stage for a number of reasons, including the following:

We have performed a limited number of experiments in the hyperammonemia model.
While we observe detectable levels of human OTC protein in mice, we currently do not know how much human OTC protein is being made. We anticipate a minimum level of OTC protein will be needed to cure OTCD patients and it is unclear whether the protein levels produced in mice using our OTCD program will be sufficient for the human disease.
It is unclear whether the doses of mRNA required to normalize ammonia and orotic acid levels in mice will translate into larger animal species and ultimately humans. Dose levels will affect the cost of the ultimate therapeutic and high dosage levels may be cost prohibitive.
It is unknown if the dosing frequency used in mouse studies will translate into larger animal species and humans. The dosing frequency may be inconsistent with acceptable dosing frequency for a commercial product.
While the OTC-encoded mRNA treatment appears to be well tolerated in mice, we will be required to test a lead candidate in larger animal species which may be more susceptible to side effects of the treatment and thus stall or prevent further preclinical development of the lead candidate. Furthermore, it is unclear whether tolerability studies in larger animals will fully translate into humans which may be more susceptible to the side effects of the drug.

The development of our product candidates including clinical trials utilizing our technologies will be expensive and time-consuming, and if the development of our product candidates does not produce favorable results or commencement or completion of clinical trials are delayed, we and our collaborators may be unable to commercialize these products.

Our research and development programs with respect to mRNA-based products are at an early stage. To receive regulatory approval for the commercialization of our current product candidates, or any other candidates that we may develop, extensive preclinical studies and adequate and well-controlled clinical trials must be conducted to demonstrate safety and efficacy in humans to the satisfaction of the FDA and comparable foreign authorities. In order to support marketing approval, these agencies typically require

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successful results in one or more Phase 3 clinical trials, which our current product candidates have not yet reached and may never reach. Preclinical and clinical testing is expensive, can take many years and has an uncertain outcome, and the historical failure rate for product candidates is high. The length of time generally varies substantially according to the type of drug, complexity of clinical trial design, regulatory compliance requirements, intended use of the product candidate and rate of patient enrollment for the clinical trials, and we do not know whether planned clinical trials will begin on time or be completed on schedule, if at all. Delays in the commencement or completion of clinical trials could significantly impact our product development costs. In addition, our clinical trials may also be delayed by the limited number of patients who have the orphan diseases we are pursuing or by slower than expected enrollment.

A failure of one or more preclinical studies or clinical trials can occur at any stage of the development process. We or our future partners may experience numerous unforeseen events during, or as a result of, the preclinical testing and the clinical trial process that could delay or prevent the commencement and completion of clinical trials, and as a result, the receipt of regulatory approval or the commercialization of our product candidates, including:

preclinical tests or clinical trials may produce negative or inconclusive results, and we or a partner may decide, or a regulator may require us, to conduct additional preclinical testing or clinical trials, or we or a partner may abandon projects that were previously expected to be promising;
regulators may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;
prospective third-party contract research organizations, or CROs, and clinical trial sites may not reach an agreement with us on acceptable terms, or at all;
enrollment in clinical trials may be slower than anticipated or participants may drop out of clinical trials at a higher rate than anticipated, resulting in significant delays;
CROs may fail to conduct the clinical trial in accordance with regulatory requirements or clinical protocols or meet their contractual obligations in a timely manner;
product candidates may have very different chemical and pharmacological properties in humans than in laboratory testing and may interact with human biological systems in unforeseen, ineffective or harmful ways;
collaborators who may be responsible for the development of our product candidates may not devote sufficient resources to these clinical trials or other preclinical studies of these candidates or conduct them in a timely manner;
clinical trials may be suspended or terminated if the participants are being exposed to unacceptable health risks;
regulators, including the FDA, may require that clinical research be held, suspended or terminated for various reasons, including noncompliance with regulatory requirements;
the cost of clinical trials may be greater than anticipated;
lack of adequate funding to continue the clinical trial;
the supply or quality of product candidates or other materials necessary to conduct clinical trials may be insufficient or inadequate; and
product candidates may not have the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics that delay or preclude regulatory approval or limit their commercial use or market acceptance, if approved.

Further, even if the results of preclinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer term treatment. Drugs in late stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. For example,

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positive results in early Phase 1 or Phase 2 clinical trials may not be repeated in larger Phase 2 or Phase 3 clinical trials. This product candidate development risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As product candidates are developed through preclinical to early to late stage clinical trials towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for late stage clinical trials, approval and commercialization, such changes carry the risk that they will not achieve these intended objectives. Any of these changes could make the results of our planned clinical trials or other future clinical trials we may initiate less predictable and could cause our product candidates to perform differently, including causing toxicities, which could delay completion of our clinical trials, delay approval of our product candidates, and/or jeopardize our ability to commence product sales and generate revenues.

It is expected that all of the product candidates that may be developed by us or in collaboration with future partners based on our technologies will be prone to the risks of failure inherent in drug development. The clinical trials of any or all of our product candidates could be unsuccessful, which would prevent the commercialization of these drugs. We currently do not have strategic collaborations in place for clinical development of any of our current product candidates. Therefore, in the future, we or any potential future collaborative partner will be responsible for establishing the targeted endpoints and goals for development of our product candidates. These targeted endpoints and goals may be inadequate to demonstrate the safety and efficacy levels required for regulatory approvals. Even if we believe data collected during the development of our product candidates are promising, such data may not be sufficient to support marketing approval by the FDA or comparable foreign authorities. Further, data generated during development can be interpreted in different ways. The FDA or comparable foreign authorities conducts its own independent analysis of some or all of the preclinical and clinical trial data submitted in a regulatory filing and often comes to different and potentially more negative conclusions than the analysis performed by the drug sponsor. Our failure to adequately demonstrate the safety and efficacy of our product candidates would prevent our receipt of regulatory approval, and ultimately the potential commercialization of these product candidates.

We in-license some of the intellectual property related to our product candidates from UW and CSIRO pursuant to the license agreements. Since our experience with our product candidates is limited, we will need to train our existing personnel and hire additional personnel in order to successfully administer and manage our clinical trials and other studies as planned, which may result in delays in completing such planned clinical trials and preclinical studies.

Since we do not currently possess the resources necessary to independently develop and commercialize our product candidates or any other candidates that we may develop, we may seek to enter into collaborative agreements to assist in the development and potential future commercialization of some or all of these assets as a component of our strategic plan. However, our discussions with potential collaborators may not lead to the establishment of collaborations on acceptable terms, if at all, or it may take longer than expected to establish new collaborations, leading to development and potential commercialization delays, which would adversely affect our business, financial condition and results of operations.

If we experience delays in the completion or termination of any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to commence product sales and generate product revenues from any of our product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs and slow down our product candidate development and approval process. Delays in completing our clinical trials could also allow our competitors to obtain marketing approval before we do or shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

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We expect to continue to incur significant research and development expenses, which may make it difficult for us to attain profitability.

We expect to expend substantial funds in research and development, including preclinical studies and clinical trials of our product candidates, and to manufacture and market any product candidates in the event they are approved for commercial sale. We also may need additional funding to develop or acquire complementary companies, technologies and assets, as well as for working capital requirements and other operating and general corporate purposes. Moreover, our planned increases in staffing will dramatically increase our costs in the near and long-term.

Because the successful development of our product candidates is uncertain, we are unable to precisely estimate the actual funds we will require to develop and potentially commercialize them. In addition, we may not be able to generate sufficient revenue, even if we are able to commercialize any of our product candidates, to become profitable.

Gene editing technology is relatively new, and if we are unable to use our technology in gene editing applications, our revenue opportunities from such partnerships will be limited.

Delivering mRNA encoding gene editing nucleases to the liver involves the relatively new approach of gene editing, and the scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited. Gene editing technologies have been subject to only a limited number of animal studies and clinical trials, and we are not aware of any gene editing products that have obtained marketing approval from the FDA. Gene editing in humans may cause deaths, serious adverse events, undesirable side effects, or unexpected characteristics, and if such adverse events were to occur with in vivo gene editing in humans, it could lead to a temporary or permanent cessation of clinical studies and product development in the field of gene editing, which could lead to the termination of any gene editing partnership we enter into with our collaborators. Moreover the regulatory requirements that will govern gene editing product candidates are uncertain and are subject to change. In addition, gene editing products involve new and rapidly evolving technologies that may render our products or processes obsolete or less attractive. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. If we or our potential collaborators are unable to use our delivery technology to develop commercial gene editing products, our revenue opportunities will be limited and our operations may be adversely affected.

We are subject to extensive U.S. and foreign government regulations, including the requirement of approval before products may be marketed. The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time-consuming, and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

We and the drug product candidates developed by us or in collaboration with future partners are subject to extensive regulation by governmental authorities in the United States and other countries. Failure to comply with applicable requirements could result in, among other things, any of the following actions:

warning letters;
fines and other civil penalties;
unanticipated expenditures;
delays in approving or refusal to approve a product candidate;
product recall or seizure;
interruption of manufacturing or clinical trials;
operating restrictions; and
injunctions and criminal prosecution.

Our product candidates, developed independently or in collaboration with future partners, cannot be marketed in the United States without FDA approval or clearance, and they cannot be marketed in foreign countries without regulatory approval from comparable foreign authority. Neither the FDA nor any foreign regulatory authority has approved any of the product candidates being developed by us based on our

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technologies. These product candidates are in preclinical development and will have to be approved by the FDA or applicable foreign regulatory authorities before they can be marketed in the United States or abroad. Obtaining regulatory approval requires substantial time, effort, and financial resources, and may be subject to both unexpected and unforeseen delays, including, without limitation, citizen’s petitions or other filings with the FDA, and there can be no assurance that any approval will be granted on a timely basis, if at all, or that delays will be resolved favorably or in a timely manner. Specifically, neither our polymer-LNP technology nor, to our knowledge, any mRNA-based therapeutic has been approved as a human therapeutic. We have not obtained regulatory approval for any product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. If our product candidates are not approved in a timely fashion, or are not approved at all, our business and financial condition may be adversely affected.

In addition, both before and after regulatory approval, we, our collaborators and our product candidates are subject to numerous requirements by the FDA and foreign regulatory authorities covering, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, distribution and export. These requirements may change and additional government regulations may be promulgated that could affect us, our collaborators or our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. There can be no assurance that neither we nor any of our future partners will be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business.

Failure to comply with foreign regulatory requirements governing human clinical trials and marketing approval for drugs could prevent the sale of product candidates based on our technologies in foreign markets, which may adversely affect our operating results and financial condition.

We generally plan to seek regulatory approval to commercialize our product candidates in the United States, the European Union, and in additional foreign countries. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement for marketing product candidates based on our technologies outside the United States vary greatly from country to country. We have, and our future partners may have, limited experience in obtaining foreign regulatory approvals. The time required to obtain approvals outside the United States may differ from that required to obtain FDA approval. Neither we nor our future partners may be able to obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA. Failure to comply with these regulatory requirements or obtain required approvals could restrict the development of foreign markets for our product candidates and may have a material adverse effect on our financial condition or results of operations.

Even if regulatory approvals are obtained for our products, such products will be subject to ongoing regulatory review. If we or a partner fail to comply with continuing U.S. and foreign regulations, the approvals to market drugs could be lost and our business would be materially adversely affected.

Following any initial FDA or foreign regulatory approval of any drugs we or a partner may develop, such drugs will continue to be subject to regulatory review, including the review of adverse drug experiences and clinical results that are reported after such drugs are made available to patients. This would include results from any post-marketing studies or vigilance required as a condition of approval. The manufacturer and manufacturing facilities used to make any product candidates will also be subject to periodic review and inspection by regulatory authorities, including the FDA. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. Marketing, advertising and labeling also will be subject to regulatory requirements and continuing regulatory review. The failure to comply with applicable continuing regulatory requirements may result in fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.

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We have used, and may continue to use, hazardous chemicals and biological materials in our business. Any disputes relating to improper use, handling, storage or disposal of these materials could be time-consuming and costly.

Our research and development operations have involved, and if continued in the future will likely continue to involve, the use of hazardous and biological, potentially infectious, materials. Such use subjects us to the risk of accidental contamination or discharge or any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials and specific waste products. We could be subject to damages, fines or penalties in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials, and our liability could be substantial. The costs of complying with these current and future environmental laws and regulations may be significant, thereby impairing our business.

We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials. The limits of our workers’ compensation insurance are mandated by state law, and our workers’ compensation liability is capped at these state-mandated limits. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims 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. The laws that may affect our ability to operate include:

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security, and transmission of individually identifiable health information;
the federal physician sunshine requirements under the Patient Protection and Affordable Care Act requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and

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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

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

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Risks Related to our Reliance on Third Parties

We are dependent on technologies we license, and if we lose the right to license such technologies or we fail to license new technologies in the future, our ability to develop new products would be harmed.

We currently are dependent on licenses from third parties for certain of our key technologies relating to mRNA delivery, including the licenses from UW and CSIRO. Our current licenses impose, and any future licenses we enter into are likely to impose, various development, funding, royalty, diligence, sublicensing, insurance and other obligations on us. For example, the Hybrid mRNA Technology we anticipate utilizing in developing our product candidates is based upon a multi-component nanoparticle delivery system that includes our SMARTT Polymer Technology®, which uses novel synthetic polymers we developed pursuant to an exclusive license from UW. UW may terminate the license upon delivery of a written notice of termination if we breach or fail to perform one or more of our duties under the license agreement or if we become insolvent. If our license with respect to any of these technologies is terminated for any reason, the development of the products contemplated by the licenses would be delayed, or suspended altogether, while we seek to license similar technology or develop new non-infringing technology. We may need to obtain rights to additional intellectual property, and the costs of obtaining new licenses may be high, or licenses may be unavailable. If our existing licenses are terminated, the development of the products contemplated by the licenses, including the product candidates for urea cycle disorders we are currently developing, would be delayed or terminated and we may not be able to negotiate additional licenses on acceptable terms, if at all, which would have a material adverse effect on our business.

We may become dependent on our collaborative arrangements with third parties for a substantial portion of our revenue, and our development and commercialization activities may be delayed or reduced if we fail to initiate, negotiate or maintain successful collaborative arrangements.

We plan to pursue and form partnerships to accelerate the development and maximize the market potential of our mRNA delivery technology. Such potential partners may provide the financial resources, preclinical and clinical development, regulatory compliance, sales, marketing and distribution capabilities required for the success of our business. If we fail to secure or maintain successful collaborative arrangements, our development and commercialization activities may be delayed, reduced or terminated, and our revenues could be materially and adversely impacted.

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Over the next several years, we may depend on these types of collaborations for a significant portion of our revenue. The potential future milestone and royalty payments and cost reimbursements from collaboration agreements could provide an important source of financing for our research and development programs, thereby facilitating the application of our technology to the development and commercialization of our products. These collaborative agreements might be terminated either by us or by our partners upon the satisfaction of certain notice requirements. Our partners may not be precluded from independently pursuing competing products and drug delivery approaches or technologies. Even if our partners continue their contributions to our collaborative arrangements, of which there can be no assurance, they may nevertheless determine not to actively pursue the development or commercialization of any resulting products. Our partners may fail to perform their obligations under the collaborative arrangements or may be slow in performing their obligations. In addition, our partners may experience financial difficulties at any time that could prevent them from having available funds to contribute to these collaborations. If our collaborators fail to conduct their commercialization, regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, or if they terminate or materially modify their agreements with us, the development and commercialization of one or more product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.

Although we currently do not have any such partnership agreements, in the future we may receive milestone and/or royalty payments as a result of each of such agreements. If our partner with respect to any agreement terminates the applicable agreement or fails to perform its obligations thereunder, we may not receive any revenues from the technology that we have licensed pursuant to the agreement, including any milestone or royalty payments.

The mRNAs and formulation components for our product candidates are currently acquired from a single or a limited number of suppliers. The loss of these suppliers, or their failure to supply us with the mRNAs and the formulation components, could materially and adversely affect our business.

We currently produce the LNPs and the polymers we need for discovery research programs and preclinical studies of our therapeutic candidates internally. We rely on a few suppliers of our formulation components, and for mRNAs, only a single supplier. We currently do not have long-term contracts in place with these suppliers. There can be no assurance that sufficient quantities of product candidates could be manufactured if our suppliers are unable or unwilling to supply such materials. It is possible that we may be required to switch suppliers in the foreseeable future. In such case, the process of switching suppliers may be costly and/or time-consuming for us, and that may include the temporary or permanent suspension of a preclinical or clinical study or commercial sales of our candidate products.

The mRNAs and formulation components we use are highly specialized, and we do not currently have a contractual relationship with other suppliers for the mRNAs and formulation components. Although we believe that there are alternate sources of supplies that could satisfy our clinical and commercial requirements with respect to the mRNAs and formulation components, we cannot guarantee that identifying alternate sources and establishing relationships with such sources would not result in significant delay in the development of our product candidates. Additionally, we may not be able to enter into supply arrangements with alternative suppliers on commercially reasonable terms, or at all. A delay in the development of our product candidates or having to enter into a new agreement with a different third party on less favorable terms than we have with our current suppliers could have a material adverse impact on our business.

We anticipate that we will rely completely on third parties to manufacture certain preclinical and all clinical drug supplies. Our business could be harmed if those third parties fail to provide us with sufficient quantities of drug product, or fail to do so at acceptable quality levels or prices.

We do not currently have, nor do we plan to acquire, the infrastructure or capability internally to manufacture our preclinical and clinical drug supplies for use in the conduct of our clinical studies, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. Our internal manufacturing capabilities are limited to small-scale production of non-cGMP material in quantities necessary to conduct preclinical studies of our product candidates. Our product candidates utilize specialized formulations with polymer and LNP components whose scale-up and manufacturing could be

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challenging and require specific technical expertise that we may not be able to access on acceptable terms, if at all. We also have very limited experience in such scale-up and manufacturing, requiring us to depend on a limited number of third parties, who might not be able to deliver in a timely manner, or at all. In order to develop products, apply for regulatory approvals and commercialize our products, we will need to develop, contract for, or otherwise arrange for access to the necessary manufacturing capabilities. We anticipate that we will rely on contract manufacturing organizations, or CMOs, and other third party contractors, some of whom may have limited cGMP experience, to manufacture formulations and produce larger scale amounts of drug substance and the drug product required for any clinical trials that we initiate.

The manufacturing process for any products based on our technologies that we or our partners may develop is subject to the FDA and foreign regulatory authority approval process, and we or our partners will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory authority requirements on an ongoing basis. In addition, if we receive the necessary regulatory approval for any product candidate, we also expect to rely on third parties, including our commercial collaborators, to produce materials required for commercial supply. We may experience difficulty in obtaining adequate manufacturing capacity for our needs. If we are unable to obtain or maintain contract manufacturing for these product candidates, or to do so on commercially reasonable terms, we may not be able to successfully develop and commercialize our products.

To the extent that we enter into manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner and consistent with regulatory requirements, including those related to quality control and quality assurance. The failure of a third-party manufacturer to perform its obligations as expected could adversely affect our business in a number of ways, including:

we may not be able to initiate or continue preclinical and clinical trials of products that are under development;
we may need to repeat pivotal clinical trials;
we may be delayed in submitting regulatory applications, or receiving regulatory approvals, for our product candidates;
we may lose the cooperation of our collaborators;
our products could be the subject of inspections by regulatory authorities;
we may be required to cease distribution or recall some or all batches of our products; and
ultimately, we may not be able to meet commercial demands for our products.

If a third-party manufacturer with whom we contract fails to perform its obligations, we may be forced to manufacture the materials ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different third-party manufacturer, which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills required to manufacture our product may be unique to the original manufacturer and we may have difficulty transferring such skills to a back-up or alternate manufacturer, or we may be unable to transfer such skills at all. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. We will also be required to demonstrate that the newly manufactured material is similar to the previously manufactured material, or we may need to repeat clinical trials with the newly manufactured material. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget. Furthermore, a manufacturer may possess technology related to the manufacture of our product candidate that such manufacturer owns independently, which would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our products.

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We intend to rely on third parties to conduct our preclinical studies and clinical trials and perform other tasks for us. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business, financial condition and results of operations could be substantially harmed.

We plan to rely upon third-party CROs, medical institutions, clinical investigators and contract laboratories to monitor and manage data for our licensed ongoing preclinical and clinical programs. We have relied and expect to continue to rely on these parties for execution of our preclinical studies and clinical trials, and we control only certain aspects of their activities. Nevertheless, we maintain responsibility for ensuring that each of our clinical trials and preclinical studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and our reliance on these third parties does not relieve us of our regulatory responsibilities. We and our CROs and other vendors are required to comply with cGMP, good clinical practices, or GCP, and GLP, which are a collection of laws and regulations enforced by the FDA or comparable foreign authorities for all of our product candidates in clinical development. Regulatory authorities enforce these regulations through periodic inspections of preclinical study and clinical trial sponsors, principal investigators, preclinical study and clinical trial sites, and other contractors. If we or any of our CROs or vendors fails to comply with applicable regulations, the data generated in our preclinical studies and clinical trials may be deemed unreliable and the FDA or comparable foreign authorities may require us to perform additional preclinical studies and clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with products produced consistent with cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the development and regulatory approval processes.

If any of our relationships with these third-party CROs, medical institutions, clinical investigators or contract laboratories terminate, we may not be able to enter into arrangements with alternative CROs on commercially reasonable terms, or at all. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical and clinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our protocols, regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. CROs may also generate higher costs than anticipated. As a result, our business, financial condition and results of operations and the commercial prospects for our product candidates could be materially and adversely affected, our costs could increase, and our ability to generate revenue could be delayed.

Switching or adding additional CROs, medical institutions, clinical investigators or contract laboratories involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work replacing a previous CRO. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.

If any of our product candidates are approved for marketing and commercialization and we are unable to develop sales, marketing and distribution capabilities on our own or enter into agreements with third parties to perform these functions on acceptable terms, we will be unable to commercialize successfully any such future products.

We currently have no sales, marketing or distribution capabilities or experience. If any of our product candidates is approved, we will need to develop internal sales, marketing and distribution capabilities to commercialize such products, which would be expensive and time-consuming, or enter into collaborations with third parties to perform these services. If we decide to market our products directly, we will need to commit significant financial and managerial resources to develop a marketing and sales force with technical expertise and supporting distribution, administration and compliance capabilities. If we rely on third parties with such capabilities to market our products or decide to co-promote products with collaborators, we will need to establish and maintain marketing and distribution arrangements with third parties, and there can be no assurance that we will be able to enter into such arrangements on acceptable terms or at all. In entering into

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third-party marketing or distribution arrangements, any revenue we receive will depend upon the efforts of the third parties and there can be no assurance that such third parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance of any approved product. If we are not successful in commercializing any product approved in the future, either on our own or through third parties, our business, financial condition, results of operations and prospects could be materially adversely affected.

Risks Related to our Intellectual Property

If we are unable to adequately protect our proprietary technology from legal challenges, infringement or alternative technologies, our competitive position may be hurt and our operating results may be negatively impacted.

Our business is based upon the development of mRNA-based therapeutics, and we rely on the issuance of patents, both in the United States and internationally, for protection against competitive technologies. As of May 17, 2016, we own or have in-licensed 12 issued U.S. patents, 20 issued foreign patents, and over 35 pending U.S. and foreign patent applications. Although we believe we exercise the necessary due diligence in the patent filings we make in connection with the patents we own or in-license, our proprietary position is not established until the appropriate regulatory authorities actually issue a patent, which may take several years from initial filing or may never occur.

Moreover, even the established patent positions of pharmaceutical companies are generally uncertain and involve complex legal and factual issues. Although we believe our issued patents are valid, third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability of our patents. The issuance of a patent is not conclusive as to its claim scope, validity or enforceability. Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying us licensing fees or royalties, which could significantly diminish the value of these discoveries or technologies. Responding to challenges initiated by third parties, including in response to a suit we initiate regarding infringement or other intellectual property violations, may require significant expenditures and divert the attention of our management and key personnel from other business concerns.

Furthermore, it is possible others will infringe or otherwise circumvent our issued patents and that we will be unable to fund the cost of litigation against them or that we would elect not to pursue litigation. In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts. We also cannot assure you that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology. There may also exist third party patents or patent applications relevant to our potential products that may block or compete with the technologies covered by our patent applications and third parties may independently develop intellectual property similar to our patented intellectual property, which could result in, among other things, interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention.

In addition, we may not be able to protect our established and pending patent positions from competitive technologies, which may provide more effective therapeutic benefit to patients and which may therefore make our products, technology and proprietary position obsolete.

If we are unable to adequately protect our proprietary intellectual property from legal challenges, infringement or alternative technologies, we will not be able to compete effectively in the drug discovery and development business.

We license patent rights from third-party owners or licensees. If such owners or licensees do not properly or successfully obtain, maintain or enforce the patents underlying such licenses, or if they retain or license to others any competing rights, our competitive position and business prospects may be adversely affected.

We do, and will continue to, rely on intellectual property rights licensed from third parties to protect our technology. We are a party to a number of licenses that give us rights to third-party intellectual property that is necessary or useful for our business. See “Business-License Agreements.” We also intend to license additional third-party intellectual property in the future. Our success will depend in part on the ability of our

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licensors to obtain, maintain and enforce patent protection for our licensed intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications licensed to us. Even if patents issue or are granted, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue litigation less aggressively than we would. Further, we may not obtain exclusive rights, which would allow for third parties to develop competing products. Without protection for, or exclusive right to, the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.

In addition to filing patents, in an effort to maintain the confidentiality and ownership of our trade secrets, know-how, and other proprietary information, we have typically required parties to whom we disclose confidential information to execute confidentiality or non-disclosure agreements. These parties include our employees, consultants, advisors, and potential or actual collaborators. We also enter into agreements that purport to require the disclosure and assignment to us of the rights to the ideas, development, discoveries, and inventions of our employees, consultants, and advisors while we employ or engage them. However, it is possible that these agreements may be breached, invalidated or rendered unenforceable, and if so, there may not be an adequate corrective remedy available. In addition, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets or know-how. The disclosure to, or independent development by, a competitor of any trade secret, know-how, or other technology not protected by a patent could materially adversely affect any competitive advantage we may have over such a competitor. Furthermore, like many companies in our industry, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and non-disclosure agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we have typically required our employees and consultants to maintain the confidentiality of all confidential information of previous employers, we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. If a dispute arises with respect to any proprietary right, enforcement of our rights can be costly and unpredictable and a court may determine that the right belongs to a third party. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market and to execute our business strategies.

Because intellectual property rights are of limited duration, expiration of intellectual property rights and licenses will negatively impact our operating results.

Intellectual property rights, such as patents and license agreements based on those patents, generally are of limited duration. Our operating results depend on our patents and intellectual property licenses. Therefore, the expiration or other loss of rights associated with intellectual property and intellectual property licenses can negatively impact our business. For example, due to the extensive time needed to develop, test, and obtain regulatory approval for our therapeutic candidates, any patents that may be issued that protect our therapeutic candidates may expire prior to or early during commercialization. This may reduce or eliminate any market advantages that such patents may give us. Following patent expiration, we may face increased competition through the entry of generic or biosimilar products into the market and a subsequent decline in market share and profits.

Our patent applications may be inadequate in terms of priority, scope or commercial value.

We apply for patents covering our discoveries and technologies as we deem appropriate and as our resources permit. However, we or our partners may fail to apply for patents on important discoveries or technologies in a timely fashion or at all. Also, our pending patent applications, and those that we may file in the future or those we may license from third parties, may not result in the issuance of any patents. These applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related discoveries or technologies we may want to

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commercialize. In addition, because patent applications are maintained in secrecy for approximately 18 months after filing, other parties may have filed patent applications relating to inventions before our applications covering the same or similar inventions. In addition, foreign patent applications are often published initially in local languages, and until an English language translation is available it can be impossible to determine the significance of a third party invention. Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice the claimed inventions.

Although we have acquired and in-licensed a number of issued patents, the discoveries or technologies covered by these patents may not have any therapeutic or commercial value. Also, issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented product candidates. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope.

Third-party claims of intellectual property infringement may require us to spend substantial time and money and could prevent us from developing or commercializing our therapeutic candidates.

The development, manufacture, use, offer for sale, sale or importation of our therapeutic candidates may infringe on the claims of third party patents or other intellectual property rights. Also, the nature of claims contained in unpublished patent filings around the world is unknown to us, and it is not possible to know in which countries patent holders may choose for the extension of their filings under the Patent Cooperation Treaty, or other mechanisms. The cost to us of any legal proceeding arising from a third party’s assertion of intellectual property rights, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation or defense of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace and could result in an injunction prohibiting certain activities. Legal proceedings to resolve third party claims of intellectual property infringement may also absorb significant management time. Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for sale, sell or import our therapeutic candidates in the event of an infringement action or other dispute regarding intellectual property rights.

While we are aware that there are third party patents having claims that may be considered relevant to certain technologies for which we plan to seek regulatory approval, we believe those patents will expire prior to the time we expect to obtain regulatory approval for our first product. The estimated expiration dates for those patents were determined according to information on the face pages of the patents, and certain factors that could influence patent term, such as patent term extension, for example, were not factored into these estimates. Accordingly, the estimated expiration dates of those patents may not be accurate and one or more of those patents may not expire before we obtain regulatory approval for an applicable technology. Owners or licensees of one or more of those patents may bring a patent infringement suit against us. If one or more of those patents are asserted against us, we expect to be able to assert a defense for a safe harbor to patent infringement under 35 U.S.C. 271(e)(1) if certain requirements are met. It is possible that (1) certain of these requirements may not be met, and/or (2) one or more of the third party patents might expire after one or more of our technologies obtain regulatory approval, and consequently we may not successfully assert such a defense to patent infringement. If we are unsuccessful in asserting a defense under 35 U.S.C. 271(e)(1), it is possible we may not prevail in defending against claims of infringement and/or challenging the validity of claims in those patents. We may not successfully develop alternative technologies or enter into agreements by which we obtain rights to applicable patents. These rights, if necessary, may not be available on terms acceptable to us or at all.

In the event of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third party and would most likely be required to pay license fees or royalties, or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage. Ultimately, we could be prevented from commercializing a therapeutic candidate or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement or other claims, we are unable to

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enter into licenses on acceptable terms. This inability to enter into licenses could harm our business significantly or even prevent us from commercializing one or more therapeutic candidates.

We may be subject to other patent-related litigation or proceedings that could be costly to defend and uncertain in their outcome.

In addition to infringement claims against us, we may in the future become a party to other patent litigation or proceedings before regulatory agencies, including interference, derivation, or post-grant proceedings filed with the U.S. Patent and Trademark Office or opposition proceedings in other foreign patent offices regarding intellectual property rights with respect to our therapeutic candidates, as well as other disputes regarding intellectual property rights with our potential or actual corporate partners, or others with whom we have contractual or other business relationships. Post-issuance proceedings, including oppositions, are not uncommon and we will be required to defend these proceedings as a matter of course. These post-grant procedures may be costly, and there is a risk that we may not prevail.

If we fail to comply with our obligations under any license, collaboration or other agreements, we may be required to pay damages and could lose intellectual property rights that are necessary for developing and protecting our product candidates and delivery technologies or we could lose certain rights to grant sublicenses.

Our current licenses with UW and CSIRO impose, and any future licenses we enter into are likely to impose, various development, commercialization, funding, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement, and other obligations on us. If we breach any of these obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages and the licensor may have the right to terminate the license, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology. Moreover, our licensors may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, while we cannot currently determine the amount of the royalty obligations we would be required to pay on sales of future products, if any, the amounts may be significant. The amount of our future royalty obligations will depend on the technology and intellectual property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize products, we may be unable to achieve or maintain profitability.

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

Filing, prosecuting and defending patents on drug candidates throughout the world would be prohibitively expensive. Competitors may use our licensed and owned technologies in jurisdictions where we have not licensed or obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain or license patent protection, but where patent enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our licensed patents and future patents we may own, or marketing of competing products in violation of our proprietary rights generally. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our licensed and owned intellectual property both in the United States and abroad. Proceedings to enforce our future patent rights, if any, in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

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Many countries, including European Union countries, India, Japan and China, have compulsory licensing laws under which a patent owner may be compelled under certain circumstances to grant licenses to third parties. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.

Risks Related to Our Business Operations

Even if we are successful in developing and commercializing a product candidate, it is possible that the commercial opportunity for mRNA-based therapeutics will be limited.

The product candidates based on our technologies that are being developed are based on new technologies and therapeutic approaches, none of which has been brought to market. Key participants in pharmaceutical marketplaces, such as physicians, third-party payors and consumers, may not accept a product intended to improve therapeutic results based on mRNA mechanisms of action. Accordingly, while we believe there will be a commercial market for mRNA-based therapeutics utilizing our technologies, there can be no assurance that this will be the case, in particular given the novelty of the field. Many factors may affect the market acceptance and commercial success of any potential products, including:

establishment and demonstration of the effectiveness and safety of the drugs;
timing of market entry as compared to competitive products and alternative treatments;
benefits of our drugs relative to their prices and the comparative price of competing products and treatments;
availability of adequate government and third-party payor reimbursement;
marketing and distribution support of our products;
safety, efficacy and ease of administration of our product candidates;
willingness of patients to accept, and the willingness of medical professionals to prescribe, relatively new therapies; and
any restrictions on labeled indications.

In addition, we focus our research and product development on treatments for orphan liver diseases. Given the small number of patients who have the diseases that we are targeting, it is critical to our ability to grow and become profitable that we continue to successfully identify patients with these diseases. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including the scientific literature, surveys of clinics, patient foundations, or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn out to be lower than expected. The effort to identify patients with diseases we seek to treat is in early stages, and we cannot accurately predict the number of patients for whom treatment might be possible. Additionally, the potentially addressable patient population for each of our product candidates may be limited or may not be amenable to treatment with our product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect our results of operations and our business.

If we fail to obtain or maintain orphan drug exclusivity for our products, our competitors may sell products to treat the same conditions and our revenue will be reduced. In addition, if a competitor obtains orphan drug designation and is first to market for a product we are developing, it could prevent or delay us from marketing our product.

We currently focus on the development of drugs that are eligible for the FDA and European Union orphan drug designation. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, defined as a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the European

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Union, the Committee for Orphan Medicinal Products, or COMP, of the European Medicines Agency, or EMA, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention, or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union community. Additionally, designation is granted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biological product.

In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity. In the European Union, orphan drug designation also entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity is granted following drug or biological product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. If a competitor obtains orphan drug designation and is first to market for a product we are developing, it could prevent or delay us from marketing our product.

Because the extent and scope of patent protection for our products may in some cases be limited, orphan drug designation is especially important for our products for which orphan drug designation may be available. For eligible drugs, we plan to rely on the exclusivity period under the Orphan Drug Act to maintain a competitive position. If we do not obtain orphan drug exclusivity for our drug products and biologic products that do not have broad patent protection, our competitors may then sell the same drug to treat the same condition sooner than if we had obtained orphan drug exclusivity and our revenue will be reduced.

Even though we may obtain orphan drug designation for our products in the United States, we may not be the first to obtain marketing approval for any particular orphan indication due to the uncertainties associated with developing pharmaceutical products. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition. Even with orphan drug exclusivity, if a third party were to prepare or market a product which infringes upon our intellectual property, we may need to initiate litigation, which may be costly, to enforce our rights against such party. Even after an orphan drug is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is safer, more effective, or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process.

If we are not able to retain our key management or attract and retain qualified scientific, technical and business personnel, our ability to implement our business plan may be adversely affected.

Our success largely depends on the skill, experience and effort of our senior management. The loss of the service of any of these persons, including Robert Overell, Ph.D., our president and chief executive officer, and Michael Houston, Ph.D., our chief scientific officer, would likely result in a significant loss in the knowledge and experience that we possess and could significantly delay or prevent successful product development and other business objectives. There is intense competition from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions, seeking to employ qualified individuals in the technical fields in which we operate, and we may not be able to attract and retain the qualified personnel necessary for the successful development and commercialization of our product candidates.

If our product candidates advance into clinical trials, we may experience difficulties in managing our growth and expanding our operations.

We have limited experience in product development and have not begun clinical trials for any of our product candidates. As our product candidates enter and advance through preclinical studies and any clinical trials, we will need to expand our development, regulatory and manufacturing capabilities or contract with

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other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators or partners, suppliers and other organizations. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

We may be required to defend lawsuits or pay damages for product liability claims.

Our business exposes us to significant product liability risks inherent in the development, testing, manufacturing and marketing of therapeutic treatments. We may face substantial product liability exposure in human clinical trials that we may initiate and for products that we sell, or manufacture for others to sell, after regulatory approval. The risk exists even with respect to those drugs that are approved by regulatory agencies for commercial distribution and sale and are manufactured in facilities licensed and regulated by regulatory agencies. Product liability claims could delay or prevent completion of our development programs. If we succeed in marketing products, such claims could result in an FDA investigation of the safety and effectiveness of our products, our manufacturing processes and facilities or our marketing programs and potentially a recall of our products or more serious enforcement action, limitations on the approved indications for which they may be used or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may also result in decreased demand for our products, injury to our reputation, costs to defend the related litigation, a diversion of management’s time and our resources, substantial monetary awards to trial participants or patients and a decline in our stock price. We currently do not have product liability insurance. We will need to obtain such insurance as we believe is appropriate for our stage of development and may need to obtain higher levels of such insurance if we were ever to market any of our product candidates. Any insurance we have or may obtain may not provide sufficient coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to obtain sufficient insurance at a reasonable cost to protect us against losses caused by product liability claims that could have a material adverse effect on our business.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we may establish, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

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Risks Related to our Industry

The biotechnology and pharmaceutical industries are intensely competitive. If we are unable to compete effectively with existing drugs, new treatment methods and new technologies, we may be unable to commercialize successfully any drugs that we develop.

The biotechnology and pharmaceutical industries are intensely competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs for the same diseases that we are targeting or expect to target. Many of our competitors have:

much greater financial, technical and human resources than we have at every stage of the discovery, development, manufacture and commercialization of products;
more extensive experience in preclinical testing, conducting clinical trials, obtaining regulatory approvals, and in manufacturing, marketing and selling pharmaceutical products;
product candidates that are based on previously tested or accepted technologies;
products that have been approved or are in late stages of development; and
collaborative arrangements in our target markets with leading companies and research institutions.

Products based on our technologies may face competition from drugs that have already been approved and accepted by the medical community for the treatment of the conditions for which we may develop drugs. We also expect to face competition from new drugs that enter the market. We believe a significant number of drugs and delivery technologies are currently under development, and may become commercially available in the future, for the treatment of conditions for which we and our partners may try to develop drugs. These drugs may be more effective, safer, less expensive, or marketed and sold more effectively, than any products we and our partners develop.

If we and our partners successfully develop product candidates based on our technologies, and obtain approval for them, we will face competition based on many different factors, including:

safety and effectiveness of such products;
ease with which such products can be administered and the extent to which patients accept relatively new routes of administration;
timing and scope of regulatory approvals for these products;
availability and cost of manufacturing, marketing and sales capabilities;
price;
reimbursement coverage; and
patent position.

Our competitors may develop or commercialize products with significant advantages over any products we develop based on any of the factors listed above or on other factors. Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our competitive position and business. Competitive products may make any products we develop obsolete or noncompetitive before we can recover the expenses of developing and commercializing our product candidates. Such competitors could also recruit our future employees, which could negatively impact our level of expertise and the ability to execute on our business plan. Furthermore, we also face competition from existing and new treatment methods that reduce or eliminate the need for drugs, such as the use of advanced medical devices. The development of new medical devices or other treatment methods for the diseases we are targeting could make our product candidates noncompetitive, obsolete or uneconomical.

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We may be unable to compete successfully against other companies that are working to develop novel drugs and technology platforms using technology similar to ours.

In addition to the competition we face from competing drugs in general, we also face competition from other biotechnology and pharmaceutical companies and medical institutions that are working to develop novel drugs using technology that competes more directly with our own. Among those companies that are or may be working in the field of RNA therapeutics to treat orphan liver disease and/or the urea cycle disorders are: Moderna LLC, Shire plc, Bio Blast Pharma Ltd., Alnylam Pharmaceuticals, Arcturus Therapeutics, Inc., Acuitas Therapeutics, Arbutus Biopharma Corporation, CureVac AG, Dicerna Pharmaceuticals, Inc., Horizon Pharma plc, Ocera Therapeutics, Inc., Cytonet GmbH & Co., Promethera Biosciences S.A., BioNTech AG, Synlogic, Inc. and Aeglea Biotherapeutics, Inc. Any of these, or other, companies may develop their technology more rapidly and more effectively than us.

In addition to competition with respect to our technology and with respect to specific products, we face substantial competition to discover and develop safe and effective means to deliver mRNAs to the hepatocytes. Substantial resources are being expended by third parties, both in academic laboratories and in the corporate sector, in an effort to discover and develop a safe and effective means of delivery into the hepatocytes. If safe and effective means of delivery to the hepatocytes are developed by our competitors, our ability to successfully commercialize a competitive product would be adversely affected.

Many of our competitors, either alone or together with their partners, have substantially greater research and development capabilities and financial, scientific, technical, manufacturing, sales, marketing, distribution, regulatory and other resources and experience than us. They may also have more established relationships with pharmaceutical companies. Even if we and/or our partners are successful in developing products based on our technologies, in order to compete successfully we may need to be first to obtain intellectual property protection for, or to commercialize, such products, or we may need to demonstrate that such products are superior to, or more cost effective than, products developed by our competitors (including therapies that are based on different technologies). If we are not first to protect or market our products, or if we are unable to differentiate our products from those offered by our competitors, any products for which we are able to obtain approval may not be successful.

Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to the drug delivery field or secure protection that we may need for development of our technologies and products. We may attempt to license one or more of these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all.

Any drugs based on our technologies that we develop may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which could have a material adverse effect on our business and financial results.

The success of the products based on our technologies will depend upon the extent to which third-party payors, such as Medicare, Medicaid and other domestic and international government programs, private insurance plans and managed care programs, provide reimbursement for the use of such products. Most third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication.

Third-party payors also may refuse to reimburse for experimental procedures and devices. Furthermore, because our programs are in the early stages of development, we are unable at this time to determine their cost-effectiveness and the level or method of reimbursement. Increasingly, the third-party payors, who reimburse patients, such as government and private insurance plans, are requiring that drug companies provide them with predetermined discounts from list prices, and are challenging the prices charged for medical products. If the price charged for any products based on our technologies that we or our partners develop is inadequate in light of our development and other costs, our profitability could be adversely affected.

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We expect that drugs based on our technologies that we or a partner develop may need to be administered under the supervision of a physician. Under currently applicable law, drugs that are not usually self-administered may be eligible for coverage by the Medicare program if they:

are “incidental” to a physician’s services;
are “reasonable and necessary” for the diagnosis or treatment of the illness or injury for which they are administered according to accepted standards of medical practice;
are not excluded as immunizations; and
have been approved by the FDA.

There may be significant delays in obtaining insurance coverage for newly-approved drugs, and insurance coverage may be more limited than the purpose for which the drug is approved by the FDA. Moreover, eligibility for insurance coverage does not imply that any drug will be reimbursed in all cases or at a rate that covers costs, including research, development, manufacture, sale and distribution. Interim payments for new drugs, if applicable, may also not be sufficient to cover costs and may not be made permanent. Reimbursement may be based on payments for other services and may reflect budgetary constraints or imperfections in Medicare data. Net prices for drugs may be reduced by mandatory discounts or rebates required by government health care programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates. The inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for new drugs based on our technologies that we or our partners develop could have a material adverse effect on our operating results, our ability to raise capital, and our overall financial condition.

We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare and legislative and regulatory proposals to broaden the availability of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. A number of legislative and regulatory changes in the healthcare system in the United States and other major healthcare markets have occurred in recent years, and interpretation and application of such changes continue to evolve. These developments have included prescription drug benefit legislation that was enacted and took effect in January 2006, healthcare reform legislation recently enacted by certain states, and implementation of the Patient Protection and Affordable Care Act, or the Affordable Care Act, enacted in 2010 which resulted in significant changes to the health care industry. These developments could, directly or indirectly, affect our ability to sell our products, if approved, at a favorable price.

The Affordable Care Act includes significant provisions that encourage state and federal law enforcement agencies to increase activities related to preventing, detecting and prosecuting those who commit fraud, waste and abuse in federal healthcare programs, including Medicare, Medicaid and Tricare. The Affordable Care Act continues to be implemented through regulation and government activity but is subject to possible, amendment, additional implementing regulations and interpretive guidelines. The manner in which the Affordable Care Act continues to evolve could materially affect the extent to which and the amount at which pharmaceuticals are reimbursed by government programs such as Medicare, Medicaid and Tricare. We cannot predict all impacts the Affordable Care Act may have on our products, but it may result in our products being chosen less frequently or the pricing being substantially lowered. Or, the new legislation could have a positive impact on our future net sales due to increasing the number of persons with healthcare coverage in the United States.

We cannot predict what additional healthcare reform initiatives may be adopted in the future or how federal and state legislative and regulatory developments are likely to evolve, but we expect ongoing initiatives in the United States to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates based on our technologies that are successfully developed and for which regulatory approval is obtained, and may affect our overall financial condition and ability to develop product candidates.

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Risks Related to our Organization and Ownership of our Common Stock

Our share price may be volatile, and you may lose all or part of your investment.

The market price of shares of our common stock could be highly volatile and may fluctuate substantially as a result of many factors, including:

actual or anticipated fluctuations in our results of operations;
announcement or expectation of additional financing efforts;
the timing and results of preclinical studies for our urea cycle disorder programs and any product candidates that we may develop;
commencement or termination of collaborations for our product development and research programs;
failure or discontinuation of any of our product development and research programs;
variance in our financial performance from the expectations of market analysts;
announcements by us or our competitors of results of preclinical studies, clinical trials, or regulatory approvals of product candidates, significant business developments, changes in distributor relationships, acquisitions or expansion plans;
adverse regulatory decisions;
changes in the prices of our raw materials or the products we sell;
data concerning the safety and efficacy profile of our products;
sales of our common stock by us, our insiders, or other stockholders;
expiration of market stand-off or lock-up agreements;
our involvement in litigation;
our sale of common stock or other securities in the future;
market conditions in our industry;
changes in key personnel;
the trading volume of our common stock;
changes in the structure of healthcare payment systems;
changes in the estimation of the future size and growth rate of our markets;
the recruitment or departure of key personnel;
developments or disputes concerning patent applications, issued patents, or other proprietary rights;
market conditions in the pharmaceutical and biotechnology sectors;
general economic, industry, and market conditions; and
the other factors described in the “Risk Factors” section of this prospectus.

In recent years, the stock markets in general have experienced extreme price and volume fluctuations, especially in the biotechnology sector. Broad market and industry factors may materially harm the market price of shares of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation, we could incur substantial costs and our management’s attention and resources could be diverted.

The market price of our common stock could be negatively affected by future sales of our common stock in the public market by our existing stockholders and lenders.

After giving effect to the sale of 3,700,000 shares of common stock in our initial public offering, there will be 11,583,234 shares of common stock outstanding. Sales by us or our stockholders of a substantial number of shares of our common stock in the public market following our initial public offering, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of our equity securities. All of the shares of our

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common stock sold in our initial public offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended.

Upon the closing of our initial public offering,

approximately 5,689,764 shares of our outstanding shares of common stock will be beneficially owned by certain existing stockholders who are subject to lock-up agreements, each of which, subject to limited exceptions, restricts transfer of the stockholder’s shares of common stock for a period of 12 months after the closing of our initial public offering without the prior written consent of Titan Multi-Strategy Fund I, LTD., one of the lenders from the bridge loan financing we received in December 2015; provided that, after 180 days following our initial public offering, the foregoing restrictions will automatically terminate if for 20 consecutive trading days on each such trading day (x) the closing price of our common stock is at least 150% of the initial public offering price for our common stock and (y) the trading volume of our common stock is not less than 100,000 shares; provided further that, Titan Multi-Strategy Fund I, LTD. may unilaterally waive any term of the lock-up agreement (“Category 1”);
approximately 454,337 shares of our outstanding shares of common stock will be beneficially owned by certain existing stockholders and option holders who are subject to lock-up agreements, each of which, subject to limited exceptions, restricts transfer of the stockholder’s shares of common stock for a period of 12 months after the closing of our initial public offering without our prior written consent, which restriction will terminate in accordance with the same terms as Category 1; provided further that, we may unilaterally waive any term of the lock-up agreement (“Category 2”);
approximately 1,393,880 shares of our outstanding shares of common stock will be beneficially owned by certain investors, who will purchase shares of our common stock from certain insiders at a nominal purchase price and are subject to lock-up agreements, each of which, subject to limited exceptions, restricts transfer of the investor’s shares of common stock for a period of 180 days following our initial public offering without our prior written consent; provided that, we may unilaterally waive any term of the lock-up agreement;
approximately 8,185,470 shares of our outstanding shares of common stock held by us and our directors, executive officers and holders of more than 5% of our outstanding equity securities, of which approximately 5,614,677 shares are included in Category 1 and Category 2, will be restricted from resale for a period of 180 days after the date of the final prospectus relating to our initial public offering pursuant to lock-up agreements without the prior written consent of Laidlaw & Company (UK) Ltd.; provided that, Laidlaw & Company (UK) Ltd. may unilaterally waive any term of the lock-up agreement; and
approximately 480,001 shares of our outstanding shares of common stock issuable upon conversion of the term loans in the aggregate principal amount of $4.0 million will be restricted from resale for a period of 90 days after the date of the final prospectus relating to our initial public offering pursuant to lock-up agreements without the prior written consent of Laidlaw & Company (UK) Ltd.; provided that, Laidlaw & Company (UK) Ltd. may unilaterally waive any term of the lock-up agreement.

As noted above, each of we, Laidlaw & Company (UK) Ltd. or Titan Multi-Strategy Fund I, LTD., as applicable, may, in our or their sole discretion, and at any time without notice, release all or any portion of the shares subject to the corresponding lock-up agreements. After the expiration of the lock-up period, these shares can be resold into the public markets in accordance with the requirements of Rule 144, subject to certain volume limitations. Moreover, we are concurrently registering all of the shares of our common stock into which the bridge loans we received in December 2015 would convert at the time of our initial public offering, of which only 480,001 shares are subject to lock-up agreements for 90 days, as described above. In addition, we intend to file one or more registration statements on Form S-8 with the Securities and Exchange Commission covering all of the shares of common stock issuable under our 2016 Plan or any other incentive plan that we may adopt, and such shares will be freely transferable, except for any shares held by “affiliates,” as such term is defined in Rule 144 under the Securities Act of 1933, as amended. The market price of our

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common stock may drop significantly when the restrictions on resale by our existing stockholders lapse and these stockholders are able to sell our common stock into the market.

Upon the filing of the registration statements and following the expiration of the lock-up restrictions described above, the number of shares of our common stock that are potentially available for sale in the open market will increase materially, which could make it harder for the value of our common stock to appreciate unless there is a corresponding increase in demand for our common stock. This increase in available shares could cause the value of your investment in our common stock to decrease.

In addition, a sale by us of additional shares of common stock or similar securities in order to raise capital might have a similar negative impact on the share price of our common stock. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities, and may cause you to lose part or all of your investment in our common stock.

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following our initial public offering.

Prior to our initial public offering, there has been no public market for our common stock. Although our common stock has been approved for listing on The NASDAQ Capital Market, an active trading market may not develop following the completion of our initial public offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

The concentration of the capital stock ownership with our insiders after our initial public offering will likely limit the ability of the stockholders to influence corporate matters.

Following our initial public offering, the executive officers, directors, 5% or greater stockholders, and their respective affiliated entities will in the aggregate beneficially own approximately 43.9% of our outstanding common stock (assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options). As a result, these stockholders, acting together, have control over matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a corporate transaction that other stockholders may view as beneficial.

We have broad discretion in the use of a portion of the net proceeds from our initial public offering and may not use them effectively.

We currently intend to use the net proceeds from our initial public offering to progress our research and development programs, to repay our $440,000 promissory note and for general corporate purposes, including working capital and capital expenditures. However, our management will have broad discretion in the application of the net proceeds. Our stockholders may not agree with the manner in which we choose to allocate the net proceeds from our initial public offering. Our failure to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

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We do not intend to pay dividends for the foreseeable future, which could reduce the attractiveness of our stock to some investors.

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. In addition, governing documents we may enter into in the future in connection with debt financing to further finance our operations, including the proposed loan and security agreement for a term loan we intend to enter into upon consummation of our initial public offering, may contain restrictions on our ability to pay dividends.

Provisions in our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a change of control of our company and, therefore, may depress the trading price of our stock.

Our certificate of incorporation and bylaws contain, or will contain upon completion of our initial public offering, certain provisions that may discourage, delay or prevent a change of control that our stockholders may consider favorable. These provisions:

authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
prohibit stockholder action to elect or remove directors by majority written consent;
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;
prohibit our stockholders from calling a special meeting of stockholders; and
establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Our certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation upon the completion of our initial public offering will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

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

As a public company whose common stock is listed on The NASDAQ Capital Market, we will incur accounting, legal and other expenses that we did not incur as a private company, including costs associated with our reporting requirements under the Securities Exchange Act of 1934, as amended. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the Securities and Exchange Commission and The NASDAQ Capital Market. We expect that these rules and regulations will increase our legal and financial compliance costs, introduce new costs such as investor relations and stock exchange listing fees, and will make some activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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As an “emerging growth company,” as defined in the JOBS Act, we may take advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes Oxley Act (and the rules and regulations of the Securities and Exchange Commission thereunder). When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the Securities and Exchange Commission after the closing of our initial public offering, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related thereto discussed above and depending on our status as per Rule 12b-2 of the Securities Exchange Act of 1934, as amended, our independent registered public accounting firm may also need to attest to the effectiveness of our internal control over financial reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective controls over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate, including the hiring of outside consultants. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.

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Changes in the laws and regulations affecting public companies will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.

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

In the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.

We are an “emerging growth company” and may elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growth company”, we may take advantage of exemptions from various reporting requirements that are applicable to other public reporting companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports. We could be an “emerging growth company” up until the December 31st following the fifth anniversary after our first equity offering, although circumstances could cause us to lose that status earlier if our annual revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in any three-year period or if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30th, in which case we would no longer be an “emerging growth company” as of the following December 31st. We cannot predict if investors will find our securities less attractive because we may rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the price of our securities may be more volatile.

Even after we no longer qualify as an “emerging growth company”, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Risks Related to our Indebtedness

We may incur debt obligations that require us to make payments of principal and interest, which could adversely affect our business or restrict the manner in which we operate, obtain financing or return cash to stockholders.

Upon consummation of our initial public offering, we intend to enter into a loan and security agreement for a secured term loan in the principal amount of $6 million to $8 million. This could have important consequences to our investors, including:

requiring a significant portion of our cash flow from operations to make interest payments;
increasing our vulnerability to downturns in our business and industry;
reducing the cash flow available for working capital, to fund capital expenditures and other corporate purposes and to grow our business;
limiting our ability to pay future dividends;

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limiting our ability to incur new debt or liens;
limiting our ability to sell assets and conduct certain corporate transactions; and
limiting our flexibility in planning for, or reacting to, changes in our business and the industry.

These restrictions may limit our ability to obtain additional financing or take advantage of business opportunities.

It may be necessary in the future to refinance our indebtedness. If, at such time, market conditions are materially different or our credit profile is worse, the cost of refinancing such debt may be significantly higher than our existing indebtedness, or we may be unable to procure refinancing at all. To the extent we cannot meet any future debt service obligations through use of cash flow, refinancing or otherwise, we will risk having our outstanding debt accelerated.

We may incur substantial additional indebtedness in the future. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify. The terms of such additional indebtedness may contain covenants restricting our financial and operational flexibility, including, among other things, restrictions on the payment of dividends and other distributions to our stockholders. If we breach a restrictive covenant under any of our indebtedness, or an event of default occurs in respect of such indebtedness, our lenders may be entitled to declare all amounts owing in respect thereof to be immediately due and payable, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Substantially all of our assets will be pledged as collateral to secure the proposed term loan.

Our obligations under the proposed loan and security agreement we intend to enter into upon consummation of our initial public offering will be secured by substantially all of our assets. In the event we default under the terms of our new term loan, the lenders could accelerate our indebtedness thereunder and we would be required to repay the entire principal amount of the term loan, which would significantly reduce our cash balances. In the event we do not have sufficient cash available to repay such indebtedness, the lenders could foreclose on its security interest and liquidate some or all of our assets to repay the outstanding principal and interest under our term loan. The liquidation of a significant portion of our assets would reduce the amount of assets available for common stockholders in a liquidation or winding up of our business.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described under the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.

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USE OF PROCEEDS

We will not receive any of the proceeds from the sale of the shares common stock issuable upon the conversion of the term loans by the selling stockholders named in this prospectus. All proceeds from the sale of these shares of common stock will be paid directly to the selling stockholders.

DIVIDEND POLICY

We have never paid dividends on our common stock, and currently do not intend to pay any cash dividends on our common stock in the foreseeable future. In addition, governing documents we may enter into in the future in connection with debt financing to further finance our operations, including the proposed loan and security agreement for a term loan we intend to enter into upon consummation of our initial public offering, may contain restrictions on our ability to pay dividends. Even if we are permitted to pay cash dividends in the future, we currently anticipate that we will retain all future earnings, if any, to fund the operation and expansion of our business and for general corporate purposes.

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2016 on:

an actual basis;
a pro forma basis, to give effect to:
º the conversion of $12.6 million of convertible notes and related accrued interest into Series A preferred stock and then into 1,843,369 shares of our common stock in accordance with the terms of such notes and, with respect to Series A preferred stock, our third amended and restated certificate of incorporation, as amended;
º the conversion of $3.6 million of convertible notes and related accrued interest into 945,511 shares of our common stock in accordance with the terms of such notes;
º the conversion of $4.0 million principal amount of term loans together with all accrued and unpaid interest thereon into 1,021,525 shares of common stock at a conversion price equal to 80% of the initial public offering price in our initial public offering in accordance with the terms of the loan and security agreement, dated December 21, 2015;
º the conversion of 25,716,583 outstanding shares of preferred stock into 3,229,975 shares of our common stock under the terms of our third amended and restated certificate of incorporation, as amended;
º the exercise of warrants to purchase 2,452,242 shares of preferred stock at an exercise price of $0.01 per share and the conversion of the preferred stock issuable upon exercise of such warrants into 308,001 shares of our common stock under the terms of our third amended and restated certificate of incorporation, as amended; and
º following each of the foregoing, the 1-for-10.656096 reverse stock split of our outstanding shares of common stock.
a pro forma as adjusted basis, to give further effect to:
º our sale of 3,700,000 shares of common stock in our initial public offering, at the initial public offering price of $5.00 per share after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and
º the accounting of the value of an aggregate of 1,393,880 shares of our common stock certain of our existing investors that collectively beneficially own the majority of our common stock will transfer to Titan Multi-Strategy Fund I, LTD. and certain of its third-party designees at a nominal purchase price, which constitutes an expense for us, as the primary benefactor. The expense was calculated based on our initial public offering price of $5.00 per share.

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This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes thereto appearing elsewhere in this prospectus.

     
  March 31, 2016 (unaudited)
     Actual   Pro Forma   Pro Forma
As Adjusted
     (in thousands, except share and per share amounts)
Cash and cash equivalents   $ 905     $ 930     $ 17,370  
Accrued interest of convertible debt   $ 3,249     $     $  
Convertible notes, net of debt discount     19,992              
Preferred stock warrant liabilities     3,082       644       644  
Redeemable convertible preferred stock
                          
Series A, $0.0001 par value, 45,100,000 shares authorized at March 31, 2016; 20,216,583 shares issued and outstanding at March 31, 2016; no shares issued and outstanding pro forma and pro forma as adjusted as of March 31,
2016
    20,214              
Series A-1, $0.0001 par value, 10,500,000 shares authorized at March 31, 2016; 5,500,000 shares issued and outstanding at March 31, 2016; no shares issued and outstanding pro forma and pro forma as adjusted as of March 31,
2016
    5,500              
Stockholders’ equity (deficit)
                          
Common stock; $0.0001 par value; 65,600,000 shares authorized at March 31, 2016; 534,853 shares issued and outstanding at March 31, 2016; 7,883,234 and 11,583,234 issued and outstanding pro forma and pro forma as adjusted; respectively, as of March 31, 2016     2       3       3  
Additional paid-in capital     469       52,938       76,335  
Accumulated deficit     (51,577 )      (52,629 )      (59,585 ) 
Total stockholders’ equity (deficit)     (51,106 )      312       16,753  
Total capitalization   $ 931     $ 956     $ 17,397  

The table set forth above is based on 534,853 shares of our common stock outstanding as of March 31, 2016.

The outstanding share information in the table above excludes the following:

688,329 shares of our common stock issuable upon the exercise of stock options as of March 31, 2016, with a weighted average exercise price of $1.26 per share;
1,523,299 shares of common stock reserved for issuance pursuant to future awards under the 2016 Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately following the consummation of our initial public offering;
an estimated 146,013 shares of our common stock issuable upon the exercise of outstanding preferred stock warrants and conversion of the preferred stock issuable upon exercise of such warrants as of March 31, 2016, at an estimated weighted average exercise price of $1.00 per share, of which preferred stock warrants to purchase 131,880 shares of common stock (as calculated on a fully diluted basis) will terminate upon the consummation of our initial public offering;
any shares of our common stock issuable upon exercise of the underwriters’ over-allotment option; and
the issuance of shares of our common stock to Palladium Capital Advisors, LLC as consideration for serving as a non-exclusive advisor, equal to the lesser of (i) 112,000 shares of our common stock or (ii) 1% of our fully diluted outstanding common stock following our initial public offering.

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SELECTED HISTORICAL FINANCIAL DATA

The following tables set forth a summary of our selected historical financial data at, and for the period ended on, the dates indicated. We have derived the statements of operations data for the years ended December 31, 2014 and 2015 and the balance sheet data as of December 31, 2014 and 2015 from our audited financial statements included in this prospectus. We have derived the statements of operations data for the three month periods ended March 31, 2015 and 2016, and the balance sheet data as of March 31, 2016 from our unaudited financial statements included in this prospectus. The unaudited financial data includes, in the opinion of our management, all adjustments, consisting of normal recurring adjustments that are necessary for a fair statement of our financial position and results of operations for these periods. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results to be expected for a full fiscal year. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the sections in this prospectus entitled “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

       
  Years Ended December 31,   Three Months Ended March 31,
     2014   2015   2015   2016
               (unaudited)
     (in thousands, except per share data)
Statement of Operations Data:
                                   
Revenue   $ 1,200     $ 375     $ 375     $  
Total operating expenses     (6,791 )      (6,182 )      1,566       2,114  
Loss from operations     (5,591 )      (5,807 )      (1,191 )      (2,114 ) 
Total other expense     (1,258 )      (1,570 )      (229 )      (120 ) 
Net Loss   $ (6,849 )    $ (7,377 )    $ (1,420 )    $ (2,234 ) 
Basic and diluted net loss per share   $ (15.68 )    $ (14.22 )    $ (2.96 )    $ (4.19 ) 
Shares used in computation of basic and diluted net loss per share     437       519       479       533  
Pro forma net loss   $ (6,849 )    $ (7,377 )    $ (1,420 )    $ (3,286 ) 
Pro forma basic and diluted net loss per share   $ (1.16 )    $ (1.12 )    $ (0.23 )    $ (0.42 ) 
Share used in computation of pro forma basic and diluted net loss per share(1)     5,895       6,575       6,259       7,882  

     
  December 31,   March 31,
2016
     2014   2015
               (unaudited)
     (in thousands)
Balance Sheet Data:
                          
Cash and cash equivalents   $ 2,031     $ 3,290     $ 905  
Total assets     2,659       3,914       2,058  
Accrued interest     2,055       3,199       3,249  
Convertible notes, net of debt discount     12,540       19,841       19,992  
Preferred stock warrant liability     2,695       3,163       3,082  
Redeemable convertible stock     25,705       25,712       25,714  
Accumulated deficit     (41,966 )      (49,343 )      (51,577 ) 
Total stockholders’ deficit     (41,536 )      (48,889 )      (51,106 ) 

(1) See Note 9 of notes to financial statements for an explanation of the determination of the number of shares used in computing pro forma net loss per share.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results may differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.”

Overview

We are a preclinical biopharmaceutical company developing a portfolio of products for the treatment of inherited enzyme deficiencies in the liver using intracellular enzyme replacement therapy, or i-ERT, and expect to generate clinical safety and efficacy data in 2018. We are not aware of any other enzyme replacement therapies for intracellular enzyme deficiencies currently being marketed for inherited enzyme deficiencies in the liver, and believe that the commercial potential for i-ERT is completely untapped and similar to the large and growing $4 billion worldwide market for conventional ERT, which includes drugs such as Cerezyme. Our i-ERT approach is enabled by our proprietary Hybrid mRNA Technology platform, which allows synthesis of the missing enzyme inside the cell. Our initial product portfolio targets the three urea cycle disorders OTCD, ASL deficiency and ASS1 deficiency. We have preclinical proof of concept in a mouse model of a urea cycle disorder showing significant reductions in the level of blood ammonia, which is the approvable endpoint by the FDA for the demonstration of efficacy in human clinical trials of the urea cycle disorders. To our knowledge, there are no ERT products on the market to treat these diseases, because the urea cycle reaction occurs inside the cell and is inaccessible to the administered enzyme. In contrast, we expect delivery of the missing enzyme using i-ERT with our Hybrid mRNA Technology to be a promising approach to treat these patients. Beyond the urea cycle disorders, we believe there are a significant number of inherited disorders of metabolism in the liver that are candidates for our therapeutic approach and that proof of concept for the treatment of one inherited liver disorder with our Hybrid mRNA Technology can be adapted to develop mRNA therapeutics for the treatment of other inherited liver disorders using our platform.

Our i-ERT approach is accomplished by delivering normal copies of the mRNA that make the missing enzyme inside the liver cell, thereby reinstating the normal physiology and correcting the disease. A key challenge with mRNA therapeutics historically has been their satisfactory delivery into the patients’ cells. We believe that our Hybrid mRNA Technology addresses these difficulties and also directs synthesis of the desired protein to the hepatocyte, which is the chief functional cell type in the liver harboring the metabolic cycles that need to be corrected in metabolic liver diseases. We believe our technology is superior to alternative technologies because, based upon peer-reviewed journal articles and presentations of our competitors and our internal preclinical studies, it results in high-level synthesis of the desired protein in the hepatocyte, has better tolerability and can be repeat-dosed without loss of effectiveness, thus enabling treatment of chronic conditions.

We are focused on inherited, single-gene disorders of metabolism in the liver that result in deficiency of an intracellular enzyme and thus have been unable to be treated with conventional ERT. Some inherited orphan liver diseases, such as the lysosomal storage disorders, can be successfully treated with conventional ERT. However, this approach does not work for many of the inherited orphan liver diseases, including the urea cycle disorders, because the missing enzyme is inside the cell, and the administered enzyme is unable to get inside the target cell where it is needed to be therapeutically active. Our approach is to deliver mRNA encoding the missing enzyme into the cell using our Hybrid mRNA Technology, such that the mRNA makes the missing enzyme inside the cell, restores the intracellular enzyme function and corrects the disease.

As noted above, our initial focus is on urea cycle disorders, which are a group of rare genetic diseases generally characterized by the body’s inability to remove ammonia from the blood. The urea cycle consists of several enzymes, including OTC, ASL and ASS1. Since the urea cycle reactions occur inside the cell, conventional ERT does not work as a treatment for these disorders. Urea cycle disorders are caused by a genetic mutation that results in a deficiency of one of the enzymes of the urea cycle that is responsible for removing ammonia from the bloodstream, causing elevated levels of ammonia in the blood. The elevated

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ammonia then reaches the brain through the circulation, where it causes cumulative and irreversible neurological damage, and can result in coma and death. While currently marketed ammonia scavengers such as Ravicti (glycerol phenylbutyrate) and Buphenyl (sodium phenylbutyrate) provide palliative care of the symptoms, liver transplant is the only currently available cure for urea cycle disorders. Our goal is to treat the urea cycle disorders by intravenous delivery of mRNA that makes the relevant missing urea cycle enzyme inside the cell, thus reinstating normal control of blood ammonia. We believe that anticipated improvements in newborn screening and the availability of corrective therapy will lead to improved diagnosis and survival rates among patients with urea cycle disorders.

We have three therapeutic urea cycle disorder programs under development: PRX-OTC to treat OTCD, PRX-ASL to treat ASL deficiency and PRX-ASS1 to treat ASS1 deficiency. Preclinical efficacy has been established for PRX-OTC with two biological measures, including normalization of the level of ammonia in the blood. Lowering the level of ammonia in the blood is an approvable endpoint by the FDA for the treatment of urea cycle disorders, since it was the basis for the approval of Ravicti by the FDA in 2013. We expect to achieve preclinical proof of concept for the treatment of a second urea cycle disorder and select a urea cycle disorder product candidate for further development and eventual commercialization in the first half of 2016. We also plan to scale up the manufacturing of this product candidate and conduct further preclinical studies in the second half of 2016. In addition, we plan to test the safety and efficacy of the Hybrid mRNA Technology in large animals by the end of 2016. We intend to initiate IND-enabling studies in the first half of 2017 and plan to start manufacturing clinical supplies of the lead urea cycle disorder product candidate consistent with cGMP in the third quarter of 2017. We expect to file an IND application with the FDA in the fourth quarter of 2017 for this candidate and to conduct Phase 2a/2b single- and repeat-dose clinical proof of concept studies in urea cycle disorder patients that are expected to generate Phase 2a safety and efficacy data in the first half of 2018 and Phase 2b safety and efficacy data in the second half of 2018, including measurement of reduction in blood ammonia.

Financial Overview

Our operations have been funded, to date, primarily through a series of private placements of convertible preferred stock and issuance of convertible notes and warrants. From our inception through March 31, 2016, we have raised an aggregate of approximately $47.4 million to fund our operations, of which approximately $25.7 million was from the issuance of preferred stock and approximately $20.2 million was from issuance of convertible notes and warrants. In addition we received a $1.5 million upfront fee from Synageva BioPharma Corp., or Synageva, in 2014 pursuant to a collaboration and development agreement with Synageva.

Operating Losses

Since our inception, we have incurred significant operating losses. Our net losses were $6.8 million and $7.4 million for the years ended December 31, 2014 and 2015, respectively. Our net losses were $1.4 million and $2.2 million for the three months ended March 31, 2015 and 2016, respectively. As of March 31, 2016, we had accumulated deficits of $51.6 million. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase significantly as we plan to conduct our preclinical studies, scale up the manufacturing process, advance our research programs into clinical trials, continue to discover, validate and develop additional product candidates, expand and protect our intellectual property portfolio, and hire additional development and scientific personnel. In addition, upon the consummation of our initial public offering, we expect to incur additional costs associated with operating as a public company.

Revenues

We currently do not have any products approved for sale in any jurisdiction and have not generated any revenue from product sales. In years ended December 31, 2014 and 2015, we have recognized revenues from Synageva.

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include the following:

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employee-related expenses, including salaries, benefits, travel and stock-based compensation;
external research and development expenses incurred under arrangements with third parties, such as consulting fees, research testing and preclinical studies of our product candidates;
laboratory supplies, and acquiring, developing and manufacturing preclinical study materials;
license fees; and
costs of facilities, depreciation and other expenses.

Research and development costs are expensed as incurred. In certain circumstances, we will make nonrefundable advance payments to purchase goods and services for future use pursuant to contractual arrangements. In those instances, we defer and recognize an expense in the period that we receive or consume the goods or services.

At any point in time, we typically have various early stage research and drug discovery projects ongoing. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding the costs incurred for these early stage research and drug discovery programs on a project-specific basis.

The nature and efforts required to complete a prospective research and development project are typically indeterminable at very early stages when research is primarily conceptual and may have multiple applications. Once a focus towards developing a specific product candidate has been developed, we obtain more visibility into the efforts that may be required to reach conclusion of the development phase. However, there are inherent risks and uncertainties in developing novel biologics in a rapidly-changing industry environment. To obtain approval of a product candidate from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and preclinical and clinical trials. The collection of this data, as well as the preparation of applications for review by the FDA, is costly in time and effort, and may require significant capital investment.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance and support functions and not otherwise included in research and development expenses. Other general and administrative expenses include allocated facility related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services. We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company. These increases will likely include legal fees, accounting fees, directors’ and officers’ liability insurance premiums and fees associated with investor relations.

Interest Expense

Interest expense consists primarily of cash and non-cash interest related to our convertible notes.

On December 11, 2015, we issued a promissory note to Titan Multi-Strategy Fund I, LTD. in exchange for $500,000. On December 21, 2015, we entered into a loan and security agreement with 17 investors, which was subsequently amended on April 6, 2016, pursuant to which Titan Multi-Strategy Fund I, LTD. converted its note and certain investors made new term loans to us in the aggregate principal amount of $4.0 million. The term loans closed on December 21, 2015, and we received from the escrow agent net proceeds of approximately $3.2 million, after deducting certain fees and expenses. Interest accrues on the term loans at the rate of 5% per annum. The maturity date of the term loans is December 21, 2016, unless earlier converted into equity or otherwise repaid. The repayment of the term loans is subject to acceleration upon the occurrence of certain customary events of default contained in the loan and security agreement. The entire outstanding principal amount of the term loans together with all accrued and unpaid interest thereon will automatically convert into shares of our common stock upon the closing of a qualified offering and compliance with all components of the qualified offering as set forth in the loan and security agreement, at a conversion price equal to 80% of the price shares of common stock are sold in the qualified offering. Our initial public offering constitutes a qualified offering under the terms of the loan and security agreement.

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As of March 31, 2016, we have an aggregate amount of convertible notes, plus accrued and unpaid interest thereon, of approximately $19.4 million. The convertible notes carry interest at a rate of 8% per annum. The convertible notes are payable upon demand of the holders of a majority of the applicable series of convertible notes. No demands for conversion of the notes have been made. The convertible notes are also payable upon the occurrence of certain liquidation or financing events set forth in such convertible notes. The repayment of the convertible notes is subject to acceleration upon the occurrence of certain customary events of default contained in the convertible notes. We also issued seven-year warrants to purchase shares of the same class and series of capital stock into which the convertible notes convert. In connection with our initial public offering, the convertible notes and unpaid accrued interest thereon converted into, and certain of the warrants were exercised for, shares of our common stock as described elsewhere in this prospectus. In December 2015, in connection with us entering into the loan and security agreement pursuant to which certain investors made term loans to us in the aggregate principal amount of $4.0 million, our existing investors holding the convertible notes agreed that such notes will cease accruing interest as of December 31, 2015. Accordingly, no interest expense on these notes was recorded after December 31, 2015. The fair value of the warrants were recorded as debt discount and warrant liabilities upon issuance of the convertible notes on the balance sheets. The debt discount is amortized to interest expense over the term of the notes.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

Non-refundable, up-front payments received in connection with collaborative research and development agreements are deferred and recognized on a straight-line basis, unless evidence suggests that the revenue is earned or obligations are fulfilled in a different pattern, over the contractual term of the arrangement or the expected period during which those specified services will be performed, whichever is longer.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs include salaries and personnel related costs, consulting fees, fees paid for contract research services, the costs of laboratory supplies, equipment and facilities, license fees and other external costs. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

Fair Value of Financial Instruments

We establish the fair value of our assets and liabilities using 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. We established a fair value hierarchy based on the inputs used to measure fair value. The three levels of the fair value hierarchy are as follows:

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

Level 2:  Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

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Level 3:  Unobservable inputs in which little or no market data exists, therefore determined using estimates and assumptions developed by us, which reflect those that a market participant would use.

The carrying value of cash and cash equivalents, accounts payable and accrued liabilities approximate their respective fair values due to their relative short maturities. The carrying value of our 8% convertible notes payable approximates fair value because the interest rate is reflective of the rate we could obtain on debt with similar terms and conditions. The carrying value of the 5% term loans was approximately $3.8 million as of March 31, 2016. See Note 5 to our audited financial statements — Convertible Notes Payable and Other Credit Facility in the audited financial statements included elsewhere in this prospectus for further discussion. We estimate the fair value of the preferred stock warrant liability using Level 3 inputs.

We may apply the fair value option to any eligible financial assets or liabilities, which permits an instrument by instrument irrevocable election to account for selected financial assets and liabilities at fair value. To date, we have not applied this election.

Derivative Financial Instruments

We evaluate our financial instruments such as convertible preferred stock and convertible notes to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. At each reporting date, we review our convertible securities to determine their classification is appropriate.

Deferred Financing Costs

We defer costs related to the issuance of debt which are included on the accompanying balance sheets as a deduction from the debt liability. Deferred financing costs are amortized over the term of the related loan and are included as a component of interest expense on the accompanying statements of operations.

Warrant Liabilities

Warrants to purchase our redeemable convertible preferred stock are classified as liabilities and are recorded at their estimated fair value. We use the Black-Scholes option pricing model to evaluate the fair value of the warrants. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to volatility, expected option term and fair value of our common stock. In each reporting period, any change in fair value of the warrants is recorded as expense in the case of an increase in fair value and income in the case of a decrease in fair value.

Redeemable Convertible Preferred Stock

We initially record redeemable convertible preferred stock that may be redeemed at the option of the holder or based upon the occurrence of events not under our control outside of stockholders’ deficit at the value of the proceeds received, net of issuance costs. The difference between the original carrying value and the redemption value is accreted at each reporting period on a straight line basis so that the carrying value equals the redemption value on the redemption date. In the absence of retained earnings, these accretion charges are recorded against additional paid-in capital, if any, and then to accumulated deficit.

Stock-Based Compensation

We expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. We use the Black-Scholes option pricing model to calculate the fair value of any equity instruments on the grant date. We recognize stock-based compensation, net of estimated forfeitures, on the accelerated method as expense over the requisite service period. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to volatility, expected option term and fair value of our common stock. Measurement of stock-based compensation for options granted to non-employees is subject to periodic adjustment as the underlying equity instruments vest.

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We have granted options with performance conditions to certain executive officers and directors. At each reporting date, we evaluate whether the achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of the achievement of each performance condition or the occurrence of the event which will trigger the options to vest.

We recorded stock-based compensation expense in the Statements of Operations as follows (in thousands):

       
  Years Ended
December 31,
  Three Months Ended
March 31,
     2014   2015   2015   2016
               (unaudited)
Research and development   $ 23     $ 17     $ 4     $ 10  
General and administrative     7       4       1       9  
     $ 30     $ 21     $ 5     $ 19  

All stock options are granted at a price no less than the fair value per share of our common stock. Due to the absence of an active market for our common stock, the fair value of our common stock underlying options granted is determined by the board of directors relied in part upon independent third party valuation analyses and input from our management on each grant date. We use valuation techniques and methods that rely on recommendations by the American Institute of Certified Public Accountants, or AICPA, in its Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, 2013, and conform to generally accepted valuation practices. A number of objective and subjective factors were considered including:

our capital structure and the price at which we issued our preferred stock and the rights, preferences and privileges of the preferred stock as compared to those of our common stock;
our results of operations, financial position and our future business plans;
the material risks related to our business, the state of the development of our target markets and the pace of adoption of our chosen technology platforms;
achievement of enterprise milestones, including research results and our entry into or termination of collaboration and license agreements;
the market performance of publicly traded companies in the life sciences and biotechnology sectors;
external market conditions affecting the life sciences and biotechnology industry sectors; and
the likelihood of achieving a liquidity event for the holders of our common stock, preferred stock and stock options, such as an initial public offering given prevailing market conditions.

The intrinsic value of all outstanding vested and unvested options as of March 31, 2016 is $2.6 million based on the initial public offering price of $5.00 per share for our common stock and based on shares of our common stock issuable upon the exercise of options outstanding as of March 31, 2016 with a weighted average exercise price of $1.26 per share.

Valuation of Stock Option Grants in 2014 and 2015

Our board of directors granted a total of 275,551 and 21,588 stock options with weighted average exercise prices of $0.3352 and $0.1066 per share in the years ended December 31, 2014 and 2015, respectively.

On each of the grant dates during 2014 and 2015, in addition to the objective and subjective factors discussed above, our board of directors also relied in part upon valuations prepared by independent valuation specialists which utilized Option Pricing Method, or OPM, to determine the value of our common stock. The OPM treats the rights of the holders of preferred and common stock as equivalent to call options on the enterprise’s value, with exercises prices based on the liquidation preferences at the time of a liquidity event. The common stock is modeled as a call option that gives its owner the right, but not the obligation, to buy the underlying equity value at a predetermined or exercise price. In the model, the exercise price is based on a

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comparison with the equity value rather than, as in the case of a “regular” call option, a comparison with a per-share stock price. Thus, common stock is considered to be a call option with a claim on the equity at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM has commonly used the Black-Scholes model to price the call option. One of the critical inputs into the OPM is the total equity value for the enterprise, which was estimated using the discounted cash flow method under the income approach.

The decrease in the fair value from 2014 to 2015 was mainly due to:

we ended our collaboration with Synageva in May 2015 when the contract expired and Synageva decided not to exercise their right to acquire us;
we issued and sold 5.5 million shares of Series A-1 preferred stock for an aggregate purchase price of $5.5 million in 2014, and obtained $7.7 million in proceeds from issuing convertible notes in the years ended December 31, 2015, which diluted the per share ownership of our common stock and stock option holders; and
when the options were granted in 2015, the possible financing available for us at the time were either (a) a substantial private equity financing round, the terms of which would likely have been at a valuation and terms that would have been very punitive to the common/stock option holders or (b) an acquisition of us by another entity, which would have resulted in a valuation of the common stock/options similar to that determined for the Synageva transaction; at that time, we had not received any written proposal for an initial public offering or any other financing or business proposal. Thus, at the time the options were granted in 2015, any financing options available to us would have further diluted the ownership interest of our common stockholders.

Valuation of Stock Option Grants in 2016

Our board of directors granted a total of 240,887 stock options on February 8, 2016 with an exercise price of $1.81 per share.

Other than the factors listed above, our board of directors also relied in part upon valuations prepared by the same independent valuation specialists which utilized Probability-Weighted Expected Return Method, or PWERM, to determine the value of our common stock. The PWERM analyzes the present value of the returns afforded to common stockholders under several future stockholder exit or liquidity event scenarios including:

an initial public offering with a high valuation on or before December 31, 2016;
an initial public offering with a low valuation on or before June 30, 2016;
a strategic merger or sale of our company on or before July 31, 2016; and
continued operations assuming the company will continue to obtain financing through issuing of preferred stock or convertible notes.

The valuations of the two initial public offering scenarios were estimated by our management based on discussions with investment bankers. Employing a simple market approach, these initial public offering valuations were compared to similar metrics for recent initial public offerings of biotechnology companies in order to gain comfort that the estimated initial public offering values were not unreasonable. The valuation in the merger or sale scenario was based on the estimates developed for the initial public offering scenarios and assumes that potential acquirers emerge during the initial public offering process with offers at the upper end of the range contemplated in the initial public offering scenarios. The valuation in the continued operations scenario was estimated using the cost approach based on aggregate invested capital. The PWERM used probability weightings of 55% for the initial public offering (high) scenario, 20% for the initial public offering (low) scenario, 5% for a strategic merger or sale of our company, and 20% for continued operations. The probability weighting assigned to the respective exit scenarios were based on management’s expected near-term and long-term funding requirements and an assessment of the current financing and biotechnology industry environment at the time of the valuation. The valuation also applied a discount for lack of marketability of 40% to reflect the fact that there is no market mechanism to sell our shares, and as such, the

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stockholders will need to wait for a liquidity event such as an initial public offering or a sale of the company to enable the sale of the common stock. Our board of directors concluded a fair value of $1.81 per share as of February 8, 2016.

Income Taxes

We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

We utilize a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

JOBS Act

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended for complying with new or revised accounting standards. Thus, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU is effective for public entities for annual periods beginning after December 15, 2017. In June 2015, the FASB deferred for one year the effective date of the new revenue standard, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted. We are evaluating the impact this standard may have on our revenue recognition, but do not expect that the adoption will have a material impact on our financial statements.

In June 2014, the FASB issued ASU 2014 10, Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810 Consolidation. This ASU removes the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. In addition, the update eliminates the requirements for development stage entities to (1) present inception to date information in the statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. This standard is effective for annual reporting periods beginning after December 15, 2014. Early adoption prior to the effective date is permitted. We have early adopted this standard in the presentation of our 2014 financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU is intended to define management’s responsibility to evaluate

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whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. For all entities, the ASU is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. We are evaluating the impact of this standard, but do not expect that the adoption will have a material impact on our financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, guidance to simplify the presentation of debt issuance costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction for the debt liability as opposed to recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. This is similar to the presentation of debt discounts or premiums. This ASU requires retrospective application which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We have adopted this guidance. The adoption of this guidance did not have a material impact on our financial statements.

In February 2016 the FASB issued ASU 2016-02, Leases (Topic 842). This ASU will require organizations that lease assets — referred to as “leases” — to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The ASU is effective for public entities for annual periods beginning on or after December 15, 2018. Early adoption is permitted, and adoption must be applied on a modified retrospective basis. We are evaluating the impact of this standard but do not expect that the adoption will have a material impact on our financial statements.

In March 2016 the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting which amends ASC 718, Compensation — Stock Compensation. The ASU includes provisions intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for public entities for annual periods beginning on or after December 15, 2016 and interim periods within that reporting period. Early adoption is permitted in any interim or annual period. We are evaluating the impact of this standard but do not expect that the adoption will have a material impact on our financial statements.

Results of Operations

Comparison of the Three Months Ended March 31, 2015 (unaudited) and the Three Months Ended March 31, 2016 (unaudited)

The following table summarizes the results of our operations for each of the three months ended March 31, 2015 and 2016 (in thousands):

       
  Three Months Ended March 31,   Dollar Change   %
Change
     2015   2016
          (unaudited)          
Statement of operations data:
                                   
Revenue   $ 375     $     $ (375 )      -
Operating expenses:
                                   
Research and development     1,282       1,434       152       11.9 % 
General and administrative     284       680       396       139.4 % 
Total operating expenses     1,566       2,114       548       35.0 % 
Loss from operations     (1,191 )      (2,114 )      (923 )      77.5 % 
Interest expense     (250 )      (201 )      49       -19.6 % 
Other income (loss), net     21       81       60       285.7 % 
Total other income (expense)     (229 )      (120 )      109       -47.6 % 
Net loss   $ (1,420 )    $ (2,234 )    $ (814 )      57.3 % 

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Revenue

Revenue decreased from $375,000 for the three months ended March 31, 2015 to zero for the three months ended March 31, 2016. To date, we have not generated revenue from the sale of any products. The $375,000 recorded as revenue for the three months ended March 31, 2015 related to our development agreement with Synageva. On April 4, 2014, we entered into an exclusive development and option agreement, or development agreement, with Synageva, pursuant to which we agreed to conduct certain development activities in connection with the development of our mRNA and polymer products. Synageva paid us a non-refundable upfront fee in the aggregate amount of $1.5 million in 2014, which was recognized over the term of the agreement. The development agreement with Synageva expired in 2015. See “Certain Relationships and Related Party Transactions — Development and Option Agreement with Synageva BioPharma Corp.” We did not record any revenue in the three months ended March 31, 2016.

Research and Development Expenses

Our research and development expenses increased from $1.3 million for the three months ended March 31, 2015 to $1.4 million for the three months ended March 31, 2016. The increase of $152,000, or 11.9%, for the three months ended March 31, 2016, was primarily due to an increase in research activities as we developed our portfolio of products for the treatment of inherited enzyme deficiencies in in the liver and an increase in laboratory facility expenses as a result of an extension of our lease during the three months ended March 31, 2016.

General and Administrative Expenses

General and administrative expenses increased from $284,000 for the three months ended March 31, 2015 to $680,000 for the three months ended March 31, 2016. This increase of approximately $396,000 or 139.4%, was primarily due to an increase in payroll costs of $189,000 resulting from increased headcount and an increase in consulting costs associated with our initial public offering.

Interest Expense

Interest expense decreased from $250,000 for the three months ended March 31, 2015 to $201,000 for the three months ended March 31, 2016. The decrease of approximately $49,000, or 19.6%, for the three months ended March 31, 2016 was due to the accrued interest on the outstanding principal under the $4.0 million of term loans we received on December 21, 2015, pursuant to a loan and security agreement. In connection with our incurrence of the term loans, our existing investors holding our 8% convertible notes agreed to the conversion of such notes upon a qualified offering under the loan and security agreement pursuant to which the term loans were made and that such notes will cease accruing interest as of December 31, 2015, so that the number of shares issuable upon conversion of such notes can be fixed. The interest expense for the three months ended March 31, 2016 consists of $50,000 of accrued interest on the term loans and $150,000 of amortized deferred debt issuance costs. Interest expense for the three months ended March 31, 2015 consists of accrued interest on the 8% convertible notes.

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Comparison of the Years Ended December 31, 2014 and 2015

The following table sets forth information concerning our operating results for the years ended December 31, 2014 and 2015:

       
  For the Years Ended December 31,   Dollar
Change
  %
Change
     2014   2015
          (in thousands)          
Statement of operations data:
                                   
Revenue   $ 1,200     $ 375     $ (825 )      -68.8 % 
Operating expenses:
                                   
Research and development     4,860       4,883       23       0.5 % 
General and administrative     1,931       1,299       (632 )      -32.7 % 
Total operating expenses     6,791       6,182       (609 )      -9.0 % 
Loss from operations     (5,591 )      (5,807 )      (216 )      3.9 % 
Interest expense     (1,367 )      (1,649 )      (282 )      20.6 % 
Other income (loss), net     109       79       (30 )      -27.5 % 
Total other income (expense)     (1,258 )      (1,570 )      (312 )      24.8 % 
Net loss   $ (6,849 )    $ (7,377 )    $ (528 )      7.7 % 

Revenue

Revenue decreased from $1.2 million for the year ended December 31, 2014 to $375,000 for the year ended December 31, 2015. To date, we have not generated revenue from the sale of any products. The $1.2 million and $375,000 of revenue we recorded in the years ended December 31, 2014 and 2015, respectively, related to our development agreement with Synageva. Synageva paid us a non-refundable upfront fee in the aggregate amount of $1.5 million in 2014. The development agreement with Synageva expired in 2015. The fee was recognized over the term of the agreement.

Research and Development Expenses

Our research and development expenses were $4.9 million in each of the years ended December 31, 2014 and 2015. Excluding a decrease in depreciation expense of $138,000 in 2015, research and development expenses increased $162,000, or 3.7%, for the year ended December 31, 2015, compared to research and development expenses for the year ended December 31, 2014. The increase was primarily attributable to a $306,000 increase in outsourced contract research expenses which was offset by a decrease in usage of laboratory supplies of $132,000. The decrease in depreciation expense was predominantly due to our leasehold improvements and some of our laboratory equipment having fully depreciated in 2015.

General and Administrative Expenses

General and administrative expenses were $1.3 million for the year ended December 31, 2015, which was a decrease of approximately $632,000 or 33%, compared to general and administrative expenses of $1.9 million for the year ended December 31, 2014. The decrease was primarily due to a decrease of $548,000 in legal fees associated with the Synageva agreements entered in 2014.

Interest Expense

Interest expense increased approximately $282,000, or 21%, from $1.4 million for the year ended December 31, 2014 to $1.6 million for the year ended December 31, 2015. Increase in interest expense was attributable to the increase in convertible notes payable in 2015. We expect interest expense to decrease when the convertible notes and related unpaid accrued interest are converted into series A preferred stock and then into common stock immediately prior to the pricing of our initial public offering.

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Liquidity and Capital Resources

From inception to March 31, 2016, we have incurred an accumulated deficit of $51.6 million. We have financed our operations since inception primarily with the net proceeds of $25.7 million from the sales of shares of our convertible preferred stock and $20.2 million from the issuance of convertible notes and warrants. We also received a $1.5 million upfront fee from Synageva in 2014 pursuant to a development agreement which expired in 2015. At March 31, 2016, we had $905,000 of cash and cash equivalents. We anticipate that we will continue to incur losses, and that such losses will increase over the next several years due to development costs associated with our urea cycle disorder programs. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding and other collaborations and strategic alliances.

Loan and Security Agreement

On December 11, 2015, we issued a promissory note to Titan Multi-Strategy Fund I, LTD. in exchange for $500,000. On December 21, 2015, we entered into a loan and security agreement with 17 investors, which was subsequently amended on April 6, 2016, pursuant to which Titan Multi-Strategy Fund I, LTD. converted its note and certain investors made new term loans to us in the aggregate principal amount of $4.0 million. The term loans closed on December 21, 2015, and we received from the escrow agent net proceeds of approximately $3.2 million, after deducting certain fees and expenses. Interest accrues on the term loans at the rate of 5% per annum. The maturity date of the term loans is December 21, 2016, unless earlier converted into equity or otherwise repaid. The repayment of the term loans is subject to acceleration upon the occurrence of certain customary events of default contained in the loan and security agreement. On the closing date of our initial public offering, the aggregate outstanding principal amount of the term loans, plus all accrued and unpaid interest thereon, will be approximately $4.1 million. The entire outstanding principal amount of the term loans together with all accrued and unpaid interest thereon will automatically convert into shares of our common stock upon the closing of a qualified offering and compliance with all components of the qualified offering as set forth in the loan and security agreement, at a conversion price equal to 80% of the price shares of common stock are sold in the qualified offering. We agreed to use our reasonable best efforts to consummate a qualified offering on or prior to June 5, 2016. Among other things, a qualified offering under the loan and security agreement requires a firm commitment underwritten initial public offering of our common stock not later than June 5, 2016 at a pre-offering valuation of at least $24 million (exclusive of the term loans and their subsequent conversion) and which results in gross proceeds to us of at least $16.9 million. Our initial public offering constitutes a qualified offering under the terms of the loan and security agreement, and therefore, upon the closing of our initial public offering, we will issue an aggregate of 1,021,525 shares of common stock to the investors under the loan and security agreement.

We also granted to Titan Multi-Strategy Fund I, LTD., as security agent, for the benefit of the lenders under the loan and security agreement, a first priority security interest to all of our right, title and interest in and to our assets as collateral to secure the payment and performance of all obligations under the loan and security agreement.

Under the loan and security agreement, we are subject to affirmative and negative covenants. We agreed to, among other things, use our reasonable best efforts to consummate a qualified offering on or prior to June 5, 2016 and deliver certain financial statements. In addition, we agreed to use the proceeds from the loans solely as working capital and for general corporate purposes in the ordinary course of business. Under the loan and security agreement, and subject to certain exceptions, we may not take certain actions without the consent of the lenders representing at least 51% of the outstanding principal amount of the term loans, or the required lenders, such as incur or repay indebtedness, engage in related party transactions, dispose of our assets, or issue shares of our capital stock. In addition, upon any sale of all or substantially all of our assets that results in net cash proceeds sufficient to satisfy our obligations under the loan and security agreement, we are required to satisfy the entire outstanding principal amount of the term loans, all accrued and unpaid interest thereon and all other obligations thereunder, together with a prepayment premium equal to 25% of the outstanding principal amount of the term loans on the date of repayment. We may not voluntarily prepay the term loans without the consent of the required lenders.

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An event of default under the loan and security agreement will be deemed to occur or exist in the event we fail to make principal or interest payments when due; if the accredited investors cease to have a first priority perfected lien in the collateral, if we breach and fail to cure within a specified period of time in any material respect any term, covenant or agreement in the loan and security agreement or the other facility documents, except for the non-occurrence of the qualified offering; or upon the occurrence of certain other events.

Registration Rights Agreement

As contemplated by the loan and security agreement, on February 29, 2016, we entered into a registration rights agreement with the investors in the December 2015 financing, pursuant to which we agreed to use our reasonable best efforts to register the resale of the shares of common stock issuable upon the conversion of our term loans concurrently with the registration of our initial public offering and to keep the related registration statement continuously effective until the earlier of the date that is one year from the date such registration statement is declared effective or all of the shares issuable upon the conversion of our term loans have been sold thereunder or pursuant to Rule 144 or may be sold pursuant to Rule 144 without volume or manner-of-sale restrictions and without the requirement for us to be in compliance with the current public information requirement under Rule 144. In the event we are unable to register all such shares in the registration statement contemplated by the registration rights agreement, we agreed to use our commercially reasonable efforts to file amendments to the initial registration statement to cover any such unregistered shares. We agreed to pay all fees and expenses related to the filing of such registration statements.

Convertible Notes

As of December 31, 2015, we had an aggregate amount of convertible notes, plus accrued and unpaid interest thereon, of approximately $19.4 million. The convertible notes carry interest at a rate of 8% per annum. The convertible notes are payable upon demand of the holders of a majority of the applicable series of convertible notes, No demands for conversion of the notes have been made. The convertible notes are also payable upon the occurrence of certain liquidation or financing events set forth in such convertible notes. The repayment of the convertible notes is subject to acceleration upon the occurrence of certain customary events of default contained in the convertible notes. We also issued to purchasers of our convertible notes seven-year warrants to purchase shares of the same class and series of capital stock into which the convertible notes convert. In connection with our initial public offering, the convertible notes and unpaid accrued interest thereon converted into, and certain of the warrants were exercised for, shares of our common stock as described elsewhere in this prospectus. In December 2015, in connection with us entering into the loan and security agreement pursuant to which certain investors made term loans to us in the aggregate principal amount of $4.0 million, our existing investors holding the convertible notes agreed that such notes will cease accruing interest as of December 31, 2015. Accordingly, no interest expense on these notes was recorded after December 31, 2015.

We believe that with our existing cash and cash equivalents as of March 31, 2016 and the net proceeds of the $400,000 loan we received pursuant to the $440,000 original issue discount promissory note, dated May 2, 2016, excluding the anticipated proceeds from our initial public offering and the anticipated term loan under the proposed loan and security agreement we intend to enter into upon consummation of our initial public offering, will finance our planned operations through May 2016, and the anticipated proceeds from our initial public offering will be sufficient to meet our anticipated cash requirements for at least the next 12 months. In addition, we intend to pursue a combination of debt financing and strategic partnerships to further finance our operations. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.

Our primary uses of cash are to fund operating expenses and research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

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Our future capital requirements are difficult to forecast and will depend on many factors, including:

the initiation, progress, timing and completion of preclinical studies of our lead product and potential product candidates;
the number and characteristics of product candidates that we pursue;
the progress, costs and results of our clinical trials;
the terms and timing of any other strategic alliance, licensing and other arrangements that we may establish;
the outcome, timing and cost of regulatory approvals;
delays that may be caused by changing regulatory requirements;
the costs and timing of hiring new employees to support our continued growth;
the costs required for operating a public company;
the costs and timing of procuring preclinical supplies of our product candidates; and
the extent to which we acquire or invest in businesses, products or technologies.

The following table shows a summary of our cash flows for the years ended December 31, 2014 and 2015 and the three months ended March 31, 2015 and 2016 (in thousands):

       
  Years Ended December 31,   Three Months Ended March 31,
     2014   2015   2015   2016
          (unaudited)
Net Cash provided by (used in)
                                   
Operating activities   $ (4,861 )    $ (5,980 )    $ (1,527 )    $ (1,797 ) 
Investing activities     (53 )      (114 )            (142 ) 
Financing activities     5,268       7,353       10       (446 ) 
     $ 354     $ 1,259     $ (1,517 )    $ (2,385 ) 

Operating Activities

Net cash used in operating activities increased from $1.5 million for the three months ended March 31, 2015 to $1.8 million for the three months ended March 31, 2016. The increase in net cash used in 2016 was primarily due to an increase in payroll costs from increased head count and an increase in consulting costs associated with our initial public offering. Research and development costs also increased due to an increase in research activities as we developed our portfolio of products for the treatment of inherited enzyme deficiencies in the liver.

Net cash used in operating activities increased from $4.9 million for the year ended December 31, 2014 to $6.0 million for the year ended December 31, 2015. The increase in net cash used in 2015 was primarily due to the development agreement entered with Synageva in 2014. We received a $1.5 million upfront non-refundable fee from Synageva in 2014 offset by approximately $548,000 in legal fees. Contract research expenses increased $306,000 in the year ended December 31, 2015 due to our increased outsourced preclinical research which was offset by a decrease in laboratory supplies of $132,000.

Investing Activities

The net cash used in investing activities for the three months ended March 31, 2016 was $142,000, which relates entirely to the purchase of property and equipment, that was comprised primarily of lab equipment. No cash was used for investing activities in the three months ended March 31, 2015.

The net cash used in investing activities for the years ended December 31, 2014 and 2015 relates entirely to the purchases of property and equipment, primarily lab equipment. The amount spent in the years ended December 31, 2014 and 2015 was approximately $53,000 and $114,000, respectively.

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Financing Activities

Net cash used in financing activities was $446,000 for the three months ended March 31, 2016, which related to the expenses associated with our initial public offering. Net cash provided by financing activities was $10,000 for the three months ended March 31, 2015, which resulted from the exercise of certain common stock warrants.

Net cash provided by financing activities was $7.4 million for the year ended December 31, 2015, which was due to the issuance of convertible notes payable of $3.7 million net of debt issuance costs of $332,000 and issuance of convertible term loans of $4.0 million. Net cash provided by financing activities was approximately $5.3 million for the year ended December 31, 2014, which was due to the issuing of Series A-1 preferred stock of $5.5 million related to the agreement with Synageva. This was offset by $232,000 in principal payments of our credit facility which was paid in full in 2014.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet financing arrangements through special purpose entities.

Emerging Growth Company Status

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We have elected to avail ourselves of the following provisions of the JOBS Act:

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

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BUSINESS

Overview

We are a preclinical biopharmaceutical company developing a portfolio of products for the treatment of inherited enzyme deficiencies in the liver using intracellular enzyme replacement therapy, or i-ERT, and expect to generate clinical safety and efficacy data in 2018. We are not aware of any other enzyme replacement therapies for intracellular enzyme deficiencies currently being marketed for inherited enzyme deficiencies in the liver, and believe that the commercial potential for i-ERT is completely untapped and similar to the large and growing $4 billion worldwide market for conventional ERT, which includes drugs such as Cerezyme. Our i-ERT approach is enabled by our proprietary Hybrid mRNA Technology platform, which allows synthesis of the missing enzyme inside the cell. Our initial product portfolio targets the three urea cycle disorders OTCD, ASL deficiency and ASS1 deficiency. We have preclinical proof of concept in a mouse model of a urea cycle disorder showing significant reductions in the level of blood ammonia, which is the approvable endpoint by the FDA for the demonstration of efficacy in human clinical trials of the urea cycle disorders. To our knowledge, there are no ERT products on the market to treat these diseases, because the urea cycle reaction occurs inside the cell and is inaccessible to the administered enzyme. In contrast, we expect delivery of the missing enzyme using i-ERT with our Hybrid mRNA Technology to be a promising approach to treat these patients. Beyond the urea cycle disorders, we believe there are a significant number of inherited disorders of metabolism in the liver that are candidates for our therapeutic approach and that proof of concept for the treatment of one inherited liver disorder with our Hybrid mRNA Technology can be adapted to develop mRNA therapeutics for the treatment of other inherited liver disorders using our platform.

Our i-ERT approach is accomplished by delivering normal copies of the mRNA that make the missing enzyme inside the liver cell, thereby reinstating the normal physiology and correcting the disease. A key challenge with mRNA therapeutics historically has been their satisfactory delivery into the patients’ cells. We believe that our Hybrid mRNA Technology addresses these difficulties and also directs synthesis of the desired protein to the hepatocyte, which is the chief functional cell type in the liver harboring the metabolic cycles that need to be corrected in metabolic liver diseases. We believe our technology is superior to alternative technologies because, based upon peer-reviewed journal articles and presentations of our competitors and our internal preclinical studies, it results in high-level synthesis of the desired protein in the hepatocyte, has better tolerability and can be repeat-dosed without loss of effectiveness, thus enabling treatment of chronic conditions.

We are focused on inherited, single-gene disorders of metabolism in the liver that result in deficiency of an intracellular enzyme and thus have been unable to be treated with conventional ERT. Some inherited orphan liver diseases, such as the lysosomal storage disorders, can be successfully treated with conventional ERT. However, this approach does not work for many of the inherited orphan liver diseases, including the urea cycle disorders, because the missing enzyme is inside the cell, and the administered enzyme is unable to get inside the target cell where it is needed to be therapeutically active. Our approach is to deliver mRNA encoding the missing enzyme into the cell using our Hybrid mRNA Technology, such that the mRNA makes the missing enzyme inside the cell, restores the intracellular enzyme function and corrects the disease.

As noted above, our initial focus is on urea cycle disorders, which are a group of rare genetic diseases generally characterized by the body’s inability to remove ammonia from the blood. The urea cycle consists of several enzymes, including OTC, ASL and ASS1. Since the urea cycle reactions occur inside the cell, conventional ERT does not work as a treatment for these disorders. Urea cycle disorders are caused by a genetic mutation that results in a deficiency of one of the enzymes of the urea cycle that is responsible for removing ammonia from the bloodstream, causing elevated levels of ammonia in the blood. The elevated ammonia then reaches the brain through the circulation, where it causes cumulative and irreversible neurological damage, and can result in coma and death. While currently marketed ammonia scavengers such as Ravicti (glycerol phenylbutyrate) and Buphenyl (sodium phenylbutyrate) provide palliative care of the symptoms, liver transplant is the only currently available cure for urea cycle disorders. Our goal is to treat the urea cycle disorders by intravenous delivery of mRNA that makes the relevant missing urea cycle enzyme inside the cell, thus reinstating normal control of blood ammonia. We believe that anticipated improvements in newborn screening and the availability of corrective therapy will lead to improved diagnosis and survival rates among patients with urea cycle disorders.

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We have three therapeutic urea cycle disorder programs under development: PRX-OTC to treat OTCD, PRX-ASL to treat ASL deficiency and PRX-ASS1 to treat ASS1 deficiency. Preclinical efficacy has been established for PRX-OTC with two biological measures, including normalization of the level of ammonia in the blood. Lowering the level of ammonia in the blood is an approvable endpoint by the FDA for the treatment of urea cycle disorders, since it was the basis for the approval of Ravicti by the FDA in 2013. We expect to achieve preclinical proof of concept for the treatment of a second urea cycle disorder and select a urea cycle disorder product candidate for further development and eventual commercialization in the first half of 2016. We also plan to scale up the manufacturing of this product candidate and conduct further preclinical studies in the second half of 2016. In addition, we plan to test the safety and efficacy of the Hybrid mRNA Technology in large animals by the end of 2016. We intend to initiate IND-enabling studies in the first half of 2017 and plan to start manufacturing clinical supplies of the lead urea cycle disorder product candidate consistent with cGMP in the third quarter of 2017. We expect to file an IND application with the FDA in the fourth quarter of 2017 for this candidate and to conduct Phase 2a/2b single- and repeat-dose clinical proof of concept studies in urea cycle disorder patients that are expected to generate Phase 2a safety and efficacy data in the first half of 2018 and Phase 2b safety and efficacy data in the second half of 2018, including measurement of reduction in blood ammonia.

We are engaged in discussions with a number of prospective biopharmaceutical companies regarding partnership opportunities focused on our product pipeline, the use of our Hybrid mRNA Technology for the delivery of potential partners’ mRNAs and the use of Hybrid mRNA Technology for in vivo gene editing. In vivo gene editing is a type of in vivo genetic engineering in which DNA is inserted, deleted or replaced in the genome of an organism using proteins called nucleases. Gene editing requires the delivery of mRNA and/or DNA into cells, which can be accomplished by several methods, the two most common of which are using engineered viruses as gene delivery vehicles, or viral vectors, and those that use naked DNA/RNA or DNA/RNA complexes, or non-viral methods. Gene editing companies are interested in our Hybrid mRNA Technology for its potential to express nucleases-encoding mRNAs in the hepatocyte, providing a non-viral delivery platform for in vivo gene editing, ultimately correcting the genetic defects in the liver of patients. We believe that our approach offers advantages over viral vectors for in vivo gene editing, which can persist in the patient over the long term, and thus may cause continued modification of the genome after the intended change to the desired gene has been made. If successful, we believe that our technology would enable genes to be added, repaired or deleted in a patient’s hepatocytes for therapeutic benefit. To date, we have not entered into any partnerships or collaborations for our current product candidates.

Our pipeline includes our most advanced mRNA therapeutic program for the treatment of OTCD, for which we have shown preclinical proof of concept, and programs for ASL deficiency and ASS1 deficiency which are under development as summarized in the table below:

[GRAPHIC MISSING]

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Our Strategy

Our strategy is to use our proprietary Hybrid mRNA Technology to develop mRNA therapeutics for the treatment of orphan liver diseases. We believe that our focus on urea cycle disorders maximizes the leverage of our know-how and proprietary technology and allows us to build value through our programs by moving them forward into development in a cost-efficient manner with the goal of promptly delivering safe and effective therapies to urea cycle disorder patients in need of effective treatment.

Our business strategy includes the following:

Rapidly develop a portfolio of mRNA therapeutics to treat orphan liver diseases that are intractable to ERT, with initial focus on the urea cycle disorders.  We have achieved preclinical proof of concept for our OTCD program, with additional data in ASL and/or ASS1 programs expected to follow in the first half of 2016. We intend to initiate IND-enabling studies in the first half of 2017, file an IND in the fourth quarter of 2017 and expect to generate clinical proof of concept in urea cycle disorder patients in the first half of 2018.
Leverage our Hybrid mRNA Technology across a broad range of additional orphan liver diseases.  There are many other orphan liver diseases beyond the urea cycle disorders that we believe would be good candidates for mRNA replacement therapy. Given that the delivery system will be the same across the programs, once the Hybrid mRNA Technology is successful with one mRNA and orphan liver disease, we anticipate that the costs and risks associated with developing new mRNA therapeutics for other orphan liver diseases will be relatively low.
Pursue and form strategic collaborations that leverage our Hybrid mRNA Technology.  We are engaged in discussions with potential partners for developing mRNA programs in various disease indications. We intend to pursue partnerships in order to accelerate the development and maximize the market potential of our Hybrid mRNA Technology platform. In particular, we intend to partner with larger biopharmaceutical companies that possess market know-how and marketing capabilities to complete the development and commercialization of mRNA therapeutics. Our Hybrid mRNA Technology also enables us to deliver nuclease-encoding mRNAs to the liver. The combination of our Hybrid mRNA Technology and gene editing technology has the potential to enable in vivo gene editing, to either add or delete gene function in humans, which, if successful, could have a variety of important potential medical applications. For example, deleting gene function could be used for lowering cholesterol, and adding gene function could be used to correct certain types of hemophilia.

Our Competitive Strengths

With our proprietary Hybrid mRNA Technology, intellectual property portfolio and experienced management team, we believe we are well positioned to advance our development candidates and partner our technology platform to expand future development and commercial opportunities. Although our technology is at a preclinical stage of development and will require substantial resources and clinical and regulatory validation of efficacy, we believe that our delivery technology will provide opportunities to create value with therapeutic mRNAs for the treatment of orphan liver diseases in a cost-effective way.

We believe that our competitive strengths include:

Specific production of desired proteins in hepatocytes.  Based on the internal preclinical studies we have conducted, the Hybrid mRNA Technology enables protein production specifically in hepatocytes in the liver with minimal impact in other major organs and tissues. This outcome is accomplished by attaching the hepatocyte-specific targeting ligand molecule GalNAc to the polymer used in our Hybrid mRNA Technology, which results in hepatocyte-specific expression of the desired protein. GalNAc targeting of mRNA expression is a notable aspect of our technology and we are not aware of any competitor that is using GalNAc to target expression of mRNA therapeutics. This specificity limits off-target effects that may occur by producing proteins in tissues outside the liver.
Ability to repeat dose.  Our preclinical data shows that the Hybrid mRNA Technology enables repeat dosing at therapeutically efficacious doses without loss of protein production. This ability enables treatment of chronic indications that require multi-dose treatment regimens.

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Better tolerability relative to other nucleic acid delivery systems.  In our preclinical studies, the Hybrid mRNA Technology has demonstrated better tolerability relative to other nucleic acid delivery systems, as demonstrated by the lack of an immune system response evidenced by the low levels of a number of cytokines observed in mice. Moreover, at doses well above those needed for a therapeutic effect, liver enzyme levels, a measure of liver damage, remained within normal ranges in mice. This ability to dose at high mRNA levels in combination with the ability to multi-dose without loss of expression upon subsequent dosing represents one of the significant strengths of the Hybrid mRNA Technology.
Potential for rapid development of follow-on products with unusually low cost and risk.  There are many single-gene inherited metabolic disorders of the liver which may be candidates for our mRNA therapeutic approach. Once proof of concept has been established for one orphan liver disease with the Hybrid mRNA Technology, we believe that the same delivery platform may be used to deliver many different mRNAs. Because our delivery technology platform is largely complete and the sequence of all mRNAs is widely known and in public domain, once we successfully develop an mRNA therapeutic for one of the single-gene inherited metabolic disorders of the liver, we believe that development of an mRNA therapeutic targeting other single-gene inherited metabolic disorders of the liver can be made in a significantly shorter amount of time and at less cost relative to a conventional drug discovery process, which generally takes several years to discover new drugs. In addition, we believe that the precise specificity of mRNA for its target minimizes off-target risks associated with conventional drug development, which we believe will contribute to lower cost and risks. For these reasons, while not mitigating potential future regulatory or clinical risks, and not shortening regulatory or clinical timelines for drug approval, we believe our approach can lead to the generation of new drugs more rapidly and with lower risk compared to conventional drug development.
Ability to develop high-barrier to entry products.  Due to our propriety know-how in nucleic acid therapeutics and their delivery, we expect to develop high barrier to entry therapeutics which we believe will result in our products being subject to relatively less competition in the market.
Experienced team.  Our management team has an extensive track record and experience in the research, development and delivery of RNA therapeutics. Our management team has over 50 years of combined experience in RNA delivery technologies and RNA therapeutics, and our team is well placed to further develop the Hybrid mRNA Technology for orphan liver disease therapeutics and for gene editing applications.
Patent protection for our Hybrid mRNA Technology.  In order to protect our innovations, we have aggressively built upon our extensive and enabling intellectual property estate worldwide. Our portfolio of patents and patent applications includes multiple families and is primarily focused on synthetic polymers and related compositions, the use of polymer and polymer- LNP, compositions for delivery of mRNA and other therapeutic agents, including the use of polymer-LNP compositions in our core platform technology, and methods for treating protein deficiency diseases such as orphan diseases characterized by single-gene metabolic defects in the liver, including OTCD. As of May 17, 2016, we own or have in-licensed 12 issued U.S. patents, 20 issued foreign patents, and over 35 pending U.S. and foreign patent applications.

While future manufacturing, regulatory and clinical challenges have not yet been addressed by us, our Hybrid mRNA Technology has proven highly effective in internal preclinical testing. However, to date, none of the above described studies involved human subjects. As such, there can be no assurance that we will achieve the same results upon the commencement of human clinical trials. Should we fail to achieve similar results in human clinical trials, it could result in a material adverse effect on our business and operations. Establishing the efficacy of our technology in human subjects will require substantial funds and could take multiple years. In addition, our successful development is subject to many risks, both known and unknown that may impede our ability to ever bring this technology to market or to generate revenue. See “Risk Factors” beginning on page 13.

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The main competitive technologies to provide treatment for our target diseases are AAV vectors, and mRNA delivery using conventional LNPs. AAV vectors offer the potential of longer-term correction of the liver disease by gene therapy. These vectors are in clinical development to treat orphan liver diseases such as hemophilia. However, triggering of multiple types of immune response to the virus represents a major challenge facing development of these viral vectors and can make repeat dosing ineffective. So if the therapy wanes over time, or if the cells targeted by a first AAV treatment turnover or die, then a repeat administration may be ineffective. mRNAs may also be delivered by conventional LNPs. We believe at least one mRNA/LNP formulation may have been reviewed by the FDA to enter clinical trials for an orphan liver disease indication. While LNPs are effective in delivering mRNA cargo into the liver, and hence, if successfully developed, could become a significant competitive technology for us, LNPs generally contain fusogenic lipids that can activate the innate immune system and result in dose-limiting toxicities.

Our Team

We were founded by Robert W. Overell, Ph.D., our president and chief executive officer, and world leaders in polymer-based drug delivery systems Patrick S. Stayton, Ph.D., professor of bioengineering at the University of Washington, and Allan S. Hoffman, Ph.D., professor emeritus of bioengineering at the University of Washington, together with Oliver W. Press, M.D., Ph.D., a member of the Fred Hutchinson Cancer Research Center and a professor of medicine at the University of Washington, and Paul H. Johnson Ph.D., our founding chief scientific officer.

We believe that success in the field of in vivo nucleic acid delivery and therapeutics requires a highly specialized team. We have a highly experienced management team with over 50 years of combined experience in the delivery and development of nucleic acid therapeutics working in state-of-the-art chemistry and biology facilities in Seattle, Washington. In addition to the experience of our management team, leadership in research and development includes Mary Prieve, Ph.D., senior director of biology and Sean Monahan, Ph.D., senior director of chemistry, each of whom have over 10 years of experience in nucleic acid delivery. We also use consultants and advisors who provide us with key advice in specific areas. These include Gordon Brandt, M.D., our chief clinical advisor, who has been working with us for five years and most recently served as president and executive vice president of clinical affairs for Nastech Pharmaceutical Company Inc., which became MDRNA Inc., where he worked on the development of nucleic acid therapeutics from 2004 until 2008; James Watson, MBA, who serves as our head of corporate development and most recently served as chief business officer at Alvine Pharmaceuticals, Inc. from 2011 to 2016, and, prior to that, was a managing director and head of private equity at Burrill & Company and chief executive officer of Burrill & Company’s merchant banking group; and Stuart Swiedler, M.D., Ph.D., our clinical advisor for orphan drug development, who has been working with us since 2014 and most recently served as senior vice president of clinical affairs at BioMarin Pharmaceutical Inc., an orphan drug company, where for over a 10-year period he contributed to both the non-clinical and clinical aspects of drug development for the regulatory approvals of the orphan drugs Aldurazyme®, Naglazyme® and Kuvan®.

Our Mission and Culture

We are dedicated to the development of mRNA therapeutics that hold promise for treatment of orphan diseases for which few, if any, effective therapeutic options are available. Our guiding principles, against which all employees have been evaluated annually as a key component of our performance management system since our inception, are:

Open Communication.  This is especially important in a drug development company, where tremendous value can be built from close collaboration between team members.
Teamwork.  Talented multidisciplinary teams, with the right skill set, that collaborate effectively against a common goal can create a practically unstoppable force.
Mutual Respect.  We each have different points of view, and nobody is right all of the time. Trust your instincts, but respect those of others too, especially in areas of their expertise.
Excellence and Integrity.  We strive for excellence in everything we do, and do it with the highest level of personal and professional integrity.

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Company Information

We were incorporated on March 9, 2006 as a Delaware corporation. Our principal executive office is located at 410 W. Harrison Street, Suite 300, Seattle, Washington 98119. Our telephone number is 206-805-6300. Our website address is www.phaserx.com. Information contained in, or accessible through, our website does not constitute a part of this prospectus or any prospectus supplement.

Our Initial Target Diseases: Urea Cycle Disorders

Our initial target diseases are urea cycle disorders. Urea cycle disorders are a family of inherited rare genetic metabolic disorders, each of which is caused by a mutation that results in a deficiency of one of the enzymes that are necessary for the normal function of the urea cycle to remove ammonia from the bloodstream. When proteins are broken down by the body, ammonia is produced as a waste byproduct. The urea cycle involves a series of biochemical steps which removes ammonia from the blood. Normally, in individuals with a functioning urea cycle, ammonia is converted into a compound called urea and excreted in urine. In patients with urea cycle disorders, the liver’s ability to convert ammonia to urea is diminished, and the process of removing ammonia from the bloodstream is disrupted. As a result, excess ammonia accumulates in the blood, a condition known as hyperammonemia. Ammonia is a potent neurotoxin, and when ammonia reaches the brain through the bloodstream, it causes severe medical complications including cumulative and irreversible brain damage, and can cause coma and death.

Urea cycle disorders are diagnosed either through newborn screening or when symptoms occur and are recognized as related to a urea cycle disorder by further blood and urine testing. Initial urea cycle disorder symptoms range from catastrophic illness with coma occurring within a few days of birth to milder and non-specific symptoms such as difficulty sleeping, headache, nausea, vomiting, disorientation and seizures, particularly in patients who present later in life.

Urea cycle disorders occur in approximately 1 in 35,000 births in the United States, with OTCD being most common at a rate of approximately 1 in 56,500 live births, followed by ASL deficiency at a rate of approximately 1 in 218,750 live births and ASS1 deficiency at a rate of approximately 1 in 250,000 live births according to the journal article “The Incidence of Urea Cycle Disorders” published in Molecular Genetics and Metabolism, 2013, or the Incidence of Urea Cycle Disorders article. Based on demographic data for those patients enrolled in the National Institutes of Health-sponsored urea cycle disorder consortium longitudinal study, “A Longitudinal Study of Urea Cycle Disorders” published in Molecular Genetics and Metabolism, 2014, or the Longitudinal Study article, approximately one quarter of patients with urea cycle disorders are diagnosed in the neonatal period (first month of life), seventy percent are diagnosed after the neonatal period, and 5% remain asymptomatic throughout life. According to the Longitudinal Study article, approximately 114 newborns are predicted to be born with a urea cycle disorder in the United States each year, and approximately one quarter of the patients diagnosed in the neonatal period die due to the urea cycle disorder, compared with 11% mortality for patients with late onset disease. There were approximately 3.9 million births in the United States in 2013, according to Centers for Disease Control and Prevention (source: http://www.cdc.gov/nchs/births.htm, last visited Mar. 11, 2016).

Our Development Programs

Our mRNA therapeutics for the urea cycle disorders are intended to provide to patients greater than two years of age weekly or biweekly intravenous delivery of mRNA encoding the missing enzyme, thereby allowing the patient to produce the needed enzyme and correcting the disease. Because our approach addresses the underlying cause of the disease by reinstating the normal physiology, it is anticipated that no dietary restriction or special amino acid supplementation will be necessary, and the disease can be managed without crisis or continued neurologic deterioration. For all of our urea cycle disorder programs, the product profile of our candidates is anticipated to include reversal of the enzyme deficiency, which would be expected to correct the disorder by restoring the normal physiology, and normalize plasma ammonia levels, eliminate the dietary restrictions, and eliminate hyperammonemic crises.

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OTCD

Our most advanced program is for OTCD. OTCD is the most common subtypes of the urea cycle disorders and affects all ethnic groups and geographic areas. OTC is a critical enzyme in the urea cycle that removes ammonia in the blood. Patients with severe OTCD rapidly develop hyperammonemia soon after birth and have a disease phenotype which may lead to coma or death in the absence of liver transplant. In some affected individuals, signs and symptoms of OTCD may be less severe, and may not appear until later in life, but most patients show symptoms of OTCD by age 12 which typically manifest as hyperammonemic crises. The gene that codes for OTC is located on the X-chromosome, and hence, the majority of severe patients are male, but females with one abnormal gene in their gene pair can also be affected, usually after the neonatal period, as reported in the journal article “Diagnosis, Symptoms, Frequency and Mortality of 260 Patients with Urea Cycle Disorders from a 21-year, Multicentre Study of Acute Hyperammonaemic Episodes” published in Acta Paediatrica, 2008. Patients can present at almost any time of life with a stressful triggering event such as an infection or pregnancy, resulting in elevations of plasma ammonia concentration. Despite milder presentations in adulthood, patients are at constant risk of ammonia level rising, and hyperammonemia, encephalopathy, cerebral edema, and death can occur. The incidence of OTCD is 1 in 56,500 live births, according to the Incidence of Urea Cycle Disorders article.

Preclinical Development

In 2015, we achieved preclinical proof of concept for OTCD in a well-accepted animal model of a human orphan liver disease using OTC-spfash mice. Like human OTCD patients, the OTC-spfash mice have a defective OTC gene, and when OTC expression in these mice is further impaired, the mice recapitulate the human OTCD, including elevated blood ammonia and death, as reported in the journal article “Induction and Prevention of Severe Hyperammonemia in the spfash Mouse Model of Ornithine Transcarbamylase Deficiency Using shRNA and rAAV-mediated Gene Delivery” published in Molecular Therapy, 2011. Hyperammonemia is induced in these mice by treating the animals with a viral vector containing a short hairpin RNA designed to knock down mouse OTC mRNA. Over time as the mouse OTC mRNA levels are decreased, OTC enzyme levels also decrease resulting in the mice developing elevated ammonia levels in the blood. Normal mice have ammonia levels of ~100 μM. Delivery of the human OTC mRNA using our Hybrid mRNA Technology resulted in the production of the natural human OTC enzyme and normalization of two key clinical biomarkers, ammonia level in the blood and orotic acid level in the urine when dosed once a week or twice a week. In contrast, the treatment of mice with a human OTC mRNA designed not to be translated (a negative control) resulted in the mice having higher ammonia and orotic acid levels. As shown in the figure below, treatment of mice twice a week with 3 mg/kg doses of a functional human OTC mRNA over a three-week period resulted in a statistically significant reduction in blood ammonia levels and normalized ammonia levels to those observed in the wild type mice. To determine whether data is statistically significant compared to controls we use standard statistical measures, in this case the t-test. The t-test provides a “p-value” representing the probability that random chance could explain the result. In general, a 5% or lower p-value (p < 0.05) is considered to be statistically significant. However, it should be noted that statistical significance alone may not be sufficient to establish efficacy by the FDA. Rather, efficacy endpoints are generally agreed upon with the FDA prior to commencement of a study, which may require clinical significance beyond a statistically significant p-value. Notwithstanding that fact, the p-value calculated in this study was p < 0.001, as shown in the figure below, meaning that the probability that random chance could explain this result is 0.1%. Normalization of ammonia levels was also achieved with treatment of mice once a week. The study has shown meaningful reduction in ammonia levels, the endpoint that was evaluated by the FDA in order to grant approval of Ravicti.

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Normalization of Ammonia Levels in OTC-spfash Mice Treated with Human OTC mRNA
Delivered by Hybrid mRNA Technology

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Moreover, levels of the other well-accepted biomarker, urinary orotic acid, were also normalized in this study. As shown in the figure below, treatment of mice twice a week with 3 mg/kg doses of a functional human OTC mRNA over a three-week period demonstrated that the orotic acid levels were maintained at the levels similar to the orotic acid levels in normal mice. Similar results were obtained with treatment of mice once a week. Mice treated with buffer or the negative control mRNA resulted in urinary orotic acid levels that were 10 to 30-fold higher than mice treated once a week or twice a week.

Normalization of Orotic Acid Levels in OTC-spfash Mice Treated with Human OTC mRNA
Delivered by Hybrid mRNA Technology

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The induction of hyperammonemia in OTC-spfash mice resulted in ataxia, significant body weight loss and, ultimately, the mice succumbing to the effects of elevated ammonia levels. As shown in the figure below, mice treated with buffer or the negative control mRNA did not live beyond days 21 and 27, respectively. Mice treated twice a week with 3 mg/kg doses of a functional human OTC mRNA showed complete survival of the mice as long as 35 days. Additionally, no outward signs of ataxia were observed in the treated mice, and all mice in the treated group gained weight. When therapy with the Hybrid mRNA Technology was terminated in these mice, the mice remained disease-free for two weeks at which time the mice started to succumb to the effects of elevated ammonia levels.

Complete Survival of OTC-spfash Mice Treated with Human OTC mRNA
Delivered by Hybrid mRNA Technology in Hyperammonemia Model

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Delivery of the human OTC mRNA using our Hybrid mRNA Technology in the OTC-spfash mice was well tolerated, based on our internal tolerability study with formulation being dosed twice per week for three weeks in fragile OTC-spfash mice, with normal serum chemistries (electrolytes, albumin and creatinine levels) observed 48 hours following dosing, and no elevation of alanine aminotransferase, or ALT, level in the blood, which is a test for liver damage. This is shown in the figure below.

Levels of Liver Enzymes in Mice Dosed with Hybrid mRNA Technology

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Moreover, we observed no detection of the cytokine IP-10 in OTC-spfash mice 3 hours following dosing (below limit of quantitation, or BLOQ), indicating no stimulation of the innate immune system. When the dose of human OTC mRNA was doubled to 3 mg/kg, transient low levels of cytokine IP-10 were observed in half of the OTC-spfash mice while the remaining half of the mice had levels at limit of quantitation or BLOQ.

Levels of the Cytokine IP-10 in OTC-spfash Mice Treated with Hybrid mRNA Technology

[GRAPHIC MISSING]

* BLOQ: below limit of quantitation

ASL Deficiency

ASL deficiency is the second subtype of urea cycle disorder we are pursuing as a development program. ASL deficiency affects the body’s ability to clear the nitrogen already incorporated into the urea cycle as citrulline and argininosuccinate. As in OTCD, ASL deficiency often manifests with rapid-onset hyperammonemia in the newborn period or as a late onset form with episodic hyperammonemia and/or long term complications that include liver dysfunction, neuro-cognitive deficits and hypertension. The accumulation of citrulline and argininosuccinic acid is the biochemical hallmark of ASL deficiency. The incidence of ASL deficiency is estimated at 1 in 218,750 live births, according to the Incidence of Urea Cycle Disorders article.

Preclinical Development

We have designed and manufactured the ASL mRNA, obtained ASL-deficient mice and are working with animal disease models for ASL deficiency internally. We plan to perform initial studies to examine production of ASL mRNA in normal mice, and following confirmation of the synthesis of the corrected gene, we plan to administer therapeutic ASL mRNA into ASL hypomorphic mice suffering from a genetic mutation to examine protein production in the liver and reduction of argininosuccinic acid levels in plasma. We anticipate using the same delivery platform used for our OTCD formulation.

ASS1 Deficiency

ASS1 deficiency is the third subtype of urea cycle disorder we are pursuing as a development program. The argininosuccinate synthase 1 enzyme is responsible for combining two amino acids, citrulline made by other enzymes in the urea cycle, and aspartate, to form a molecule called argininosuccinic acid. A series of additional chemical reactions in the urea cycle uses argininosuccinic acid to form urea. If the ASS1 enzyme is absent or defective, then a build-up of citrulline and ammonia in the blood can occur, resulting in hyperammonemia. The incidence of ASS1 deficiency is estimated at 1 in 250,000 live births, according to the Incidence of Urea Cycle Disorders article.

Preclinical Development

We have designed and manufactured the ASS1 mRNA, obtained ASS1-deficient mice and are working with animal disease models for the treatment of ASS1 deficiency internally. We plan to perform initial studies to examine the production of ASS1 mRNA in normal mice, and following confirmation of the synthesis of the

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corrected gene, we plan to administer therapeutic ASS1 mRNA into ASS1-deficient mice to examine protein production in the liver, reduction of citrulline levels in plasma and presence of argininosuccinic acid levels in plasma. We anticipate using the same delivery platform used for our OTCD formulation.

IND-Enabling Studies and Clinical Development Plans

Urea Cycle Disorder Candidate Selection and IND-Enabling Studies

We plan to advance the urea cycle disorder programs by conducting further preclinical studies, including optimal dosing interval and maximum tolerated dosing studies in the first half of 2016. Upon successful completion of these studies, we plan to select the first urea cycle disorder candidate to move forward into development. We intend to scale up the manufacturing process for the selected urea cycle disorder therapeutic candidate in the first half of 2017 to initiate IND-enabling studies, including preclinical GLP-compliant toxicology studies in rodents and large animals in the second half of 2017. We expect that we will require substantial additional capital to conduct clinical activities for our lead mRNA product candidates.

Clinical Development Plans

Based on the results of the preclinical studies, we expect to demonstrate safety and clinical efficacy in a Phase 2a study in the first half of 2018 and in a Phase 2b study in the second half of 2018 in urea cycle disorder patients. The clinical development of the selected urea cycle disorder candidate is planned to include a two-stage clinical trial for adults and pediatric patients who are currently on Ravicti. In the first stage Phase 2a trial, we intend to enroll a limited number of adult patients for evaluation of the pharmacokinetics, as measured by blood concentration, and pharmacodynamics, as measured by plasma ammonia levels, following administration of our urea cycle disorder therapeutic. This stage is expected to be followed by a repeat-dose Phase 2b trial in which we intend to enroll a larger number of adults and pediatric patients and plan to include a direct comparison of ammonia levels between Ravicti and our therapeutic candidate. Following this study, we intend to offer all patients enrollment into a one-year extension study with our urea cycle disorder therapeutic.

Market Opportunities

Currently, there is no cure for urea cycle disorders other than liver transplant. Liver transplant is limited by donor availability and patient eligibility, and it is also associated with significant risks and complications, including perioperative morbidity and mortality, liver rejection, kidney failure and vulnerability to infection due to lifelong immunosuppressant medication. Therefore, liver transplant is an option typically reserved for the most severely affected patients in life-threatening conditions. Liver transplantation is especially complicated for patients with urea cycle disorders as many of them show symptoms shortly after birth.

Current management of urea cycle disorders includes decreasing ammonia production through the reduction of protein in the diet, supplementation with essential and/or branched chain amino acids, the use of dietary supplements such as arginine and citrulline and ammonia lowering agents, including Ravicti and Buphenyl, FDA-approved ammonia scavenger products currently being marketed by Horizon Pharma plc. Horizon Pharma plc acquired Ravicti and Buphenyl in 2015 through the acquisition of Hyperion Therapeutics Inc. for $958 million.

Ravicti was approved by the FDA in 2013 for chronic management of urea cycle disorders in adult and pediatric patients greater than two years of age. It is a three times daily oral drug that must be used with a protein-restricted diet and amino acid dietary supplements. As reported in the FDA news release, dated February 1, 2013, announcing approval of Ravicti, the major study supporting Ravicti’s safety and effectiveness involved 44 adults who had been using Buphenyl. According to this news release, patients were randomly assigned to take Buphenyl or Ravicti for two weeks before being switched to the other product for an additional two weeks. The FDA news release reported that blood testing showed Ravicti was as effective as Buphenyl in controlling ammonia levels. Three additional studies in children and adults provided evidence supporting the long-term safety and effectiveness of Ravicti in patients two years and older. In 2014, Hyperion Therapeutics Inc. reported that the average gross selling price per patient per year for Ravicti was approximately $385,000. The revenue projection for 2016 for Ravicti is $138 million in the United States, based on the sales data from the fourth quarter of 2015 reported by Horizon Pharma plc in its press releases. The revenues for Ravicti are growing at approximately 14% per year based on the sales data from the third and the fourth quarters of 2015 reported by Horizon Pharma plc in its press releases.

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Buphenyl was approved by the FDA in 1996 and was the only branded FDA-approved therapy for the chronic management of certain subtypes of urea cycle disorders prior to Ravicti’s approval for the same subtypes. Buphenyl is also available for the treatment of urea cycle disorders in select countries throughout Europe, the Middle East, and the Asia-Pacific region. Buphenyl is administered in tablet and powder form and sold in the United States to patients who have not transitioned to Ravicti.

Ammonul (sodium benzoate and phenylacetate), an intravenous therapy marketed by Ucyclyd Pharma, Inc., a wholly owned subsidiary of Valeant Pharmaceuticals International, Inc., was approved by the FDA in the United States in 2005. We believe that Ammonul is the only FDA-approved adjunctive therapy for the treatment of hyperammonemic crises in adult and pediatric patients with the most prevalent urea cycle disorders. Currently, Ammonul is not approved for use outside the United States, but is being prescribed by physicians in parts of Europe.

Current commercial products for treatment of urea cycle disorders such as Ravicti, Buphenyl and Ammonul are ammonia scavengers that provide, in our opinion, palliative care of the symptoms at best and have substantial limitations. When urea cycle disorders are not well controlled, or even in well-controlled patients who experience concurrent illness such as infection, or physiological stress such as pregnancy or surgery, hyperammonemia crises may occur. In a Phase 2 trial of Ravicti, two-thirds of patients with high ammonia levels at the start of the clinical trial still had high ammonia levels at the end of the trial despite taking Ravicti, as reported in the journal article “Phase 2 Comparison of a Novel Ammonia Scavenging Agent with Sodium Phenylbutyrate in Patients with Urea Cycle Disorders: Safety, Pharmacokinetics and Ammonia Control” published in Molecular Genetics and Metabolism, 2010. In the Phase 3 trials of Ravicti, sixteen percent of adult patients and 25% of pediatric patients experienced hyperammonemic crises while taking Ravicti during the one year extension trial, according to the journal articles “Ammonia Control and Neurocognitive Outcome among Urea Cycle Disorder Patients Treated with Glycerol Phenylbutyrate” published in Hepatology, 2013 and “Glycerol Phenylbutyrate Treatment in Children with Urea Cycle Disorders: Pooled Analysis of Short and Long-term Ammonia Control and Outcomes” as published in Molecular Genetics and Metabolism, 2014. In the pivotal Ravicti pediatric studies, 20% of subjects 0-5 years old and 18% of subjects 6-17 years old required a gastric tube for management of feeding while on ammonia scavengers according to the journal articles “Ammonia Control in Children Ages 2 Months Through 5 Years with Urea Cycle Disorders: Comparison of Sodium Phenylbutyrate and Glycerol Phenylbutyrate” published in The Journal of Pediatrics in 2013 and “Ammonia Control in Children with Urea Cycle Disorders (UCDs); Phase 2 Comparison of Sodium Phenylbutyrate and Glycerol Phenylbutyrate” published in Molecular Genetics and Metabolism in 2011. In addition, Buphenyl has a high pill burden or large quantity of powder and frequent dosing of 3 – 6 times per day and a taste and smell deemed unpleasant by many patients, which makes compliance for many urea cycle disorder patients difficult.

We believe our approach, which is to deliver mRNA encoding the missing enzyme into the cell, thereby making the missing enzyme and reinstating the normal intracellular physiology, offers the potential to correct certain subtypes of urea cycle disorders and avoid the need for scavenger therapy, restrictive diet and dietary supplements. In view of the rapid onset of expression observed with our Hybrid mRNA Technology in our luciferase expression studies in mice, our approach may also lead to more effective treatment of acute hyperammonemic crises in urea cycle disease patients. Additionally, the current ammonia scavengers can only remove a fixed amount of ammonia from the blood: each molecule of Ravicti can remove up to six molecules of ammonia, and each molecule of Buphenyl can remove up to two molecules of ammonia, according to the U.S. package inserts for Ravicti and Buphenyl, respectively. In comparison, there is no fixed limit on the number of ammonia molecules which can be removed following replacement of a missing enzyme.

We are not aware of any other enzyme replacement therapies for intracellular enzyme deficiencies currently being marketed for inherited enzyme deficiencies in the liver, and believe that the commercial potential for i-ERT is completely untapped and similar to the large and growing $4 billion worldwide market for conventional ERT, which includes drugs such as Cerezyme (see sales data for 2015 in the press releases and annual reports filed in 2016 by Sanofi S.A., BioMarin Pharmaceutical Inc., Shire plc and Protalix BioTherapeutics, Inc.). Cerezyme costs approximately $25,000 for a month’s course of therapy in 2014, according to a news article published in the Boston Globe (Sept. 2, 2014), and commercially available ERTs list for $290,000 –  $1.28 million per patient per year according to goodrx.com (last visited Mar. 11, 2016). Therapeutics for orphan liver diseases treated with ERT with

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similar incidences to the urea cycle disorders (1/56,500 – 1/250,000) have generated substantial sales, including for Gaucher’s disease, with estimated incidence of 1/60,000, according to GeneReviews®, and worldwide sales of $1.2 billion in 2015 according to sales data by Sanofi S.A. and Shire plc; Fabry disease, with estimated incidence of 1/50,000 – 1/117,000, according to GeneReviews, and worldwide sales of $1.1 billion in 2015 according to sales data by Sanofi S.A. and Shire plc; Pompe disease, with estimated incidence of 1/40,000 – 1/100,000, according to GeneReviews, and worldwide sales of $728 million in 2015 according to sales data by Sanofi S.A.; and mucoploysaccharidosis type VI, with estimated incidence of 1/250,000 – 1/600,000 according to Genetics Home Reference and worldwide sales of $303 million in 2015 according to sales data by BioMarin Pharmaceutical Inc. Conventional ERTs are generally dosed intravenously once a week to once every two weeks, according to the article “Enzyme-Replacement Therapies for Lysosomal Storage Diseases” published online by the National Center for Biotechnology Information (source: http://www.ncbi.nlm.nih.gov/books/NBK117223, last visited Mar. 11, 2016), and can be given by home infusion or in an outpatient setting, according to the journal article “Intravenous Enzyme Replacement Therapy: Better in Home or Hospital?” published in British Journal of Nursing, 2006.

The value that can be created by orphan drug companies early in clinical development is exemplified by Shire plc’s acquisition of Dyax Corp. for approximately $5.9 billion, since at the time, Dyax Corp.’s most advanced asset was in a rare disease setting for hereditary angioedema and had efficacy data based on clinical trial results in approximately 40 patients, according to Shire plc’s press release (source: https://www.shire.com/newsroom/2015/november/shire-to-acquire-dyax-corp). Hereditary angioedema has an incidence of 1/50,000 births, according to the journal article “Hereditary Angioedema: Epidemiology, Management, and Role of Icatibant” published in Biologics, 2013.

Our Hybrid mRNA Technology

mRNA Therapeutics and Competitive Approaches

mRNAs play an essential role in the process of encoding and translating genetic information from DNA to proteins. The genes in DNA encode protein molecules, including enzymes, which are essential building blocks to the functions necessary for life. Expressing a gene means synthesizing proteins encoded by the gene. The information stored within DNA are “read” and expressed in two major steps: transcription and translation. During transcription, the genes in the DNA are transcribed into mRNA, which encodes the protein sequence. mRNA serves as the blueprint for making the desired protein by cellular machinery called ribosomes during translation.

Genetic diseases are the result of a key protein not being correctly coded in the DNA. As a result, the mRNA corresponding to the gene is either defective or missing, resulting in a defective or missing protein. Our therapeutic mRNAs seek to restore the normal mRNA encoding of the normal protein, thereby restoring the missing protein function within target tissues and correcting the disease. In the case of a large number of inherited metabolic diseases of the liver that are caused by single-gene defects, expression, or synthesis, of a therapeutic mRNA providing a functional copy of the missing or defective protein has the potential to correct the genetic disorder.

The main impediment in the development of mRNA therapeutics has been a lack of effective delivery, principally due to the fact that mRNA molecules are (i) fragile and easily degradable by nucleases in the blood, and (ii) large and highly charged molecules that are typically taken up into cellular vesicles called endosomes from which they are unable to cross the endosomal membrane and enter the cytoplasm of the cell. These delivery challenges prevent therapeutic mRNA molecules from reaching the target tissue and being taken up into the cytoplasm of the target cells so that they can be translated into the desired protein of interest. To overcome these impediments, mRNA has typically been formulated into LNPs, which function to protect the mRNA from degradation in the blood and enable uptake of the mRNA inside the cell. While LNPs are effective in delivering mRNA cargo into the liver, and hence, if successfully developed, could become a significant competitive technology for us, LNPs generally contain fusogenic lipids that can activate the innate immune system and result in dose-limiting toxicities, according to the journal articles “Lipid-Based Nanocarriers for RNA Delivery” published in Current Pharmaceutical Design, 2015, and “Nanotoxicity: a Key Obstacle to Clinical Translation of siRNA-based Nanomedicine” published in Nanomedicine, 2014.

An alternative approach to treating orphan liver diseases is gene therapy using AAV vectors; however, triggering of multiple types of immune response to the virus represents a major challenge facing development of these viral vectors, according to the journal article “Gene Therapy in Liver Diseases: State-of-the-Art and

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Future Perspectives” published in Current Gene Therapy, 2012. The AAV vectors offer the potential of longer-term correction of the liver disease by gene therapy, but they can be susceptible to pre-existing neutralizing antibody-mediated immunity against the virus present in a significant number of patients; they trigger immune responses in the body can prevent repeat dosing, since the initial dose primes the immune system and can neutralize vector given in a subsequent administration; and they can stimulate cell mediated immunity against infected liver hepatocytes, according to the journal articles “Hemophilia Gene Therapy: Caught Between a Cure and an Immune Response” published in Molecular Therapy, 2015, and “Immune Responses to AAV Vectors: Overcoming Barriers to Successful Gene Therapy” published in Blood, 2013. Additionally AAV vectors may not be effective in treating the new born patients, since AAV-mediated correction of OTCD is durable in adult but not neonatal OTC-spfash mice, according to a journal article “AAV2/8-mediated Correction of OTC Deficiency Is Robust in Adult but Not Neonatal Spfash Mice” published in Molecular Therapy, 2009.

Our Hybrid mRNA Technology

Our Hybrid mRNA Technology provides a differentiated polymer-LNP-based formulation approach for the delivery of mRNA into the hepatocytes in the liver. The Hybrid mRNA Technology utilizes our SMARTT Polymer Technology in combination with an inert LNP which functions as a carrier for the mRNA. The LNP, which is comprised of several distinct lipids, encapsulates and protects the mRNA following intravenous injection while it transits the blood and is taken up into the hepatocytes while the polymer delivers mRNAs into the cytoplasm by mediating their escape from endosomes. The synthetic polymers exploit a proprietary mechanism to effect passage of mRNA molecules across the endosomal membrane. Our approach does not require fusogenic lipids typical of competitor LNPs and we believe that is one of the reasons why our delivery system is better tolerated than our competitors’ technology.

Our SMARTT Polymer Technology is comprised of a diblock vinyl polymer comprising two blocks of monomers with distinct delivery functionalities. The polymer is targeted to the asialoglycoprotein receptor on liver hepatocytes by the inclusion of a GalNAc moiety to one end of the polymer. The polymers have a first hydrophilic block comprising 2-3 hydrophilic monomers which impart water solubility to the polymer and a second hydrophobic block comprising 2-3 hydrophobic monomers that are pH-tunable and mediate endosome escape of the mRNA cargo into the cytoplasm. These polymers self-assemble into nanoparticles. The structure of the polymer is shown below.

Schematic Representation of the PhaseRx Hybrid mRNA Technology

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We have performed two studies in collaboration with external specialist contract research laboratories using one of polymers as a polymer-siRNA, or small interfering RNA, conjugate. The polymers had the same diblock architecture as shown above, and were similar in composition to the polymers used in the Hybrid

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mRNA Technology. In the first study, we evaluated the absorption, distribution, metabolism, and excretion of a polymer with a radioactive label in rats which showed rapid uptake into the liver, with greater than 95% of the polymer dose in the liver within two hours after dosing. Very little or no polymer was detected in other tissues or organs. The main route of polymer clearance from the liver was into the bile and then feces with 71% of the dose being cleared into bile within 72 hours after dosing. In the second study, the safety and efficacy of a polymer was evaluated in non-human primates. In a single dose, dose ranging study, primates received doses of a polymer conjugate ranging from 1 to 2.4 mg/kg of RNA. The formulation was well tolerated with no significant dose-related changes in serum chemistry, hematology, or coagulation. Moreover, no changes in complement activity or increase in IL-6 cytokine levels, which indicates stimulation of the immune system, were observed, and histopathological evaluation of the liver, kidneys and spleen of treated animals showed no dose-related effects. In addition, our internal studies using dye-labeled siRNA conjugates of our polymers have shown that GalNAc-targeted polymers deliver siRNA effectively to the hepatocytes in vivo, while polymers targeted with mannose were ineffective in mediating siRNA delivery to the hepatocytes.

Our Hybrid mRNA Technology has been shown in our internal preclinical studies to result in synthesis of intended proteins in hepatocytes with a fast onset of action, suggesting highly effective delivery of mRNA molecules, and the synthesis of a number of protein classes including cytosolic proteins, mitochondrial proteins and secreted proteins. By developing a rapid in vivo-based screening program, we have gained valuable information about the structure-activity relationships of formulation components. The figure below illustrates the dramatic changes in activity that have resulted from our formulation screening program showing a 5000-fold improvement in the production of luciferase in the livers of mice treated intravenously with a single 1 mg/kg dose of mRNA encoding luciferase delivered with our Hybrid mRNA Technology, as measured six hours after dosing. The numbers 1 through 7 at the bottom of the figure below represent the successive generations of the Hybrid mRNA Technology that were tested in this assay which showed progressively increased activity. In addition, expression levels within three-fold of maximal luciferase signal were observed within three hours after dosing, which indicates that the synthesis of the desired protein in the liver can be very rapid following administration of the mRNA therapeutic using our Hybrid mRNA Technology. The observed levels of fluorescence for formulation 7 are 1 million-fold above background.

5,000-fold Increase in Activity of Hybrid mRNA Technology Through Formulation Development and
Screening as Measured by Luciferase Expression

[GRAPHIC MISSING]

Moreover, when the Hybrid mRNA technology was used to deliver human erythropoietin mRNA and administered intravenously to mice at a dose of 1 mg/kg, it resulted in supraphysiological levels of the secreted protein erythropoietin 20,000 times above normal levels in untreated mice.

In addition to the ability of the Hybrid mRNA Technology to effect high levels of production of desired proteins, our internal preclinical studies with luciferase mRNA showed that luciferase expression is highly specific to the liver, with little or no expression in immune organs such as the spleen or other tissues. This data is shown in the figure below. Mice were injected intravenously with 0.5 mg/kg of luciferase mRNA delivered using the Hybrid mRNA Technology, and six hours later the various organs were harvested and

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analyzed for expression of luciferase. As can be seen from the data below, expression of the luciferase mRNA was specifically seen in the liver, with no detectable expression in other organs, including the spleen. This data is in contrast to a recent report with a fusogenic LNP-based mRNA formulation where expression was also observed in the spleen and pancreas, as reported in Optimization of Lipid Nanoparticle Formulations for mRNA Delivery in Vivo with Fractional Factorial and Definitive Screening Designs published in ACS Nanoletters, 2015. We believe that the specificity of mRNA expression to the liver observed with our technology will minimize off-target toxicities that can result from the unintended expression of therapeutic proteins in other tissues.

Imaging of Expression of Luciferase in Individual Organs Dissected from Mice Treated with
Luciferase mRNA Delivered using the Hybrid mRNA Technology

[GRAPHIC MISSING]

In addition to organ specificity, the expression of the luciferase protein was seen predominantly in the hepatocyte, the desired cell type in the liver, with no apparent expression in Kuppfer cells in the liver lining the walls of the sinusoids. This result is shown in the immunofluorescence figure below in which the luciferase expression occurs as bright green areas that are specifically in the hepatocytes. The blue areas represent nuclei of individual cells. The observed specificity of expression to the hepatocytes, in addition to the organ specificity shown above, is expected to further improve the safety profile of our products.

Immunofluorescent Staining of Luciferase Protein in Liver Section from Mice Treated with
Luciferase mRNA Delivered using Hybrid mRNA Technology

[GRAPHIC MISSING] 

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Moreover, in our chronic dosing study, the Hybrid mRNA Technology enabled mRNA to be repeat-dosed every week over a 3-month period without loss of expression at each dose. In the data presented in the figure below mice were treated intravenously once a week for 12 weeks with 0.5 mg/kg of luciferase mRNA formulated with Hybrid mRNA Technology without loss of the luciferase fluorescence signal at each dose given. In these studies, luciferase activity was measured six hours after the weekly dosing. The significance of this result is that our Hybrid mRNA Technology would likely be able to be chronically administered without the loss of potency after each dose that has been observed with other LNP-only formulations, as reported in the journal article “Accelerated Blood Clearance of PEGylated Liposomes following Preceding Liposome Injection: Effects of Lipid Dose and PEG Surface-Density and Chain Length of the First-Dose Liposomes” published in the Journal of Controlled Release, 2005.

Luciferase Expression Measured Immediately After Each Dose of a Repeat-Dosing Regimen of the
Hybrid mRNA Technology in Mice

[GRAPHIC MISSING]

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Of critical importance to mRNA therapeutics is the ability to avoid unwanted induction of cytokines which can cause dose-limiting toxicities through activation of the innate immune system. This type of an acute response can result in lower levels of protein expression. Mice injected with 0.5 mg/kg of luciferase mRNA delivered using the Hybrid mRNA Technology did not elicit an innate immune response as determined by measuring levels of cytokines, interferon gamma-induced protein 10 (IP-10), tumor necrosis factor alpha (TNF-α), interleuckin-6 (IL-6), interferon gamma (IFN-ϒ), interleukin 12, (IL-12) and macrophage inflammatory protein alpha (MIP-1α), as shown in the figure below. The levels of cytokines observed in all cases were generally similar to untreated mice and differences were not statistically significant. The term “n.s”. in each graph, means “not significant” and represents a p-value greater than 0.05. We believe that the levels of cytokine induction observed in the preclinical study support the likelihood of our product candidate having a favorable safety profile, hence offering potential advantages over other mRNA delivery using fusogenic LNPs or AAV-based approaches.

Assessment of Cytokine Levels in Mice Treated with Luciferase mRNA Delivered
Using the Hybrid mRNA Technology

[GRAPHIC MISSING]

  

We have developed our Hybrid mRNA Technology into a robust system for in vivo mRNA delivery that allows protection of mRNA in the circulation, endosome escape and targeted expression in the hepatocytes. Our mRNA therapeutic candidates using our Hybrid mRNA Technology have proven effective in preclinical models, and have shown proof of concept and efficacy across a number of studies in OTCD mice, including meaningful reduction in ammonia levels in the blood, which is an approvable endpoint by the FDA for the treatment of urea cycle disorders. Our delivery technology is designed to provide a versatile, predictable, reproducible and scalable mRNA delivery system with the ability to manufacture at scale, using a process known as RAFT polymerization which has enabled manufacturing of polymers at the hundreds of kg scale. We believe that our technology enables rapid deployment of mRNA therapeutics to new disease targets, and we intend to leverage our technology platform to develop a pipeline of product candidates for the treatment of many chronic and life-threatening orphan liver diseases. Beyond the urea cycle disorders, these diseases include organic acidemias, a group of diseases with an aggregate incidence of 1 in 1,000 live births according to GeneReviews; glycogen storage diseases, a group of diseases with an aggregate incidence of 1 in 20,000 live births according to Medscape: Glycogen Storage Diseases Types I-VII, 2014; porphyria, a group of diseases with an aggregate incidence of 1 in 75,000 live births according to a journal article “Porphyrias” published in Lancet, 2010; hyperoxalurea, with an incidence of 1 in 175,000 live births according to

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GeneReviews; phenylketonuria, with an incidence of 1 in 15,000 live births according to a National Institutes of Health Consensus Statement, “Phenylketonuria: Screening and Management” published online in 2000; tyrosinemia type 1 with an incidence of 1 in 100,000 live births according to GeneReviews; and Wilson’s Disease, with an incidence of 1 in 30,000 live births according to GeneReviews. We believe the i-ERT market potential is as large as the $4 billion ERT market because (1) the incidences of the diseases treatable by ERT and i-ERT are similar, as noted above, and (2) the numbers of diseases currently treated by ERT (six diseases, according to a brief “Enzyme Replacement Therapies for Lysosomal Storage Diseases” published by the Agency for Healthcare Research and Quality in 2013) are similar to the number of target diseases for i-ERT.

Partnering Opportunities

We believe that our Hybrid mRNA Technology can be of significant interest to potential corporate partners who are interested in developing mRNA therapeutics. In addition, we have received indications of interest from gene editing companies to use our technology to introduce gene editing therapeutics into the hepatocytes in order to enable in vivo gene editing. Companies developing mRNA and in vivo gene editing therapeutics have reported to us a common set of challenges that we believe can be addressed by our technology, including in vivo instead of ex vivo delivery, high levels of expression and activity, specificity of expression to the liver, avoidance of off-target effects and ability to use repeat dosing regimens without loss of expression on subsequent dosing. Companies focused on gene editing include bluebird bio, Inc., Cellectis S.A., CRISPR Therapeutics AG, Editas Medicine, Inc., Intellia Therapeutics, Inc., Precision Biosciences, Inc. and Sangamo Biosciences, Inc.

There are many companies interested in mRNA therapeutics to treat orphan liver diseases, including Shire plc, Moderna LLC, Alexion Pharmaceuticals, Inc. and Ultragenyx Pharmaceutical Inc. Also, there are many single-gene inherited metabolic disorders of the liver beyond the urea cycle disorders that we believe may be good candidates for mRNA replacement therapy. Once proof of concept is obtained in one orphan liver disease, we believe our technology can be used to rapidly develop mRNA therapeutics to treat other orphan liver diseases. The mRNA sequences for each of these diseases are readily available in public databases, and we expect those mRNAs can readily be manufactured by contract manufacturers. As a result, we believe that new potential mRNA therapeutics may be efficiently developed by combining different mRNAs with our Hybrid mRNA Technology. Given that the delivery system will be the same across the programs, once the Hybrid mRNA Technology is successful with one mRNA therapeutic to treat an orphan liver disease, we anticipate that the costs and risks associated with developing new mRNA therapeutics for other orphan liver diseases will be relatively low. We are engaged in discussions with potential partners for developing mRNA programs in various disease indications. We intend to pursue partnerships in order to accelerate the development and maximize the market potential of our Hybrid mRNA Technology platform. In particular, we intend to partner with larger biopharmaceutical companies that possess market know-how and marketing capabilities to complete the development and commercialization of mRNA therapeutics.

In addition, the ability of our technology platform to effectively deliver mRNA to the liver hepatocytes provides the potential to apply our technology platform to in vivo gene editing — the modification of the genome of a patient’s cells in vivo to either delete genes that are causing disease or to add genes to correct genetic defects, which, if successful, could have a variety of important potential medical applications. For example, deleting gene function could be used to lower levels of drug targets such as PCSK-9 for lowering cholesterol, and adding gene function could be used to correct certain types of hemophilia. We believe that such applicability provides opportunities to form revenue-generating strategic collaborations with partners developing gene editing technologies.

In 2014, we entered into a collaboration and development agreement with Synageva, pursuant to which we and Synageva agreed that we would develop mRNA technologies for the treatment of inherited orphan liver diseases, including development of the Hybrid mRNA Technology. Under this agreement, Synageva had an option to acquire us. This right was not exercised mainly, we believe, because of the acquisition of Synageva by Alexion Pharmaceuticals, Inc. in May 2015, which occurred during Synageva’s option period. All rights to the technology and products generated under this collaboration and development agreement have now reverted to us. Subsequent to our collaboration and development agreement with Synageva, we have not entered into any additional partnerships, collaborations or license agreements for our current product candidates.

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Competition

The biotechnology industry is characterized by intense and rapidly changing competition to develop new technologies and proprietary products and affected by new technologies, new developments, government regulations, health care legislation, availability of financing and other factors. We compete with numerous other companies that currently operate, or intend to operate, in the industry, including companies that are engaged in RNA-based therapeutic technologies and other manufacturers that may decide to undertake development of such products, as well as other companies that are pursuing non-RNA-based approaches for the treatment of urea cycle disorders. While we believe that our intellectual property portfolio, scientific expertise and our Hybrid mRNA Technology provide us with competitive advantages, we face potential competition from many different sources, including larger and better-funded biotechnology and pharmaceutical companies, who, due to their size, may have significant advantages over us. These larger companies have substantially greater capital resources, larger customer bases, broader product lines, larger sales forces, greater marketing and management resources, larger research and development staffs and larger facilities than ours and have established reputations and relationships with physicians and patients, as well as worldwide distribution channels that are more effective than those we will have. In addition, due to ongoing consolidation in the industry, there are high barriers to entry for small biotechnology companies. For a discussion of some of these advantages and the competitive risks we face, see “Risk Factors — Risk Related to our Industry.”

We are aware of several companies that are developing nucleic acid-based therapeutics for orphan liver diseases. There are several companies developing AAV-based approaches to gene therapy including REGENXBIO Inc., Dimension Therapeutics, Inc. and uniQure N.V. Of these, Dimension Therapeutics, Inc. has selected OTCD as one of its development programs as of February 2016. In addition, Moderna LLC is developing injectable modified mRNA therapeutics encoding a variety of proteins. Alexion Pharmaceuticals, Inc. has established an exclusive agreement with Moderna LLC for the discovery and development of mRNA therapeutics to treat rare diseases. As of January 2016, Moderna LLC and Alexion Pharmaceuticals, Inc. have announced that their first mRNA therapeutic program is the treatment of Crigler Najjar Syndrome, an orphan liver disease. Shire plc is known to have pursued mRNA replacement therapy for ASS1 as a development candidate, but we believe that its lead mRNA therapeutic candidate is for cystic fibrosis. Arcturus is developing mRNA-based therapeutics for the treatment of OTCD as well as for iron deficiencies, thrombopoietin and cystic fibrosis. Alnylam Pharmaceuticals, Inc. and Dicerna Pharmaceuticals, Inc. are developing a LNP delivery platform for targeted delivery of small interfering RNA, or siRNA, therapeutics to hepatocytes for silencing specific mRNA to prevent disease-causing proteins from being made and are using this approach to develop therapeutics for primary hyperoxalurea and hepatic porphyrias. There are substantial differences to what these companies are doing relative to us. Specifically, through our technology we are seeking to deliver and replace a specific missing mRNA in the cell, whereas Alnylam Pharmaceuticals, Inc. and Dicerna Pharmaceuticals, Inc. are decreasing the amount of a specific mRNA. In addition, although Alnylam Pharmaceuticals, Inc. and Dicerna Pharmaceuticals, Inc.’s approach uses a covalent GalNAc conjugate to target the siRNA, we use GalNAc to target the polymer component of the delivery system which enables intracellular delivery of the mRNA.

Because liver transplant in newborns is technically difficult, Cytonet GmbH & Co. is developing a therapy for newborns severely affected by urea cycle disorders, and recently filed a Marketing Authorization Application, or MAA, with the EMA and is seeking approval for its liver cell therapy for treatment of urea cycle disorders in children. This treatment involves the infusion of human liver cells with the aim of prolonging crisis-free survival until the patients are able to undergo a liver transplant. In addition, Promethera Biosciences S.A., a Belgian company, is evaluating stem cell based therapy for treatment of urea cycle disorders in the pediatric population. Promethera Biosciences S.A. has completed a 20 patient Phase 1/2 trial in Europe and is currently enrolling patients in a Phase 2b trial. Other potential therapies for the urea cycle disorders in early stage preclinical or clinical testing include gene therapy and mitochondrial enzyme replacement. For example, Aeglea Biotherapeutics, Inc. has a degrading enzyme treatment in preclinical development for arginase 1 deficiency. Ocera Therapeutics Inc. is developing an ammonia scavenger which they claim has improved properties. Bio Blast Pharma Ltd., an Israeli biopharmaceutical company, is pursuing a mitochondrial protein replacement platform in OTCD, which is currently in preclinical development. Synlogic, Inc. is developing a engineered synthetic biotic designed to change the microbiome in the gut

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which, according to Synlogic, Inc., could reduce excess ammonia in the blood for the treatment of urea cycle disorders and other forms of hyperammonemia.

Other companies with mRNA delivery technologies that may compete for gene editing partnerships include Arcturus Therapeutics, Inc., Acuitas Therapeutics Inc., Arbutus Biopharma Corporation, CureVac AG, and BioNTech AG.

These companies also compete with us in recruiting personnel and securing licenses to complementary technologies or specific substances that may be critical to the success of our business. They also compete with us for potential funding.

Intellectual Property

We rely on a combination of patents, trade secrets, non-disclosure agreements, and other intellectual property to protect the proprietary technologies that we believe are important to our business. Our success will depend in part on our ability to obtain and maintain patent and other proprietary protection for commercially important inventions and know-how, defend and enforce our patents, maintain our licenses, preserve our trade secrets, and operate without infringing valid and enforceable patents and other proprietary rights of third parties. We also rely on continuing technological innovation to develop, strengthen, and maintain our proprietary position in the field of mRNA therapeutics and delivery.

Our Patent Portfolio

Our portfolio of patents and patent applications includes multiple families that protect various aspects of our business. The patents and patent applications that make up our patent portfolio are primarily focused on synthetic polymers and related compositions, the use of polymer and polymer-LNP compositions for delivery of mRNA and other therapeutic agents, including the use of polymer-LNP compositions in our core platform technology, and methods for treating protein deficiency diseases such as orphan diseases characterized by single-gene metabolic defects in the liver, including OTCD. As of May 17, 2016, we own or have in-licensed 12 issued U.S. patents, 20 issued foreign patents, and over 35 pending U.S. and foreign patent applications:

     
Case Family   Issued Patents   Pending
Applications by
Jurisdiction
  Owned or In-licensed
Enhanced Transport   US 6,835,393; US 7,374,778;
US 8,003,129; US 8,846,106;
EP 1044021; AU 758368; CA 2317549
  US   In-licensed
Enhanced Transport   US 7,737,108; US 8,318,816        In-licensed
Temperature and pH-responsive Compositions   US 7,718,193        In-licensed
Diblock Copolymer   EP 2281011; AU 2009246327; CN ZL200980122888.3; IL 209238; MX 316902; SG 166444; ZA 2010/08729   US, AU, CA, JP, BR, CN, IN, KR   Co-owned; UW’s rights in-licensed
Micellic Assemblies   EP 2285853; AU 2009246329; JP 5755563; MX 315375; US 9,339,558   US, AU, CA, JP, KR   Co-owned; UW’s rights in-licensed
Polymeric Carrier   US 9,006,193   US   Co-owned; UW’s rights in-licensed
Heterogeneous Polymeric Micelles   US 9,211,250        Co-owned; UW’s rights in-licensed

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Case Family   Issued Patents