ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel oligonucleotide therapeutics for oncology and rare diseases. We use two distinct proprietary drug discovery technology platforms to design and develop drug candidates: our Toll-like receptor, or TLR, targeting technology and our third-generation antisense, or 3GA, technology. We developed these platforms based on our scientific expertise and pioneering work with synthetic oligonucleotides as therapeutic agents. Using our TLR targeting technology, we design synthetic oligonucleotide-based drug candidates to modulate the activity of specific TLRs. In addition, using our 3GA technology, we are developing drug candidates to turn off the messenger RNA, or mRNA, associated with disease causing genes. We believe that our 3GA technology may potentially reduce the immunotoxicity and increase the potency of earlier generation antisense and RNA interference, or RNAi, technologies.

Our business strategy is focused on the clinical development of drug candidates for oncology and rare diseases characterized by small, well-defined patient populations with serious unmet medical needs. We believe we can develop and commercialize these targeted therapies on our own.  To the extent we seek to develop drug candidates for broader disease indications, we may explore potential collaborative alliances to support development and commercialization.

TLR Modulation Technology Platform

TLRs are key receptors of the immune system and play a role in innate and adaptive immunity. As a result, we believe TLRs are potential therapeutic targets for the treatment of a broad range of diseases. Using our chemistry-based platform, we have designed TLR agonists and antagonists to act by modulating the activity of targeted TLRs. A TLR agonist is a compound that stimulates an immune response through the targeted TLR. A TLR antagonist is a compound that inhibits an immune response by blocking the targeted TLR.

Our TLR agonist lead drug candidate IMO-2125 is an agonist of TLR9. Our TLR antagonist lead drug candidate is IMO-8400, which is an antagonist of TLR7, TLR8 and TLR9.

We are evaluating IMO-2125 for the treatment by intra-tumoral injection of multiple oncology indications both in combination with checkpoint inhibitors and as monotherapy. We are developing IMO-8400 for the treatment of a rare disease called dermatomyositis.

Intra-tumoral IMO-2125 Development Program in Immuno-oncology

Advancements in cancer immunotherapy have included the approval and late-stage development of multiple checkpoint inhibitors, which are therapies that target mechanisms by which tumor cells evade detection by the immune system. Despite these advancements, many patients fail to respond to these therapies. For instance, approximately fifty percent of patients with melanoma fail to respond to therapy with approved checkpoint inhibitors. Current published data suggests that the lack of response to checkpoint inhibition is related to a non-immunogenic tumor micro environment. Because TLR9 agonists stimulate the immune system, we believe that there is a scientific rationale to evaluate the combination of intra-tumoral injection of our TLR9 agonists with checkpoint inhibitors. Specifically, we believe that intra-tumoral injection of our TLR9 agonists activates a local immune response in the injected tumor, which may complement the effect of the systemically administered checkpoint inhibitors. In studies in preclinical cancer models conducted in our laboratories, intra-tumoral injection of TLR9 agonists has potentiated the anti-tumor activity of multiple checkpoint inhibitors in multiple tumor models. These data have been presented at a number of scientific conferences from 2014 through 2016. We believe that these data support evaluation of combination regimens including the combination of a TLR9 agonist and a checkpoint inhibitor for the treatment of cancer.

We are initially developing IMO-2125 for use in combination with checkpoint inhibitors for the treatment of  patients with anti-PD1 refractory metastatic melanoma. We believe, based on internally conducted commercial research, that in the United States, by 2025, approximately 20,000 people will have metastatic melanoma and approximately 13,000 of those people will have metastatic melanoma that is anti-PD1 refractory. We also believe that TLR9 agonists may be useful in other tumor types that are unaddressable with current immunotherapy due in part to low mutation load and low dendritic cell infiltration, which include non-small cell lung cancer, head and neck cancer, renal cell cancer and bladder cancer. We believe, based on internally conducted commercial research, that in the United States, by 2025, approximately

160,000 people will have tumor types that are addressable with current immunotherapy and approximately 70,000 of those people will have tumor types that are anti-PD1 refractory.

In June 2015, we entered into a strategic research alliance with the University of Texas, MD Anderson Cancer Center, or MD Anderson, to commence clinical development of IMO-2125 in combination with checkpoint inhibitors. In December 2015, we initiated a Phase 1/2 clinical trial to assess the safety and efficacy of IMO-2125, administered intra-tumorally, in combination with ipilimumab, a CTLA4 antibody marketed as Yervoy® by Bristol-Myers Squibb Company, in patients with metastatic melanoma (refractory to treatment with a PD1 inhibitor, also referred to as anti-PD1 refractory). We subsequently amended the trial protocol to enable an additional arm to study the combination of IMO-2125 with pembrolizumab, an anti-PD1 antibody marketed as Keytruda® by Merck & Co. in the same patient population. In the Phase 1 portion of this clinical trial, escalating doses of IMO-2125 ranging from 4 mg through 32 mg in the ipilimumab arm and ranging from 8 mg through 32 mg in the pembrolizumab arm are being administered intra-tumorally into a selected tumor lesion, together with the standard dosing regimen of ipilimumab or pembrolizumab, administered intravenously. The primary objectives of the Phase 1 portion of the trial include characterizing the safety of the combinations and determining the recommended Phase 2 dose. A secondary objective of the Phase 1 portion of the trial is describing the anti-tumor activity of IMO-2125 when administered intra-tumorally in combination with ipilimumab or pembrolizumab. The primary objectives of the Phase 2 portion of the trial will be to characterize the safety of the combinations and determine the activity of the combinations utilizing immune-related response criteria. Additionally, a secondary objective of the Phase 2 portion of the trial will be to assess treatment response using traditional RECIST criteria. Serial biopsies will be taken of selected injected and non-injected tumor lesions to assess immune changes and response assessments. We anticipate that the entire Phase 1/2 trial may enroll approximately 60 to 80 patients across both ipilimumab and pembrolizumab arms.

In September 2016, we disclosed early clinical results from the 4 mg and 8 mg dosing cohorts of the Phase 1 ipilimumab combination portion of the trial in which three of six evaluable patients demonstrated clinical responses (one complete response and two partial responses). We also disclosed that the drug was well tolerated through the initial dosing of the 16 mg dosing cohort. We have completed enrollment in the dose escalation phase in the ipilimumab arm of the trial as well as the 8 mg dosing cohort in the pembrolizumab arm of the trial. We presented available translational, efficacy and safety data findings from the 4 mg, 8 mg and 16 mg dosing cohorts in the ipilimumab arm during an oral presentation at the Society for Immunotherapy of Cancer (SITC) Annual Meeting in November 2016.  In February 2017, we provided a further update in a poster session at the joint meeting of the American Society of Clinical Oncology (ASCO)-SITC Meeting where we  disclosed that the drug was well tolerated through the initial dosing of the 32mg dosing cohort in the ipilimumab arm as well as through the initial dosing of the 8mg cohort in the pembrolizumab arm.

In April 2017, we initiated enrollment in the Phase 2 portion of the trial with the 8mg dose of intratumoral IMO-2125.  The Phase 2 portion of the trial utilizes a Simon two-stage design to evaluate the objective response rate of IMO-2125 in combination with ipilimumab, compared to historical data for ipilimumab alone in the anti-PD-1 refractory metastatic melanoma population. The ipilimumab arm of IMO-2125-204 has already met the pre-specified futility assessment to advance immediately into the second stage of the Phase 2 portion of the trial given that two patients treated at the Phase 2 dose experienced confirmed responses, including one complete response. We anticipate that the Phase 2 portion of the trial will enroll a total of 21 patients dosed at the 8mg dose, of which nine were already enrolled as of April 11, 2017.  The MD Anderson Cancer Center will continue to lead the trial and will be joined by additional centers.

Additionally, the Phase 1 dose escalation of IMO-2125 in combination with pembrolizumab is ongoing and we initiated a Phase 1 trial with IMO-2125 administered as a single agent intra-tumorally in multiple tumor types. We are also planning to initiate a Phase 2 clinical trial with IMO-2125 administered intra-tumorally together with other checkpoint inhibitors in multiple tumor types. 

IMO-8400 in Rare Diseases

We have initiated clinical development of IMO-8400 for the treatment of rare diseases. We have selected dermatomyositis as the first rare disease for which we are developing IMO-8400. We selected this indication for development based on the reported increase in TLR expression in this disease state, expression of cytokines indicative of key TLR-mediated pathways and the presence of auto-antibodies that can induce TLR-mediated immune responses.

We considered that multiple independent research studies across a broad range of autoimmune diseases, including both dermatomyositis and psoriasis, have demonstrated that the over-activation of TLRs plays a critical role in disease maintenance and progression. In autoimmune diseases, endogenous nucleic acids released from damaged or dying cells initiate signaling cascades through TLRs, leading to the induction of multiple pro-inflammatory cytokines. This inflammation causes further damage to the body's own tissues and organs and the release of more self-nucleic acids, creating a self-sustaining autoinflammatory cycle that contributes to chronic inflammation in the affected tissue, promoting disease progression.

We believe that we demonstrated proof of concept for our approach of using TLRs to inhibit the over-activation of specific TLRs for the treatment of psoriasis and potentially other autoimmune diseases in a randomized, double-blind, placebo-controlled Phase 2 clinical trial of IMO-8400 that we conducted in patients with moderate to severe plaque psoriasis, a well-characterized autoimmune disease. In this trial, we evaluated IMO-8400 at four subcutaneous dose levels of 0.075 mg/kg, 0.15 mg/kg, 0.3 mg/kg, and 0.6 mg/kg, versus placebo, administered once weekly for 12 weeks in 46 patients. The trial met its primary objective as IMO-8400 was well tolerated at all dose levels with no treatment-related discontinuations, treatment-related serious adverse events or dose reductions. The trial also met its secondary objective of demonstrating clinical activity in psoriasis patients, as assessed by the Psoriasis Area Severity Index.

Dermatomyositis is a rare, debilitating, inflammatory muscle and skin disease associated with significant morbidity, decreased quality of life and an increased risk of premature death. While the cause of dermatomyositis is not well understood, the disease process involves immune system attacks against muscle and skin that lead to inflammation and tissue damage. Major symptoms can include progressive muscle weakness, severe skin rash, calcium deposits under the skin (calcinosis), difficulty swallowing (dysphagia) and interstitial lung disease. We believe, based on internally conducted commercial research, that dermatomyositis affects approximately 25,000 people in the United States, and is about twice as common in women as men, with a typical age of onset between 45 and 65 years in adults. Dermatomyositis represents one form of myositis, a spectrum of inflammatory muscle diseases that also includes juvenile dermatomyositis, polymyositis and inclusion body myositis.

In December 2015, we initiated a Phase 2, randomized, double-blind, placebo-controlled clinical trial designed to assess the safety, tolerability and treatment effect of IMO-8400 in adult patients with dermatomyositis. Eligibility criteria include evidence of active skin involvement. Patients in the trial are randomized to one of three groups to receive once weekly subcutaneous injections of: placebo, 0.6 mg/kg of IMO-8400 or 1.8 mg/kg of IMO-8400, in each case, for a period of 24 weeks. The trial is expected to enroll approximately 36 patients and is being conducted at approximately 22 centers in the United States, the United Kingdom, Hungary and Sweden. The primary efficacy endpoint is the change from baseline in the Cutaneous Dermatomyositis Disease Area and Severity Index (CDASI), a validated outcome measure of skin disease. Additional exploratory endpoints include muscle strength and function (which are among the International Myositis Assessment & Clinical Studies Group (IMACS) core set measures), patient-reported quality of life and biochemical markers of disease activity.

Third-generation Antisense (3GA)

Third-generation Antisense (3GA) Technology to Target mRNA

We are developing our 3GA technology to "turn off" the mRNA associated with disease causing genes. We have designed 3GA oligonucleotides to specifically address challenges associated with earlier generation antisense and RNAi technologies.

Our focus is on creating 3GA candidates targeted to specific genes to treat cancer and rare diseases. Our key considerations in identifying disease indications and gene targets in our 3GA program include: strong evidence that the disease is caused by a specific protein; clear criteria to identify a target patient population; biomarkers for early assessment of clinical proof of concept; a targeted therapeutic mechanism of action; unmet medical need to allow for a rapid development path to approval and commercial opportunity.  To date, we have created 22 novel 3GA compounds for specific gene targets that are potentially applicable across a wide variety of therapeutic areas.  These areas include rare diseases, oncology, autoimmune disorders, metabolic conditions, single point mutations and others.  Our current activities with respect to these compounds range from cell culture through investigational new drug, or IND, application-enabling toxicology.

In January 2017, we announced that we had selected our first candidate to enter clinical development.  We are planning to develop IDRA-008 for a well-established liver target with available pre-clinical animal models and well-known clinical endpoints.  IDRA-008 has potential for both broad and rare disease applications.

In November 2015, we entered into a collaboration and license agreement with GlaxoSmithKline Intellectual Property Development Limited, or GSK, to license, research, develop and commercialize pharmaceutical compounds from our 3GA technology for the treatment of selected targets in renal disease, which agreement we refer to as the GSK Agreement.  Under this collaboration, we are creating multiple development candidates to address the initial target designated by GSK.  From the population of identified development candidates, GSK may designate one development candidate in its sole discretion to move forward into clinical development.  Once GSK designates a development candidate, GSK would be solely responsible for the development and commercialization activities for that designated development candidate.

Additional Programs

IMO-9200 for Autoimmune Disease.   We have developed a second novel synthetic oligonucleotide antagonist of TLR7, TLR8, and TLR9, IMO-9200, as a drug candidate for potential use in selected autoimmune disease indications. In 2015, we completed a Phase 1 clinical trial of IMO-9200 in healthy subjects as well as additional preclinical studies of IMO-9200 for autoimmune diseases. In 2015, we determined not to proceed with the development of IMO-9200 because the large autoimmune disease indications for which IMO-9200 had been developed did not fit within the strategic focus of our company.  In November 2016, we entered into an exclusive license and collaboration agreement with Vivelix Pharmaceuticals, Ltd., or Vivelix, granting Vivelix worldwide rights to develop and market IMO-9200 for non-malignant gastrointestinal disorders, which agreement we refer to as the Vivelix Agreement.

IMO-8400 for B-Cell Lymphomas.   In December 2013, we initiated a Phase 1/2 clinical trial of IMO-8400 in patients with Waldenström's macroglobulinemia, and in March 2014, we initiated a Phase 1/2 clinical trial of IMO-8400 in diffuse large B-cell lymphoma, or DLBCL, harboring the MYD88 L265P oncogenic mutation.

In September 2016, we announced that we had suspended internal development of IMO-8400 for B-cell lymphomas, including our ongoing trials in Waldenström's macroglobulinemia and DLBCL.  We are exploring strategic alternatives for IMO-8400 in these indications. This decision was based upon our prioritization of the clinical development plans for IMO-2125 and our assessment that the level of clinical activity seen in the Waldenström's macroglobulinemia trial would not support the development of IMO-8400 for these indications as a monotherapy, the very slow enrollment rate in DLBCL and our commercial assessment. The trial of IMO-8400 in DLBCL is now closed. We plan to finish treating patients in the trial of IMO-8400 in Waldenström's macroglobulinemia but enrollment of new patients has been suspended. In these trials under our B-cell lymphoma program, IMO-8400 was generally well tolerated at all dose levels evaluated, with only one treatment-related discontinuation due to adverse events and no dose reductions. The treatment-related discontinuation involved a single patient who experienced a serious adverse event that was possibly related to IMO-8400.

In October 2016, we presented interim clinical data from the Phase 1/2 clinical trial of IMO-8400 in Waldenström's macroglobulinemia, which showed signals of positive clinical activity as well as safety in the first four dosing cohorts of the trial.

Collaborative Alliances

We may explore potential collaborative alliances to support development and commercialization of our TLR agonists and antagonists. We may also seek to enter into additional collaborative alliances with pharmaceutical companies with respect to applications of our 3GA program. We are currently party to collaborations with Vivelix, GSK, Abbott Molecular, and Merck & Co.

Accumulated Deficit

As of March 31, 2017, we had an accumulated deficit of $553.6 million. We expect to incur substantial operating losses in future periods. We do not expect to generate product revenue, sales-based milestones or royalties from our development programs until we successfully complete development and obtain marketing approval for drug candidates, either alone or in collaborations with third parties, which we expect will take a number of years. In order to commercialize our drug candidates, we need to complete clinical development and comply with comprehensive regulatory requirements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to stock-based compensation. Management bases its estimates and judgments on historical experience and on 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.

We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where:

Our significant accounting policies are described in Note 2 of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016. Not all of these significant policies, however, fit the definition of critical accounting policies and estimates. We believe that our accounting policies relating to revenue recognition, stock-based compensation and research and development prepayments, accruals and related expenses, as described under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2016, fit the description of critical accounting estimates and judgments.  There were no changes in these policies during the three months ended March 31, 2017.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2017 and 2016

Alliance Revenue

Alliance revenue increased $0.1 million in the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. In November 2015, in connection with the execution of the GSK Agreement, we received a $2.5 million upfront payment that we recorded as deferred revenue.  We are recognizing this deferred revenue as revenue on a straight line basis over the anticipated 27-month performance period under the GSK Agreement. Accordingly, we recognized approximately $0.3 million of alliance revenue related to the GSK Agreement during the three months ended March 31, 2017 and 2016. The $0.1 million increase in revenue resulted additional services provided for under GSK Agreement, offset by lower reimbursements by licensees of costs associated with patent maintenance.

Research and Development Expenses  

Research and development expenses increased by $2.2 million or 24%, from $9.3 million for the three months ended March 31, 2016, to $11.5 million for the three months ended March 31, 2017. In the following table, research and development expenses are set forth in the following five categories which are discussed beneath the table:

IMO-2125 External Development Expenses.     These expenses include external expenses that we have incurred in connection with the development of IMO-2125 as part of our immuno-oncology program. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-2125 clinical development in immuno-oncology, but exclude internal costs such as payroll and overhead expenses. We commenced clinical development of IMO-2125 as part of our immuno-oncology program in July 2015 and from July 2015 through March 31, 2017 we incurred approximately $7.8 million in IMO-2125 external development expenses as part of our immuno-oncology program, including costs associated with the preparation for and conduct of the ongoing Phase 1/2 clinical trial being conducted under our research alliance with MD Anderson to assess the safety and efficacy of IMO-2125 in combination with ipilimumab and with pembrolizumab in patients with metastatic melanoma, the manufacture of additional drug substance for use in our clinical trials and additional nonclinical studies. The $7.8 million in IMO-2125 external development expenses excludes costs incurred prior to July 2015 with respect to IMO-2125, including costs incurred for the development of IMO-2125 for the treatment of patients with chronic hepatitis C virus which we discontinued in the third quarter of 2011.

The increase in our IMO-2125 external development expenses in the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, was primarily due to increases in costs associated with the design and planning for additional clinical trials of IMO-2125 and continued Phase 1/2 clinical trials, partially offset by lower drug manufacturing costs.

We expect our IMO-2125 external development expenses to increase during 2017, as compared to 2016, as we plan to continue our Phase 1/2 clinical trial being conducted under our research alliance with MD Anderson to assess the safety and efficacy of IMO-2125 in combination with ipilimumab and with pembrolizumab in patients with metastatic melanoma, conduct clinical trials of IMO-2125, work on the design and planning for additional clinical trials of IMO-2125 and develop our strategy to optimize IMO-2125, and continue manufacturing activities and nonclinical studies.

IMO-8400 External Development Expenses.     These expenses include external expenses that we have incurred in connection with IMO-8400 since October 2012, when we commenced clinical development of IMO-8400. These

external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-8400 clinical development but exclude internal costs such as payroll and overhead expenses. Since October 2012, we have incurred approximately $36.6 million in IMO-8400 external development expenses through March 31, 2017, including costs associated with our Phase 1 clinical trial in healthy subjects; our Phase 2 clinical trial in patients with psoriasis; preparation for and conduct of our Phase 1/2 clinical trial in patients with Waldenström’s macroglobulinemia and our Phase 1/2 clinical trial in patients with DLBCL harboring the MYD88 L265P oncogenic mutation, which we discontinued in September 2016; the preparation for and conduct of our ongoing Phase 2 clinical trial in patients with dermatomyositis; the manufacture of additional drug substance for use in our clinical trials; and expenses associated with our collaboration with Abbott Molecular for the development of a companion diagnostic for identification of patients with B-cell lymphoma harboring the MYD88 L265P oncogenic mutation.

The increase in our IMO-8400 external development expenses in the three months ended March 31, 2017, as compared to three months ended March 31, 2016, was primarily due to increases related to our ongoing Phase 2 clinical trial of IMO-8400 in patients with dermatomyositis, partially offset by lower spend on awareness and education.

We expect our IMO-8400 external development expenses during 2017 to be similar to 2016.  In September 2016, we announced that we had suspended the internal clinical development of IMO-8400 for B-cell lymphomas, including our trials in Waldenström’s macroglobulinemia and DLBCL.  We are exploring strategic alternatives for IMO-8400 in these indications.  We expect to continue to incur costs associated with IMO-8400 as we continue our ongoing Phase 2 clinical trial of IMO-8400 in patients with dermatomyositis, finish treating enrolled patients in our clinical trial of IMO-8400 in Waldenström’s macroglobulinemia and wind down our clinical development of IMO-8400 in Waldenström’s macroglobulinemia and DLBCL.

IMO-9200 External Development Expenses.     These expenses include external expenses that we have incurred in connection with IMO-9200 since October 2014, when we commenced clinical development of IMO-9200. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-9200 clinical development but exclude internal costs such as payroll and overhead expenses. We have incurred approximately $4.6 million in IMO-9200 external development expenses from October 2014 through March 31, 2017 including costs associated with our Phase 1 clinical trial in healthy subjects, the manufacture of additional drug substance for use in our clinical and nonclinical trials and additional nonclinical studies. We classified the IMO-9200 external development expenses incurred prior to October 2014 in other drug development expenses.

The decrease in IMO-9200 external development expenses in the three months ended March 31, 2017, as compared to three months ended March 31, 2016, reflects lower spending on manufacturing and nonclinical toxicology studies during the three months ended March 31, 2017.  We expect our IMO-9200 external development expenses to decrease during 2017, as compared to 2016, as in September 2016, we determined not to proceed with the development of IMO-9200 and, in November 2016, we entered into the Vivelix Agreement, granting Vivelix worldwide rights to develop and market IMO-9200 for non-malignant gastrointestinal disorders.

Other Drug Development Expenses.     These expenses include external expenses associated with preclinical development of identified compounds in anticipation of advancing these compounds into clinical development. In addition, these expenses include internal costs, such as payroll and overhead expenses, associated with preclinical development and products in clinical development. The external expenses associated with preclinical compounds include payments to contract vendors for manufacturing and the related stability studies, preclinical studies, including animal toxicology and pharmacology studies, and professional fees. Other drug development expenses also include costs associated with compounds that were previously being developed but are not currently being developed.

The increase in other drug development expenses in the three months ended March 31, 2017, as compared to three months ended March 31, 2016, was primarily due to the external costs of preclinical programs and awareness and education programs, partially offset by lower consulting costs during the three months ended March 31, 2016.

Basic Discovery Expenses.     These expenses include our internal and external expenses relating to our discovery efforts with respect to our TLR-targeted programs, including agonists and antagonists of TLR3, TLR7, TLR8 and TLR9, and our 3GA program. These expenses reflect payments for laboratory supplies, external research, and professional fees, as well as payroll and overhead expenses. 

The decrease in basic discovery expenses in the three months ended March 31, 2017, as compared to three months ended March 31, 2016, was primarily due to lower overhead expenses.

We do not know if we will be successful in developing any drug candidate from our research and development programs. At this time, and without knowing the results from our ongoing clinical trial of IMO-8400, our ongoing clinical trial of IMO-2125, and our ongoing development of compounds in our 3GA program, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from, any drug candidate from our research and development programs. Moreover, the clinical development of any drug candidate from our research and development programs is subject to numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of unanticipated events arising during clinical development.

General and Administrative Expenses

General and administrative expenses consist primarily of payroll, stock-based compensation expense, consulting fees and professional legal fees associated with our patent applications and maintenance, our corporate regulatory filing requirements, our corporate legal matters, and our business development initiatives.

General and administrative expenses increased by approximately $0.2 million, or 4%, from $3.9 million in the three months ended March 31, 2016 to $4.1 million in the three months ended March 31, 2017.  The increase in general and administrative expenses was primarily due to increases in patent preparation fees and commercial research costs.

We expect general and administrative expenses to increase during 2017, as compared to 2016, due to additional headcount to support our drug development programs.

Interest Income

Interest income increased by $33,000 from $120,000 in the three months ended March 31, 2016 to $153,000 in the three months ended March 31, 2017, primarily due to fluctuations of investment balances in the three months ended March 31, 2017 and 2016, which were impacted by the investment of funds obtained from our follow-on underwritten public offering in October 2016, offset by general spending.  

Interest Expense

Interest expense decreased during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to a decrease in the outstanding principal amount of our note under our loan and security agreement with Oxford Finance LLC.

Net Loss

As a result of the factors discussed above, our net loss was $15.1 million for the three months ended March 31, 2017, compared to $12.8 million for the three months ended March 31, 2016.  Since January 1, 2001, we have primarily been involved in the development of our TLR pipeline. From January 1, 2001 through March 31, 2017, we incurred losses of $293.4 million. We also incurred net losses of $260.2 million prior to December 31, 2000 during which time we were primarily involved in the development of earlier generation antisense technology. Since our inception, we had an accumulated deficit of $553.6 million through March 31, 2017. We expect to continue to incur substantial operating losses in the future.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We require cash to fund our operating expenses and to make capital expenditures. Historically, we have funded our cash requirements primarily through the following:

We have an effective shelf registration statement on Form S-3 that permits us to offer and sell, as of April 28, 2017, up to an additional $61.3 million of securities in one or more offerings.

Cash Flows

Three Months Ended March 31, 2017

As of March 31, 2017, we had approximately $91.3 million in cash, cash equivalents and investments, a net decrease of approximately $17.8 million from December 31, 2016.

Net cash used in operating activities totaled $17.6 million during the three months ended March 31, 2017, reflecting our $15.1 million net loss for the period, as adjusted for non-cash income and expenses, including stock-based compensation, depreciation and amortization expense and accretion of investment premiums. Net cash used in operating activities also reflects changes in our prepaid expenses, accounts payable, accrued expenses and other liabilities and the recognition of deferred revenue.

The $16.7 million net cash provided by investing activities during the three months ended March 31, 2017 reflects proceeds from the maturity of $16.7 million of available-for-sale securities, which are investments that we do not have the positive intent to hold to maturity at the time of purchase ,   partially offset by payments for the purchase of $30,000 in property and equipment.

The $17,000 net cash used in financing activities during the three months ended March 31, 2017 reflects $ 70,000 in payments on our note payable , partially offset by $57,000 in net proceeds from employee stock purchases under our 1995 Employee Stock Purchase Plan, or ESPP and $4,000 of payments on capital leases.

Three Months Ended March 31, 2016

As of March 31, 2016, we had approximately $74.1 million in cash, cash equivalents and investments, a net decrease of approximately $13.0 million from December 31, 2015.

Net cash used in operating activities totaled $12.9 million during the three months ended March 31, 2016, reflecting our $12.8 million net loss, as adjusted for non-cash income and expenses, including stock-based compensation, depreciation and amortization expense and accretion of investment premiums. Net cash used in operating activities also reflects changes in our prepaid expenses, accounts payable, accrued expenses and other liabilities and the recognition of deferred revenue.

The $8.2 million net cash provided by investing activities during the three months ended March 31, 2016 reflects the purchase of $2.9 million of available-for-sale securities, which are investments that we do not have the positive intent to hold to maturity at the time of purchase, proceeds from the maturity of $9.2 million of available-for-sale securities, proceeds from the sale of $2.0 million of available-for-sale securities, and payments for the purchase of $90,000 in property and equipment.

           The $29,000 net cash used in financing activities during the three months ended March 31, 2016 reflects $36,000 in net proceeds from employee stock purchases under our ESPP and $63,000 in payments on our note payable.

Funding Requirements

We have incurred operating losses in all fiscal years since our inception except 2002, 2008 and 2009, and we had an accumulated deficit of $553.6 million at March 31, 2017. We expect to incur substantial operating losses in future

periods. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital. We have received no revenues from the sale of drugs. As of April 28, 2017, substantially all of our revenues have been from collaboration and license agreements. We have devoted substantially all of our efforts to research and development, including clinical trials, and we have not completed development of any drugs. Because of the numerous risks and uncertainties associated with developing drugs, we are unable to predict the extent of any future losses, whether or when any of our products will become commercially available or when we will become profitable, if at all.

We do not expect to generate significant additional funds internally until we successfully complete development and obtain marketing approval for products, either alone or in collaboration with third parties, which we expect will take a number of years. In addition, we have no committed external sources of funds.

We had cash, cash equivalents and investments of approximately $91.3 million at March 31, 2017. We believe that, based on our current operating plan, our existing cash, cash equivalents and investments will enable us to fund our operations into the second quarter of 2018. Specifically, we believe that our available funds will be sufficient to enable us to:

We expect that we will need to raise additional funds in order to conduct any other clinical development of our TLR drug candidates or to conduct any other development of our 3GA technology, and to fund our operations. We are seeking and expect to continue to seek additional funding through collaborations, the sale or license of assets or financings of equity or debt securities. We believe that the key factors that will affect our ability to obtain funding are:

In addition, increases in expenses or delays in clinical development may adversely impact our cash position and require additional funds or cost reductions.

Financing may not be available to us when we need it or may not be available to us on favorable or acceptable terms or at all. We could be required to seek funds through collaborative alliances or through other means that may require us to relinquish rights to some of our technologies, drug candidates or drugs that we would otherwise pursue on our own.

In addition, if we raise additional funds by issuing equity securities, our then existing stockholders will experience dilution. The terms of any financing may adversely affect the holdings or the rights of existing stockholders. An equity financing that involves existing stockholders may cause a concentration of ownership. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, and are likely to include rights that are senior to the holders of our common stock. Any additional debt or equity financing may contain terms which are not favorable to us or to our stockholders, such as liquidation and other preferences, or liens or other restrictions on our assets. As discussed in Note 10 to the financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2016 that was filed with the SEC, additional equity financings may also result in cumulative changes in ownership over a three-year period in excess of 50% which would limit the amount of net operating loss and tax credit carryforwards that we may utilize in any one year.

If we are unable to obtain adequate funding on a timely basis or at all, we will be required to terminate, modify or delay preclinical or clinical trials of one or more of our drug candidates, significantly curtail or terminate discovery or development programs for new drug candidates or relinquish rights to portions of our technology, drug candidates and/or products.

Contractual Obligations

During the three months ended March 31, 2017, there were no material changes outside the ordinary course of our business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

As of March 31, 2017, we had no off-balance sheet arrangements.

New Accounting Pronouncements

New accounting pronouncements are discussed in Note 2 in the notes to the financial statements in this Quarterly Report on Form 10-Q.