The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto for the year ended December 31, 2017, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission, or the SEC, on February 20, 2018.

This report contains forward-looking statements that are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, or PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA. Forward-looking statements involve risks and uncertainties. In this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution our readers that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company engaged in the discovery and development of a novel class of therapeutics using our proprietary small molecule nucleotide platform.  Our compounds are synthetic nucleotide segments that are designed to mimic the interactions of nucleic acids with proteins.  We design our compounds to selectively target and modulate the activity of specific proteins implicated in various disease states.  We are developing our lead product candidate, inarigivir soproxil, or inarigivir, for the treatment of chronic hepatitis B virus, or HBV. We have designed our antiviral product candidates, including inarigivir, to selectively activate within infected cells the cellular protein, retinoic acid-inducible gene 1 (RIG-I), to inhibit viral replication and to cause the induction of intracellular interferon signaling pathways for antiviral defense.  We believe that inarigivir, as a RIG-I agonist, could play an important role in antiviral therapy as a result of its dual mechanism of action that is designed to selectively modulate the body’s immune response and inhibit viral replication.  We are also developing additional product candidates, including our lead STING (STimulator of INterferon Genes) agonist product candidate, SB 11285, which is an immunotherapeutic agent for the potential treatment of selected cancers.

In April 2017, the World Health Organization, or WHO, Global Hepatitis Report estimated that 257 million people are chronically infected with chronic HBV worldwide, and nearly 900,000 people worldwide die every year due to complications from chronic HBV infection despite the availability of vaccines against the virus.  There is no approved cure for chronic HBV and currently approved direct-acting antiviral therapies for the treatment of chronic HBV lack a broadly sustained response following the discontinuation of treatment.

We are developing inarigivir, an orally-administered investigational selective immunomodulator, as a potential backbone in a combinatorial treatment for chronic HBV, with a goal to accelerate and substantially increase functional cure rates in a simple, safe and selective manner. We are currently conducting a global Phase 2 multi-center clinical trial of inarigivir, which we refer to as the ACHIEVE trial, and we plan to initiate one or more Phase 2b/3 inarigivir clinical trials in 2019.  We are also pursuing the development of SB 9225, a co-formulation of inarigivir with tenofovir disoproxil fumarate, or TDF, as a potential fixed-dose combination product for the treatment of patients with chronic HBV.  In addition to our inarigivir clinical trials, we continue to explore collaborations , including with siRNA compounds targeting hepatitis B surface antigen, or HBsAg, as well as other antiviral and immunomodulatory mechanisms.  We believe the immunomodulatory activity of inarigivir could become a key component of a future combinatorial treatment for patients infected with chronic HBV, increasing the percentage of chronic HBV patients who achieve a functional cure.  

In July 2017, we entered into a clinical trial supply and collaboration agreement with Gilead Sciences, Inc., or Gilead, under which Gilead is funding and conducting a Phase 2 clinical trial examining the co-administration of inarigivir and Vemlidy® 25 mg (tenofovir alafenamide) in patients infected with chronic HBV. On August 2, 2018, we announced the expansion of the clinical trial being undertaken by Gilead Sciences, Inc. to include two additional cohorts. The new second cohort of the study will assess

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inarigivir 200mg co-administered with Vemlidy, subject to independent regulator assessments of the safety of inarigivir at the 200mg dose.  Additionally, a new third cohort has been added to examine the administration of inarigivir 100mg in chronic HBV patients currently treated with nucleoside/tide analogues.  

Our ongoing Phase 2 ACHIEVE trial is a placebo-controlled, sequential-cohort, double-blind trial to evaluate increasing doses of inarigivir as monotherapy for 12 weeks followed by Viread® 300mg for an additional 12 weeks.  Part A of the ACHIEVE trial has an adaptive trial design that enrolls chronically-infected HBV patients between 18 and 70 years of age who have been or will be assigned to one of four dosing cohorts, 25mg, 50mg, 100mg or 200mg of inarigivir, or placebo, once daily for 12 weeks.  All subjects then receive Viread® 300mg once daily for an additional 12 weeks of treatment.  The adaptive trial design of Part A of the ACHIEVE trial allows us to conduct additional cohorts.  Due to the favorable safety and tolerability profile and continuing dose response that we have observed in the ACHIEVE trial thus far, we plan to expand Part A of the ACHIEVE trial to include an exploratory fifth cohort evaluating inarigivir 400mg.

In August 2018, we announced that, due to the expansion of the inarigivir + tenofovir alafenamide co-administration program described above, the previously planned Part B of the ACHIEVE trial evaluating inarigivir with TDF 300mg is no longer necessary and will not be completed.  

In August 2018, we also announced results from the third cohort (inarigivir 100mg) and aggregated results from Part A of the ACHIEVE trial. In the third cohort, 20 patients were randomized; 17 on inarigivir 100mg (13 HBeAg-positive, 4 HBeAg-negative) and 3 on placebo. The primary endpoints, safety and antiviral activity, were achieved at both week 12 (inarigivir monotherapy) and week 24 (following the switch to TDF after week 12). Inarigivir was well tolerated with no serious adverse events observed. Overall, treatment-emergent adverse events ranged from mild to moderate in severity, with no observed interferon-like side effects or clinical or biochemical events above Grade 3. One HBeAg-negative patient on inarigivir alone had an ALT flare >200 IU with reductions in HBV DNA and HBsAg consistent with previously described inarigivir immune flares. We observed a maximum reduction in both HBV DNA and HBV RNA by up to 2.76log ₁₀ and 5.0log ₁₀ , respectively. Overall, mean HBV DNA reduction at week 12 was 1.0log ₁₀ , with a mean 0.55log ₁₀ reduction in HBeAg-positive patients and a mean 2.26log ₁₀ reduction in HBeAg-negative patients, which was significantly superior (t-test: p=0.006) to combined placebo from all groups (n=11). Similar log reductions were seen for the secondary endpoint of HBV RNA reduction, with a mean 0.6log ₁₀ reduction in HBeAg-positive patients and a mean 1.4log ₁₀ reduction in HBeAg-negative patients. Three patients had a greater than 0.5log ₁₀ reduction in HBsAg at either week 12 or week 24.  Overall, 13 of 47 (28%) of inarigivir-treated patients in the ACHIEVE trial have had a predefined HBsAg response of 0.5log ₁₀ decrease, with a mean decrease in the responder group of 0.8log ₁₀ (range 0.5 – 1.4log ₁₀ ) at either week 12 or week 24 after the switch to TDF.

Inarigivir responses have been proportional to the baseline HBsAg level and we believe are reflective of the mechanism of action of inarigivir as an immunomodulator. Baseline HBsAg level < 10,000 IU (4log ₁₀ ) has been the strongest predictor of response to inarigivir across all cohorts for HBV DNA and HBV RNA reductions irrespective of HBeAg status. We believe this response is consistent with the known role of HBsAg as a down regulator of the host immune response to HBV.

In addition to our inarigivir clinical development program, we are developing our lead STING agonist product candidate, SB 11285, as a potential next-generation immunotherapeutic agent for the treatment of selected cancers.  In our preclinical studies in multiple tumor-derived cell lines, SB 11285 has been observed to cause the induction of cytokines consistent with engagement of the target, as well as cell death and apoptosis.  Based on our preclinical studies performed to date, SB 11285 has reduced tumor volumes, without dose-limiting toxicities, in multiple rodent tumor models when administered intravenously or intratumorally.  These findings lead us to believe that SB 11285 has the potential to be administered clinically by either route of administration, and that SB 11285 may be used to target a variety of tumors at various anatomic sites and, if approved, has the potential to be used in combination with other therapeutic modalities to enhance efficacy.  We are currently advancing the SB 11285 program with preclinical, toxicology, and process development efforts. Subject to the results of these preclinical studies, we anticipate that we will submit an investigational new drug or clinical trial application for SB 11285 in the first half of 2019, and, if approved, initiate a Phase 1b clinical trial in cancer later in 2019.

To date, we have devoted substantially all of our resources to research and development efforts, including conducting clinical trials for our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have not generated any revenue to date other than from grants from the National Institutes of Health, or NIH. No additional funding remains available to us under any grant for the development of any of our product candidates. We have funded our operations primarily through proceeds received from private placements of convertible notes, common stock and/or warrants; the exercise of options and warrants; NIH grant funding; and public offerings of securities.

We have incurred significant annual net operating losses in every year since our inception and expect to continue to incur significant expenses and net operating losses for the foreseeable future. Our net losses for the three and nine months ended

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Septembe r 30, 2018 were $8.8 million and $17.4 million, respectively, and our net losses for the three and nine months ended September 30, 2017 were $10.8 and $26.2 million, respectively. As of September 30, 2018, we had an accumulated deficit of $96.6 million. Ou r net losses may fluctuate significantly from quarter to quarter and year to year. We expect to continue to incur significant expenses and increasing operating losses for the next several years.

We anticipate that our expenses will increase significantly as we continue to develop inarigivir, SB 11285 and our other product candidates.  See “—Liquidity and Capital Resources—Funding Requirements.” As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings, including our at-the-market offering program with Cantor Fitzgerald & Co., or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve and sustain profitability, and we may never be able to do so.

As of September 30, 2018, we had $71.3 million in cash, cash equivalents and marketable securities. We expect that our cash, cash equivalents and marketable securities as of September 30, 2018 will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. See “—Liquidity and Capital Resources.”

We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. We have no manufacturing facilities, and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party contract research organizations, or CROs, to carry out our clinical development activities, and we do not yet have a sales organization. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will seek to continue to fund our operations through public or private equity or debt financings or other sources including geographic partnerships. However, we may be unable to raise additional funds or enter into other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our products.

Financial Operations Overview

Operating expenses

Our operating expenses since inception have consisted primarily of research and development expense and general and administrative costs.

Research and development

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

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We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. P ayments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses.

Our primary focus of research and development since inception has been on the development of inarigivir. Our direct research and development expenses consist primarily of external costs, such as fees paid to investigators, consultants and CROs in connection with our preclinical studies and clinical trial and regulatory fees. We do not allocate employee-related costs and other indirect costs to specific research and development programs because our primary focus has been on the discovery and development of inarigivir. Our direct research and development expenses are not currently tracked on a program-by-program basis.

The successful development of our product candidates is highly uncertain. Accordingly, at this time, we cannot reasonably estimate the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of these product candidates. We are also unable to predict when, if ever, we will generate revenues from inarigivir or any of our other current or potential product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainties of:

A change in the outcome of any of these variables with respect to any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue development of our current product candidates and research and develop new product candidates. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and administrative

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to continue to incur significant expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs, and investor and public relations costs.

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Other income (expense)

Other income (expense) consists of interest income earned on our cash, cash equivalents, restricted cash and marketable securities and the gain/loss on the change in the fair value of the warrant liabilities.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described therein may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a predetermined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:

We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

Liability-Classified Warrants

In connection with our private placement offering in November 2016, we issued warrants to purchase 1,644,737 shares of common stock, which we refer to as our November 2016 Warrants, to a group of accredited investors. The November 2016 Warrants became exercisable beginning May 24, 2017 at an exercise price of $10.79 per share. We evaluated the terms of these warrants and concluded that they should be liability-classified. We recognize any change in the value of the warrant liability each reporting period in the statement of operations. As of September 30, 2018, the fair value of the warrants was approximately $9.3 million, which is a decrease of $3.8 million from the fair value of approximately $13.1 million as of December 31, 2017.  See Note 7 of the notes to the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Stock-Based Compensation

We issue stock-based awards to employees and non-employees, generally in the form of stock options. We account for our stock-based compensation awards in accordance with Financial Accounting Standards Board, (FASB) ASC Topic 718, Compensation—Stock Compensation , or ASC 718. ASC 718 requires all stock-based payments to employees, including grants of employee stock options and modifications to existing stock awards, to be recognized in the statements of operations and comprehensive loss based on their fair values. We adopted ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting , effective July 1, 2018, which aligns the accounting treatment of nonemployee awards with employee awards. Described below is the methodology we have utilized in measuring stock-based compensation expense. Stock option, common stock and restricted stock values are determined based on a blend of our stock price and the quoted market price of our comparable public companies.

We measure stock options and other stock-based awards granted to employees, nonemployees and directors based on the fair value on the date of grant and recognize the corresponding compensation expense of those awards, over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock options and restricted stock awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09, effective January 1, 2017. Prior to adoption, share-based compensation expense was recognized on a straight-line basis, net of estimated forfeitures, such that expense was recognized only for share-based awards that are expected to vest. A forfeiture rate was estimated annually and revised, if necessary, in subsequent periods if actual forfeitures differed from initial estimates. Following adoption of ASU 2016-09, we no longer apply a forfeiture rate and instead will account for forfeitures as they occur.

We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Use of this model requires that we make assumptions as to the fair value of our common stock, the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Because we lack company-specific historical and implied volatility information due in part to the limited time in which we have operated as a publicly traded company, we estimate our expected volatility based on the historical volatility of a group of publicly traded peer companies. We expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. We use the simplified method prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment , to calculate the expected term of options granted to employees and directors. We base the expected term of options granted to consultants and nonemployees on the contractual term of the options. We determine the risk-free interest rate by reference to the United States Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

There were no stock options granted prior to 2015. We recognize forfeitures as they occur and the compensation expense is reversed in the period that the forfeiture occurs.

In 2015, we began issuing stock options to employees, directors and consultants. During the periods ended September 30, 2018 and 2017, we issued common stock to consultants and advisors as compensation for services and recognized expense equal to the fair value of the shares issued. The following table summarizes the classification of our stock-based compensation expenses recognized in our consolidated statements of operations and comprehensive loss (in thousands):

We expect the impact of our stock-based compensation expense for stock options granted to employees and non-employees to grow in future periods due to the potential increases in the fair value of our common stock and the increase in the number of grants as a result of an increase in headcount.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or EGC, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably

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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 a doption of such standards is required for other public companies.

Subject to certain conditions, as an EGC, we intend to rely on certain exemptions afforded by the JOBS Act, including the exemption from: certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, and the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments; the requirement that the auditors provide an attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and complying with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an EGC until the earliest of the last day of the fiscal year in which we have total annual gross revenues of approximately $1.07 billion or more; the last day of the fiscal year following the fifth anniversary of the date of the completion of the closing of our IPO; the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Research and development expenses .

Research and development expenses were $5.7 million for the three months ended September 30, 2018, compared to $3.2 million for the three months ended September 30, 2017. The increase of $2.5 million for the three months ended September 30, 2018 was due primarily to an increase of $1.9 million in spending on preclinical studies and clinical trial related activities for inarigivir and preclinical studies for SB 11285, an increase of $0.2 million in salaries and benefits associated with higher research and development headcount, an increase of $0.1 million for laboratory supplies and laboratory equipment maintenance, an increase of $0.1 million related to lease costs, an increase of $0.1 million related to building maintenance costs and an increase in non-cash charges of $0.1 million related to stock-based compensation.

Research and development expenses were $15.2 million for the nine months ended September 30, 2018, compared to $9.2 million for the nine months ended September 30, 2017. The increase of $6.0 million for the nine months ended September 30, 2018 was due primarily to an increase in spending on preclinical studies and clinical trial related activities for inarigivir and preclinical studies for SB 11285 of $4.9 million, an increase of $0.5 million in salaries and benefits associated with higher research and development headcount, an increase of $0.1 million for laboratory supplies and laboratory equipment maintenance, an increase of $0.1 million related to building maintenance costs, an increase of $0.1 million related to lease costs and an increase in non-cash charges of $0.3 million related to stock-based compensation and depreciation expenses.

General and administrative expenses .

General and administrative expenses were $2.1 million for the three months ended September 30, 2018, compared to $2.0 million for the three months ended September 30, 2017. The increase of $0.1 million for the three months ended September 30, 2018 was primarily due to an increase of $0.1 million in non-cash charges for stock-based compensation and an increase of $0.1 million in salaries and benefits, which were offset by a decrease of $0.1 million in consulting related costs.

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General and administrative expenses were $6.7 million for the nine months ended September 30, 2018, compared to $5.8 million for the three months ended September 30, 2017. The increase of $0.9 million for the nine months ended September 30, 2018 was primarily due to an increase in non-cash charges of $0.4 million for stock-based compensation and $0.3 million for lease related costs, an increase of $0.2 million for legal related costs, an increase of $0.1 million in salaries and benefits and an increase of $0.1 million for consulting related costs, which were offset by a decrease of $0. 2 million in public company related costs.

Other income . Other income for the three and nine months ended September 30, 2018 and 2017 is solely comprised of interest income. Interest income for the three and nine months ended September 30, 2018 was $0.3 million and $0.6 million, respectively, and was primarily related to the interest earned on marketable securities. Interest income for the three and nine months ended September 30, 2017 was $0.1 million and $0.2 million, respectively, and was primarily related to the interest earned on marketable securities. The increase in interest income in the three and nine months ended September 30, 2018 was due to a higher average balance of marketable securities as a result of the receipt of proceeds primarily from our June 2017 and June 2018 public offerings.

Change in fair value of warrant liabilities . Change in fair value of warrant liabilities for the three months ended September 30, 2018 was a loss of $1.3 million, which was solely related to the change in the fair value of the November 2016 Warrants resulting from an increase in our stock price and expected stock price volatility. Change in fair value of warrant liabilities for the nine months ended September 30, 2018 was a gain of $3.8 million, which was solely related to the change in the fair value of the November 2016 Warrants resulting from a decrease in our stock price and expected stock price volatility. The change in the fair value of the warrant liabilities for the three and nine months ended September 30, 2017 was a loss of $5.8 million and $11.5 million, respectively, and was solely related to the change in fair value of the November 2016 Warrants resulting from an increase in our stock price.

Liquidity and Capital Resources

Sources of Liquidity

From our inception through September 30, 2018, we have financed our operations through proceeds received from private placements of convertible notes, common stock and/or warrants, the exercise of options and warrants, NIH grant funding and public offerings of securities. As of September 30, 2018, we had cash, cash equivalents and marketable securities totaling $71.3 million and an accumulated deficit of $96.6 million.

In August 2018, we issued and sold in an underwritten public offering an aggregate of 3,246,079 shares of our common stock at $12.50 per share, which included 246,079 shares pursuant to the exercise of an option to purchase additional shares granted to the underwriters in connection with the offering. The shares issued in this offering were registered under the Securities Act pursuant to our Registration Statement on Form S-3 (Registration No. 333-218399) that was declared effective by the SEC on June 12, 2017, which we refer to as the S-3 Registration Statement , and a prospectus supplement and base prospectus filed on August 9, 2018 . The offering resulted in $38.0 million of net proceeds, after deducting underwriting discounts and commissions and other offering expenses payable by us.

In August 2017, we entered into a Controlled Equity Offering Sales Agreement, or Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock having an aggregate offering price of up to $50.0 million. We will pay Cantor a commission rate equal to 3.0% of the aggregate gross proceeds from each sale. Shares sold under the Sales Agreement will be offered and sold pursuant to the S-3 Registration Statement and a prospectus supplement and accompanying base prospectus that we filed with the SEC on August 18, 2017.  During the three months ended September 30, 2018, we did not sell any shares under the Sales Agreement.  During the nine months ended September 30, 2018, we sold an aggregate of 217,329 shares of our common stock under the Sales Agreement at a weighted average selling price of $15.42 per share, which resulted in $3.2 million of net proceeds. During the year ended December 31, 2017, we sold an aggregate of 252,443 shares of our common stock pursuant to the Sales Agreement at a weighted-average selling price of $15.55 per share, which resulted in $3.7 million of net proceeds. 

In June 2017, we issued and sold in an underwritten public offering an aggregate of 3,269,219 shares of our common stock at $13.00 per share, which included 384,604 shares pursuant to the exercise of an option to purchase additional shares granted to the underwriters in connection with the offering. The shares issued in this offering were registered under the Securities Act pursuant to the S-3 Registration Statement. The offering resulted in $39.6 million of net proceeds, after deducting underwriting discounts and commissions and other offering expenses payable by us.

In November 2016, we entered into a definitive agreement with a group of accredited investors resulting in a private placement of 1,644,737 shares of our common stock and warrants to purchase 1,644,737 shares of common stock, which we refer to as

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the November 2016 Private Placement. These investors paid $9.12 for each share of common stock and warrant to purchase one share of common stock. The w arrants will be exercisable beginning May 24, 2017 with a term of five years at an exercise price of $10.79. We completed the November 2016 Private Placement on November 23, 2016, resulting in approximately $15.0 million in gross proceeds. Net proceeds fro m this issuance after deducting placement agent fees and other offering-related expenses were $13.7 million.

In May 2016, we completed our IPO and sold an aggregate of 944,900 shares of common stock at a price to the public of $12.00 per share, which included 24,900 shares pursuant to the exercise of an option to purchase additional shares granted to the underwriters in connection with the IPO. The offering resulted in $8.2 million of net proceeds, after deducting underwriting discounts and commissions and other offering expenses payable by us. In connection with the closing of the IPO, we received approximately $5.3 million in proceeds upon the exercise of previously issued warrants to purchase 641,743 shares of common stock.

Net cash used in operating activities . The use of cash in both periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was $18.4 million and $12.6 million during the nine months ended September 30, 2018 and 2017, respectively. The increase in cash used in operating activities for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 of $5.8 million was primarily due to an increase in prepaid expenses and other current assets of $0.4 million, an increase in other assets of $0.1 million, an increase of accounts payable of $0.6 million, which were offset by a decrease in the net loss of $8.8 million and accrued expenses of $0.8 million. In addition, there was an increase in the non-cash change in the fair value of the warrant liability of $15.3 million, an increase in non-cash stock-based compensation of $0.6 million, an increase in non-cash investment income of $0.4 million and an increase in non-cash depreciation of $0.1 million.

Net cash used in investing activities . Net cash used in investing activities was $23.1 million for the nine months ended September 30, 2018 and net cash provided by investing activities was $19.9 million for the nine months ended September 30, 2017. The cash used in investing activities of $23.1 million in the nine months ended September 30, 2018 was primarily the result of $28.8 million in proceeds from the sale of marketable securities, which was offset by $50.0 million for the purchase of marketable securities and $1.9 million for the purchase of property and equipment. The cash used in investing activities of $19.9 million for the nine months ended September 30, 2017 was mainly due to proceeds of $14.6 million from the sale of marketable securities, which was offset by $34.4 million for the purchase of marketable securities and $0.1 million for the purchase of property and equipment for the nine months ended September 30, 2017.

Net cash provided by financing activities . Net cash provided by financing activities was $41.2 million during the nine months ended September 30, 2018 compared to $39.7 million during the nine months ended September 30, 2017. The cash provided by financing activities in the nine months ended September 30, 2018 was primarily the result of $38.0 million of net proceeds from the August 2018 common stock offering and $3.2 million of net proceeds from our at-the-market offering program under the Sales Agreement. The cash provided by financing activities in the nine months ended September 30, 2017 was primarily the result of $39.6 million of net proceeds from the June 2017 common stock offering and $0.1 million of proceeds from the exercise of stock options.

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Funding Requirements

We expect to continue to incur significant and increasing losses for the foreseeable future. We anticipate these losses to increase as our expenses increase, and we expect that our expenses will increase if and as we:

We expect that our existing cash, cash equivalents and marketable securities as of September 30, 2018 w ill enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months . We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements, both near and long-term, will depend on many factors, including, but not limited to :

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Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.

Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. We have an effective shelf S-3 Registration Statement.  In August 2017, we entered into the Sales Agreement with Cantor pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock having an aggregate offering price of up to $50.0 million.  Shares sold under the Sales Agreement will be offered and sold pursuant to the S-3 Registration Statement and a prospectus supplement and accompanying base prospectus that we filed with the SEC on August 18, 2017.  As of September 30, 2018, we had up to $59.6 million in securities available for future issuance under the S-3 Registration Statement, which included $42.7 million in shares issuable pursuant to the Sales Agreement with Cantor. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Additional debt financing and equity 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 may require the issuance of warrants, which could potentially dilute the ownership interests of our stockholders.

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

In addition to the amounts shown in the above table, we have contractual obligations pursuant to our amended and restated license agreement with BioHEP. Under this agreement, we have agreed to pay up to $3.5 million in development and regulatory milestone payments to BioHEP for each distinct viral indication for which we develop licensed product(s). BioHEP is also eligible to receive tiered royalties in the low-to-mid single-digits on net product sales of licensed products by us and our affiliates and sub licensees, and a specified share of non-royalty sublicensing revenues we and our affiliates receive from sub licensees, which share of sublicensing revenues is capped at a maximum aggregate of $2.0 million under all such sublicenses. Milestone and royalty payments

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associated with our amended and restated license agreement with BioHEP have not been inclu ded in the above table of contractual obligations as we cannot reasonably estimate if or when they will occur.

In October 2017, we entered into a lease agreement for our new principal office and laboratory space. The initial term of the lease is 125 months beginning on June 1, 2018, the date we began occupying the new premises. Following an 11-month rent abatement period, we will be obligated to make monthly rent payments in the amount of approximately $35,000, which is subject to increase by approximately 3% annually for the first five years of the lease and by approximately 2.5% annually thereafter. The total lease payments due during the term of the lease are approximately $4.4 million. In addition, we are responsible under the lease for specified costs and charges, including certain operating expenses, utilities, taxes and insurance.  

We enter into contracts in the normal course of business with third party service providers for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. We have not included our payment obligations under these contracts in the table as these contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material. We could also enter into additional research, manufacturing, supplier and other agreements in the future, which may require up-front payments and even long-term commitments of cash.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards, or IFRS. This standard removes inconsistencies and limitations between U.S. GAAP and IFRS in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements, and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. This update is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and early application is not permitted. We adopted this standard as of January 1, 2018; however, until we expect material revenue to be recognized, the adoption of this standard is not expected to have an impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , which amends Accounting Standards Codification, or ASC, Subtopic 825-10, Financial Instruments - Overall , and includes updates on certain aspects of recognition, measurement, presentation and disclosure of financial instruments and applies to all entities that hold financial assets or owe financial liabilities. The new standard is effective for our annual period beginning after December 15, 2017, with early adoption permitted. We adopted this standard as of January 1, 2018; however, the adoption of this standard does not have an impact on our consolidated financial statements.

In September 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments , which amends ASC Topic 230, Statement of Cash Flows , and includes provisions intended to reduce diversity in practice and provides guidance on eight specific statements of cash flows classification issues. The new standard is effective for our annual period ending after December 15, 2017, and for annual and interim periods thereafter, with early adoption permitted. We adopted this standard as of January 1, 2018; however, the adoption of this standard did not have an impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which supersedes the current leasing guidance and upon adoption, will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than twelve months. Based on certain criteria, leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying assets not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The new standard is effective for our annual period beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact that the adoption of this standard may have on our consolidated financial statements.

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In July 2017, the FASB issued ASU 2017-11, Earnings Pe r Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception . Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down round features. Part II simply replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within Accounting Standard s Codification (“ASC”) Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. This ASU is effective for public companies for the annual reporting periods beginning after December 15, 2018, and inte rim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact that the adoption of this standard may have on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting , which amends ASC Topic 718, Compensation – Stock Compensation , and includes provisions intended to provide simplification of several aspects of accounting for nonemployee share-based payment transactions. The new standard is effective for us for the annual period beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than the date on which we adopted Topic 606. We elected early adoption of this standard as of September 30, 2018. The adoption of this standard has resulted in a de minimis impact on our consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

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