UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): September 26, 2017

EXICURE, INC.

(Exact name of Registrant as specified in its charter)

8045 Lamon Avenue

Suite 410

Skokie, IL 60077

(Address of principal executive offices)

Registrant’s telephone number, including area code: (847) 673-1700

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

Explanatory Note

On October 2, 2017, Exicure, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K,” and, together with this amendment, the “Form 8-K”) with the Securities and Exchange Commission (the “SEC”) disclosing the consummation, on September 26, 2017, of a merger between Exicure Operating Company, a Delaware corporation (“Exicure OpCo”) and Max-1 Acquisition Sub, Inc. (“Acquisition Sub”), a Delaware corporation and a wholly-owned subsidiary of the Company’s predecessor, Max-1 Acquisition Corporation (“Max-1”), pursuant to which Exicure OpCo merged with and into Acquisition Sub, with Exicure OpCo being the surviving entity (the “Merger”). Pursuant to the Merger, all of the outstanding capital stock of Exicure OpCo was converted into shares of Max-1’s common stock and Exicure OpCo became the wholly owned subsidiary of Max-1. Following the effective time of the Merger, Max-1 adopted Exicure OpCo’s former company name, “Exicure, Inc.” and has been continuing the existing business operations of Exicure OpCo as a publicly traded company under the name Exicure, Inc. All references to the “Company”, “we,” “us,” “our”, or “it” herein refer to Exicure, Inc., incorporated in Delaware, and the business of Exicure OpCo after giving effect to the Merger and company name changes described above.

The Company is filing this Current Report on Form 8-K/A (the “Form 8-K/A”) to (i) amend and restate the “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections filed under Item 2.01 of the Original Form 8-K and (ii) include six additional exhibits under Item 9.01 of the Original Form 8-K. No other changes have been made to the Original Form 8-K.

References to the exhibits in this Form 8-K/A are references to the exhibits filed with the Original Form 8-K. This Form 8-K/A should be read in conjunction with the Original Form 8-K and with our filings with the SEC subsequent to the Original Form 8-K. The Form 8-K/A speaks as of the filing date of the Original Form 8-K, and we have not updated the disclosures contained therein or herein to reflect any events which occurred at a date subsequent to the filing of the Original Form 8-K. Defined terms not otherwise defined herein shall have the meaning ascribed to such terms in the Original Form 8-K save that all references to the “Report” shall now refer to the Original Form 8-K, as amended by this Form 8-K/A.

DESCRIPTION OF BUSINESS

Exicure OpCo’s History

Exicure OpCo was originally formed as a limited liability company under the name AuraSense Therapeutics, LLC in the State of Delaware in June 2011, which was converted into AuraSense Therapeutics, Inc., a Delaware corporation, on July 9, 2015, and changed its name on the same date to Exicure, Inc. This transaction is referred to herein as the corporate conversion. Immediately after giving effect to the Merger, the Share Conversion and the initial closing of the Offering, the business of Exicure OpCo became our business.

Overview

We are a clinical-stage biotechnology company developing gene regulatory and immuno-oncology therapeutics based on our proprietary Spherical Nucleic Acid, or SNA, technology. We believe the design of our SNAs gives rise to distinct chemical and biological properties that may provide advantages over other nucleic acid therapeutics and enable therapeutic activity outside of the liver. Since our SNAs can cross biological barriers such as the skin when administered locally, we believe they can be used to target diseases not typically addressed with other nucleic acid therapeutics. We have demonstrated the ability to cross biological barriers in a Phase 1 clinical trial of our lead therapeutic candidate, AST-005, and in preclinical studies of two other therapeutic candidates, XCUR17 and AST-008, both of which we are advancing to the clinic.

In a completed Phase 1 clinical trial, AST-005, when topically administered to the skin of patients with mild to moderate psoriasis, resulted in no drug associated adverse events, and demonstrated a reduction of tumor necrosis factor messenger RNA, or TNF mRNA. The TNF mRNA reduction elicited by the highest strength of AST-005 gel was statistically significant when compared to the effects of the vehicle. These results are significant because we believe this is the first time gene regulation with topically applied oligonucleotides has been observed in the clinic. While we did not observe an antipsoriatic effect in our Phase 1 clinical trial, we believe this is due to the short duration of the treatment. The results of a clinical trial with etanercept, a systemic TNF inhibitor, indicate that at least four weeks of therapy is required before antipsoriatic efficacy can be observed.

On December 2, 2016, Exicure OpCo entered into a research collaboration, option and license agreement with Purdue Pharma L.P., or Purdue, referred to as the Purdue Collaboration. Purdue has the option to obtain from us the full worldwide development and commercial rights to AST-005, an option to obtain three additional collaboration targets and a further option to obtain from us the full worldwide development and commercial rights to any therapeutic candidates developed targeting the three additional collaboration targets. Additionally, Purdue has rights of first offer to some potential collaboration targets. These rights of first offer are subject to limitations in time and scope. In connection with the Purdue Collaboration, we received a non-refundable development fee of $10.0 million. In addition, we are eligible to receive up to $776.5 million upon successful completion of certain research, regulatory and commercial sales milestones. We cannot assure you that these milestones will be achieved as they are subject to highly significant risks and uncertainties, many of which are outside of our control. In the event a therapeutic candidate subject to the collaboration results in commercial sales, we are eligible to receive royalties ranging from the low single digits to a maximum of 10% on future net sales of such commercialized therapeutic candidates. We are conducting, on behalf of Purdue, a Phase 1b clinical trial in psoriasis patients in Germany to evaluate the effect of higher concentrations of AST-005 gel on TNF mRNA and downstream mRNA expression. We expect the results from this clinical trial to be available in late 2017.

Our second therapeutic candidate, XCUR17, is an SNA targeted to interleukin 17 receptor alpha, or IL-17RA, for the treatment of mild to moderate psoriasis. We filed a CTA for a Phase 1 clinical trial of XCUR17 in patients with psoriasis in Germany in the third quarter of 2017 and expect to commence the Phase 1 clinical trial in the fourth quarter of 2017. We expect the results from this clinical trial to be available in the second quarter of 2018. Our third therapeutic candidate, AST-008, is an SNA consisting of toll-like receptor 9, or TLR9, agonists designed for immuno-oncology applications. AST-008 has exhibited anti-tumor activity as both a monotherapy and in combination with certain checkpoint inhibitors across a range of preclinical models of solid and hematological cancers. In the third quarter of 2017, we received an authorization from the Medicines and Healthcare products Regulatory Agency, or MHRA, the competent health authority of the United Kingdom, to conduct a Phase 1 clinical trial with AST-008. Although we plan to begin AST-008 clinical development as a monotherapy in a Phase 1 clinical trial in the fourth quarter of 2017, we ultimately plan to clinically advance AST-008 exclusively in combination with checkpoint inhibitors. We expect the results from the Phase 1 clinical trial to be available on a rolling basis starting in the fourth quarter of 2017.  

SNAs are nanoscale constructs consisting of densely packed synthetic nucleic acid sequences that are radially arranged in three dimensions. We refer to the synthetic nucleic acid sequences in our SNAs as oligonucleotides and the radial orientation of the oligonucleotides without lipid or polymer encapsulation as our “inside out” or “3-D” approach. Our SNAs, unlike many other nucleic acid therapeutics, do not require lipid or polymer encapsulation or complexation in order to be delivered. Encapsulation is the process of confining the nucleic acids inside the cavities of larger structures, typically liposomes, whereas complexation is the process of creating an assembly of nucleic acids bound together with other molecules, typically lipids or polymers. Our proprietary SNAs enter cells through class A scavenger receptors. A receptor is a protein molecule which recognizes and responds to chemical signals from outside the cell. Class A scavenger receptors are commonly found on the surface of cells throughout the body, which we believe provides a ubiquitous mechanism of cellular entry for the local administration of our SNA therapeutic candidates. This mechanism of cellular entry is different from many other nucleic acid therapeutics that typically bind to receptors found only in the liver. As a result of these advantages, we are developing our SNAs for two different therapeutic approaches: gene regulatory SNAs for diseases beyond the liver and immuno-oncology SNAs for solid and hematological cancers.

We are developing AST-005, an SNA targeting TNF for the treatment of mild to moderate psoriasis. AST-005 is intended to be administered locally in a gel to psoriatic lesions. Our Phase 1 clinical trial of AST-005 resulted in no drug associated adverse events, and suggested that AST-005 modulates the production of TNF mRNA in patient psoriatic skin after topical application. Therefore, we believe we have preliminarily demonstrated the intended therapeutic mechanism of action of AST-005 in the tissue of interest in the Phase 1 clinical trial.

We are developing XCUR17 for the treatment of mild to moderate psoriasis. XCUR17, our second therapeutic candidate, targets the mRNA that encodes IL-17RA, a protein that is considered essential in the initiation and maintenance of psoriasis. Although the availability of inhibitors of TNF revolutionized the systemic treatment of severe psoriasis, studies of disease pathogenesis have shifted attention to the IL-17 pathway, in which IL-17RA is a key driver of psoriasis. Our strategy is to reduce the levels of IL-17RA in the skin by topically applying XCUR17. In preclinical studies, XCUR17 inhibited IL-17RA in the keratinocytes of the skin. We filed a CTA for a Phase 1 clinical trial of XCUR17 in Germany in the third quarter of 2017 and expect to commence the Phase 1 clinical trial in the fourth quarter of 2017.

We are developing AST-008, an SNA consisting of TLR9 agonist oligonucleotides. TLR9 agonists bind to and activate TLR9 receptors. We believe AST-008 may be used for immuno-oncology applications as a monotherapy or in combination with checkpoint inhibitors. Checkpoint inhibitors are therapeutics that prevent tumors from evading destruction by the immune system. We have observed that administration of AST-008 as a monotherapy can have anti-tumor activity in colon cancer, breast cancer, lymphoma and melanoma mouse models. We have also observed that, in preclinical studies in a variety of tumor models, AST-008 applied in combination with certain checkpoint inhibitors exhibited anti-tumor responses and survival rates that were greater than those demonstrated by checkpoint inhibitors alone. Importantly, in an anti-PD-1 antibody-resistant breast cancer mouse model, administration of AST-008 with certain anti-PD-1, or programmed death 1, antibodies restored the anti-tumor activity of these antibodies. We have also demonstrated that AST-008 was active when administered subcutaneously, intratumorally or intravenously, in both prevention and established mouse tumor models. The administration of AST-008 also produced localized as well as abscopal anti-tumor activity in mouse cancer models. Additionally, administration of AST-008 in combination with certain checkpoint inhibitors conferred adaptive immunity in breast and colon cancer mouse models. We filed a CTA for a Phase 1 clinical trial of AST-008 in the United Kingdom in the second quarter of 2017. In the third quarter of 2017, we received an authorization from the MHRA to conduct a Phase 1 clinical trial with AST-008. We expect to commence the Phase 1 clinical trial in the fourth quarter of 2017 and expect the results from this clinical trial to be available on a rolling basis starting in the fourth quarter of 2017.

Given the extensive potential therapeutic applications for our SNA platform, we believe it is important to enter into selective partnerships to broaden the indications we can pursue and accelerate the development of new programs. To that end, on December 2, 2016, Exicure OpCo entered into a research collaboration, option and license agreement with Purdue. We believe this collaboration exemplifies our strategy of establishing alliances with leaders with a proven track record in the development and global commercialization of treatments for patients with chronic conditions.

We believe that we have a strong intellectual property, or IP, position in the field of SNA therapeutics. As of June 30, 2017, our patent portfolio consists of over 40 issued patents and allowed patent applications and over 110 pending patent applications. We have licensed IP from Northwestern University and have also independently filed patents to protect our IP. Our license from Northwestern University is for exclusive worldwide rights to the use of SNA technology for therapeutic applications. Any patents arising from AST-005, XCUR17 or AST-008 applications would expire by 2035, 2037, and 2034 or 2035, respectively.

Our Strategy

We intend to build a leading nucleic acid therapeutics company based on our proprietary SNA technology. The key elements of our strategy are:

gene regulation in the skin. We believe these results preliminarily validate the SNA as a platform for local gene regulation. AST-005 is the subject of the Purdue Collaboration. We are conducting, on behalf of Purdue, a Phase 1b clinical trial in psoriasis patients in Germany to evaluate the effect of higher concentrations of AST-005 gel on TNF mRNA and downstream mRNA expression. We expect the results from this clinical trial to be available in late 2017.

Introduction to Nucleic Acid Therapeutics

Overview of nucleic acids as a therapeutic modality

Historically, therapeutic development has been focused on small molecules and biologics, or protein-based therapeutics, including antibodies. Development of small molecule therapeutics often involves screening thousands of compounds, sometimes without a known protein structure or active site to which the small molecule can bind and affect its disease-related function. Protein-based therapeutics are also subject to limitations. For example, the choice of targets that antibodies can address is typically limited to extracellular protein targets. However, the majority of protein targets are located inside the cell, making them undruggable by antibodies.

Nucleic acid therapeutics represent a treatment approach differing in many important ways from small molecules and biologics. Nucleic acid therapeutics are based on the well-established scientific understanding that DNA in the nucleus of cells is converted into an intermediate molecule, called messenger RNA, or mRNA, that serves as the template for making proteins. Therapeutic gene regulation is the use of nucleic acid therapeutics to modulate the production of target proteins by changing the amount of mRNA that is converted to protein, thereby providing an approach to treating diseases at their genetic origin. Our SNAs are a type of nucleic acid therapeutic.

We believe the development timeline for nucleic acid therapeutic candidates will be shorter than that of small molecules and antibodies. Nucleic acid therapeutics can be directed against most mRNA, including the mRNA of proteins that cannot be targeted by small molecules or antibodies. Due to the detailed knowledge of mRNA sequences in humans, nucleic acid therapeutics can be engineered to be specific to a region of an mRNA sequence while interacting minimally with all other mRNA sequences. Moreover, due to the well-defined length and composition of mRNA sequences, a relatively small set of rationally designed therapeutic candidates, usually hundreds, can be synthesized and tested for activity against an mRNA target. This is in contrast to the small molecule drug development process that requires a much larger number of candidates to be screened.

Challenges in developing nucleic acid therapeutics

Significant progress has been made in the development of nucleic acid therapeutics. At the end of 2016, three nucleic acid therapeutics were being marketed and many were in various stages of clinical development. However, we believe there are ongoing technical challenges in the nucleic acid therapeutics field. Nucleic acids are molecules that, when administered without proper formulation, encounter a number of barriers to their bioavailability, biodistribution, and desired biological activity. These challenges have often been met by chemically modifying the oligonucleotide and by encapsulating or complexing it with a lipid or polymer carrier. Despite these advances in the delivery of oligonucleotides, the biodistribution of these molecules remains a challenge since oligonucleotides typically accumulate in the liver after subcutaneous or intravenous administration, thereby limiting their primary application to diseases of the liver. In contrast, we have demonstrated, in a clinical trial, the ability of our gene regulatory SNAs to modulate target mRNA expression after topical application to psoriatic lesions. Further, in an array of experiments, we have demonstrated that SNAs, administered locally without encapsulation or complexation, enter cells and organs. We believe the local administration of our gene regulatory SNAs will enable safe and efficacious therapeutic applications to organs beyond the liver.

Overview of immuno-oncology as a therapeutic modality

In healthy individuals, the immune system fights off pathogens, such as bacteria and viruses. The immune system should also recognize cancer cells as foreign and eliminate them. However, cancers present a challenge because they have developed strategies to resist detection and clearance by the immune system. Immuno-oncology approaches help the patient’s immune system identify a cancer as foreign and stimulate a tumor-clearing immune response. One of the greatest benefits of the immuno-oncology approach is the continuous, durable anti-tumor response that can be achieved long after discontinuation of treatment.

Current immuno-oncology therapeutic approaches generally fall into three broad categories. First, there are approaches that stimulate the immune system to detect and eliminate tumors. Examples include cytokines and toll-

like receptor, or TLR, agonists. Second, some therapeutics make a cancer more readily visible to the immune system. These therapeutics include checkpoint inhibitors, such as those that target CTLA4, or cytotoxic T-lymphocyte-associated protein 4, PD-1, and PD-L1, or programmed death-ligand 1. Third, there are adoptive cell transfer therapies, including dendritic cell vaccines and chimeric antigen receptor T-cells, or CAR-Ts, that direct the immune system to target a specific type of cancer.

The knowledge of the TLR activation pathway is central to the understanding of how the immune system is stimulated to target cancer. TLRs are membrane- and endosome-bound receptors found on a number of cell types, including specialized immune cells. TLRs recognize specific molecular patterns ordinarily presented by pathogens. When cells recognize pathogens, they produce and release protein signals called cytokines that mobilize the immune system to fight invading pathogens. In addition, they activate antigen presenting cell and helper T-cells, which then coordinate the longer-term pathogen specific adaptive immune response, and as a result, confer long-term immunity to the host.

Checkpoint proteins, such as CTLA4 and PD-1, are expressed on the surface of T-cells and inhibit the function of activated T-cells. Cancers are difficult to treat because they have developed mechanisms to take advantage of these checkpoint proteins thereby evading detection and clearance by the immune system. Inhibiting these checkpoint proteins, especially PD-1 and PD-L1, has proven to be a highly effective anti-cancer therapy in some patients. Nevertheless, checkpoint inhibitors targeting the PD-1 pathway have limited clinical efficacy as monotherapy, with response rates of 20% or less in many common types of cancers, including breast and colon cancers. Emerging evidence suggests that checkpoint inhibitors are effective primarily in patients whose tumors already have pre-existent CD8 T-cell infiltrate, i.e. immune system is already capable of recognizing the tumors. We believe the challenge in the field is to increase the efficacy of checkpoint inhibitors in a broader cancer patient population by converting tumors that are non-T-cell inflamed to T-cell inflamed.

Preclinical data suggest our immuno-oncology SNAs delivered in combination with checkpoint inhibitors generate a greater anti-tumor activity than checkpoint inhibitors alone. In mouse tumor models, administration of AST-008 with anti-PD-1 antibodies suppresses regulatory T-cells, or Tregs, and myeloid-derived suppressor cells, or MDSCs, and increases the levels of CD8 effector T-cells. We believe these important results suggest that the combination of immuno-oncology SNAs and checkpoint inhibitors will successfully treat a larger proportion of cancer patients than checkpoint inhibitors alone.

Our Proprietary Technology: Spherical Nucleic Acids

Our therapeutic discovery and development efforts rely on our proprietary SNA technology. SNAs are nanoscale constructs consisting of densely packed synthetic nucleic acid molecules that are radially arranged in three dimensions. Our SNAs, unlike many other nucleic acid therapeutics, do not require lipid or polymer encapsulation or complexation in order to be delivered. We refer to these synthetic nucleic acid molecules in our SNAs as oligonucleotides and the radial orientation of the oligonucleotides without lipid or polymer encapsulation as our “inside out” or “3-D” approach. This is distinct from other existing nucleic acid therapeutics, which we characterize as “encapsulated” or “linear” oligonucleotides.

This arrangement of oligonucleotides allows our proprietary SNAs to enter cells through class A scavenger receptors. Class A scavenger receptors are commonly found on the surface of cells throughout the body, which we believe provides a ubiquitous mechanism of cellular entry for the local administration of our SNA therapeutic candidates. This mechanism of cellular entry is different from many other nucleic acid therapeutics that typically bind to receptors found only in the liver.

The broad cellular and tissue penetration properties of SNAs enable two distinct therapeutic approaches. Gene regulatory SNAs can be designed to modulate the production of target proteins for a therapeutic benefit without triggering an unintended immune response. Immuno-oncology SNAs can be designed to elicit an anti-tumor immune response. Accordingly, we are developing both gene regulatory SNAs for diseases beyond the liver and immuno-oncology SNAs for solid and hematological cancers.

Examples of our proprietary SNA constructs

All of our SNAs contain oligonucleotides that are densely packed and radially oriented.

We believe the key advantages of our proprietary SNAs include:

We plan to develop SNA-based therapeutics utilizing two distinct approaches. First, we will use SNA constructs containing oligonucleotides for gene regulation applications in target organs. Our first development programs have been focused on the skin because of a combination of unmet medical need and low barriers to achieving therapeutic and mechanistic proof of concepts. As we progress, we will explore the use of SNAs in other local applications, such as the brain, lung, eye and gastrointestinal tract. Second, we will design SNAs for immuno-oncology applications. We believe the properties of our proprietary SNAs will allow us to develop therapeutic candidates in both fields.

Gene regulatory SNAs

Introduction to gene regulation

Gene regulation is the process of modulating target protein levels within cells. This represents a powerful approach for developing targeted therapies for diseases with known genetic origins. This approach is highly attractive for therapeutic targets that are identified as “undruggable” with small molecules or antibodies.

Gene regulation can be achieved with a number of approaches, three of which, siRNA-, miRNA-, and antisense-based therapeutics, have been the focus of commercial development. Small interfering RNAs, or siRNAs, are double-stranded RNA-like oligonucleotides that harness RNA interference, or RNAi, a potent and natural biological mechanism. When delivered into cells, siRNAs can lead to target mRNA degradation and a decrease in protein expression. miRNAs are naturally occurring small RNA molecules that modulate protein expression. Antisense therapeutics are short single-stranded oligonucleotides that bind to target mRNA and thus prevent its translation into protein.

Gene regulatory SNA advantages for therapeutic applications

We believe our gene regulatory SNAs will provide the attractive features of nucleic acid therapeutics while potentially overcoming their limitations. Gene regulatory SNAs enter cells to a much greater extent than linear oligonucleotides and we believe do so with minimal toxicity. SNAs enter cells through class A scavenger receptors. These receptors are commonly found on the surface of cells throughout the body thereby providing a mechanism of cellular entry that can be accessed through the local administration of SNA therapeutics. This mechanism of cellular entry is different from many nucleic acid therapeutics which typically bind to receptors found only in the liver. We believe our gene regulatory SNAs are not limited to diseases of the liver. We have shown that gene regulatory SNAs cross the stratum corneum and deliver nucleic acid therapeutics to the epidermal and dermal layers of the skin ex vivo. We believe the ability of SNAs to penetrate through biological barriers will open up new opportunities for the use of nucleic acid therapeutics in local applications. We believe that our SNAs will have therapeutic applications in organs such as the brain, eye, gastrointestinal tract, liver, lung, and skin.

Immuno-oncology SNAs

We believe our immuno-oncology SNAs are potent and specific activators of TLRs. It has been demonstrated that oligonucleotides containing specific nucleotide sequences bind to TLRs and induce a robust immune response. The challenge in the field has been to expose these oligonucleotides to the cells of the immune system in such a way as to optimally bind the TLRs and launch the activation pathway. We believe our immuno-oncology SNAs enter cells of the immune system, bind to a variety of TLRs, and generate a robust immune response.

SNAs localize to endosomes of immune cells, engage multiple TLRs, and activate the immune system.

Note: Image not to scale

Immuno-oncology SNA advantages for therapeutic applications

We believe that SNAs are well suited for immuno-oncology applications because of four key properties:

We believe that these properties collectively make our proprietary SNAs an attractive therapeutic approach for immuno-oncology applications.

Our Research and Development Programs

Our research and development programs include the development of three SNA therapeutic candidates to address unmet medical needs in the treatment of mild to moderate psoriasis and solid tumors as well as early stage research activities in neurology, opthalmology, respiratory and gastrointestinal, and the development of SNAs that target IL-4RA. These early stage research activities are described in more detail in the sections entitled "—Early development programs" and "—SNA targeting IL-4RA for atopic dermatitis." The table below sets forth the stage of development of our three SNA therapeutic candidates as of October 2, 2017:

TNF = Tumor Necrosis Factor; IL-17RA = Interleukin 17 Receptor Alpha; TLR9 = Toll-like Receptor 9

(1) AST-005 is the subject of the Purdue Collaboration described below in "Description of Business— Our Research and Development Programs—Purdue Collaboration."

Regulatory documents are prepared and submitted to the appropriate health authority to enable clinical trials in any given jurisdiction. In the United States, this document is called an IND application, while in other jurisdictions, this document is often called an IMPD, which is submitted as part of a CTA. The content and scope of an IND and a CTA are similar.

AST-005—topically applied SNAs for psoriasis

Overview

Our lead program is AST-005 for the treatment of mild to moderate psoriasis, which is often defined as psoriasis that affects less than 10% body surface area and is generally not treated with systemic antibody therapy. AST-005 is an SNA containing TNF antisense oligonucleotides and is intended to be applied in a gel to psoriatic lesions. The clinical success of systemically delivered anti-TNF antibodies has validated TNF as a clinically relevant therapeutic target for psoriasis. We believe that the local inhibition of TNF with AST-005 may result in targeted therapeutic activity in patients with mild to moderate psoriasis, where, given their systemic risks, treatment with anti-TNF antibodies falls outside of the current American Academy of Dermatology guidelines.

In our Phase 1 clinical trial, AST-005 resulted in no drug associated adverse events, and AST-005 reduced the production of TNF mRNA in psoriatic skin after topical application. We believe these results demonstrate the intended therapeutic mechanism of action of AST-005 in the tissue of interest, and provide early validation that SNAs are capable of regulating gene expression in human skin. On December 2, 2016, Exicure OpCo entered into the Purdue Collaboration for further development of AST-005 in mild to moderate psoriasis and in other indications. We are conducting, on behalf of Purdue, a Phase 1b clinical trial in psoriasis patients in Germany to evaluate the effect of higher concentrations of AST-005 gel on TNF mRNA and downstream mRNA expression. We expect the results from this clinical trial to be available in late 2017.

Psoriasis market and current treatments

According to a 2016 Global Report on Psoriasis issued by the World Health Organization, the prevalence of psoriasis in countries ranges between 0.09% and 11.43%, making psoriasis a serious global problem with at least 100 million individuals affected worldwide. According to LeadDiscovery, in 2009, over 4.5 million prescriptions were written for patients with psoriasis in the U.S., with approximately 3.9 million of these prescriptions written for topical therapies.  

Patients suffering from severe psoriasis can benefit from antibody therapeutics, such as etanercept or adalimumab. These antibodies target TNF, a cytokine that plays a central role in the inflammation underlying psoriasis. When injected, the antibodies bind to TNF, diminishing TNF’s ability to act as an inflammatory signal. Patients with limited disease, or mild to moderate psoriasis, can be treated with topical or oral anti-inflammatory therapeutic agents. These patients are generally not treated with systemic anti-TNF antibodies due to adverse health risks. According to the American Academy of Dermatology, patients with limited skin disease should not automatically be treated with systemic treatments if they do not improve, because treatment with systemic therapy may carry more risk than the disease itself.

Accordingly, topically applied agents, such as corticosteroids, are widely used to treat mild to moderate psoriasis. Unlike antibodies that target a specific pathway to treat psoriasis, topical therapies generally have a non-specific mechanism of action, which may cause skin thinning, skin irritation, and other side effects. Moreover, many of these therapies become less effective at treating the disease over time as patients become refractory to treatment. Findings from National Psoriasis Foundation surveys conducted between 2003 and 2011 indicate that 52.3% of patients with psoriasis were dissatisfied with their treatment.  

We believe there is an unmet medical need in mild to moderate psoriasis for a locally administered therapeutic that combines the specificity of antibodies with the convenience of topical corticosteroids without the side effects of either class of therapeutics. To date, the skin has proven to be a barrier to the penetration of many potential therapies. Some approaches for delivering oligonucleotides directly into the skin require injections, which may be uncomfortable and painful.

Our approach

AST-005 is intended to be administered locally as a topically applied gel to psoriatic lesions. We developed AST-005 to enter into cells of the epidermis and dermis and modulate the expression of TNF.

Clinical success of systemically delivered anti-TNF antibodies has validated TNF as a clinically relevant target for psoriasis. TNF is an important trigger and mediator of inflammatory responses. Excessive TNF production in the skin causes keratinocyte and T-cell proliferation as well as immune cell infiltration, which results in the formation of psoriatic lesions.

Preclinical development of AST-005

We gathered experimental evidence of the biological activity of AST-005 in both healthy and psoriatic human skin samples prior to undertaking a Phase 1 clinical trial. As a consequence, we believe we had a deeper understanding of how AST-005 would perform during clinical trials than would be ordinarily possible with traditional therapeutic development. Data from our preclinical studies demonstrated that AST-005 penetrates into, and modulates the production of TNF in, both healthy and psoriatic human skin after topical application. We believe we had preliminarily demonstrated the intended therapeutic mechanism of action of AST-005 in the tissue of interest in advance of a Phase 1 clinical trial. We intend to use this model when developing other gene regulatory SNA compounds.

We also examined AST-005 in a mouse model of psoriasis known as the imiquimod model. AST-005 was applied topically in an ointment. Histological and biomarker results showed that AST-005 prevents the development

of psoriatic phenotype in mouse models of the disease. A biomarker is a substance whose measurement is indicative of a disease state.

Finally, we performed preclinical studies which demonstrate that our SNAs cause minimal off-target changes in gene expression in human skin cells and in mouse tissue. Such experiments demonstrated that SNA treatment leads to fewer genetic misregulations as compared to linear oligonucleotides against the same target delivered with a commercially available lipid encapsulation-based oligonucleotide delivery system. A misregulated gene is expressed at an inappropriately high or low level.

Phase 1 clinical development for AST-005

We conducted a Phase 1 clinical trial to assess the safety, antipsoriatic efficacy and pharmacodynamic effect of AST-005 in 15 mild to moderate psoriasis patients in Germany. The primary endpoint of the clinical trial was the change in psoriatic infiltrate thickness compared to the start of the study, which is a method of measuring antipsoriatic effects. Secondary endpoints included evaluation of antipsoriatic efficacy by a clinical score, safety and tolerability assessments, and target mRNA reduction. The clinical trial design allowed for intrapatient comparisons of AST-005 to a placebo and a currently approved therapeutic. A mask containing five holes, or test fields, was placed on the patients’ psoriatic lesions, enabling the application of different agents within one lesion. The test fields were treated with one of three strengths of a gel containing AST-005, a matched control gel without AST-005 and an approved therapeutic administered 10 times over a 12-day treatment period. Safety assessments included a complete physical examination with special focus on the skin, vital signs, and laboratory assessments. At the end of the clinical trial, full biopsy punches were taken of the AST-005 gel and vehicle gel treated areas for measurement of TNF mRNA expression.

The Phase 1 clinical trial design utilized a mask that allowed for the evaluation of multiple strengths of AST-005, a placebo, and a currently approved therapeutic within one psoriatic lesion.

We believe our clinical trial design is consistent with other topical studies that have been accepted by the U.S. Food and Drug Administration, or the FDA, and the European Medicines Agency, or the EMA.

The results of the clinical trial showed no drug associated adverse events related to treatment with AST-005. In addition, AST-005 application reduced the expression of TNF mRNA in a dose dependent manner in the psoriatic skin of the patients. The TNF mRNA reduction elicited by the highest strength of AST-005 gel was statistically significant when compared to the effects of the vehicle. These results confirm that topically applied SNAs are capable of reducing gene expression in the skin of psoriasis patients, and we believe that these results validate the

gene regulatory SNA platform. These results are significant because we believe this is the first time gene regulation with topically applied oligonucleotides has been observed in the clinic. While the results of the clinical trial did not show antipsoriatic efficacy, we believe antipsoriatic efficacy was not to be expected based on the length of treatment in this clinical trial. The results of a clinical trial with etanercept, a systemic TNF inhibitor, indicate that four weeks of therapy is required before antipsoriatic efficacy can be observed.

A gel containing AST-005 reduced the target TNF mRNA expression in the lesional psoriatic skin of patients in a dose dependent manner after topical application in a Phase 1 clinical trial. The knockdown achieved by the high strength of gel was statistically significant compared to the vehicle treated skin. * p < 0.05

On December 2, 2016, Exicure OpCo entered into the Purdue Collaboration for further development of AST-005 in mild to moderate psoriasis and in other indications. Together with Purdue, we will pursue continued development of AST-005 in psoriasis and potentially in other indications. A Phase 1b clinical trial is currently underway to evaluate the effect of higher concentrations of AST-005 gel on TNF mRNA and downstream mRNA expression. We expect the results from this clinical trial to be available in late 2017.

XCUR17—a topically applied anti-IL-17RA SNA

Overview

XCUR17, our second therapeutic candidate, targets the mRNA that encodes IL-17RA, a protein that is considered essential in the initiation and maintenance of psoriasis. Although the availability of inhibitors of TNF revolutionized the systemic treatment of severe psoriasis, studies of disease pathogenesis have shifted attention to the IL-17 pathway, in which IL-17RA is a key driver of psoriasis. IL-17 binding to IL-17RA on keratinocytes stimulates and perpetuates the inflammation cascade of psoriasis. IL-17RA-mediated inflammation can be inhibited by disrupting the protein’s function. Brodalumab, an anti-IL-17RA monoclonal antibody, was approved by the FDA as an effective treatment for chronic moderate to severe plaque psoriasis. Our strategy is to reduce the levels of IL-17RA in the skin by topically applying XCUR17. In preclinical studies, XCUR17 showed inhibition of IL-17RA expression in the keratinocytes of the skin. We submitted a CTA for a Phase 1 clinical trial of XCUR17 in Germany in the third quarter of 2017 and expect to commence the Phase 1 clinical trial in the fourth quarter of 2017. We have filed a CTA to work with a German contract research organization with expertise in our Phase 1 clinical trial design. We expect the results from this clinical trial to be available in the second quarter of 2018.

Our approach

The clinical success of a systemically delivered anti-IL-17RA antibody has validated that target as a clinically relevant target for psoriasis. The IL-17 pathway is important for initiating and sustaining inflammatory responses. IL-17RA stimulation in the skin causes keratinocyte and T-cell proliferation as well as immune cell infiltration, which results in the formation of psoriatic lesions.

We are developing XCUR17, an SNA containing IL-17RA antisense oligonucleotides. XCUR17 is intended to be applied locally as a topically applied gel to psoriatic lesions. We expect XCUR17 to enter into cells of the epidermis, especially keratinocytes, and modulate the production of IL-17RA.

Preclinical development of XCUR17

Similar to the AST-005 preclinical development, we have gathered experimental evidence of the biological activity of XCUR17 in healthy human skin samples prior to undertaking a Phase 1 clinical trial. As a consequence, we believe we have a deeper understanding of how XCUR17 will perform during clinical trials than would be ordinarily possible with traditional therapeutic development.

XCUR17 exhibits cellular uptake and skin penetration properties. Specifically, XCUR17 enters into keratinocytes in vitro and enters into healthy human skin ex vivo after topical application. In addition, it also down-regulates the expression of IL-17RA mRNA and protein in keratinocytes in vitro . Further, XCUR17 gel down-regulates IL-17RA mRNA in healthy human skin ex vivo .

Topical application of XCUR17 in a prototype gel to healthy human skin ex vivo results in a dose-dependent decrease in IL-17RA mRNA expression. * p < 0.05; *** p< 0.001 vs the controls

Planned Phase 1 clinical development for XCUR17

We plan to initiate a Phase 1 clinical trial for XCUR17 in mild to moderate psoriasis patients in the fourth quarter of 2017 in Germany. A CTA is required to initiate a clinical trial in Germany, which we have submitted in the third quarter of 2017. Topline results are expected in the second quarter of 2018. The primary endpoints of the clinical trial will be safety and tolerability, and the secondary endpoints will include the measurement of IL-17RA mRNA and protein levels from lesional skin biopsies, lesional skin histology and other assessments of mRNA targets in the psoriasis network.

The clinical trial design allows for intrapatient comparisons of XCUR17 to a placebo and a currently approved therapeutic. A mask containing 5 holes will be placed on the patient’s skin, enabling the application of three different strengths of a gel containing XCUR17 as well as a placebo and a currently approved therapeutic within one psoriatic lesion. The drug will be applied daily for 26 days in up to 25 patients. Over the course of the clinical trial, the safety and tolerability of XCUR17 will be monitored. In addition, the severity of psoriasis in the treated areas will be assessed. At the end of the clinical trial, biopsy samples from XCUR17- and vehicle-treated areas will be taken and interrogated for IL-17RA and downstream mRNA modulation to demonstrate that XCUR17 engages the target of interest and has an effect on inflammation in the skin. We believe our clinical trial design is consistent with the clinical trial design for other topically applied therapeutic candidates that have been accepted by the FDA and EMA.

Additional gene regulation programs

We believe that additional gene regulation programs are enabled by the successful results of our Phase 1 clinical trial with AST-005 and the results from preclinical testing of XCUR17. We are also evaluating the use of AST-005 in other indications where anti-TNF therapeutics have been successful and where we believe we have a strategic advantage. In addition, we believe that the initial clinical results of AST-005 have important implications for the application of our proprietary SNA technology across a broad range of organs and diseases. First, there were no drug associated adverse events related to treatment with AST-005 and we observed initial pharmacodynamic activity in the Phase 1 clinical trial. We believe that there are other skin diseases for which we can design therapeutically relevant SNAs. Other targets of interest include IL-17RA, which we are addressing with XCUR17, interleukin 4 receptor alpha, or IL-4RA, and other targets at various levels of preclinical development. We also believe that the initial clinical trial results of AST-005 suggest that our SNAs will have potential therapeutic applications in other organs and diseases for which local administration would be appropriate such as the brain, eye, gastrointestinal tract, liver, and lung.

AST-008—an SNA for immuno-oncology

Overview

Our third therapeutic candidate, AST-008, an SNA consisting of a TLR9 agonist, is being developed for the treatment of cancer. We believe AST-008 may be used for immuno-oncology applications as a monotherapy or in combination with checkpoint inhibitors. We have observed that administration of AST-008 as a monotherapy can have anti-tumor activity in colon cancer, breast cancer, lymphoma and melanoma mouse models. We have also observed that, in preclinical studies in a variety of tumor models, AST-008 applied in combination with certain checkpoint inhibitors exhibited anti-tumor responses and survival rates that were greater than those demonstrated by checkpoint inhibitors alone. Importantly, in an anti-PD-1 antibody-resistant breast cancer mouse model, administration of AST-008 with certain anti-PD-1, or programmed death 1, antibodies restored the anti-tumor activity of these antibodies. We have also demonstrated that AST-008 is active when administered subcutaneously, intratumorally or intravenously, in both prevention and established mouse tumor models. The administration of AST-008 also produces localized as well as abscopal anti-tumor activity in mouse cancer models. Additionally, administration of AST-008 in combination with certain checkpoint inhibitors confers adaptive immunity in breast and colon cancer mouse models. In the third quarter of 2017, we received an authorization from the MHRA to conduct a Phase 1 clinical trial with AST-008. We expect to commence the Phase 1 clinical trial in the fourth quarter of 2017 and expect the results from this clinical trial to be available on a rolling basis starting in the fourth quarter of 2017.

Our approach

Our preclinical data with AST-008 illustrate many of the important attributes of our proprietary SNA technology. Our immuno-oncology SNAs bind to class A scavenger receptors and are localized on the endosomes of immune cells. These same endosomes contain TLRs and are responsible for inducing an innate immune response. SNAs present their TLR agonists externally, in a 3-D configuration, which allows SNAs to bind to TLRs efficiently. We have designed and prepared SNAs which activate multiple classes of TLRs. Our preclinical data show that SNAs induce a broad immune response. We believe that such broad immune response includes the production of cytokines

that induce a potent adaptive immune response, which in turn, may confer long-term immunity. In preclinical studies, local administration of AST-008 elicits systemic pro-inflammatory cytokine response. In mouse tumor models, administration of AST-008 with anti-PD-1 antibodies suppresses regulatory T-cells, or Tregs, and myeloid-derived suppressor cells, or MDSCs, and increases the levels of CD8 effector T-cells.

AST-008 in combination with checkpoint inhibitors

We have demonstrated that the combination of AST-008 with certain anti-PD-1 antibodies enhances therapeutic activity in a number of animal models, including breast and colorectal cancers, as well as lymphoma and melanoma.

Breast cancer mouse model. We have demonstrated that administration of AST-008 with a selected anti-PD-1 antibody shows a durable anti-tumor response in an anti-PD-1 antibody insensitive mouse breast cancer model. This study was carried out with four groups, each consisting of eight mice per group. The four groups were vehicle treatment, antibody treatment alone, linear oligonucleotide plus antibody treatment, and AST-008 plus antibody treatment. Both the AST-008 and the linear oligonucleotide comparator treatments consisted of subcutaneous administration on days 3, 6, 9, 12, and 15 after tumor implantation at a dose of 0.8 mg/kg per injection. In the three groups where mice received anti-PD-1 antibody therapy, drug administration was performed intraperitoneally on days 3, 8 and 13 at a dose of 10 mg/kg per injection. The mice were monitored for mortality and their tumor volumes were periodically measured. The mice treated with the combination of AST-008 and the anti-PD-1 antibody had average tumor volume reductions of greater than 90% compared to anti-PD-1 antibody treatment alone. In addition, treatment with AST-008 resulted in an 88% average decrease in tumor volume compared to mice treated with linear oligonucleotides at the same dose. At the conclusion of the initial phase of the experiment, seven out of eight mice in the group treated with the combination of AST-008 and the anti-PD-1 antibody had no palpable tumors. In contrast, no mice treated with linear oligonucleotides and the anti-PD-1 antibody survived.

In the next phase of this study, we re-challenged the seven surviving mice from the combination group that was treated with AST-008 and anti-PD-1 with the same breast cancer tumor type. A new group of six mice that had never received any therapy, referred to here as naïve mice, was also inoculated with the same breast cancer tumor type for comparison. The tumor growth and survival were monitored in both groups of mice without further treatment with the AST-008 and anti-PD-1 antibody combination. No palpable tumors were observed in the surviving mice from the combination group through day 105 of the study, whereas naïve mice showed tumor growth. Finally, on day 105 of the study, the mice from the combination group that had survived two rounds of tumor implantation were injected with different tumor types. The mouse colon cancer tumors grew in the animals that had survived two challenges with breast cancer cells. Taken together, we believe these data demonstrate an adaptive immune response and a systemic anti-cancer vaccination against the treated tumor type. We believe these data also demonstrate that AST-008 has the potential to synergize with checkpoint inhibitors for immuno-oncology applications.

Importantly, AST-008 in combination with selected anti-PD-1 antibodies shows significantly greater activity compared to the linear oligonucleotides of the same sequence and concentration. We believe this demonstrates the potential advantage of our proprietary SNA design compared to linear oligonucleotides for effecting a tumor clearing response.

AST-008 in combination with a certain anti-PD-1 antibody in breast cancer mouse model resistant to anti-PD-1 treatment. Surviving mice from the experiment treated with anti-PD-1 and AST-008 survived when re-injected with the same EMT6 breast cancer cells, but did not survive when injected with unrelated CT-26 or 4T1 cancer cells. * p < 0.0001 versus vehicle treated group.

Melanoma mouse model. We have demonstrated the synergy of AST-008 with a selected anti-PD-1 antibody in a mouse melanoma model where the antibody is not effective on its own. This is representative of most advanced melanoma patients who receive anti-PD-1 antibodies because the majority of patients do not respond to the therapy. This study was executed with 10 mice per group, and there were four treatment groups. The animals were treated with vehicle, an anti-PD-1 antibody alone, AST-008 alone, or a combination of the antibody and AST-008. AST-008 was administered subcutaneously on days 3, 6, 9, 12, and 15 after tumor implantation at a dose of 0.8 mg/kg/injection. The anti-PD-1 antibody was injected intraperitoneally on days 5, 10 and 15 at a dose of 10 mg/kg/injection. AST-008 treatment resulted in a large decrease in tumor volume and an increase in survival versus the mice treated with vehicle or antibody alone. Importantly, mice treated with both AST-008 and the anti-PD-1 antibody had no measurable tumor volume, in contrast to animals treated with the anti-PD-1 antibody alone, where no meaningful tumor volume change or survival was observed compared to the vehicle treated group. Moreover, median survival for the anti-PD-1 treatment group was 36 days whereas median survival for the combination group was greater than 67 days, at least an 86% increase. These results suggest that AST-008 treatment may be able to potentiate anti-PD-1 antibody therapy when the antibody is ineffective on its own.

 

The combination of AST-008 with an anti-PD-1 antibody shows improved tumor volume reduction and increased median survival in a mouse model of melanoma compared to anti-PD-1 antibody alone. * p < 0.0001 vs vehicle treated group.

Lymphoma mouse model. In a third demonstration of how AST-008 treatment can synergize with checkpoint inhibitor antibodies, we combined our SNA with an anti-PD-1 antibody in a lymphoma mouse model. This study used 10 mice per group, and the study had four groups. At the start of the study, A20 mouse lymphoma tumor cells were implanted in mice on day 0. Mice received vehicle, AST-008 alone, the anti-PD-1 antibody alone, or a combination of AST-008 and the antibody. AST-008 was injected directly into the tumor at a dose of 2.4 mg/kg, while the antibody was dosed intraperitoneally at 5 mg/kg. Therapy began on day 8 of the study when average tumor volume was 100mm ³ . Both agents were dosed once a week for a total of four doses. Over the course of the study, the mice were monitored for mortality and tumor volume was measured twice a week until study termination.

AST-008 monotherapy greatly decreased the tumor volume growth rate and increased the proportion of animals surviving to the end of the study to 80%, compared to both the vehicle and anti-PD-1 antibody groups, where survival was only 20%. Importantly, in the AST-008 and a-PD-1 antibody combination group, the tumor completely regressed in nine out of 10 animals, and 90% of the mice in the group survived to the end of the study.

Tumor growth and survival curves for combinations of AST-008 and an anti-PD-1 antibody in a lymphoma mouse model

AST-008 as a monotherapy for cancer.

We believe AST-008 potentially can be used as a monotherapy to treat cancer. We have examined AST-008 in a colon cancer mouse model, as well as in a melanoma model.

Mouse colon cancer model. Mice were implanted with colon cancer tumors. Once the tumor volume reached approximately 100 mm ³ , the mice were treated with vehicle or varying doses of the mouse analogue of AST-008,

referred to as mu-AST-008. The mu-AST-008 was administered by intratumoral injection every three days, starting on the ninth day after tumor implantation, for a total of five doses. The dose levels were 0.8, 3.2, or 6.4 mg/kg/injection. The mice were monitored for mortality, and tumor volume measurements were obtained twice weekly until day 40 of the experiment.

The mice treated with mu-AST-008 had a dose dependent increase in survival and decrease of tumor burden compared to mice receiving the vehicle. A complete clearance of the tumors was observed in animals receiving the 6.4 mg/kg/injection dose of mu-AST-008. In addition, no mice in the group receiving the high dose of mu-AST-008 had died at day 40 of the study, while all of the vehicle-treated animals died by day 33.

Intratumoral treatment with the mouse analogue of AST-008, referred to as mu-AST-008, reduces tumor volume and increases survival in a colon cancer mouse model in a dose dependent manner. * = p < 0.0001 versus vehicle on day 23.

We believe the results of this study demonstrate that AST-008 has potential as a monotherapy for cancer.

Clinical development plan for AST-008

While we ultimately plan to clinically advance AST-008 exclusively in combination with checkpoint inhibitors, in the third quarter of 2017, we received an authorization from the MHRA to conduct a Phase 1 clinical trial with AST-008. The Phase 1 clinical trial is the first-in-human clinical trial of AST-008 and will evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of single and multiple doses of AST-008 by subcutaneous administration in healthy volunteers. The clinical trial is planned to be a randomized, single ascending dose, or SAD, and randomized, double-blind multiple ascending dose, or MAD, trial. Subjects will be recruited in five or more SAD cohorts. After the fourth SAD cohort, the first of three or more MAD cohorts will begin recruiting. We plan to dose a total at least 44 healthy subjects during this Phase 1 clinical trial and expect the results of this Phase 1 clinical trial to be available on a rolling basis starting in the fourth quarter of 2017.

Upon identification of the maximum tolerated dose, or MTD, of single agent AST-008 in the Phase 1 trial, we intend to conduct a Phase 1b/2 clinical trial of AST-008 and a checkpoint inhibitor antibody combination in oncology patients. We expect this clinical trial to comprise a Phase 1b dose escalation of AST-008 with a label dose of checkpoint inhibitor to determine an AST-008 MTD.

SNA targeting IL-4RA for atopic dermatitis

Overview

We are developing SNAs that target IL-4RA mRNA for the treatment of atopic dermatitis. The signaling of the cytokines IL-4 and IL-13 is believed to play a role in the pathogenesis of atopic dermatitis. Both of those cytokines require binding to the IL-4RA protein to produce inflammatory signaling.

Atopic dermatitis is a chronic rash characterized by inflammation and itching. The lifetime prevalence of atopic dermatitis is 10–20% in children and 1–3% in adults. Its prevalence has increased two- to threefold during the past three decades in industrialized countries.

Current Treatments

Current mild to moderate atopic dermatitis treatments aim to reduce inflammation and itchiness. Combinations of antihistamines, topical corticosteroids and topical immunomodulators are the current standard of care. Corticosteroid therapy use requires caution, however, because prolonged use can cause skin atrophy and tachyphylaxis. The FDA has warned of lymphoma and other cancers associated with prolonged use of topical immunomodulators. Antihistamines do not treat the disease, but are only useful to dull the urge to scratch to relieve itching.

Recently, a clinical trial of dupilumab, a fully human monoclonal antibody that is directed against the shared alpha subunit of the IL-4 receptor and that blocks signaling from both IL-4 and IL-13, showed efficacy in moderate to severe atopic dermatitis. Dupilumab is now marketed in the United States for the treatment of moderate to severe atopic dermatitis.

Our Approach

We believe that an anti-IL-4RA SNA applied topically to the skin will reduce the levels of IL-4RA mRNA, and in turn IL-4RA protein, in the skin thereby preventing the inflammatory signaling through both IL-4 and IL-13. Late stage clinical trials with dupilumab have confirmed that inhibiting the function of IL-4RA leads to successful treatment of atopic dermatitis. We believe our approach of modulating IL-4RA specifically and locally will result in an improved safety profile versus topical antihistamines, corticosteroids and immunomodulators, as well as systemically administered antibodies.

Early development programs

In addition to our named pipeline programs, a variety of research efforts are ongoing in areas we believe will best leverage the properties of the SNA. Potential applications of the SNA include those in neurology, ophthalmology, respiratory, and the gastrointestinal tract.

Neurology

Despite delivery challenges, nucleic-acid based therapy has been successfully developed to treat a central nervous system, or CNS, disorder. Nusinersen, by Ionis Pharmaceuticals and Biogen Inc., was approved in late 2016 for the treatment of spinal muscular atrophy, or SMA by the US FDA. SMA is a genetic disorder characterized by progressive muscle wasting and loss of muscle function due to motor neuron dysfunction. SMA is characterized by reduced amount of survival of motor neuron 1, or SMN1, protein. The severity of the disease depends on the amount of a related protein, SMN2, where lesser quantities of SMN2 are correlated to more severe disease. SMN2 is similar to SMN1, but in patients with SMA, has a mutation that leads to production of truncated protein, which is normally rapidly degraded. Nusinersen is designed to mitigate the effects of this mutation by directing the production of a more stable variant of SMN2, increasing the level of SMN2 protein, and thus improving motor function. In clinical trials, SMA patients treated with nusinersen achieved and sustained meaningful improvement in motor function and survival compared to untreated patients.

To demonstrate the superiority of the SNA over linear oligonucleotides in directing the production of a the more stable variant of the SMN2 protein, we compared the effects of nusinersen in linear format with nusinersen in SNA format in cells derived from SMA patients. The data showed that treatment with SNA format of nusinersen results in greater levels of the more stable variant of SMN2 mRNA compared with linear format. SNA format of nusinersen resulted in up to 45-fold increase in the more stable SMN2 mRNA variant versus controls, while a much smaller 2.5-fold increase was observed using nusinersen in the linear format.

Nusinersen in the SNA format significantly increases the levels of stable variant of SMN2 compared to the linear format as measured by changes in mRNA levels in cells derived from SMA patients.

We believe these results suggest that nucleic acid therapeutics based on SNA may be superior to those in the linear format, some of which are already approved by the US FDA. The results also demonstrate potential of our SNA technology to treat a broad range of genetic disorders.

Ophthalmology

Ophthalmic therapies, such as antibodies, peptides or aptamers, are typically injected into the eye to reach their target tissues and achieve therapeutic effects. We believe that the penetration properties of the SNA may result in the delivery of therapeutically relevant concentrations of oligonucleotides to certain tissues in the eye after topical administration in the form of eyedrops.

To assess penetration into the eye, Dutch belted rabbits were given either eyedrops containing no SNAs, referred to as vehicle, or an SNA in a formulation. The eyedrops were administered to the animals 18 times over the course of five days. On the fifth day, the rabbit eyes were analyzed for SNA content. The results indicate that SNA were detected in tissues at the surface of the eye, where the application occurred, but also in the retina and vitreous humor, indicating that the SNA had penetrated into the eye.

The distribution of SNAs in rabbit eyes when administered as topical drops demonstrates that SNAs penetrate the eye

We believe these results are a promising step in demonstrating that SNAs may be used to treat ophthalmic diseases with eyedrops, an alternative to injections requiring medical personnel.

Respiratory

Altering the immunological state of the lung has promising therapeutic implications for the treatment of allergic diseases, such as asthma. In a preliminary assessment, we demonstrated an alteration of the immunological state both locally in the lung and systemically in mice after the inhalation of SNAs. An intranasal dose of PBS or nebulized formulation of AST-008 was administered to mice at 7.5 mg/kg to assess the pharmacodynamic effects of SNA delivery to the lungs. Four mice per group were used. At 4, 10, 16, or 24 hours following administration, serum was collected from the animals and bronchoalveolar lavage, or BAL, was performed to produce fluid from the lung surface. Finally, lung tissue was also collected from the animals. The fluids and tissue were subjected to cytokine concentration analysis. The results show that nebulized SNAs can produce a cytokine response in the lung tissue and BAL fluid, as well as systemically, as measured in the mouse serum. We believe these results have implications for the potential treatment of allergic diseases of the lung.

Nebulized SNAs can induce an immune response in lung tissue, BAL, and serum.

Gastrointestinal

A variety of gastrointestinal disorders, including ulcerative colitis and Crohn’s disease, collectively referred to as irritable bowel disease, or IBD, are inadequately treated with existing therapies such as immunosuppressive steroids and anti-TNF antibodies.

We believe that orally applied SNAs may provide the opportunity to treat diseases such as IBD by taking advantage of the local tissue penetration of the SNA technology. Accordingly, the effect of oral SNA treatment was assessed in an induced IBD mouse model. After the induction of colitis, the mice were treated with anti-TNF SNAs on day 1, 2, 3 and 4, for a total four doses, at 100 or 200 µg/dose/mouse by oral gavage. Control mice were treated with vehicle only. The mice were monitored for mortality and scored clinically for seven days.

Clinical scores for the mice during the course of the study were assigned by considering the body weight, stool consistency, bleeding and any abnormalities observed in fur coat and abdomen. Gross pathology scores were assigned on the last day of study from the colons removed from the animals after euthanization. Gross pathology scores ranging from 0 to 5, indicating no abnormalities and multiple ulcers, respectively, were assigned based on the severity of the inflammation and ulceration in the colon.

The results showed improvement in clinical score and gross pathology for animals treated with 200 µg/dose of anti-TNF SNAs compared to those treated with vehicle only. Overall, the results suggest that oral administration of SNA had a positive effect on disease symptoms as reflected by lower clinical and pathology scores.

Oral administration of anti-TNF SNAs improve clinical scoring, left panel, and pathology results, right panel, in a mouse model of IBD. * p <0.05 vs vehicle

Novel TLR9 agonists

We are developing novel TLR9 agonist SNAs that produce cytokine profiles distinct from AST-008 in an effort to broaden our armamentarium of options for treatment of cancer, respiratory and autoimmune diseases.

Purdue Collaboration

Pursuant to the Purdue Collaboration Exicure OpCo entered into with Purdue on December 2, 2016, Purdue has the option to obtain from us the full worldwide development and commercial rights to AST-005, an option to obtain three additional collaboration targets and a further option to obtain from us the full worldwide development and commercial rights to any therapeutic candidates developed targeting the three additional collaboration targets.

Additionally, Purdue has rights of first offer to some potential collaboration targets. These rights of first offer are subject to limitations in time and scope. In connection with the Purdue Collaboration, we received a non-refundable development fee of $10.0 million. In addition, we are eligible to receive up to $776.5 million upon successful completion of certain research, regulatory and commercial sales milestones. The research milestones are payable upon target identification and IND-enabling pre-clinical development, per program, with an aggregate total of up to $16.5 million. The regulatory milestones are payable upon the initiation or completion of clinical trials, and regulatory approval in the United States and outside the United States, per program, with an aggregate total of up to $410.0 million. The commercial sales milestones are payable upon achievement of specified aggregate product sales thresholds and total up to $350.0 million. There can be no assurance these milestones will be achieved as they are subject to highly significant risks and uncertainties, many of which are outside of our control. In the event a therapeutic candidate subject to the collaboration results in commercial sales, we are eligible to receive royalties ranging from the low single digits to a maximum of 10% on future net sales of such commercialized therapeutic candidates.

Purdue is entitled to terminate the Purdue Collaboration by providing the Company with advance written notice. The agreement also provides termination provisions for material breaches of contract provisions that are customary for agreements of this type.

By working with Purdue, we believe we will be able to discover and develop the next generation of nucleic acid therapies that have the potential to substantially advance the field of targeted therapies. We believe this collaboration exemplifies our strategy of establishing alliances with leaders with a proven track record in the development and global commercialization of treatments for patients with chronic conditions.

Our Intellectual Property

Proprietary Protection

Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our therapeutic candidates, manufacturing and process discoveries and other know-how, to operate without infringing the proprietary rights of others, and to prevent others from infringing on our proprietary rights. We have been building and continue to build our intellectual property portfolio relating to our AST-005, XCUR17 and AST-008 therapeutic candidates and our SNA technology platform. Our policy is to seek to protect our proprietary position by, among other methods, filing and licensing U.S. and certain foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business. We also intend to rely on trade secrets, know-how, and technological innovation to develop and maintain our proprietary position. We cannot be sure that patents will be granted with respect to any of our owned or licensed pending patent applications or with respect to any patent applications filed or licensed by us in the future, nor can we be sure that any of our existing owned or licensed patents or any patents that may be granted or licensed to us in the future will be commercially useful in protecting our technology.

Patent Rights

Our patent portfolio includes pending patent applications and issued patents in the United States and in foreign countries. As of June 30, 2017, our patent portfolio consists of over 40 issued patents and allowed patent applications and over 110 pending patent applications. Our general practice is to seek patent protection in major markets worldwide, including the U.S., Canada, China, Japan, Australia, certain members of the European Union, among others. All of the issued patents and allowed patent applications are licensed from Northwestern University, or NU. Among the pending patent applications, we license 42 from NU, we exclusively own 66, and we jointly own 8 with NU.

Our license from NU is for royalty bearing worldwide exclusive rights to the use of SNAs for therapeutic applications. Pursuant to the license, we are allowed to manufacture, use, offer for sale, sell and import products covered by the licensed patent rights.

Our AST-005 patent portfolio includes one pending U.S. patent application and corresponding applications in 28 foreign jurisdictions. The pending applications are composition of matter and method of use type applications and include claims to an oligonucleotide that is 18 nucleotides in length, and methods of use for treating dermal and other disorders. Any patents that may issue from these applications would expire by 2035. The expiration dates do not take into consideration any potential patent term adjustment that may be applied by the U.S. Patent Office upon issuance of the patent, any terminal disclaimers that may be filed in the future or any regulatory extensions that may be obtained.

Our AST-008 patent portfolio includes 24 pending U.S. nonprovisional and foreign patent applications. Foreign jurisdictions where we are seeking patent protection for our AST-008 patent portfolio include Canada, China, Japan, Australia, the European Union, India, South Korea and Mexico. Each of these applications is a composition of matter and method of use type application. The claims of these applications are directed to certain nanoscale constructs, liposomal particles, and multivalent nanostructures, and their methods of use for treating cancer and other disorders. Any patents that may issue from these applications would expire by 2034 or 2035. The expiration dates do not take into consideration any potential patent term adjustment that may be applied by the U.S. Patent Office upon issuance of the patent, any terminal disclaimers that may be filed in the future or any regulatory extensions that may be obtained.

Our XCUR17 patent portfolio includes one pending international patent application filed under the Patent Cooperation Treaty, or PCT. The pending PCT application is a composition of matter and method of use type application and includes claims to one or more oligonucleotides that are 18 nucleotides in length, and methods of use for treating dermal and other disorders. We have the option of pursuing patent protection for this pending PCT application in the U.S. and elsewhere. Any patents that may issue from this application would expire by 2037. The expiration date does not take into consideration any potential patent term adjustment that may be applied by the U.S. Patent Office upon issuance of the patent, any terminal disclaimers that may be filed in the future or any regulatory extensions that may be obtained.

Upon receiving FDA approval for AST-005, XCUR17 or AST-008, we intend to list applicable patents in the FDA’s Orange Book.

Patent life determination depends on the date of filing of the application and other factors as promulgated under the patent laws. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country.

Trade Secret and Other Protection

In addition to patented intellectual property, we also rely on trade secrets and proprietary know-how to protect our technology, especially when we do not believe that patent protection is appropriate or can be obtained. It is our policy to require our employees and consultants, outside scientific collaborators, sponsored researchers and other advisors who receive confidential information from us to execute confidentiality agreements upon the commencement of employment or consulting relationships. These agreements provide that all confidential information developed or made known to these individuals during the course of the individual’s relationship with the company is to be kept confidential and is not to be disclosed to third parties except in specific circumstances. The agreements provide that all inventions conceived by an employee shall be the property of our Company. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.

Other Intellectual Property Rights

We seek trademark protection in the United States when appropriate. We have filed for trademark protection for the following marks: LIFE HAPPENS IN 3D, LIFE IN 3D, and EXICURE. We currently have one registered trademark, EXICURE.

From time to time, we may find it necessary or prudent to obtain licenses from third party intellectual property holders.

Northwestern University license agreements

In September 2009, NU and AuraSense LLC, or ASLLC, one of our significant stockholders, entered into a license agreement under which NU granted ASLLC an exclusive, worldwide license under certain NU patents and patent applications to exploit products and processes in the field of the use of nanoparticles, nanotechnology, microtechnology or nanomaterial-based constructs as or accompanying therapeutics or theradiagonostics and in or for intracellular diagnostic applications and intracellular research. On December 12, 2011, ASLLC assigned to us all of its worldwide rights and interests under the NU-ASLLC license in the field of the use of nanoparticles, nanotechnology, microtechnology or nanomaterial-based constructs as therapeutics or accompanying therapeutics as a means of delivery, but expressly excluding diagnostics (the “assigned field”). In accordance with the terms and conditions of this assignment, we assumed all liabilities and obligations of ASLLC to NU as set forth in its license agreement in the assigned field and in August 2015 we entered into a restated license agreement with NU. In February 2016, we obtained exclusive license as to NU’s rights in certain SNA technology we jointly own with NU. Our license to NU’s rights is limited to the assigned field, however we have no such limitation as to our own rights in this jointly owned technology. In June 2016, we entered into an exclusive license with NU to obtain worldwide rights to certain inhibitors of glucosylceramide synthase and their use in wound healing in diabetes. Our rights and obligations in these 2016 agreements are substantially the same as in the restated license agreement from August 2015. For purposes of the assigned field, therapeutic uses means the use of products and processes that are covered by the patents and patent applications licensed from NU for the purpose of providing a therapy or course of medical treatment to address a medical condition or disease. The NU license agreements provide to us the exclusive, worldwide right to make, have made, use, modify, sell, offer for sale and import any product or process that is covered by any claim in the licensed NU patents and patent applications. We have the right to sublicense these rights to third parties. The NU license agreements require us to use commercially reasonable efforts, consistent with demand in the marketplace, regulatory procedures and industry conditions and development timelines, to research, develop, market and manufacture the licensed products.

Our rights under the NU license agreements are subject to a variety of material limitations. First, the license specifically excludes use of the licensed patent rights to perform qualitative or quantitative in vitro analysis, testing, or measurement as well as detection of a variety of combinations of biodiagnostics field subsets and targets. Second, the license specifically prohibits us from using the licensed patent rights with regard to diagnostics, including without limitation, theradiagnostics. Third, though the license is otherwise exclusive in the assigned field, NU retains the right to use the licensed patent rights for research, teaching, and other educational purposes, including the right to distribute and publish materials related to the licensed patent rights. Fourth, the license is subject to the rights of the U.S. government under any and all applicable laws including substantially manufacturing all licensed products in the U.S. unless such requirement is waived by the U.S. government. Fifth, other than in certain circumstances, the NU license agreements are non-transferable without the consent of NU. Under the terms of the NU license agreements, depending on the circumstances, either we or NU can sue to enforce the patent rights against third party infringers.

In order to secure the assignment of the NU-ASLLC license in the field, we assumed the obligation to pay NU an annual license fee, which may be credited against any royalties based on sales of licensed products that are due to NU in the same year, and to reimburse NU for expenses associated with the prosecution and maintenance of the licensed patent rights. In addition, we assumed the obligation to pay NU royalties at a low single-digit percentage of any net revenue generated by our sale or transfer of any licensed product. In the event we grant a sublicense under the licensed patent rights, we also assumed the obligation to pay NU, on a quarterly basis, the greater of a mid-teen percentage of all sublicensee royalties or a low single-digit percent of any net revenue generated by a sublicensee’s sale or transfer of any licensed product. As of June 30, 2017, we have paid to NU an aggregate of $3.2 million in consideration of each of the obligations described above.

We may terminate our license agreements with NU at any time by providing 90 days written notice to NU. NU may terminate the agreements or, alternatively, convert our exclusive rights to non-exclusive rights if we fail to

comply with certain prescribed timelines for research, development, marketing and manufacturing milestones for the licensed products. NU may also terminate the agreements if we sue, or do not terminate all agreements with a sublicensee who sues NU, in a matter not arising from the agreements themselves. Either party may terminate the agreements in the event of a material breach by the other that remains uncured for a period of 30 days after the non-breaching party provides notice to the breaching party. The agreements will automatically terminate if we reach specified thresholds of financial distress. In the event of termination, all rights immediately revert to NU. The agreements will automatically expire upon the expiration of the last to expire patent rights. In the event of expiration, the license automatically becomes a non-exclusive, irrevocable, fully-paid license to use or sublicense the use of know-how to make and sell products in each country where the license had previously been in effect.

Our technology licenses and assignments

Our strategy around protection of our proprietary technology, including any innovations and improvements, is to obtain worldwide patent coverage with a focus on jurisdictions that represent significant global pharmaceutical markets. Generally, patents have a term of twenty years from the earliest priority date, assuming that all maintenance fees are paid, no portion of the patent has been terminally disclaimed and the patent has not been invalidated. In certain jurisdictions, and in certain circumstances, patent terms can be extended or shortened. We are pursuing worldwide patent protection for at least novel molecules, compositions of matter, pharmaceutical formulations, methods of use, including treatment of disease, methods of manufacture and other novel uses for the inventive molecules originating from our research and development efforts. We continuously assess whether it is strategically more favorable to maintain confidentiality for the “know-how” regarding a novel invention rather than pursue patent protection. For each patent application that is filed we strategically tailor our claims in accordance with the existing patent landscape around a particular technology.

There can be no assurance that an issued patent will remain valid and enforceable in a court of law through the entire patent term. Should the validity of a patent be challenged, the legal process associated with defending the patent can be costly and time consuming. Issued patents can be subject to oppositions, interferences and other third party challenges that can result in the revocation of the patent or limit patent claims such that patent coverage lacks sufficient breadth to protect subject matter that is commercially relevant. Competitors may be able to circumvent our patents. Development and commercialization of pharmaceutical products can be subject to substantial delays and it is possible that at the time of commercialization any patent covering the product has expired or will be in force for only a short period of time following commercialization. We cannot predict with any certainty if any third party U.S. or foreign patent rights, or other proprietary rights, will be deemed infringed by the use of our technology. Nor can we predict with certainty which, if any, of these rights will or may be asserted against us by third parties. Should we need to defend ourselves and our partners against any such claims, substantial costs may be incurred. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief, which could effectively block our ability to develop or commercialize some or all of our products in the U.S. and abroad, and could result in the award of substantial damages. In the event of a claim of infringement, we or our partners may be required to obtain one or more licenses from a third party. There can be no assurance that we can obtain a license on a reasonable basis should we deem it necessary to obtain rights to an alternative technology that meets our needs. The failure to obtain a license may have a material adverse effect on our business, results of operations and financial condition.

We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that we can meaningfully protect our trade secrets on a continuing basis. Others may independently develop substantially equivalent confidential and proprietary information or otherwise gain access to our trade secrets.

It is our policy to require our employees and consultants, outside scientific collaborators, sponsored researchers and other advisors who receive confidential information from us to execute confidentiality agreements upon the commencement of employment or consulting relationships. These agreements provide that all confidential information developed or made known to these individuals during the course of the individual’s relationship with the company is to be kept confidential and is not to be disclosed to third parties except in specific circumstances. The agreements provide that all inventions conceived by an employee shall be the property of the company. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.

Our success will depend in part on our ability to obtain and maintain patent protection, preserve trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others, both in the U.S. and other territories worldwide.

Manufacturing and Supply

We do not currently own or operate manufacturing facilities for the production of preclinical, clinical or commercial quantities of any of our therapeutic candidates. We currently contract with only one therapeutic substance and three drug product manufacturers for the supply of SNAs and we expect to continue to do so to meet the preclinical and any clinical requirements of our therapeutic candidates. We do not have a long-term agreement with these third parties.

We have agreements for the supply of such therapeutic materials with manufacturers or suppliers that we believe have sufficient capacity to meet our demands. In addition, we believe that adequate alternative sources for such supplies exist. However, there is a risk that, if supplies are interrupted, it would materially harm our business. We typically order raw materials and services on a purchase order basis and do not enter into long-term dedicated capacity or minimum supply arrangements.

Manufacturing is subject to extensive regulations that impose various procedural and documentation requirements, which govern record keeping, manufacturing processes and controls, personnel, quality control and quality assurance, among others. Our contract manufacturing organizations manufacture our therapeutic candidates subject to cGMP conditions. cGMPs are regulatory requirements for the production of therapeutics that will be used in humans.

Competition

We believe that our scientific knowledge and expertise in SNA-based therapies provide us with competitive advantages over the various companies and other entities that are attempting to develop oligonucleotide based-therapeutics. However, we face competition at the technology and therapeutic indication levels from both large and small biotechnology companies, academic institutions, government agencies and public and private research institutions. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Our success will be based in part upon our ability to identify, develop and manage a portfolio of therapeutics that are safer and more effective than competing products in the treatment of our targeted patients. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than any therapeutics we may develop.

Competition in oligonucleotide-based therapeutics

There is intense and rapidly evolving competition in the biotechnology, pharmaceutical and oligonucleotide therapeutics fields. We believe that while our SNA technology, its associated intellectual property and our scientific and technical know-how gives us a competitive advantage in this space, competition from many sources remains. Our competition includes larger and better funded pharmaceutical, biotechnological and oligonucleotide therapeutic firms. Moreover, we not only compete with other firms, but also with current and future therapeutics.

We are aware of several companies that are developing oligonucleotide delivery platforms and oligonucleotide based therapeutics. These competitors include Ionis Pharmaceuticals, Inc., Alnylam Pharmaceuticals, Inc., Dicerna Pharmaceuticals, Inc., Arbutus Biopharma Corp., Wave Life Sciences Ltd., Dynavax Technologies Corp., Idera Pharmaceuticals, Inc., Mologen AG, and Checkmate Pharmaceuticals, Inc. These and other competitors compete

with us in recruiting scientific and managerial talent, and for the finite funding available from biotechnology and pharmaceutical companies.

Our success will partially depend on our ability to develop and protect therapeutics that are safer and more effective than competing products. Our commercial opportunity and success will be reduced or eliminated if competing products are safer, more effective, or less expensive than the therapeutics we develop.

If our lead therapeutic candidates are approved for the indications for which we undertake clinical trials, they will compete with therapies that are either in development or currently marketed, such as the following:

Competition in psoriasis

There are currently a number of therapeutics on the market for the treatment of psoriasis. Over the counter medications such as salicylic acid and zinc pyrithione are used for treating mild to moderate psoriatic lesions. Prescription medications such as corticosteroids, calcipotriene, retinoids are available and can be applied topically. Oral therapeutics like cyclosporine and methotrexate are also used. Finally, injectable antibody-based therapies are used to decrease TNF-driven inflammation and thus reduce the symptoms of the disorder in the case of severe psoriasis.

Competition in immuno-oncology

There are a number of competitive products to SNAs for immuno-oncology on the market and in development. Ipilimumab and nivolumab from Bristol-Myers Squibb Company, atezolizumab from the Roche Group, as well as pembrolizumab from Merck & Co., Inc., are now marketed for the treatment of advanced melanoma or other cancers, and these and other therapeutic products are in development for other immuno-oncology applications. In addition, adoptive cell therapies such as CAR-T cells are showing great promise for the treatment of B-cell malignancies in clinical trials.

Government Regulation and Product Approval

Governmental authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, packaging, promotion, storage, advertising, distribution, marketing, sales, and export and import of products such as those we are developing. Our therapeutic candidates must be approved by the FDA through the NDA process before they may be legally marketed in the U.S. and will be subject to similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

U.S. government regulation

NDA approval processes . In the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act of 1938, or the FDCA, and implementing regulations. If we fail to comply with applicable FDA or other requirements at any time during the product development or approval process, or after approval, we may become subject to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include:

The process required by the FDA before a therapeutic candidate may be marketed in the U.S. generally involves the following:

The testing and approval process requires substantial time, effort, and financial resources, and we cannot be certain any approvals for our therapeutic candidates will be granted on a timely basis, if at all.

Once a therapeutic candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests include laboratory evaluations of product chemistry, toxicity, formulation and stability, as well as animal studies. An IND sponsor must submit the results of the nonclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some nonclinical testing may continue even after the IND is submitted. In addition to including the results of the nonclinical studies, the IND will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. Currently, the IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Submission of an IND may result in the FDA not allowing the clinical trials to commence or not allowing the clinical trials to commence on the terms originally specified in the IND. A separate submission to an existing IND must also be made for each successive clinical trial conducted during drug development, and the FDA must grant permission, either explicitly or implicitly by not objecting, before each clinical trial can begin.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCPs. They must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol, and any subsequent material amendment to the protocol, must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must report to the FDA serious and unexpected adverse reactions in a timely manner, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigation brochure or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the therapeutic. An institutional review board, or IRB, at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution and must also approve the

information regarding the trial and the consent form that must be provided to each research subject or the subject’s legal representative, monitor the trial until completed and otherwise comply with IRB regulations. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trials results to public registries.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined.

Human clinical trials are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the therapeutic candidate has been associated with unexpected serious harm to patients.

A drug being studied in clinical trials may be made available to individual patients, in certain circumstances. Pursuant to the 21st Century Cures Act, or Cures Act, which was signed into law in December 2016, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug.

During the development of a new therapeutic candidate, sponsors are given opportunities to meet with the FDA at certain points; specifically, prior to the submission of an IND, at the end of Phase 2 and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trial that they believe will support the approval of the new therapeutic.

Concurrent with clinical trials, sponsors usually complete additional animal safety studies and also develop additional information about the chemistry and physical characteristics of the therapeutic candidate and finalize a process for manufacturing commercial quantities of the therapeutic candidate in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the therapeutic candidate and the manufacturer must develop methods for testing the quality, purity and potency of the therapeutic candidate. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the therapeutic candidate does not undergo unacceptable deterioration over its proposed shelf-life.

The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a significant user fee.

The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual product fee for products and an annual establishment fee on facilities used to manufacture prescription drug products. Fee waivers or reductions are available in certain circumstances, such as where a waiver is necessary to protect the public health, where the fee would present a significant barrier to innovation, or where the applicant is a small business submitting its first human therapeutic application for review. Within 60 days following submission of the application, the FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.

Once the submission is accepted for filing, the FDA begins an in-depth substantive review. NDAs receive either standard or priority review. A therapeutic representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND trial requirements and GCP requirements. To assure cGMP and GCP compliance, an applicant must incur significant expenditures of time, money and effort in the areas of training, record keeping, production and quality control.

During the product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategies, or REMS, plan is necessary to assure the safe use of the product. If the FDA concludes a REMS plan is needed, the sponsor of the NDA must submit a proposed REMS plan. The FDA will not approve an NDA without a REMS plan, if required. The FDA has authority to require a REMS plan under the Food and Drug Administration Amendments Act of 2007, or FDAAA, when necessary to ensure that the benefits of a therapeutic outweigh the risks. In determining whether a REMS plan is necessary, the FDA must consider the size of the population likely to use the therapeutic, the seriousness of the disease or condition to be treated, the expected benefit of the therapeutic, the duration of treatment, the seriousness of known or potential adverse events, and whether the therapeutic is a new molecular entity. A REMS plan may be required to include various elements, such as a medication guide or patient package insert, a communication plan to educate health care providers of the risks, limitations on who may prescribe or dispense the therapeutic, or other measures that the FDA deems necessary to assure the safe use of the therapeutic. In addition, the REMS plan must include a timetable to assess the strategy at 18 months, three years, and seven years after the strategy’s approval.

The FDA may also require a REMS plan for a therapeutic that is already on the market if it determines, based on new safety information, that a REMS plan is necessary to ensure that the product’s benefits outweigh its risks.

Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the NDA does not satisfy its regulatory criteria for approval and deny approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. If the agency decides not to approve the NDA in its present form, the FDA will issue a complete response letter that describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if the NDA is resubmitted, FDA may again decide that the resubmitted NDA does not satisfy the criteria for approval.

Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require post-marketing clinical trials, sometimes referred to as “Phase 4” clinical trials, designed to further assess a product’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that have been commercialized.

Companion Diagnostics . The FDA has issued a final guidance document addressing the agency’s policy in relation to in vitro companion diagnostic tests. The guidance explains that for some therapeutics, the use of a companion diagnostic test is essential for the safe and effective use of the product, such as when the use of a product is limited to a specific patient subpopulation that can be identified by using the test. According to the guidance, the FDA generally will not approve such a product if the companion diagnostic is not also approved or cleared for the appropriate indication, and accordingly the therapeutic product and the companion diagnostic should be developed and approved or cleared contemporaneously. However, the FDA may decide that it is appropriate to approve such a product without an approved or cleared in vitro companion diagnostic device when the therapeutic is intended to treat a serious or life-threatening condition for which no satisfactory alternative treatment exists and the FDA determines that the benefits from the use of a product with an unapproved or uncleared in vitro companion diagnostic device are so pronounced as to outweigh the risks from the lack of an approved or cleared in vitro companion diagnostic device. The FDA encourages sponsors considering developing a therapeutic product that requires a companion diagnostic to request a meeting with both relevant device and therapeutic product review divisions to ensure that the product development plan will produce sufficient data to establish the safety and effectiveness of both the therapeutic product and the companion diagnostic. Because the FDA’s policy on companion diagnostics is set forth only in guidance, this policy is subject to change and is not legally binding.

Expedited review and approval. The FDA has various programs, including Fast Track, priority review, accelerated approval and breakthrough therapy, which are intended to expedite or simplify the process for reviewing therapeutic candidates, or provide for the approval of a therapeutic candidate on the basis of a surrogate endpoint. Even if a therapeutic candidate qualifies for one or more of these programs, the FDA may later decide that the therapeutic candidate no longer meets the conditions for qualification or that the time period for FDA review or approval will be lengthened. Generally, therapeutic candidates that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of therapeutic candidates to treat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give a therapeutic candidate that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness, an initial review within eight months as compared to a standard review time of twelve months.

Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated therapeutic candidate and expedite review of the application for a therapeutic candidate designated for priority review. Accelerated approval, which is described in Subpart H of 21 CFR Part 314, provides for an earlier approval for a new therapeutic candidate that is intended to treat a serious or life-threatening disease or condition, generally provides a meaningful advantage over available therapies and demonstrates an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably likely to predict an effect on IMM or other clinical benefit. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA may require that a sponsor of a therapeutic candidate receiving accelerated approval perform post-marketing clinical trials to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the product may be subject to accelerated withdrawal procedures.

In the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law in July 2012, the U.S. Congress encouraged the FDA to utilize innovative and flexible approaches to the assessment of therapeutic candidates under accelerated approval. The law required the FDA to issue related guidance and also promulgate confirming regulatory changes. In May 2014, the FDA published a final Guidance for Industry titled “Expedited Programs for Serious Conditions—Drugs and Biologics,” which provides guidance on FDA programs that are intended to facilitate and expedite development and review of new therapeutic candidates as well as threshold criteria generally applicable to concluding that a therapeutic candidate is a candidate for these expedited development and review programs.

In addition to the Fast Track, accelerated approval and priority review programs discussed above, the FDA also provided guidance on a new program for Breakthrough Therapy Designation, established by FDASIA to subject a new category of drugs to accelerated approval. A sponsor may seek FDA designation of a therapeutic candidate as a “breakthrough therapy” if the therapeutic is intended, alone or in combination with one or more other therapeutics, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the therapeutic may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. A request for Breakthrough Therapy designation should be submitted concurrently with, or as an amendment to, an IND, but ideally no later than the end of the Phase 2 meeting.

Similar to FDASIA, the Cures Act, which was signed into law in December 2016, includes numerous provisions intended to accelerate the development of new products regulated by the FDA. As an example, the Cures Act provides that the FDA may allow the sponsor of an NDA for a genetically targeted drug or variant protein targeted drug to rely upon data and information previously developed by the same sponsor (or another sponsor that has provided the sponsor with a contractual right of reference to such data and information) and submitted by the sponsor in support of one or more previously approved applications submitted to the FDA for a drug that incorporates or utilizes the same or similar genetically targeted technology or the same variant protein targeted drug.

Patent term restoration and marketing exclusivity. Depending upon the timing, duration and specifics of FDA approval of the use of our therapeutic candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the therapeutic candidate’s approval date. The patent term restoration period is generally one half of the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved therapeutic candidate is eligible for the extension and the application for extension must be made prior to expiration of the patent. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of the relevant NDA.

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A therapeutic candidate is a new chemical entity if the FDA has not previously approved any other new therapeutic candidate containing the same active moiety, which is the molecule or ion responsible for the action of the therapeutic candidate substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such therapeutic candidate where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an approved NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by

the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing therapeutic candidate. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for therapeutic candidates containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Orphan drug designation. Under the Orphan Drug Act, the FDA may grant orphan drug designation to therapeutic candidates intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the U.S. or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a therapeutic candidate for this type of disease or condition will be recovered from sales in the U.S. for that therapeutic candidate. Orphan drug designation must be requested before submitting a marketing application for the therapeutic for that particular disease or condition. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. The FDA may revoke orphan drug designation, and if it does, it will publicize the drug is no longer designated as an orphan drug.

If a therapeutic candidate with orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the therapeutic candidate is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same therapeutic candidate for the same indication, except in very limited circumstances, for seven years. Orphan drug exclusivity, however, could also block the approval of one of our therapeutic candidates for seven years if a competitor obtains approval of the same therapeutic candidate as defined by the FDA or if our therapeutic candidate is determined to be contained within the competitor’s therapeutic candidate for the same indication or disease.

Pediatric exclusivity and pediatric use. Under the Best Pharmaceuticals for Children Act, or BPCA, certain therapeutic candidates may obtain an additional six months of exclusivity if the sponsor submits information requested in writing by the FDA, referred to as a Written Request, relating to the use of the active moiety of the therapeutic candidate in children. The FDA may not issue a Written Request for studies on unapproved or approved indications where it determines that information relating to the use of a therapeutic candidate in a pediatric population, or part of the pediatric population, may not produce health benefits in that population.

In addition, the Pediatric Research Equity Act, or PREA, requires a sponsor to conduct pediatric studies for most therapeutic candidates and biologics, for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under PREA, original NDAs, BLAs and supplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must assess the safety and effectiveness of the therapeutic candidate for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the therapeutic candidate is safe and effective. The sponsor or the FDA may request a deferral of pediatric studies for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the drug or biologic is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be collected before the pediatric studies begin. The FDA must send a noncompliance letter to any sponsor that fails to submit the required assessment, keep a deferral current or fails to submit a request for approval of a pediatric formulation. The FDA also must post the PREA noncompliance letter and sponsor’s response.

As part of the FDASIA, the U.S. Congress made a few revisions to BPCA and PREA, which were slated to expire on September 30, 2012, and made both laws permanent.

Post-approval requirements. Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the therapeutic candidate reaches the market. Later discovery of previously unknown problems with a therapeutic candidate may result in restrictions on

the therapeutic candidate or even complete withdrawal of the therapeutic candidate from the market. After approval, some types of changes to the approved therapeutic candidate, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may under some circumstances require testing and surveillance programs to monitor the effect of approved therapeutic candidates that have been commercialized, and the FDA under some circumstances has the power to prevent or limit further marketing of a therapeutic candidate based on the results of these post-marketing programs.

Any therapeutic candidates manufactured or distributed by us or our collaborators pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things:

Therapeutic manufacturers, their subcontractors, and other entities involved in the manufacture and distribution of approved therapeutic candidates are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMPs and other laws. The FDA periodically inspects manufacturing facilities to assess compliance with ongoing regulatory requirements, including cGMPs, which impose extensive procedural, substantive and record-keeping requirements upon us and any third-party manufacturers that we may decide to use if our therapeutic candidates are approved. In addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require FDA approval before being implemented. FDA regulations would also require investigation and correction of any deviations from cGMPs and impose reporting and documentation requirements upon us and the third-party manufacturers. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMPs and other aspects of regulatory compliance. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory actions, such as warning letters, suspension of manufacturing, seizures of products, injunctive actions or other civil penalties. We cannot be certain we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials or require us to recall a product from distribution.

New Legislation and Regulations . From time to time, legislation is drafted, introduced and passed in the U.S. Congress that could significantly change the statutory provisions governing the testing, approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policies or interpretations will be changed or what the effect of such changes, if any, may be.

Regulation outside of the U.S.

In addition to regulations in the U.S., we will be subject to regulations of other countries governing any clinical trials and commercial sales and distribution of our therapeutic candidates. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the U.S. before we can commence clinical trials in such countries and approval of the regulators of such countries or

economic areas, such as the European Union, before we may market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.

The currently applicable Clinical Trials Directive 2001/20/EC and Commission Directive 2005/28/EC on GCP setting out the system for the approval of clinical trials in the European Union, or EU, have been implemented through national legislation in the EU Member States. Under this system, an applicant must obtain approval from the national competent authorities in all EU Member States in which the clinical trials are to be conducted. Furthermore, the applicant may only start a clinical trial at a specific study site once approved by the competent ethics committee.

In 2014, a new Clinical Trials Regulation 536/2014, replacing the current Clinical Trials Directive, was adopted. The new Regulation will become directly applicable in all EU Member States (without national implementation) once the EU Portal and Database are fully functional. The Regulation was expected to apply by October 2018. However, due to technical difficulties with the development of the IT systems, it is currently expected that the new Regulation will come into application during 2019. The new Regulation seeks to simplify and streamline the approval of clinical trials in the EU. For example, the sponsor shall submit a single application for approval of a clinical trial via the EU Portal. As part of the application process, the sponsor shall propose a reporting Member State, who will coordinate the validation and evaluation of the application. The reporting Member State shall consult and coordinate with the other concerned Member States. If an application is rejected, it can be amended and resubmitted through the EU Portal. If an approval is issued, the sponsor can start the clinical trial in all concerned Member States. However, a concerned Member State can in limited circumstances declare an “opt-out” from an approval. In such a case, the clinical trial cannot be conducted in that Member State. The Regulation also aims to streamline and simplify the rules on safety reporting, and introduces enhanced transparency requirements such as mandatory submission of a summary of the clinical trial results to the EU Database.

In the EU, a company may submit a marketing authorization application either: (i) at the national level with the national competent authorities in one EU Member State, or the national procedure; (ii) via mutual recognition of a national authorization in other EU Member States, or the mutual recognition procedure; (iii) at the national level in several EU Member States, or the decentralized procedure; or (iv) at centralized level with the European Medicines Agency, or EMA, referred to as the centralized procedure. The national procedure allows sponsor to choose the EU Member State in which he wishes to first submit an application. The mutual recognition procedure allows a marketing authorization granted in one EU Member State via the national procedure to be recognized in other EU Member States. The decentralized procedure allows a medicine that has not yet been authorized in the EU to be authorized in several EU Member States. The centralized procedure, whereby a medicine receives marketing authorization in all EU Member States, is compulsory for certain medicines and is optional for other types of medicines if the applicant can show eligibility.

As in the U.S., we may apply for designation of a therapeutic candidate as an orphan drug for the treatment of a specific indication in the EU before the application for marketing authorization is made. Orphan drugs in the EU enjoy economic and marketing benefits, including up to ten (10) years of market exclusivity for the approved indication unless certain exceptions apply.

Healthcare Reform

In March 2010, Congress passed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the ACA), a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of health spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry, and impose additional policy reforms. The ACA contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes, and fraud and abuse, impacting existing government healthcare programs and resulting in the development of new programs, including Medicare payment for performance initiatives, and improvements to the physician quality reporting system and feedback program. Other aspects of the ACA include, but are not limited to:

From time to time, legislation is drafted, introduced, and passed in Congress that could significantly change the statutory provisions governing the sale, marketing, coverage, and reimbursement of products regulated by CMS or other government agencies. In addition to new legislation, CMS regulations and policies are often revised or interpreted by the agency in ways significantly affecting our business and our products.

In particular, we expect that the new administration and the U.S. Congress will seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the U.S. healthcare reform legislation. Since taking office, President Trump has continued to support the repeal of all or portions of the ACA. President Trump has also issued an executive order in which he stated it is his administration’s policy to seek the prompt repeal of the ACA and directed executive departments and federal agencies to waive, defer, grant exemptions from, or delay the implementation of the provisions of the ACA to the maximum extent permitted by law. There is still uncertainty with respect to the impact President Trump’s administration and the U.S. Congress may have, if any, and any changes

will likely take time to unfold. Such reforms could have an adverse effect on anticipated revenues from therapeutic candidates we may successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop therapeutic candidates. However, we cannot predict the ultimate content, timing, or effect of any healthcare reform legislation or the impact of potential legislation on us.

Furthermore, political, economic, and regulatory influences frequently subject the healthcare industry in the U.S. to fundamental change. For example, initiatives to reduce the federal budget and debt and to reform healthcare coverage are increasing cost-containment efforts. We anticipate federal agencies, Congress, state legislatures, and the private sector will continue to review and assess alternative healthcare benefits, controls on healthcare spending, and other fundamental changes to the healthcare delivery system. Any proposed or actual changes could limit coverage for or the amounts federal and state governments will pay for health care products and services, which could also result in reduced demand for our products or additional pricing pressures, and limit or eliminate our spending on development projects and affect our ultimate profitability.

Third-Party Payor Coverage and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory approval. In the U.S., sales of any products for which we may receive regulatory marketing approval will depend, in part, on the availability of coverage and reimbursement from third-party payors. Third-party payors include government authorities such as Medicare, Medicaid, TRICARE, and the Veterans Administration, managed care providers, private health insurers, and other organizations.

The Medicaid Drug Rebate Program, which is part of the federal Medicaid program (a program for financially needy patients, among others), requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services as a condition for receiving federal reimbursement for the manufacturer’s outpatient drugs furnished to Medicaid patients.

In order for a pharmaceutical product to (i) receive federal reimbursement under Medicaid and Medicare Part B (the part of the federal Medicare program covering outpatient items and services for the aged and disabled) or (ii) be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program, which is a federal program that requires manufacturers to provide discounts to certain statutorily defined safety-net providers. The required 340B discount on a given product is calculated based on certain Medicaid Drug Rebate Program metrics the manufacturer is required to report to CMS. The failure to report or the misreporting of such pricing metrics could result in significant civil monetary penalties and fines, including up to $178,156 (adjusted for inflation) for each item of false or omitted information and $17,816 (adjusted for inflation) per day per labeler code for each day the submission of such pricing information is late beyond the due date.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, imposed requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities, which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

The process for determining whether a payor will provide coverage for a product is typically separate from the process for setting the reimbursement rate a payor will pay for the product. Third-party payors may limit coverage to specific products on an approved list or formulary, which may not include all FDA-approved products for a particular indication. Also, third-party payors may refuse to include a particular branded product on their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. Furthermore, a payor’s decision to provide coverage for a product does not imply an adequate reimbursement rate will be available. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of therapeutics have been a focus in this effort. The U.S. government, state legislatures, and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement, and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Our drug candidates may not be considered medically necessary or cost-effective. If third-party payors do not consider a product to be cost-effective compared to other available therapies, they may not cover an approved product as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.

Further, the American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. The plan for the research was published in 2012 by the Department of Health and Human Services, the Agency for Healthcare Research and Quality (AHRQ) and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to the U.S. Congress. In addition, the ACA requires, among other things, that AHRQ broadly disseminate findings from federally funded comparative clinical effectiveness research. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of our therapeutic candidates if any such therapeutic, or the condition that it is intended to treat, is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our therapeutic candidates.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by the U.S. Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, started in April 2013, and, due to subsequent legislative amendments, will stay in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which among other things, also reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare drugs and services, and in turn could significantly reduce the projected value of certain development projects and reduce our profitability.

Finally, in some foreign countries, the proposed pricing for a therapeutic candidate must be approved before it may be lawfully marketed. The requirements governing therapeutic pricing vary widely from country to country. For example, in the EU, pricing and reimbursement of pharmaceutical products are regulated at a national level under the individual EU Member States’ social security systems. Some foreign countries provide options to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A country may approve a specific price for the medicinal product or

it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our therapeutic candidates. Even if approved for reimbursement, historically, therapeutic candidates launched in some foreign countries such as some countries in the EU do not follow price structures of the U.S. and prices generally tend to be significantly lower.

Other Healthcare Laws and Regulations

If we obtain regulatory approval of our products, we may be subject to various federal and state laws targeting fraud and abuse in the healthcare industry. These laws may impact, among other things, our proposed sales and marketing strategies. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conducts our business. These laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security, and physician sunshine laws and regulations.

The federal Anti-Kickback Statute prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or paying remuneration (a term interpreted broadly to include anything of value, including, for example, gifts, discounts and credits), directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, an item or reimbursable, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. Violations of the federal Anti-Kickback Statute can result in significant civil monetary and criminal penalties, including $21,916 (adjusted annually for inflation) per kickback plus three times the amount of remuneration and a five year prison term per violation. Further, violation of the federal Anti-Kickback Statute can also form the basis for False Claims Act liability (discussed below). The Anti-Kickback Statute is subject to evolving interpretations. In the past, the government has enforced the Anti-Kickback Statute to reach large settlements with healthcare companies based on allegedly inappropriate consulting, discounting and other financial arrangements with physicians and others in a position to refer patients to receive items or services reimbursable by a federal healthcare program. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only government programs.

Additionally, the civil False Claims Act prohibits knowingly presenting or causing the presentation of a false, fictitious or fraudulent claim for payment to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act can result in very significant monetary penalties, including $10,957-$21,916 (adjusted annually for inflation) for each false claim and treble the amount of the government’s damages. The federal government continues to use the False Claims Act, and the accompanying threat of significant liability, in its investigations and prosecutions of pharmaceutical and biotechnology companies throughout the U.S. Such investigations and prosecutions frequently involve, for example, the alleged promotion of products for unapproved uses and other sales and marketing practices. The government has obtained multi-million and multi-billion dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with the False Claims Act and other applicable fraud and abuse laws.

The U.S. federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) includes a fraud and abuse provision referred to as the HIPAA All-Payor Fraud Law, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, including the final omnibus rule published on January 25, 2013, imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. Penalties include up to $55,010 per violation (with a maximum fine of $1,650,300 per violation category per year) (adjusted for inflation) and ten years in prison.

We may also be subject to federal transparency laws, including the federal Physician Payment Sunshine Act, which was part of the ACA and requires manufacturers of certain drugs and biologics, among others, to track and disclose payments and other transfers of value they make to U.S. physicians and teaching hospitals, as well as physician ownership and investment interests in the manufacturer. This information is subsequently made publicly available in a searchable format on a CMS website. Failure to disclose required information may result in civil monetary penalties of up to an aggregate of $163,117 per year (or up to an aggregate of $1,087,450 per year for “knowing failures”) (adjusted for inflation), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Certain states also mandate implementation of compliance programs, impose restrictions on drug manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians and/or other healthcare providers.

Finally, as noted above, analogous state laws and regulations, such as, state anti-kickback and false claims laws may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers. Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures. Similarly, many states also have laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Environment

Our third party manufacturers are subject to inspections by the FDA for compliance with cGMP and other U.S. regulatory requirements, including U.S. federal, state and local regulations regarding environmental protection and hazardous and controlled substance controls, among others. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We have incurred, and may continue to incur, significant expenditures to ensure we are in compliance with these laws and regulations. We would be subject to significant penalties for failure to comply with these laws and regulations.

Sales and Marketing

Our current focus is on the development of our existing portfolio, the initiation and completion of clinical trials and, if and where appropriate, the registration of our therapeutic candidates. We currently do not have marketing, sales and distribution capabilities. If we receive marketing and commercialization approval for any of our therapeutic candidates, we intend to market the product through strategic alliances and distribution agreements with third parties. The ultimate implementation of our strategy for realizing the financial value of our therapeutic candidates is dependent on the results of clinical trials for our therapeutic candidates, the availability of funds and the ability to negotiate acceptable commercial terms with third parties.

Advisors

We seek advice from our advisory board, which consists of a number of leading executive officers, scientists and physicians, on strategic direction, scientific and medical matters. Our advisory board meets periodically to assess

The current members of our advisory board are as follows.

Employees

As of June 30, 2017, we have 25 full time employees, 9 of whom have Ph.D. degrees. Of these full time employees, 18 are engaged in research and development activities and 7 are engaged in finance, legal, human resources, business development and general management. We have no collective bargaining agreement with our employees and we have not experienced any work stoppages. We consider our relations with our employees to be good.

Facilities

Our corporate headquarters are located in Skokie, Illinois, where we lease approximately 12,000 square feet of office and laboratory space. The lease term for our office and laboratory space in Skokie, Illinois commenced in March 2012 for a lease term of three years. In March 2014, we amended the lease agreement to extend the term for an additional six years, which expires in 2021. In May 2016, we amended the lease agreement to include additional space to be used primarily for administrative functions.

We believe that our existing facilities are adequate for our current needs and have sufficient laboratory space to house additional scientists as we grow. When our lease expires, we may exercise our renewal options or look for additional or alternate space for our operations. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms.

Legal Proceedings

From time to time, we may be subject to legal proceedings. We are not currently a party to or aware of any proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

RISK FACTORS

Investing in our common stock involves a high degree of risk. In addition to the other information set forth in this Report, you should carefully consider the risk factors discussed below when considering an investment in our common stock. If any of the following risks occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the market price of our common stock could decline and you could lose some or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Related to Our Business

We are a clinical-stage biotechnology company with a history of losses. We expect to continue to incur significant losses for the foreseeable future and may never achieve or maintain profitability, which could result in a decline in the market value of our common stock.

We are a biotechnology company developing gene regulatory and immuno-oncology therapeutics based on our proprietary SNA technology. We have a limited operating history. Since our inception in June 2011, we have devoted our resources to the development of SNA technology. We have had significant operating losses since our inception. As of December 31, 2016 and as of June 30, 2017, we have generated an accumulated deficit of $41.4 million and $48.1 million, respectively. For the years ended December 31, 2016 and 2015 and for the six months ended June 30, 2017, our net loss was $16.9 million, $13.2 million, and $6.6 million, respectively. Substantially all of our losses have resulted from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations. Our technology and therapeutic candidates are in early stages of development, and we are subject to the risks of failure inherent in the development of therapeutic candidates based on novel technologies.

We have not generated, and do not expect to generate, any product revenue for the foreseeable future, and we expect to continue to incur significant operating losses for the foreseeable future due to the cost of research and development, preclinical studies, clinical trials, and the regulatory approval process for therapeutic candidates. The amount of future losses is uncertain. Our ability to achieve profitability, if ever, will depend on, among other things, us, or any current or future collaborators, successfully developing therapeutic candidates, obtaining regulatory approvals to market and commercialize therapeutic candidates, manufacturing any approved products on commercially reasonable terms, establishing a sales and marketing organization or suitable third party alternatives for any approved product and raising sufficient funds to finance business activities. If we, or any current or future collaborators, are unable to develop and commercialize one or more of our therapeutic candidates or if sales revenue from any therapeutic candidate that receives approval is insufficient, we will not achieve profitability, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our ability to continue as a going concern will require us to obtain additional financing to fund our current operations, which may be unavailable on attractive terms, if at all.

As of June 30, 2017, our recurring operating losses and our current operating plans raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will require us to obtain additional financing to fund our current operating plans. We believe that the net proceeds from the initial closing of the Offering and our existing cash and cash equivalents will be sufficient to fund our current operating plans through September 30, 2018. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and therapeutic candidate development programs or commercialization efforts.

Our approach to the discovery and development of innovative therapeutic treatments based on our technology is unproven and may not result in marketable products.

We plan to develop a pipeline of therapeutic candidates using our proprietary SNAs as therapeutic agents. We believe that therapeutic candidates identified with our therapeutic discovery technology may offer an improved therapeutic approach to small molecules and antibodies, as well as several advantages over linear oligonucleotide-based therapeutics. However, the scientific research that forms the basis of our efforts to develop therapeutic candidates based on our SNAs and the identification and optimization of SNAs is relatively new. Further, the scientific evidence to support the feasibility of developing therapeutic treatments based on SNAs is both preliminary and limited.

Only one therapeutic candidate based on SNA technology has been tested in humans, and a number of clinical trials conducted by other companies using oligonucleotide technologies have not been successful. We may discover that the SNAs do not possess certain properties required for therapeutic treatment to be effective, such as the ability to remain stable in the human body for the period of time required for the therapeutic candidate to reach the target tissue or the ability to cross the cell membrane and enter into cells within the target tissue for effective delivery. We currently have only limited data, and no conclusive evidence, to suggest that we can introduce these necessary drug-like properties into SNAs. We may spend substantial funds attempting to introduce these properties and may never succeed in doing so. In addition, therapeutic candidates based on SNAs may demonstrate different chemical and pharmacological properties in patients than they do in laboratory studies. Even if therapeutic candidates have successful results in animal studies, they may not demonstrate the same chemical and pharmacological properties in humans and may interact with human biological systems in unforeseen, ineffective or harmful ways. As a result, we may never succeed in developing a marketable therapeutic, we may not become profitable and the value of our common stock will decline.

Further, the FDA has limited experience with SNA-based therapeutics. No regulatory authority has granted approval to any person or entity, including us, to market and commercialize therapeutics using SNAs, which may increase the complexity, uncertainty and length of the regulatory approval process for our therapeutic candidates. We and any current or future collaborators may never receive approval to market and commercialize any therapeutic candidate. Even if we or a future collaborator obtain regulatory approval, the approval may be for disease indications or patient populations that are not as broad as we intended or desired or may require labeling that includes significant use or distribution restrictions or safety warnings. We or a future collaborator may be required to perform additional or unanticipated clinical trials to obtain approval or be subject to post-marketing testing requirements to maintain regulatory approval. If our SNA technology proves to be ineffective, unsafe or commercially unviable, our technology and pipeline would have little, if any, value, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our therapeutic candidates are in early stages of development and may fail in development or suffer delays that materially and adversely affect their commercial viability.

We have no therapeutics on the market and all of our therapeutic candidates are in early stages of development. Our ability to achieve and sustain profitability depends on obtaining regulatory approvals, including IRB approval to conduct clinical trials at particular sites for, and successfully commercializing, our therapeutic candidates, either alone or with third parties. Before obtaining regulatory approval for the commercial distribution of our therapeutic candidates, we or an existing or a future collaborator must conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our therapeutic candidates. Preclinical studies and clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. The start or end of a clinical trial is often delayed or halted due to changing regulatory requirements, manufacturing challenges, required clinical trial administrative actions, slower than anticipated patient enrollment, changing standards of care, availability or prevalence of use of a comparative therapeutic or required prior therapy, clinical outcomes or financial constraints. For instance, delays or difficulties in patient enrollment or difficulties in retaining trial participants can result in increased costs, longer development times or termination of a clinical trial. Clinical trials of a new therapeutic candidate require the enrollment of a sufficient number of patients, including patients who are suffering from the disease the therapeutic candidate is intended to treat and who meet other

eligibility criteria. Rates of patient enrollment are affected by many factors, including the size of the patient population, the eligibility criteria for the clinical trial, the age and condition of the patients, the stage and severity of disease, the nature of the protocol, the proximity of patients to clinical sites and the availability of effective treatments for the relevant disease.

A therapeutic candidate can unexpectedly fail at any stage of preclinical and clinical development. In our completed Phase 1 trial, AST-005 did not show an antipsoriatic effect. Although we believe this result was due to the short length of this clinical trial, there is no guarantee that AST-005 will show an antipsoriatic effect in future clinical trials of longer duration. The historical failure rate for therapeutic candidates is high due to scientific feasibility, safety, efficacy, changing standards of medical care and other variables. The results from preclinical studies or early clinical trials of a therapeutic candidate may not predict the results that will be obtained in later phase clinical trials of the therapeutic candidate. We, the FDA, an IRB, an independent ethics committee, or other applicable regulatory authorities may suspend clinical trials of a therapeutic candidate at any time for various reasons, including a finding that subjects participating in such trials are being exposed to unreasonable and significant risk of illness or injury. Similarly, an IRB or ethics committee may suspend a clinical trial at a particular trial site. We may not have the financial resources to continue development of, or to enter into collaborations for, a therapeutic candidate if we experience any problems or other unforeseen events that delay or prevent regulatory approval of, or our ability to commercialize, therapeutic candidates, including:

Product development involves a lengthy and expensive process with an uncertain outcome, and results of earlier preclinical studies and clinical trials may not be predictive of future clinical trial results.

Clinical testing is expensive and generally takes many years to complete, and the outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early

clinical trials of our therapeutic candidates may not be predictive of the result of larger, later-stage controlled clinical trials. Therapeutic candidates that have shown promising results in early stage clinical trials may still suffer significant setbacks in subsequent clinical trials. We will have to conduct trials in our proposed indications to verify the results obtained to date and to support any regulatory submissions for further clinical development. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles despite promising results in earlier, smaller clinical trials. Moreover, clinical data is often susceptible to varying interpretations and analyses. We do not know whether Phase 1, Phase 2, Phase 3, or other clinical trials we may conduct will demonstrate consistent or adequate efficacy and safety with respect to the proposed indication for use sufficient to receive regulatory approval or market our therapeutic candidates.

We will need substantial additional funds to advance the development of our therapeutic candidates, and we cannot guarantee that we will have sufficient funds available in the future to develop and commercialize our current or future therapeutic candidates.

If our existing therapeutic candidates or our future therapeutic candidates enter and advance through preclinical studies and clinical trials, we will need substantial additional funds to expand our development, regulatory, manufacturing, marketing, and sales capabilities or contract with other organizations to provide these capabilities for us. We have used substantial funds to develop our therapeutic candidates and will require significant funds to conduct further research and development and preclinical studies and clinical trials of our therapeutic candidates, to seek regulatory approvals for our therapeutic candidates and to manufacture and market products, if any, that are approved for commercial sale. As of June 30, 2017 and as of December 31, 2016, we had $8.8 million and $19.6 million in cash and cash equivalents, respectively. Based on our current operating plan, we believe that our available cash and cash equivalents, together with the net proceeds from the initial closing of the Offering, will be sufficient to fund our anticipated level of operations through September 30, 2018. Our future capital requirements and the period for which we expect our existing resources to support our operations may vary significantly from what we expect. Our monthly spending levels vary based on new and ongoing development and corporate activities. Since the length of time and activities associated with successful development of our therapeutic candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. To execute our business plan, we will need, among other things:

If we are unable to obtain funding on a timely basis or on acceptable terms, we may have to delay, reduce or terminate our research and development programs and preclinical studies or clinical trials, if any, limit strategic opportunities or undergo reductions in our workforce or other corporate restructuring activities. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technology or therapeutic candidates that we would otherwise pursue on our own. We do not expect to realize revenue from product sales, milestone payments or royalties in the foreseeable future, if at all. Our revenue

sources are, and will remain, extremely limited unless and until our therapeutic candidates are clinically tested, approved for commercialization and successfully marketed. To date, we have primarily financed our operations through the sale of equity securities, payments received in connection with our research collaboration, license, and option agreement with Purdue or as a primary contractor or as a subcontractor on government grants, and proceeds from our loan agreement with Hercules Technology Growth Capital. We will be required to seek additional funding in the future and intend to do so through either collaborations, public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. Our ability to raise additional funds will depend on financial, economic and other factors, many of which are beyond our control. Additional funds may not be available to us on acceptable terms or at all. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, may involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of equity securities received any distribution of corporate assets.

Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline.

We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

We are dependent on Purdue for the successful development of therapeutic candidates in our collaboration arrangement with Purdue.

On December 2, 2016, Exicure OpCo entered into a research collaboration, option and license agreement with Purdue. As part of the agreement, Purdue has the option to obtain from us the full worldwide development and commercial rights to AST-005, an option to obtain three additional collaboration targets and a further option to obtain from us the full worldwide development and commercial rights to any therapeutic candidates developed targeting the three additional collaboration targets. Additionally, Purdue has rights of first offer to some potential collaboration targets. These rights of first offer are subject to limitations in time and scope. In connection with the Purdue Collaboration, we received a non-refundable development fee of $10.0 million. In addition, we are eligible to receive up to $776.5 million upon successful completion of certain research, regulatory and commercial sales milestones. There can be no assurance these milestones will be achieved as they are subject to highly significant risks and uncertainties, many of which are outside of our control. In the event a therapeutic candidate subject to the collaboration results in commercial sales, we are eligible to receive royalties ranging from the low single digits to a maximum of 10% on future net sales of such commercialized therapeutic candidates.

The success of our collaboration programs with Purdue depends largely upon the efforts of Purdue. Purdue has sole discretion in determining and directing the efforts and resources, including the ability to discontinue all efforts and resources, it applies to the development and, if approval is obtained, commercialization and marketing of the therapeutic candidates covered by the collaboration. Purdue may not be effective in obtaining approvals for the therapeutic candidates developed under the collaboration arrangement or marketing or arranging for necessary supply, manufacturing or distribution relationships for any approved products. Purdue may change its strategic focus or pursue alternative technologies in a manner that results in reduced, delayed or no revenue to us. Purdue has a variety of marketed products, and its own corporate objectives may not be consistent with our best interests. If Purdue fails to develop, obtain regulatory approval for or ultimately commercialize any therapeutic candidate under our collaboration or if Purdue terminates our collaboration, our business, financial condition, results of operations and prospects could be materially and adversely affected. In addition, any dispute or litigation proceedings we may have with Purdue in the future could delay development programs, create uncertainty as to ownership of intellectual property rights, distract management from other business activities and generate substantial expense.

If third parties on which we depend to conduct our preclinical studies and clinical trials do not perform as contractually required, fail to satisfy regulatory or legal requirements, or miss expected deadlines, our development program could be delayed with materially adverse effects on our business, financial condition, results of operations and prospects.

We rely on third party clinical investigators, contract research organizations, or CROs, clinical data management organizations and consultants to design, conduct, supervise and monitor preclinical studies and clinical trials for our therapeutic candidates. Because we rely on third parties and do not have the ability to conduct preclinical studies or clinical trials independently, we have less control over the timing, quality and other aspects of preclinical studies and clinical trials than we would if we conducted them on our own. These investigators, CROs and consultants are not our employees and we have limited control over the amount of time and resources that they dedicate to our programs. These third parties may have contractual relationships with other entities, some of which may be our competitors, which may draw time and resources away from our programs. The third parties with which we contract might not be diligent, careful or timely in conducting our preclinical studies or clinical trials, resulting in the preclinical studies or clinical trials being delayed or unsuccessful.

If we cannot contract with acceptable third parties on commercially reasonable terms, or at all, or if these third parties do not carry out their contractual duties, satisfy legal and regulatory requirements for the conduct of preclinical studies or clinical trials or meet expected deadlines, our clinical development programs could be delayed and otherwise adversely affected. In all events, we are responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. The FDA requires preclinical studies to be conducted in accordance with applicable GLPs, and clinical trials to be conducted in accordance with applicable FDA regulations and GCPs, including requirements for conducting, recording and reporting the results of preclinical studies and clinical trials to assure that data and reported results are

credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Any adverse development or delay in our preclinical studies or clinical trials could have a material adverse effect on our business, financial condition, results of operations and prospects.

Because we rely on third party manufacturing and supply partners, our supply of research and development, preclinical studies and clinical trial materials may become limited or interrupted or may not be of satisfactory quantity or quality.

We rely on third party partners to manufacture and supply the materials and components for our research and development, preclinical study and clinical trial supplies. We do not own manufacturing facilities or supply sources for such components and materials. Our manufacturing requirements include oligonucleotides and lipids. We procure our nonclinical toxicology and clinical development materials from a single source supplier on a purchase order basis. There can be no assurance that our supply of research and development, preclinical study and clinical trial therapeutic candidates and other materials will not be limited, interrupted, restricted in certain geographic regions or of satisfactory quality or continue to be available at acceptable prices. In particular, any replacement of our drug product manufacturers could require significant effort and expertise because there may be a limited number of qualified replacements.

The manufacturing process for a therapeutic candidate is subject to oversight by the FDA and foreign regulatory authorities. Suppliers and manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and process validation tests required by regulatory authorities in order to comply with regulatory requirements, such as cGMPs. In the event that any of our suppliers or manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills or technology required to manufacture our therapeutic candidates may be unique or proprietary to the original manufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skills or technology to another third party and a feasible alternative may not exist. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our therapeutic candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop therapeutic candidates in a timely manner or within budget.

We expect to continue to rely on third party manufacturers if we receive regulatory approval for any therapeutic candidate. To the extent that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related to quality control and assurance. If we are unable to obtain or maintain third party manufacturing for therapeutic candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercialize our therapeutic candidates successfully. Our or a third party’s failure to execute on our manufacturing requirements and comply with cGMP could adversely affect our business in a number of ways, including:

We may not successfully engage in strategic transactions, including any collaborations we seek, which could adversely affect our ability to develop and commercialize therapeutic candidates, impact our cash position, increase our expense, and present significant distractions to our management.

From time to time, we may consider strategic transactions, such as collaborations, acquisitions of companies, asset purchases and out- or in-licensing of therapeutic candidates or technologies. In particular, we will evaluate and, if strategically attractive, seek to enter into collaborations, including with major biotechnology or pharmaceutical companies. The competition for collaborators is intense, and the negotiation process is time-consuming and complex. Any new collaboration may be on terms that are not optimal for us, and we may be unable to maintain any new collaboration if, for example, development or approval of a therapeutic candidate is delayed, sales of an approved therapeutic candidate do not meet expectations or the collaborator terminates the collaboration. Any such collaboration, or other strategic transaction, may require us to incur non-recurring or other charges, increase our near- and long-term expenditures and pose significant integration or implementation challenges or disrupt our management or business. These transactions would entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business and diversion of our management’s time and attention in order to manage a collaboration or develop acquired therapeutics, therapeutic candidates or technologies, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in facilitating the collaboration or combining the operations and personnel of any acquired business, impairment of relationships with key suppliers, manufacturers or customers of any acquired business due to changes in management and ownership and the inability to retain key employees of any acquired business. Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, any transactions that we do complete may be subject to the foregoing or other risks and may have a material adverse effect on our business, results of operations, financial condition and prospects. Conversely, any failure to enter into any collaboration or other strategic transaction that would be beneficial to us could delay the development and potential commercialization of our therapeutic candidates and have a negative impact on the competitiveness of any therapeutic candidate that reaches market.

We face competition from entities that have developed or may develop therapeutic candidates for our target disease indications, including companies developing novel treatments and technology platforms based on modalities and technology similar to ours. If these companies develop technologies, including delivery technologies, or therapeutic candidates more rapidly than we do or their technologies are more effective, our ability to develop and successfully commercialize therapeutic candidates may be adversely affected.

The development and commercialization of therapeutic candidates is highly competitive. We compete with a number of multinational pharmaceutical companies and specialized biotechnology companies, as well as technology being developed at universities and other research institutions. Our competitors have developed, are developing or will develop therapeutic candidates and processes competitive with our therapeutic candidates. Competitive therapeutic treatments include those that have already been approved and accepted by the medical community and any new treatments that enter the market. We believe that a significant number of therapeutics are currently under development, and may become commercially available in the future, for the treatment of conditions for which we may try to develop therapeutic candidates. There is intense and rapidly evolving competition in the biotechnology, pharmaceutical and oligonucleotide therapeutics fields. While we believe that our SNA technology, its associated intellectual property and our scientific and technical know-how give us a competitive advantage in this space, competition from many sources remains. Our competitors include larger and better funded pharmaceutical, biotechnology and oligonucleotide therapeutics companies. Moreover, we also compete with current and future therapeutics developed at universities and other research institutions.

We are aware of several companies that are developing oligonucleotide delivery platforms and oligonucleotide-based therapeutics. These competitors include Ionis Pharmaceuticals, Inc., Alnylam Pharmaceuticals, Inc., Dicerna Pharmaceuticals, Inc., Arbutus Biopharma Corp., Wave Life Sciences Ltd., Dynavax Technologies Corp., Idera Pharmaceuticals, Inc., Mologen AG, and Checkmate Pharmaceuticals, Inc. These and other competitors compete with us in recruiting scientific and managerial talent, and for funding from pharmaceutical companies.

Our success will partially depend on our ability to develop and protect therapeutics that are safer and more effective than competing therapeutics. Our commercial opportunity and success will be reduced or eliminated if competing therapeutics are safer, more effective, or less expensive than the therapeutics we develop.

If our lead therapeutic candidates are approved for the indications we are currently pursuing, they will compete with a range of therapeutic treatments that are either in development or currently marketed. A number of therapeutics for treating psoriasis and cancers are on the market or in clinical development. For the treatment of psoriasis, marketed therapies range from small molecules like topical steroids to biologics, such as AbbVie Inc.’s adalimumab. In addition, numerous compounds are in clinical development for psoriasis treatment. With respect to immunogenic cancers such as melanoma, the most common treatments are chemotherapeutic compounds, radiation therapy and now immunotherapeutic antibodies such as ipilimumab, atezolizumab and pembrolizumab.

Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and supply resources or experience than we do. If we successfully obtain approval for any therapeutic candidate, we will face competition based on many different factors, including the safety and effectiveness of our therapeutics, the ease with which our therapeutics can be administered and the extent to which patients accept relatively new routes of administration, the timing and scope of regulatory approvals for these therapeutics, the availability and cost of manufacturing, marketing and sales capabilities, price, reimbursement coverage and patent position. Competing therapeutics could present superior treatment alternatives, including by being more effective, safer, less expensive or marketed and sold more effectively than any therapeutics we may develop. Competitive therapeutics may make any therapeutics we develop obsolete or noncompetitive before we recover the expense of developing and commercializing our therapeutic candidates. Such competitors could also recruit our employees, which could negatively impact our level of expertise and our ability to execute our business plan.

The market may not be receptive to our therapeutic candidates based on a novel therapeutic modality, and we may not generate any future revenue from the sale or licensing of therapeutic candidates.

Even if approval is obtained for a therapeutic candidate, we may not generate or sustain revenue from sales of the product due to factors such as whether the product can be sold at a competitive cost and otherwise accepted in the market. The therapeutic candidates that we are developing are based on our SNA technology. Market participants with significant influence over acceptance of new treatments, such as physicians and third party payors, may not adopt a treatment based on SNA technology, and we may not be able to convince the medical community and third party payors to accept and use, or to provide favorable reimbursement for, any therapeutic candidates developed by us or any current or future collaborators. Market acceptance of our therapeutic candidates will depend on, among other factors:

With our focus on SNAs, these risks may increase to the extent the space becomes more competitive or less favored in the commercial marketplace. Additional risks apply in relation to any disease indications we may pursue which are classified as rare diseases and allow for orphan drug designation by regulatory agencies in major commercial markets, such as the U.S., Europe and Japan. Because of the small patient population for a rare disease, if pricing is not approved or accepted in the market at an appropriate level for an approved product with orphan drug designation, such therapeutic may not generate enough revenue to offset costs of development, manufacturing, marketing and commercialization despite any benefits received from the orphan drug designation, such as market exclusivity, assistance in clinical trial design or a reduction in user fees or tax credits related to development expense. Market size is also a variable in disease indications not classified as rare. Our estimates regarding potential market size for any indication may be materially different from what we discover to exist at the time we commence commercialization, if any, for a therapeutic, which could result in significant changes in our business plan and have a material adverse effect on our business, financial condition, results of operations and prospects.

If a therapeutic candidate that has orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the therapeutic candidate is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same therapeutic candidate for the same indication, except in very limited circumstances, for seven years. Orphan drug exclusivity, however, could also block the approval of one of our therapeutic candidates for seven years if a competitor obtains approval of the same therapeutic candidate as defined by the FDA or if our therapeutic candidate is determined to be contained within the competitor’s therapeutic candidate for the same indication or disease.

As in the U.S., we may apply for designation of a therapeutic candidate as an orphan drug for the treatment of a specific indication in the European Union before the application for marketing authorization is made. Sponsors of orphan drugs in the European Union can enjoy economic and marketing benefits, including up to ten years of market exclusivity for the approved indication unless certain exceptions apply.

Any inability to attract and retain qualified key management and technical personnel would impair our ability to implement our business plan.

Our success largely depends on the continued service of key management and other specialized personnel, including David A. Giljohann, Ph.D., our Chief Executive Officer, David S. Snyder, our Chief Financial Officer, and Ekambar Kandimalla, Ph.D., our Chief Scientific Officer. The loss of one or more members of our management team or other key employees or advisors could delay our research and development programs and materially harm our business, financial condition, results of operations and prospects. The relationships that our key managers have cultivated within our industry make us particularly dependent upon their continued employment with us. We are dependent on the continued service of our technical personnel because of the highly technical nature of our therapeutic candidates and our technology and the specialized nature of the regulatory approval process. Because our management team and key employees are not obligated to provide us with continued service, they could terminate their employment with us at any time without penalty. We do not maintain key person life insurance policies on any of our management team members or key employees. Our future success will depend in large part on our continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing, manufacturing, governmental regulation and commercialization. We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations.

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

We have limited experience in therapeutic development and limited experience with clinical trials of therapeutic candidates. As our therapeutic candidates enter and advance through preclinical studies and clinical trials, we will need to expand our development, regulatory and manufacturing capabilities or contract with other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators or partners, suppliers and other organizations. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

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

We currently have no sales, marketing or distribution capabilities or experience. If any of our therapeutic candidates is approved, we will need to develop internal sales, marketing and distribution capabilities to commercialize such therapeutics, which would be expensive and time-consuming, or enter into collaborations with third parties to perform these services. If we decide to market our approved therapeutics directly, we will need to commit significant financial and managerial resources to develop a marketing and sales force with technical expertise and supporting distribution, administration and compliance capabilities. If we rely on third parties with such capabilities to market our approved therapeutics or decide to co-promote therapeutics with collaborators, we will need to establish and maintain marketing and distribution arrangements with third parties, and there can be no assurance that we will be able to enter into such arrangements on acceptable terms or at all. In entering into third party marketing or distribution arrangements, any revenue we receive will depend upon the efforts of the third parties and there can be no assurance that such third parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance of any approved therapeutic. If we are not successful in commercializing any therapeutic approved in the future, either on our own or through third parties, our business, financial condition, results of operations and prospects could be materially and adversely affected.

If we fail to comply with U.S. or foreign regulatory requirements, regulatory authorities could withhold marketing or commercialization approvals, limit or withdraw any marketing or commercialization approvals we may receive and subject us to other penalties that could materially harm our business.

We and our therapeutic candidates, as well as our suppliers, contract manufacturers, distributors, and contract testing laboratories are subject to extensive regulation by governmental authorities in the European Union, the U.S., and other countries, with the regulations differing from country to country.

If we or current or future collaborators, manufacturers or service providers fail to comply with applicable requirements, these regulatory authorities could refuse to issue necessary approvals for marketing and commercialization. Even if we receive marketing and commercialization approval of a therapeutic candidate, we and our third party service providers will be subject to continuing regulatory requirements, including a broad array of regulations related to establishment, registration and product listing, manufacturing processes, risk management measures, quality and pharmacovigilance systems, pre- and post-approval clinical data, labeling, advertising and promotional activities for such therapeutic, record keeping, distribution, and import and export of therapeutics for any therapeutic for which we obtain marketing approval. We are required to submit safety and other post market information and reports and are subject to continuing regulatory review, including in relation to adverse patient experiences with the therapeutic and clinical results that are reported after a therapeutic is made commercially available, both in the U.S. and any foreign jurisdiction in which we seek regulatory approval. The FDA and certain foreign regulatory authorities, such as the EMA, have significant post-market authority, including the authority to require labeling changes based on new safety information and to require post-market studies or clinical trials to evaluate safety risks related to the use of a therapeutic or to require withdrawal of the therapeutic from the market.

The FDA also has the authority to require a REMS plan either before or after approval, which may impose further requirements or restrictions on the distribution or use of an approved therapeutic. The EMA now routinely requires risk management plans, or RMPs, as part of the marketing authorization application process, and such plans must be continually modified and updated throughout the lifetime of the product as new information becomes available. In addition, the relevant governmental authority of any EU member state can request an RMP whenever there is a concern about the risk/benefit balance of the product.

The manufacturer and manufacturing facilities we use to make a future therapeutic, if any, will also be subject to periodic review and inspection by the FDA and other regulatory agencies, including for continued compliance with cGMP requirements. The discovery of any new or previously unknown problems with our third party manufacturers, manufacturing processes or facilities may result in restrictions on the therapeutic, manufacturer or facility, including withdrawal of the therapeutic from the market. If we rely on third party manufacturers, we will not have control over compliance with applicable rules and regulations by such manufacturers. Any product promotion and advertising will also be subject to regulatory requirements and continuing regulatory review. If we or our future collaborators, manufacturers or service providers fail to comply with applicable continuing regulatory requirements in the U.S. or foreign jurisdictions in which we seek to market our therapeutics, we or they may be subject to, among other things, fines, warning and untitled letters, clinical holds, delay or refusal by the FDA or foreign regulatory authorities to approve pending applications or supplements to approved applications, suspension, refusal to renew or withdrawal of regulatory approval, recalls, seizures or administrative detention of products, refusal to permit the import or export of therapeutics, operating restrictions, inability to participate in government programs including Medicare and Medicaid, and total or partial suspension of production or distribution, injunction, restitution, disgorgement, debarment, civil and criminal penalties and criminal prosecution.

Price controls imposed in foreign markets may adversely affect our future profitability.

In some countries, particularly member states of the EU, the pricing of prescription drugs is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a therapeutic. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing and reimbursement negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various EU member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we or current or future collaborators may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our SNA therapeutic candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of any therapeutic candidate approved for marketing is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business, financial condition, results of operations or prospects could be adversely affected.

Our business entails a significant risk of product liability and our inability to obtain sufficient insurance coverage could have a material adverse effect on our business, financial condition, results of operations or prospects.

Our business exposes us to significant product liability risks inherent in the development, testing, manufacturing and marketing of therapeutic treatments. Product liability claims could delay or prevent completion of our development programs. If we succeed in marketing therapeutics, such claims could result in an investigation by certain regulatory authorities, such as the FDA or foreign regulatory authorities, of the safety and effectiveness of our therapeutics, our manufacturing processes and facilities or our marketing programs and potentially a recall of our therapeutics or more serious enforcement action, limitations on the approved indications for which they may be used or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may also result in decreased demand for our therapeutics, injury to our reputation, costs to defend the related litigation, a diversion of management’s time and our resources, substantial monetary awards to trial participants or patients and a decline in our stock price. We currently have product liability insurance that we believe is appropriate for our stage

of development and may need to obtain higher levels of product liability insurance prior to marketing any of our therapeutic candidates. Any insurance we have or may obtain may not provide sufficient coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to obtain sufficient insurance at a reasonable cost to protect us against losses caused by product liability claims that could have a material adverse effect on our business.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements which could have an adverse effect on our business.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include, but is not limited to, intentional failures to comply with FDA regulations, applicable laws, regulations, guidance or codes of conduct set by foreign governmental authorities or self-regulatory industry organizations, or provide accurate information to any governmental authorities, such as the FDA, comply with manufacturing standards we may establish, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us.

In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws, regulations, guidance and codes of conduct intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws, regulations, guidance and codes of conduct may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.

Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions, including debarment or disqualification of those employees from participation in FDA-regulated activities, and serious harm to our reputation. This could include violations of HIPAA, as amended by HITECH, other U.S. federal and state law, and requirements of non-U.S. jurisdictions, including the European Union Data Protection Directive.

It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, regulations, guidance or codes of conduct. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Compliance with governmental regulations regarding the treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of our technology.

The Animal Welfare Act, or AWA, is the federal law that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals, most notably relating to personnel, facilities, sanitation, cage size, and feeding, watering and shipping conditions. Third parties with whom we contract are subject to registration, inspections and reporting requirements under the AWA. Furthermore, some states have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals. Comparable rules, regulations, and or obligations exist in many foreign jurisdictions. If we or our contractors fail to comply with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity, and our operations could be adversely affected.

Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our therapeutic development programs.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such events could cause interruptions of our

operations. For instance, the loss of preclinical study or clinical trial data involving our therapeutic candidates could result in delays in our development and regulatory filing efforts and significantly increase our costs. In addition, theft or other exposure of data may interfere with our ability to protect our intellectual property, trade secrets, and other information critical to our operations. We can provide no assurances that certain sensitive and proprietary information relating to one or more of our therapeutic candidates has not been, or will not in the future be, compromised. Although we have invested resources to enhance the security of our computer systems, there can be no assurances we will not experience additional unauthorized intrusions into our computer systems, or those of our CROs and other contractors and consultants, that we will successfully detect future unauthorized intrusions in a timely manner, or that future unauthorized intrusions will not result in material adverse effects on our financial condition, reputation, or business prospects. Payments related to the elimination of ransomware may materially affect our financial condition and results of operations.

Certain data breaches must also be reported to affected individuals and the government, and in some cases to the media, under provisions of HIPAA, as amended by HITECH, other U.S. federal and state law, and requirements of non-U.S. jurisdictions, including the European Union Data Protection Directive, and financial penalties may also apply.

To the extent that any disruption or security breach were to result in a loss of, or damage to, our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the development of our therapeutic candidates could be delayed.

If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

Our research, development and manufacturing involve the use of hazardous materials and various chemicals. We maintain quantities of various flammable and toxic chemicals in our facilities in Skokie, Illinois that are required for our research, development and manufacturing activities. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. We believe our procedures for storing, handling and disposing these materials in our Skokie facilities comply with the relevant guidelines of Skokie, the state of Illinois, and the Occupational Safety and Health Administration of the U.S. Department of Labor. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards mandated by applicable regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of animals and biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological or hazardous materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.

Our information technology systems could face serious disruptions that could adversely affect our business.

Our information technology and other internal infrastructure systems, including corporate firewalls, servers, leased lines and connection to the Internet, face the risk of systemic failure that could disrupt our operations. A significant disruption in the availability of our information technology and other internal infrastructure systems could cause interruptions and delays in our research and development work.

Our current operations are concentrated in one location and any events affecting this location may have material adverse consequences.

Our current operations are located in our facilities situated in Skokie, Illinois. Any unplanned event, such as flood, fire, explosion, earthquake, extreme weather condition, medical epidemics, power shortage, telecommunication failure or other natural or man-made accidents or incidents that result in us being unable to fully utilize the facilities, may have a material adverse effect on our ability to operate our business, particularly on a daily basis, and have significant negative consequences on our financial and operating conditions. Loss of access to these facilities may result in increased costs, delays in the development of our therapeutic candidates or interruption of our business operations. As part of our risk management policy, we maintain insurance coverage at levels that we believe are appropriate for our business. However, in the event of an accident or incident at these facilities, we cannot assure you that the amounts of insurance will be sufficient to satisfy any damages and losses. If our facilities are unable to operate because of an accident or incident or for any other reason, even for a short period of time, any or all of our research and development programs may be harmed. Any business interruption may have a material adverse effect on our business, financial position, results of operations and prospects.

The investment of our cash, cash equivalents and fixed income marketable securities is subject to risks which may cause losses and affect the liquidity of these investments.

As of June 30, 2017 and as of December 31, 2016, we had $8.8 million and $19.6 million in cash and cash equivalents, respectively. We historically have invested excess cash in certificates of deposit or money market mutual funds which invest exclusively in U.S. government or U.S. government agency securities. Pending use in our business, we expect to invest the net proceeds of the Offering in substantially the same manner. These investments are subject to general credit, liquidity, market and interest rate risks, including potential future impacts similar to the impact of U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused credit and liquidity issues. We may realize losses in the fair value of these investments, an inability to access cash in these investments for a potentially meaningful period, or a complete loss of these investments, which would have a negative effect on our financial statements.

In addition, should our investments cease paying or reduce the amount of interest paid to us, our interest income would suffer. The market risks associated with our investment portfolio may have an adverse effect on our results of operations, liquidity and financial condition.

Changes in accounting rules and regulations, or interpretations thereof, could result in unfavorable accounting charges or require us to change our compensation policies.

Accounting methods and policies for biotechnology companies, including policies governing revenue recognition, research and development and related expenses, and accounting for stock-based compensation, are subject to review, interpretation and guidance from our auditors and relevant accounting authorities, including the SEC. Changes to accounting methods or policies, or interpretations thereof, may require us to reclassify, restate or otherwise change or revise our historical financial statements, including those contained in this Report.

Our business may be affected by litigation and government investigations.

We may from time to time receive inquiries and subpoenas and other types of information requests from government authorities and others and we may become subject to claims and other actions related to our business activities. While the ultimate outcome of investigations, inquiries, information requests and legal proceedings is difficult to predict, defense of litigation claims can be expensive, time-consuming and distracting, and adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, costs and significant payments, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Risks Related to Intellectual Property

If we are not able to obtain and enforce patent protection for our technology or therapeutic candidates, development and commercialization of our therapeutic candidates may be adversely affected.

Our success depends in part on our ability to obtain and maintain patents and other forms of intellectual property rights, including in-licenses of intellectual property rights of others, for our therapeutic candidates, methods used to manufacture our therapeutic candidates and methods for treating patients using our therapeutic candidates, as well as our ability to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights and to operate without infringing upon the proprietary rights of others. As of June 30, 2017, our patent portfolio consists of over 40 issued patents and allowed patent applications and over 110 pending patent applications. We may not be able to apply for patents on certain aspects of our therapeutic candidates in a timely fashion or at all. Our existing issued and granted patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technology or from developing competing therapeutics and technology. There is no guarantee that any of our pending patent applications will result in issued or granted patents, that any of our issued or granted patents will not later be found to be invalid or unenforceable or that any issued or granted patents will include claims that are sufficiently broad to cover our therapeutic candidates or to provide meaningful protection from our competitors. Moreover, the patent position of pharmaceutical and biotechnology companies can be highly uncertain because it involves complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our current and future proprietary technology and therapeutic candidates are covered by valid and enforceable patents or are effectively maintained as trade secrets. If third parties disclose or misappropriate our proprietary rights, it may materially and adversely impact our position in the market.

The U.S. Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. The standards applied by the USPTO and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology and pharmaceutical patents. As such, we do not know the degree of future protection that we will have on our proprietary therapeutics and technology. While we will endeavor to try to protect our therapeutic candidates with intellectual property rights such as patents, as appropriate, the process of obtaining patents is time-consuming, expensive and sometimes unpredictable.

In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the USPTO, which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, the Leahy-Smith America Invents Act enacted in 2011, involves significant changes in patent legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, some of which cases either narrow the scope of patent protection available in certain circumstances or weaken the rights of patent owners in certain situations. The 2013 decision by the Supreme Court in Association for Molecular Pathology v. Myriad Genetics, Inc. precludes a claim to a nucleic acid having a stated nucleotide sequence that is identical to a sequence found in nature and unmodified. We currently are not aware of an immediate impact of this decision on our patents or patent applications because we are developing oligonucleotide therapeutics which contain modifications that we believe are not found in nature. However, this decision has yet to be clearly interpreted by courts and by the USPTO. We cannot assure you that the interpretations of this decision or subsequent rulings will not adversely impact our patents or patent applications. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that may weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

Once granted, patents may remain open to opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices or similar proceedings for a given period after allowance or grant, during which time third parties can raise objections against such initial grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit the scope of the allowed or granted claims thus attacked, or may lose the allowed or granted claims altogether. In addition, there can be no assurance that:

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

We do, and will continue to, rely on intellectual property rights licensed from third parties to protect our technology. We are a party to a number of licenses that give us rights to third party intellectual property that is necessary or useful for our business. In particular, we have a license from NU, which provides us the exclusive worldwide right under certain patents and patent applications owned by NU to exploit therapeutics and processes using nanoparticles, nanotechnology, microtechnology and nanomaterial-based constructs as therapeutics or accompanying therapeutics as a means of administration. See “Our Intellectual Property—Northwestern University License Agreements.” We may also license additional third party intellectual property in the future. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property, and in particular, for those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications licensed to us. Even if patents issue or are granted, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue litigation less aggressively than we would. Further, we may not obtain exclusive rights, which would allow for third parties to develop competing therapeutics. Without protection for, or exclusive rights to, the intellectual property we license, other companies might be able to offer substantially identical therapeutics for sale, which could adversely affect our competitive business position and harm our business prospects. In addition, the U.S. government has certain rights to the inventions covered by the patent rights licensed to us by third parties and NU, as an academic research and medical center, has reserved the right to practice the patent rights it has licensed to us (i) for research, teaching and/or other educationally related purposes (including the right to distribute materials for such purposes) and (ii) for use in the field of diagnostics (including theradiagnostics) and in any field other than the field of use licensed to us.

Other companies or organizations may challenge our or our licensors’ patent rights or may assert patent rights that prevent us from developing and commercializing our therapeutics.

Oligonucleotide and SNA-based therapeutics are a relatively new scientific field. We have obtained grants and issuances of SNA therapeutic patents and have licensed many of these patents from a third party on an exclusive basis for therapeutics applications. The issued patents and pending patent applications in the U.S. and in key markets around the world that we own or license claim many different methods, compositions and processes relating to the discovery, development, manufacture and commercialization of SNA therapeutics. Specifically, we own and have licensed a portfolio of patents, patent applications and other intellectual property covering SNA compositions of matter as well as their methods of use.

As the field of SNA therapeutics matures, patent applications are being processed by national patent offices around the world. There is uncertainty about which patents will issue, and, if they do, as to when, to whom, and with what claims. In addition, third parties may attempt to invalidate our intellectual property rights. Even if our rights are not directly challenged, disputes could lead to the weakening of our intellectual property rights. Our defense against any attempt by third parties to circumvent or invalidate our intellectual property rights could be costly to us, could require significant time and attention of our management and could have a material adverse effect on our business and our ability to successfully compete.

There are many issued and pending patents that claim aspects of oligonucleotide chemistry and modifications that we may need to apply to our SNA therapeutic candidates. There are also many issued patents that claim targeting genes or portions of genes that may be relevant for SNA therapeutics we wish to develop. Thus, it is possible that one or more organizations will hold patent rights to which we will need a license. If those organizations refuse to grant us a license to such patent rights on reasonable terms, we may not be able to market therapeutics or perform research and development or other activities covered by these patents.

We may be unable to protect our intellectual property rights throughout the world.

Obtaining a valid and enforceable issued or granted patent covering our technology in the U.S. and worldwide can be extremely costly. In jurisdictions where we have not obtained patent protection, competitors may use our technology to develop their own therapeutics and, further, may export otherwise infringing therapeutics to territories where we have patent protection, but where it is more difficult to enforce a patent as compared to the U.S. Competitor therapeutics may compete with our future therapeutics in jurisdictions where we do not have issued or granted patents or where our issued or granted patent claims or other intellectual property rights are not sufficient to prevent competitor activities in these jurisdictions. The legal systems of certain countries, particularly certain developing countries, make it difficult to enforce patents and such countries may not recognize other types of intellectual property protection, particularly that relating to biotechnology and pharmaceuticals. This could make it difficult for us to prevent the infringement of our patents or marketing of competing therapeutics in violation of our proprietary rights generally in certain jurisdictions. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

We generally file a provisional patent application first, also known as a priority filing, at the USPTO. An international application under the PCT is usually filed within twelve months after the priority filing. Based on the PCT filing, national and regional patent applications may be filed in the U.S., European Union, Japan, Australia and Canada and, depending on the individual case, also in any or all of, inter alia , China, India, South Korea, and Mexico. We have so far not filed for patent protection in all national and regional jurisdictions where such protection may be available. In addition, we may decide to abandon national and regional patent applications before grant. Finally, the grant proceeding of each national or regional patent is an independent proceeding which may lead to situations in which applications might in some jurisdictions be refused by the relevant registration authorities, while granted by others. It is also quite common that depending on the country, various scopes of patent protection may be granted on the same therapeutic candidate or technology.

The laws of some jurisdictions do not protect intellectual property rights to the same extent as the laws in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in such

jurisdictions. If we or our licensors encounter difficulties in protecting, or are otherwise precluded from effectively protecting, the intellectual property rights important for our business in such jurisdictions, the value of these rights may be diminished and we may face additional competition from others in those jurisdictions. Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position in the relevant jurisdiction may be impaired and our business and results of operations may be adversely affected.

We or our licensors, or any current or future strategic partners, may become subject to third party claims or litigation alleging infringement of patents or other proprietary rights or seeking to invalidate patents or other proprietary rights, and we may need to resort to litigation to protect or enforce our patents or other proprietary rights, all of which could be costly, time consuming, delay or prevent the development and commercialization of our therapeutic candidates, or put our patents and other proprietary rights at risk.

We or our licensors, or any current or future strategic partners, may be subject to third party claims for infringement or misappropriation of patent or other proprietary rights. We are generally obligated under our license agreements to indemnify and hold harmless our licensors for damages arising from intellectual property infringement by us. If we or our licensors, or any current or future strategic partners, are found to infringe a third party patent or other intellectual property rights, we could be required to pay damages, potentially including treble damages, if we are found to have willfully infringed. In addition, we or our licensors, or any current or future strategic partners, may choose to seek, or be required to seek, a license from a third party, which may not be available on acceptable terms, if at all. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. If we fail to obtain a required license, we or any current or future collaborator may be unable to effectively market therapeutic candidates based on our technology, which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. In addition, we may find it necessary to pursue claims or initiate lawsuits to protect or enforce our patent or other intellectual property rights. The cost to us in defending or initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor, could be substantial, and litigation would divert our management’s attention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our research and development efforts and limit our ability to continue our operations.

If we were to initiate legal proceedings against a third party to enforce a patent covering one of our therapeutics or our technology, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our therapeutics or certain aspects of our technology. Such a loss of patent protection could have a material adverse impact on our business. Patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without legally infringing our patents or other intellectual property rights.

It is also possible that we have failed to identify relevant third party patents or applications. For example, U.S. applications filed before November 29, 2000 and certain U.S. applications filed after that date that will not be filed outside the U.S. remain confidential until patents issue. Patent applications in the U.S. and elsewhere are published

approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications covering our therapeutics or technology could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our SNA technology, our therapeutics or the use of our therapeutics. Third party intellectual property right holders may also actively bring infringement claims against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we are unable to successfully settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable and time-consuming litigation and may be prevented from or experience substantial delays in marketing our therapeutics. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing any of our therapeutic candidates that are held to be infringing. We might, if possible, also be forced to redesign therapeutic candidates so that we no longer infringe the third party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.

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

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

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patent protection for certain aspects of our therapeutic candidates, we also consider trade secrets, including confidential and unpatented know-how important to the maintenance of our competitive position. We protect trade secrets and confidential and unpatented know-how, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to such knowledge, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants that obligate them to maintain confidentiality and assign their inventions to us. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts in the U.S. and certain foreign jurisdictions are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

Under the terms of the NU license agreements, NU could publish research findings relating to the patent rights licensed to us by NU, which could have a material adverse effect on our business.

We are also subject both in the U.S. and outside the U.S. to various regulatory schemes regarding requests for the information we provide to regulatory authorities, which may include, in whole or in part, trade secrets or confidential commercial information. While we are likely to be notified in advance of any disclosure of such information and would likely object to such disclosure, there can be no assurance that our challenge to the request would be successful.

We may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of our employees’ or consultants’ former employers or their clients. These claims may be costly to defend and if we do not successfully do so, we may be required to pay monetary damages and may lose valuable intellectual property rights or personnel.

Many of our employees were previously employed at universities or pharmaceutical or biotechnology companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to commercialize, or prevent us from commercializing, our therapeutic candidates, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

Our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and our business may be adversely affected.

Third parties may independently develop similar or superior technology.

There can be no assurance that others will not independently develop, or have not already developed, similar or more advanced technologies than our technology; or that others will not design around, or have not already designed around, aspects of our technology and/or our trade secrets developed therefrom. If third parties develop technology similar or superior to our technology, or they successfully design around our current or future technology, our competitive position, business prospects, and results of operations could be materially and adversely affected.

The intellectual property which we have licensed from Northwestern University was discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers.

We have licensed certain intellectual property from NU pursuant to the NU license agreements. The NU license agreements indicate that the rights licensed to us by NU are subject to the obligations to and the rights of the U.S. government, including those set forth in the Bayh-Dole Act of 1980, or Bayh-Dole Act. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future therapeutics based on the licensed NU intellectual property. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to

meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations, also referred to as “march-in rights.” While the U.S. government has sparingly used, and to the Company’s knowledge never successfully exercised, such march-in rights, any exercise of the march-in rights by the U.S. government could harm our competitive position, business, financial condition, results of operations, and prospects. If the U.S. government exercises such march-in rights, we may receive compensation that is deemed reasonable by the U.S. government in its sole discretion, which may be less than what we might be able to obtain in the open market. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us to expend substantial resources.

In addition, the U.S. government requires that any therapeutics embodying any invention generated through the use of U.S. government funding be manufactured substantially in the U.S. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. therapeutic manufacturers for therapeutics covered by such intellectual property.

Risks Related to Government Regulation

We may be unable to obtain U.S. or foreign regulatory approval and, as a result, unable to commercialize our therapeutic candidates.

Our therapeutic candidates are subject to extensive governmental regulations relating to, among other things, research, testing, development, manufacturing, safety, efficacy, approval, recordkeeping, reporting, labeling, storage, packaging, advertising and promotion, pricing, marketing, sampling, and distribution of therapeutics. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required to be successfully completed in the U.S. and in many foreign jurisdictions before a new therapeutic can be marketed. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the therapeutic candidates we may develop will obtain the regulatory approvals necessary for us or any current or future collaborators to begin selling them.

We have very limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA as well as foreign regulatory authorities, such as the EMA and EU national competent authorities. The time required to obtain FDA and foreign regulatory approvals is unpredictable but typically takes many years following the commencement of clinical trials, depending upon the type, complexity and novelty of the therapeutic candidate. The standards that the FDA and its foreign counterparts use when regulating us are not always applied predictably or uniformly and can change. Any analysis we perform of data from preclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unexpected delays or increased costs due to new government regulations, for example, from future legislation or administrative action, or from changes in the policy of the FDA or foreign regulatory authorities during the period of therapeutic development, clinical trials and regulatory review by the FDA or foreign regulatory authorities. It is impossible to predict whether legislative changes will be enacted, or whether FDA or foreign laws, regulations, guidance or interpretations will be changed, or what the impact of such changes, if any, may be.

Because the therapeutics we are developing may represent a new class of therapeutic, the FDA and its foreign counterparts have not yet established any definitive policies, practices or guidelines in relation to these therapeutics. While we believe the therapeutic candidates that we are currently developing are regulated as new drugs under the FDCA, the FDA could decide to regulate them or other therapeutics we may develop as biologics under the Public Health Service Act. The lack of policies, practices or guidelines may hinder or slow review by the FDA or foreign regulatory authorities of any regulatory filings that we may submit. Moreover, the FDA may respond to these submissions by defining requirements we may not have anticipated. Such responses could lead to significant delays in the clinical development of our therapeutic candidates. In addition, because there may be therapeutic candidates approved for some of the diseases for which we may seek approval, in order to receive regulatory approval, we may

need to demonstrate through clinical trials that the therapeutic candidates we develop to treat these diseases, if any, are not only safe and effective, but safer or more effective than existing products.

Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenues from the particular therapeutic candidate for which we are seeking approval. Furthermore, any regulatory approval to market a therapeutic may be subject to limitations on the approved uses for which we may market the therapeutic or the labeling or other restrictions. Regulatory authorities also may impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of the therapeutic. In addition, the FDA has the authority to require a REMS plan as part of a NDA or BLA, or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug or biologic, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry. These limitations and restrictions may limit the size of the market for the therapeutic and affect coverage and reimbursement by third party payors.

We are also subject to numerous foreign regulatory requirements governing, among other things, the conduct of clinical trials, manufacturing and marketing authorization, pricing and third party reimbursement. The foreign regulatory approval process varies among countries and may include all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities outside the U.S. and vice versa.

If we or current or future collaborators, manufacturers or service providers fail to comply with healthcare laws and regulations, we or they could be subject to enforcement actions, which could affect our ability to develop, market and sell our therapeutics and may harm our reputation.

Although we do not currently have any products on the market, once we begin commercializing our therapeutic candidates, we will be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal, state and foreign governments of the jurisdictions in which we conduct our business. Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any therapeutic candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our therapeutic candidates for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

Ensuring that our future business arrangements with third-parties comply with applicable healthcare laws and regulations could involve substantial costs. If our operations are found to be in violation of any such requirements, we may be subject to penalties, including civil or criminal penalties, monetary damages, the curtailment or restructuring of our operations, or exclusion from participation in government contracting, healthcare reimbursement or other government programs, including Medicare and Medicaid, any of which could adversely affect our financial results. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these risks cannot be entirely eliminated. Any action against us for an alleged or suspected violation could cause us to incur significant legal expenses and could divert our management’s attention from the operation of our business, even if our defense is successful. In addition, achieving and sustaining compliance with applicable laws and regulations may be costly to us in terms of money, time and resources.

If we or current or future collaborators, manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, which could affect our ability to develop, market and sell our therapeutics successfully and could harm our reputation and lead to reduced acceptance of our therapeutics by the market. These enforcement actions include, among others:

Any therapeutics we develop may become subject to unfavorable pricing regulations, third party coverage and reimbursement practices or healthcare reform initiatives, thereby harming our business.

The regulations that govern marketing approvals, pricing and reimbursement for new therapeutics vary widely from country to country. Some countries require approval of the sale price of a therapeutic before it can be marketed. In many countries, the pricing review period begins after marketing or therapeutic licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. Although we intend to monitor these regulations, our programs are currently in the early stages of development and we will not be able to assess the impact of price regulations for a number of years. As a result, we might obtain regulatory approval for a therapeutic in a particular country, but then be subject to price regulations that delay our commercial launch of the therapeutic and negatively impact the revenues we are able to generate from the sale of the therapeutic in that country.

Our ability to commercialize any therapeutics successfully also will depend in part on the extent to which coverage and reimbursement for these therapeutics and related treatments will be available from government health administration authorities, private health insurers and other organizations. However, there may be significant delays in obtaining coverage for newly-approved therapeutics. Moreover, eligibility for coverage does not necessarily signify that a therapeutic will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution costs. Also, interim payments for new therapeutics, if applicable, may be insufficient to cover our costs and may not be made permanent. Thus, even if we succeed in bringing one or more therapeutics to the market, these therapeutics may not be considered cost-effective, and the amount reimbursed for any therapeutics may be insufficient to allow us to sell our therapeutics on a competitive basis. Because our programs are in the early stages of development, we are unable at this time to determine their cost effectiveness or the likely level or method of reimbursement. Increasingly, the third party payors who reimburse patients or healthcare providers, such as government and private insurance plans, are seeking greater upfront discounts, additional rebates and other concessions to reduce the prices for therapeutics. If the price we are able to charge for any therapeutics we develop, or the reimbursement provided for such therapeutics, is inadequate in light of our development and other costs, our return on investment could be adversely affected.

We currently expect that some therapeutics we develop may need to be administered under the supervision of a physician on an outpatient basis. Under currently applicable U.S. law, certain therapeutics that are not usually self-administered (including injectable therapeutics) may be eligible for coverage under Medicare through Medicare Part B. Medicare Part B is part of original Medicare, the federal health care program that provides health care benefits to the aged and disabled, and covers outpatient services and supplies, including certain pharmaceutical products that are medically necessary to treat a beneficiary’s health condition. Specifically, Medicare Part B coverage may be available for eligible beneficiaries when the following, among other requirements, have been satisfied:

Under current law, as a condition of receiving Medicare Part B reimbursement (the Medicare program that generally covers physician-administered, outpatient drugs) for a manufacturer’s eligible drugs or biologicals, the manufacturer is required to participate in other government healthcare programs, including the Medicaid Drug Rebate Program, the Veterans Health Administration program, and the 340B Drug Pricing Program. The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Under the 340B Drug Pricing Program, the manufacturer must extend discounts to entities eligible to participate in the program. Average prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of therapeutics from countries where they may be sold at lower prices than in the U.S. Reimbursement rates under Medicare Part B would depend in part on whether the newly approved therapeutic would be eligible for a unique billing code. Self-administered therapeutics are typically reimbursed under Medicare Part D, and therapeutics that are administered in an inpatient hospital setting are typically reimbursed under Medicare Part A under a bundled payment. It is difficult for us to predict how Medicare coverage and reimbursement policies will be applied to our therapeutics in the future and coverage and reimbursement under different federal healthcare programs are not always consistent. Medicare reimbursement rates may also reflect budgetary constraints placed on the Medicare program.

Third-party payors often rely upon Medicare coverage policies and payment limitations in setting their own reimbursement rates. These coverage policies and limitations may rely, in part, on compendia listings for approved therapeutics. Our inability to promptly obtain relevant compendia listings, coverage, and adequate reimbursement from both government-funded and private payors for new therapeutics we develop and for which we obtain regulatory approval could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our financial condition.

We believe that the efforts of governments and third party payors to contain or reduce the cost of healthcare and legislative and regulatory proposals to broaden the availability of healthcare will continue to affect the business and financial condition of pharmaceutical and biotechnology companies. A number of legislative and regulatory changes in the healthcare system in the U.S. and other major healthcare markets have been proposed, and such efforts have expanded substantially in recent years. These developments could, directly or indirectly, affect our ability to sell our therapeutics, if approved, at a favorable price.

For example, in the U.S., in 2010, the U.S. Congress passed the ACA, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of health spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional policy reforms.

Among the provisions of the ACA addressing coverage and reimbursement of pharmaceutical products, of importance to our potential therapeutic candidates are the following:

certain federal healthcare programs, such as Medicare, Medicaid, Department of Veterans Affairs, and Department of Defense. Since we currently expect our branded pharmaceutical sales to constitute a small portion of the total federal healthcare program pharmaceutical market, we do not currently expect this annual assessment to have a material impact on our financial condition.

Separately, pursuant to the health reform legislation and related initiatives, CMS is working with various healthcare providers to develop, refine, and implement Accountable Care Organizations, or ACOs, and other innovative models of care for Medicare and Medicaid beneficiaries, including the Bundled Payments for Care Improvement Initiative, the Comprehensive Primary Care Initiative, the Duals Demonstration, and other models. The continued development and expansion of ACOs and other innovative models of care will have an uncertain impact on any future reimbursement we may receive for approved therapeutics administered by such organizations.

In addition, in recent years, the U.S. Congress has enacted various laws seeking to reduce the federal debt level and contain healthcare expenditures. For example, as a result of the Budget Control Act of 2011 and the Bipartisan Budget Act of 2015, an annual 2% reduction to Medicare payments took effect on April 1, 2013 and has been extended through 2025. These across-the-board spending cuts could adversely affect our future revenues, earnings, and cash flows.

The financial impact of U.S. healthcare reform legislation over the next few years will depend on a number of factors, including the policies reflected in implementing regulations and guidance and changes in sales volumes for therapeutics affected by the legislation.

From time to time, legislation is drafted, introduced and passed in the U.S. Congress that could significantly change the statutory provisions governing coverage, reimbursement, and marketing of products regulated by CMS or other government agencies. In addition to new legislation, CMS coverage and reimbursement policies are often revised or interpreted in ways that may significantly affect our business and our products. In particular, we expect that the new administration and the U.S. Congress will seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the U.S. healthcare reform legislation. Since taking office, President Trump has continued to support the repeal of all or portions of the ACA. President Trump has also issued an executive order in which he stated that it is his administration’s policy to seek the prompt repeal of the ACA and in which he directed executive departments and federal agencies to waive, defer, grant exemptions from, or delay the implementation of the provisions of the ACA to the maximum extent permitted by law. There is still uncertainty with respect to the impact President Trump’s Administration and the U.S. Congress may have, if any, and any changes will likely take time to unfold. Such reforms could have an adverse effect on anticipated revenues from therapeutic candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop therapeutic candidates. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.

The healthcare industry is heavily regulated in the U.S. at the federal, state, and local levels, and our failure to comply with applicable requirements may subject us to penalties and negatively affect our financial condition.

As a healthcare company, our operations, clinical trial activities and interactions with healthcare providers may be subject to extensive regulation in the U.S., particularly if the company receives FDA approval for any of its therapeutics in the future. For example, if we receive FDA approval for a therapeutic for which reimbursement is available under a federal healthcare program (e.g., Medicare, Medicaid), it would be subject to a variety of federal laws and regulations, including those that prohibit the filing of false or improper claims for payment by federal

healthcare programs (e.g., the federal False Claims Act), prohibit unlawful inducements for the referral of business reimbursable by federal healthcare programs (e.g., the federal Anti-Kickback Statute), and require disclosure of certain payments or other transfers of value made to U.S.-licensed physicians and teaching hospitals, or Open Payments. We are not able to predict how third parties will interpret these laws and apply applicable governmental guidance and may challenge our practices and activities under one or more of these laws. If our past or present operations are found to be in violation of any of these laws, we could be subject to civil and criminal penalties, which could hurt our business, our operations and financial condition.

Similarly, HIPAA prohibits, among other offenses, knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors, or falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for items or services under a health care benefit program. To the extent that we act as a business associate to a healthcare provider engaging in electronic transactions, we may also be subject to the privacy and security provisions of HIPAA, as amended by HITECH, which restricts the use and disclosure of patient-identifiable health information, mandates the adoption of standards relating to the privacy and security of patient-identifiable health information, and requires the reporting of certain security breaches to healthcare provider customers with respect to such information. Additionally, many states have enacted similar laws that may impose more stringent requirements on entities like ours. Failure to comply with applicable laws and regulations could result in substantial penalties and adversely affect our financial condition and results of operations.

Our ability to obtain services, reimbursement or funding from the federal government may be impacted by possible reductions in federal spending.

U.S. federal government agencies currently face potentially significant spending reductions. The BCA established a Joint Select Committee on Deficit Reduction, which was tasked with achieving a reduction in the federal debt level of at least $1.2 trillion. That committee did not draft a proposal by the BCA’s deadline. As a result, automatic cuts, referred to as sequestration, in various federal programs were scheduled to take place, beginning in January 2013, although the American Taxpayer Relief Act of 2012 delayed the BCA’s automatic cuts until March 1, 2013. While the Medicare program’s eligibility and scope of benefits are generally exempt from these cuts, Medicare payments to providers and Part D health plans are not exempt. The BCA did, however, provide that the Medicare cuts to providers and Part D health plans would not exceed two percent. President Obama issued the sequestration order on March 1, 2013, and cuts went into effect on April 1, 2013. Additionally, the Bipartisan Budget Act of 2015 extended sequestration for Medicare through fiscal year 2025.

The U.S. federal budget remains in flux, which could, among other things, cut Medicare payments to providers. The Medicare program is frequently mentioned as a target for spending cuts. The full impact on our business of any future cuts in Medicare or other programs is uncertain. In addition, we cannot predict any impact President Trump’s administration and the U.S. Congress may have on the federal budget. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health, to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve therapeutic research and development, manufacturing, and marketing activities, which may delay our ability to develop, market, and sell any therapeutics we may develop.

If any of our therapeutic candidates receives marketing approval and we or others later identify undesirable side effects caused by the therapeutic candidate, our ability to market and derive revenue from the therapeutic candidates could be compromised.

In the event that any of our therapeutic candidates receive regulatory approval and we or others identify undesirable side effects, adverse events or other problems caused by one of our therapeutics, any of the following adverse events could occur, which could result in the loss of significant revenue to us and materially and adversely affect our results of operations and business:

Significant developments stemming from the United Kingdom’s recent referendum on membership in the EU could have a material adverse effect on our business.

On June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the EU. This referendum has created political and economic uncertainty, particularly in the United Kingdom and the EU, and this uncertainty may last for years. Any business we conduct, now and in the future, in the United Kingdom, the EU, and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. The referendum, and the likely withdrawal of the United Kingdom from the EU it triggers, has caused and, along with events potentially occurring in the future as a consequence of the United Kingdom’s withdrawal, including the possible breakup of the United Kingdom, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe, or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the U.S., and by the possible imposition of trade or other regulatory barriers in the United Kingdom.

It is currently unclear how regulations affecting clinical trials, the approval of our future therapeutic candidates, and the sale of these therapeutic candidates will be affected by this referendum either in the United Kingdom or elsewhere in Europe. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the EU, may adversely affect our operating results and growth prospects.

Risks Related to Our Common Stock and the Offering

We are an “emerging growth company” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this Report and our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements and two years of selected financial data in this Report.

We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.1 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31, or if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, in which case we would no longer be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this Report and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Our stock price may be volatile and purchasers of our common stock could incur substantial losses.

If a market for our common stock develops, its market price could fluctuate substantially due to a variety of factors, including the other risks described in this section of the Report titled “Risk Factors” and the following:

In addition, the stock markets in general, and the markets for pharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that has been often unrelated to the operating performance of the issuer. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. As a result of this volatility, investors may not be able to sell their common stock at or above the Offering Price.

The future issuance of equity or of debt securities that are convertible into equity may dilute your investment and reduce your equity interest.

We may choose to raise additional capital in the future, depending on market conditions, strategic considerations and operational requirements. To the extent that additional capital is raised through the issuance of shares or other securities convertible into shares, our stockholders will be diluted. Future issuances of our common stock or other equity securities, or the perception that such sales may occur, could adversely affect the prevailing market price of our common stock and impair our ability to raise capital through future offerings of equity or equity-linked securities. For example, we have agreed, at our expense, to prepare a registration statement, and to cause us to file a registration statement with the SEC registering the resale of up to 46,269,418 shares of our common stock issued in connection with the Merger and the Offering. Once effective, the registration statement will permit the resale of these shares at any time for up to five years following the effective date of such registration statement. The resale of a substantial number of shares of our common stock in the public market could adversely affect the market price for our common stock and make it more difficult for you to sell shares of our common stock at times and prices that you feel are appropriate. Furthermore, we expect that, because there will be a large number of shares registered pursuant to a registration statement, selling stockholders will continue to offer shares covered by such registration statement for a significant period of time, the precise duration of which cannot be predicted. Accordingly, the adverse market and price pressures resulting from an offering pursuant to a registration statement may continue for an extended period of time and continued negative pressure on the market price of our common stock could have a material adverse effect on our ability to raise additional equity capital.

Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition and may result in further dilution to our stockholders.

We have entered into a loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules, pursuant to which we may borrow in an aggregate principal amount of up to $10.0 million from Hercules at a floating per annum interest rate (based on a year consisting of 360 days) equal to the greater of either (i) 9.95%

or (ii) the sum of (a) 9.95% plus (b) the prime rate (as reported in The Wall Street Journal ) minus 3.50%. We must make interest only payments on the amounts borrowed until June 2017. Commencing on July 1, 2017, the loan began amortizing in equal monthly installments of principal and interest in an amount sufficient to fully amortize the outstanding principal balance of the loan over the remaining scheduled monthly payments due prior to the maturity date on September 1, 2019. Any remaining obligations under the loan agreement and other loan documents (other than the warrant) are due and payable on the maturity date. On the earliest to occur of the maturity date, the date we prepay the term loan in full or the date the loan otherwise becomes due and payable, we must pay the lender under the agreement an additional charge equal to 3.85% of the total amounts funded under the loan agreement. To the extent we desire to prepay the indebtedness prior to maturity, we will be obligated to pay a prepayment penalty to Hercules ranging from 1% to 3% of the amounts being prepaid, depending on when such prepayment occurs. The loan agreement was amended on October 10, 2016 to revise the language granting Hercules a contingent security interest in certain of our assets. Under the loan agreement, Hercules or its affiliates have a right to participate in a single subsequent unregistered financing by us in an amount of up $1.0 million on the same terms, conditions and pricing afforded to others participating in such financing. Hercules has not yet exercised this right to participate.

Our ability to make payments on this indebtedness depends on our ability to generate cash in the future. We expect to experience negative cash flow for the foreseeable future as we fund our operations and capital expenditures. There can be no assurance that we will be in a position to repay this indebtedness when due or obtain extensions of the maturity date. We anticipate that we will need to secure additional funding in order for us to be able to satisfy our obligations when due. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If that additional funding involves the sale of equity securities or convertible securities, it would result in the issuance of additional shares of our capital stock, which would result in dilution to our stockholders. The indebtedness is secured by substantially all of our assets other than intellectual property, on which we have given Hercules a negative pledge. In addition, under the loan agreement, we are subject to certain customary covenants that limit or restrict our ability to, among other things, incur additional indebtedness, grant any security interests, pay cash dividends, repurchase our common stock, make loans, or enter into certain transactions without the prior consent of Hercules.

This level of debt could have important consequences to you as an investor in our securities. For example, it could:

In connection with the loan agreement, we issued Hercules a warrant to purchase up to 104,348 shares of our Series C Preferred Stock at an exercise price of $2.30 per share, plus an additional number of shares in the event that the second tranche of funding had been drawn before it expired on December 31, 2016. The warrant terminated at the closing of the Merger.

The employment agreements with our executive officers may require us to pay severance benefits to officers in connection with termination of employment or upon a change of control of us, which could harm our financial condition.

Each of David A. Giljohann, our Chief Executive Officer, Ekambar Kandimalla, our Chief Scientific Officer, and David S. Snyder, our Chief Financial Officer, is entitled to receive cash severance equal to twelve months, six months, and six months, respectively, of his base salary if his employment is terminated by us without cause (as such term is defined in his employment offer letter). In addition, our 2015 Plan generally provides for accelerated vesting of equity awards upon the involuntary termination of an employee within the twelve month period following

a change in control (as defined under the plan) and accelerated vesting of equity awards upon a change of control (as defined under the plan) for each of our executive officers. This vesting acceleration is intended to provide each of our executive officers with the full benefit of their equity awards and reward them for a successful outcome for our stockholders. The accelerated vesting of equity awards could result in dilution to our existing stockholders and harm the market price of our common stock. The payment of these severance benefits could harm our financial condition. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.

There is currently no market for our common stock and we cannot assure you that any market will ever develop. You may therefore be unable to re-sell shares of our common stock at times and prices that you believe are appropriate.

Our common stock is not listed on a national securities exchange or any other exchange, or quoted on an over-the-counter market. Therefore, there is no trading market, active or otherwise, for our common stock and our common stock may never be included for trading on any stock exchange, automated quotation system or any over-the-counter market. Accordingly, our common stock is highly illiquid and you will likely experience difficulty in re-selling such shares at times and prices that you may desire and without depressing the market price for the shares or at all.

Our common stock may not be eligible for listing or quotation on any securities exchange.

We do not currently meet the initial quantitative listing standards of any national securities exchange or over-the-counter trading system. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial listing standards, that we will be able to maintain any such listing. Further, the national securities exchanges are adopting so-called “seasoning” rules that will require that we meet certain requirements, including prescribed periods of time trading over-the-counter and minimum filings of periodic reports with the SEC, before we are eligible to apply for listing on such national securities exchanges. We intend to contact an authorized market maker for an over-the-counter quotation system for sponsorship of our common stock, but we cannot guarantee that such sponsorship will be approved and our common stock listed and quoted for sale. Even if our common stock is quoted for sale on an over-the-counter quotation system, buyers may be insufficient in numbers to allow for a robust market and it may prove impossible to sell your shares. In addition, an investor may find it difficult to obtain accurate quotations as to the market value of our common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.

The designation of our common stock as a “penny stock” would limit the liquidity of our common stock.

Our common stock may be deemed a “penny stock” (as that term is defined under Rule 3a51-1 of the Exchange Act) in any market that may develop in the future. Generally, a “penny stock” is a common stock that is not listed on a securities exchange and trades for less than $5.00 a share. Prices often are not available to buyers and sellers and the market may be very limited. Penny stocks in start-up companies are among the riskiest equity investments. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. The document provides information about penny stocks and the nature and level of risks involved in investing in the penny stock market. A broker must also provide purchasers with bid and offer quotations and information regarding broker and salesperson compensation and make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written agreement to the purchase. Many brokers choose not to participate in penny stock transactions. Because of the penny stock rules, there may be less trading activity in penny stocks in any market that develops for our common stock in the future and stockholders are likely to have difficulty selling their shares.

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

The Financial Industry Regulatory Authority, or FINRA, has adopted rules requiring that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative or low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated its belief that there is a high probability that speculative or low-priced securities will not be suitable for at least some customers. If these FINRA requirements are applicable to us or our securities, they may make it more difficult for broker-dealers to recommend that at least some of their customers buy our common stock, which may limit the ability of our stockholders to buy and sell our common stock and could have an adverse effect on the market for and price of our common stock.

The shares of common stock issued in the Merger and the Offering are “restricted securities” and, as such, may not be sold except in limited circumstances.

None of the shares of common stock issued in the Merger and the Offering have been registered under the Securities Act or registered or qualified under any state securities laws. The shares of common stock issued in the Merger and the Offering were sold and/or issued and will be sold and/or issued pursuant to exemptions contained in and under those laws. Accordingly, such shares of common stock are “restricted securities” as defined in Rule 144 under the Securities Act and must, therefore, be held indefinitely unless registered under applicable federal and state securities laws, or an exemption is available from the registration requirements of those laws. The certificates representing the shares of common stock issued in the Merger and the Offering reflect their restricted status.

We have agreed to register the shares of common stock issued in the Merger and the Offering. We cannot assure you, however, that the SEC will declare the registration statement effective, thereby enabling the shares of common stock issued in the Merger or the Offering to be freely tradable. In addition, Rule 144 under the Securities Act, which permits the resale, subject to various terms and conditions, of limited amounts of restricted securities after they have been held for six months will not immediately apply to our common stock because we were at one time designated as a “shell company” under SEC regulations. Pursuant to Rule 144(i), securities issued by a current or former shell company that otherwise meet the holding period and other requirements of Rule 144 nevertheless cannot be sold in reliance on Rule 144 until one year after the date on which the issuer filed current “Form 10 information” (as defined in Rule 144(i)) with the SEC reflecting that it ceased being a shell company, and provided that at the time of a proposed sale pursuant to Rule 144, the issuer has satisfied certain reporting requirements under the Exchange Act. We believe this requirement to file Form 10 information has been satisfied by the filing of this Report. Because, as a former shell company, the reporting requirements of Rule 144(i) will apply regardless of holding period, the restrictive legends on certificates for the shares of common stock issued in the Merger and the Offering cannot be removed except in connection with an actual sale that is subject to an effective registration statement under, or an applicable exemption from the registration requirements of, the Securities Act.

If we are unable to timely register the shares of common stock issued to stockholders in the Merger or the Offering, then the ability to re-sell shares of such common stock will be delayed.

We have agreed, at our expense, to prepare a registration statement, and to cause our Company to file a registration statement with the SEC registering the resale of up to 46,269,418 shares of our common stock issued in connection with the Merger and the Offering. To the extent such registration statement is not declared effective by the SEC, or there are delays resulting from the SEC review process and comments raised by the SEC during that process, the shares of common stock proposed to be covered by such registration statement will not be eligible for resale until the registration statement is effective or an exemption from registration, such as Rule 144, becomes available. If the registration statement is not filed within 60 days of the closing of the Merger, then we may be subject to certain liquidated damages pursuant to the registration rights agreement we entered into with the holders of up to 46,269,418 shares of our common stock issued in connection with the Merger and the Offering.

Because our management will have broad discretion over the use of the net proceeds from the Offering, you may not agree with how we use them and the proceeds may not be invested successfully.

We intend to use the net proceeds to us from the Offering to fund research and development, preclinical studies and clinical trial expenses and potential in-licensing of intellectual property and technology or other acquisition activities, and other general corporate purposes, including funding the costs of operating as a public company, and therefore, our management will have broad discretion as to the use of the Offering proceeds. Accordingly, you will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return for our company.

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. In addition, because we did not become a reporting company by conducting an underwritten initial public offering of our common stock, and because we will not be listed on a national securities exchange, security analysts of brokerage firms may not provide coverage of our Company. In addition, investment banks may be less likely to agree to underwrite secondary offerings on our behalf than they might if we became a public reporting company by means of an underwritten initial public offering, because they may be less familiar with our Company as a result of more limited coverage by analysts and the media, and because we became public at an early stage in our development. The failure to receive research coverage or support in the market for our shares will have an adverse effect on our ability to develop a liquid market for our common stock and the trading price for our stock would be negatively impacted.

In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our target studies and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Because the Merger was a reverse merger, the registration statement we file with respect to the shares of common stock received by investors in the Merger and the Offering may be subject to heightened scrutiny by the SEC.

Certain SEC rules are more restrictive when applied to reverse merger companies, such as the ability of stockholders to re-sell their shares of common stock pursuant to Rule 144, and the SEC may subject the registration statement we file with respect to the shares of common stock received by investors in the Merger and the Offering to heightened scrutiny. In addition, securities analysts of major brokerage firms may not provide coverage of our capital stock or business. Because we became a public reporting operating company through a reverse merger, there is no incentive to brokerage firms to recommend the purchase of our common stock. We cannot assure you that brokerage firms will want to provide analyst coverage of our capital stock or business in the future.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Based on the beneficial ownership of our common stock as of September 26, 2017, after the Merger and the initial closing of the Offering, our executive officers and directors, together with holders of five percent or more of our outstanding common stock and their respective affiliates, will beneficially own approximately 70.6 percent of our outstanding common stock (assuming no exercise of the underwriters’ option to purchase additional shares of common stock). As a result, these stockholders, if acting together, will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger,

consolidation or sale of all or substantially all of our assets and any other significant corporate transaction. The interests of these stockholders may not be the same as or may even conflict with your interests. For example, these stockholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets and might affect the prevailing market price of our common stock. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Anti-takeover provisions in our charter documents and under the General Corporation Law of the State of Delaware could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our management.

Provisions in our certificate of incorporation and our bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of the combined organization’s stockholders, and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined organization voting stock from merging or combining with the combined organization. Although we believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove then-current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

Anti-takeover provisions in our charter documents could discourage, delay or prevent a change in control of us and may affect the trading price of our common stock.

Our corporate documents and the DGCL contain provisions that may enable our board of directors to resist a change in control of us even if a change in control were to be considered favorable by our stockholders. These provisions:

These provisions could discourage, delay or prevent a transaction involving a change in control of us. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions our stockholders desire.

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

As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of any national securities exchange or other exchange and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors. However, these rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

As a public company, we are required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed time frame or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, if we are not able to continue to meet these requirements, we may not be able to remain listed on any national securities exchange or other exchange or quoted on an over-the-counter market.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We may incur significant costs from class action litigation due to our expected stock volatility.

Our stock price may fluctuate for many reasons, including as a result of public announcements regarding the progress of our development efforts or the development efforts of current or future collaborators or competitors, the addition or departure of our key personnel, variations in our quarterly operating results and changes in market valuations of pharmaceutical and biotechnology companies. This risk is especially relevant to us because pharmaceutical and biotechnology companies have experienced significant stock price volatility in recent years. When the market price of a stock has been volatile as our stock price may be, holders of that stock have occasionally brought securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our amended and restated certificate of incorporation will provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or any action asserting a claim that is governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein and the claim not being one which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery or for which the Court of Chancery does not have subject matter jurisdiction. Any person purchasing or otherwise acquiring any interest in any shares of our common stock shall be deemed to have notice of and to have consented to this provision of our amended and restated certificate of incorporation. This choice of forum provision may limit our stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees and agents even though an action, if successful, might benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to find this provision of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of operations.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

We have incurred substantial losses during our history and do not expect to become profitable in the near future and we may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its post-change income or taxes may be limited. The merger, our prior equity offerings and other changes in our stock ownership may have resulted in ownership changes. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which are outside of our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Forward-Looking Statements” elsewhere in this Report. You should review the disclosure under the heading “Risk Factors” in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

On September 26, 2017, our wholly-owned subsidiary, Max-1 Acquisition Sub, Inc., a corporation formed in the State of Delaware, or the Acquisition Sub, merged with and into Exicure OpCo. Pursuant to this transaction, Exicure OpCo was the surviving corporation and became our wholly-owned subsidiary. All of the outstanding capital stock of Exicure OpCo was converted into shares of our common stock.

As a result of the Merger, we acquired the business of Exicure OpCo and will continue the existing business operations of Exicure OpCo as a publicly-traded company under the name Exicure, Inc. The Merger was treated as a recapitalization and reverse acquisition for our Company for financial reporting purposes. Exicure OpCo is considered the acquirer for accounting purposes, and our historical financial statements before the Merger will be replaced with the historical financial statements of Exicure OpCo before the Merger in future filings with the SEC.

As the result of the Merger and the change in our business and operations, a discussion of the past financial results of Max-1 Acquisition Corporation is not pertinent, and under applicable accounting principles the historical financial results of Exicure OpCo, the accounting acquirer, prior to the Merger are considered the historical financial results of our Company.

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on Exicure OpCo’s audited financial statements contained in this Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.

Basis of Presentation

The audited financial statements of Exicure OpCo for the fiscal years ended December 31, 2016 and 2015, and the unaudited interim financial statements for the six months ended June 30, 2017 and 2016, contained herein, include a summary of our significant accounting policies and should be read in conjunction with the discussion below.

Operating Overview

We are a clinical-stage biotechnology company developing gene regulatory and immuno-oncology therapeutics based on our proprietary SNA, technology. We believe the design of our SNAs gives rise to distinct chemical and biological properties that may provide advantages over other nucleic acid therapeutics and enable therapeutic activity outside of the liver. Since our SNAs can cross biological barriers such as the skin when administered locally, we believe they can be used to target diseases not typically addressed with other nucleic acid therapeutics. We have demonstrated the ability to cross biological barriers in a Phase 1 clinical trial of our lead therapeutic candidate, AST-005, and in preclinical studies of two other therapeutic candidates, XCUR17 and AST-008, both of which we are advancing to the clinic.

In a completed Phase 1 clinical trial, AST-005, when topically administered to the skin of patients with mild to moderate psoriasis, resulted in no drug associated adverse events, and demonstrated a reduction of TNF mRNA. The TNF mRNA reduction elicited by the highest strength of AST-005 gel was statistically significant when compared to the effects of the vehicle. These results are significant because we believe this is the first time gene regulation with topically applied oligonucleotides has been observed in the clinic. While we did not observe an antipsoriatic effect in our Phase 1 clinical trial, we believe this is due to the short duration of the treatment. The results of a clinical trial with etanercept, a systemic TNF inhibitor, indicate that at least four weeks of therapy is required before antipsoriatic efficacy can be observed.

On December 2, 2016, Exicure OpCo entered into a research collaboration, option and license agreement with Purdue referred to as the Purdue Collaboration. Purdue has the option to obtain from us the full worldwide development and commercial rights to AST-005, an option to obtain three additional collaboration targets and a further option to obtain from us the full worldwide development and commercial rights to any therapeutic candidates developed targeting the three additional collaboration targets. Additionally, Purdue has rights of first offer to some potential collaboration targets. These rights of first offer are subject to limitations in time and scope. In connection with the Purdue Collaboration, we received a non-refundable development fee of $10.0 million. In addition, we are eligible to receive up to $776.5 million upon successful completion of certain research, regulatory and commercial sales milestones. We cannot assure you that these milestones will be achieved as they are subject to highly significant risks and uncertainties, many of which are outside of our control. In the event a therapeutic candidate subject to the collaboration results in commercial sales, we are eligible to receive royalties ranging from the low single digits to a maximum of 10% on future net sales of such commercialized therapeutic candidates. We are conducting, on behalf of Purdue, a Phase 1b clinical trial in psoriasis patients in Germany to evaluate the effect of higher concentrations of AST-005 gel on TNF mRNA and downstream mRNA expression. We expect the results from this clinical trial to be available in late 2017.

Our second therapeutic candidate, XCUR17, is an SNA targeted to IL-17RA for the treatment of mild to moderate psoriasis. We filed a CTA for a Phase 1 clinical trial of XCUR17 in patients with psoriasis in Germany in the third quarter of 2017 and expect to commence the Phase 1 clinical trial in the fourth quarter of 2017. We expect the results from this clinical trial to be available in the second quarter of 2018. Our third therapeutic candidate, AST-008, is an SNA consisting of TLR9 agonists designed for immuno-oncology applications. AST-008 has exhibited anti-tumor activity as both a monotherapy and in combination with certain checkpoint inhibitors across a range of preclinical models of solid and hematological cancers. In the third quarter of 2017, we received an authorization from the MHRA to conduct a Phase 1 clinical trial with AST-008 in the United Kingdom. Although we plan to begin AST-008 clinical development as a monotherapy in a Phase 1 clinical trial in the fourth quarter of 2017, we ultimately plan to clinically advance AST-008 exclusively in combination with checkpoint inhibitors. We expect the results from the Phase 1 clinical trial to be available on a rolling basis starting in the fourth quarter of 2017.

Since the inception of Exicure OpCo in 2011, we have devoted substantial resources to the research and development of SNAs and the protection and enhancement of our intellectual property. We have no products approved for sale and all of our $10.9 million in revenue through June 30, 2017 has been earned through our research collaboration, license, and option agreement with Purdue or as a primary contractor or as a subcontractor on government grants. In addition to our revenue, we have funded our operations through private placements of preferred stock with gross proceeds totaling $42.8 million and debt financing totaling $6.0 million. As of June 30, 2017, our cash and cash equivalents were $8.8 million.

Since the inception of Exicure OpCo, we have incurred significant operating losses. Our net loss was $16.9 million and $13.2 million for the years ended December 31, 2016 and 2015, respectively, and $6.6 million and $7.8 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, our accumulated deficit was $48.1 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant and increasing losses in the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially as we:

We have not generated any commercial product revenue nor do we expect to generate substantial revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our therapeutic candidates. Successful therapeutic development and regulatory approval are subject to significant uncertainty and we expect will take at least five years. If we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Other sources of revenue could include a combination of research and development payments, license fees and other upfront payments, milestone payments, and royalties in connection with our current and any future collaborations and licenses. Until such time, if ever, that we generate revenue from whatever source, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings and research collaboration and license agreements. We may be unable to raise capital or enter into such other arrangements when needed or on favorable terms. 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 therapeutic candidates.

Recent Developments

Reverse Merger

On September 26, 2017, pursuant to the Merger Agreement, Acquisition Sub merged with and into Exicure OpCo, with Exicure OpCo remaining as the surviving entity and a wholly-owned operating subsidiary of our Company. The Merger was effective as of September 26, 2017, upon the filing of a Certificate of Merger with the Secretary of State of the State of Delaware.

At the Effective Time, the legal existence of Merger Sub ceased. At the Effective Time, each outstanding share of Exicure OpCo’s common and preferred stock (other than shares of Exicure OpCo’s Series C preferred stock) issued and outstanding immediately prior to the closing of the Merger will be converted into 0.49649 shares of our common stock, and each outstanding share of Exicure OpCo’s Series C preferred stock issued and outstanding immediately prior to the closing of the Merger will be converted into 0.7666652 shares of our common stock. As a result, an aggregate of 26,666,627 shares of our common stock were issued to the holders of Exicure OpCo’s capital stock after adjustments due to rounding for fractional shares. In addition, pursuant to the Merger Agreement options to purchase 7,414,115 shares of Exicure OpCo’s common stock issued and outstanding immediately prior to the closing of the Merger were assumed and converted into options to purchase 3,680,997 shares of our common stock.

Exicure OpCo is considered the accounting acquirer in the Merger and will account for the transaction as a capital transaction because Exicure OpCo’s former stockholders received substantially all of the voting rights in the combined entity and Exicure OpCo’s senior management represents all of the senior management of the combined entity.

Private Placement

Following the Effective Time of the Merger, we held an initial closing of the Offering in which we sold to accredited investors approximately $20.3 million of our shares of common stock, or 6,767,360 shares, at a price of $3.00 per share. Also, we granted the investors in the Offering registration rights requiring us to register those shares of common stock for public resale, as described in more detail below. The then existing stockholders of Exicure OpCo who agreed to become parties to the registration rights agreement also became entitled to such registration rights. The initial closing of the Offering occurred on September 26, 2017. We may hold one or more Subsequent Closings at any time prior to October 31, 2017, unless otherwise extended, to sell the remaining shares in the Offering. We may also sell an additional 3,333,333 shares of common stock at the Offering Price to cover over-subscriptions in the event the Offering is oversubscribed.

Each investor in any Subsequent Closing of the Offering will be required to represent that, at the time of the applicable closing, it (i) has a substantive, pre-existing relationship with us, or has direct contact with the Company or the Placement Agent or other enumerated parties outside of the Offering, (ii) was not identified or contacted through the marketing of the Offering, and (iii) did not independently contact us as a result of general solicitation by means of this Report, any press release or any other public disclosure disclosing the material terms of the Offering.

Segment Reporting

We view our operations and manage our business as one segment, which is the discovery, research and development of treatments based on our SNA technology.

Critical Accounting Policies and Significant Judgments and Estimates

Our 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 U.S., or GAAP. The preparation of these financial statements requires us 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, as well as the revenue and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the notes to our financial statements appearing in this Report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Revenue recognition

We recognize revenue when the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered and risk of loss has passed; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When payments are received in advance of recognizing revenue, we include the amount in deferred revenue on the balance sheet. Amounts deferred that are not anticipated to be recognized as revenue within a year of the balance sheet date are classified as noncurrent liabilities.

We have generated all of our revenue to date through our research collaboration, license, and option agreement with Purdue or as a primary contractor or as a subcontractor on government grants. We have not generated any commercial product revenue. Historically, our research collaborations and grants have been either as a direct contractor or as a sub-awardee on contracts funded by various governmental agencies.

In arrangements involving the delivery of more than one element, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting. The determination is based on whether the deliverable has “standalone value” to the customer. If a deliverable does not qualify as a separate unit of accounting, it is combined with the other applicable undelivered item(s) within the arrangement and these combined deliverables are treated as a single unit of accounting.

The arrangement’s consideration that is fixed or determinable is allocated to each separate unit of accounting based on the relative selling price methodology in accordance with the selling price hierarchy, which includes vendor-specific objective evidence, or VSOE, of selling price, if available, or third-party evidence of selling price if VSOE is not available, or the best estimate of selling price, if neither VSOE nor third-party evidence is available.

Payments or reimbursements for our research and development efforts for the arrangements where such efforts are considered as deliverables are recognized as the services are performed and are presented on a gross basis. When upfront payments are received and if there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, we recognize revenue ratably over the associated period of performance.

Purdue Collaboration

On December 2, 2016, Exicure OpCo entered into a research collaboration, option and license agreement with Purdue and referred to as the Purdue Collaboration. Purdue has the option to obtain from us the full worldwide development and commercial rights to AST-005 (the Company’s lead therapeutic candidate that targets tumor necrosis factor), an option to obtain three additional collaboration targets and a further option to obtain from us the full worldwide development and commercial rights to any therapeutic candidates developed targeting the three additional collaboration targets. Additionally, Purdue has rights of first offer to some potential collaboration targets. These rights of first offer are subject to limitations in time and scope. In connection with the Purdue Collaboration, we received a non-refundable development fee of $10.0 million. In addition, we are eligible to receive up to $776.5 million upon successful completion of certain research, regulatory and commercial sales milestones. The research milestones are payable upon target identification and IND-enabling pre-clinical development, per program, with an aggregate total of up to $16.5 million. The regulatory milestones are payable upon the initiation or completion of clinical trials, and regulatory approval in the United States and outside the United States, per program, with an aggregate total of up to $410.0 million. The commercial sales milestones are payable upon achievement of specified aggregate product sales thresholds and total up to $350.0 million. There can be no assurance these milestones will be achieved as they are subject to highly significant risks and uncertainties, many of which are outside of our control. In the event a therapeutic candidate subject to the collaboration results in commercial sales, we are eligible to receive royalties ranging from the low single digits to a maximum of 10% on future net sales of such commercialized therapeutic candidates. Additionally, Purdue had an obligation to invest in a qualified equity financing of the Company if such financing was completed before June 2, 2017. We did not complete such qualified equity financing before June 2, 2017.

In accordance with ASC 605-25, we identified the following deliverables at the inception of the Purdue Collaboration agreement: (1) exclusive rights to the TNF-α target, (2) the obligation to participate in a joint research committee, (3) the provision of research and development activities based on a prescribed full-time employee rate per year, (4) a non-voting board of director observer role, (5) Purdue’s right to participate in a future qualified equity financing of the Company if such financing occurs prior to June 2, 2017 or the pricing of the initial public offering of shares of the Company’s common stock, (6) the option for an exclusive development and commercialization license to AST-005 or a TNF-α development candidate other than AST-005, (7) the option to select and develop three additional collaboration targets, and (8) the option for an exclusive development and commercialization license to any developed therapeutic candidate targeting the three additional collaboration targets. We determined that deliverables (2), (4), (5), and (6) do not have stand-alone value to Purdue, and accordingly,

deliverables (2), (4), (5) and (6) were combined with deliverables (1) and (3) as a single unit of accounting. We concluded that, at the inception of the agreement, deliverables (7) and (8) are substantive options and do not contain a significant or incremental discount; as a result, no portion of the upfront $10.0 million is allocated to deliverables (7) and (8).

The upfront payment of $10.0 million was allocated to the single unit of accounting consisting of deliverables (1), (2), (3), (4), (5), and (6) above and was recorded as deferred revenue and is being recognized on a ratable basis over the estimated performance period of the relevant research and development activities of 14.5 months.

During the year ended December 31, 2016, we recognized collaboration revenue of $0.7 million. During the six months ended June 30, 2017, we recognized collaboration revenue of $5.1 million, which included $1.0 million of research and development activities that will be reimbursed by Purdue and is presented on a gross basis in the accompanying statement of operations. As of June 30, 2017 and December 31, 2016, deferred revenue relating to the Purdue Collaboration was $5.3 million and $9.3 million, respectively, of which $5.3 million and $8.3 million, respectively, is classified as current portion of deferred revenue in the accompanying balance sheet.

The Purdue Collaboration agreement includes contingent payments related to specified research, development and regulatory milestones and sales-based milestones. Each contingent and milestone payment is evaluated to determine whether it is substantive and at risk to both parties. We recognize any payment that is contingent upon the achievement of a substantive milestone entirely in the period in which the milestone is achieved. Any payments that are contingent upon achievement of a non-substantive milestone are recognized as revenue prospectively, when such payments become due and collectible, over the remaining expected performance period under the arrangement, which is generally the remaining period over which the research and development services are expected to be provided. To date, we have not recognized any contingent payments in connection with the Purdue Collaboration as revenue.

Our grant contracts have typically been cost or cost-plus fee contracts. Revenues on these contracts are recognized as costs are incurred, generally based on allowable costs incurred during the period, plus any recognizable earned fee. We consider fixed fees under cost and cost-plus fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract. We analyze costs for contracts and reimbursable grants to ensure that reporting of revenues on a gross basis instead of on a net basis is appropriate.

We have entered into certain grant contracts containing milestone payments. We recognize revenue from milestone payments when earned, provided that the milestone event was substantive, its achievability was not reasonably assured at the inception of the agreement, we have no further performance obligations relating to the event and collectability is reasonably assured. If these criteria are not met, we recognize milestone payments ratably over the remaining period of our performance obligations under the grant contract. For a milestone to be considered substantive, the payment associated with its achievement must have all of the following characteristics: (1) relate solely to past performance; (2) be reasonable, relative to all of the deliverables and payment terms within the arrangement; and (3) be commensurate with either our efforts required to achieve the milestone or the enhanced value of the delivered items(s) as a result of the milestone achievement.

During the years ended December 31, 2016 and 2015 and during the six months ended June 30, 2017 and 2016, Exicure OpCo was not participating in any grant research activities involving milestone payments.

Equity-based compensation

In connection with the corporate conversion, each common unit, Class A unit, Class B-I unit, Class B-II unit and Class C unit of AuraSense Therapeutics, LLC issued and outstanding immediately prior to the effectiveness of the corporate conversion was converted into one share of common stock, Series A preferred stock, Series B-1 preferred stock, Series B-2 preferred stock and Series C preferred stock of Exicure OpCo, respectively. Fractional units of AuraSense Therapeutics, LLC that were outstanding prior to the corporate conversion were not converted to shares of stock in Exicure OpCo, resulting in 17 less aggregate shares of outstanding preferred stock of Exicure OpCo as compared to aggregate outstanding preferred units of AuraSense Therapeutics, LLC in connection with the

corporate conversion. Each outstanding option to purchase one common unit of AuraSense Therapeutics, LLC was converted into an option to purchase one share of common stock of Exicure OpCo. The following discussion is presented to reflect the corporate conversion as if it had occurred as of the beginning of all respective periods presented.

We measure the cost of common stock option awards at fair value and record the cost of the awards, net of estimated forfeitures, on a straight-line basis over the requisite service period. We measure fair value for all common stock options using the Black-Scholes option-pricing model. For all common stock option awards to employees, the fair value measurement date is the date of grant and the requisite service period is the period over which the employee is required to provide service in exchange for the common stock option awards, which is generally the vesting period. For all common stock option awards to nonemployees, we remeasure fair value at each financial statement reporting date and recognize compensation expense as services are rendered, generally on a straight-line basis.

The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including: (1) the estimated grant date fair value of Exicure OpCo’s common stock; (2) the option exercise price; (3) the expected term of the option in years; (4) the annualized volatility of the stock; (5) the risk-free interest rate; and (6) the annual rate of quarterly dividends on the stock. We make those estimates as follows:

Fair value of Exicure OpCo’s common stock. Exicure OpCo’s common stock has not yet been publicly traded, therefore we estimate the fair value of the common stock underlying our stock options. The grant date fair value of Exicure OpCo common stock has been determined by its board of directors exercising their judgment in the consideration of a variety of factors. Please see “Exicure OpCo common stock valuation” below for a detailed discussion of the assumptions used in estimating the grant date fair value of the common stock underlying Exicure OpCo’s stock options. For financial reporting purposes and principally to aid Exicure OpCo in the revaluation of certain common stock option awards to non-employees and certain warrant liabilities, Exicure OpCo has periodically estimated the per share fair value of its common stock at various dates using valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid. Exicure OpCo performed these valuations as of the following dates: March 31, 2012; July 31, 2013; June 30, 2014; December 31, 2014; March 31, 2015; June 30, 2015; September 30, 2015; December 31, 2015; March 31, 2016; June 30, 2016; October 31, 2016; December 15, 2016; March 31, 2017; and June 30, 2017.

Option exercise price . For all common stock options granted prior to August 31, 2013, the grant date exercise price was equal to $1.10 per share based on the purchase price per share of Exicure OpCo’s Series B-1 preferred stock sold in December 2011. For all common stock options granted between August 31, 2013 and October 2, 2014, the grant date exercise price was equal to $1.30 per share based on the purchase price per share of Exicure OpCo’s Series B-2 preferred stock sold in June 2013. On October 3, 2014, the board of directors determined that the fair value of Exicure OpCo’s common stock was $0.32 per unit and further determined that for all periods prior to October 3, 2014, the fair value of Exicure OpCo’s common stock was less than or equal to $0.32 per share. Also on October 3, 2014, Exicure OpCo’s board of directors took action by way of unanimous written consent to modify the exercise price on all outstanding stock options to $0.32 to reflect the board’s determination of fair value of Exicure OpCo’s common stock for all periods prior to such date. No other terms of the repriced stock options were modified and these repriced stock options continued to vest according to their original vesting schedules and retained their original expiration dates.

After the October 3, 2014 modification, Exicure OpCo granted additional common stock options as follows.

No additional common stock options were granted since January 4, 2017.

Expected term. In determining the expected term of the options, Exicure OpCo elected to use the “simplified” method in accordance with SEC SAB No. 107, Share-Based Payments. The use of the “simplified” method under SAB No. 107 was extended beyond December 31, 2007, in accordance with SAB No. 110, Share-Based Payment, issued on December 21, 2007, until such time when there is sufficient information to make more refined estimates on the estimated life of options. SAB No. 110 expressed the views of the staff regarding the use of the “simplified” method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with ASC 718, Share-Based Payment. SAB No. 110 allows companies that do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share options grants after December 31, 2007. The Company will continue to use the “simplified” method until we have enough historical experience to provide a reasonable estimate of expected term in accordance with SAB No. 110.

Volatility . Because Exicure OpCo’s common stock has not been freely traded in any market or public exchange, we do not have information on the trading volatility of Exicure OpCo’s common stock. Consequently, we have derived our assumption for volatility by examining the historical volatilities of several unrelated public companies within our industry. When selecting the industry peer group of companies to be used in the volatility calculation, we also consider the stage of development, size and financial leverage of each potential comparable company.

Risk-free rate . The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option grant.

Dividend yield . Exicure OpCo has never declared or paid cash dividends and we do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

We are also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest.

Exicure OpCo common stock valuation

Exicure OpCo has historically granted common stock options at exercise prices not less than the fair value of its common stock. As there has been no public market for Exicure OpCo’s common stock to date, the estimated fair value of its common stock has been determined by its board of directors.

On each occasion when Exicure OpCo’s board determined the fair value of its common stock, they considered each of the factors listed below as well as certain qualitative factors particular to each grant:

We have periodically determined, for financial reporting purposes, the estimated per share fair value of Exicure OpCo’s common stock at various dates using contemporaneous and retrospective valuations. These valuations have been performed in accordance with the guidance outlined in the Practice Aid.

Common stock valuation methodologies. These contemporaneous and retrospective valuations discussed below were prepared in accordance with the guidelines in the Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its common units. We generally used the income and market approaches. When applying the market approach, we used the guideline company and precedent transaction methodologies based on inputs from comparable public companies’ equity valuations and comparable acquisition transactions to estimate Exicure OpCo’s enterprise value. In applying the income approach, we applied the discounted cash flow method based on Exicure OpCo’s projections.

In order to determine the fair market value of Exicure OpCo’s common stock, Exicure OpCo’s board of directors first valued the enterprise and then allocated that value through the capital structure.

Methods used to determine the enterprise value of Exicure OpCo . Exicure OpCo’s board considered three basic approaches to determining value as outlined in the Practice Aid: 1) Market Approach, 2) Income Approach, and 3) Asset-Based or Cost Approach.

Market Approach . The Market Approach relies on an analysis of publicly traded companies similar in industry and/or business model to Exicure OpCo. This methodology uses these guideline companies to develop relevant market multiples and ratios, using metrics such as revenue, earnings before interest and taxes, or EBIT, earnings before interest, taxes, depreciation and amortization, or EBITDA, net income and/or tangible book value. These multiples and values are then applied to Exicure OpCo’s corresponding financial metrics. Since no two companies are perfectly comparable, premiums or discounts may be applied to the subject company’s metrics if its position in its industry is significantly different from the position of the guideline companies, or if its intangible attributes are significantly different.

Application of the Market Approach will also consider the actual prices paid in merger and acquisition transactions for companies similar to Exicure OpCo. Exit multiples of total purchase price paid to revenue, EBIT, EBITDA, net income and/or tangible book value may be developed for each comparable transaction, if the data is available. These multiples are then applied to Exicure OpCo’s corresponding latest 12-month and projected financial metrics.

New to the Practice Aid is the “Back-solve Method.” The Back-solve Method, a form of the Market Approach to valuation, derives the implied equity value for one type of equity security (e.g., common stock) from a contemporaneous transaction involving another type of equity security (e.g., preferred stock). The Back-solve Method relies on the Black-Scholes Option pricing model to determine the value of the common stock. Inputs into the Black-Scholes model were determined by an analysis of publicly traded companies similar in industry and/or business model to Exicure OpCo.

During the periods under consideration, Exicure OpCo raised preferred stock financing in arm’s length market transactions on six occasions: December 2011, June 2013, June 2014, February 2015, October 2015, and January 2016. All of Exicure OpCo’s preferred stock financings included independent, third-party investors and therefore we believe are reliable indications of the fair value for the class of preferred stock acquired at the time. We also believe they form a reasonable basis for estimating the fair value of Exicure OpCo’s common stock. In the board’s judgment, the proximity between these financings and the date for which a fair market value determination of Exicure OpCo’s common stock was required, indicate that the Back-solve Method is the most appropriate method for determining fair market value of Exicure OpCo’s common stock.

Income Approach. Exicure OpCo’s board determined that the Income Approach cannot be appropriately applied to Exicure OpCo. Exicure OpCo is at a very early stage in its development and is not currently generating material positive cash flow nor do we anticipate generating material positive cash flows within the economic time horizon typically considered in a discounted cash flow analysis. As discussed elsewhere in this Report, Exicure OpCo is an early stage biotechnology company and Exicure OpCo’s primary activities to date have been research and development of potential new therapeutics based upon its technology. We believe that any valuation of Exicure OpCo’s common stock’s fair value must recognize that Exicure OpCo is subject to a risky and lengthy period of time until commercial product revenue, if any, is earned. Exicure OpCo’s future business model is also uncertain and could include a variety of technology and product licensing opportunities in addition to commercial product revenue from product sales. As a consequence, Exicure OpCo’s board has determined that the projection of typical inputs into the Income Approach such as market size, market share, product revenue and the future expense and capital expenditures to support that forecast revenue, cannot be reasonably generated by Exicure OpCo at this time.

Cost Approach. The Cost Approach involves identifying Exicure OpCo’s significant tangible assets, estimating the individual current market values of each and then totaling them to derive the value of the business as

a whole. The board determined that, based on Exicure OpCo’s industry and stage of development, Exicure OpCo’s tangible assets are not a reasonable estimation of Exicure OpCo’s enterprise value.

Methods used to allocate Exicure OpCo’s enterprise value to each class of securities. In accordance with the Practice Aid, we considered the various methods for allocating the enterprise value across Exicure OpCo’s classes and series of capital stock to determine the fair value of Exicure OpCo’s common stock at each valuation date. The methods we considered consisted of the following:

Current Value Method. Under the Current Value Method, once the fair value of the enterprise is established, the value is allocated to the various series of preferred and common stock based on their respective seniority, liquidation preferences or conversion values, whichever is greatest. We believe that application of the Current Value Method is generally only appropriate when a liquidity event in the form of an acquisition or dissolution of the company is imminent and expectations about the future value of the company are virtually irrelevant. Alternatively, the Current Value Method can be used when the company is so early in its development that no significant economic value has yet been created above the value of the capital invested in the business. We believe neither circumstance fits Exicure OpCo and so we did not use this method in allocating fair value to each of Exicure OpCo’s classes of stock.

Option Pricing Method. Prior to March 31, 2015, the principal method by which we allocated value to each class of preferred stock and to the common stock was the Option Pricing Method. Subsequent to March 31, 2015 the Option Pricing Method was used in combination with the Probability Weighted Expected Return method (see below) using a Hybrid Method (see below). Under the Option Pricing Method, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options. Because of the various liquidation preferences granted to Exicure OpCo’s different classes of preferred stock, we utilized a lattice-based option-pricing model. We utilized a twenty-five step binomial lattice in order to estimate a wide range of possible future values for Exicure OpCo’s total enterprise value. The binomial lattice is based on the following parameters:

The resultant values at the end nodes of the lattice tree were then allocated based on the respective preferences of each class of preferred stock with the residual flowing to the common stock.

Probability-weighted Expected Return Method. Under the Probability-weighted Expected Return Method, or PWERM, the value of Exicure OpCo’s common stock is estimated based upon an analysis of values for Exicure OpCo assuming possible future events:

The per share value of the common stock using PWERM is based upon the probability-weighted present value of expected future equity values, under each of the possible future event scenarios, as well as the rights and preferences of each stock class.

Hybrid Method. As outlined in the AICPA practice aid, in certain circumstances, it may be appropriate to use a hybrid of certain allocation methodologies. In Exicure OpCo’s circumstances, the per share values calculated under the Option Pricing Method and PWERM are weighted appropriately to arrive at a final fair market value per share value of Exicure OpCo’s common stock.

Since March 31, 2015, Exicure OpCo’s board has utilized the PWERM analysis to determine the fair value of Exicure OpCo’s common stock in combination with the Option Pricing Method (see above) using a Hybrid Method. As discussed below, on those occasions the board utilized the Hybrid Method where they considered both the results from the Option Pricing Method and the results of PWERM analysis where particular consideration was given to the value of Exicure OpCo in the event of an IPO of Exicure OpCo’s stock.

October 3, 2014 . On October 3, 2014, Exicure OpCo’s board determined that the fair value of Exicure OpCo’s common stock was less than or equal to $0.32 per common share for all periods from the formation of Exicure OpCo until October 3, 2014. In its deliberation the board considered all of the qualitative and quantitative factors detailed above in the section captioned “Exicure OpCo common stock valuation.”

As part of its determination the board considered four separate retrospective analyses of Exicure OpCo’s common stock. Those analyses, each prepared by an independent third party appraiser in accordance with the Practice Aid, indicated a per share value for Exicure OpCo’s common stock of $0.18 as of March 31, 2012, $0.21 as of July 31, 2013, and $0.32 as of June 30, 2014.

On October 3, 2014, the board determined the fair value of Exicure OpCo’s common stock as of October 3, 2014 to be $0.32. In its deliberation the board considered all of the qualitative and quantitative factors detailed above in the section captioned “Exicure OpCo common stock valuation.”

In determining the fair value of Exicure OpCo’s common stock Exicure OpCo’s board relied principally on the Back-solve Method for determining the enterprise value of Exicure OpCo and the Option Pricing Method for determining the fair value of Exicure OpCo’s common stock. An important input into the application of the Back-solve Method was the June 2014 sale of Exicure OpCo’s Series C preferred stock for net proceeds of $13.5 million at a per share price of $2.30.

April 28, 2015 and May 22, 2015. On April 28, 2015 and May 22, 2015, Exicure OpCo’s board determined that the fair value of Exicure OpCo’s common stock as of such dates was $0.51 per share. In its deliberation the board considered all of the qualitative and quantitative factors detailed above in the section captioned “Exicure OpCo common stock valuation.”

In determining the fair value of Exicure OpCo’s common stock, the board relied principally on the Back-solve Method for determining the enterprise value of Exicure OpCo. When determining the fair value of Exicure OpCo’s common stock, the board, for the first time, considered both the probability of an IPO of Exicure OpCo’s common stock in a PWERM analysis and the results provided by the Option Pricing Method. The fair value determined using the PWERM analysis was aggregated with the fair value determined by the Option Pricing Method using the Hybrid Method.

An important input into the application of the Back-solve Method was the February 2015 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $4.6 million at a per share price of $2.30.

As part of its determination the board considered a contemporaneous valuation of Exicure OpCo’s common stock prepared by an independent third party appraiser in accordance with the Practice Aid, which indicated a per share value for Exicure OpCo’s common stock of $0.51 as of March 31, 2015. The board concluded in its deliberations that this valuation remained an important input into its deliberations since in its judgment no material change in the value of Exicure OpCo had occurred since March 31, 2015.

November 24, 2015. On November 24, 2015, Exicure OpCo’s board determined that the fair value of Exicure OpCo’s common stock as of such date was $0.98 per share. In its deliberation the board considered all of the

qualitative and quantitative factors detailed above in the section captioned “Exicure OpCo common stock valuation.”

In determining the fair value of Exicure OpCo’s common stock, the board relied principally on the Back-solve Method for determining the enterprise value of Exicure OpCo. When determining the fair value of Exicure OpCo’s common stock, the board considered both the probability of an IPO of Exicure OpCo’s common stock in a PWERM analysis and the results provided by the Option Pricing Method. The fair value determined using the PWERM analysis was aggregated with the fair value determined by the Option Pricing Method using the Hybrid Method.

An important input into the application of the Back-solve Method was the October 2015 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $15.0 million at a per share price of $2.30. As part of its determination the board considered a contemporaneous valuation of Exicure OpCo’s common stock prepared by an independent third party appraiser in accordance with the Practice Aid, which indicated a per share value for Exicure OpCo’s common stock of $0.98 as of September 30, 2015. The board concluded in its deliberations that this valuation remained an important input into its deliberations since in its judgment no material change in the value of Exicure OpCo had occurred since September 30, 2015.

In the board’s judgment the increase in fair value from $0.32 at October 3, 2014 to $0.35 at December 31, 2014 to $0.51 at April 28, 2015 and May 22, 2015 to $0.98 at November 24, 2015 reasonably reflected both the scientific and clinical progress of Exicure OpCo’s research programs and prospective therapeutic candidates as well as the possibility of an IPO.

May 11, 2016. On May 11, 2016, Exicure OpCo’s board determined that the fair value of Exicure OpCo’s common stock as of such date was $0.95 per share. In its deliberation the board considered all of the qualitative and quantitative factors detailed above in the section captioned “Exicure OpCo common stock valuation.”

In determining the fair value of Exicure OpCo’s common stock, the board relied principally on the Back-solve Method for determining the enterprise value of Exicure OpCo. When determining the fair value of Exicure OpCo’s common stock, the board considered both the probability of an IPO of Exicure OpCo’s common stock in a PWERM analysis and the results provided by the Option Pricing Method. The fair value determined using the PWERM analysis was aggregated with the fair value determined by the Option Pricing Method in the Hybrid Method. The board’s analysis reflected that, based on then-existing market conditions, the IPO prospects for Exicure OpCo had diminished since the previous time the board determined fair value on November 24, 2015.

An important input into the application of the Back-solve Method was the October 2015 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $15.0 million at a per share price of $2.30 and the January 2016 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $0.4 million also at a per share price of $2.30. The Back-solve analysis also took into consideration changes in the market value of benchmark equity indices and the value created from cash spent on research and development, or R&D, activities. As part of its determination the board considered a contemporaneous valuation of Exicure OpCo’s common stock prepared by an independent third party appraiser in accordance with the Practice Aid, which indicated a per share value for Exicure OpCo’s common stock of $0.95 as of March 31, 2016. The board concluded in its deliberations that this valuation remained an important input into its deliberations since in its judgment no material change in the value of Exicure OpCo had occurred since March 31, 2016.

In the board’s judgment the decrease in fair value from $0.98 at November 24, 2015 to $0.95 at May 11, 2016 reasonably reflected the diminished IPO prospects, based on then-existing market conditions, for Exicure OpCo while also reflecting the scientific and clinical progress of Exicure OpCo’s research programs and prospective therapeutic candidates.

August 10, 2016. On August 10, 2016, Exicure OpCo’s board determined that the fair value of Exicure OpCo’s common stock as of such date was $1.05 per share. In its deliberation the board considered all of the qualitative and quantitative factors detailed above in the section captioned “Exicure OpCo common stock valuation.”

In determining the fair value of Exicure OpCo’s common stock, the board relied principally on the Back-solve Method for determining the enterprise value of Exicure OpCo. When determining the fair value of Exicure OpCo’s common stock, the board considered both the probability of an IPO of Exicure OpCo’s common stock in a PWERM analysis and the results provided by the Option Pricing Method. The fair value determined using the PWERM analysis was aggregated with the fair value determined by the Option Pricing Method in the Hybrid Method. The board’s analysis reflected that the IPO prospects for Exicure OpCo were generally consistent with those assumed in May 2016.

An important input into the application of the Back-solve Method was the October 2015 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $15.0 million at a per share price of $2.30 and the January 2016 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $0.4 million also at a per share price of $2.30. The Back-solve analysis also took into consideration changes in the market value of benchmark equity indices and the value created from cash spent on R&D activities. As part of its determination the board considered a contemporaneous valuation of Exicure OpCo’s common stock prepared by an independent third party appraiser in accordance with the Practice Aid, which indicated a per share value for Exicure OpCo’s common stock of $1.05 as of June 30, 2016. The board concluded in its deliberations that this valuation remained an important input into its deliberations since in its judgment no material change in the value of Exicure OpCo had occurred since June 30, 2016.

In the board’s judgment the increase in fair value from $0.95 at May 11, 2016 to $1.05 at August 10, 2016 reasonably reflected the scientific and clinical progress of Exicure OpCo’s research programs and prospective therapeutic candidates.

November 9, 2016. On November 9, 2016, Exicure OpCo’s board determined that the fair value of Exicure OpCo’s common stock as of such date was $1.20 per share. In its deliberation the board considered all of the qualitative and quantitative factors detailed above.

In determining the fair value of Exicure OpCo’s common stock, the board relied principally on the Back-solve Method for determining the enterprise value of Exicure OpCo. When determining the fair value of Exicure OpCo’s common stock, the board considered both the probability of an IPO of Exicure OpCo’s common stock in a PWERM analysis and the results provided by the Option Pricing Method. The fair value determined using the PWERM analysis was aggregated with the fair value determined by the Option Pricing Method in the Hybrid Method. The board’s analysis reflected that, based on then-existing market conditions, the IPO prospects for Exicure OpCo had improved as compared to the assumption at August 2016.

An important input into the application of the Back-solve Method was the October 2015 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $15.0 million at a per share price of $2.30 and the January 2016 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $0.4 million. The Back-solve analysis also took into consideration changes in the market value of benchmark equity indices and the value created from cash spent on R&D activities. As part of its determination the board considered a contemporaneous valuation of Exicure OpCo’s common stock prepared by an independent third party appraiser in accordance with the Practice Aid, which indicated a per share value for Exicure OpCo’s common stock of $1.20 as of October 31, 2016. The board concluded in its deliberations that this valuation remained an important input into its deliberations since in its judgment no material change in the value of Exicure OpCo had occurred since October 31, 2016.

In the board’s judgment the increase in fair value from $1.05 at August 10, 2016 to $1.20 at November 9, 2016 reasonably reflects both the scientific and clinical progress of Exicure OpCo’s research programs and prospective therapeutic candidates, as well as the completion of the Phase 1 trial for AST-005 and an understanding of the progress in negotiating the then pending Purdue Collaboration.

January 4, 2017. On January 4, 2017, Exicure OpCo’s board determined that the fair value of Exicure OpCo’s common stock as of such date was $2.09 per share. In its deliberation the board considered all of the qualitative and quantitative factors detailed above.

In determining the fair value of Exicure OpCo’s common stock, the board relied principally on the Back-solve Method for determining the enterprise value of Exicure OpCo. When determining the fair value of Exicure OpCo’s common stock, the board considered both the probability of an IPO of Exicure OpCo’s common stock in a PWERM analysis and the results provided by the Option Pricing Method. The fair value determined using the PWERM analysis was aggregated with the fair value determined by the Option Pricing Method in the Hybrid Method. The board’s analysis reflected that, based on then-existing market conditions, the IPO prospects for Exicure OpCo had improved as compared to the assumption at November 2016.

An important input into the application of the Back-solve Method was the October 2015 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $15.0 million at a per share price of $2.30 and the January 2016 sale of Exicure OpCo’s Series C preferred stock for aggregate proceeds of $0.4 million. The Back-solve analysis also took into consideration changes in the market value of benchmark equity indices and the value created from cash spent on R&D activities. As part of its determination the board considered a contemporaneous valuation of Exicure OpCo’s common stock prepared by an independent third party appraiser in accordance with the Practice Aid, which indicated a per share value for Exicure OpCo’s common stock of $2.09 as of December 15, 2016. The board concluded in its deliberations that this valuation remained an important input into its deliberations since in its judgment no material change in the value of Exicure OpCo had occurred since December 15, 2016.

In the board’s judgment the increase in fair value from $1.20 at November 9, 2016 to $2.09 at January 4, 2017 reasonably reflects both the scientific and clinical progress of Exicure OpCo’s research programs and prospective therapeutic candidates, the execution of the Purdue Collaboration agreement on December 2, 2016, receipt of the upfront payment from Purdue, and the improved IPO prospects for Exicure OpCo.

Results of valuation models may vary . There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding Exicure OpCo’s future performance, including the successful enrollment and completion of Exicure OpCo’s clinical studies as well as the determination of the appropriate valuation methods. If we had made different assumptions, our equity-based compensation expense could have been different. The foregoing valuation methodologies are not the only methodologies available and they will not be used once the Offering is complete. We cannot make assurances as to any particular valuation for Exicure OpCo’s common stock. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future stock prices.

Preferred stock warrant liability

Freestanding warrants related to shares that are redeemable, contingently redeemable, or for purchases of preferred stock that are not indexed to the Company’s own stock are classified as a liability on the Company’s balance sheet. The preferred stock warrants are recorded at fair value, estimated using the Black-Scholes option-pricing model, and marked to market at each balance sheet date with changes in the fair value of the liability recorded in other income (expense), net in the statements of operations. The fair value of the preferred stock warrant is based significantly on the fair value of the Series C preferred stock, which is developed using unobservable inputs, which are classified within Level 3 of the fair value hierarchy of ASC Topic 820, Fair Value Measurement.

The following assumptions were used to estimate the fair value of the preferred stock warrant liability at June 30, 2017:

A 10% change in the estimate of expected volatility at June 30, 2017 would increase or decrease the fair value of the preferred stock warrant liability in the amount of $11,000. A 10% change in the estimate of fair value of the Series C preferred stock at June 30, 2017 would increase or decrease the fair value of the preferred stock warrant liability in the amount of $27,000.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (ASC 606), Revenue from Contracts with Customers. This ASU, as amended by ASU 2015-14, affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company in the first quarter of 2018 and early adoption is permitted beginning in the first quarter of 2017. The Company is currently evaluating the impact of this guidance on its financial statements.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. ASU 2016-02 is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. ASU 2016-02 will be effective for the Company beginning in the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement and treated as discrete items in the reporting period. Further, excess tax benefits are required to be classified along with other income tax cash flows as an operating activity. The guidance was effective for the Company during the first quarter of 2017. Adoption of this guidance did not have a significant impact to the Company’s financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. ASU 2016-15 is effective for the Company in the first quarter of 2018 and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of this guidance on its statement of cash flows.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. ASU 2017-09 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its financial statements.

Components of Statements of Operations

Revenue

We have earned all of our revenue through June 30, 2017 through our research collaboration, license, and option agreement with Purdue or as a primary contractor or as a subcontractor on government grants. We do not intend for government grants to be a principal commercial or strategic focus, but will evaluate opportunities when consistent with our strategic priorities. We have not generated any commercial product revenue and do not expect to generate any product revenue for the foreseeable future.

In the future, we may generate revenue from partnership activities including a combination of research and development payments, license fees and other upfront payments, milestone payments, product sales and royalties, and reimbursement of certain research and development expenses, in connection with the Purdue Collaboration or any future collaborations and licenses. We expect that any such revenue we generate will fluctuate in future periods as a result of the timing of achievement, if at all, of preclinical, clinical, regulatory and commercialization milestones, the timing and amount of any payments to us relating to such milestones and the extent to which any of our therapeutic candidates are approved and successfully commercialized by us or potential development partners. If we, or any potential development partner fails to develop therapeutic candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially and adversely affected.

Research and development expense

Research and development expense consists of costs associated with our research activities, including discovery and development of our SNAs, and their therapeutic applications. Our research and development expenses include:

We expense research and development costs as they are incurred. A significant portion of our research and development costs are not tracked by project as they benefit multiple projects or our technology.

We expect our research and development expenses to increase for the foreseeable future as we advance our therapeutic candidates through preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We or future development partners may never succeed in obtaining marketing approval for any of our therapeutic candidates. The probability of success for each therapeutic candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability.

All of our research and development programs are at an early stage and successful development of future therapeutic candidates from these programs is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future therapeutic candidate and are difficult to predict. We anticipate we will make determinations as to which therapeutic candidates to pursue and how much funding to

direct to each therapeutic candidate on an ongoing basis in response to our ability to maintain or enter into development partnership with respect to each therapeutic candidate, the scientific and clinical success of each therapeutic candidate as well as ongoing assessments as to the commercial potential of therapeutic candidates. We will need to raise additional capital and may seek collaborations in the future in order to advance our various therapeutic candidates. Additional private or public financings may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.

General and administrative expense

General and administrative expense consists primarily of salaries and related benefits, including equity-based compensation, related to our executive, finance, legal, business development and support functions. Other general and administrative expenses include travel expenses, professional fees for auditing, tax and legal services and allocated facility-related costs not otherwise included in research and development expenses.

We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company. These increases will likely include legal, accounting and filing fees, directors’ and officers’ liability insurance premiums and fees associated with investor relations.

Interest expense

Interest expense consists of interest expense pursuant to the loan and security agreement with Hercules that Exicure OpCo closed on February 17, 2016 with an initial advance of $6.0 million.

Other income (loss), net

Other income (loss), net consists of interest income earned on our cash and cash equivalents, fair value adjustments of our warrant liability, and gains and losses on foreign currency transactions.

We recognized revenue of $5.1 million for the six months ended June 30, 2017 and $0.3 million for the six months ended June 30, 2016. In connection with the Purdue Collaboration, we received a non-refundable development fee of $10.0 million in December 2016 which was deferred and is recognized as collaboration revenue over the period in which the revenue is earned. We recognized $5.1 million of collaboration revenue during the six months ended June 30, 2017, which included $1.0 million of research and development activities that is reimbursable by Purdue and is presented on a gross basis in the accompanying statement of operations. The grant income revenue recognized in the six months ended June 30, 2016 related to our performance as a primary contractor or as a subcontractor on government grants that concluded in early 2016. We did not have any active grants as of June 30, 2017.

We do not intend for government grants to be a principal commercial or strategic focus, but will evaluate opportunities when consistent with our strategic priorities. We do not expect to generate any product revenue for the foreseeable future. However, future revenue may include amounts attributable to partnership activities including, a combination of research and development payments, license fees and other upfront payments, milestone payments,

product sales and royalties, and reimbursement of certain research and development expenses, in connection with the Purdue Collaboration or any future collaboration and licenses.

Research and development expense was $7.8 million for the six months ended June 30, 2017 and $5.9 million for the six months ended June 30, 2016, an increase of $1.9 million, or 31%. This increase was primarily due to a net increase in costs related to our therapeutic development programs of $1.9 million and higher compensation and related expenses of $0.2 million. The net increase of $1.9 million in the six months ended June 30, 2017 related to our therapeutic development programs and was mostly due to higher costs for preparation for the Phase 1 clinical trials of both AST-008 and XCUR17.

We expect our research and development expenses to increase in 2018 as we continue spending on our therapeutic development programs, further develop our SNA technology platform and broaden our pipeline of SNA-based candidates.

General and administrative expense was $3.5 million for the six months ended June 30, 2017 and $1.9 million for the six months ended June 30, 2016, an increase of $1.6 million, or 87%. This increase is primarily due higher costs for legal and accounting services of approximately $1.1 million, which were incurred in support of a potential public offering that was abandoned during the second quarter of 2017. Higher equity-based compensation expense of $0.4 million, mostly related to stock options granted in January 2017, also contributed to the increase in general and administrative expense in the six months ended June 30, 2017.

We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company. These increases will likely include legal, accounting and filing fees, directors’ and officers’ liability insurance premiums and fees associated with investor relations.

Interest expense

Interest expense consists of interest expense pursuant to the loan and security agreement with Hercules that Exicure OpCo closed on February 17, 2016 with an initial advance of $6.0 million.

Other income (loss), net

Other income (loss), net consists of interest income earned on our cash and cash equivalents, fair value adjustments of our warrant liability, and gains and losses on foreign currency transactions. Other income (loss), net was not significant to our results of operations in both the six months ended June 30, 2017 and 2016.

Comparison of the Years Ended December 31, 2016 and 2015

The following table summarizes the results of our operations for the years ended December 31, 2016 and 2015 (in thousands, except percentages):