PZRXQ PhaseRx Inc (CE)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited interim consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Unless the context provides otherwise, all references in this Quarterly Report on Form 10-Q to “PhaseRx,” “we,” “us,” “our,” the “Company,” or similar terms, refer to PhaseRx, Inc. and its directly and indirectly owned subsidiaries on a consolidated basis.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described under the sections in this Quarterly Report on Form 10-Q entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2016 annual report on the Form 10-K filed with the Securities and Exchange Commission on March 27, 2017. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Overview

We are a biopharmaceutical company developing a portfolio of products for the treatment of inherited enzyme deficiencies in the liver using intracellular enzyme replacement therapy, or i-ERT. Our lead compound, PRX-OTC to treat ornithine transcarbamylase deficiency, or OTCD, one of the urea cycle disorders, is in preclinical development and is expected to generate safety and clinical efficacy data in 2018. We are not aware of any other enzyme replacement therapies for intracellular enzyme deficiencies currently being marketed for inherited enzyme deficiencies in the liver and believe that the commercial potential for i-ERT remains untapped and is similar in size to the $4.8 billion worldwide market for conventional ERT, which includes drugs such as Cerezyme. Our i-ERT approach is enabled by our proprietary Hybrid mRNA Technology platform, which allows synthesis of the missing enzyme inside the cell. Our initial product portfolio targets the three urea cycle disorders: OTCD; ASL deficiency and ASS1 deficiency. We have preclinical proofs of concept for the treatment of OTCD and ASL deficiency which show significant reductions in the level of blood ammonia, which we believe is an approvable endpoint by the FDA for the demonstration of efficacy in human clinical trials for the treatment of the urea cycle disorders. To our knowledge, there are no ERT products on the market to treat these diseases, because the urea cycle reaction occurs inside the cell and is inaccessible to the administered enzyme. In contrast, we expect delivery of the missing enzyme using i-ERT with our Hybrid mRNA Technology to be a promising approach to treat these patients. Beyond the urea cycle disorders, we believe there are a significant number of inherited disorders of metabolism in the liver that are candidates for our therapeutic approach and that our Hybrid mRNA Technology can be adapted to develop mRNA therapeutics for the treatment of other inherited liver disorders using our platform.

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

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

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

We have three therapeutic urea cycle disorder programs under development: PRX-OTC to treat OTCD, PRX-ASL to treat ASL deficiency and PRX-ASS1 to treat ASS1 deficiency. Preclinical efficacy has been established for PRX-OTC with two biological measures, including normalization of the level of ammonia in the blood. In June 2016, we selected PRX-OTC as our lead product candidate and demonstrated preclinical proof of concept for the treatment of a second product candidate, PRX-ASL. In 2016, we initiated scale up of the manufacturing of PRX-OTC, and in November 2016, we announced positive safety results from our single escalating dose response study in non-human primates using our Hybrid mRNA Technology. In November 2016, PRX-OTC received orphan drug designation from the FDA. In April 2017, PRX-OTC received orphan medicinal product designation from the European Commission. We have received feedback on our PRX-OTC development program from both the FDA and the European Commission. We intend to initiate IND-enabling studies in the second half of 2017 and plan to start manufacturing clinical supplies of the lead urea cycle disorder product candidate consistent with cGMP in 2018. We plan to file an IND application for PRX-OTC with the FDA in 2018, conduct Phase 2a/2b single- and repeat-dose clinical proof of concept studies in OTCD patients that are expected to generate Phase 2a safety and efficacy data, including measurement of reduction in blood ammonia in the second half of 2018 and Phase 2b (repeat-dose) safety and efficacy data in the first half of 2019.

We believe our cash, cash equivalents and marketable securities balance of $8.4 million at June 30, 2017, is sufficient to fund our operations until March 31, 2018. We are exploring various financing options including equity funding and strategic collaborations. However, there are no assurances that we will be successful in obtaining the level of financing needed for our operations. Assuming we can raise sufficient cash to fund our operations beyond March 31, 2018, we expect to file an IND application for PRX-OTC with the FDA in 2018, conduct Phase 2a/2b single- and repeat-dose clinical proof of concept studies in OTCD patients that are expected to generate Phase 2a safety and efficacy data, including measurement of reduction in blood ammonia in the second half of 2018 and Phase 2b (repeat-dose) safety and efficacy data in the first half of 2019.

Financial Overview

Our operations have been funded, to date, primarily through the sale of our common stock in the IPO, debt financing, a series of private placements of convertible preferred stock and issuance of convertible notes and warrants.

Operating Losses

Since our inception, we have incurred significant operating losses. Our net losses were $3.5 million and $11.1 million for the three months ended June 30, 2017 and 2016, respectively. Our net losses were $7.7 million and $13.3 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, we had an accumulated deficit of $77.2 million. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase as we plan to conduct our preclinical studies, scale up the manufacturing process, advance our research programs into clinical trials, continue to discover, validate and develop additional product candidates, expand and protect our intellectual property portfolio, and hire additional development and scientific personnel.

Revenue

We currently do not have any products approved for sale in any jurisdiction and have not generated any revenue from product sales.

Research and Development Expenses

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

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

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

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

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance and support functions. Other general and administrative expenses include allocated facility related costs not otherwise included in research and development expenses, professional fees for auditing, tax, investor relations, legal services, market research, intellectual property and travel expenses.

Interest Expense

On June 7, 2016, we entered into a loan and security agreement by and among us, the several banks and other financial institutions or entities from time to time parties to the loan and security agreement and Hercules, in its capacity as administrative agent for itself and the Lenders, pursuant to which the Lenders funded $6 million of the term loan, and we received $5.7 million, net of issuance costs.

The Term Loan bears interest at a floating annual rate equal to the greater of (i) 9.25% and (ii) the sum of (a) 9.25%, plus (b) the prime rate as reported by The Wall Street Journal minus 3.50%, resulting in a rate of 10.00% as of June 30, 2017. We are required to make interest payments in cash on the first business day of each month, beginning on July 1, 2016. The Term Loan begins amortizing on July 3, 2017, in equal monthly installments of principal and interest, with such payments beginning on July 3, 2017, and continuing on the first business day of each month thereafter until the Term Loan is repaid. The final maturity date of the Term Loan is December 2, 2019. Upon repayment of the term loan, we are required to pay an end of term charge to the Lenders equal to 5.85% of the aggregate original principal amount of all Term Loan advances extended by the Lenders to us.

On May 2, 2016, we issued an original issue discount promissory note in the aggregate amount of $440,000 payable to a lender in exchange for a $400,000 loan. The note was repaid after the closing of the IPO.

Critical Accounting Policies and Estimates

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

While our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements included in our 2016 annual report on the Form 10-K filed with the Securities and Exchange Commission on March 27, 2017, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Research and Development Costs

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

Fair Value of Financial Instruments

We establish the fair value of our assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We established a fair value hierarchy based on the inputs used to measure fair value. The three levels of the fair value hierarchy are as follows:

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

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

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

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

Stock-Based Compensation

We expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. We use the Black-Scholes option pricing model to calculate the fair value of any equity instruments on the grant date. We recognize stock-based compensation, on the graded-vesting method as expense over the requisite service period. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to volatility, expected option term and, prior to the IPO, the fair value of our common stock. Measurement of stock-based compensation for options granted to non-employees is subject to periodic adjustment as the underlying equity instruments vest. We have granted options with performance conditions to certain executive officers, directors and non-employee consultants. At each reporting date, we evaluate whether the achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of the achievement of each performance condition or the occurrence of the event which will trigger the options to vest. 

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

All stock options are granted at a price no less than the fair value per share of our common stock. Prior to the IPO, the fair value of our common stock underlying options granted was determined by the board of directors who relied, in part, upon independent third party valuation analyses and input from our management on each grant date. We used valuation techniques and methods that rely on recommendations by the American Institute of Certified Public Accountants, or AICPA, in its Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , 2013, and conformed to generally accepted valuation practices.

JOBS Act

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

Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU is intended to provide more transparent and economically neutral information about the assets and liabilities that arise from leases than previous guidance. The ASU is effective for public entities for annual periods beginning on or after December 15, 2018. Early adoption is permitted, and adoption must be applied on a modified retrospective basis. We are evaluating the impact of this guidance on our financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Credit Losses that changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU is effective for us in the first quarter of 2020 and must be adopted using a modified retrospective transition approach. We are evaluating the impact of this guidance but do not expect that the adoption will have a material impact on our financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments that clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for us in the first quarter of 2018 with early adoption permitted and must be applied retrospectively to all periods presented. We are evaluating the impact of this guidance but do not expect that the adoption will have a material impact on our financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation , which is intended to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. This ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact of this guidance but do not expect that the adoption will have a material impact on our financial statements.

Research and Development Expenses

Research and development expenses were $2.3 million for the three months ended June 30, 2017, compared to $1.4 million for the three months ended June 30, 2016, and $4.6 million for the six months ended June 30, 2017, compared to $2.9 million for the six months ended June 30, 2016.

The increase of $839,000, or 59%, in the three months ended June 30, 2017, was primarily due to an increase in research activities to execute the development plan of our lead drug candidate, PRX-OTC. In the three months ended June 30, 2017, costs for preclinical studies and scaling up manufacturing increased by $591,000 and our payroll costs increased by $168,000 and noncash stock-based compensation increased by $45,000.

The increase of $1.7 million or 61% in the six months ended June 30, 2017, was also primarily due to an increase in research activities in connection with execution of the development plan for our lead drug candidate, PRX-OTC. During the six months ended June 30, 2017, costs for preclinical studies and scaling up of manufacturing increased by $1.2 million, our payroll costs increased by $317,000 and noncash stock-based compensation increased by $153,000.

General and Administrative Expenses

General and administrative expenses were $1.1 million for the three months ended June 30, 2017, compared to $880,000 for the three months ended June 30, 2016, and $2.7 million for the six months ended June 30, 2017, compared to $1.6 million for the six months ended June 30, 2016.

The increase of $185,000, or 21%, in the three months ended June 30, 2016, was primarily due to an increase in the costs associated with being a publicly-traded company of $114,000, an increase in payroll costs of $102,000 which includes an increase in noncash stock compensation expense of $57,000 and an increase in patent legal costs of $71,000, offset by a decrease in travel and consulting costs related to our IPO in 2016.

The increase of $1.1 million, or 70%, in the six months ended June 30, 2017, was primarily due to an increase of $411,000 due to costs associated with meeting requirements for being a publicly-traded company, including legal, consulting, insurance, board fees, audit fees and investor relation fees. Additionally, payroll costs increased by $339,000 due to $253,000 in increased stock compensation expense and $84,000 from increased headcount. We also incurred market research analysis costs of $267,000.

Noncash Financial Advising Fees

We did not incur any noncash financial advising fees during the three and six months ended June 30, 2017, compared to $7.5 million of noncash financial advising fees during the three and six months ended June 30, 2016.

In December 2015, we engaged Palladium Capital Advisors, LLC, or Palladium, to serve as a non-exclusive agent in connection with a bridge loan financing and as a non-exclusive advisor in connection with our IPO and for the provision of general capital markets advice. Prior to the consummation of the bridge loan financing, we determined, following discussions with Palladium, to request certain of our stockholders to transfer an aggregate of 1,393,880 shares of our common stock to Titan Multi-Strategy Fund I, LTD, or Titan, and certain of its third-party designees at a nominal purchase price in order to induce Titan to serve as the initial committed investor in the bridge financing and also in expectation of receiving other support from Titan, Palladium and their respective contacts in connection with our then proposed IPO, including introductions to certain prospective underwriters. The sales of shares were completed immediately prior to the IPO. We recorded the fair value of this stock amounting to $7.0 million, based on the IPO price of $5.00 per share, as a noncash financial advising fee to reflect the economic benefits that we received from the contributions by our principal stockholders.

We also issued Palladium, as consideration for serving as a non-exclusive advisor, 112,000 shares of our common stock in June 2016. We valued the stock based on the IPO price of $5.00 per share as we determined that the fair market value of the stock was more readily determinable than the fair value of the services received. The $560,000 fair value of the stock was recorded as a non cash financial advising fee during the three months ended June 30, 2016.

Interest Income

Interest income was approximately $22,000 for the three months ended June 30, 2017, compared to $6,000 for the three months ended June 30, 2016, and $47,000 for the six months ended June 30, 2017, compared to $6,000 for the six months ended June 30, 2016. We did not have any marketable securities held for investment in 2016 until after our IPO in May 2016.

Interest Expense

Interest expense was $241,000 for the three months ended June 30, 2017, compared to $1.4 million for the three months ended June 30, 2016. Interest expense was $476,000 for the six months ended June 30, 2017, compared to $1.6 million for the six months ended June 30, 2016.

The interest expense recorded in the three and six months ended June 30, 2017, was related to the Hercules Term Loan. The interest expense recorded in the three and six months ended June 30, 2016, was related to the amortization of the debt discounts of our convertible notes and the amortization of the value of the beneficial conversion feature and the interest expense of the convertible bridge loan. The convertible notes and loan were converted to common stock upon the IPO in May 2016 (See detailed disclosure under “Liquidity and Capital Resources” below).

Liquidity and Capital Resources

From inception to June 30, 2017, we have incurred an accumulated deficit of $77.2 million. We have financed our operations since inception primarily with the net proceeds of approximately $16.5 million from the sale of our common stock in our IPO in May 2016, the net proceeds of $5.7 million from Hercules Term Loan, $25.7 million from the sales of shares of our convertible preferred stock and $20.2 million from the issuance of convertible notes and warrants. We also received a $1.5 million upfront fee pursuant to a development agreement in 2014. At June 30, 2017, we had $8.4 million of cash, cash equivalents and marketable securities, which we believe is sufficient to fund our operations until March 31, 2018. We anticipate that we will continue to incur losses, and that such losses will increase over the next several years due to development costs associated with our urea cycle disorder programs. Our expected recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding and other collaborations and strategic alliances. We are exploring various financing options including equity funding and strategic collaboration. However, there are no assurances that we will be successful in obtaining the level of financing needed for our operations. If we are unsuccessful, we may need to reduce activities, curtail or cease operations.

Initial Public Offering

On May 23, 2016, we closed our IPO and sold 3,700,000 shares of common stock at a price of $5.00 per share to the public. The aggregate net proceeds received by us from the offering, net of underwriting discounts and commissions and offering expenses, were $16.5 million.

Hercules Loan – June 2016 Loan and Security Agreement

On June 7, 2016, we entered into a loan and security agreement by and among us, the several banks and other financial institutions or entities from time to time parties to the loan and security agreement and Hercules, in its capacity as administrative agent for itself and the lenders, pursuant to which the lenders funded $6 million of the term loan, and we received $5.7 million, net of related expenses. The Term Loan is secured by substantially all of our assets other than our intellectual property.

The Term Loan bears interest at a floating annual rate equal to the greater of (i) 9.25% and (ii) the sum of (a) 9.25%, plus (b) the prime rate as reported by The Wall Street Journal minus 3.50%, resulting in a rate of 10.00% as of June 30, 2017. Beginning on July 1, 2016, we are required to make interest payments in cash on the first business day of each month. The Term Loan begins amortizing on July 3, 2017, in equal monthly installments of principal and interest, with such payments beginning on July 3, 2017, and continuing on the first business day of each month thereafter until the Term Loan is repaid. The final maturity date of the Term Loan is December 2, 2019. Upon repayment of the Term Loan, we are required to pay an end of term charge to the Lenders equal to 5.85% of the aggregate original principal amount of all Term Loan advances extended by the Lenders to us.

At our option, we may prepay all or any portion of the outstanding principal balance and all accrued and unpaid interest with respect to the principal balance being prepaid of the Term Loan, subject to a prepayment fee of 2.00% of the amount prepaid if the prepayment occurs after June 7, 2017 but on or prior to June 7, 2018, or 1.00% of the amount prepaid if the prepayment occurs after June 7, 2018.

Convertible Loan- Bridge Loan Financing - December 2015 Loan and Security Agreement

On December 11, 2015, we issued a promissory note to Titan Multi-Strategy I, LTO (“Titan”) in exchange for $500,000. On December 21, 2015, we entered into a loan and security agreement with 17 investors, which was subsequently amended on April 6, 2016, pursuant to which Titan converted its note and certain investors made new term loans to us in the aggregate principal amount of $4.0 million. The term loans closed on December 21, 2015, and we received from the escrow agent net proceeds of approximately $3.2 million, after deducting certain fees and expenses. Interest accrued on the term loans at the rate of 5% per annum. The entire outstanding principal amount of the term loans together with all accrued and unpaid interest thereon converted into shares of our common stock upon the closing of our IPO.

Convertible Notes

Prior to 2016 we issued to investors, including beneficial owners of more than 5% of our capital stock, convertible promissory notes, in the aggregate principal amount of $16.2 million and seven-year warrants to purchase shares of the same class and series of capital stock into which the notes convert. The notes carried interest at a rate of 8% per annum. On December 11, 2015, the noteholders agreed that for purposes of calculating the number of conversion shares, the notes ceased accruing interest as of December 31, 2015. The accrued interest payable on convertible notes payable totaled $3.2 million as of December 31, 2015. Immediately prior to the consummation of the IPO, the convertible notes and unpaid accrued interest thereon were converted into 2,788,880 shares of our common stock, and the seven-year warrants to purchase 2,452,242 shares of preferred stock with an exercise price of $0.01 were exercised on a cashless basis to purchase 303,096 shares of our common stock. Warrants to purchase 1,049,999 shares of preferred stock with an exercise price of $1.00 expired upon the IPO.

Promissory Note

On May 2, 2016, we issued an original issue discount promissory note in the aggregate amount of $440,000 payable to a lender in exchange for a $400,000 loan. The note was repaid after the closing of the IPO.

We believe our existing cash, cash equivalents and marketable securities as of June 30, 2017 will be sufficient to meet our anticipated cash requirements until March 31, 2018. We intend to pursue a combination of sales of additional equity securities and strategic partnerships to further finance our operations. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. There are no assurances however, that we will be successful in obtaining the level of financing needed for our operations.

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

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

The following table shows a summary of our cash flows for the six months ended June 30, 2017 and 2016 (in thousands):

Operating Activities

Net cash used in operating activities increased to $7.1 million for the six months ended June 30, 2017, from $4.1 million for the six months ended June 30, 2016. The increase in net cash used in the six months ended June 30, 2017, was primarily due to an increase in PRX-OTC development expense payments of $883,000, an increase in payroll costs of approximately $542,000, an increase in bonus payments of $422,000, an additional $412,000 in costs associated with being a publicly-traded company, $291,000 in interest paid on our term loan, $273,000 for market research studies and additional facilities costs of $60,000.

Investing Activities

Net cash provided by investing activities was $2.1 million for the six months ended in June 30, 2017, compared to cash used in investing activities of $6.1 million for the six months ended June 30, 2016. The $2.1 million of cash provided by investment activities in the six months ended June 30, 2017, is the net amount of cash generated from the maturities and the purchases of our marketable securities. The $6.1 million of cash used by investment activities in the six months ended June 30, 2016 was primarily due to the purchase of marketable securities for $6.0 million and property and equipment purchases in the amount of $157,000.

Financing Activities

Net cash provided by financing activities decreased from $22.2 million for the six months ended June 30, 2016 to zero for the six months ended June 30, 2017. The net cash provided by financing activities in the six months ended June 30, 2016, was due to the net proceeds of $16.5 million from our IPO and the net proceeds of $5.7 million from the Hercules Loan received in June 2016.

Off Balance Sheet Arrangements

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

Emerging Growth Company Status

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

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