CRISPR
Annual Report 2016

Plain-text annual report

Transformative Gene-Based Medicines For Serious Human Diseases (cid:179) (cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:53)(cid:53)(cid:53)(cid:53)(cid:53)(cid:53)(cid:53)(cid:918)(cid:918)(cid:918)(cid:918)(cid:918)(cid:918)(cid:54)(cid:54)(cid:54)(cid:54)(cid:54)(cid:54)(cid:54)(cid:51)(cid:51)(cid:51)(cid:51)(cid:51)(cid:53)(cid:53)(cid:53)(cid:53)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18)(cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:38)(cid:68)(cid:68)(cid:68)(cid:68)(cid:68)(cid:86)(cid:28)(cid:28)(cid:3)(cid:83)(cid:79)(cid:68)(cid:87)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:70)(cid:82)(cid:82)(cid:80)(cid:80)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:90)(cid:90)(cid:75)(cid:75)(cid:75)(cid:75)(cid:72)(cid:72)(cid:72)(cid:81)(cid:81)(cid:81)(cid:3) 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In parallel, wwe continue We also succesessffuullllyy clcloosesedd ouourr innitial public offeff toto mamakke strong progress in establblishing and addvavannncicicinnnggg ououo rr foounundadatitioonalal ininttelllece tual property poosisittioionn inin ththe U.S., Europe annd the restt of the world.d Our lead program, which aims to provide a functional curere for β-thalasssemia and sickle cell disease, is on track and we plan to file for a clinical trial authorization in Europe by the end of 2017. The program plan, including the manufacturing process and the design of the initial clinical trial, has been vetttted and accepted by the Paul-Ehrlich Inststiitutuutetete inin Germany, andd byyyy ththee United Kinnnngdodo ’m’s MeMedicines annd HeH althcare reguuulattooory auauthhororiitytyy (MMHRH A). CRISPPRR’sss gene dediitiing apprproaoaachhhch iisiis dedesis ggned to ree-c-creerereate the gegenen tic varianntsts ththaatt arree aassociateddd wiwith heherereddititararyy pepersrsissttenencece ofof fefettalal hemomooggglololobbbbin (HHPPFHFH)), whwhich has been shown toto siggnnin ficacanttlyy reduce morbidity in patienntts wwiitthh bothh ββ-thalassemiiaa anaandd sisickckllee cell diseaasee.. IIn twoo presentationnonss ataaatat thththt ee 5858ththh AmA eriican SSSociciciciettyyy of HeHemmatolologggygy ((AAA(AASSHSHSH)) Annuuaall Meeting in Deeceemmmbere , 20016, weew shhhowowoowed thatat CRC ISSPRPR/C/CCasasas999 gggeg the genetics oof nanatuturrallyy ococcucuurring HHPH FFFH in human hemattoopopoieietic ststemem ceellllss,, lell aadadinnggggg ttooto high exxpresesessisisioooon lelelelevevevevevelslsls ofofofofo prpprprprrprp ototototototottotececececececece titit vveeee fefefeef tttaaal heh moglobin. ene edediting cacannn safeeeeely ree-creeattee InIn adaddid tion, wee aare mam king usee of ououo r significantnt exexexpepep rrtrtrtise in editing cceceelllssss ex vivivvo to expand intoo imimmmummmum nono-ooncologyy ananandd otherrr indications susuchhc as Hurler Synddrdrome andd Severe Combini ede Immuno-Deffficiency Syndrome. We hah vevevv plplacaceded aa sspecial focus on immuno-oncologgy,yyyy, whwhhwheeeererrere wewewe hahhah vee established aa sesepapararatete bubusiness unit with ittts oown dedicaated scieentntiifificc leleadaderershshipipp.. WeW have established thhe abababilililititityyy toto bobothth ddidid srs upuptttt ananddd insertrt multiplee gegennes inin T-cells,,, enennababablililingngng thththeeeee geneneraratititionon fofoff allologegenneiic prododucctsts targeted too varirioouus tummooror tytypep s,s, includingg soliddd tumomorss. ToToggettherr with Caaaaasesesesebibibibia Ta Ta Ta Theheheherarararapeepepeuticsscs (ourr jojoinntt veventntnttururureee wiwiwiththth BaBBB yyyey r), we are connntinuing to Rodger Novak, M.D. Founder, CEO and Director TTo Our Shareholders CRISPR/Cas9 is aa revololuutionaryy teechhnooloogy whichhh alalloloows us toto editt gegennon mimic DNA in aa precise aannd coontrrolllede mammm nnnerr.r Thhiss genne editingg plpllaatatfforrmm has tremmeendndoousus prommisisee in medicciinneene, sincce it can be used too addresesss diseaseesss att aa funndamental genetic level, ana d consttititutututtes ththe bab sis for the devev lolopmp eentnt ofof highlyy efeffefff ctiive and potentially cuurar titiveve treatmmenentss foforr patients with seriouss diseassseees.s ThT e discovery and rapid addoptit onn of the CRRIISSPR/Cas9 platform comes at a tit me when sisiggnificant advances have been made in persoonalizedd medicine and delivery technonologiess. This confluence of forces repreessentss aa ununniiquququee oppportunity to establish an ennttirreeelyy nen w clclasass of ththhere apeutics. Today, CRISPSPRR ThTherraapeutics findddds ititseself at the foreffroor nntt oof ththisis trtranansformative opoppop rtunity. 20166 wwaass a yeearr of significant progreesss foff r CRISSPSPRRR ThTherapepeutticss.. We have acachievvveedd imppop rrtaat ntnt mileeststononees inn susuppport of our lead proggraamm,m and matureedd ouourr Researrchchc and DeDevveelolololopment organization. strategy. In the lonngg run, we are cconfident that we will be able to establish aand reeini force our clear leadership on the IP frfront. Most importantly, we have cocontinued to build a high caliber team with multi--disciplinary experience. At the enend of 2010 66, wewee hah d nearly 100 employees ssppreaead acrosss Caambrridge, MA, Basel, Switzerland annd Londdon,n, U.K. The skill and dedication of ourr employeees is remarkabblele anand conststiti utes a kkey basis for deliveringng onon thhe pe roomim se off CRISI PRR/CCas9 gene edditing to creeaate te ransfof rrmativeve ggene- babasesed medicines fs foro serious humannn diseases. Overall, it haas been a very reewarding yg year and I aI am humbbled by the siggnifficcant acaccoompmpllishsshmments thatat ouo r Cr Company hah s aca hhieveved since its foundding jg ust threee shshort yeyearars aagogo A. AAs always, I wwouuld like to thhaankk our ded ddicac tedd employeese fofof r their tireless ds rive, deddicacationn,, and commmm iitmmennt to buildining aag pre- eminnenent ccoompapanynyny, a, aandnn totot ouour shah rehoh lddeers for thheeir cr onontit nuuuedede ssus ppporortt. WWe look ffoorward to tthe coommingng yeyeaars andd ddelivevering upopon on ur mission to brinng tg trannsfofoormativve ge ene---bbasses d medicines bbaasededd on ouourr Cr RIR SPPR/CCasa 9 gegene editinng pg platforrm tm o ppatatients with serioooous did seseasasee. Rodger Novak, M.D. Founder, CEO and Direcrr tor April 2017 make substanntiaal inveestments in dedelilivery technologies, both viral and nonn-vviral, to enable in vivoo apapplications of CRRISSPRPR/C/Cas99 technology. To do datate,, wee hahavee opoptiimimizezezeddd lililipipip dd nanopartrticle delivery to ththe le liviverer whwheere we have demonstrated high levelss off ggene disruptioon and elimination of protein expression in animal models at therapeutically relevant doses. One of our major achievements in 2016 was the successful completion of our initial public offering (IPO) in October where we raised appproximately UUSD 97 million. The proceeds fromm ththe Ie IPOPOO, t, togogether with the closings of our SeSeririeses BBB fB fininanancic nnnng in 2016, tototatalel dd apapprproxo imatellllyy UUSUU D 208 millionn. Thih s providess usus a sa sa sttrttronnong cg caash ph osititiion to advdvd anance our leadd prrogograram im n hemogoglolobib nopathhieieies,s expand ouourr pipipepelilinee, a, attttraractct totop tp tala enent,, andd fuunu d opoperations. We have madee strong progreress inin aadvvana cic ng ouur foundadatitiooononnalala intellectuall prp oopeerrrttyt poportrtrtfolio iin tn tn thhehehe UU.UU S.SSS., EuEurororopppe aaee andnnd ototo hheeer juririsdictionsnss. In thee paasst siixx moontths, we have bebeenen grg annttetedddd twowowowo fofofooununuu dadadatititionononaala paaatents with brbrrroaoao d cd cd clalalaaimmimmsss ttts o thehehe CRCRISPSPR/R/CaCass9 gggenome eededdededititttinininng tg tgggg eeechhnh ology iinin anany cy elllulullaarr setting, inninnclcclccluuuddid nngngng ininin eeueukakkarryooteses. In DDececemmmmbbberer 200116, CRCRRIIISPSPSPRR TTRR Theheheeerraapepeeeuututtututiiicsss, IIntellia Thhhherrrapeutics, CaCarribibboou BBiBiB ooooscieienncecececes as ass a dndndnd ERERERERERSSSSS GGeeG nomics and theirir lilicecensororrs es nnnntnn ered into a gga gloobbab l cross- consennt at and iiinveveev ntion manageeemmementntn agreememm nt foooorr ththhhhhe founddattioonnaalal ininntetellece tual proppererty ccooveriinnng CRISPR / Cass99 gegenen editing technology. Theee agreement reffleccts the Company’s commimitmtmenent tt to mo mmaia ntain and coordinate thhe prrprp ososececutututiionono , ddd, d, efense, and enforcement of tthe CRISPR / Cas999 ffoundda ition lal papatttent poppp rtfolio tto po protect theh ononongoog ining dg dg ddeevee eloppoppmemem ntnt efefe fofoofff CRCRCRRRIIISPSPSPSS R’R’R s ps ps prororoddducuct candidaattees aas wwell thossee bebeing developpedded bybyy ttthhe CoCoC mpmpaany’y’y’y s ps ps pararartntntneeersrsrs anand ld ldd liccenseeses. Whih le we exxpep ctct thththeee IPI laandnddscs ape to bo e dynamic aand cd ontiinunue to evevolo eve in thhe nee eaaar term, it will nnnon t have anan impacct on our R&&D& programs oooro bbubub ssininese s rtrtrts as as assoociated with UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 OR FOR THE TRANSITION PERIOD FROM TO Commission File Number 001-37923 CRISPR THERAPEUTICS AG (Exact name of Registrant as specified in its Charter) Switzerland (State or other jurisdiction of incorporation or organization) Aeschenvorstadt 36 4051 Basel, Switzerland (Address of principal executive offices) Not Applicable (I.R.S. Employer Identification No.) Not Applicable (Zip Code) Registrant’s telephone number, including area code: +41 61 228 7800 Securities registered pursuant to Section 12(b) of the Act: Common shares, nominal value CHF 0.03 per share Title of each class The NASDAQ Global Market Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:2) NO (cid:3) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (cid:3) NO (cid:2) in Rule 405 of the Securities Act. YES (cid:2) NO (cid:3) ff Indicate by check mark whether the Registrant has submitted electronically and posted on its corpora te Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES (cid:3) NO (cid:2) rr Indicate by check mark if disclosure of delinquent qq filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Partaa III of this Form 10-K or any amendment to this Form 10-K. (cid:2) Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filff er, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in RulRR e 12b-2 of the Exchange Act. (Check one): Large accelerated filer (cid:2) Non-accelerated filff er (cid:3) (Do not check if a small reporting company) Accelerated filer ff Small reporting company (cid:2) (cid:2) Indicate by check mark whether the Registrant is a shell company (as defined ff As of June 30, 2016, the last day of the registrant’s most recently completed second fiscal quarter, there was no public market for the registrant’s in Rule 12b-2 of the Exchange Act). YES (cid:2) NO (cid:3) Common Stock. The registrant’s Common Stock began trading on the NASDAQ Global Select Market on October 19, 2016. As of March 1, 2017, the aggregate market value of the Common Stock held by non-affiliates registrant’s common stock on March 1, 2017. of the registrant was approximately $605.6 million, based on the closing price of the ff As of March 1, 2017, 39,810,051 common shares were outstanding. The Registrant was not a public company as of the last business day of its most recently completed second fiscal quarter and, therefore, cannot calculate the aggregate market value of the voting and non-voting common equity held by non-affiliaff tes of such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Definitive Proxy Statement relating to the Annual General Meeting of Shareholders for the year ended December 31, 2016, which the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2016, are incorporated by reference into Part III of this Report. PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. g Page 1 37 74 74 74 75 76 78 79 89 89 90 90 90 91 91 91 91 91 92 92 Table of Contents Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures y Market forff Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits, Financial Statement Scheduldd es Form 10-K Summary i Throughu out this Annual Repoe rt on Form 10-K, the “Company,”yy “CRISPR,” “CRISPRII Therapeutics,” “we,” “us,” and “our,” excepte where the context requires otherwise, directors” refers to the board of directors orr refer to CRISPR Therapeua Therapeutics AG. CC f Co RISPR ii tics AG and its consolidated subsidiaries, and “our board of Special Note Regarding Forward-Looking Statements and Industry Data rr This Annual Report on Form 10-K contains forward-looking statements regarding, among other things, our future discovery and development efforts, our future operating results and financial position, our business strategy, and other objectives for our operations. The words “anticipate,” “believe,” “intend,” “expect,” “may,” “estimate,” “predict,” “project,” “potential” and similar expressions are rd-looking statements, although not all forward-looking statements contain these identifying words. We intended to identify forwarr re events and financial -looking statements largely on our current expectations and projections about futuff have based these forward trends that we believe may affect our business, financial condition and results of operations. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forwar actual tt reliance on our forwarr disclosed in the forward-looking statements we make. We have included important fact this Annual Report on Form 10-K, particularly in the section entitled “Risk Factors” in Part I that could cause actuatt to differff materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint venturtt es or investments that we may make. ly achieve the plans, intentions or expectations disclosed in our forwar rd-looking statements. Actual results or events could diffeff r materially froff m the plans, intentions and expectations d-looking statements, and you should not place undue ors in the cautionary statements included in d-looking statements. We may not l results or events ff rr rr You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially differeff nt from what we expect. The forward-looking statements contained in this Annual Report on Form 10-K are made as of the date of this Annual Report on Form 10- K, and we do not assume any obligation to update any forward-looki gng statements, whether as a result of new informff events or otherwis e, except as required by applicablea ation, future law. rr This Annual Report on Form 10-K includes statistical and other indusdd try and market data, which we obtained from our own internal estimates and research, as well as from industdd parties. Industry publications, studies, and surveys generally state that they have been obtained fromff although they do not guarantee the accuracy or completeness of such informff publications is reliable, we have not independently verifieff d market and indusdd try data fromff internarr verified by any independent source. l company research is reliable and the market definff itions are appa ation. While we believe that each of these studies and ropriate, neither such research nor these definff third-party sources. While we believe our itions have been ry and general publications and research, surveys, and studies conducted by third sources believed to be reliable, ii Item 1. Business. Overview PART I BUSINESS We are a leading gene editing company focused on the development of CRISPR/CRR as9-based therapeaa utics. CRISPR/CRR as9 stands for Clustered, Regularly Interspaced Short Palindromic Repeats (CRISPR) Associated protein-9 and is a revolutionary technology for gene editing, the process of precisely altering specific sequences of genomic DNA. We are applying this technology to potentially treat a broad set of both rare and common diseases by disruptuu ing, correcting or regulating disease-related genes. We believe that our scientificff curative treatments for patients for whom current biopharmaceutical appro programs target beta-thalassemia and sickle cell disease, two hemoglobinopathies that have high unmet medical need. expertise, together with our gene editing approach, may enable an entirely new class of highly effective and potentially aa aches have had limited success. Our most advanced ls as a breakthrough technology. The appl gene editing was derived from a naturtt ally occurring viral defense mechanism in bacteria and has ication of CRISPR/Cas9 for gene editing was co- founders, Dr. Emmanuelle Charperr ntier, a director of the Max- Planck Institute for Infection Biology The use of CRISPR/Cas9 forff been described by leading scientific journarr invented by one of our scientificff ators published work elucidating the mechanism by which the Cas9 endonuclease, a key in Berlin. Dr. Charpentier and her collabor component of CRISPR/Cas9, can be programmed to cut double-stranded DNA at specific locations. We have acquired rights to the foundational intellectuatt strengthen our intellectual property estate through our own research and additional in-licensing effor development of CRISPR/Cas9-based therapeaa utics. l property encompassing CRISPR/Cas9 and related technologies fromff Dr. Charpentier, and continue to ering our leadership in the ff ts, furth a a ff Our producdd t development and partnership strategies are designed to exploit the full ff potential of the CRISPR/CRR as9 platforff m while maximizing the probabia lity of successfully developing our productdd development strategy utilizing both ex vivo and in vivo approaches. Our most advanced programs use an ex vivo approach, whereby cells are harvested from a patient, treated with a CRISPR/Cas9-based therapeuaa approach is less technically challenging than an in vivo approach. We have chosen to conduct our lead programs in hemoglobinopathies given the relative ease of editing genes ex vivo, the significant thalassemia and sickle cell disease and the well-understood genetics of these diseases. Beyond these lead programs, we are pursuing a number of additional ex vivo applications, as well as select in vivo applications, whereby the CRISPR/CRR as9 product candidate is delivered directly to target cells within the human body. Our initial in vivo applications will leverage well-established delivery technologies forff candidates. We are pursuing a two-pronged producdd t unmet medical need associated with beta- d. We believe that an ex vivo gene-based therapeutics. tic and reintroducedd ff Given the numerous potential therapeaa utic applications for CRISPR/CRR as9, we have partnered strategically to broaden the indications we can pursue and accelerate development of programs by accessing specific disease-area expertise. In particular, we established a joint venture with Bayer AG and its subsidiaries, or Bayer, in which we have a 50% interest, and a collaboration agreement with Vertex Pharmaceuticals Incorporated, or Vertex, in order to pursue specific indications where these companies have outstanding and distinctive capabilities. The significant resource commitments by our partners underscore the potential of our platform, as well as their dedication to developing transformative CRISPR/CaRR s9-based treatments. Our mission is to create transformative gene-based medicines for serious human diseases. We believe that our highly experienced team, together with our scientificff us as a leader in the development of CRISPR/Cas9-based therapeuaa expertise, productdd tics. development strategy, partnerships and intellectual property position Gene Editing Background There are thousands of diseases caused by aber a rant DNA sequences. Traditional small molecule and biologic therapieaa s have had to address the underlying genetic causes. Newer approaches such ff limited success in treating many of these diseases because they fail as RNA therapeutics and viral gene therapy more directly target the genes related to disease, but each has clear limitations. RNA- based therapies, such as mRNA and siRNA, facff e challenges with repeat dosing and related toxicities. Non-integrating viral gene therapy platforms, such as adeno-associated virusrr genome and have limited effiff cacy upon such as lentivirusrr Additionally, cells may recognize the transduced genes as foreign and respond by reducing their expression, limiting their effiff cacy. Thus, while our understanding of genetic diseases has increased tremendously since the mapping of the human genome, our ability to treat them effeff ctively has been limited. re-administration due to resulting immune responses. Integrating viral gene therapya , permanently alter the genome but do so randomly, which leads to the potential for undesirabla e mutations. , or AAV, may have limited durability because they do not permanently change the platformff uu s, 1 We believe gene editing has the potential to enabla e a next generation of therapeaa utics and provide curative solutions to many genetic diseases through precise gene modificati on. The process of gene editing involves precisely altering DNA sequences within the genomes of cells using enzymes to cut the DNA at specific locations. After a cut is made, natural cellular processes repair the DNA to either silence or correct undesirablea modified in this process, the change is permanent in the patient. sequences, potentially reversing their negative effects. Importantly, because the genome itself is ff Earlier generation gene-editing technologies, such as zinc finger nucleases (ZFNs), transcription-activator like effector nucleases (TALENs) and meganucleases, rely on engineered protein-DNA interactions. While these systems were an important first step to demonstrate the potential of gene editing, their development has been challenging in practice duedd engineering protein-DNA interactions. In contrast, CRISPR/Cas9 is guided by RNA- and straightforward to engineer and apply. DNA interactions, which are more predictable to the complexity of RR The CRISPR/Cas9 Technology CRISPR/Cas9 evolved as a naturally occurring defense mechanism that protects bacteria against viral infections. Dr. Emmanuelle Charperr ntier and her collaboa gene editing. The CRISPR/CRR as9 technology they described consists of three basic components: CRISPR-Associated protein 9, or Cas9, CRISPR RNA, or crRNA, and trans-activating CRISPR RNA, or tracrRNA. Cas9, in combination with these two RNA molecules, is described as “molecular scissors” that can make specificff rators elucidated this mechanism and developed ways to adapt and simplify it for use in cuts and edits in selected doublu e-stranded DNA. and tracrRNA into a single RNA molecule called a guide RNA. Dr. Emmanuelle Charpentier and her collaborators further simplified the system for use in gene editing by combining the RR crRNARR direct the Cas9 enzyme to a specificff DNA sequence based on Watson-Crick base pairing rules used to make cuts in DNA at specific sites of targeted genes, providing a powerful tool for developing gene editing based therapeuaa The guide RNA binds to Cas9 and can be programmed to . The CRISPR/Cas9 technology can be rr tics. Once the DNA is cut, the cell uses naturally occurring DNA repair mechanisms to rejoin the cut ends. If a new DNA template with the correct sequence has been delivered to the cell prior to the time the DNA is cut, it will be incorporated, leading to a correction n the two cut of the targeted gene, which we refer to as gene correction. Alternarr ends in a way that will likely lead to the disruption and inactivation of the gene, which we refer to as gene disruption. tively, if no DNA template is present, the cell will rejoie CRISPR/CRR as9 can also be adapted to regulate the activity of an existing gene without modifyiff ng the actual DNA sequence, which we refer to as gene regulation. This is accomplished using a catalytically inactive form of the Cas9 enzyme that can be directed to bind specific DNA sequences without cutting. By linking this inactive Cas9 to proteins that regulate gene function, the activity of specificff genes can be either up ouu r downregulated. CRISPR/Cas9 gene editing Cas9 DNA Guide RNA (gRNA) RR Disruption Correction Gene Regulation 2 We believe that CRISPR/Cas9 is a versatile technology that can be used to either disrupt,uu correct or regulate genes. We intend to take advantage of the versatility and modularity of the CRISPR/Cas9 system to adapt and rapidly customize individual components forff RR specific disease appl potential to treat a large number of both rare and common diseases. may form the basis of a new class of therapeutics with the ications. Consequently, we believe that CRISPR/Cas9 aa Our Approach to CRISPR/Cas9 Portfolio Development We have established a portfolio of programs by selecting disease targets based on a number of criteria, including high unmet medical need, advantages of CRISPR/Cas9 relative to alternative approaches, technical feaff product candidate into and through clinical trials. For CRISPR/Cas9-based therapeutics, technical feasibility is primarily determined by the delivery modality and by the editing strategy required to treat the disease. The diagram below illustrates this spectrum of therapeaa utic applications, beginning with ex vivo delivery arr sophisticated gene regulation strategies. nd gene disruption, progressing to in vivo organ systems and more sibility and the time required to advance the Strategic Progression of Our CRISPR/CaRR s9-Based Therapeutic Applications MEDIUM TERM OPPORTUNITIES Ex viivovo— immunmuno-oncology In vivo— musculoskeletal, pulmonary,rr and ophthalmology NEAR TERM OPPORTUNITIES Ex vivo In vivovo—liver MEDIUM-TO-LONG TERM OPPORTUNITIES In vivo— central nervous system, cardiology,yy other organ systems Ex vivo— regenerative medicine I T E C H N O L O G C A L C O M P L E X I T Y Gene disruption Disruption and correction Disruption, correction and regulation TIME TO CLINICAL PoC We have initiated programs in three primary arr reas: (i) ex vivo programs involving gene editing of hematopoietic cells, (ii) in vivo programs targeting the liver and (iii) additional in vivo programs targeting other organ systems such as muscle and lung. By focusing our most advanced programs in ex vivo applications we believe we can mitigate technical and clinical risk, while also developing in vivo programs in parallel to fully realize the potential of our platform. Strategic Partnerships and Collaborations We intend to develop CRISPR/Cas9-based therapeutics both independently and in collaboration with current and potential corporate partners. We have establia shed collaborations with Bayer and Vertex which will provide over $400 million, subject to ed programs, which will be used to advance the programs included in these futurett certain conditions, inclusive of estimated spending on fund partnerships. These significant commitments will allow us to broaden our development portfolio, as well as invest in technology enhancements and delivery technologies. As part of these collaboa and $30 million, respectively, which we believe strengthen their commitments to the growth of our company. Bayer made an additional equity investment of $35 million as a private placement concurrent with our initial public offerff resources committed by Bayer and Vertex illustrate the potential of our CRISPR/Cas9 gene editing technology. rations, Bayer and Vertex made equity investments of $35 million ing. We believe that the ff 3 Under our agreement with Bayer HealthCare, we establia shed Casebia Therapeutics LLP, or Casebia, a joint venture in which we and Bayer HealthCare are equal owners. We and Bayer intend forff Casebia to largely focuff areas in larger patient populations, and to invest resources in optimizing the platformff Through our agreement, we will have access to technology enhancements developed or obtained by Casebia for the benefit of our other wholly owned programs. s on more challenging in vivo therapeutic in vivo delivery. and delivery technologies forff Our agreement with Vertex is a two-part collabora a tion. We have retained co-development and co-commercialization rights for the hemoglobinopathies program. We have also granted Vertex an option to license certain programs, with the potential to receive milestone payments and royalties. Our Pipeline The following table summarizes the current status of our product development pipeline: Program Ex vivo : Hematopoietic Beta-thalassemia Sickle cell disease (SCD) Hurler syndrome Editing approach Disruption Disruption Correction Severe combined immunodeficiency (SCID) Severe immunodeficiency (SCID) Correction Immuno-oncology In vivo : Liver Various Glycogen storage disease Ia (GSDIa) Correction Hemophilia Correction In vivo : Other Organs Duchenne muscular dystrophy (DMD) Disruption Cystic fibrosis (CF) Correction Ex Vivo Hematoptt oietictt Progragg m Backgrok und Research IND enabling Ph I/II Partner Structure Collaboration Collaboration Wholly-oyy wned Joint venture Wholly-oyy wned Wholly-oyy wned Joint venture Wholly-oyy wned License option ing allo-HSCT, physicians replace a patient’s blood-formff We are primarily utilizing ex vivo approaches to treat diseases related to the hematopoietic system, which is the system of organs and tissues, such as bone marrow, the spleen and lymph nodes, involved in the production of blood. Today, many of the hematopoietic system diseases we are targeting are treated with allogeneic hematopoietic stem cell transplants, or allo-HSCT. In performff differeff do undergo allo-HSCT facff e a high risk of complications such as infect ff graft-versus-host disease, where immune cells in the transplanted tissue (the graft) recognize the recipient (the host) as “foreign” and begin to attack the host’s cells. nt person that contain the normal gene. Unfortunately, not all patients are able to be matched with suitable donors. Patients who ing cells that contain the defective gene with cells obtained from a ession, transplant rejection and ions related to immunosuppruu In contrast to allo-HSCT, our approach harvests stem cells directly from the patient, edits the defective gene ex vivo, and reintroduces those same cells back into the patient. We believe this ex vivo gene editing approach, which uses the patient’s own cells, will provide better safetyff cy than allo-HSCT. and efficaff 4 Our Lead Programgg s—HemoHH glob o tt inopato hies Our lead programs aim to develop a single, potentially transformative CRISPR/Cas RR 9-based therapy to treat both beta- thalassemia and sickle cell disease, or SCD. These diseases are caused by specific mutations of the beta globin gene. Beta globin is an essential component of hemoglobin, a protein in red blood cells that delivers oxygen and removes carbon dioxide throughout the body. A number of facto (iii) well-understood genetics and (iv) the ability to employ an ex vivo gene disrupt rs make these attractive lead indications, including: (i) high unmet medical need, (ii) compelling market potential, ion strategy. ff rr Beta-tt thalasll semiaii Overview Beta-thalassemia is a blood disorder that is associated with a reducdd tion in the production of hemoglobin. This disease is caused by mutations that give rise to the insufficient expression of the beta globin protein, which can lead to symptoms related to not only the lack of hemoglobin, but also as result of the buildup of unpaired alpha globin proteins in red blood cells. The severity of symptmm oms associated with beta-thalassemia varies depending on the levels of functional beta globin present in the blood cells. In the most severe cases, described as beta-thalassemia major, func While chronic blood transfusions can be effective at addressing symptoms, they often lead to iron overload, progressive heart and liver failure, and eventually death. Patients with mild forms of beta-thalassemia may experience some mild anemia or even be asymptomatic. tional beta globin is either completely abse d, resulting in severe anemia. nt or reducedd a ff The total worldwide incidence of beta-thalassemia is estimated to be 60,000 births annually, the total prevalence in the United States and the European Union is estimated to be approximately 19,000 and there are over 200,000 people worldwide who are alive and registered as receiving treatment for the disease. Limitations of current treatment optio ons The most common treatment for beta-thalassemia is chronic blood transfusions. Patients typically receive transfusff ions every two to four weeks and chronic administration of blood often leads to elevated levels of iron in the body and can cause organ damage over a relatively short period of time. Patients are often given iron chelators, or medicines to reduce iron levels in the blood, which are associated with their own significant toxicities. Low adherence to this burdensome regime often results in death by 30 years of age for patients with transfusion-dependent beta-thalassemia. The only potentially curative therapyaa patients elect to have this procedure given its associated morbidr are not available, most patients die in early childhood. We believe that our therapeaa utic appr safe treatment forff for this disease is allo-HSCT, but fewff ity and mortality. In developing countries, where chronic transfusff ions a potentially curative and this devastating disease. oach could offerff aa Sickle Cell Dll isease Overview Sickle cell disease is an inherited disorder of red blood cells resulting from a mutation in the beta globin gene that causes ction. Under conditions of low oxygen concentration, the abnormal hemoglobin proteins aggregate within abnormal red blood cell funff the red blood cells causing them to become sickled in shapeaa flow to organs, ultimately resulting in anemia, severe pain, infect and inflexff ff ible. These sickled cells obstrucrr ions, stroke, overall poor quality of life aff nd early death. t blood vessels, restricting blood The worldwide incidence of SCD is estimated to be 300,000 births annually and there are 20 million to 25 million people worldwide with the disease. In the United States, the total prevalence is estimated to be 100,000 individuadd ls. Limitations of current treatment optio o ns As with beta-thalassemia, in regions where access to modern medical care is available, standard treatment for SCD involves chronic blood transfusi HSCT is a second potential treatment option. While allo-HSCT provides the only potentially curative therapeutic path for SCD, it is often avoided given the significff ant risk of transplant-related morbidity and mortality in these patients. ons, which has the same associated risks of iron overload and toxicities associated with chelation therapy. Allo- ff 5 Our Gene Editingtt Approach aa Our therapeut ic approach to treating beta-thalassemia and SCD employs gene editing to upregulate the expression of the gamma rr globin protein, a hemoglobin subunit that is commonly present only in newborn i nfants. Hemoglobin that contains gamma globin instead of beta globin protein is referred to as fetal hemoglobin, or HbF. In most individuals HbF disappears in infancy as gamma globin is replaced by beta globin through naturatt thalassemia and SCD typically do not manifest until several months after birth, when the levels of HbF have declined considerably. Some patients with beta-thalassemia or SCD have elevated levels of HbF that persist into adulthood, a condition known as hereditary persistence of fetal hemoglobin, or HPFH. Patients with HPFH are often asymptomatic, or experience much milder forms of disease. This protective HPFH condition has been shown to result from specific changes to the DNA in the cell, either in the region of the globin genes or in certain genetic regulatory elements that control the expression levels of the globin genes. lly occurring suppression of the gamma globin gene. The symptoms of beta- Relationship between level of HbF and morbidity in beta-thalassemia R2=0.933 e r o c s y t i d i b r o M 8 7 6 5 4 3 2 1 0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 Log fetaff l hemoglobin level (%) We are using our CRISPR/CRR as9 platforff m to mimic the same DNA sequence changes that occur naturally in HPFH patients. We plan to isolate patients’ hematopoietic stem cells, which differentiate into red blood cells, treat these cells ex vivo with a CRISPR/Cas9 producdd t candidate to edit their DNA to upreuu into the patients. We believe that the genetically modified stem cells will give rise to red blood cells that contain HbF and significantly reduce the severity of the symptoms associated with these two diseases. gulate the expression of the gamma globin protein and reintroducdd e the edited cells back RR An alternative CRISPR/Cas9 appr a oach to treating hemoglobinopathies would be to correct the mutated beta globin gene. We have chosen the HbF upregulation strategy as our initial approach given the relative technical simplicity of the gene deletion strategy involved, abili patients with high HbF levels. ty of this strategy to counteract a wide variety of different beta globin mutations, and the absen ce of symptoms in a a We believe our CRISPR/Cas9 gene editing strategy may have significant advantages over other gene therapiaa es in development for the treatment of hemoglobinopathies. For example, lentivirus-based treatments involve a random integration of one or more copies of the globin gene throughout the genome. The expression levels of the newly introducedd location of the DNA in the genome, leading to inconsistent and variable levels of expression. In addition, with each random integration, a mutation may be created, which may have an associated safetyff concern, including the potential to cause cancer. epending on the exact d gene can vary drr 6 Preclinical Datatt We are progressing toward initiating clinical trials forff our hemoglobinopathy programs. The first step in this process involves selecting the specific gene editing strategy and RNA guides we will use in our product candidates. We are applying our high- throughput target evaluation process to test a number of these approaches, and ultimately select RNARR rate of the globin genes and the greatest effect on HbF expression. Using our high-throughput guide screening platform, we have been able to identify gff iency. efficff that allow editing of hematopoietic stem cells at specific locations in the genome with greater than 90% guides with the highest editing RR uide RNAs In addition to selecting guide RNAs with the highest cutting activity, we also screen our guide RNAs for off-tff arget effecff the introduction of cuts in DNA at locations other than the target sequence. To do this, we use bioinformatics to predict the most likely sites of off-target cuts, then test for cuts at these locations. The example guide RNA analysis shown below illustrates that we are abla e to identify guide RNAs that cut very effici where off-taff sequencing beforff e advancing them forff ently at the target sites but show no off-target activity above control levels, even at sites rget activity is most likely to occur. We also test our lead candidates for any unlikely off-target effects using genome use as therapeutics. ts, or ff Example guide RNA analysis CRISPR/CRR as9 Control g n i t i d E % 100.0 95.0 90.0 85.0 80.0 0.5 0.4 0.3 0.2 0.1 0 Target 1 2 3 4 5 6 7 8 9 10 11 Most likely off-target ff sites 7 There are multiple naturally occurring genetic variants that lead to HPFH and which could form the basis of our product candidate. We have used CRISPR/Cas9 to recreate a number of these variants and tested their abia lity to upregulate HbF. The figure below shows the level of HbF upregulation, resulting from the recreation of five diffeff from sickle cell and beta thalassemia patients using CRISPR/CaRR produced in these variants, to confirmff E”, may result in potentially curative levels of HbF if successfully introduced rent genetic variants in hematopoietic stem cells s9. Additionally, we have measured the level of gamma globin protein gulation of HbF. We believe that at least two of these, named “Target D” and “Target into patients with beta-thalassemia and SCD. the upreuu dd Ability of different gene targets to drive HbF production To date, we have identified guide RNAs that perform the desired gene edits with very high efficiency, result in high levels of HbF production in cells and show no detectable evidence of off-target effects. As we continue to advance our hemoglobinopathies programs to the clinic, we are in the process of evaluating the ability of edited hematopoietic stem cells to engraft and persist in mice. Our initial engraftment studtt ies show that the edited cells retain their ability to engraft and repopulate in immuno-compromised mice. Additionally, a subset analysis of the edited hematopoietic stem cells shows that all subsets of stem cells including the long-term repopulating stem cells are edited at high rates. These studies will also assess the ability of the edited cells to home the marrow and differ entiate. Before entering clinical trials, we will also perform longer-term studies in mice to ensure there are no undesirablea ff consequences caused by the gene edited cells. 8 We have also made significant progress in developing a GMP-compliant process for editing these cells in a GMP-compliant facility. We have completed multiple clinical-scale runs and analyzed the cells to show that we can achieve high editing efficiency at t change in viability of the edited cells (figure below). We have also begun toxicology studies in mice, clinical scale with no significan which will utilize the edited cells manufactured in this GMP-compliant facility. ff Comparison of editing efficff iency at lab and clinical scales Hurlerll Syndrome Hurler syndrome is a type of mucopolysaccharide disease caused by a defective IDUA gene. The IDUA gene is responsible for encoding alpha-L-iduronidase, an enzyme that breaks down large molecules called glycosaminoglycans, or GAGs, in the lysosomes of cells. A defective IDUA gene results in a lack of alpha-L-iduroindase which leads to an accumulation of GAGs and results in cellular dysfunction and severe clinical abnormalities. Patients with Hurler syndrome have a broad spectrum of clinical problems including to a lack of this enzyme in the brain. Most skeletal abnormalities, enlarged livers and spleens, and severe intellectuatt patients experience a decline in intellectual development and often lose both vision and hearing as the disease progresses. Without t treatment, the average age at death is fivff e years, and nearly all patients die by the age of ten. The worldwide incidence of Hurler syndrome is appr oximately one in 100,000 births. l disability duedd a aa There are two common approaches to treating mucopolysaccharide diseases: enzyme replacement therapyaa and allo-HSCT. Enzyme replacement therapy, or ERT, does not adequately address the symptoms of Hurler syndrome because it cannot cross the blood-brain barrier to address the severe neurologic symptoms associated with this disease. While allo-HSCT can be effective in treating the disease, it is associated with significff ant morbir dity and mortality, and not all patients are able to find suitable donors. Even nt irreversible disease progression. Our when a match is found ff approach is to introduce a funct ional copy of the IDUA gene into a patient’s own hematopoietic cells using ex vivo CRISPR/Cas9 ing them to the patient. We believe that using a patient’s own cells rather than those from a donor will gene editing, before returntt eliminate a potentially lengthy search for an appropriate donor, allowing us to intervene at an earlier point and avoid the significff ant risks associated with allo-HSCT. , the delay between diagnosis and treatment often results in significaff ff 9 Severe Combinedii Immunodefidd cienc ii yc Diseii ase Severe combined immunodeficiency disease, or SCID, is a disease in which the patient’s immune system is compromised and tions, which can be life-threatening in the absence of a funct cannot fight off infections. These patients are identified early in life because they often suffer fromff infecff SCID, and in one particularly severe form, a gene called RAG1 is mutated. Mutations in RAG1, a gene that plays a critical role in the process of antibody generation, prevent normal development of the patient’s immune system, resulting in an absence of B-cells, a type of white blood cell. The worldwide incidence of SCID is estimated to be one in 58,000 births, with the RAG1 mutation associated form accounting forff ioning immune system. There are multiple underlying causes of approximately 15% of patients. recurrent severe respiratoryrr ff Currently, the only curative therapy forff this potentially fatal disorder is allo-HSCT, which carries a high risk of complications. Gene therapies for SCID insert copies of a replacement gene randomly into the genome, potentially resulting in unwanted mutations. The risks associated with this type of gene therapy were underscored in a clinical trial for another variant of SCID in which five out of twenty patients developed leukemia. We believe that the precise correction of the RAG1 gene with CRISPR/CRR as9 will bring benefit to these patients while minimizing the risk of leukemia associated with gene therapy. Considering corrected cells proliferff ate fasff ter than non-corrected cells, we believe that a small number of corrected cells reintroducdd ed into the patient could provide a therapeutic benefit and in time, compensate forff the defective cells. With our ex vivo approach, we believe we can attain sufficient levels of correction to generate the desired therapeaa utic benefit. Our Casebia joint venturtt e with Bayer HealthCare will lead development of our SCID program, and leverage Bayer HealthCare’s expertise in hematologic disorders. Future Development Opportunities Engineered CelCC l Tll heTT rapia es For CanCC cer ImmII unothett rapya Over the past several years, interest in the oncology community has centered on immunotherapyaa , or treatments that harness a patient’s own immune system to attack cancer cells. Engineered cell therapy is one such immunotherapy approach, in which immune system cells such as T-cells and natural killer, or NK, cells are genetically modifieff d to enabla e them to recognize and attack tumo cells. r tt Engineered cell therapy has demonstrated encouraging clinical results and shown the potential to become an entirely new class in development require unique products to be created forff of oncology therapeutics; however, realizing this full potential will require overcoming some key challenges. Most engineered cell therapies roach a to drug development is both ineffiff cient and cost-prohibitive. Additionally, these versions of engineered cell therapiaa es appear limited in ors. These producdd ts have also demonstrated sub-u optimal safetff y profiles, including overstimulation of the their ability to treat solid tumtt immune system, occasionally resulting in death. each patient treated, using conventional techniques. This appaa We are utilizing CRISPR/Cas9 to create an “off-ff the-shelf” cell therapyaa producdd t candidate, overcoming the ineffiff ciency and cost for each patient. In addition to delivering a gene for an engineered receptor to target the tumor, creating of creating a unique productdd such a product would require simultaneous disruption of several genes in order to prevent off-target immune responses. We have initial results demonstrating that this type of “multiplexed” editing can be achieved with high efficff also using our platform to make other improvements such as disruption checkpoint inhibitor genes to overcome solid tumor suppression, and disruptin g other genes to improve the safety profilff e. iency using CRISPR/CRR as9. We are uu 10 We expect that the cellular engineering strategies that are ultimately successful in cancer immunotherapyaa will involve multiple will play a central role. While other gene editing platforms genetic modifications, an application forff which we believe CRISPR/Cas9 could potentially be used for these purporr modification of multiple genes within a single cell. Current gene editing techniques that require diffeff genetic modificat ion may be limited in the number of edits they can make concurrently. In contrast, CRISPR/Cas make multiple edits using a single Cas9 protein and multiple small guide RNA molecules. The example below demonstrates the abila of CRISPR/CaRR one gene. ity -cells with an efficiency rate similar to that of editing just s9 is particularly well-suited for multiplexed editing, which is the rent protein enzymes for each ently s9 technology to edit two differff ent genes in human primary Trr ses, CRISPR/CaRR 9 can effici RR RR ff ff 9 Multiplexed editing of human primary T-cells using CRISPR/Cas RR g n i t i d E % 100 90 80 70 60 50 40 30 20 10 0 Target 1 TarTT get 2 Target 1 & 2 Single gene Single gene Two genes Vertical lines in each bar show the mean ± standard error from multiple experiments. Given the potential for CRISPR/Cas9 in immunotherapy, rts. This group wuu accelerate our effoff aa ill have dedicated leadership, resources and capabilities to rapidly advance these programs. we have established a separate unit focff used on immunotherapy to In Vivo Programs In parallel with our ex vivo programs, we are pursuing a number of in vivo indications which will involve delivery of CRISPR/Cas9 productdd leveraging well-established delivery technologies. We have also begun optimizing delivery systems to target other organ systems, including musculoskeletal and pulmonary.rr candidates directly to tissues within the human body. Our initial in vivo applications will target the liver, Liver Diseases We have selected liver diseases as our initial in vivo targets because delivery of nucleic acid therapies into the liver has been clinically established and validated delivery technologies are now available, including, but not limited to, lipid nanoparticle based delivery vehicles, or LNPs, and AAVs. We believe this proof of concept reducedd CRISPR/Cas9-based therapeutics in vivo to the liver. s the challenges associated with delivering 11 Within the liver we are pursuing diseases that have well understood genetic linkages, and have begun preclinical development for multiple indications including glycogen storage disease Ia, or GSDIa, and hemophilia. In both of these indications, evidence suggests that correction of the mutant gene in only a small percentage of liver cells may have a significant therapeutic effect, which makes the gene correction strategy feas ible in these indications. ff Glycogen Storagea Disease IaII Overview GSDIa, also known as Von Gierke disease, is an autosomal recessive inborn err sm caused by a mutation in the G6PC gene, which encodes the glucose-6-phosphatase protein, or G6Pase. In patients with GSDIa, the lack of G6Pase prevents the release of glucose from the liver, resulting in accumulation of a large chain form of glucose known as glycogen. The inability of patients with GSDIa to regulate glucose levels leads to hypoglycemia, or low blood glucose, and high levels of lactic acid when patients are not eating, requiring patients to adhere to burdensome dietaryrr regimes. GSDIa patients also face long-term risks such as growth delay, neuropathy and kidney stones. Additionally, due to the accumulation of glycogen in the liver, 70% to 80% of patients over 25 years of age will develop hepatocellular adenomas, a type of non-cancerous growth in the liver, of which approximately 10% will progress to hepatocellular carcinoma, a potentially fatal liver cancer. There are approximately 1,000 new cases of GSDIa per year worldwide. rror of glucose metaboli a Limitations of Current Treatment Options There are currently no disease-modifying treatment options forff n in carbohydrate delivery may lead to low blood sugar levels, which can cause life-threatening consequences including seizure, coma and death. To minimize the risk of acute complications, patients are required to adhere to highly burdensome, lifeloff administration of uncooked cornst non-compliance, leading to increased risk of serious long-term complications. rate product such as Glycosade. These regimens have a high rate of ng dietary regimens such as overnight patients with GSDIa. Any disruptio arch or a slow-release carbohyd uu rr r Our Gene EditEE ing ApprA oach We are developing a CRISPR/Cas9 product candidate to correct the mutation in GSDIa patients. Animal model experiments have demonstrated that the addition of functional copies of the G6PC gene is capable of correcting the defici ency of G6Pase protein in GSDIa and that as little as 3% of normal levels of G6Pase can restore the equilibrium of glucose and glycogen in the bloodstream and liver. Our approach is to correct the G6PC gene directly in its native location. We believe this direct gene correction will result in appropriate expression of the G6Pase protein. Other methods rely on adding copies of the gene through viral delivery methods, which we believe may lead to overexpression of the G6Pase protein and ineffecff tive control of glucose levels. ff Hemophilia Overview Hemophilia is an X-linked recessive genetic disease primarily present in male children. Our initial hemophilia program targets hemophilia B, which results from a deficff system, which enablea bleeding, either spontaneously or in response to injury.rr s blood to formff iency in factor IX, an enzyme produced in the liver. Factor IX is part of the blood coagulation clots in response to injury arr nd bleeding. A lack of factor IX leads to an increased risk of Patients with severe forms of the disease are firsff cy, as witnessed through prolonged bleeding from simple medical procedures or through excessive bruising from simple fall muscles, which can lead to edema, inflammation and debilitating pain. Patients with mild forms of the disease typically present as normal, and diagnosis usually follows surgery orr 28,000, including over 4,000 in the United States. About half of hemophilia B cases are classifiedff IX activity that are less than 1% of normal. r trauma. The worldwide prevalence of hemophilia B patients is estimated to be s. These patients have frequent spontaneous bleeding into joints and as severe based on levels of factor t diagnosed at infanff ff Limitations of Current Treatment OptO ions ff The standard of care forff symptomatic patients with hemophilia B involves enzyme replacement with recombinant factor IX. r IX protein is administered both as a prophylaxis and during acute bleeding episodes. While considered effective, required weekly Exogenous facto factor IX replacement therapies are invasive, inconvenient and non-curative. Until recently, hemophilia B therapyaa intravenous injections or infusions. While administration freqff including fluctuations in factor IX levels, remain a significant pitfall of enzyme replacement therapiaa es. uency has improved in recent years, key drawbacks of protein therapy, aa 12 Our Gene Editing Approach We believe that hemophilia B symptoms can be dramatically reduced with only a moderate restoration in facto ff r IX activity. It has been shown that patients with more than 5% of normal factor IX activity have milder forms of the disease and may not present symptoms in the absence factor IX activity to a level of 5% or more of normal may be clinically meaningful. of trauma or surgery. This observation implies that in patients with severe forms of the disease, restoration of a The correction of a mutant facto ff r IX gene with CRISPR/Cas9 leverages endogenous regulation via correction of the gene at its native location within the genome. As a result, we believe it may represent a superior way to treat hemophilia B patients, relative to other gene therapyaa developed within the Casebia joint venturtt e, leveraging Bayer’s expertise in this disease area together with our gene editing expertise. approaches that insert the correct gene at a random location in the genome. Our hemophilia program will be Other Organs We intend to pursue select in vivo programs targeting diseases of other organ systems such as Duchenne muscular dystrophy, or DMD, and cystic fibrosis, which have significant for a CRISPR/Cas9 gene editing system. For cystic fibrosi area expertise. We are working internally as well as through third-party collaborations to optimize viral and non-viral delivery technologies to overcome the delivery crr patient populations with high unmet medical needs, and we believe are well suited s, or CF, we are working with Vertex, a global leader with extensive disease hallenges to these organ systems. ff ff Duchenne Muscular Dystrophy Overview Duchenne muscular dystrophy is an X-linked recessive genetic disease caused by a mutation in the dystrophin gene, which tion. The absence of dystrophin results in a lack of the dystrophin protein, a protein that plays a key structural role in muscle fibeff in muscle cells leads to significant cell damage and ultimately causes muscle cell death and fibff rosis. DMD is characterized by muscle degeneration, loss of mobility and premature death, and is among the most prevalent severe genetic diseases, occurring in one in 3,300 male births worldwide. There is also a related formff caused by mutations in the dystrophin gene. However, unlike DMD, the mutations in BMD result in the loss of certain exons or regions of the gene, and can lead to an abnoa milder symptoms than DMD patients. rmal version of dystrophin that retains some function. As a result, BMD patients have of muscular dystrophy called Becker muscular dystrophy, or BMD, which is also ff r func There is currently one appr a oved disease-modifying therapyaa in the United States for the treatment of DMD in patients who have a confirmed mutation of the dystrophin gene amenable to exon 51 skipping, which affects about 13% of the population with DMD. There is currently no approved disease-modifying therapies in the United States for the treatment of BMD. Our gene-based therapeutic approach in development to treat DMD involves the use of oligonucleotides to promote exon skipping over the mutations that , otherwise would result in truncated dystrophin synthesis. While exon skipping has demonstrated promising results in limited settings larger clinical trials of this approach have suggested only modest efficacy t levels of oligonucleotides requires repeated administration and presents challenges to treating DMD. . In addition, delivering sufficien ff ff tt Our Gene EditEE ing Appro A ach We are pursuing multiple approaches to developing therapiaa es for DMD. Our first appr to muscle cells in patients to delete the defective exons in the dystrophin gene. The goal of this appa some funct ff milder form of the disease known as BMD. We believe that currently available technology is capablea into muscle cells, and together with the relatively high efficff move this program into clinical testing. aa of delivering the CRISPR/Cas9 iency of exon deletion using the CRISPR/CRR as9 system, we will be abla e to ional capacity and produce enough dystrophin protein to diminish the more severe symptoms of DMD to resemble the oach is to deliver CRISPR/CaRR s9 directly roach is to allow the gene to regain We also plan to develop an ex vivo cell therapy product candidate for DMD. We will derive stem cells from patient tissues and modify them ex vivo using our CRISPR/Cas9 technology to correct the disease causing mutations. These corrected stem cells will then be differen ff the cells will divide and provide the patient with properly funct tiated into muscle precursor cells and reintroduced into patient tissues. Once administered to the patients, we believe that ioning muscle fibers with corrected copies of the dystrophin gene. ff In parallel, we are performing in vitro experiments to test the principle of dystrophin gene correction which could potentially be curative. Prior studies in mice and humans have indicated that dystrophin levels as low as 4 to 15% of normal are sufficient to ameliorate symptoms, suggesting that even a partial restoration of dystrophin levels would be therapeutically beneficial. 13 Cystictt Fibrosis Cystic fibrosis is a progressive disease caused by mutations in the cystic fibr ff resulting in the loss or reduced function of the CFTR protein. Although there are several diffeff approximately 70% of CF patients have the same mutation at codon 508 of the CFTR gene. Patients with CF develop thick mucus in vital organs, particularly in the lungs, pancreas and gastrointestinal tract. As a result, CF patients experience chronic severe respiratory ff infect rption of nutrients, progressive respiratory failure and early mortality. ions, chronic lung inflammation, poor absoa osis transmembrane regulator, or CFTR, gene rent mutations associated with CF, rr CF is an orpha n disease that affecff Europe. The median age of death fromff failure. CF patients require lifeloff hospitalizations and sometimes even lung transplantation, which can prolong survival but is not curative. ts an estimated 70,000 to 100,000 patients worldwide, with a majority in the United States and CF in the United States in 2014 was 29 years, with most deaths resulting from respiratory require frequent ng treatment with multiple daily medications and hours of self-cff are. They oftenff qq Studies have shown that as little as 10% of normal CFTR function can ameliorate disease symptoms. Our approach is focused on using our CRISPR/CRR as9 technology to correct the mutation at codon 508. Together with our collabor believe that we will be able to deliver CRISPR/Cas9 to the lung and correct this mutation sufficiently to improve symptoms in patients with CF. ation partner Vertex, we a Further Unlocking the Potential of Our CRISPR/Cas9 Platform We are working to optimize our CRISPR/Cas9 platformff . Our key areas of focus are described below. OPTIMIZATION Enhance function of the CRISPR/Cas9 system through protein and nucleic acid engineering GUIDEDE RNARNA SELSELECECTION Identify optimal RNA sequences to guide genomic editing PLATFORM ENHANCEMENT CELLULAR ENGINEERING Improve power of gene-edited stem cells as a therapeutic strategy DELIVERY Enhance ability to specifically introduce editing machinery into target tissues CORRECTION Increase efficiency of gene correction approaches Optimtt izatiott n of to hett Cas9 Proteitt nii The Cas9 nucleases found in nature are highly efficient and specific. We believe that for many gene-editing applications, the naturally occurring Cas9 variants have all the properties required to suppouu certain disease areas and organ systems where modifiedff through our external collaborations to develop these. rr versions of Cas9 may be more effective, and we are working internarr lly and rt an effect ff ive therapeutic. However, we also see potential in 14 Our research and development effort ff s seek to enhance a number of characteristics of Cas9, including size, specificff ity, immunogenicity and ability to support different types of editing strategies. We believe that the process of optimizing these different parameters may yield a number of effective Cas9 versions with different properties, each of which may be best suited to a certain disease area or type of genetic editing. Guide Rdd NARR Selection Selecting the sequence for guide RNAs is a critical step in the process of designing our product candidates. Once we have chosen a gene editing strategy, we seek to identify guide RNAs that will perform the desired edit with high efficiency and with extremely low off-tff arget cutting. While computational models can predict effiff ciency and off-tff arget effecff we believe that a combination of computation and experimental appr RNAs. oaches is necessary to reliably select the best possible guide ts with reasonable accuracy, a We are building a guide RNA selection process that combines bioinformatics and experimental assays to enabla e the screening of atics algorithms that select a large pool of over 10,000 guide RNAs in each experiment. This process starts with proprietary brr guide RNAs that are predicted to have desired properties. These guides are then tested for target site cutting efficiency using a high- throughput screening platform in a model cell line. The most efficient guides are then put through two screening processes for possible off-taff s. First, bioinformatics algorithms are used to identify the 10 to 20 sites in the genome that are most likely to show off- target effects, and these sites are examined through high-throughput assays for empirical off-target cutting. Second, whole genome rget cutting, even at unpredicted locations. Finally, a small subset of guides sequencing is performed to identify any potential off-ta with the highest efficff or guides forff iency and lowest off-target potential are tested in the cell type of therapeut ic interest before choosing a lead guide our program. rget effect ioinformff a ff ff Delivery Delivery of CRISPR/CRR as9 into cells is a critical step to ensure that the therapeutic will be effecff tive. We can deliver our Cas9 in the form of protein, DNA or RNA, allowing us to tailor the delivery format to the target tissue. For our ex vivo programs, we are using both protein and mRNA forff ms of Cas9 delivered via electroporation, which is the process of using a pulse of electricity to briefly open the pores of the cell membrane. For in vivo delivery t technologies that include LNPs and AAVs, as well as other delivery methods, beforff e selecting the specific versions forff product candidates. In addition, we are collaborating external access organ systems that are less accessible today. Some of this activity may be done through our Casebia joint venture with Bayer HealthCare which provides us access to supporting technologies such as delivery vehicles. o cells and organs in the patient we are evaluating and testing a variety of ly to develop next-generation delivery technologies that will allow us to use in our rr rr Correctiott n While gene correction is achievable today using CRISPR/CRR as9, it is more difficff ult and has lower efficaff cy than the more rd gene disruption strategy. Our initial gene correction programs target diseases in which therapeutic efficacy can be straightforwarr achieved through correction of only a small percentage of cells, while other potential indications may require correction of a significantly higher percentage of cells. We are working with our collaborators to increase the efficiency of gene correction in order to facilitate the potential treatment of these additional indications. A central focus of our development efforts ff is to optimize the correction rates in cell types where rates of correction are typically low. Some of this optimization is being done internally, to test the influence of differ correction efficiency. In addition, we are advised by Dr. Stephen Elledge, Professor of Genetics at Harvard Medical School, who is an expert in DNA damage and repair, to explore ways to optimize the cellular processes involved in the correction process. We are also collaborating more broadly with leaders in the DNA repair field, to explore other approaches to optimize correction rates. ent parameters of the CRISPR/Cas 9 system on RR ff Cellull lar Engineeringii uu Many ex vivo applications of our technology use a strategy of editing stem cells ex vivo which, when returned to the patient, rentiate into a variety of differff ent cell types. For certain stem cell types, especially hematopoietic cells, there are well-established for y, efficiency and safety of the ex vivo cell collection, manipulation and administration process for a variety diffeff procedures to suppor us is to improve the efficac of stem cell types. We are evaluating technologies to improve mobilization of a patient’s stem cells, to maintain viability of the harvested cells, and to improve the ability of these cells to engraft into a patient’s body. Both in our own laboratories and through our academic partnerships, we intend to perform additional research to optimize these parameters forff t this strategy. For others, these procedures are more nascent and require further development. A critical focus each organ system. ff ff 15 Intellectual Property We strive to protect and enhance the proprietary t rr echnologies that we believe are important to our business by seeking patents to technology, which consists of the in-licensed intellectual property of Dr. Emmanuelle Charpentier described cover our platformff below, including compositions of matter and their therapeuaa are not amenablea to obtain and maintain patent and other proprietary protection for our technology, our ability to defend and enforce our intellectual property rights and our ability to operate without infringing any valid and enforceable patents and proprietary rights of third parties. ropriate for, patent protection. Our success will depend significantly on our ability tic uses. We also rely on trade secrets to protect aspects of our business that to, or that we do not consider appa tt In-Li- censed Intellecll tual Property In April 2014, pursuant to an exclusive license with Dr. Emmanuelle Charpentier, or the Charpenrr tier License, we licensed from ff Dr. Charpentier certain rights to a fami CRISPR/TRR RACR/Cas9 complexes, and methods of use, including their use in targeting or cutting DNA. The Charpentier License is limited to therapeutic products such as pharmaceuticals and biologics and any associated companion diagnostics, forff the treatment or t the Charpentier License, please see “Business – prevention of human diseases, disorders, or conditions. For further information abou CRISPR License with Dr. Emmanuelle Charpentier.” ly of patent applications relating to compositions of matter, including additional a This famff ily of patent appli lications in the United States, Europe, Canada, Mexico, Australia and other selected countries in Central America, South America, Asia and Africa. The granted patents in the United Kingdom and any other patents that may ultimately issue in this patent family are expected to expire in 2033, not including any applicable extensions. cations includes two granted patents in the United Kingdom and pending patent appaa aa In addition to Dr. Emmanuelle Charpentier, this family of patent applications has named inventors who assigned their rights either to the Regents of the University of California, or Californff subju ect to certain overriding obligations to the sponsors of its research, including the Howard Hughes Medical Institutett Government. Caribou Biosciences, or Caribou, had reported that it had an exclusive license to patent rights froff m California and Vienna, subject to a retained right to allow non-profit entities to use the inventions for research and educational purposes. Intellia Therapeutics, Inc., or Intellia, had reported that it had an exclusive license to such rights from Caribou in certain fields. ia, or the University of Vienna, or Vienna. California’s rights are and the U.S. In January 2rr l matters, the PTAB concluded in February 2017 that the declared interferen ily and twelve issued U.S. patents owned jointly by the Broad Institute and Massachusetts Institutett 016, the U.S. Patent and Trademark Office, or USPTO, declared an interference between one of the pending U.S. of to individually and collectively as patent applications in this famff Technology and, in some instances, the President and Fellows of Harvard College, which we referff Broad. The interference was redeclared in March 2016 to add a U.S. patent application owned by Broad. An interference is a proceeding conducted at the USPTO by the Patent Trial and Appeal Board, or PTAB, to determine which party was the first to invent subject matter claimed by at least two parties. There are currently two parties to this interference. The USPTO designated Dr. Emmanuelle Charpentier, Califorff nia and Vienna collectively as “Senior Party” and designated Broad as “Junior Party.” Following motions by the parties and other proceduradd dismissed because the claim sets of the two parties were not directed to the same patentable invention in accordance with the PTAB’s two-way test for patent interferff ences. In particular, the Junior Party’s claims in the interference were all limited to uses in eukaryorr tic cells, while the Senior Party’s claims in the interference were not limited to uses in eukaryorr tic cells but included uses in all settings. Either party can appeal an adverse decision to the U.S. Court of Appeals forff pursue existing or new patent appaa new interferenc patents could be the subjeu again appeal an adverse decision to the U.S. Court of Appeals for the Federal Circuit. In any case, it may be years before there is a final determination on priority. Pursuant to the terms of the license agreement with Dr. Charpenrr reimbursing Dr. Charpentier’s patent prosecution, defense and related costs associated with our in-licensed technology. For further information regarding risks regarding the interfereff to Our Intellectuatt e related to the uses of the technology in eukaryotic cells or other aspects of the technology, and any existing or new ct of other challenges to their validity of enforceability. If there is a second interference, either party could nce and patent rights held by third parties, please see “Risk Factors—Risks Related the Federal Circuit. In parallel, either party can also d, either party as well as other parties could seek a lications in the U.S. and elsewhere. Going forff war tier, we are responsible for covering or ce should be l Property.” ff rr ff 16 On December 15, 2016, we entered into a Consent to Assignments, Licensing and Common Ownership and Invention rr Vienna, Dr. Charpentier, Intellia, Caribou, ERS Genomics Ltd., or ERS, and Management Agreement, or the IMA, with California, TRACR. Under the IMA, California and Vienna retroactively consent to Dr. Charpentier’s licensing of her rights to the CRISPR/Cas9 intellectual property, pursuant to the Charpentier License, to us, our wholly-owned subsidiary Trr RACR, and ERS, in the United States and globally. The IMA also provides retroactive consent of co-owners to sublicenses granted by us, TRACR and other licensees, prospective consent to sublu icenses they may grant in futuff for, among other things, (i) good faiff sharing arrangements, and (iii) notice of and coordination in the event of third-party infrinff respect to certain adverse claimants of the CRISPR/Cas continue in effect until the later of the last expiration date of the patents underlying the CRISPR/Cas9 technology, or the date on s of joint ownership in the which the last underlying patent application is abandoned. For further information regarding the effect United States and in other jurisdictions worldwide, please see “Risk Factors – The IntII ellectual Propeo rty Ttt Editing Technology Is Jointly Owned, Add The United States And In Other JurJJ re, retroactive approval of prior assignments by certain parties, and provides th cooperation among the parties regarding patent maintenance, defense and prosecution, (ii) cost- nd Our License Is From Only One Of The Joint Owners,rr Materially Limiting Our Rights In 9 intellectual property. Unless earlier terminated by the parties, the IMA will gement of the subject patents and with haTT t Protects Ott ur Core Gene isdictions.” RR ff CRISPII R-PP Owned IntII eltt lell ctual ProPP peo rtytt We also own over 80 families of patent applications relating to our platforff m technology or its therapeuaa a tic appl ications. These patent applications are currently pending in the United States and in some cases in other countries, and we may elect to pursue additional related applications internationally. Any patents that ultimately issue from these patent appa 2034. lications may begin to expire in Patent Assignment Agreement In November 2014, we entered into a patent assignment agreement with Dr. Emmanuelle Charpentier, Dr. Ines Fonfara and Vienna, or the Patent Assignment Agreement. Under the Patent Assignment Agreement, Dr. Charpentier, Dr. Fonfara and Vienna assigned to us all rights to a famff CRISPR/TRACR/Cas9 complexes, and methods of use, including their use in targeting or cutting DNA. cations relating to certain compositions of matter, including additional ily of patent appli aa As consideration forff the patent rights assigned to us, we agreed to pay an upfronff t payment, milestone payments beginning with lication or its equivalent in another country, a minimum annual royalty, a low single- ff re, use, sale, or importation is covered by the assigned patent rights, and a low the filing of a U.S. Investigational New Drug appa digit royalty on net sales of products whose manufactu single-digit percentage of licensing revenues. We are obliged to use commercially reasonable effor ts to obtain regulatory approval to market a producdd t whose manufacff use, sale, or importation is covered by the assigned patent rights, including but not limited to an obligation to use commercially reasonable effort 2021. application (or its equivalent in a major market country) by November s to file a U.S. Investigational New Drugrr ff ff ture, License Agreements CRISPII R LPP icense Withii Dr. Err mmEE anuelle Cll haCC rpentier aa RR 9 complexes and their use in targeting or cutting DNA, which we refer to as the In April 2014, we entered into a license agreement, or the Charpentier License Agreement, with Dr. Emmanuelle Charpentier, one of our co-founders, pursuant to which we received an exclusive license under Dr. Charpentier’s joint ownership interest a family of patent applications relating to CRISPR/TRACR/Cas Patent Rights, to research, develop and commercialize therapeut any associated companion diagnostics, for the treatment or prevention of human diseases, disorders, or conditions, other than hemoglobinopathies, which we refer to as the CRISPR Field. The license is exclusive, even as to Dr. Charpentier, except that she retains a non-transferablea non-profit partners. The exclusive license is granted only under Dr. Charpenrr is not granted under any other joint owner’s interest. Additionally, the Charpentier License granted us an exclusive, worldwide, royalty-freff e sublicense, including the right to sublicense, to research, develop, produce, commercialize and sell therapeutic products relating to the CRISPR Field which incorporate any intellectual property that TRACR Hematology Ltd., our majority-owned subsidiary, or TRACR, develops under its license with Dr. Charperr ntier. In turntt with the obligation to sublicense to TRACR and prevention of hemoglobinopathy in humans, including, without limitation, sickle cell disease and thalassemia. her own research purposes and in research collaborations with academic and l property we develop under the license with Dr. Charperr ntier for treatment ic products such as pharmaceuticals or biological preparations, and , we granted to Dr. Charpentier an exclusive license tier’s interest in the patent appli right to use the technology forff cations and the exclusivity any intellectuatt RR a ff 17 Under the terms of the Charpentier License Agreement, as consideration forff the license, Dr. Emmanuelle Charpentier received a , an immaterial annual maintenance fee, immaterial milestone payments that will be due after the initiation of technology transfer feeff clinical trials, a low single digit percentage royalty on net sales of licensed producdd ts, and a low single digit percentage royalties of sublicensing revenue. We are obligated to use commercially reasonable effoff roval to market a licensed therapeutic product. CRISPR must use commercially reasonabla e effort a U.S. Investigational New Drug application (or its equivalent in a major market country for a therapeutic product in the CRISPR field) by April 2021. In addition, CRISPR must file a U.S. Investigational New Drug application (or its equivalent in a major market country) forff by April 2024. a therapeutic product in the CRISPR field rts to obtain regulatory arr s to fileff ppa ff Unless terminated earlier, the term of the Charpentier License Agreement will expire on a country-by-country brr asis, upon the expiration of the last to expire valid claim of the Patent Rights in such country. We have the right to terminate the agreement at will upon 60 days’ written notice to Dr. Emmanuelle Charpentier. We and Dr. Charperr ntier may terminate the agreement upon 90 days’ notice in the event of a material breach by the other party, which is not cured during the 90 day notice period. Dr. Charpentier may terminate the license agreement immediately if we challenge the enforce ability, validity, or scope of any Patent Rights. ff TRACRR R LCC icense WithWW Dr. Err mmEE anuelle Charpentier In April 2014, concurrently with our license agreement with Dr. Emmanuelle Charpenrr RR tier, TRACR Hematology Ltd., our RR majority owned subsidiary, entered into a license agreement, or the TRACR RR shareholder of TRACR, under the Patent Rights. Pursuant to the TRACR worldwide, royalty-bearing license, including the right to sublicense, to research, develop, producdd e, commercialize and sell therapeutic and diagnostic producdd ts for the treatment and prevention of hemoglobinopathy in humans, including sickle cell disease and thalassemia, or the TRACR Field. TRACR also received a non-exclusive, worldwide, royalty-freff e license, including the right to sublicense, to carryrr out internal pharmaceutical research for therapeaa utic producdd ts outside of the TRACR Field and an exclusive, worldwide, royalty-freff e sublicense, including the right to sublicense, to research, develop, producdd e, commercialize and sell therapeutic products relating to the TRACR Field which incorporate any intellectual property that CRISPR develops under its license with Dr. Charpentier. In turn, TRACR granted to Dr. Charpentier an exclusive license to sublicense to CRISPR any intellectual property that TRACR develops under the license with Dr. Charpentier forff License Agreement, with Dr. Charpentier, a minority License Agreement, TRACR was granted an exclusive, use in the CRISPR Field. RR TRACRR R is obligated to use commercially reasonable efforts c to research, develop, and commercialize at least one therapeuti for the prevention or treatment of human disease under the license agreement. TRACR must use commercially reasonable a ff s to fileff a U.S. Investigational New Drug appl productdd effort ff TRACR field by April 2021. In addition, TRACR market country) forff a a therapeut development costs. RR ic producdd t in the TRACRR aa ication (or its equivalent in a major market country)rr must file a U.S. Investigational New Drugrr for a therapeutic product in the application (or its equivalent in a major R fieff ld by April 2024. Tracr is solely responsible forff all clinical, regulatory and Under the TRACR License Agreement, Dr. Emmanuelle Charpentier is entitled to receive immaterial clinical and regulatory milestone payments per productdd percentage royalties on the net sales of any approved therapeutic or diagnostic products, made by it, its affiliates, or its sublic and low single-digit percentage royalties on sublicensing revenue. that TRACR commercializes. TRACR is also required to pay Dr. Charpentier low single digit u ensees Unless terminated earlier, the term of the license agreement will expire on a country-rr by-country basis, uponuu the expiration of the last to expire valid claim of the Patent Rights in such country. TRACR has the right to terminate the agreement at will upon 60 days’ written notice to Dr. Emmanuelle Charperr ntier. TRACRR R and Dr. Charpentier may terminate the agreement upon 90 days’ notice in the event of a material breach by the other party, which is not cured during the 90 day notice period. Dr. Charperr ntier may terminate the license agreement immediately if TRACR challenges the enforceability, validity, or scope of any Patent Right. Bayer JoinJJ t VentVV ure In December 2015, we entered into a Joint Venture Agreement, or the JV Agreement, with Bayer HealthCare LLC, or Bayer HealthCare, to create Casebia Therapeaa utics LLP, or Casebia, to discover, develop and commercialize new therapeaa utics forff linked diseases, including blood disorders, blindness and heart disease. At the closing of the transactions contemplated by the JV Agreement in March, 2016, or the Closing, we contributed $0.1 million to Casebia and we and certain of our affiliates entered into an l property contribution agreement with Casebia, or the CRISPR IP Contribution Agreement, as discussed below, exclusively intellectuatt licensing our CRISPR/Cas technology to Casebia forff in certain specified fields, or the Casebia Fields. Bayer HealthCare contributed an initial amount of $45 million at the Closing to Casebia and is committed to contribute up to an additional $255 million in additional funds over time to fundff conditions and procedurdd es discussed below. We and Bayer HealthCare each hold a 50%, non-transferablea u sublea the operations of Casebia, subjeb ct to the interest in Casebia. Casebia e of developing and commercializing therapeut ses a portion of our Cambridge officeff its initial operations. dd ic products genetically the purpos forff aa rr 18 Casebia’s initial focus will be within the areas of hematology, ophthalmology and cardiology, in addition to select indications related to other sensory organs, metabolic diseases and autoimmune diseases. Within these areas of focus, we and Bayer HealthCare each have exclusive rights to specified disease indications, the CRISPR Field and Bayer Field, respectively, as discussed below. Governance In November of 2016, Casebia appointed James Burnsrr as chief executive officer, or CEO, of Casebia, replacing Axel Bouchon, the head of LifeScience Center of Bayer AG, who was serving as interim CEO. Dr. Burnsrr also joined the Casebia Board as a non- voting member. Casebia is generally governed by a management board, or the Management Board, which is initially comprised of four voting members, two of which are designated by us and two of which are designated by Bayer. We have initially designated Drs. Novak and Lundberg to serve as our designees to the Management Board. Decisions of the Management Board are generally made by majority vote, with each member having one vote. Certain matters require the consent of Bayer HealthCare and us. Budgetdd And Fundingdd ff The JV Agreement sets forth the initial 24-month budget forff Casebia, which will be revised by the Management Board on a owing 24 months. Bayer HealthCare, subject to certain conditions, is solely responsible forff yearly basis for the foll with the necessary additional funding as determined by the Management Board until the earlier of (i) its aggregate additional commitment amount of $255 million is full Board or (ii) the termination of the JV Agreement in accordance with its terms. Any additional fund committed by Bayer HealthCare in the JV Agreement up tuu an acquisition or otherwise, will not affect or dilute our 50% interest in Casebia. aa ing beyond the amounts initially ff o the $300 million aggregate commitment amount, whether for purposes of ed, at which point all additional financing must be appr oved by the Management providing Casebia y fundff ff Non-Competim tion During the term of the JV Agreement, neither we nor Bayer HealthCare, nor any of our respective affiliates, may develop, commercialize or otherwise exploit any competing product utilizing the CRISPR/Cas technology in any of the Casebia Fields unless, t of a pre-existing license or an approved third party agreement, or in the case of CRISPR or one of our affiliates, a target is the subjec certain other excluded targets. In addition, in the event either we, Bayer HealthCare or a third party license a product candidate from Casebia pursuant to the Option Agreement discussed below, the non-licensing party or parties to the JV Agreement will be prohibited from developing, commercializing or otherwise exploiting any product utilizing CRISPR/CRR as technology to target the same target as that of the licensed productdd clinically developing, commercializing or otherwise exploiting such licensed product candidate. candidate in any of the fields covered by such Option Agreement, so long as the licensing party is u Furthermore, upouu n a termination by either party forff specifiedff breaches of the other party, the defaulting party will be prohibited from utilizing the CRISPR/Cas technology to develop, commercialize or otherwise exploit product candidates in the fieff terminating party which would be competitive with the terminating party, for a period of two years foll ld of the owing such termination. ff Termination The JV Agreement can be terminated by Bayer HealthCare and us upon mutual written consent. Either party may terminate the JV Agreement in the event of specified breaches by the other party or in the event the other party becomes subjecb bankruptcy, winding up or similar circumstances. Either party may also terminate uponuu defined in the JV Agreement. Bayer HealthCare also has the right to terminate in the event (i) we are not able to maintain the intellectual property rights licensed to Casebia pursuant to the CRISPR IP Contribution Agreement or (ii) we have not achieved preclinical proof of concept with a CRISPR/Cas9 product candidate in a specifieff d period of time. The JV Agreement may also be terminated by either party if, sff ubsequent to the time that Bayer HealthCare has funded its entire $300 million commitment, the Management Board is unable to approve and obtain sufficient funding, within the time specified in the JV Agreement, to continue Casebia’s operations forff a change of control of the other party, as the next 18 months. t to specifiedff Subject to certain exceptions, in the event of a termination, all Casebia owned patents, know-how and technology will be jointly owned by us and Bayer HealthCare, with the right to subliu will receive an exclusive license to Casebia CRISPR/Cas human therapeutic uses. Upon such termination, we will receive an exclusive license to Casebia CRISPR/CRR as exclusive license forff technology in human therapeutic areas, other than in the Bayer Field, and a non-exclusive license for human therapeutic uses in the Bayer Field. Upon any termination, all rights licensed to Casebia pursuant to the CRISPR IP Contribution Agreement will terminate, except for any rights licensed to third parties or to a party who has exercised an option pursuant to the Option Agreement described below. cense. Upon termination, subjeu technology for all non-human therapeaa utic uses in the Bayer Field and a non- ct to certain exceptions, Bayer HealthCareaa RR 19 IP Contritt but iott n Agreement Withii Casebiaii ii As part of our contribution to Casebia, in March 2016, we and certain of our affiliates entered into the CRISPR IP Contribution ff y paid-up,uu royalty-free license, including the right to sublicense, to the use of our CRISPR/Cas , commercialize and sell products in the Casebia Fields. As partial consideration forff Agreement with Casebia. Pursuant to the CRISPR IP Contribution Agreement, we and certain of our affiliated entities granted Casebia an exclusive, worldwide, full technology to research, develop, producedd license, Casebia is required to pay us an aggregate amount of $35 million for a technology access fee, consisting of an upfront payment of $20 million, which was paid at the closing of the JV Agreement in March 2016, and another payment of $15 million when we obtain specifiedff intellectual property rights relating to our CRISPR/Cas9 technology outside of the United States, which was paid in December 2016 upon uu us to various forms of intellectual property developed or in-licensed by Casebia. The CRISPR IP Contribution Agreement will terminate simultaneously with the termination of the JV Agreement, subject to survival of certain licenses granted during the term, including licenses granted pursuant to an exercise of an option pursuant to the Option Agreement. the signing of the IMA. The CRISPR IP Contribution Agreement also contains license grants from Casebia to the Option Agreement With Bayer In connection with the Closing, in March 2016, we, Bayer HealthCare and Casebia entered into an Option Agreement. Pursuant candidate it is developing, both to the Option Agreement, in the event the FDA accepts an IND submitted by Casebia for any productdd we and Bayer HealthCare have the right to submit an offer to enter into a license with Casebia for the exclusive right to develop, manufacture and commercialize the producdd t candidate in certain Casebia Fields. In addition, Casebia is allowed to receive and consider unsolicited third-party offer the applicable product candidate. The Option Agreement sets forth the procedures the Management Board will follow when considering . and voting on any offers as well as the considerations on how to value any offerff s, and both we and Bayer HealthCare can require Casebia to seek third-party offerff s forff ff Collall boration Agregg ement WitWW h Vtt erteVV xee On October 26, 2015, we entered into a Strategic Collabor a ation, Option and License Agreement, or the Collaboration a Agreement, with Vertex Pharmaceuticals, Incorporated and Vertex Pharmaceuticals (Europe) Limited, together, Vertex. Pursuant to the Collabor to Vertex in exchange for a $75 million upfruu million equity investment in us. ation Agreement, we agreed to provide technology and options to obtain licenses relating to our CRISPR/Cas technology ont payment. In connection with the Collaboration Agreement, Vertex also made a $30 , commercialize, sell and use therapeaa utics directed to each such collaboa Under the Collaboration Agreement, Vertex has the option to exclusively license treatments forff up to six collaboration targets that emerge from the four-year research collaboration under certain of our platforff m and background intellectual property to develop, manufacturett ration target. For any non-hemoglobinopathies targets in-licensed for development, Vertex will pay future development, regulatory and sales milestones of up to $420 million per target, as well as royalty payments in the single digits to low teens on futuff milestone and royalty payments are each subject to reduction under certain specified conditions set forth in the Collaboa Agreement. For these therapiaa es, Vertex is solely responsible for all research, development, manufact commercialization activities. re sales of a commercialized product candidate. The ration ing and global urtt ff However, specifically for hemoglobinopathies targets, if Vertex exercises one or more of its six options on a hemoglobinopathy target, including targets for sickle cell disease, we and Vertex will equally share all development costs and sales expenses. If a hemoglobinopathy target is successfully developed, we would be the lead party responsible forff States and Vertex would be the lead party responsible for commercialization efforts outside the United States. The profits fromff sales of any hemoglobinopathies products will be equally shared by Vertex and us. commercialization effort ff the s in the United RR The initial focus of the collaboration will be to use CRISPR/Cas ff fforts focus 9 technology to discover and develop gene-based treatments for ed on a specified number of other genetic targets will also be ration Agreement. We will be responsible for discovery activities, and the related expenses will be fully osis. Further discovery err ff ation Agreement, we and Vertex have each agreed to certain exclusivity obligations with respect hemoglobinopathies and cystic fibr conducted under the Collaboa funded by Vertex. Under the Collabor to targets subject to the Collaboration Agreement. a Either party can terminate the Collaboration Agreement upon the other party’s material breach, subjeb ct to specifieff d notice and cure provisions. Vertex also has the right to terminate the Collaboa notice prior to any product receiving marketing approval and upouu n 270 days’ notice after a product has received marketing approval. In the event we and Vertex make a filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, forff collabor a with respect to that target. We may also terminate the Collaboration Agreement in the event Vertex challenges any of our patent rights. ation target and such filing is not cleared within a specifiedff time after such filff ing, the Collaboration Agreement will terminate convenience at any time upon 90 days’ written ration Agreement forff a 20 Absent early termination, the Collaboa ration Agreement will continue until the expiration of the Vertex’s payment obligations under the Collabor a ation Agreement. Upon termination, the targets that are not licensed by Vertex will be returned tt to us. License Agregg ement with Anagenes a is On June 7, 2016, we entered into a license agreement with Anagenesis Biotechnologies SAS, or Anagenesis, pursuant to which we received an exclusive worldwide license to Anagenesis’ proprietary technology for all human based muscle diseases. We plan to initially use these rights to advance our research and productdd Pursuant to the license agreement, we made a one-time upfront payment of $0.5 million to Anagenesis and are required to pay Anagenesis up to $89.0 million upon the achievement of futuff e and autologous licensed products developed pursuant to the license agreement, as well as low single digit royalty payments on futur sales of commercialized producdd t candidates. re clinical, regulatory and sales milestones for each of the first allogeneic our Duchenne muscular dystrophy program. development efforts forff ff We can terminate the license agreement at any time upon 30 days’ written notice. Either party may also terminate the license uu the other party’s material breach, subjecb agreement upon license agreement in the event the other party becomes subject to specified bankruptcy, winding up ouu early termination, the license agreement will continue until the expiration of our payment obligations on a country-by-country brr t to specified notice and cure provisions. Either party may terminate the r similar circumstances. Absent asis. Manufacturing We currently have no commercial manufacff turing or cell processing capaaa bia lities. We are working to establish manufacturing ff ities to manufact urtt e the necessary human cells, Cas9 and guide RNAs processes for both in vivo and ex vivo CRISPR/Cas9-based therapies and have establa ished relationships with third-party manufacturers with capabila tt Practices, or cGMP. We plan to continue to rely on qualified third-party organizations to produce or process bulk compounds, formulated compounds, viral vectors or engineered cells forff commercial quantities of any compound, vector, or engineered cells that we may seek to develop will be manufacff by processes that comply with FDA and other regulations. At the appropriate time in the product development process, we will determine whether to establish manufacturtt any products that we may successfull futurett instances, we may consider building our own commercial infrastructure. to utilize strategic partners, distributors or contract sales forces to assist in the commercialization of our products. In certain y develop. Outside of the United States and Europe, where appropriate, we may elect in the IND-supporting activities and early stage clinical trials. We expect that ilities or continue to rely on third parties to manufacff in accordance with current Good Manufacturi ture commercial quantities of tured in facilities and ing facff ng RR ff As producdd t candidates advance through our pipeline, our commercial plans may change. In particular, some of our research programs target potentially larger indications. Data, the size of the development programs, the size of the target market, the size of a commercial infraff structurtt e and manufacturtt world. ing needs may all influence our strategies in the United States, Europe and the rest of the Competition The biotechnology and pharmaceutical industries, including in the gene therapyaa rapidly advancing technologies, intense competition, and a strong emphasis on intellectuatt we believe that our technology, development experience, and scientific knowledge provide us with competitive advantages, we currently face, and will continue to face, competition froff m many diffeff pharmaceutical, and biotechnology companies, academic instituttt instituttt therapies currently in development, we will have to compete with new therapies that may become availablea rent sources, including major pharmaceutical, specialty ions and governmental agencies, and public and private research ions. For any producdd ts that we may ultimately commercialize, not only will we compete with any existing therapies and those l property and proprietary prr lds, are characterized by and gene editing fieff roducts. While in the future. We compete in the segments of the pharmaceutical, biotechnology, and other related markets that utilize technologies encompassing genomic medicines to create therapieaa are working to develop therapies in areas related to our research programs. s, including gene editing and gene therapy. aa There are additional companies that Our platform and product focus is on the development of therapies developing CRISPR/Cas9 technology include Intellia and Editas Medicine, Inc. aa using CRISPR/Cas9 technology. Other companies 21 There are additional companies developing therapiaa es using additional gene-editing technologies, including TALENs, meganucleases, and zinc finger nucleases. The companies developing these additional gene-editing technologies include bluebird bio, Cellectis, Poseida Therapeutics, Precision Biosciences, and Sangamo Biosciences. Additional companies developing gene therapy products include Abeona Therapeaa utics, Avalanche Biotechnologies, Dimension Therapeaa utics, REGENXBIO, Spark Therapeutics and uniQure. In addition to competition from other gene-editing therapies or gene therapies, any producdd ts that we develop may also face competition from other types of therapies, such as small molecule, antibody, or protein therapiaa es. We may also face future competition fromff newly discovered gene editing technologies or new CRISPR-associated nucleases. While we believe that CRISPR/Cas9 will be highly effeff ctive forff many therapeutic appa enhance the technology, more efficient gene editing technologies may emerge. For example, recent publu ications by Feng Zhang, Ph.D., one of the founders of Editas Medicine, Inc. and others have elucidated a differ can also edit human DNA. Some have argued that Cpf1 is supeuu rior to Cas9 for certain applications. Gene editing is a highly active field of research and new technologies, related or unrelated to CRISPR, may be discovered and create new competition. lications and are actively working to further ent CRISPR-associated nuclease, Cpf1, which ff In addition, many of our current or potential competitors, either alone or with their collabor a ation partners, have significantly turing, preclinical testing, conducdd ting clinical trials, aa nt competitors, particularly through collaboa oved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology, and gene therapy greater financial resources and expertise in research and development, manufacff and marketing appr industdd ries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significaff rative arrangements with large and established ting and retaining qualifieff d scientific and management personnel and companies. These competitors also compete with us in recruirr establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary f ff commercialize producdd ts that are saferff oval for their products more than any products rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position beforff e we are able to enter the market. The key competitive factors affect safetff y, convenience, and availability of reimbursement. a that we may develop. Our competitors also may obtain FDA or other regulatory arr ing the success of all of our programs are likely to be their efficacy, y could be reduced or eliminated if our competitors develop and our programs. Our commercial opportunit tive, have fewer or less severe side effecff , more effecff ts, are more convenient or are less expensive ppr or, dd rr ff tt If our current programs are approved forff with other products currently under development, including gene editing and gene therapyaa products currently under development may include competition forff clinical trial sites, patient recruitment, and product sales. the indications for which we are currently planning clinical trials, they may compete s. Competition with other related productdd In addition, due to the intense research and development that is taking place by several companies, including us and our competitors, in the gene editing field, the intellectual property landscape is in flux and highly competitive. There may be significant intellectual property related litigation and proceedings, in addition to the ongoing interfereff . in-licensed, and other third party, intellectual property and proprietary rights in the futff urett nce proceedings, relating to our owned and For example, in January 2016, at our request, the USPTO declared an interference between one of the pending U.S. patent rr y 2rr applications we licensed from Dr. Emmanuelle Charpentier and twelve issued U.S. patents, and subsequently added one U.S. patent application, owned jointly by Broad. Because our application was filed first, the USPTO designated Dr. Charpentier, Californff ia and Vienna, or Vienna, collectively as “Senior Party” and designated Broad as “Junior Party.” Following motions by the parties and other 017 that the declared interference should be dismissed because the claim sets of procedural matters, the PTAB concluded in Februar patent the two parties were not directed to the same patentable invention in accordance with the PTAB’s two-way test forff interferences. In particular, the Junior Party’s claims in the interference were all limited to uses in eukaryorr tic cells, while the Senior Party’s claims in the interference were not limited to uses in eukaryotic cells but included uses in all settings. Either party can appeal an adverse decision to the U.S. Court of Appeals for the Federal Circuit. In parallel, either party can also pursue existing or new patent applications in the U.S. and elsewhere. Going forward, either party as well as other parties could seek a new interference related to the uses of the technology in eukaryotic cells or other aspects of the technology, and any existing or new patents could be the subjb ect of other challenges to their validity of enforcff ity. In the context of a second interfereff could be reached regarding that the Senior Party was not the firff st to invent, or it could be concluded that the contested subjeb ct matter is not patentable to the Senior Party and is patentablea from issuing as patents, in which case the proceedings would result in our losing the right to protect core innovations and our freedom to practice our core gene editing technology. If there is a second interference, either party could again appeal an adverse decision to the U.S. Court of Appeals for the Federal Circuit. In any case, it may be years before there is a final determination on priority. For example, Toolgen Inc., or Toolgen, filed Suggestions of Interference in the USPTO on April 13, 2015 and December 3, 2015, suggesting that they believe some of the claims in pending U.S. applications owned by Toolgen (U.S. Serial No. 14/685,568 and U.S. Serial No. 14/685,510, respectively) interferff e with certain claims in five of the Broad patents currently involved in the interference with Dr. Emmanuelle Charpentier, Califorff niarr applications relating to CRISPR technologies, which similarly may lead to furff and Vienna. We are also aware of additional third parties that have pending patent to the Junior Party, which in this case could preclude our U.S. patent applications ther interferff ence proceedings. For example, Rockefeller nce or in other proceedings, a determination eabila 22 ff as co-inventor of CRISPR/Cas9 University has filed a continuation application (U.S. Serial No. 14/324,960) of an application filed by the Broad that Rockefeller’s employee Luciano Marraffini technology; Vilnius University has filed applications in the United States and in other jurisdictions (published internationally as WO2013/141680 and WO2013/142578), Harvard University has filed applications in the United States and in other jurisdictions (published internationally as WO2014/099744), and Sigma-Aldrich has filed appa of CRISPR/Cas9 technology based on applications claiming priority to provisional filings in 2012. Numerous other filings are based on provisional applications filed after 2012. lications in the United States and in other jurisdictions (published internarr tionally as WO2014/089290), each claiming aspects RR rr onal counterpar Both Broad and Toolgen have filed internati ts of their U.S. applications, some of which were granted in Europe and/or other jurisdictions. We and third parties have initiated opposition proceedings against some of these grants, and we may in the future oppose other grants to these or other applicants. Similarly, if we should obtain patent grants in the U.S., Europe and other jurisdictions, these could also be the subjecb s sought by third parties in order to revoke the grants or narrow the scope of granted claims. Going forward, with existing and new challenges being filed against CRISPR/Cas9 cases in the U.S., Europe and elsewhere, and considering the number of interested parties, it is reasonable to expect that patents directed to the underlying technology will continue to be the subject beyond as decisions in favoff of ongoing disputes over at least the next several years, and potentially r or against particular parties may be the subject of appeals. t of oppositions or other post-grant proceduredd b rr Government Regulation Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing, manufactu control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products, including biological products. Some jurisdictions outside of the United States also regulate the pricing of such products. The processes for obtaining marketing approvals in the United States and in other countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources. re, qualitytt ff Licensure and Regul e atll iontt of Biologico s in t ii hett Unitedtt States In the United States, our candidate products would be regulated as biological productdd s, or biologics, under the Public Health Service Act, or PHSA, and the Federal Food, Drug, and Cosmetic Act, or FDCA, and their implementing regulations. The failure to comply with the applicable U.S. requirements at any time duridd clinical testing, the approval process or post-appro review and approval, and/or administrative or judicial sanctions. These sanctions may include, but are not limited to, the U.S. Food and Drug Administration’s, or FDA’s, refusal to allow an applicant to proceed with clinical testing, refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, untitled or warninrr g letters, adverse publicity, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fineff and penalties brought by the FDA or the Department of Justice, or DOJ, or other governme ng the product development process, including non-clinical testing, ct an applicant to delays in the conduct of a study, regulatory s, and civil or criminal investigations val process, may subjeu ntal entities. aa rr An applicant seeking approval to market and distribute a new biologic in the United States generally must satisfactorily complete each of the following steps: • • • • • • preclinical labor Laboratory Practice, or GLP, regulations; a atory tests, animal studies and formulation studi tt es all performed in accordance with the FDA’s Good submission to the FDA of an investigational new drug, or IND, application for human clinical testing, which must become effecff tive before human clinical trials may begin; approval by an independent instituttt may be initiated, or by a central IRB if appropriate; ional review board, or IRB, representing each clinical site before each clinical trial performance of adequate and well-controlled human clinical trials to establish the safety, potency, and purity of the product candidate for each proposed indication, in accordance with the FDA’s Good Clinical Practice, or GCP, regulations; preparation and submission to the FDA of a Biologics License Application, or BLA, forff marketing forff one or more proposed indications, including submission of detailed informff composition of the product and proposed labeling; a biologic productdd ation on the manufacff requesting ture and review of the product by an FDA advisory committee, where appropriate or if appli a cable; 23 • • • • satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities, including those of third parties, at which the product, or components thereof, are produced to assess compliance with cGMP requirements and to assure that the facilities, methods, and controls are adequate to preserve the product’s identity, strength, quality, and purity,tt and, if applicable, the FDA’s current good tissue practice, or CGTP, for the use of human cellular and tissue products; tory crr satisfacff and GCPs, respectively, and the integrity of clinical data in support of the BLA; ompletion of any FDA audits of the non-clinical study and clinical trial sites to assure compliance with GLPs payment of user fees and securing FDA approval of the BLA; and compliance with any post-approval requirements, including thett Mitigation Strategy, or REMS, adverse event reporting, and compliance with any post-approval studies required by the FDA. potential requirement to implement a Risk Evaluation and Preclinical Studies and Investigational New Drug Application tt es to evaluate the potential for efficaff Before testing any biologic product candidate in humans, including a gene therapy producdd t candidate, the producdd t candidate must undergo preclinical testing. Preclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as studi compounds forff manufacturi The IND automatically becomes effecff based on concernsrr subjects would be exposed to unreasonable and significant health risks. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns before the clinical trials can begin. testing must comply with federal regulations and requirements. The results of the preclinical tests, together witht or IND, appl ng inforff mation and analytical data, are submitted to the FDA as part of an Investigational New Drug, tive 30 days after receipt by the FDA, unless before that time the FDA imposes a clinical hold or questions about the product or conducdd t of the proposed clinical trial, including concernsrr cy and toxicity in animals. The conductdd of the preclinical tests and formulation of the that human research ication. a rr tt As a result, submission of the IND may result in the FDA not allowing the trials to commence or allowing the trial to commence by the sponsor in the IND. If the FDA raises concernsrr on the terms originally specifiedff period, or at any time durdd ing the conductdd impose a partial or complete clinical hold. This order issued by the FDA would delay either a proposed clinical study or cause suspension of an ongoing study, until all outstanding concerns have been adequately addressed and the FDA has notified the company that investigations may proceed or recommence but only under terms authorized by the FDA. This could cause significant delays or ff difficul of the IND study, including safety concerns or concerns due to non-compliance, it may ties in completing planned clinical studies in a timely manner. or questions either during this initial 30-day With gene therapy protocols, if the FDA allows the IND to proceed, but the Recombinant DNA Advisory Committee, or RAC, of the National Institute of Health, or NIH, decides that full public review of the protocol is warranted, the FDA will request at the completion of its IND review that sponsors delay initiation of the protocol until after completion of the RACRR review process. Human Clinical Trials i ll n SupSS port pp of a BLABB Clinical trials involve the administration of the investigational productdd candidate to healthy volunteers or patients with the disease to be treated under the supervision of a qualified principal investigator in accordance with GCP requirements. Clinical trials are conducdd ted under studtt y protocols detailing, among other things, the objb ectives of the stutt dy, inclusion and exclusion criteria, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and subsequent protocol amendments must be submitted to the FDA as part of the IND. A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to the clinical trial under an IND. If a non-U.S. clinical trial is not conducted under an IND, the sponsor may submit data fromff conductdd well-designed and well-conducted clinical trial to the FDA in support of the BLA so long as the clinical trial is conducted in compliance with internarr FDA is able to validate the data fromff the ethical conduct of clinical research known as good clinical practice, or GCP, and the the study through an onsite inspection if the FDA deems it necessary. tional guidelines forff a a oved by an independent instituti ct informed consent, ethical factors, and the safetyff Further, each clinical trial must be reviewed and appr onal review board, or IRB, either centrally or individuadd lly at each institution at which the clinical trial will be conducted. The IRB will consider, among other things, clinical trial design, subjeu regulations. The FDA or the clinical trial sponsor may suspend or terminate a clinical trial at any time for various reasons, including a ts or patients are being exposed finding that the clinical trial is not being conductdd to an unacceptabla e health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducdd ted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Clinical testing also must satisfy eff clinical trials are overseen by an independent group of qualifiedff informed consent. Additionally, some experts organized by the clinical trial sponsor, known as a data safety of human subjects. An IRB must operate in compliance with FDA ed in accordance with FDA requirements or the subjec xtensive GCP rules and the requirements forff u tt 24 monitoring board or committee. This group may recommend continuation of the study as planned, changes in study conduct, or cessation of the study at designated check points based on access to certain data from the study. Finally, research activities involving infectious agents, hazardous chemicals, recombinant DNA, and genetically altered organisms and agents may be subject to review and approval of an Institutio Synthetic Nucleic Acid Molecules. nal Biosafety Committee in accordance with NIH Guidelines forff Research Involving Recombinant or tt Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Additional studies may be required after appa roval. • • • Phase 1 clinical trials are initially conducted in a limited population to test the product candidate for safety, including adverse effecff ts, dose tolerance, absorptrr or, on occasion, in patients, such as cancer patients. ion, metabolism, distribution, excretion, and pharmacodynamics in healthy humans risks, evaluate the efficaff Phase 2 clinical trials are generally conducdd ted in a limited patient population to identify possible adverse effecff safetyff and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain informff beginning larger and more costly Phase 3 clinical trials. cy of the product candidate forff specific targeted indications and determine dose tolerance ation prior to ts and Phase 3 clinical trials proceed if the Phase 2 clinical trials demonstrate that a dose range of the producdd t candidate is potentially effeff ctive and has an acceptabla e safetff y profile. Phase 3 clinical trials are undertaken within an expanded patient iveness and safetff y that is needed population to further evaluate dosage, and gather the additional information about effect to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis forff physician label ing. a ff Progress reports detailing the results, if known, of the clinical trials must be submitted at least annually to the FDA. Written IND for reporting. IND safety reports are required for serious and unexpected suspected adverse events, findings fromff safety reports must be submitted to the FDA and the investigators within 15 calendar days after determining that the informa qualifiesff studies or animal or in vitrott testing that suggest a significant risk to humans exposed to the drug, and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Additionally, a sponsor must notify FDA within 7 calendar days after receiving information concerning any unexpected fatal or life-threatening suspected adverse reaction. tion other ff In some cases, the FDA may approve a BLA for a producdd t candidate but require the sponsor to conductdd additional clinical trials to further assess the product candidate’s safety and effect iveness after approval. Such post-approval trials are typically referred to as Phase 4 clinical trials. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication and to document a clinical benefitff exhibit due diligence with regard to conducting Phase 4 clinical trials could result in withdrawal of approval for productdd in the case of biologics approved under accelerated approval regulations. Failure to s. ff Special Regulations and Guidance Governing Gene TherTT apy Ppp roducts It is possible that the proceduredd s and standards applied to gene therapy products and cell therapy products may be applied to any CRISPR/Cas9 producdd t candidates we may develop, but that remains uncertain at this point. The FDA has defined a gene therapy product as one that mediates its effeff cts by transcription and/or translation of transferred genetic material and/odd r by integrating into the host genome and which are administered as nucleic acids, viruses, or genetically engineered microorganisms. The products may be used to modify cells in vivo or transferr ed to cells ex vivo prior to administration to the recipient. Within the FDA, the Center forff Biologics Evaluation and Research, or CBER, regulates gene therapy products. Within the CBER, the review of gene therapy and related products and Gene Therapies Advisory Crr makes recommendations to the NIH on gene therapy issues and engages in a public discussion of scientific, safety, ethical, and societal issues related to proposed and ongoing gene therapy protocols. The FDA and the NIH have published guidance documents with respect to the development and submission of gene therapy protocols. and the FDA has establa ished the Cellular, Tissue ommittee to advise CBER on its reviews. The CBER works closely with the NIH and the RAC, which is consolidated in the Office of Cellular, Tissue and Gene Therapies, dd aa ff ff rr aa o gain appro ors that the FDA will consider at each of the above stages of development and relate to, among other things, the Although the FDA has indicated that its guidance documents regarding gene therapies are not legally binding, we believe that any product candidate we may develop. The guidance documents our compliance with them is likely necessary t provide additional fact proper preclinical assessment of gene therapies; the chemistry,rr manufacturing, and control information that should be included in an IND application; the proper design of tests to measure product potency in support of an IND or BLA appli observe delayed adverse effect high. Further, the FDA usually recommends that sponsors observe subjecb for a 15-year period, including a minimum of five years of annual examinations folff person or by questionnaire. a when the risk of such effects is elated delayed adverse events s in subjeb cts who have been exposed to investigational gene therapies lowed by 10 years of annual queries, either in ts for potential gene therapy-r cation; and measures to val forff a aa ff 25 If a gene therapy trial is conductdd ed at, or sponsored by, instituttt ions receiving NIH funding for recombinant DNA research, a protocol and related documentation must submitted to, and the study registered with, the NIH Office of Biotechnology Activities, or OBA, pursuant to the NIH Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules prior to the submission of an IND to the FDA. In addition, many companies and other instituttt voluntarily follow them. The NIH will convene the Recombinant DNA Advisory Committee, or RAC, a feder to discuss protocols that raise novel or particularly important scientific, meetings. The OBA will notify the FDA of the RACRR protocol. RAC proceedings and reports are posted to the OBA web site and may be accessed by the public. al advisory committee, safety or ethical considerations at one of its quarterly public ions not otherwise subject to the NIH Guidelines ff ’s decision regarding the necessity forff full public review of a gene therapy ff Finally, to faci ff litate adverse event reporting and dissemination of additional information about gene therapy trials, the FDA and the NIH established the Genetic Modification Clinical Research Inforff mation System, or GeMCRIS. Investigators and sponsors of a human gene transfer trials can utilize this web-based system to report serious adverse events and annual reports. GeMCRIS also allows members of the public to access basic reports about human gene transferff trials registered with the NIH and to search for informff ation such as trial location, the names of investigators conductdd ing trials, and the names of gene transfer products being studied. Complim ance with ctt GMP and CGTP Requirementstt Beforeff approving a BLA, the FDA typically will inspect the facil urtt ff ity or facilities where the product is manufact ured. The FDA ing processes and facilities are in full compliance with cGMP ff will not approve an application unless it determines that the manufact ff requirements and adequate to assure consistent production of the producdd t within required specifications. The PHSA emphasizes the importance of manufacff s like biologics whose attributes cannot be precisely defineff turing control for productdd d. For a gene therapyaa product, the FDA also will not approve the product if the manufact ff urtt er is not in compliance with CGTP. of human cells, tissues, and cellular and tissue based products, or HCT/Ps, which are human cells or tissue intended for into a human recipient. The primary intent of the CGTP requirements is to ensure that These requirements are found in FDA regulations that govern the methods used in, and the facilities and controls used for, the manufacturett implantation, transplant, infusion, or transferff cell and tissue based products are manufact tt ured communicable disease. FDA regulations also require tissue establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through screening and testing. in a manner designed to prevent the introduction, transmission, and spread of ff Manufacturett rs and others involved in the manufacff ture and distribution of products must also register their establishments with ation to the FDA and/or other health regulatory agencies upon their initial participation in the manufacturing process. producdd ts intended for the U.S. market, and with analogous health regulatory arr the FDA and certain state agencies forff products intended for other markets globally. Both U.S. and non-U.S. manufacturing establishments must register and provide additional informff Any productdd manufactured by or imported from a facff under the FDCA, and could be affecff be subject to periodic unannounced inspections by governme Manufacturett limiting, or refusing inspection by the FDA or other governing health regulatory agency may lead to a productdd adulterated. nt authorities to ensure compliance with cGMPs and other laws. rs may also have to provide, on request, electronic or physical records regarding their establa ishments. Delaying, denying, ted by similar as well as additional compliance issues in other jurisdictions. Establishments may ility that has not registered, whether U.S. or non-U.S., is deemed misbranded being deemed to be gencies for rr Review and Approval of a BLABB The results of productdd candidate development, preclinical testing, and clinical trials, including negative or ambiguous results as well as positive findings, are submitted to the FDA as part of a BLA requesting a license to market the product. The BLA must contain extensive manufacff payment of a user fee. turing information and detailed information on the composition of the product and proposed labeling as well as The FDA has 60 days after submission of the appaa lication to conduct an initial review to determine whether it is sufficff ient to iently complete to permit substantive review. Once the accept for filing based on the agency’s threshold determination that it is sufficff submission has been accepted forff filing, the FDA begins an in-depth review of the application. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or the PDUFA, the FDA has ten months in which to complete its initial review of a standard application and respond to the applicant, and six months forff always meet its PDUFA goal dates for standard and priority BLAs. The review process may often be significantly extended by FDA requests for additional information or clarification. The review process and the PDUFA goal date may be extended by three months if the FDA requests or if the applicant otherwise provides through the submission of a majora amendment additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date. a priority review of the application. The FDA does not 26 Under the PHSA, the FDA may approve a BLA if it determines that the product is safe, pure, and potent and the facility where the productdd will be manufactured meets standards designed to ensure that it continues to be safe, pure, and potent. On the basis of the FDA’s evaluation of the application and accompanying information, including the results of the inspection of ff urtt ing facilities and any FDA audits of non-clinical study and clinical trial sites to assure compliance with GLPs and roval letter or a complete response letter. An approval letter authorizes commercial the manufact GCPs, respectively, the FDA may issue an appaa marketing of the product with specific prescribing inforff mation for specific indications. If the appl issue a complete response letter, which will contain the conditions that must be met in order to secure final appr and when possible will outline recommended actions the sponsor might take to obtain approval of the application. Sponsors that receive a complete response letter may submit to the FDA information that represents a complete response to the issues identified by under PDUFA as either Class 1 or Class 2. The classification of a resubmission is based the FDA. Such resubmissions are classifiedff on the information submitted by an appli cant in response to an action letter. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has two months to review a Class 1 resubmission and six months to review a Class 2 resubmission. The FDA will not approve an appaa lication until issues identified in the complete response letter have been addressed. ication is not approved, the FDA will oval of the application, a a a The FDA may also referff the application to an advisory committee forff a oved. In particular, the FDA may refer appl application should be appr present difficff ult questions of safety or efficacy to an advisory crr experts, including clinicians and other scientificff application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefull experts, that reviews, evaluates, and provides a recommendation as to whether the ommittee. Typically, an advisory committee is a panel of independent y when making decisions. ications forff a ff review, evaluation, and recommendation as to whether the novel biologic products or biologic products that If the FDA approves a new product, it may limit the approved indications forff use of the product. It may also require that labeling. In addition, the FDA may call for post-approval ff contraindications, warnirr ngs or precautions be included in the productdd her assess the producdd t’s safety after appr studies, including Phase 4 clinical trials, to furt surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, to help ensure that the benefits of the producdd t outweigh the potential risks. REMS can include medication guides, communication plans for healthcare profesff ETASU can include, but are not limited to, specific or special training or certificaff under certain circumstances, special monitoring, and the use of patent registries. The FDA may prevent or limit furth product based on the results of post-market studies product, dd requirements and FDA review and approval. such as adding new indications, certain manufacturing changes and additional labeling claims, are subjecb oval, many types of changes to the approved her testing sionals, and elements to assure safe uff tion forff oval. The agency may also require testing and prescribing or dispensing, dispensing only or surveillance programs. After appr er marketing of a se, or ETASU. ff t to furt a aa ff tt Fast Track, Breakthrough Tgg herTT apy app nd Priority Review Designai tions The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical need in the treatment of a serious or life-threatening disease or condition. These programs are referred to as fast breakthrough therapy designation, and priority review designation. ff track designation, Specifically, the FDA may designate a product for fast track review if it is intended, whether alone or in combination with one or more other products, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the potential to address unmet medical needs forff FDA and the FDA may initiate review of sections of a fast review may be availabla e if the FDA determines, after product may be effective. The sponsor must also provide, and the FDA must appro information and the sponsor must pay applicablea does not begin until the last section of the application is submitted. In addition, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process, or if the designated drugrr such a disease or condition. For fast track products, sponsors may have greater interactions with the ication is complete. This rolling t track ve, a schedule for the submission of the remaining aa the appl valuation of clinical data submitted by the sponsor, that a fasff user fees. However, the FDA’s time period goal for reviewing a fast development program is no longer being pursued. ff preliminary err track product’s appl ication beforeff aa track appli cation a aa ff ff Second, in 2012, Congress enacted the Food and Drug Administration Safety and Innovation Act, or FDASIA. This law hed a new regulatory scheme allowing for expedited review of products designated as “breakthrough therapies.” A producdd t establis a may be designated as a breakthrough therapy if it is intended, either alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the producdd t may demonstrate substantial improvement over existing therapiaa es on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to breakthrough therapieaa s, including holding meetings with the sponsor throughout the development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficff ient manner. ff 27 Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, if approved, represents a significff ant improvement when compared with other available therapiaa es. Significant improvement may would provide a significant improvement in safety or effectiveness. The FDA determines, on a case-by-case basis, whether the proposed productdd be illustrated by evidence of increased effeff ctiveness in the treatment of a condition, elimination or subsu tantial reducdd tion of a treatment- limiting adverse reaction, documented enhancement of patient compliance that may lead to improvement in serious outcomes, and evidence of safetyff to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing appl six months. pulation. A priority designation is intended to direct overall attention and resources and effeff ctiveness in a new subpou ication from ten months to aa Accelerated Approval Pathway The FDA may grant accelerated approval to a productdd for a serious or life-threatening condition that provides meaningful therapeutic advantage to patients over existing treatments based upon a determination that the producdd t has an effect on a surrogate endpoidd the producdd t has an effecff mortality, or IMM, and that is reasonabla y likely to predict an effect on IMM or other clinical benefit,ff rarity, or prevalence of the condition and the availabia lity or lack of alternarr meet the same statutory standards forff nt that is reasonabla y likely to predict clinical benefit. The FDA may also grant accelerated approval for such a condition when t on an intermediate clinical endpodd int that can be measured earlier than an effeff ct on irreversible morbidity or taking into account the severity, roval must safetff y and effectiveness as those granted traditional appr tive treatments. Products granted accelerated appa oval. aa For the purposes of accelerated approval, a surrogate endpodd int is a marker, such as a laboratory measurement, radiographa ic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints can ofteff n be measured more easily or more rapiaa dly than clinical endpodd ints. An intermediate clinical endpoint is a measurement of a therapeut that is considered reasonably likely to predict the clinical benefit of a product, such as an effect on IMM. The FDA has limited experience with accelerated approvals based on intermediate clinical endpodd ints, but has indicated that such endpoints generally could support accelerated approval where a study demonstrates a relatively short-term clinical benefitff chronic disease setting in which assessing duradd benefit is considered reasonably likely to predict long-term benefit.ff bia lity of the clinical benefit is essential forff traditional approval, but the short-term ff ic effect in a a The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extended period of time is required to measure the intended clinical benefitff of a product, even if the effeff ct on the surrogate or intermediate clinical endpoint occurs rapidly. Thus, accelerated appr treatment of a variety of cancers in which the goal of therapyaa of the typical disease course requires lengthy and sometimes large trials to demonstrate a clinical or survival benefit. oval has been used extensively in the development and approval of products for is generally to improve survival or decrease morbidity and the duration aa The accelerated appaa roval confirmatory studies to verify and describe the productdd roval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner, additional candidate approved on post-appaa this basis is subject trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the product from the market on an expedited basis. All promotional materials for product candidates approved under accelerated regulations are subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical ’s clinical benefit. As a result, a productdd to prior review by the FDA. b u Post-Approval Regulation If regulatory approval forff marketing of a productdd or new indication for an existing product is obtained, the sponsor will be uu roval regulatory requirements as well as any post-appaa ted safety and effiff cacy information and comply with requirements concerning advertising and promotional required to comply with all regular post-appaa imposed as part of the approval process. The sponsor will be required to report certain adverse reactions and production problems to the FDA, provide upda labeling requirements. Manufacturers and certain of their subcontractors are required to register their establia shments with the FDA and certain state agencies, and are subjeb ct to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP regulations, which impose certain procedural and documentation requirements upon manufact the areas of production and quality control to maintain compliance with cGMP regulations and other regulatory requirements. urers. Accordingly, the sponsor and its third-party manufacturett rs must continue to expend time, money, and effoff roval requirements that the FDA has rt in ff A productdd may also be subject to officff ial lot release, meaning that the manufacturer is required to perform certain tests on each it is released for distribution. If the product is subjeb ct to officff lot of the product beforeff samples of each lot, together with a release protocol showing a summary of the history of manufact of the manufacturett some productdd potency, and effecti ed on the lot, to the FDA. The FDA may in addition perform certain confirmff s before releasing the lots for distribution. Finally, the FDA will conduct laboratory research related to the safety, purity, urtt e of the lot and the results of all atory tests on lots of . veness of pharmaceutical products ial lot release, the manufact urtt er must submit r’s tests performff dd ff ff ff 28 Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained reaches the market. Later discovery of previously unknown problems with a product, including or if problems occur after the productdd adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatoryrr requirements, may result in revisions to the approved labeling to add new safetyff information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things: • • • • • restrictions on the marketing or manufact producdd t recalls; ff urtt ing of the product, complete withdrawal of the producdd t fromff the market or fines, untitled or warning letters or holds on post-appr aa oval clinical trials; refusal of the FDA to approve pending applications or supplements to approved appli of product license approvals; a cations, or suspension or revocation productdd seizure or detention, or refusal to permit the import or export of products; or injunctions or the imposition of civil or criminal penalties. The FDA strictly regulates marketing, labeling, advertising and promotion of licensed and approved products that are placed on the market. Pharmaceutical productdd roved indications and in accordance with the provisions of the the appa approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-laff l uses may be subject to significant liability. s may be promoted only forff bea Orphan Drug Designation Orphan drug designation in the United States is designed to encourage sponsors to develop products intended for rare diseases or conditions. In the United States, a rare disease or condition is statutott individuals dd expectation that the cost of developing and making availablea the producdd t in the United States. in the United States or that affects more than 200,000 individuals in the United States and forff which there is no reasonable the biologic forff the disease or condition will be recovered from sales of rily defineff d as a condition that affecff ts fewer than 200,000 Orphan drug designation qualifiesff a company forff oval if granted by the FDA. An application forff a ’s marketing appr productdd to the filing of an application for approval to market the product. A product becomes an orphan when it receives orphan drug designation from the Office of Orphan Products Development, or OOPD, at the FDA based on acceptable confidential requests made under the regulatory provisions. The product must then go through the review and approval process forff commercial distribution like any other product. designation as an orphan productdd can be made any time prior tax credits and market exclusivity for seven years following the date of the A sponsor may request orphan drug designation of a previously unapproved product or new orphan indication for an already marketed product. In addition, a sponsor of a product that is otherwis rr and obtain orphan drug designation for the subsequent product for the same rare disease or condition if it can present a plausible hypothesis that its product may be clinically superior to the first drug. More than one sponsor may receive orphan drug designation for the same producdd t forff request forff the same rare disease or condition, but each sponsor seeking orphan drug designation must file a complete e the same product as an already approved orphan drug may seek designation. The period of exclusivity begins on the date that the marketing application is approved by the FDA and appa lies only to the indication for which the productdd use or a second appl ication for a clinically superior version of the product for the same use. The FDA cannot, however, approve the aa same productdd made by another manufacturer for the same indication during the market exclusivity period unless it has the consent of the sponsor or the sponsor is unablea has been designated. The FDA may approve a second appl to provide sufficient quantities. the same product for a differff ent ication forff a Pediatrictt Studies and Exclusivitytt Under the Pediatric Research Equity Act of 2003, a BLA or suppluu and effectiveness of the product for the claimed indications in all relevant pediatric subpou pulations, and to support dosing and safetyff administration for each pediatric subpopulation for which the product is safe aff it pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans to conduct, including study objeb ctives and design, any deferral or waiver requests, and other informff applicant, the FDA, and the FDA’s internal and agree upon a finff al plan. The FDA or the applicant may request an amendment to the plan at any time. review committee must then review the information submitted, consult with each other, ement thereto must contain data that are adequate to assess the ation required by regulation. The ive. Sponsors must also submu ff nd effect rr 29 The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submi ff approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional until after requirements and procedures otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation. relating to deferral requests and requests for extension of deferrals are contained in FDASIA. Unless ssion of some or all pediatric data u dd rr Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non- patent and orphan exclusivity. This six-month exclusivity may be granted if a BLA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the producdd t are extended by six months. This is not a patent term extension, but it effecff tively extends the regulatory period durin g which the FDA cannot appr ove another application. dd a Biosimilars and ExcEE lusivity The Patient Protection and Affff off rdaba le Care Act, which was signed into law in March 2010, included a subtitle called the Biologics Price Competition and Innovation Act of 2009 or BPCIA. The BPCIA established a regulatory scheme authorizing the FDA to approve biosimilars and interchangeable biosimilars. To date, four the United States. No interchangeable biosimilars, however, have been appr outlining an appr term. biosimilar products have been approved by the FDA for use in oved. The FDA has issued several guidance documents oach to review and approval of biosimilars. Additional guidances are expected to be finalized by the FDA in the near a aa ff Under the BPCIA, a manufacturtt er may submit an appaa lication for licensure of a biologic producdd t that is “biosimilar to” or with” a previously approved biological producdd t or “reference product.” In order for the FDA to approve a biosimilar ences between the reference product and proposed biosimilar product “interchangeablea product, it must finff d that there are no clinically meaningful differ in terms of safetyff agency must find that the biosimilar product can be expected to producedd products administered multiple times) that the biologic and the referff ence biologic may be switched after one has been previously administered without increasing safetyff , purity, and potency. For the FDA to approve a biosimilar product as interchangeablea the same clinical results as the reference product, and (for cy relative to exclusive use of the reference biologic. risks or risks of diminished efficaff with a reference product, the ff lication forff nce productdd Under the BPCIA, an appaa was approved. Even if a product is considered to be a reference product eligible for exclusivity, another company a biosimilar product may not be submi of approval of the reference product. The FDA may not approve a biosimilar product until 12 years from the date on which the refereff could market a competing version of that product if the FDA appr preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity, and potency of their product. The BPCIA also created certain exclusivity periods forff is unclear whether products deemed “interchangeable” by the FDA will, in fact, governed by state pharmacy law. be readily substituted by pharmacies, which are such product containing the sponsor’s own biosimilars approved as interchangeablea tted to the FDA until four years foll ff BLA forff producdd ts. At this juncture, it owing the date oves a full u aa ff ff Patent Term Restoration and Extension o five years forff A patent claiming a new biologic productdd may be eligible for a limited patent term extension under the Hatch-Waxman Act, patent term lost duridd which permits a patent restoration of up tuu restoration period granted on a patent covering a product is typically one-half the time between the effective date of an IND and the ication and the ultimate submission date of a marketing appl approval date, less any time the applicant failed to act with due diligence. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicablea is eligible for the extension, and the appaa lication forff patent that covers multiple products forff which appr USPTO reviews and appr to an approved product the extension must be submitted prior to the expiration of the patent in question. A oval is sought can only be extended in connection with one of the approvals. The oves the application for any patent term extension or restoration in consultation with the FDA. ng product development and FDA regulatory r ication, plus the time between the submu ission date of the marketing appl eview. The aa a aa aa rr Regulation And Procedurdd es Governing An pprA oval Of MO ediMM cinal Products In The European Union In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not it obtains FDA approval forff an applicant will need to obtain the necessary arr a clinical trials or marketing of the productdd vals by the comparabla e health regulatory authorities before it can commence in those countries or jurisdictions. Specifically, the process governing approval of medicinal a product, ppro rr 30 products in the European Union, or EU, generally follows the same lines as in the United States. It entails satisfacff preclinical studies and adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed indication. It also requires the submission to the European Medicines Agency, or EMA, or the relevant competent authorities of a marketing authorization appaa product can be marketed and sold in the EU. lication, or MAA, and granting of a marketing authorization by the EMA or these authorities before the toryrr completion of Clinical TriTT al Approval aa the appaa Pursuant to the currently appli cable Clinical Trials Directive 2001/20/EC and the Commission Directive 2005/28/EC on GCP, a roval of clinical trials in the EU has been implemented through national legislation of the member states. Under this roval froff m the competent national authority of an EU member state in which the clinical trial is to system forff system, an applicant must obtain appaa be conducted, or in multiple member states if the clinical trial is to be conducted in a number of member states. Furthermore, the applicant may only start a clinical trial at a specificff studtt y site after the ethics committee has issued a favorabla e opinion. The CTA must be accompanied by an investigational medicinal product dossier with supporting information prescribed by Directive 2001/20/EC and Commission Directive 2005/28/EC and corresponding national laws of the member states and further detailed in appa licabla e guidance documents. In April 2014, the EU adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set to replace the current Clinical licabla e no earlier than May 28, Trials Directive 2001/20/EC. The new Clinical Trials Regulation (EU) No 536/2014 will become appa 2016. It will overhaul the current system of appr directly appaa new Clinical Trials Regulation provides forff for the assessment of clinical trial appli lly, the new legislation, which will be val of clinical trials in the EU. For instance, the a streamlined application procedurdd e via a single entry point and strictly definff ed deadlines licabla e in all member states, aims at simplifying and streamlining the appro clinical trials in the EU. Specificaff ovals forff cations. a a aa Marketikk ng Authorization To obtain a marketing authorization for a product under the EU regulatory srr an MAA, either under a centralized procedure administered by the European Medicines Agency, or EMA, or one of the procedurdd es administered by competent authorities in EU Member States (decentralized procedure, national procedure, or mutuatt marketing authorization may be granted only to an applicant established in the EU. Regulation (EC) No 1901/2006 provides that prior to obtaining a marketing authorization in the EU, an appa licant must demonstrate compliance with all measures included in an EMA- approved Pediatric Investigation Plan, or PIP, covering all subsu ets of the pediatric population, unless the EMA has granted a product- specificff waiver, class waiver, or a deferral forff one or more of the measures included in the PIP. l recognition procedurdd e). A licant must submit ystem, an appa u The centralized procedure provides forff for all EU member states. Pursuant to Regulation (EC) No. 726/2004, the centralized proceduredd including for medicines produced therapy producdd ts and products with a new active substu treatment of cancer. For products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional. by certain biotechnological processes, products designated as orphan medicinal products, advanced ance indicated for the treatment of certain diseases, including products for the the grant of a single marketing authorization by the European Commission that is valid is compulsory for specific producdd ts, dd Specifically, the grant of marketing authorization in the European Union for products containing viable human tissues or cells such as gene therapy medicinal products is governed by Regulation (EC) No 1394/2007 on advanced therapy medicinal products, read in combination with Directive 2001/83/EC of the European Parliament and of the Council, commonly known as the Community code on medicinal products. Regulation (EC) No 1394/2007 lays down specificff pharmacovigilance of gene therapy medicinal producdd ts, somatic cell therapy medicinal producdd ts, and tissue engineered producdd ts. Manufact which provides an opinion regarding the application for marketing authorization. The European Commission grants or refuses marketing authorization in light of the opinion delivered by EMA. rs of advanced therapyaa medicinal producdd ts must demonstrate the quality, safetyff rules concerning the authorization, superv , and efficacy of their producdd ts to EMA ision, and urett u ff e forff Under the centralized procedure, the Committee for Medicinal Producdd ts for Human Use, or the CHMP, established at the EMA in the European Union, the maximum the evaluation of an MAA is 210 days, excluding clock stops when additional information or written or oral explanation is responsible for conducting an initial assessment of a product. Under the centralized proceduredd timeframff is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation may be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view of public health and, in particular, from the viewpoint of therapeuaa is possible that the CHMP may revert to the standard time limit forff appropriate to conducdd t an accelerated assessment. tic innovation. If the CHMP accepts such a request, the time limit of 210 days will be reduced to 150 days, but it the centralized procedure if it determines that it is no longer 31 Regulatory Data Protection in the European Union In the European Union, new chemical entities approved on the basis of a complete independent data package qualify for eight referencing the innovator’s data to assess a generic (abbreviated) application for a period of eight years. During thet years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant to Regulation (EC) No 726/2004, as amended, and Directive 2001/83/EC, as amended. Data exclusivity prevents regulatory authorities in the European Union fromff additional two-year period of market exclusivity, a generic marketing authorization application can be submitted, and the innovator’s data may be referenced, but no generic medicinal product can be marketed until the expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of eleven years if, during the firsff authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to authorization, is held to bring a significaff in comparison with existing therapies. Even if a compound is considered to be a new chemical entity so that the innovator gains the prescribed period of data exclusivity, another company may market another version of the product if such company obtained marketing authorization based on an MAA with a complete independent data package of pharmaceutical tests, preclinical tests and clinical trials. t eight years of those ten years, the marketing nt clinical benefitff Periods odd f Ao uthorization and Renewals A marketing authorization is valid for five years, in principle, and it may be renewed after fiveff years on the basis of a the marketing authorization ceases to be valid. Once renewed, the marketing authorization is valid forff and efficff acy, including all variations introduced since the marketing authorization was granted, at least nine months an unlimited period, reevaluation of the risk-benefit balance by the EMA or by the competent authority of the authorizing member state. To that end, the marketing authorization holder must provide the EMA or the competent authority with a consolidated version of the fileff quality, safetyff beforeff unless the European Commission or the competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year renewal period. Any authorization that is not followed by the placement of the drug on the EU markerr t (in the case of the centralized procedure) or on the market of the authorizing member state within three years after authorization ceases to be valid. in respect of Regulatory Requirements att ftea r MarkMM etkk ing Authorizat ii ion Following appr urtt aa ff oval, the holder of the marketing authorization is required to comply with a range of requirements appli a cabla e to ing, marketing, promotion and sale of the medicinal productdd the manufact pharmacovigilance or safety reporting rules imposed. In addition, the manufacturing of authorized producdd ts, for which a separate manufacturer’s license is mandatory,rr must also be conductdd odies in the ed in strict compliance with the EMA’s GMP requirements and comparabla e requirements of other regulatory brr EU, which mandate the methods, facilities, and controls used in manufacturing, processing and packing of drugs to assure their safetff y and identity. Finally, the marketing and promotion of authorized products drugs and/ordd c, are strictly regulated in the European Union under Directive 2001/83/EC, as amended. , pursuant to which post-authorization studies and additional monitoring obligations can be , including advertising directed toward the prescribers of . These include compliance with the EU’s stringent the general publiu dd rr Orphan Drug Designation and Exclusivity Regulation (EC) No 141/2000 and Regulation (EC) No 847/2000 provide that a productdd can be designated as an orphan drug by the European Commission if its sponsor can establish: that the producdd t is intended for the diagnosis, prevention or treatment of (i) a life-threatening or chronically debilitating condition affecting not more than five in ten thousand persons in the EU when the application is made, or (ii) a life-th incentives it is unlikely that the marketing of the drug in the EU would generate sufficient return t rr ethod of diagnosis, prevention, or For either of these conditions, the applicant must demonstrate that there exists no satisfactory mrr treatment of the condition in question that has been authorized in the EU or, if such method exists, the drug will be of significff ant benefit to those affect reatening, seriously debilitating or serious and chronic condition in the EU and that without o justify the necessary investment. ed by that condition. ff ff t An orphan drug designation provides a number of benefits, including feeff apply for a centralized EU marketing authorization. Marketing authorization forff exclusivity. During this market exclusivity period, neither the European Commission nor the member states can accept an appli cation or grant a marketing authorization for a “similar medicinal product.” A “similar medicinal product” is defined as a medicinal product containing a similar active substance or substances as contained in an authorized orphan medicinal product, and which is intended for tic indication may, however, be reducdd ed to the same therapeutic indication. The market exclusivity period for the authorized therapeuaa six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan drug designation because, forff reductdd ions, regulatory assistance, and the abili an orphan drug leads to a ten-year period of market iently profitabla e not to justify mff example, the product is sufficff arket exclusivity. ty to dd a a 32 For other markets in which we might in future seek to obtain marketing approval for the commercialization of producdd ts, there are other health regulatory r regulatory procedures and standards, as well as other governing laws and regulations for each applicable jurisdiction. egimes for seeking approval, and we would need to ensure ongoing compliance with applicablea rr health Coverage, Pricing an nd Reimbursement Significff ant uncertainty exists as to the coverage and reimbursement statustt of any product candidates forff which we may seek rr nt authorities. In the United States and markets in other countries, patients who are regulatory approval by the FDA or other governme prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use any producdd t candidates we may develop unless candidates. Even if any coverage is provided and reimbursement is adequate to cover a significaff product candidates we may develop are approved, sales of such product candidates will depend, in part, on the extent to which third- party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers, and managed care organizations, provide coverage, and establa ish adequate reimbursement levels for, such product candidates. The process for determining whether a payor will provide coverage forff the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity, and reviewing the cost-effecff imposing controls to manage costs. Third-party payors may limit coverage to specific productdd formulary, which might not include all of the appa tiveness of medical products and services and roved products for a particular indication. nt portion of the cost of such productdd a product may be separate fromff roved list, also known as a s on an appa In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct ies in order to demonstrate the medical necessity and cost-effecff physician utilization of such product candidates once approved and have a material adverse effecff expensive pharmacoeconomic studtt to the costs required to obtain FDA or other comparablea marketing appr medically necessary or cost effeff ctive. A decision by a third-party payor not to cover any producdd t candidates we may develop could reducedd operations and financial condition. Additionally, a payor’s decision to provide coverage for a productdd reimbursement rate will be appr payors will also provide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor to payor. Third-party reimbursement and coverage may not be available to enablea suffiff cient to realize an appropriate returtt n orr tiveness of the product, in addition ovals. Nonetheless, product candidates may not be considered does not imply that an adequate a product does not assure that other oved. Further, one payor’s determination to provide coverage forff n our investment in producdd t development. us to maintain price levels t on our sales, results of aa a The containment of healthcare costs also has become a priority of various federal, state and/or local governments, as well as ts. other payors, within the U.S. and in other countries globally, and the prices of pharmaceuticals have been a focus in these efforff Governments and other payors have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement, and requirements for substu on 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 a company’s revenue generated from the sale of any approved productdd change at any time. Even if favorablea its collabor aa future. coverage and reimbursement status is attained for one or more products forff which a company or oval, less favorabla e coverage policies and reimbursement rates may be implemented in the s. Coverage policies and third-party reimbursement rates may ators receive marketing appr ituti tt a Outside the United States, ensuring adequate coverage and payment forff any producdd t candidates we may develop will facff e challenges. Pricing of prescription pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with and may require us to governmental authorities can extend well beyond the receipt of regulatory marketing appr candidates we may develop to other availabla e therapies conductdd . ff The conduct of such a clinical trial could be expensive and result in delays in our commercialization effort a clinical trial that compares the cost effectiveness of any productdd oval for a productdd s. a aa 33 In the European Union, pricing and reimbursement schemes vary widely from country to country.rr Some countries provide that candidate to currently available therapies (so called health s may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional productdd studies that compare the cost-effectiveness of a particular productdd technology assessments, or HTAs) in order to obtain reimbursement or pricing approval. For example, the European Union provides options forff its member states to restrict the range of products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. E.U. member states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitff ability of the company placing the product on the market. Other member states allow companies to fixff to physicians to limit prescriptions. Recently, many countries in the European Union have increased the amount of discounts requirqq on pharmaceuticals and these efforff severe fiscal and debt crises experienced by many countries in the European Union. The downward pressure on health care costs in general, particularly prescription producdd ts, has become intense. As a result, increasingly high barriers are being erected to the entry of new producdd ts. Political, economic, and regulatory drr evelopments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union Member States, and parallel trade (arbit ther reduce prices. 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 products, if approved in those countries. products, but monitor and control prescription volumes and issue guidance ed ts could continue as countries attempt to manage healthcare expenditures, especially in light of the rage between low-priced and high-priced member states), can furff their own prices forff r Healthctt are Law and Regulatll iott n Healthcare providers and third-party payors play a primary role in the recommendation and prescription of pharmaceutical producdd ts that are granted marketing approval. Arrangements with providers, consultants, third-party payors, and customers are subject u to broadly appaa and patient privacy laws and regulations and other healthcare laws and regulations that may constrain our business and/or finan arrangements. Restrictions under appa licable fraff ud and abuse, anti-kickback, false claims laws, reporting of payments to physicians and teaching physicians al and state healthcare laws and regulations, include the following: licabla e feder cial ff ff • • • • • • the U.S. federal Anti-Kickback Statutett willfully soliciting, offering, paying, or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, forff which payment may be made, in whole or in part, under a fede , which prohibits, among other things, persons and entities froff m knowingly and ral healthcare program such as Medicare and Medicaid; ff eral civil and criminal false claims laws, including the civil U.S. False Claims Act, and civil monetary penalties the fedff laws, which prohibit individuals or entities fromff ff the federal government, claims forff to be made or used a false record or statement to avoid, decrease, or conceal an obligation to pay money to the federal government. In addition, the government may assert that a claim including items and services resulting fromff the U.S. federal Anti-Kickbakk ck Statuttt e constituttt es a falff se or fraudulent claim forff , among other things, knowingly presenting, or causing to be presented, to nt or knowingly making, using, or causing purposes of the U.S. False Claims Act; payment that are false, fict itious, or frauduledd a violation of the federal false statements statute prohibits knowingly and willfulff or making any materially false statement in connection with the delivery of or payment for healthcare benefitff s, items, or services; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual statuttt e or specific intent to violate it in order to have committed a violation; ly falsifying, concealing, or covering up a material fact knowledge of the tt ation Technology for Economic and Clinical Health Act, and their respective implementing regulations, including the U.S. federal Health Insurance Portability and Accountability Act, or HIPAA, as amended by the U.S. Health Informff the Final Omnibus Rule published in January 2rr security, and transmission of individually identifiable informff mandatory crr authorization; terms and restrictions on the use and/odd r disclosure of such information without proper ation that constitutes protected health information, including 013, which impose obligations with respect to safeguff arding the privacy, ontractual tt ff dablea the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the U.S. Patient Care Act, as amended by the U.S. Health Care and Education Reconciliation Act, collectively Protection and Affor the Afforff dable Care Act or ACA, which requires certain manufacturers of drugs, devices, biologics and medical suppluu ies to report annually to the Centers for Medicare & Medicaid Services, or CMS, within the U.S. Department of Health and Human Services, information related to payments and other transferff s of value made by that entity to physicians and teaching hospitals, and requires certain manufact and investment interests held by physicians or their immediate famff acble group purchasing organizations to report ownership ily members; and urtt ers and appli aa ff analogous laws and regulations in other national jurisdictions and states, such as state anti-kickback and false claims laws, which may apply to healthcare items or services that are reimbursed by non-governmen private insurers. tal third-party payors, including rr 34 Some state and other laws require pharmaceutical companies to comply with the pharmaceutical indusdd try’rr s voluntary compliance guidelines and the relevant compliance guidance promulgated by the fedff pharmaceutical manufacturers to report informff expenditures. State and other laws also govern the privacy and security of health information in some circumstances, many of which ff differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance effort ation related to payments to physicians and other health care providers or marketing eral government in addition to requiring s. ff Healthctt are Reforff mrr rr A primary t rend in the U.S. healthcare industry and elsewhere is cost containment. There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical producdd ts, limiting coverage and reimbursement for drugs and other medical productdd States. nt control and other changes to the healthcare system in the United s, governme rr By way of example, the United States and state governme rr nts continue to propose and pass legislation designed to reduce the cost of healthcare. In March 2010, the United States Congress enacted the ACA, which, among other things, includes changes to the products under government health care programs. Among the provisions of the ACA of importance to our coverage and payment forff potential product candidates are: • • • • • • • • • an annual, nondeductible feeff products, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products appr oved exclusively for orphan indications; branded prescription drugs and biologic on any entity that manufacff tures or imports specifiedff aa expansion of eligibility criteria forff Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a ff manufactur er’s Medicaid rebate liability; expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs calculating and reporting Medicaid drug rebates on outpat ient prescription drug prices and extending rebate liability to prescriptions for individuadd ls enrolled in Medicare Advantage plans; and revising the definition of “average manufacturer price,” or AMP, forff rr tt addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated forff producdd ts that are inhaled, infusff ed, instilled, implanted or injen cted; expanded the types of entities eligible for the 340B drug discount program; shed the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% point-of- establia sale-discount off tff he negotiated price of applicable producdd ts to eligible beneficiaries durdd ing their coverage gap paa condition for the manufacturers’ outpatient products to be covered under Medicare Part D; eriod as a a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conducdd t comparative clinical ff effect iveness research, along with funding for such research; the Independent Payment Advisory Board, or IPAB, which has authority to recommend certain changes to the Medicare program to reduce expenditures by the program that could result in reduced payments for prescription products. the IPAB implementation has been not been clearly defineff d. The ACA provided that under certain circumstances IPAB recommendations will become law unless Congress enacts legislation that will achieve the same or greater Medicare cost savings; and dd However, hed the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery a establis models to lower Medicare and Medicaid spending, potentially including prescription product spending. Funding has been allocated to support the mission of the Center forff Medicare and Medicaid Innovation from 2011 to 2019. Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, created measures forff spending reductions by Congress. A Joint Select Committee on Deficit Reducdd tion, tasked with recommending a targeted deficit reducdd tion of at least $1.2 trillion for the years nt 2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reducdd tion to several governme in programs. This includes aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, which went into effect April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, furt her reduced Medicare payments to several providers, including hospitals, imaging centers, and cancer treatment centers, and increased the statute of limitations period forff government to recover overpayments to providers fromff three to fiveff years. the ff rr ff 35 There have been, and likely will continue to be, legislative and regulatory proposals at the national level in the U.S. and other jurisdictions globally, as well as at some regional, state and/or local levels within the U.S. or other jurisdictions, directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. Such reforms could have an adverse effecff anticipated revenues fromff t our overall finaff may affecff productdd ncial condition and ability to develop product candidates. y develop and for which we may obtain marketing approval and candidates that we may successfull t on ff Additdd iott nal Regulatll iott n In addition to the foregoing, state, and fede ff onal Safety and Health Act, the Resource Conservation and Recovery Arr Occupati u business. These and other laws govern t in, and wastes generated by, operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governme that impose similar obligations. ances, including the ct, and the Toxic Substances Control Act, affect our he use, handling, and disposal of various biologic, chemical, and radioactive substances used ral laws regarding environmental protection and hazardous substu ntal fines. Equivalent laws have been adopted in third countries rr rr Employees As of December 31, 2016 we had 93 full-time employees, 48 of whom held Ph.D. or M.D. degrees, 75 of whom were engaged nce, information systems, facilities, human in research and development, and 18 of whom were engaged in business development, finaff u resources, legal functions, or administrative suppor employees has entered into a collective bargaining agreement with us. We consider our employee relations to be good. t. None of our employees is represented by a labor union, and none of our 36 Item 1A. Risk Factors. This rii eport contains forward-looking statements that involve risks akk eport. Factors that could cll discussed in this rii from those ause or contribute to these differeff tt discussed below and elsewhere in this report and in any documents incorporated in this rii nd uncertainties. Our actual results ctt ould dll iffdd erff materiallyll nces include, but are not limited to, those eport by reference. You should carefully considerdd the following risk factors, together tt financial statements and notes thereto, and in our other filff ings wgg t, develop io risks, or other risks not presently known to us or that we currently believe to not be significan business, financial condition, results of operations or prospects could be materially adversely all a ffected. tt price of our common shares could decline, and shareholder ay lose all or part of their investment. s mrr ll i with all other information in this report, it ncludingdd SS ith the Securi ties and Exchange Commission. If any of the following our nto actual events, then our If that happens, the market Risks Related to Our Financial Position and Need for Additional Capital We Have Incurred Signifi gg cant Operating Losses Since Our Inceptio e n And Anticipat i e That We Will Incur Continued Losses For The Foreseeable Future. We have funded our operations to date through proceeds from our initial public offering, or the IPO, and concurrent private placement of our common shares, private placements of our preferredrr Casebia Therapeutics, LLC pursuant to our joint venture with Bayer HealthCare LLC, or Bayer Healthcare, and our collabor Vertex Pharmaceuticals, Incorporated, or Vertex. Since inception, we have incurred significant operating losses. Our net loss was $23.2 million, $25.8 million, and $6.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, we had an accumulated defici to incur significant expenses and operating losses over the next several years and for the foreseeable futur combined with expected futuff capiaa tal. We anticipate that our expenses will increase substantially if and as we: re losses, have had and will continue to have an adverse effect on our shareholders’ deficit and working t of $57.1 million and $33.9 million, respectively. We expect to continue shares and convertible securities and payments received from e. Our prior losses, a rr ff ff ation with • • • • • • • • • • • • continue our current research programs and our preclinical development of productdd programs; candidates from our current research seek to identify additional research programs and additional product candidates; conduct IND supporting preclinical studtt from our hemoglobinopathy program targeting beta thaleassemia and sickle cell disease; ies and initiate clinical trials for our most advanced producdd t candidates which are initiate preclinical studi tt es and clinical trials for any other productdd candidates we identify and choose to develop; maintain, expand and protect our intellectuatt l property portfolff io; seek marketing approvals for any of our productdd candidates that successfully complete clinical trials; further develop our gene editing technology; hire additional clinical, quality control and scientific personnel; add operational, finaff candidate development; ncial and management information systems and personnel, including personnel to support our product acquire or in-license other technologies; ultimately establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval; and operate as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable futuff re. Because of the numerous risks and uncertainties associated with developing gene editing product candidates, we are unable to predict the extent of any future losses or when we will become profitabff increase our profitabila le, if at all. Even if we do become profitabff le, we may not be able to sustain or ity on a quarterly or annual basis. 37 We Will Need To Raise Substantial Additdd ional Funding, Which Will Dilute Our Shareholdell Capital When Needed, We Would Be Forced To DTT Commercializaii tion EffoE rts.tt elay,a Reduce Or Eliminate Some SS Of Our Product Developme o rs. If We Are Unable To Raiseii nt Programs Or The development of gene editing productdd candidates is capital intensive. We expect our expenses to increase in connection with candidates. In addition, if we obtain marketing approval forff our ongoing activities, particularly as we continue the research and development of, initiate preclinical studies and clinical trials for and seek marketing approval for our productdd candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturtt distribution to the extent that such sales, marketing, manufacff turing and distribution are not the responsibility of Bayer Healthcare or Vertex, or other future collaborators. We may also need to raise additional funds sooner if we choose to pursue additional indications or geographie our producdd t candidates or otherwise expand more rapidly than we presently anticipate. In addition, relative to prior years when we were a private company, we expect to incur signififf cant additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be force development programs or futff urett d to delay, reducdd e or eliminate certain of our research and commercialization efforff any of our productdd ing and s forff ts. aa ff As of December 31, 2016 and 2015, we had cash of approximately $315.5 million and $156.0 million, respectively. We expect that our existing cash, including the net proceeds from our IPO and the concurrent private placement, together with anticipated research support under our joint venture with Bayer Healthcare and collaboration agreement with Vertex, will enable us to fund our operating expenses and capita l expenditure requirements forff at least the next 24 months. aa Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including: • • • • • • • • • • • • • • the scope, progress, results and costs of drug discovery, preclinical development, laboratory t our product candidates; rr esting and clinical trials for the scope, prioritization and number of our research and development programs; the costs, timing and outcome of regulatory review of our product candidates; the costs of establishing and maintaining a supply chain forff the development and manufacturett of our product candidates; the success of our current joint venturtt e with Bayer Healthcare and our collaboa ration with Vertex; our ability to establish and maintain additional collaborations on favor ff able terms, if at all; the achievement of milestones or occurrence of other developments that trigger payments under any additional collaboration agreements we obtain; the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under futur collaboration agreements, if any; ff e the costs of preparing, filff ing and prosecuting patent applications, maintaining and enforcff rights and defending intellectual property-related claims; ing our intellectual property the costs of fulfilling our obligations under the IMA to reimburse other parties for costs incurred in connection with the prosecution and maintenance of associated patent rights; the extent to which we acquire or in-license other producdd t candidates and technologies; the costs of establishing or contracting forff manufacff producdd t candidates; turing capabilities if we obtain regulatory approvals to manufact ff urtt e our the costs of establishing or contracting forff product candidates; and aa sales and marketing capabilities if we obtain regulatory arr ppr ovals to market our our ability to establish and maintain healthcare coverage and adequate reimbursement. our Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect ability to develop and commercialize our product candidates. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our shareholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our shareholders and the terms of these securities may include liquidation or other preferences that adversely affecff t your rights as a shareholder. The incurrence of indebtedness would result in increased fixeff d payment obligations and we may be required to agree to certain restrictive ff ff 38 covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conductdd required to seek funds through arrangements with collabora we may be required to relinquish rights to some of our technologies or productdd us, any of which may have a material adverse effect on our business, operating results and prospects. tors or otherwise at an earlier stage than otherwise would be desirabla e and candidates or otherwise agree to terms unfavorable to our business. We could also be a If we are unable to obtain funding on a timely basis, we may be required to significant ff ly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any producdd t candidate, or be unabla e to expand our operations or otherwise capitaa condition and results of operations. alize on our business opportunities, as desired, which could materially affect our business, financial ff We Have A Limited OpO erating HisHH tory, Which May Ma akeMM It Difficff ult To Evaluate Our Technology And Product Development Capabilities And Predicdd t Our Future Perfor rmance. We are early in our development effor ff formed in October 2013, have no products ability to generate product revenue or profitff s, which we do not expect will occur forff many years, if ever, will depend heavily on the successful development and eventuatt develop or commercialize a marketable product. l commercialization of our product candidates, which may never occur. We may never be abla e to ts and all of our lead programs are still in preclinical or the discovery stage. We were commercial sale and have not generated any revenue fromff product sales. Our approved forff dd The lead producdd t candidates froff m our hemoglobinopathy program targeting beta-thalassemia and sickle cell disease require among other things, completion of IND supporting preclinical studies. Each of our other programs require additional discoveryrr research and then preclinical development. All of our programs, including our hemoglobinopathy program, require clinical oval in multiple jurisdictions, obtaining manufacff aa development, regulatory arr commercial organization, subsu tantial investment and significff ant marketing effoff In addition, our product candidates must be appr . the EMA, before we may commercialize any productdd turing supply, capacity and expertise, building of a rts before we generate any revenue from product sales. oved forff marketing by the FDA or certain other health regulatory agencies, including ppr aa Our limited operating history,rr particularly in light of the rapidl a y evolving gene editing field, may make it difficff ult to evaluate success or viabila our technology and indusdd try and predict our futff urtt e performan our futurett early stage companies in rapidly evolving fieff expect that our financial condition and operating results will fluff ctuatt variety of factors, many of which are beyond our control. As a result, our shareholders should not rely upon the results of any operating performance. quarterly or annual period as an indicator of futurett ity subject to significant uncertainty. We will encounter risks and difficff ulties freqff lds. If we do not address these risks successfull te significantly from quarter to quarter and year to year due to a ce. Our short history as an operating company makes any assessment of y, our business will suffer. uently experienced by Similarily, we ff ff ff In addition, as an early stage company, we have encounter unforeff seen expenses, difficuff lties, complications, delays and other known and unknowkk research focff us to a company capabl successfulff aa in such a transition. n circumstances. As we advance our product candidates, we will need to transition from a company with a e of supporting clinical development and if successful, commercial activities. We may not be Our Ability To Use Tax Loss CarrCC yfrr orwff ards In Switzerlanll d MayMM Be Limited. Under Swiss law, we are entitled to carry forward losses we incur for a period of seven years and we can offset future profits, if any, against such losses. As of December 31, 2016, we reported tax loss carry forwards from inception through 2015 for purposes of g Swiss federal direct taxes in the aggregate amount of CHF 22.0 million. Due to the accepted mixed company status (the tax rulin with respect to the mixed company status was accepted in Februar 017 with retroactive effect as from 2013/2014) the tax losses available to offset the year in which they occurred. Due to our limited income, there is a high risk that the tax loss carry f ff entirely. For 2016, the tax returntt rr forwar future income at cantonal level amount to CHF 4.1 million. If not used, these tax losses will expire seven years after has – in accordance with Swiss tax law – not yet been filed. Therefore, for 2016 the loss carried d will only be claimed with filiff ng of the tax returntt rds will expire partly or for the tax year 2016. orwa y 2rr rr ff rr rr 39 Risks Related to Our Business, Technology and Industry We Are Early In Our Development Efforts. All Of Our Productdd Candidates Are Still In Preclinical Development And It Will Be Many Years Before We Or Our Collaborators Commercialize A Product Candidate, If Ever. If We Are Unable To Advance Our Product Candiddd atdd es To Clinical Development, Ot ppA roval And Ultimately Commercialize Our Producdd t Candi Or Experience Significai In Doing So, Our Business Will Be Materially Harmed.dd btain Regulatll ory Arr nt Delaysa CC dates, We are early in our development efforts and have focused our research and development efforts to date CRISPR/Cas9, gene candidates. Our futurett s9 gene editing productdd candidates including our most advanced productdd editing technology, identifying our initial targeted disease indications and our initial productdd heavily on the successful development of our CRISPR/CaRR candidates which target beta-thalassemia and sickle cell disease. We have invested substantially all of our effort resources in the identification and preclinical development of our current product candidates. Currently, all of our product candidates including our most advanced producdd t candidates which target beta-thalassemia and sickle cell disease are in preclinical development. Our ability to generate product revenue, which we do not expect will occur for many years, if ever, will depend heavily on the successfulff programs, including those subject to our joint venturtt e with Bayer Healthcare and collaboration agreement with Vertex, may fail to identify potential producdd t candidates for clinical development forff unsuccessful in identifyiff ng potential product candidates, or our potential product candidates may be shown to have harmfulff effects or may have other characteristics that may make the products impractical to manufacture, unmarketabla e, or unlikely to receive marketing approval. We currently generate no revenue from sales of any product and we may never be able to develop or . commercialize a marketable productdd development and eventual commercialization of our product candidates, which may never occur. For example, our research a number of reasons. Our research methodology may be success depends s and financial side ff We plan to file our clinical trial applications, or CTAs, to begin our first clinical trial for our hemoglobinopathy program targeting beta-thalassemia in late 2017 and for our hemoglobinopathy program targeting sickle cell disease in early 2018. In each case, the filing is subject to the identification and selection of guide RNARR any other clinical trials we may initiate, is also subjecb t to acceptance by the FDA of our Investigational New Drug application, or IND, and finalizing the trial design based on discussions with the FDA and other regulatory authorities, including the NIH. In the event that the FDA requires us to complete additional preclinical studies or we are required to satisfy other FDA requests, the start of our first clinical trial for our hemoglobinopathy programs or any of our other programs may be delayed. Even after we receive and incorporate guidance from these regulatory authorities, the FDA or other regulatory authorities could disagree that we have satisfied their requirements to commence our clinical trial or change their position on the acceptability of our trial design or the clinical endpoints selected, which may require us to complete additional preclinical studtt ies or clinical trials or impose stricter approval conditions than we currently expect. ency. Commencing this clinical trial, and with acceptable effici ff ff Our producdd t candidates will require additional preclinical and clinical development, regulatory and marketing approval in multiple jurisdictions, obtaining manufacff investment and significant ff a programs must be appr commercialize our product candidates. ff turing supply, capacity and expertise, building of a commercial organization, substantial marketing effort we generate any revenue from productdd oved forff marketing by the FDA, EMA or certain other health regulatory agencies, before we may sales. In addition, our product development s beforeff The success of our producdd t candidates will depend on several factors, including the foll ff owing: • • • • • • • • • • successful completion of preclinical studie tt s; suffiff ciency of our finff ancial and other resources to complete the necessary prr reclinical studtt ies and clinical trials; ability to develop safe and effective delivery mechanisms for our in vivo therapeaa utic programs; ability to identify optimal RNA sequences to guide genomic editing; entry into collaborations to further the development of our product candidates; a positive recommendation of the Recombinant DNA Advisory Committee of the U.S. National Institutett NIH; s of Health, or approval of CTAs or INDs for our product candidates to commence clinical trials; successfulff enrollment in, and completion of, pff reclinical studies and clinical trials; successful data froff m our clinical program that supports an acceptabla e risk-benefit profile of our product candidates for the intended patient populations; receipt of regulatory arr nd marketing approvals from applicablea regulatory authorities; 40 • • • • • • • • • • establishment of arrangements with third-party manufactur commercial manufacturing capabilities; where appli a cable, aa ff ers for clinical supply and commercial manufacturing and, successful development of our internal manufacturtt contract manufact ing organization, or CMO, or by us; urtt ff ing processes and transfer to larger-scale facil ff ities operated by either a establishment and maintenance of patent and trade secret protection or regulatory err xclusivity for our product candidates; commercial launch of our productdd candidates, if and when approved, whether alone or in collaboration with others; acceptance of the product candidates, if and when approved, by patients, the medical community and third-party payors; effeff ctive competition with other therapies aa and treatment options; establishment and maintenance of healthcare coverage and adequate reimbursement; enforcement and defense of intellectual property rights and claims; maintenance of a continued acceptable safety profile of the product candidates following appro aa val; and achieving desirable medicinal properties forff the intended indications. Additionally, because our technology involves gene editing across multiple cell and tissue types, we are subju ect to many of the challenges and risks that gene therapiaa es face, including: • • • regulatory requirements governing gene and cell therapy products have changed freqff the future; to date, no products that involve the genetic modification of patient cells have been approved in the United States and only one gene therapy productdd has been approved in the European Union; uently and may continue to change in rr improper insertion of a gene sequence into a patient’s chromosome could lead to lymphoma, leukemia or other cancers, or other aberrantly functioning cells; and the FDA recommends a folff gene therapies, and we may need to adopt and support such an observation period for our product candidates. low-up observation period of 15 years or longer for all patients who receive treatment using If we do not succeed in one or more of these factors in a timely manner or at all, we could experience significant delays or an ity to successfull candidates, which would materially harm our business. If we do not receive inabila regulatory approvals for our product candidates, we may not be able to continue our operations. y commercialize our productdd ff Our CRISPRSS /CR asCC 9 Gene EdiEE ting Producdd t CanCC didates Are Baseaa d On A New Gene Editdd ing TecTT hnology,gg Which MakMM eskk A nt And Of Subsequently Obtaining Regulatory Arr It Diffi icff ult es Based On Gene EdiEE ting TechTT ppro nology Agg val, If At All. There HaveHH Only Been nd No Gene Editing Products Have To Predict The Time And Cost Of Developme A Limited NumNN ber Of Clinical Trials Of Product Candidat Been Approved In TII heTT United States Or In The European Union. dd o CRISPR/Cas9 gene editing technology is relatively new and no products based on CRISPR/Cas9 or other similar gene editing technologies have been approved in the United States or the European Union and only a limited number of clinical trials of products based on gene editing technologies have been commenced. As such it is difficult to accurately predict the developmental challenges we may incur for our product candidates as they proceed through productdd discovery or identification, preclinical studies and clinical trials. In addition, because our programs are all in the research or preclinical stage, we have not yet been abla e to assess safetyff humans, and there may be long-term effects from treatment with any product candidates that we develop that we cannot predict at this time. Any product candidates we may develop will act at the level of DNA, and, because animal DNA differs from human DNA, testing of our producdd t candidates in animal models may not be predictive of the results we observe in human clinical trials of our productdd programs. As a result of these facff cannot predict whether the application of our gene editing technology, or any similar or competitive gene editing technologies, will result in the identificaff . There can be no assurance that any development problems we experience in the future delays or unanticipated costs, or that such development problems can be solved. Any of these facff our preclinical studies or any clinical trials that we may initiate or commercializing any producdd t candidates we may develop on a timely or profitabff candidates for either safety or efficacy. Also, animal models may not exist for some of the diseases we choose to pursue in our us to predict the time and cost of product candidate development, and we related to our gene editing technology or any of our research programs will not cause significff ant tors may prevent us froff m completing tion, development, and regulatory approval of any products tors, it is more difficult forff le basis, if at all. in dd ff The clinical trial requirements of the FDA, the EMA and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the productdd candidate. No products based on gene editing technologies have been appr oved by regulators. As a result, aa 41 product candidates based on other, better known or more extensively studied technologies. It is difficult to the regulatory approval process for product candidates such as ours is uncertain and may be more expensive and take longer than the approval process forff determine how long it will take or how much it will cost to obtain regulatory arr States or the European Union or how long it will take to commercialize our product candidates. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product candidate to market could decrease our ability to generate sufficient product revenue, and our business, financial condition, results of operations and prospects may be harmed. rovals for our productdd candidates in either the United ppaa TT The FDA, The NIH And The EMA Have Demonstrated Caution In TII heir ll Regulation TT Of Gene Therapy Tpp reatm ents, And Ethical And Legal Concerns About Gene Therapy And Genetic Testing Development And Commercialization Of Our Product Candidat TT dd May Result In Additional Regulations Or Restrictions On The es, Which May Ba e Diffiff cult To Predicdd t. The FDA, NIH and the EMA have each expressed interest in further regulating biotechnology, including gene therapyaa and genetic testing. For example, the EMA advocates a risk-based appaa both the federal and state level in the United States, as well as the U.S. congressional committees and other governments or governinrr g agencies, have also expressed interest in further regulating the biotechnology industry. Such action may delay or prevent commercialization of some or all of our product candidates. Within the broader genome product field, uniQure N.V.’s Glybera has received marketing authorization from the European Commission, and to date no gene therapyaa approval in the United States. roach to the development of a gene therapyaa products have received marketing producdd t. Agencies at Regulatory requirements in the United States and in other jurisdictions governing gene therapy productdd s have changed u RR and related producdd ts, and established the , safetff y, s quarterly meetings. Even though the FDA decides frequently and may continue to change in the future. The FDA established the Officff e of Cellular, Tissue and Gene Therapiaa es within its Center for Biologics Evaluation and Research to consolidate the review of gene therapyaa tting an IND, our human clinical trials Cellular, Tissue and Gene Therapies Advisory Committee to advise this review. Prior to submi are subju ect to review by the NIH Officff e of Biotechnology Activities, or OBA, Recombinant DNA Advisory Committee, or the RAC. Following an initial review, RAC members make a recommendation as to whether the protocol raises important scientificff medical, ethical or social issues that warrant in-depth discussion at the RAC’ whether individualdd gene therapy protocols may proceed under an IND, the RAC’s recommendations are shared with the FDA and the RAC public review process, if undertaken, can delay the initiation of a clinical trial, even if the FDA has reviewed the trial design and details and has not objected to its initiation or has notified the sponsor that the study may begin. Conversely, the FDA can put an IND on a clinical hold even if the RAC has provided a favoff rable review or has recommended against an in-depth, public review. Moreover, under guidelines published by the NIH, patient enrollment in our futurtt e gene editing clinical trials cannot begin until the investigator for such clinical trial has received a letter froff m the OBA indicating that the RAC review process has been completed; and Institutional Biosafetff y Committee, or IBC, approval as well as all other applicabla e regulatoryrr authorizations have been obtained. In addition to the governmrr product candidates, or a central IRB if appropriate, would need to review the proposed clinical trial to assess the safetff y of the trial. In ed by others may cause the FDA or other oversight addition, adverse developments in clinical trials of gene therapy products conductdd bodies to change the requirements forff therapies in the European Union and may issue new guidelines concerninrr therapyaa eview agencies and committees and the new requirements or guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies or trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory agencies and committees and comply with applicable requirements andaa guidelines. If we fail to do so, we may be required to delay or discontinue development of such product candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delays as a result of an increased or lengthier regulatory approval process or further restrictions on the development of our product candidates can be costly and could negatively impact our or our collaborators’ ability to complete clinical trials and commercialize our current and future product candidates in a timely manner, if at all. ent regulators, the IBC and institutional review board, or IRB, of each institution at which we conduct clinical trials of our producdd ts and require that we comply with these new guidelines.These regulatory r g the development and marketing authorization for gene candidates. Similarly, the EMA governsrr approval of any of our productdd the development of gene rr tt If Any On f TO heTT Productdd Candidadd tes We May Develop Oo r TheTT Delivery Mrr odeMM s We RWW ely On Cause Undesirable Side Edd ff ffE ect s,tt It Could Dll Following Any Pn elayll Or Prevent TheTT ir Regulatory Approval, Ll otential Marketkk ing AppA roval. imit The Commercial Potential Or Result In Significi ant Negative Consequences Product candidates we may develop may be associated with undesirable side effects, unexpected characteristics or other serious ion of cuts in DNA at locations other than the target sequence. These adverse events, including off-target cuts of DNA, or the introductdd off-target cuts could lead to disruptiuu instances where we also provide a segment of DNA to serve as a repair template, it is possible that folff DNA from such repair template could be integrated into the genome at an unintended site, potentially disruprr on of a gene or a genetic regulatory sequence at an unintended site in the DNA, or, in those lowing off-target cut events, ting another important 42 ts that could occur with treatment with gene editing producdd ts include an immunologic reaction after administration which gene or genomic element. There also is the potential risk of delayed adverse events following exposure to gene editing therapyaa due to persistent biologic activity of the genetic material or other components of producdd ts used to carry the genetic material. Possible adverse side effecff could substantially limit the effectiveness of the treatment. If our CRISPR/CRR as9 gene editing technology demonstrates a similar effect, we may decide or be required to halt or delay preclinical development or clinical development of our producdd t candidates. In addition to serious adverse events or side effecff ts caused by any product candidate we may develop, the administration process or related procedurdd es also can cause undesirable side effects. If any such events occur, our clinical trials could be suspended or terminated. health regulatory arr If in the futurtt e we are unable to demonstrate that such adverse events were caused by factors other than our product candidate, the FDA, EMA or other comparablea oval of, any product candidates we are able to develop for any or all targeted indications. Even if we are able to demonstrate that all future serious adverse events are not product-related, such occurrences could affect patient recruirr tment or the ability of enrolled patients to complete the trial. Moreover, if we elect, or are required, to delay, suspend or terminate any clinical trial of any product candidate we may develop, the commercial prospects of such product candidates may be harmed and our ability to generate product revenues from any of these productdd nd develop product candidates, and may harm our business, financial condition, result of operations and prospects significff antly. candidates may be delayed or eliminated. Any of these occurrences may harm our ability to identify aff uthorities could order us to cease further clinical studies of, or deny appr a Additionally, if we successfull ff y develop a producdd t candidate and it receives marketing approval, the FDA could require us to adopt a Risk Evaluation and Mitigation Strategy, or REMS, to ensure that the benefits of treatment with such product candidate outweighs the risks for each potential patient, which may include, among other things, a medication guide outlining the risks of the productdd for distribution to patients, a communication plan to health care practitioners, extensive patient monitoring, or distribution systems and processes that are highly controlled, restrictive, and more costly than what is typical for the industry. Furthermore, if we or others later identify undesirablea side effect negative consequences could result, including: s caused by any product candidate that we to develop, several potentially significant ff • • • • • regulatory authorities may revoke licenses or suspend, vary or withdraw appr aa ovals of such product candidate; regulatory authorities may require additional warnings on the label; we may be required to change the way a product candidate is administered or conduct additional clinical trials; we could be sued and held liable for harm caused to patients; and our reputation may suffer. Any of these events could prevent us from achieving or maintaining market acceptance of our CRISPR/Cas 9 technology and any producdd t candidates we may identify and develop and could have a material adverse effeff ct on our business, financial condition, results of operations and prospects. RR If We Experience Delayll Be Delayeda ouldCC syy Or Diffi icff ulties In The Enrollment Of Patientstt In Clinical Trials, Our Receipt Of Necessary Regue Or Prevented. Approvals Cll latory We or our collaborators may not be able to initiate or continue clinical trials for any productdd candidates we identify or develop if ff nt number of eligible patients to participate in these trials as required by the FDA or a given trial. . In addition, if we are unable to locate and enroll a sufficie analogous regulatory authorities outside the United States, or as needed to provide appropriate statistical power forff Enrollment may be particularly challenging for any rare genetically defined diseases we may target in the futurett patients are unwilling to participate in our gene editing trials because of negative publu icity from adverse events related to thet or gene editing fields, competitive clinical trials for similar patient populations, clinical trials in biotechnology, gene therapya competing producdd ts, or for other reasons, the timeline for recruiting patients, conducdd ting studies and obtaining regulatory approval of any product candidates we may develop may be delayed. Moreover, some of our competitors may have ongoing clinical trials for product candidates that would treat the same indications as any product candidates we may develop, and patients who would otherwi be eligible forff our clinical trials may instead enroll in clinical trials of our competitors’ productdd candidates. rr se Patient enrollment is also affected by other factors, including: • • • • severity of the disease under investigation; size of the patient population and process for identifyinff g subjects; design of the trial protocol; availabila ity and efficaff cy of approved medications forff the disease under investigation; 43 • • • • • • • • • • availability of genetic testing for potential patients; ability to obtain and maintain subject consent; risk that enrolled subjects will drop out before completion of the trial; eligibility and exclusion criteria for the trial in question; perceived risks and benefits of the product candidate under trial; perceived risks and benefits of gene editing and cellular therapies as therapeut aa ic approaches; efforts to facilitate timely enrollment in clinical trials; patient referral practices of physicians; ability to monitor patients adequately during and after treatment; and proximity and availability of clinical trial sites for prospective patients. Enrollment delays in our clinical trials may result in increased development costs forff any product candidates we may develop, ff which would cause the value of our Company to decline and limit our ability to obtain additional finaff have difficu terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business, finaff operations, and prospects. lty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay, limit, or ncing. If we or our collaborators ncial condition, results of ff Positive Results From Early Pll reclinical Studies Of Our Product Candiddd atdd es Are NotNN Necessarily Predicdd tive Of The Results Of Later Preclinical StuSS dies And Any Future Clinical TriTT als Oll From Our Earlier Preclinical Studies Of OO ur Product CandCC May Be Unable To Successfully Dll f OO ur Producdd t CanCC didates. If We Cannot Replicate The Positive Results ur Later Preclinical Studiedd s And Future Clinical TriTT als, WeWW iddd atedd s In OII evelop, Obtain Regulatory Approval For And Commercialize Our Product Candidates. Any positive results from our preclinical studies of our producdd t candidates may not necessarily be predictive of the results fromff required later preclinical studi future clinical trials of our product candidates according to our current development timeline, the positive results from such preclinical studies and clinical trials of our producdd t candidates may not be replicated in subsequent preclinical studtt es and clinical trials. Similarly, even if we are able to complete our planned preclinical studies or any ies or clinical trial results. tt Many companies in the pharmaceutical and biotechnology indusdd tries have suffered significant setbacks in late-stage clinical cks. These y ks have been caused by, among other things, preclinical and other nonclinical findings made while clinical trials were underwarr trials after achieving positive results in early-stage development and we cannot be certain that we will not face similar setbat setbac t or safety or efficaff Moreover, preclinical, non-clinical and clinical data are oftenff that believed their producdd t candidates performed satisfactorily in preclinical studtt or EMA approval. susceptible to varying interpretations and analyses and many companies ies and clinical trials nonetheless failed to obtain FDA cy observations made in preclinical studies and clinical trials, including previously unreported adverse events. e CWW omCC plm ete TheTT Necessary Prr Even If WII Time-Consuming, Agg Candidat dd We Will Not Be Able ToTT Commercialize, ii Or Will Be Delaye Ability To Generate Revenue Will Be Materially Impaired.dd es We May Da nd Uncertain And May Prevent Us From Obtaining Approvals For The Commercializati evelop.o If We Are Not Able To Obtain, Or If There Are Delays Iyy n OII ll ommCC ercializing, Product CanCC didatedd d In CII ii btaining, Required Regulator on Of Any Pn ll roduct A y Arr ppro vals, s We MWW ayMM Develop, And Our reclinical Studiedd s And Clinical Trials, TheTT Marketing Approval Process Is Expensive, Any product candidates we may develop and the activities associated with their development and commercialization, including , safety, efficff candidates we may seek to develop in the future will ever obtain regulatory arr roval, advertising, promotion, sale, and uthorities in the United States, by EMA in the their design, testing, manufacturett acy, recordkeeping, labeling, storage, appa distribution, are subject to comprehensive regulation by the FDA and other regulatory arr European Union and by comparable authorities in other countries. Failure to obtain marketing appro prevent us from commercializing the product candidate in a given jurisdiction. We have not received approval or clearance to market any product candidates from regulatory authorities in any jurisdiction and it is possible that none of our product candidates or any productdd roval or clearance. We have only limited experience in filing and suppouu research organizations, or CROs, or regulatory consultants to assist us in this process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting informff therapeutic indication to establish the biologic productdd also requires the submi the relevant regulatory authority. Any productdd prove to have undesirable or unintended side effect approval or prevent or limit commercial use. ng process to, and inspection of manufacturing facilities by, ve, or may ive, may be only moderately effecti candidates we develop may not be effect ff s, toxicities or other characteristics that may preclude our obtaining marketing candidate’s safety, purity, efficacy and potency. Securing regulatory approval o gain marketing approvals and expect to rely on third-party contract ssion of information about the product manufacturi ation to the various regulatory authorities for each ications necessary t candidate will rting the appl a productdd val forff ppa u aa aa ff rr ff tt 44 The process of obtaining marketing approvals, both in the United States and in other jurisdictions, is expensive, may take many ubstantially based upouu n a variety of factors, years if additional clinical trials are required, if approval is obtained at all, and can vary srr including the type, complexity, and novelty of the product candidates involved. Changes in marketing approval policies durin development period, changes in or the enactment of additional statuttt es or regulations, or changes in regulatory review for each submitted producdd t appli other countries have substantial discretion in the approval process and may refuse data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained fromff marketing appro approved product not commercially viable. preclinical and clinical testing could delay, limit, or prevent marketing approval of a producdd t candidate. Any val we ultimately obtain may be limited or subjeb ct to restrictions or post-approval commitments that render the cation, may cause delays in the approval or rejection of an application. The FDA and comparable authorities in to accept any application or may decide that our g thet dd aa aa ff If we experience delays in obtaining approval or if we fail to obtain approval of any productdd candidates we may develop, the commercial prospects for those producdd t candidates may be harmed, and our ability to generate revenues will be materially impaired. We May Never Obtain FDA Approval For Any Of Our Product Candidates In The United State Never Obtain Approval For Or Commercialize Any Of Our Product Candidates In Any Other Jurisdi Ability Ttt ealizeii Their Full MarkeMM t Potential. o RTT SS ii dd s, And Even If We Do, We May imit Our ction, Which WoulWW d Lll aa aa oes not guarantee regulatory arr oval by regulatory authorities in other countries or jurisdictions. In In order to eventually market any of our producdd t candidates in any particular jurisdiction, we must establish and comply with and efficacy. Approval by the numerous and varying regulatory requirements on a jurisdiction-by-jurisdiction basis regarding safetyff FDA in the United States, if obtained, does not ensure appr addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country drr can involve additional producdd t testing and validation and additional administrative review periods. Seeking regulatoryrr approval in multiple jurisdictions could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time-consuming. Regulatory requirements can vary widely fromff country to country and could delay or prevent the introducdd tion of our producdd ts in certain countries. Regulatory approval processes outside the United States involve all of the risks associated with FDA approval. We do not have any product candidates appr markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required appaa ovals in international markets are delayed, our target market will be reducdd ed and our ability to realize the full rovals, or if regulatory arr aa ppr ff market potential of our products will be unrealized. val in any other country. Approval processes vary arr mong countries and oved for sale in any jurisdiction, including international ppro aa Gene editing Products Are Novel And May Be Complex And Difficult To Manufactu ff heTT Developmo dd ent Or Commercialization Of OO ur Product CandCC idat re. We Could Experience Manufact es Or Other uring u tt wise Harm Our Problems That Result In Delays Iyy n TII Business. ff g process used to producedd tt The manufact urin have not been validated forff equipment malfunctions, faci ff services, human error or disruptions in the operations of our suppliers. clinical and commercial production. Several factors could cause production interrupt rr lity contamination, raw material shortages or contamination, naturatt l disasters, disruptiuu ions, including on in utility CRISPR/Cas9-based productdd candidates may be complex, as they are novel and Our product candidates will require processing steps that are more complex than those required for most small molecule drugs. Moreover, unlike small molecules, the physical and chemical properties of biologics generally cannot be full result, assays of the finished product may not be sufficff Accordingly, we will employ multiple steps to control the manufacturing process to assure that the process works and the producdd t ring process, even minor candidate is made strictly and consistently in compliance with the process. Problems with the manufactu deviations froff m the normal process, could result in producdd t defect productdd grade materials that meet FDA, the EMA or other applicable standards or specifications with consistent and acceptable producti yields and costs. ent inventory. We may encounter problems achieving adequate quantities and quality of clinical on ient to ensure that the product will perform in the intended manner. ff lures that result in lot faiff liability claims or insuffici y characterized. As a s or manufact ing faiff urtt dd ff ff ff ff lures, product recalls, In addition, the FDA, the EMA and other health regulatory authorities may require us to submit u samples of any lot of any approved product together with the protocols showing the results of applicablea tests at any time. Under some circumstances, the FDA, the EMA or other health regulatory authorities may require that we not distribute a lot until the relevant agency authorizes its release. Slight deviations in the manufacff changes in the producdd t that could result in lot failures or productdd launches or clinical trials, which could be costly to us and otherwi rr tt prospects. Problems in our manufact uri ff recalls. Lot failures or producdd t recalls could cause us to delay product se harm our business, financial condition, results of operations and turing process, including those affecting quality attributes and stabia lity, may result in unacceptable ng process could restrict our ability to meet market demand for our products. 45 We also may encounter problems hiring and retaining directly or through contract manufacturing organizations the experienced quality-control and manufacturing personnel needed to operate our manufacturing processes, which could result in delays in ff scientific, production or difficulties in maintaining compliance with applicable regulatory requirements. Any problems in our manufacff process or facil academic research institutions, which could limit our access to additional attractive development programs. ities could make us a less attractive collaborator for potential partners, including larger pharmaceutical companies and turing ff Adverse Public Perceptie on Of Gene EditEE ing And CellCC ularll Therapy Ppp roducdd ts May Negatively Impact Demand For, Or r Regulatory Approval Of, Our Product Candidatdd es. Our product candidates involve editing the human genome. The clinical and commercial success of our product candidates will depend in part on public acceptance of the use of gene editing therapies for the prevention or treatment of human diseases. Publu ic attitudes may be influenced by claims that gene editing is unsafe, unethical, or immoral, and, consequently, our products may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapyaa government regulation and stricter labeling requirements of gene editing products, including any of our producdd t candidates, and could cause a decrease in the demand forff any products we may develop. Adverse public attitudes may adversely impact our ability to enroll clinical trials. Moreover, our success will depend upon physicians prescribing, and their patients being willing to receive, treatments that involve the use of product candidates we may develop in lieu of, or in addition to, existing treatments with which they are already familiar and for which greater clinical data may be availabla e. in general could result in greater In particular, gene editing technology is subjeb ct to publu ic debate and heightened regulatory srr crutrr iny duedd to ethical concerns rr ed in embryos that were not viable, the work prompted calls for a moratorium or other types of restrictions on gene editing of relating to the application of gene editing technology to human embryos or the human germline. For example, in April 2015, Chinese scientists reported on their attempts to edit the genome of human embryos to modify t he gene for hemoglobin beta. This is the gene in which a mutation occurs in patients with the inherited blood disorder beta-thalassemia. Although this research was purposefully conductdd human eggs, sperm, and embryos. The Alliance forff Regenerative Medicine in Washington, D.C. has called for a voluntary moratorium on the use of gene editing technologies, including CRISPR/Cas9, in research that involves altering human embryos or human germline cells. Similarly, the NIH has announced that it would not fund any use of gene editing technologies in human embryos, noting that there are multiple existing legislative and regulatory prr prohibits the use of appropriated funds for the creation of human embryos forff embryos rr embryos rr is more tightly controlled in many other European countries. are destroyed. Laws in the United Kingdom prohibit genetically modified embryos can be altered in research labs under license fromff rohibitions against such work, including the Dickey-Wicker Amendment, which the Human Fertilisation and Embryology Authority. Research on embryos from being implanted into women, but research in which human research purpose s or forff rr rr ff rr Although we do not use our technologies to edit human embryos or the human germline, such public debate about the use of ny could prevent or delay our development of producdd t gene editing technologies in human embryos and heightened regulatory scruti candidates. More restrictive government regulations or negative public opinion would have a negative effect on our business or financial condition and may delay or impair our development and commercialization of product candidates or demand for any products we may develop. Adverse events in our preclinical studies or clinical trials or those of our competitors or of academic researchers utilizing gene editing technologies, even if not ultimately attributable to productdd and the resulting publicity could result in increased governmental regulation, unfavorable public perception, potential regulatory delays in the testing or approval of potential product candidates we may identify aff nd develop, stricter labeling requirements forff product candidates that are appaa roved, and a decrease in demand forff any such product candidates. candidates we may identify and develop, those rr If, In The Future, We Are Unable To Establish SaleSS s And Marketikk ng Capabilities Or Enter IntoII To Sell And Market Productdd Any Products Candidates Are ApprA s Btt ased On Our Technologies, We MWW ayMM Not Be Successfus l In CII oved And We May Not Be Able To GTT enerate Any Rn evenue. Agreegg ments With Third Parties omCC mercializing Our Products If And When We do not currently have a sales or marketing infrastructurett and, as a company, have no experience in the sale, marketing or distribution of therapeutic products. To achieve commercial success for any approved product candidate forff which we retain sales and marketing responsibilities, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. In the future, tructure to sell, tt ators for, or participate in sales activities with our collabor we may choose to build a focuff some of our product candidates if any are approved. sed sales and marketing infrasff a ff There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with e is expensive and time consuming and could a sales force and establish marketing third parties to perform these services. For example, recruiting and training a sales forcff delay any product launch. If the commercial launch of a product candidate forff which we recruit capabilities is delayed or does not occur forff expenses. This may be costly and our investment would be lost if we cannot retain or reposition our sales and marketing personnel. ly or unnecessarily incurred these commercialization any reason, we would have prematurett rr 46 Factors that may inhibit our efforff ts to commercialize our product candidates on our own include: • • • • a our inabilit y to recruit, train and retain adequate numbers of effective sales and marketing personnel; the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future product that we may develop; the lack of complementary treatments to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive producdd t lines; and unforeseen costs and expenses associated with creating an independent sales and marketing organization. If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenue or the profitability to us from these revenue streams is likely to be lower than if we were to market and sell any productdd develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that are favorabla e to us. We likely will have little control over such third parties and any of them may fail to devote the necessary resources and attention to sell and market our product candidates effect do not establish sales and marketing capabila successfulff will be materially adversely affected. ively. If we ities successfully, either on our own or in collaboration with third parties, we mayaa not be in commercializing our product candidates. Further, our business, results of operations, financial condition and prospects candidates that we ff Even If We, Or Any Cn ollCC abll Terms Of Approvals And Ongoing Regulation Limit HowHH We, Or TheyTT , Myy ll orators We May Have, Obtain MarkMM etinkk orFF Any Product CandCC Of Our Products Could Require The Substantial Expenditure g AppA rovals Fll iddd atedd s We DWW evelop, The Of Resources And May dd anMM ufacture And Market Our Products, Which Could Materially Impair Our Ability To Generate Revenue. Any productdd , will be subject candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical to continual requirements of and review by the data, labeling, advertising, and promotional activities for such productdd FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing informff reports, registration and listing requirements, current Good Manufacff quality assurance and corresponding maintenance of records and documents and requirements regarding recordkeeping. Even if marketing appr oval may be subject to limitations on the indicated uses for which the productdd may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA also may place other conditions on approvals including the requirement forff a REMS to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the Biologics License Application, or BLA, must submit a proposed REMS before it can obtain approval. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. turing Practice, or cGMP, requirements relating to quality control, oval of a product candidate is granted, the appr ation and b a a Accordingly, assuming we, or any collaboa rators we may have, receive marketing appro aa val forff rators, and our and their contract manufacff we develop, we, and such collaboa all areas of regulatory compliance, including manufacff collaborators are not able to comply with post-approval regulatory r approvals for our products withdrawn by regulatory authorities and our, or such collaborat could be limited, which could adversely affect our ability to achieve or sustain profitabff approval regulations may have a negative effect on our business, operating results, financial condition, and prospects. equirements, we and such collaborators could have the marketing ors’, ability to market any future products ility. Further, the cost of compliance with post- turing, production, product surveillance, and quality control. If we and such turers will continue to expend time, money, and effoff a rr one or more product candidates rt in Any Productdd Candidadd te For Which We Obtain MarkMM etkk ing Approval CoulCC d Bll SS e Subj Market,kk And We May Be Subject To Substantial Penalties If We Fail To Complym With Regulatoll Unanticipated Problems With Our Products, WhenWW And If Any Of Them Are Approved.dd ect To Restrict tt ions Or Withdrawal From The ry Requirements Or If We Experience The FDA and other regulatory agencies closely regulate the post-approval marketing and promotion of biologics to ensure that the approved indications and in accordance with the provisions of the approved labeling. The FDA and rs’ communications regarding off-label use, and if we do not t to enforcement action for off-label marketing by the FDA and eral and state enforcement agencies, including the United States Department of Justice. Violation of the Federal Food, Drug, they are marketed only forff other regulatory arr gencies impose stringent restrictions on manufacturett market our products for their approved indications, we may be subjec other fedff and Cosmetic Act and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription products may also lead to investigations or allegations of violations of federal and state health care fraud and abus protection laws. e laws and state consumer u a 47 In addition, later discoveryrr of previously unknown kk problems with a product candidate, including adverse events of unanticipated severity or frequ ff other things: ency, or with our manufacturing processes, or failure to comply with regulatory requirements, may result in, among • • • • • • • • • • • • • restrictions on such products, manufacturers, or manufacturing processes; restrictions on the labeling or marketing of a product; restrictions on the distribution or use of a product; requirements to conduct post-marketing clinical trials; receipt of warning or untitled letters; restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory brr iologic recalls; refusal to approve pending applications or supplements to approved applications that we submit; fines, restituttt ion, or disgorgement of profits or revenue; suspension or withdrawal of marketing approvals or revocation of biologics licenses; suspension of any ongoing clinical trials; refusal to permit the import or export of our products; product seizure or detention; and injunctions or the imposition of civil or criminal penalties. The FDA’s policies may change and additional government rr regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory crr may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability. ompliance, we may lose any marketing approval that we Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may also inhibit our ability to commercialize any product candidates we may develop and adversely affect our business, financial condition, results of operations, and prospects. The Commercial Success Of Any Of Our Product Candidat dd es Will Depend UponUU Its Degree Of Marketkk Acceptan e ce By Physicians, Patients, Third-party Payors And Others In The Medical Community. Ethical, social and legal concerns about gene therapyaa could result in additional regulations restricting or prohibiting our products. Even with the requisite approvals from FDA in the United States, the EMA in the European Union and other regulatoryrr authorities internationally, the commercial success of our product candidates will depend, in significant part, on the acceptance of physicians, patients and health care payors of gene therapyaa necessary, cost-effecti payors and others in the medical community. The degree of market acceptance of gene therapy products and, in particular, our product candidates, if approved for commercial sale, will depend on several facto ve and safe.ff Any product that we commercialize may not gain acceptance by physicians, patients, health care products in general, and our product candidates in particular, as medically rs, including: ff ff • • • • • • • • the effiff cacy, durdd ability and safety of such producdd t candidates as demonstrated in any future clinical trials; the potential and perceived advantages of productdd candidates over alternative treatments; the cost of treatment relative to alternative treatments; the clinical indications forff which the product candidate is approved by FDA or the EMA; patient awareness of, and willingness to seek, genotyping; the willingness of physicians to prescribe new therapieaa s; the willingness of the target patient population to try new therapies; the prevalence and severity of any side effect ff s; 48 • • • • • • product labeling or product insert requirements of FDA, the EMA or other regulatory arr or warnings contained in a product’s approved labeling; uthorities, including any limitations relative convenience and ease of administration; the strength of marketing and distribution support; ; the timing of market introduction of competitive products dd publicity concerning our products or competing products and treatments; and sufficient third-party payor coverage and reimbursement. Even if a potential product displays a favora es and future clinical trials, market acceptance of the product will not be fully known until after it is launched. If our product candidates do not achieve an adequate level owing regulatory approval, if ever, we may not generate significant product revenue and may not become profitable. of acceptance foll efficacy and safety profile in preclinical studi blea ff ff tt We May Expend x Our Limited Resources To Pursue tes Or Indications That MayMM Be More Profitaff Candidadd rr Productdd A Particular Product Candi CC ble Or For Which There Is AII date Or Indication And Fail To Capitalize On Greater Likelikk hood Of Success. We have limited financial and managerial resources. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable commercial producdd ts or profitff able market opportunities. Our spending on currerr nt and future research and development programs and product candidates for specific indications may not yield any commercially viablea products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that producdd t candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous forff us to retain sole development and commercialization rights to such product candidate. i fii cant CompCC We Face Signi chieve Regul Competm itors May Aa Which May Harm Our Business And Financial CondCC Candidatdd es. atll ory Approval Before e ff etition In An Environment Of Rapid TechTT herTT Us Or Develop To itidd on, And Our Ability Ttt nological ChanCC ge And The Possibility Ttt hatTT ff apies That Are More Advanced Or EffE ect o STT Ours, ly Marketkk Or Commercialize Our Product Our ive ThanTT ucSS cessfulff The biotechnology and pharmaceutical industries, including the gene therapyaa field, are characterized by rapidly changing technologies, significff ant competition and a strong emphasis on intellectual property. We facff e substantial competition froff m many t sources, including large and specialty pharmaceutical and biotechnology companies, academic research instituttt differen ff governmrr ent agencies and public and private research institutions, some or all of which may have greater access to capital or resources than we do. ions, We are aware of several companies focused on developing gene editing in various indications using CRISPR/CaRR s9 gene editing technology, including Intellia Therapeutics, Inc. and Editas Medicine, Inc., or Editas. There can be no certainty that other gene editing technologies will not be considered better or more attractive than our technology for the development of productdd s. For example, Editas has recently exclusively licensed a CRISPR system involving a differeff advanced forms of CAS9. Editas and certain of its scientificff cases. Cas9 may be determined to be less attractive than Cpf1 or other CRISPR proteins that have yet to be discovered. nt protein, Cpf1, which can also edit human DNA as well as founders have asserted that Cpf1 may work better than Cas9 in some There are additional companies developing therapiaa es using additional gene editing technologies, including transcription activator-like effector nucleases (TALENs), meganucleases and zinc finger nucleases (ZFNs). These companies include bluebird bio, Cellectis, Poseida Therapeut products include Abeona Therapeaa utics, Avalanche Biotechnologies, Dimension Therapeuaa uniQure. ics, Precision Biosciences, and Sangamo Biosciences. Additional companies developing gene therapyaa tics, REGENXBIO, Spark Therapeaa utics and aa In addition to competition from other gene editing therapia es or gene therapieaa s, any productdd we may develop may also face competition from other types of therapies, such as small molecule, antibody or protein therapies. In addition, new scientificff discoveries may cause CRISPR/Cas9 technology, or gene editing as a whole, to be considered an inferior form of therapy. aa Many of our current or potential competitors, either alone or with their collaboration partners, have significantly greater financial resources and expertise in research and development, manufacff regulatory approvals and marketing approved productdd and gene therapy industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with s than we do. Mergers and acquisitions in the pharmaceutical, biotechnology, ies, conducdd ting clinical trials, obtaining turing, preclinical studtt 49 rr o, or necessary for, our programs. Our commercial opportunity could be reduced or eliminated if our large and established companies. These competitors also compete with us in recruirr management personnel and establishing clinical trial sites and patient registration forff technologies complementary t competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effect convenient, have broader acceptance and higher rates of reimbursement by third party payors or are less expensive than any products that we may develop obsolete or non-competitive. Our competitors also may that we may develop or that would render any products oval for ours, which could result in a obtain FDA or other regulatory approval for their products more rapidly than we may obtain appr our competitors establia we are able to enter the market. Additionally, technologies developed by our competitors may render our potential product candidates uneconomical or obsolete, and we may not be successful in marketing any product candidates we may develop against competitors. ting and retaining qualifieff d scientific and clinical trials, as well as in acquiring shing a strong market position beforeff s, are more dd ff In addition, as a result of the expiration or successful challenge of our patent rights, we could face more litigation with respect to the validity and/or scope of patents relating to our competitors’ products and our patents may not be suffici competitors from commercializing competing producdd ts. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any products that we may develop and commercialize. ent to prevent our ff To become and remain profitff able, we must develop and eventuatt lly commercialize producdd t candidates with significant market tt candidates, obtaining marketing and reimbursement approval for these productdd ng, marketing and selling those products that are approved and satisfying any post marketing requirements. We may never potential, which will require us to be successful in a range of challenging activities. These activities can include completing preclinical studies and clinical trials of our productdd manufacturi succeed in any or all of these activities and, even if we do, we may never generate revenues that are significant or large enough to achieve profitff ability. If we do achieve profitabia lity, we may not be able to sustain or increase profitff ability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our Company and could impair our ability to raise capital, maintain our research and development effor Company also could cause shareholders to lose all or part of their investment. ts, expand our business or continue our operations. A decline in the value of our candidates, ff Even If WII e AWW re Able To Commercializeii Any Productdd Candidates, SuchSS Producdd ts May Become Subj SS ect To Unfavorable Pricing Regulations, ThirTT - d-par ty Reimburserr ment Practices, Or HealHH thcare Reform Initiatives, Which Would Harm Our Business. The regulations that govern mrr arketing appa rovals, pricing, and reimbursement forff new biologic products vary widely fromff In the United States, recently enacted legislation may significantly change the appro aa country to country.rr could involve additional costs and cause delays in obtaining appro before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some non-U.S. markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a producdd t in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the producdd t in that country. Adverse pricing limitations may hinder our ability to candidates we may develop obtain marketing appro recoup ouu val requirements in ways that a vals. Some countries require approval of the sale price of a product ur investment in one or more product candidates, even if any productdd val. aa Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers, and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary t nd elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged forff medical products. We cannot be sure that reimbursement will be available for any producdd t that we commercialize and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate forff which we obtain marketing approval. If reimbursement is not availabla e or is available only to limited levels, we may not be able to successfully commercialize any producdd t candidate for which we obtain marketing approval. rend in the U.S. healthcare industry arr rr ff There may be significant delays in obtaining reimbursement forff newly appaa roved productdd s, and reimbursement coverage may be more limited than the purposes for which the product is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility forff reimbursement does not imply that any product will be paid forff costs, including research, development, manufacturett applicable, may also not be suffici the use of the product and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost products and may be incorporated into existing payments for other services. Net prices forff products 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 ent to cover our costs and may not be made permanent. Reimbursement rates may vary according to , sale, and distribution. Interim reimbursement levels for new products, if in all cases or at a rate that covers our ff 50 s from countries where they may be sold at lower prices than in the United States. Third-party payors often restrict imports of productdd rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products we may develop could have a material adverse effecff t on our operating results, our ability to raise capital needed to commercialize products, and our overall financial condition. Risks Related to Our Relationships with Third Parties If Conflicts Ariseii Between Us And Our Collaborators Orr r StrSS ategic Partners tt TT , These Parties May Act In A MannMM er Adverserr To Us And Could Limit Our Ability To Implement Our Strategies. If confliff cts arise between our corporate or academic collaboa rators or strategic partners and us, the other party may act in a manner adverse to us and could limit our ability to implement our strategies. Some of our academic collaborators and strategic partners are conducdd ting multiple producdd t development effoff collaborators or strategic partners, however, may develop, either alone or with others, products in related fields that are compemm titive s or potential products that are the subject of these collaborations. Competing producdd ts, either developed by the with the productdd collaborators or strategic partners or to which the collaborators or strategic partners have rights, may result in the withdrawal of partner support for our product candidates. rts within each area that is the subju ect of the collaboration with us. Our Some of our collaborators or strategic partners could also become our competitors in the future. Our collaborators or strategic partners could develop competing productdd regulatory approvals, terminate their agreements with us prematurett commercialization of productdd s, preclude us from entering into collaborations with their competitors, fail to obtain timely ly, or fail ff to devote suffici ff ent resources to the development and s. Any of these developments could harm our producdd t development effort ff s. Our Collaborators Or Strategic Partners Mrr ayMM Decide To Adopto Alternative Techn TT ologies Or May Be Unable To DTT evelop Commerciallyll Viable Producdd ts Withtt Our Technology,gg Which Would Negatively Impact Our Revenues And Our Strategy To Develop These Products. Our collaborators or strategic partners may adopt alternative technologies, which could decrease the marketability of our ators or CRISPR/CRR as9 gene editing technology. Additionally, because our current are and we anticipate that any future collabor strategic partners will be working on more than one development project, they could choose to shift tff heir resources to projeco than those they are working on with us. If they do so, this would delay our ability to test our technology and would delay or terminate the development of potential products based on our CRISPR/Cas9 partners may elect not to develop products arising out of our collabor a sufficff a product candidate pursuant to our agreements with our current or futff urtt e collaborators would prevent us from receiving futur e milestone and royalty payments which would negatively impact our revenues. ient resources to the development, manufacturing, marketing or sale of these products. The failure to develop and commercialize ative and strategic partnering arrangements or to devote gene editing technology. Further, our collaboa rators and strategic ts other RR a ff Our Collaborators And StraSS Other Obstacles In TII heTT Commercializati ii tegic Partners May Ca s Aspec on Of Our Proposed Productdd tt ontCC rol ts Of Our Clinical Trials,ll Which Could Result In Delays s Att nd Materially Harm Our Results Ott ll f OO perO ations. And For some programs, we will depend on third party collaborators and strategic partners to design and conduct our clinical trials. these programs in the manner or on the time schedule we currently contemplate, which may As a result, we may not be abla e to conductdd negatively impact our business operations. In addition, if any of these collaborators or strategic partners withdraw support for our programs or proposed products or otherwise impair their development, our business could be negatively affected. In October 2015, we entered into a fouff underlying genetic causes of human diseases, including beta-thalassemia and sickle cell. In addition, in December 2015, we entered into an agreement with Bayer Healthcare to create a joint venture to discover and commercialize therapeutics for the treatment of blood disorders, blindness and heart disease in addition to select indications related to other sensory orr autoimmune diseases based on our CRISPR/Cas r-year collaboration agreement with Vertex to research, develop and commercialize new treatments aimed at the rgans, metabolic diseases and 9 gene editing technology. RR We and Bayer Healthcare each hold a 50% interest in the joint venture and each have two designees on the management board. As such, we cannot control all aspects of the clinical development and commercialization of any product candidate developed by the joint venture. Similarly, under our collaboration agreement with Vertex, Vertex has sole authority to select genetic targets to pursue and we will not have control over the development of any product candidates for the selected genetic targets. Our lack of control over the clinical development in our agreements with Bayer Healthcare and Vertex could cause delays or other diffiff culties in the development and commercialization of producdd t candidates, which may prevent among other things, completion of intended IND filings for the first clinical trial for our hemoglobinopathy program targeting beta-thalassemia in a timely fasff hion, if at all. 51 In addition, the termination of our agreement with Vertex would prevent us froff m receiving any milestone, royalty payments and under that agreement. The termination of our joint venture with Bayer Healthcare would prevent us froff m participating in other benefitsff the profits of the joint venture. Either occurrence would have a materially adverse effect on our results of operations. We May Seek To Establish Additional Collaborations And, If We Are Not Able To Establish Them On Commercially Rll easonable Terms, We May Have To Alter Our Development And Commercializatio ii n Plans. Our producdd t candidate development programs and the potential commercialization of our producdd t candidates will require substantial additional cash to fund expenses. For some of our producdd t candidates, we may decide to collaborate with additional the development and potential commercialization of those product candidates. pharmaceutical and biotechnology companies forff We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for any a ation and the proposed collaborator’s evaluation of a number of factors. Those fact additional collaborations will depend, among other things, upon our assessment of the collaboa and conditions of the proposed collabor include the design or results of clinical trials, the likelihood of approval by FDA or similar regulatory arr States, the potential market for the subju ect product candidate, the costs and complexities of manufacff candidate to patients, the potential of competing drugs, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industdd conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our producdd t candidate. The terms of any additional collaborations or other arrangements that we may establish may not be favorable to us. ors may uthorities outside thet United turing and delivering such productdd rator’s resources and expertise, the terms ry and market ff We may also be restricted under existing collaboration agreements from entering into futff urett agreements on certain terms with potential collaborators. For example, we have granted exclusive rights to Vertex forff collaboration agreement, we will be restricted from granting rights to other parties to use our CRISPR/Cas9 technology to pursue therapies that address these genetic targets. Similarly, pursuant to our joint venture agreement with Bayer Healthcare, during the term of the joint venturett products that use our CRISPR/Cas9 technology in specifieff d fieldff The non-competition provisions in each of these agreements could limit our abia lity to enter into strategic collaboa collaborators. , and for a specified period after the termination of the joint venture, we will be prohibited froff m developing s that would compete with the joint venture and Bayer, respectively. certain genetic targets, and durdd ing the term of the rations with future ff We may not be abla e to negotiate additional collaboa rations on a timely basis, on acceptabla e terms, or at all. Collaboa rations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collabor ators. If we are unable to negotiate and enter into new collaborations, we may have to curtail the development of the product candidate forff which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditurtt es and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be availabla e to us on acceptabla e terms or at all. If we do not have suffiff cient funff ds, we may not be able to furff market and generate product revenue. ther develop our product candidates or bring them to a We Expect To Rely On Third Parties To Conduct Our Clinical TriTT als All nd Certain Aspec s ts Of Our Preclinical Studies ForFF Our tes. If These Third Parties Do Not Successfull r MeetMM Expected Deadlines, We May Not Be Able To OTT y Cll ff arCC ry Out Their Contractual Duties, Comply With Regulatory btain Regul e atoll ry Approval For Or Commercialize Our Product Productdd Candidadd Requirements Ott dd Candidat es And Our Business Could Bll e SubSS stantially Harmed. We expect to rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to our product conduct future clinical trials and we currently rely on third parties to conducdd t certain aspects of our preclinical studtt ensuring that each of our preclinical studies and any future clinical trials we sponsor candidates. Nevertheless, we are responsible forff standards and our reliance protocol, legal and regulatory requirements and scientificff are conducted in accordance with the applicablea on CROs will not relieve us of our regulatory responsibilities. For example, we will remain responsible forff ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols forff the trial. Moreover, the FDA requires us to comply with regulations, commonly referred to as Good Clinical Practices, or GCPs, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity, and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a governmrr result in fines, adverse publicity, and civil and criminal sanctions. For any violations of laws and regulations during the conducdd t of our preclinical studies and clinical trials, we could be subjeb ct to warning letters or enforff cement action that may include civil penalties upuu to and including criminal prosecution. ent-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can ies forff 52 We and our CROs will be required to comply with regulations, including GCPs, for conducdd ting, monitoring, recording and tt es and clinical trials to ensure that the data and results are scientificaff reporting the results of preclinical studi lly credible and accurate and that the trial patients are adequately informed, among other things, of the potential risks of participating in clinical trials and their rights are protected. These regulations are enforced by FDA, the Competent Authorities of the Member States of the European Economic Area and comparablea health regulatory authorities for any drugs in clinical development. The FDA enforces GCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs faiff comply with appa health regulatory arr cannot assure you that, upon inspection, the FDA will determine that any of our future clinical trials will comply with GCPs. In addition, our futff ure clinical trials must be conducted with product candidates producdd ed in accordance with the requirements in cGMP regulations. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action. l to licabla e GCPs, the clinical data generated in our clinical trials may be deemed unreliabla e and FDA or comparable uthorities may require us to perform additional clinical trials before approving our marketing applications. We Although we intend to design the clinical trials for our product candidates, CROs will conduct all of the clinical trials. As a result, many important aspects of our development programs, including their conduct and timing, will be outside of our direct control. Our reliance on third parties to conducdd t futff urtt e preclinical studtt management of data developed through preclinical studi our own staff. Cff coordinating activities. Outside parties may: ies and clinical trials will also result in less direct control over the es and clinical trials than would be the case if we were relying entirely upon ommunicating with outside parties can also be challenging, potentially leading to mistakes as well as difficff ulties in tt • • • • • have staffinff g diffiff culties; fail to comply with contractual obligations; experience regulatory compliance issues; undergo changes in priorities or become financially distressed; or form relationships with other entities, some of which may be our competitors. These factors may materially adversely affeff ct the willingness or ability of third parties to conduct our preclinical studtt ies and t us to unexpected cost increases that are beyond our control. If the CROs do not perform preclinical clinical trials and may subjecb studies and future clinical trials in a satisfactory manner, breach their obligations to us or faiff the development, regulatory appro regulatory approval and commercialize our product candidates, or our development programs may be materially and irreversibly harmed. If we are unable to rely on preclinical and clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of any clinical trials we conductdd and this could significantly delay commercialization and require significantly greater expenditures. equirements, candidates may be delayed, we may not be able to obtain val and commercialization of our productdd l to comply with regulatory r aa rr We Expect To Rely Oll n Third Parties To Manufacu uring Process Of Our Product Candidatdd es, If Approved. Odd ture Our Clinical Product Supplpp ies, And We Intend To Rely Oll ur Business CouldCC n ThirTT d Parties Be Harmed If ithWW Suffu icff ient Quantities Of Producdd t InpII uts Ott r FaiFF l To DTT o So ASS t Acceptable Quality Levels Or For At Leastaa A Portion Of The ManMM ufact ff The Third Parties Fail To Provide Udd s WUU Prices. We do not currently own any facff ility that may be used as our clinical-scale manufacff turing and processing facff ility and must rely on outside vendors to manufacture supplies and process our product candidates in connection with any clinical trial we undertake of such productdd d or processed on a commercial scale and any of our product candidates. We will make changes as we work to optimize the manufacturing process, may not be able to do so forff and we cannot be sure that even minor changes in the process will result in therapiaa es that are safe and effecff candidates. We have not yet caused any product candidates to be manufact tive. urett ff The facilities used by our contract manufacturett rs to manufacturett our product candidates must be approved by the FDA, or other tt health regulatory agencies in other jurisdictions, pursuant to inspections that will be conductdd g process of, and will be completely dependent on, our FDA or other health regulatory agencies. We will not control the manufact tt urin ng partners for compliance with regulatory r equirements, known as cGMP requirements, forff manufacture of our contract manufacturi producdd t candidates. If our contract manufacturers cannot successfull ff strict regulatory requirements of the FDA or other regulatory authorities, they will not be able to secure and/odd r maintain regulatory approval for their manufacturing faci maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable health regulatory authority does not approve these faci we may need to find alternative manufacff approval forff lities for the manufacture of our product candidates or if it withdraws any such approval in the future, turing facilities, which would significantly impact our abia lity to develop, obtain regulatory lities. In addition, we have no direct control over the ability of our contract manufacturers to ed after we submit an application to the urtt e material that conformff or market our productdd candidates, if appro s to our specificaff y manufact ved. aa ff ff rr ff ff tt tions and the 53 Our Relatll kickback, Fkk rauFF Penalties, Exclusion FromFF Future Earnings. ionships With Healthcare Providersdd d And Abuse And Other Healthcare Laws Aww nd Regulations, WhicWW h CoulCC d Ell , Physicians, And Third-pdd artytt Payors Will Be Subjeb ct To Applicable Anti- xpoEE se Us To Criminal Sanct SS ions, Civil Government Healthctt are Programs, Contractual Damages, Reputational Harm And Diminished Profits And Although we do not currently have any drugs on the market, once we begin commercializing our product candidates, if ever, we will be subjeb ct to additional healthcare statuttt ory and regulatory requirements and enforcement by the U.S. fede states as well as other national, regional or local governments in other jurisdictions in which we conduct our business. ff ral governme rr nt and Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates that we may develop for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicablea business or financial arrangements and relationships through which we market, sell, and distribute our producdd t candidates for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following: fraud and abuse and other healthcare laws and regulations that may constrain the • • • • • • ng, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the the federal Anti-Kickback Statute prohibits, among other things, persons fromff offeri ff referral of an individual for, be made under a state or Federal healthcare program, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statuttt e or specific intent to violate it in order to have committed a violation. Violation of the statuttt e may give rise to criminal and/or civil penalties; or the purchase, order, or recommendation of, any good or service, forff which payment may knowingly and willfully soliciting, ff the federal civil and criminal false claims laws, including the civil False Claims Act, impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment or appro Medicare, Medicaid, or other government payors that are false, fict causing to be made or used a falsff federal government, with potential liability including mandatory treble damages and significan currently set at $5,500 to $11,000 per false claim. In addition, the government may assert that a claim including items and e of fraudulent claim for purposes services resulting from a violation of the federal Anti-Kickback Statute constitutes a falsff of the False Claims Act; dulent or knowingly making, using or e record or statement to avoid, decrease or conceal an obligation to pay money to the t per-claim penalties, itious or frauff val fromff aa ff ff the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as furth Inforff mation Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations which impose certain requirements on covered entities, including healthcare providers, health plans and healthcare clearing houses, as well as their business associates that performff and transmission of individually identifiable health information that constituttt es protected health information, including mandatory crr authorization; terms and restrictions on the use and/odd r disclosure of such information without appropriate certain services with respect to safeguff er amended by the Health ontractual arding the privacy, security ff tt the federal falff se statements statute prohibits knowingly and willfully falff sifyiff ng, concealing, or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefitsff services; similar to the federal Anti-Kickbakk ck Statuttt e, a person or entity does not need to have actual knowledge of the statuttt e or specificff intent to violate it in order to have committed a violation; , items, or able Care Act, require manufact the federal physician payment transparency requirements, sometimes referre Affordff Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Department of Health and Human Services information related to physician payments and other transfers of value to physicians and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and s, devices, biologics and medical supplies that are reimbursabla e under d to as the “Sunshine Act” under the urtt ers of drugrr ff ff analogous laws and regulations in U.S. states, and in other countries, regions or localities in which we may do business, such as state anti-kickback and false claims laws, which may apply to healthcare items or services that are reimbursed by non-governmental third-party payors, including private insurers. Because of the breadth of these laws and the narrowness of the statutott ry exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the laws described abova e or any other government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, finff es, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affecff business, financial condition, results of operations, and prospects. t our 54 The provision of benefits or advantages to physicians to inducedd or encourage the prescription, recommendation, endorsement, purchase, supply, order, or use of medicinal products is prohibited in the European Union. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of European Union Member States, such as the UK Bribery Arr Infringement of these laws could result in substantial fineff s and imprisonment. ct 2010. Payments made to physicians in certain European Union Member States must be publicly disclosed. Moreover, agreements with nal uthorities of the individual European Union Member States. These requirements are provided in physicians often must be the subjeb ct of prior notification and approval by the physician’s employer, his or her competent professio organization, and/odd r the regulatory arr the national laws, industry crr comply with these requirements could result in reputational risk, publu ic reprimands, administrative penalties, finff es, or imprisonment. applicable in the European Union Member States. Failure to sional codes of conductdd odes, or profesff ff ff Effort s to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations s, regulations, or case law involving appl will involve subsu tantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or futurtt e statutett d and abuse or other healthcare laws and regulations. a If our operations, including activities that may be conducted by sales and marketing team we establish, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subjeb ct to significaff administrative penalties, damages, fines, exclusion fromff and the curtailment or restruct tt urin do business are found to be not in compliance with applicable laws, they may be subjeb ct to criminal, civil, or administrative sanctions, including exclusions fromff significff ant costs or an interruptiuu results of operations, and prospects. nt civil, criminal, and d healthcare programs, such as Medicare and Medicaid, g of our operations. If any of the physicians or other providers or entities with whom we expect to on in operations, which could have a material adverse effecff ities they incur pursuant to these laws could result in government funded healthcare programs. Liabila t on our business, finaff government funde ncial condition, icabla e frauff rr ff Risks Related to Employee Matters, Managing Growth and Other Risks Related to Our Business Our Future Success Depends On Our Ability To Retain Key Ee nel. Personrr xeEE cutives And To Attract, Retain And MotMM ivate Qualifii ed We are highly dependent on the research and development, clinical, commercial and business development expertise of ff ff , Dr. Sven Ante (Bill) Lundberg, our Chief Scientific Officeff , as well as the other principal members of our management, scientific and clinical Dr. Rodger Novak, our President and Chief Executive Officer Dr. Samarth Kulkarni, our Chief Business Officer team. Although we have entered into employment agreements with our executive officers, each of them may terminate their employment with us at any time. We do not maintain “key person” insurance forff addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availabia lity to us. The loss of the services of our executive officers or other key employees or consultants could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. If we are unabla e to retain high quality personnel, our abia lity to pursue our growth strategy will be limited. any of our executives or other employees. In r, We will also need to recruit rr and retain qualified scientific, clinical and commercial personnel as we advance the development of our product candidates and product pipeline. We may be unable to hire, train, retain or motivate these key personnel on acceptablea terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientificff succeed in clinical trials may make it more challenging to recruit and retain qualified scientificff personnel. , clinical and commercial personnel froff m universities and research instituttt ions. Failure to In addition, being domiciled and organized in Switzerland may restrict our ability to attract, motivate and retain the required level of qualified personnel. In Switzerland, in 2013 legislation was adopted affecff members of its board of directors and executive team. Among other things, such legislation (i) imposes an annual binding shareholders’ “say on pay” vote with respect to the compensation of executive management, including executive offiff cers and the ers and directors; board of directors; (ii) prohibits severance, advances, transaction premiums and similar payments to executive officff and (iii) requires companies to specify various compensation-related matters in their articles of association, thus requiring them to be approved by a shareholders’ vote. ting compensation payabla e by public companies to 55 We Will Need To Develop And Expand Our Companm y,n And We May Encounter Difficff ulties In Managing This Development And Expansion, Which CoulCC d Dll isrupt Our Operations. • As of December 31, 2016, we had 93 full-time employees and we expect to increase our number of employees and the scope of our operations in 2017 and beyond as we conduct activities as a public company and seek to advance development and if successful, commercialization, of our product candidates. To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these expansion activities. Due to our limited resources, we may not be able to effeff ctively manage the expansion of our operations or recruit infrasff among remaining employees. The physical expansion of our operations may lead to significff ant costs and may divert financial resources from other projects, such as the development of our product candidates. If our management is unablea to effectively manage our expected expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our product candidates, if appro part, on our ability to effectively manage the futurett a development and expansion of our company. and train additional qualified personnel. This may result in weaknekk sses in our urtt e, give rise to operational mistakes, loss of business opportuni ties, loss of employees and reduced productivity ved, and compete effecff tively will depend, in rr truct rr tt Our Employees, Principal Inves II tigators, Consultants And Commercial Partners tt May Engage In Misconduct Or Other Improper Activities, Including Non-compliance With Regulatoll ry Standards And Requirementstt And Insider Tradingdd . We are exposed to the risk of fraud or other misconductdd by our employees, consultants, and commercial partners, and, if we by these parties could include intentional failures to comply with ff ff a and abuse laws and regulations in the ation or data accurately or disclose unauthorized activities to us. In also could involve the improper use of information obtained in the course of clinical trials or cable in the European Union and other jurisdictions, provide accurate information to the FDA, commence clinical trials, our principal investigators. Misconductdd FDA regulations or the regulations appli the European Commission, and other regulatory authorities, comply with healthcare fraud United States and in other jurisdications, report financial informff particular, sales, marketing and business arrangements in the healthcare industry are subjeb ct to extensive laws and regulations intended , misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a to prevent fraud wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Such misconductdd interactions with the FDA or other regulatory authorities, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify aff employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknowkk unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a fail comply with these laws or regulations. Additionally, we are subject to the risk that a person could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successfulff asserting our rights, those actions could have a significant impact on our business, finaff prospects, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion fromff participation in Medicare, Medicaid and other federal healthcare programs, contractuatt and futff urtt e earnings and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. l damages, reputational harm, diminished profits ncial condition, results of operations, and nd deter n or ff ure to in defending ourselves or If We Fail To Comply With Environmental, Health And Safety Ltt Penalties Or IncII ur Costs That CouCC ld Harm Our Business. aws And Regulatio ll ns, We Could Bll ecome Subjecb t To FTT ineFF s Or We are subject to numerous environmental, health and safetyff laws and regulations, including those governinrr g laboratory . We contract with third parties for the disposal of these materials and wastes. We will not be able to eliminate the risk of procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flaff mmable materials, including chemicals and biological materials. Our operations also producdd e hazardous waste products dd esulting froff m any use by us of hazardous contamination or injury from these materials. In the event of contamination or injury r materials, we could be held liable for any resulting damages, and any liabia lity could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations. rr Although we anticipate obtaining producdd t liabia lity insurance coverage in advance of the commencement of any clinical trial of our producdd t candidates, it may not be adequate to cover all liabia lities that we may incur. Further, we anticipate that we will need to increase our insurance coverage if we successfully commercialize any productdd expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy aff that may arise. candidate. Insurance coverage is increasingly ny liabia lity 56 In addition, we may incur substantial costs in order to comply with current or future environmental, health and safetyff laws and e laws and regulations may impair our research, development or production efforts. Our failure to regulations. These current or futur comply with these laws and regulations also may result in substantial fines, ff ff penalties or other sanctions. Product Liability Lawsuits Against Us Could Cause Us To Incur Substantial Liabilities And Could Limit Commercialization Of Any Product Candidates dd That We May Develop. We will face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any product candidates that we may develop. If we cannot successfully defend ourselves against claims that our product candidates caused injuries, we could incur substantial liabila or eventual outcome, liability claims may result in: ities. Regardless of merit • • • • • • • decreased demand for any product candidates that we may develop; injury to our reputation and significant negative media attention; withdrawal of clinical trial participants; significant costs to defend the related litigation; substantial monetary awards to trial participants or patients; loss of revenue; and the inability to commercialize any product candidates that we may develop. Although we anticipate obtaining productdd liability insurance coverage in advance of the commencement of any clinical trial of our producdd t candidates, it may not be adequate to cover all liabia lities that we may incur. Further, we anticipate that we will need to increase our insurance coverage if we successfully commercialize any product candidate. Insurance coverage is increasingly expensive. We may not be abla e to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy aff that may arise. ny liabia lity If We Fail To ETT stEE ablish And Maintain Proper And Effect And Our Ability To Operate Our Business Could Be Harmed.dd ff ive Internal ConCC trol Over FinaFF ncial Reporting, Our Operating Results Ensuring that we have adequate internarr l finaff ncial and accounting controls and procedurdd es in place so that we can producdd e ently. Our ncial reporting is a process designed to provide reasonabla e assurance regarding the reliability of financial accurate finff ancial statements on a timely basis is a costly and time-consuming effoff internal control over finaff reporting and the preparation of finan process of documenting, reviewing and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or SOX, which will require annual management assessment of the effectiveness of our internal over financial reporting. cial statements in accordance with generally accepted accounting principles. We have begun the rt that needs to be re-evaluated frequ control rr ff ff Implementing any appropriate changes to our internal controls may distract our officff ers and employees, entail substantial costs ur existing processes and take significant time to complete. These changes may not, however, be effective in maintaining to modify off the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to producdd e accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internarr cial statements on a timely basis may harm our common share price and make it more diffiff cult for us to effectively market and sell our service to new and existing customers. l controls are inadequate or that we are unable to producedd accurate finan rr ff Our Internal Computem SS r Syste Security Breaches, Which CouCC ld Result InII A MatMM erial Disruptiu ms, Or Those OfO Our Collaboll rators Or Other on Of Our Productdd tt tors Or Consultants, MayMM Fail Or Sufferff Contrac tt Development Programs. Our internal rr computer systems and those of our current and any future collaborators and other contractors or consultants are vulnerabla e to damage froff m computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptio ns in our operations, it could result in a disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary informff example, the loss of clinical trial data froff m futur ff significantly increase our costs to recover or reproduce the data. To the extent that any disruptiuu loss of, or damage to, our data or applications, or inappropriate disclosure of confideff liability, our competitive position could be harmed and the further development and commercialization of our product candidates could be delayed. ation or other similar disruptio ppaa e clinical trials could result in delays in our regulatory arr ntial or proprietary information, we could incur on or security breach were to result in a roval efforff ns. For ts and uu uu 57 Our Business Is Subject To Economic, Political, Regulatory And Other Risks Associated With International Operations. Our business is subject to risks associated with conducting business internationally. We and a number of our suppliers and collaborative and clinical study relationships are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including: • • • • • • • • • • • • • • economic weakness, including inflation, or political instabili a ty in particular non-U.S. economies and markets; ff differi ng regulatory requirements for drug approvals in non-U.S. countries; potentially reduced protection forff intellectual property rights; difficff ulties in compliance with non-U.S. laws and regulations; changes in non-U.S. regulations and customs, tariffsff and trade barriers; changes in non-U.S. currency exchange rates and currency controls; changes in a specific country’s rr or region’s political or economic environment; trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non-U.S. governmrr ents; negative consequences from changes in tax laws; compliance with tax, employment, immigration and labor laws for employees living or traveling outside the United States; workforce uncertainty in countries where labor unrest is more common than in the United States; difficff ulties associated with staffinff g and managing international operations, including differing labor relations; production shortages resulting from any events affecting raw material suppluu United States; and y or manufacturing capabia lities outside the business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including floods and fires. Our Business Operations Have a Substantia a anaMM ging tt Our Business OperaOO haCC llenges In MII l Internat tt ional tions. II Presents Ctt tt Footprint and We May Further Expand In The Future, Which We are headquartered in Basel, Switzerland and have officeff s in the U.S. and the United Kingdom. In addition, we may expand our international operations into other countries in the future. While we have acquired significant management and other personnel with substantial experience, conducting our business in multiple countries subjects us to a variety of risks and complexities that may materially and adversely affect our business, results of operations, financial condition and growth prospects, including, among other things: • • • • • • • the increased complexity and costs inherent in managing internarr tional operations; diverse regulatory,rr countries where we are located or do business; financial and legal requirements, and any future changes to such requirements, in one or more country-rr specific tax, labor and employment laws and regulations; ff challenges inherent in efficie policies, benefits and compliance programs to differff a ing labor and other regulations; ntly managing employees in diverse geographaa ies, including the need to adapt systems, liabia lities for activities of, off r related to, our international operations or product candidates; changes in currency rates; and regulations relating to data security and the unauthorized use of, or access to, commercial and personal information. As we continue to expand our operations, our corporate structure and tax structure has become substantially more complex. In potential partnerships, we are actively engaged in developing and applying technologies and connection with our current and futurett intellectual property with a view toward commercialization of products globally, often with commercialization partners. In connection with those activities, we already have and will likely continue to engage in complex cross-border and global transactions involving our technology, intellectual property and other assets, between CRISPR and other entities such as partners and licensees, and between companies within the CRISPR group.uu Such cross-border and global arrangements are both difficul t to manage and can potentially give ff 58 raise to complexities in areas such as tax treatment, particularly since we are subjeb ct to multiple tax regimes and differff ent tax authorities can also take differe be no assurance that we will effectively manage this increased complexity without experiencing operating inefficff deficiencies or tax liabilities. Significant management time and effort our company, and our failure to successfully operations and growth prospects. ff do so could have a material adverse effect each other, even as regards the same cross-border transaction or arrangement. There can ively manage the increased complexity of ncial condition, results of on our business, finaff is required to effect iencies, control nt views fromff ff ff ff ff Risks Related to Intellectual Property If We Are Unable To Adequately Pll TT rotect Our Proprietary Trr iently Bll Products We Develop Ao Sufficff Our Ability To Successfullyll Commercialize Any Product Candiddd atedd Affeff cted.dd nd For Our Technology And Product Candidates, evelop Ao road, Our Competitors Crr oulCC d Dll echn dd ology Ogg r Obtain And Maintain Patent Protection For The Or If The Scopeo Of The Patent Protection Obtained Is NII nd Commercialize Products And Technology Similarll Or Identical To OTT serr s We Maya Develop,o And Our Technology Maya Be Adverdd otNN urs, And ly Our success depends in large part on our ability to obtain and maintain proprietary or intellectual property protection in the a ications we have licensed that may cover our platform is the subject of an interference United States and other countries with respect to our CRISPR/Cas9 platforff m technology and any proprietary product candidates and technology we develop. Currently, no patents covering our CRISPR/Cas9 platformff United States and one of the patent appl proceeding at the United States Patent and Trademark Office, or USPTO, which is discussed below. We seek to protect our proprietary position by in-licensing intellectual property to cover our platform technology and filing patent appl ications in thett United States and in other jurisdictions related to our technologies and product candidates that are important to our business. We also rely on trade secrets, know-how and continuing technological innovation to develop and maintain our proprietary and intellectual property position. If we or our licensors are unable to obtain or maintain patent protection with respect to our CRISPR/CRR as9 platforff m technology and any proprietary prr prospects could be materially harmed. and technology we develop, our business, financial condition, results of operations and or product candidates have been issued to us in the dd roducts a The scope of patent protection that will be available to us in the United States and in other countries is uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain and enforff ce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our owned and licensed patents. With respect to both in-licensed and owned intellectual predict whether the patent appl whether the claims of any issued patents will provide sufficie invalid, unenforceable or not infriff nged if challenged by our competitors. ications we and our licensors are currently pursuing will issue as patents in any particular jurisdiction or nt protection from competitors, or if any such patents will be found property, we cannot aa ff tt ff patent appaa r desirablea The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, maintain, e, or license all necessary orr lications at a reasonable cost or in a timely manner. It is also possible that we to identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter iality agreements with parties who have access to confidential or patentable aspects of our research enforcff ff will fail into non-disclosure and confident and development output, such as our employees, corporate collaborators, outside scientificff manufact urett before a patent appl the scientificff typically not publu ished until 18 months after filiff ng, or in some cases not at all. Thereforff e, we cannot know with any degree of certainty whether the inventors of our licensed patents and appl licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. rs, consultants advisors, and other third parties, any of these parties may breach the agreements and disclose such output ication is filed, thereby jeopardizing our ability to seek patent protection. In addition, publications of discoveries in ications were the first to make the inventions claimed in our owned or any lications in the United States and other jurisdictions are literature ofteff n lag behind the actuatt l discoveries and patent appaa ators, CROs, contract a collabor aa a ff tt The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and eabia lity, factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforcff and commercial value of our patent rights are highly uncertain. Our pending and future patent appli being issued which protect our technology or product candidates or which effectively prevent others fromff competitive technologies and product candidates. cations may not result in patents commercializing aa Moreover, the coverage claimed in a patent appli a cation can be significantly reduced before the patent is issued, and its scope can be reinterprrr eted after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a forff m that will provide us with any meaningfulff or otherwise provide us with any competitive advantage. Any patents that we hold or in-license may be challenged, narrowed, circumvented, or invalidated by third parties. Consequently, we do not know whether any of our platform advances and productdd candidates will be protectable or remain protected by valid and enforceabla e patents. Our competitors or other third parties may be ablea protection, prevent competitors or other third parties from competing with us, 59 to circumvent our patents by developing similar or alternative technologies or products in a non-infring are aware that third parties have suggested the use of the CRISPR technology in conjunction with a protein other than Cas9. Our owned and in-licensed patents may not cover such technology. If our competitors commercialize the CRISPR technology in conjunn adversely affeff cted. ction with a protein other than Cas9, our business, financial condition, results of operations, and prospects could be materially ing manner. For example, we ff The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and our patents may be ct to third party t to a third party preissuance in another jurisdiction, or become involved in opposition, derivation, challenged in the courts or patent offices in the United States and in other jurisdictions. We may be subjecb submission of prior art to the USPTO, or a patent officeff revocation, reexamination, post-grant review and inter partes review, or interference proceedings, or litigation challenging our patent rights or the patent rights of others. Indeed, certain of our fundamental intellectual property has been subjeu observations outside the United States and interference proceedings within the United States. Competitors may claim that they invented the inventions claimed in such issued patents or patent applications prior to our inventors, or may have fileff d patent applications before our inventors did. A competitor may also claim that our products and services infrinff thereforff e cannot practice our technology as claimed under our patent appl ging third-party patent rights. Competitors claim may result in our inability to manufact may also contest our patents, if issued, by showing that the invention was not patent-eligible, was not novel, was obvious or that the patent claims faile could reduce the scope of, or invalidate, our patent rights or allow third parties to commercialize our technology or productdd compete directly with us, without payment to us. Moreover, we, or one of our licensors, may have to participate in additional interference proceedings declared by the USPTO to determine priority of invention or in post-grant challenge proceedings, such as oppositions in a non-U.S. patent officff e, that challenge priority of invention or other featurett s of patentabia lity. Such challenges may result in loss of patent rights, loss of exclusivity or freedom to operate, or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our abila of the patent protection of our technology and product candidates. Such proceedings technology and products, or limit the duration also may result in subsu tantial cost and require significant time from our scientists and management, even if the eventuatt l outcome is favorable to us. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future productdd aa or commercialize products without infrinff ications, if issued. An adverse determination in any such using or commercializing similar or identical ity. An adverse determination in any such submission, proceeding or litigation d any other requirement forff ge its patents and that we ity to stop others fromff candidates. patentabila s and urett dd ff ff We Are Required To Pay Royalties UndUU erdd Our License Agreements WithWW Third-Party Licensors, And We Must Use Commercially Reasonable Diligence Efforts ff And Meet Milestones To Maintain Our License Rightgg s.tt Under our in-license agreements, including our in-license agreements with Dr. Emmanuelle Charperr ntier, we will be required to tier, we have an obligation to use commercially reasonable effor us of any products that we may seek to commercialize. Under each of our in-license pay royalties based on our revenues from sales of our products utilizing the licensed technologies and these royalty payments could adversely affeff ct the overall profitff ability forff agreements with, Dr. Charpenrr approval to market a licensed therapeutic product. Our in-license agreements with Dr. Charpentier also include an obligation to file a U.S. Investigational New Drug appl ication (or its equivalent in a major market country) by April 2021 and an obligation to file a U.S. Investigational New Drugrr meeting these obligations in the futurett on a timely basis or at all. Our failure to meet these obligations may give Dr. Charperr ntier the right to terminate our license rights. We will need to outsource and rely on third parties forff many aspects of the clinical development o meet of the products covered under our license agreements. Delay or fail our diligence obligations and the continuation of our license agreements with third-party licensors. application (or its equivalent in a major market country)rr ure by these third parties could adversely affecff by April 2024. We may not be successful in ts to develop and obtain regulatory t our ability t aa ff ff t Some Of Our In-licensed Patent Applications Are Subject s Interference Proceeding WithWW The Broad Institute, Massachusetts Institute of To echTT In Front Of The United States Patent And Tradema Property May Be Subject To Further Priority Disputes Or To Inventorship Dispute Are Unsuccessfulff r To CTT Available On CommCC One Or More Of The Product Candidates We May Develop, Which Could Have A MateMM rial Advedd rse Impacm t On Our Business. s, Including An Active resident And Fellows of Harvard College, n, Our Owned And In-Licensed Patents And Other IntII ellectual s And Similar Proceedings. If We Or Our Licensorsrr Third Parties, Which May Not Be ture, And Commercialization Of In Any Of These Proceedings, We MWW ayMM Be Required To OTT ercially Reasoaa nable Terms Or At All, Ol s And Inventorship Dispute easCC e TheTT Developmen btain Licenses FromFF rk Office. In Additiodd To Priority Dispute t, Manufacff nology, Pyy b dd o e s s In January 2016, at our request, the USPTO declared an interferenc ff e between one of the pending U.S. patent applications we licensed from Dr. Charperr ntier and twelve issued U.S. patents, and subsequently added one U.S. patent application, owned jointly by the Broad Institute and Massachusetts Institute of Technology and, in some instances, the President and Fellows of Harvard College, collectively referff red to as the Broad. An interferff ence is a proceeding conducted at the USPTO by the Patent Trial and Appeal Board, or PTAB, to determine which party was the first to invent subject matter claimed by both of these parties. There are currently two parties to this interference. Because our application was filed first, the USPTO designated Dr. Charpentier, the Regents of the University of Californirr a, or Californff ia, and the University of Vienna, or Vienna, collectively as “Senior Party” and designated Broad 60 rr rr yrr 2017 that the as “Junior Party.” Following motions by the parties and other procedural matters, the PTAB concluded in Februar declared interference should be dismissed because the claim sets of the two parties were not directed to the same patentable invention ce were in accordance with the PTAB’s two-way test for patent interferences. In particular, the Junior Party’s claims in the interferen all limited to uses in eukaryot ic cells, while the Senior Party’s claims in the interference were not limited to uses in eukaryotic cells but included uses in all settings. Either party can appeal an adverse decision to the U.S. Court of Appeals for the Federal Circuit. In parallel, either party can also pursue existing or new patent applications in the U.S. and elsewhere. Going forwar as other parties could seek a new interference related to the uses of the technology in eukaryorr technology, and any existing or new patents could be the subject of other challenges to their validity of enforcff ity. In the context of a second interference or in other proceedings, a determination could be reached regarding that the Senior Party was not the first to invent, or it could be concluded that the contested subjeb ct matter is not patentabla e to the Senior Party and is patentable to the Junior Party, which in this case could preclude our U.S. patent applications froff m issuing as patents, in which case the proceedings would result in our losing the right to protect core innovations and our freedom to practice our core gene editing technology. If there is a second interference, either party can again appeal an adverse decision to the U.S. Court of Appeals for the Federal Circuit. In any case, it may be years before there is a final we are responsible forff licensed technology. determination on priority. Pursuant to the terms of the license agreement with Dr. Charpentier, covering or reimbursing Dr. Charpentier’s patent prosecution defense and related costs associated with our in- rr tic cells or other aspects of the d, either party as well eabila ff ff of the Broad patents currently involved in the interference with Dr. Charpentier, Furthermore, we may be involved in other interference proceedings or other disputes in the future. For example, Toolgen Inc., or Toolgen, filed Suggestions of Interferff ence in the USPTO on April 13, 2015, and December 3, 2015, suggesting that they believe some of the claims in pending U.S. applications owned by Toolgen (U.S. Serial No. 14/685,568 and U.S. Serial No. 14/685,510, respectively) interfere with certain claims in fiveff California and Vienna. The USPTO may, in the futurtt e, declare an interference between our patent application and one or more Toolgen patent applications. We are also aware of additional third parties that have pending patent appl technologies, which similarly may or may not lead to further interference proceedings. For example, Rockefell continuation appl Luciano Marraffini ff other jurisdictions (published internationally as WO2013/141680 and WO2013/142578), Harvard University has filed appa the United States and in other jurisdictions (published internat in the United States and in other jurisdictions (publiu technology based on appaa applications filed after 2012. er University has filedff ication (U.S. Serial No. 14/324,960) of an application fileff d by the Broad, but which names Rockefeller’s employee lications in the United States and in lications in ionally as WO2014/099744), and Sigma-Aldrich has filed applications tionally as WO2014/089290), each claiming aspects of CRISPR/CRR as9 lications claiming priority to provisional filff ings in 2012. Numerous other filings are based on provisional as co-inventor of CRISPR/Cas9 technology; Vilnius University has filed appaa ications relating to CRISRR PR rr shed internarr a aa aa ff Broad, Toolgen, Vilnius and other parties routinely file international counterpar ts of their U.S. applications, some of which have been granted or could in futff urtt e be granted in Europe and/odd r other non-U.S. jurisdictions. We and third parties have initiated opposition proceedings against some of these grants, and we may in the future oppose other grants to these or other applicants. Similarly, our intellectual property may in the futur e become involved in opposition proceedings in Europe or other jurisdictions. ff rr b e proceedings or other disputes. These third parties would be under no obligation to grant to us any such license and such in any interference proceedings or other priority or validity disputes (including any patent or become subject to, we may lose valuable intellectual property rights through the loss or If we or our licensors are unsuccessfulff oppositions) to which we or they are subu ject narrowing of one or more of our patent applications. If we or our licensors are unsuccessful in any interference proceeding or other dispute, we may be required to seek to obtain and maintain licenses from third parties, including parties involved in any such ff interferenc licenses may not be availabla e on commercially reasonabla e terms or at all, or may be non-exclusive. If we are unablea maintain such licenses, we and our partners may need to cease the practice of our core gene editing, and the development, manufacturett narrowing of our patent claims could limit our abili products dd prospects. If we are unsuccessfulff commercializing any products based on our core gene editing technology. Even if we are successfulff other similar disputes, it could result in substantial costs and be a distraction to management and other employees. , and commercialization of one or more of the producdd t candidates we may develop. The loss of exclusivity or the in the interference proceedings with Broad, we and our partners may be blocked from . Any of the foregoing could result in a material adverse effect on our business, finaff ty to stop others from using or commercializing similar or identical technology and ncial condition, results of operations, or in an interference proceeding or to obtain and a The Intellectual Propero ty That Protects Our Core Gene Editidd ng Technology Is Jointly Owned, And Our License IsII From Only One Of The Joint Owners,rr Materially Limiting Our Right i s Itt n TII heTT United StaSS tes And In Other Jurisdictidd ons. The family of patent applications we have in-licensed froff m Dr. Charperr ntier is the foundational patent protection for our core gene editing technology. However, that family includes other named inventors who assigned their rights either to California Vienna. As such, the intellectual ia, and Vienna. On December 15, 2016, property is currently co-owned by Dr. Charpentier, Californff we entered into a Consent to Assignments, Licensing and Common Ownership and Invention Management Agreement or IMA with California, Vienna and their licensees including Caribou Biosciences, Inc. and Caribou’s licensee Intellia Therapeutics, Inc. Under the or to ff tt 61 IMA, the co-owners provided reciprocal worldwide cross-consents to each of the other co-owners’ licensees and sublicensees, and agreed to a number of other commitments and obligations with respect to supporting and managing the underlying CRISPR/Cas9 gene below, that leaves us in a position of holding editing intellectual property, including a cost-sharing agreement. As explained more fully only non-exclusive or co-exclusive rights to the patent rights that protect our core gene editing technology, and we must continue to satisfy our contractual obligations under the IMA in order to maintain the effectiveness of the consents by Californiarr to our license from Dr. Charpenrr and Viennann tier. ff In the United States, each co-owner has the freedom to license and exploit the technology. As a result, we do not have exclusive access to any intellectual property rights that Dr. Charpentier co-owns with another entity, such as California and Vienna. Our license with Dr. Charpenrr tier is therefore non-exclusive with respect to such co-owned rights. Furthermore, in the United States each co-owner is required to be joined as a party to any claim or action we may wish to bring to enforce those patent rights. Moreover, in the United States, non-exclusive licenses have no standing to bring a patent infringement action before a court. Therefore, for the patents owned with Californi a and Vienna a and Vienna we have no ability to pursue third party infringement claims without cooperation of Californi and potentially their licensees. Although we have entered into a Consent to Assignments, Licensing and Common Ownership and Invention Management Agreement with Vienna and Califorff nirr a and their licensees, which provides for, and coordination in the event of third-party infriff ngement of the CRISPR/Cas9 intellectual property, there can be no assurance that Vienna and Califorff nia will cooperate with us in any future infriff ngement. If we are unable to enforce our core patent rights licensed from Dr. Charpentier, we may be unablea sublicense our technology, either of which could have a material adverse effect competing with us and may be unable to persuade companies to among other things, notice of to prevent third parties fromff on our business. ff ff ff ff If We Experience Disputes With Ttt That Are Important To OTT License Rightsgg heTT ur Business. Third Parties ThatTT We In-license IntII ellectual Property Rtt ights From, We Could Lose We license our foundational intellectuatt l property from a third party, and we expect to continue to in-license additional third- party intellectual property rights as we expand our CRISPR/Cas9 gene-editing technology. Disputes may arise with the third parties from whom we license our intellectual property rights fromff for a variety of reasons, including: • • • • • • the scope of rights granted under the license agreement and other interprerr tation-related issues; the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; censing of patent and other rights under our collabor a ative development relationships and obligations associated the subliu with sublicensing; our diligence obligations under the license agreement and what activities satisfy t ff hose diligence obligations; the inventorship and ownership of inventions and know-how resulting froff m the joint creation or use of intellectual property by our licensors and us and our partners; and the priority of invention of patented technology. In addition, the agreements under which we currently license intellectual property or technology from third parties, or maintain t in such a way that puts us in breach of one or more agreements, which would make us susceptible to lengthy and consents under the IMA, are complex, and certain provisions in such agreements may be susceptible to multiple interpretations, or may conflicff expensive disputes with one or more of our licensing partners or the parties to the IMA. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectuatt technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfull ff could have a material adverse effect on our business, finaff y develop and commercialize the affected product candidates, which ncial conditions, results of operations, and prospects. l property or We May Not Be Succe SS ssfulff In Obtaining Necessary Rights Ttt o ATT ny Product CanCC didatedd s We MWW ayMM Develop To hrTT ough Agg cquisitions And In-licenses. We currently have rights to intellectual property, through in-licenses fromff third parties, to identify and develop productdd candidates. Many pharmaceutical companies, biotechnology companies, and academic instituttt ions are competing with us in the fieff of gene-editing technology and filing patent applications potentially relevant to our business. For example, we are aware of several third party patent applications that, if issued, may be construedrr order to avoid infringing these third party patents, we may find it necessary or prudent to obtain licenses from such third partyrr to cover our CRISPR/Cas9 technology and product candidates. In ld 62 nucleic acids, as well as non-CRISPR/Cas9 technologies such as delivery mrr intellectual property holders. We may also require licenses from third parties for certain modified or improved components of CRISPR/Cas9 technology, such as modifiedff we are evaluating for use with product candidates we may develop. In addition, with respect to any patents we co-own with third parties, we may require licenses to such co-owners’ interest to such patents. However, we may be unable to secure such licenses or otherwise acquire or in-license any compositions, methods of use, processes, or other intellectual property rights from third parties that we identify as necessary for product candidates we may develop and CRISPR/Cas9 technology. The licensing or acquisition of third party intellectual property rights is a competitive area, and several more established companies may pursue strategies to license or acquire third party intellectual property rights that we may consider attractive or necessary. These establa ished companies may have a competitive advantage over us duedd to their size, capital resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to property rights on terms that would allow us to make an appropriate return on our investment license or acquire third party intellectual or at all. If we are unable to successfully obtain rights to required third party intellectuatt intellectual property rights we have, we may have to abandon development of the relevant program or product candidate, or discontinue the practice of our core CRISPR/Cas9 gene-editing technology, which could have a material adverse effect on our business, financial condition, results of operations, and prospects. l property rights or maintain the existing ethods that tt Issued Patents Covering Our TechTT nology Agg Court. nd Producdd t CandCC idadd tes CoulCC d Bll e FounFF d InvaII lid Or Unenforce ff able If Challenged In If we or one of our licensors initiated legal proceedings against a third party to enforff ce a patent covering a producdd t candidate we may develop or our technology, including CRISPR/Cas9, the defendant could counterclaim that such patent is invalid or unenforff ceable. In patent litigation in the United States, defenff dant counterclaims alleging invalidity or unenforce commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutoryrr lack of novelty, obviousness, or non-enablement. ability are ff requirements, including dd Grounds for an unenforceabila ity assertion could be an allegation that someone connected with prosecution of the patent withheld g prosecution. Third parties have raised challenges to the relevant inforff mation from the USPTO, or made a misleading statement, durin validity of certain of our in-licensed patent applications, such as our in-licensed CRISPR/Cas9 patent applications in the context of third party observations fileff d in Europe, and may in the future raise similar claims before administrative bodies in the United States or in other jurisdictions, even outside the context of litigation. Mechanisms forff challenging the validity of patents in patent offff icff es include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in non-U.S. jurisdictions (e.g., opposition proceedings). Such proceedings could result in the loss of our patent applications or patents, or their narrowing in such a way that they no longer cover our technology or platform, or any product candidates that we may develop. The outcome following legal assertions of invalidity and unenforceabia lity is unpredictabla e. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art. If a third party 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 our technology or platform, or any product candidates that we may develop. Such a loss of patent protection would have a material adverse impact on our business, financial condition, results of operations, and prospects. The Intellectual Propero ty Landscape Around Gene-Editidd ng Technology, Including CRISPR/CPP as9CC , I9 sII Highly Dynamic, And Third Parties May Initiate And Prevail In Legal We Are Infrinff pp isapMM prop Uncertain And Could Have A MaterMM ial Adverse Effect riating, Or Otherwise Violati Proceedings ging, Mgg dd e ff On The Success Of Our Business. Alleging That The Patents That We In-License Or Own Are Invalid Or That ng Their Intellectual Property Rights, The Outcome Of WO hicWW h WouWW ld Be ll The field of gene editing, especially in the area of CRISPR/Cas9 technology, is still in its infancy, and no such products have reached the market. Due to the intense research and development that is taking place by several companies, including us and our competitors, in this field, the intellectual property landscapeaa be significan our owned and in-licensed, and other third party, intellectual property and proprietary rights in the future. the coming years. There may t intellectual property related litigation and proceedings, in addition to the ongoing interference proceedings, relating to is in flux, and it may remain uncertain forff ff uu ity of our collabor our ability and the abila Our commercial success depends upon ators to develop, manufacture, market, and sell any product candidates that we may develop and use our proprietary technologies without infringing, misappropriating, or otherwise violating the intellectual property and proprietary rights of third parties. The biotechnology and pharmaceutical industdd characterized by extensive litigation regarding patents and other intellectuatt become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our technology and any product candidates we may develop, including re-examination interference proceedings, post-grant review, inter partes review, and derivation proceedings beforff e the USPTO and similar proceedings in other jurisdictions such as oppositions before the European Patent Office. Third parties, including parties involved in ongoing interference proceedings, may assert infriff ngement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. We are awareaa l property rights. We are subju ect to and may in the futurtt e ries are of a 63 a certain third party patents and patent applications including, for example, the Broad patents involved in the interference proceeding described abov e that may be asserted to encompass our CRISPR/CRR as9 technology. If we are unable to prove that these patents are invalid and we are not abla e to obtain or maintain a license on commercially reasonabla e terms, such third parties could potentially assert infrff ingement claims against us, which could have a material adverse effect on the conduct of our business. If we are founduu infringe such third party patents, we and our partners may be required to pay damages, cease commercialization of the infringing technology, including our core CRISPR/CaRR available on commercially reasonable terms or at all. Additionally we have not perforff med any freedom-to-operate analysis on specific producdd t candidates at this stage to identify potential infringement risks. A proper analysis of that type will not be feasible until specificff product candidates are designed. s9 gene-editing technology, or obtain a license from such third parties, which may not be to ff Even if we believe third-party intellectuatt l property claims are without merit, there is no assurance that a court would find in our ff ff ff able, and infring ed, which could materially and adversely affect our ability to commercialize favor on questions of infriff ngement, validity, enforceability, ownership, or priority. A court of competent jurisdiction could hold that these third party patents are valid, enforce any product candidates we may develop and any other product candidates or technologies covered by the asserted third party patents. In order to successfully challenge the validity of any such U.S. patent in fede ral court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. If we are found to infringe a third party’s intellectual property rights, and we are unsuccessfulff unenforceable, we could be required to obtain a license fromff any product candidates we may develop and our technology. However, we may not be able to obtain any required license on commercially reasonabla e terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. We also could be forced, including by court order, to cease developing, manufacturing, and commercializing amages, including the infringing technology or product candidates. In addition, we could be found liable for significant monetary drr treble damages and attorneys’ fees, if we are found to have willfully we have misappropriated the confidential informat our business, finaff ff ncial condition, results of operations, and prospects. ion or trade secrets of third parties could have a similar material adverse effect infringed a patent or other intellectual property right. Claims that such third party to continue developing, manufacturi in demonstrating that such patents are invalid or ng, and marketing on ff ff ff tt Intellectual Property Litigation Could Cause Us To Spend Subst SS antial Resources And Distrii act Our Personnel From TheiTT r Normal Responsibilities. Litigation or other legal proceedings relating to intellectuatt l property claims, with or without merit, is unpredictable and generally expensive and time-consuming and is likely to divert significff ant resources from our core business, including distracting our technical and management personnel from their normal responsibilities and generally harm our business. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation in certain countries, including the United States, there is a risk that some of our confiden ng this type of litigation. In addition, there could be publiu securities analysts or investors perceive these results to be negative, it could have a substu common shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any futff urtt e sales, marketing or distribution activities. c announcements of the results of hearings, motions or other interim proceedings or developments and if tial information could be compromised by disclosure duridd antial adverse effect on the price of our ff We may not have suffici ff ent finaff ncial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Accordingly, despite our efforts, we may not be able to prevent third parties froff m infringing or misappropriating or successfully challenging our intellectual property rights. Uncertainties resulting fromff litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. the initiation and continuation of patent n, ii Obtaining And Maintaining Our Patent Protection Depends On Complim ance WithWW Various Procedural, Document Submi ssio Be Reduced Or osed By Government Patent Agencies And Our Patent Protection CouldCC ent, And Othett SS Fee Payma Eliminated ForFF Non-compliance WithWW These Requirements. r Requirements Itt mpII Periodic maintenance fees, renewal fees, annuity fees and various other governme rr nt fees on patents and appl a ications will be due to be paid to the USPTO and various government patent agencies outside of the United States over the lifetime of our owned or licensed patents and applications. In certain circumstances, we rely on our licensing partners to pay these fees U.S. patent agencies. The USPTO and various non-U.S. governme documentary, fee payment, and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and other patent agencies over the lifetime of the patent. We are also dependent on our licensors to take the necessary arr ction to comply with these requirements with respect to our licensed intellectual property. In some can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are cases, an inadvertent lapse nt agencies require compliance with several procedural, due to U.S. and non- aa rr ff 64 situations, however, in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non- payment of fees patent appli aa as or similar to our product candidates, which would have a material adverse effect on our business. and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and marketing drugs that are the same ff cations covering our productdd candidates, we may not be able to stop a competitor fromff Some Intellectual Property Which We Have In-II ral Regulation licensed May Have Been Discovered Throughu Government Funded Programs nce nd A Prefereff liance WithWW Such Regulations May Limit Our Exclusive Rightgg s,tt And Limit Our Ability To As “march-in” Rights, Certai n Reporting Requirements Att s SuchSS CC ll And Thus May Be Subject To FTT For U.S.-SS based Manufact Contract With Ntt edeFF urers. CompCC on-NN U.S. Manufacturers. ff The intellectual property rights to which we have in-licensed under Dr. Charpentier’s joint interest are co-owned by California, a of Health. These irrevocable worldwide license to use inventions for any government t to certain federal regulations. The U.S. government has certain rights pursuant to the Bayh-Dole Act of which has indicated that the invention was made under Grant No. GM081879 awarded by the National Institutett rights are therefore subjecb 1980, or Bayh-Dole Act, to patents covering government rights in certain inventions developed under a government-funded program. These rights include a non-exclusive, non-transferable, al 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; ent action is necessary to meet publu ic health or safety needs; or (iii) government action is necessary t (ii) governmrr for public use under federal regulations, also referred to as “march-in rights.” The U.S. governmen these inventions if we, or the applicablea register the intellectual property within specifieff d time limits. Intellectuatt also subject to certain reporting requirements, compliance with which may require us or the applicable contractor to expend substantial resources. In addition, the U.S. government requires that any products embodying the subjeu ff through the use of the subject invention be manufactured substantially in the United States. The manufact tt urin can be waived if the owner of the intellectual property can show that reasonablea ts have been made to grant but unsuccessful effor licenses on similar terms to potential licensees that would be likely to manufacturtt e substantially in the United States or that under the ture is not commercially feasible. This preference forff U.S. manufacff circumstances domestic manufacff contract with non-U.S. productdd manufacturers for products future patents covering inventions is generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply. t also has the right to take title to ation to to file an applic ent and fail l property generated under a government funded program is covered by such intellectual property. To the extent any of our current or ct invention or producdd ed g prefereff to disclose the invention to the governmrr turers may limit our abili o meet requirements contractor, fail nce requirement ty to dd a aa ff rr rr rr ff ff We May Not Be Able To Protect Our Intellectual Propeo rty And Proprietary Rightsgg Throughu out The World.ll Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differff ability to protect and enforff ce our intellectual property rights may be adversely affected by unforeseen changes in intellectual property laws various jurisdictions worldwide. Additionally, the patent laws of some countries do not affor l property protection to the same extent as the laws of the United States. For example, unlike patent law in the United States, the patent law in Europe and many other jurisdictions precludes the patentabia lity of methods of treatment of the human body and imposes substantial restrictions on the scope of claims it will grant if broader than specifically disclosed embodiments. in certain countries, particularly in developing countries. Moreover, our d intellectuatt ff rr dd infrinff ff and, furt her, may export otherwise Many companies have encountered significant problems in protecting and defendff ging products to territories where we have patent protection but enforcement is not s may compete with our product candidates, and our patents or other intellectual ing intellectual property rights in various jurisdictions globally. Consequently, we may not be able to prevent third parties fromff practicing our inventions in all countries outside made using our inventions in and into the United States or other jurisdictions. the United States, or from selling or importing products Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products dd as strong as that in the United States. These productdd property rights may not be effective or sufficie certain developing countries, do not favor the enforce particularly those relating to biotechnology products, which could make it difficff ult for us to stop the infrinff marketing of competing products intellectual property and proprietary rights in various jurisdictions globally could result in substantial costs and divert our efforts attention fromff patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningfulff efforts to enforce our intellectual commercial advantage froff m the intellectual property that we develop or license. in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our and other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our nt to prevent them froff m competing. The legal systems of certain countries, particularly ment of patents, trade secrets, and other intellectual property protection, property and proprietary rights around the world may be inadequate to obtain a significaff . Accordingly, our nt gement of our patents or dd ff ff ff tt 65 Many countries have compulsoryrr 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 third parties, including 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 is forff ced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and prospects may be adversely affecff ted. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. Changes To TTT heTT Patent Law In The United StatSS es And Other iring Our Ability To Protect Our Product Candidates. tt dd Thereby Ib mpa II Jurisdictions CouldCC Diminishii The ValVV ue Of Patents Itt n GII eneral, As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectuatt l property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Recent patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act, or Leahy-Smith Act, signed into law on September 16, 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficff ient and cost-effective avenues for competitors to challenge the validity of patents. In addition, the Leahy-Smith Act has transformff ed the U.S. patent system into a “first ve on March 16, 2013. Accordingly, it is not yet clear what, to file” system. The first-to-fileff if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could make it more difficff ult to obtain patent protection for our inventions and increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could harm our business, results of operations and financial condition. provisions, however, only became effecti ff ., the Supreme Court ruled that a “naturally occurring DNA segment is a productdd The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection availabla e in certain circumstances or weakening the rights of patent owners in certain situations. For example, in Association for Molecular Pathology v. Myriad Genetics, IncII of naturtt e and not patent eligible merely because it has been isolated,” and invalidated Myriad Genetics’s claims on the isolated BRCA1 and BRCA2 genes. Certain claims of our patents relate to CRISPR/Cas9 gene-editing technology as well as guide components that areaa directed to naturally occurring DNA sequences. To the extent that such claims are deemed to be directed to natural products, or to lack an inventive concept aboa ve and beyond an isolated natural product, a court may decide the claims are invalid under Myriad.dd Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to obtain patent protection for our proprietary technology or our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictablea obtain new patents or to enforce our existing patents and patents that we might obtain in the future. Court, scheduldd ed to begin in 2017, may particularly present uncertainties forff competitors in Europe. While that new court is being implemented to provide more certainty and efficiency to patent enforcff throughout Europe, it will also provide our competitors with a new forum to use to centrally revoke our European patents. It will be several years before we will understand the scope of patent rights that will be recognized and the strength of patent remedies that will be provided by that court. We will have the right to opt our patents out of that system over the first seven years of the court, but doing so may preclude us from realizing the benefitff s of the new unifieff d court. our ability to protect and enforce our patent rights against ways that would weaken our ability to Europe’s planned Unified Patent ement tt If We Are UnabUU le To Protect TheTT Confidn endd tiality Of Our Trade TT Secrets, Our Business And Competm itive Position WouldWW Be Harmed. In addition to seeking patents for some of our technology and product candidates, we also rely on trade secrets and tiality agreements to protect our unpatented know-how, technology, and other proprietary informa confiden ff competitive position. Trade secrets and know-how can be difficult to protect. In particular, we anticipate that with respect to our technology platform, these trade secrets and know-how will over time be disseminated within the industdd ry through independent development, the publication of journal articles describing the methodology, and the movement of personnel from academic to industry scientific positions. tion and to maintain our ff We seek to protect these trade secrets and other proprietary technology, in part, by entering into non-disclosure and ators, CROs, contract manufact confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientificff collabor a invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. Despite rs, consultants, advisors, and other third parties. We also enter into confidentiality and urett ff 66 ff s, any of these parties may breach the agreements and disclose our proprietary inforff mation, including our trade secrets, and these effort 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 difficff ult, expensive, and time-consuming, and the outcome is unpredictabla e. In addition, some courts inside and outside the United States 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 or other third party, we would have no right to prevent them, or those to whom they communicate it, 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 or other third party, our competitive position would be materially and adversely harmed. rr If We Do Not Obtain Patent Term Extension And Data Exclusivity For Any Product Candidates We May Develop, Our Business May Be Materially Harmed. a uu Depending upon the timing, duration and specifics of any FDA marketing appr oval of any product candidates we may develop, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984, or Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent extension term of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years fromff those claims covering the approved drug, not be granted an extension because of, for example, failing to exercise due diligence during the testing phase or regulatory r process, faiff aa ing to appl a satisfy aff ppl request. If we are unablea rely on our patent position to forestall the marketing of competing producdd ts following our patent expiration, and our business, financial condition, results of operations, and prospects could be materially harmed. ling to apply within applicable deadlines, fail icable requirements. Moreover, the applicable time period or the scope of patent protection affordff the date of product approval, only one patent may be extended and only ng it may be extended. However, we may eview y prior to expiration of relevant patents, or otherwise failing to to obtain patent term extension or term of any such extension is less than we request, we will be unable to t a method for using it, or a method for manufact ed could be less than we uri ff rr ff rr Intellectual Propeo rty Rtt ightgg s Dtt o NotNN Necessarily All ddredd ss All Potential Threats.tt The degree of futuff re protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example: • • • • • • • • • • may be able to make gene therapy products that are similar to any producdd t candidates we may develop or utilize similar technology but that are not covered by the claims of the patents that we license or may own in the future; gene therapyaa we, or our license partners or current or future collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that we license or may own in the future; we, or our license partners or current or future collaborators, might not have been the first to file patent applications covering certain of our or their inventions; others may independently develop similar or alternative technologies or duplicate any of our technologies without infrinff ging our owned or licensed intellectuatt l property rights; it is possible that our pending licensed patent applications or those that we may own in the futurett patents; will not lead to issued issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors; our competitors might conduct research and development activities in countries where we do not have patent rights and commercial then use the informff markets; ation learned from such activities to develop competitive products forff sale in our majora we may not develop additional proprietary t rr echnologies that are patentable; the patents of others may harm our business; and we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently filff e a patent covering such intellectual property. Should any of these events occur, they could have a material adverse effect ff on our business, finff ancial condition, results of operations, and prospects. 67 We May Be Subject To Claims That Our Employees, Consultants,tt Or Advisors Have Wrongfully Used Or Disclosed Alleged Current Or Former Employers Or Claims Asserting Ownership Oi f WO hatWW We Regard As Our Own Intellectual b TT f TO heir Trade Secrets Ott Property.tt Many of our employees, consultants, and advisors are currently or were previously employed at universities or other biotechnology or pharmaceutical companies. Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary i or former employer. Litigation may be necessary to defend against these claims. If we fail in defendff paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management. nformation, of any such individual’s current ing any such claims, in addition to rr rr In addition, while it is our policy to require our employees and contractors who may be involved in the conception or tt property to execute agreements assigning such intellectual property to us, we may be unsuccessfulff development of intellectual , conceives or develops intellectual property that we regard as our own. The executing such an agreement with each party who, in fact l property rights may not be self-eff xecuting, or the assignment agreements may be breached, and we may be assignment of intellectuatt forced to bring claims against third parties, or defenff d claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects. in ff Risks Related to The Ownership of Our Common Shares We Will IncuII II r Incr easedaa Devote SubSS stantial Time To New ComCC plm iance IniII Costs As A Result Of OO peO rating As A Public Company And Our Management Will Be Required To rate Governance Practices. tiatives And Corpo CC As a public company, and particularly after ce practices. Our management and other personnel will need to devote a substantial amount of time towards ff we are no longer an “emerging growth company,” we will incur significff ant legal, accounting and other expenses that we did not incur as a private company. SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Global Market, and other applicable securities rules and regulations impose various requirements on publu ic companies, including establishment and maintenance of effecff tive disclosure and finff ancial controls and corporate governanrr maintaining compliance with these requirements. Moreover, these requirements will increase our legal and finff ancial compliance costs and will make some activities more time-consuming and costly. For example, the rulrr es and regulations may make it more diffiff cult and more expensive forff qualifieff d members of our board of directors. We are currently evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. 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 governarr nce practices. us to obtain director and officer liability insurance, which could make it more difficul us to attract and retain t forff ff l control over financial reporting issued by our independent registered publu ic accounting firm. To achieve compliance with Pursuant to SOX Section 404, we are required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internarr l control over SOX Section 404 within the prescribed period, we are engaged in a process to document and evaluate our internarr resources, financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal rr potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internarr l 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 forff internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify off adverse reaction in the financial markets duedd ne or more material weaknesses, it could result in an ity of our financial statements. to a loss of confiden ce in the reliabila u ff 68 The Markerr Losses For Shareholders. t Price Of Our Common Shares Hasaa Been Volatile and Fluctuate Substantially,yy Which Could Result In Substantial Our stock price has been and in the future may be subjec t to substantial volatility. For example, our stock traded within a range of a high price of $25.00 and a low price of $11.63 per share for the period October 19, 2016, our first day of trading on The NASDAQ Global Market, through March 1, 2017. As a result of this volatility, our shareholders could incur substantial losses. In addition, the ff market price for our common stock may be influenced by many fact ors, including: u • • • • • • • • • • • • • • • • • • • • • the success of existing or new competitive producdd ts or technologies; the timing and results of any productdd candidates that we may develop; commencement or termination of collaborations for our producdd t development and research programs; failure or discontinuation of any of our productdd development and research programs; results of preclinical studies, clinical trials, or regulatory approvals of product candidates of our competitors, or announcements about new research programs or product candidates of our competitors; developments or changing views regarding the use of genomic productdd s, including those that involve gene editing; regulatory orr r legal developments in the United States and other countries; developments or disputes concerning patent applications, issued patents, or other proprietary r rr ights; the recruitment or departure of key personnel; the level of expenses related to any of our research programs, clinical development programs, or product candidates that we may develop; the results of our effort ff s to discover, develop, acquire or in-license additional product candidates or products; l or anticipated changes in estimates as to financial results, development timelines, or recommendations by securities actuatt analysts; announcement or expectation of additional financing efforts; sales of our common shares by us, our insiders, or other shareholders; expiration of market stand-off off r lock-up agreement; variations in our financial results or those of companies that are perceived to be similar to us; changes in estimates or recommendations by securities analysts, if any, that cover our common shares; changes in the strucrr ture of healthcare payment systems; market conditions in the pharmaceutical and biotechnology sectors; general economic, industry arr nd market conditions; and the other factors described in this “Risk Factors” section. In recent years, the stock market in general, and the market for pharmaceutical and biotechnology companies in particular, has ance of the companies whose stock is experiencing those price and volume flucff experienced extreme price and volume flucff performff tuations. Broad market and industry factors may seriously affect the market price of our common shares, regardless of our actual operating performance. Following periods of such volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our common share price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business. tuations that have often been unrelated or disproportionate to changes in the operating If Securities Analysts ll Do Not Publish Research Or Reports About Our Business Or If They Publish Negative Evaluations Of Our Common Shares, The Price Of Our Common Share SS s CouCC ld Decline. The trading market for our common shares will rely in part on the research and reports that industry orr r financial analysts publish about us or our business. If one or more of the analysts covering our business downgrade their evaluations of our common shares, the price of our common shares could decline. If one or more of these analysts cease to cover our common shares, we could lose visibility in the market for our common shares, which in turn could cause our common share price to decline. 69 ff A Signifgg ican t Portion Of Our Total Outstandingdd Common Shares May Be Sold Into The Marketkk In The Near Future, Which Could Cause The Market Price Of Our Common Shares To Decline Significantly,ll Even If Our Business IsII Doing Well. Sales of a substantial number of our common shares in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of common shares intend to sell shares, could reduce the market price of our common stock. All lock-up agreements entered into in connection with our initial public offering are expected to expire on April 17, 2017. Following the lockup expiration, outstanding common shares may be freeff permitted by Rules 144 and 701 under the Securities Act of 1933, as amended (the “Securities Act”), or to the extent that such shares have already been registered under the Securities Act and are held by non-affiff liates of ours. ly sold in the public market at any time to the extent Moreover, holders of a substantial number of our common shares have rights, subject b to conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also have registered substantially all common shares that we may issue under our equity compensation plans or that are issuable upon exercise of outstanding options. These common shares can be freely sold in the public market uponuu once vested, subjeu perceived that they will be sold, in the public market, the market price of our common shares could decline. icable to affiliates. If any of these additional common shares are sold, or if it is ct to volume limitations appl issuance and aa Our Executive Officer All Matters Submitted To STT ff tocSS kholdell rs For Appropp val. s,rr Directors,rr And Principal Stockholders,rr If TII heyTT ChooCC se To Act Together, Have The Ability To Control As of March 1, 2017, common shares benefici ff ally owned by our executive officers, directors and principal shareholders, including Vertex, Bayer Healthcare and other shareholders and their affilff iates who owned more than 5% of our outstanding common shares totaled 31,822,899. As a result, these shareholders, if they were to act together, would be ablea affairs and all matters requiring shareholder approval, including the election of directors and approval of significant transactions. This concentration of ownership may have the effect the market price of our common shares. might affect of delaying or preventing a change in control of our company and to influence our management and corporate ff ff ff We Have Broad Discretion In The UseUU Of Our Cash Reserves And May Not Use Such Cash Reserves EffeE ctively. Our management has broad discretion to use our cash reserves and could use our cash reserves in ways that do not improve our results of operations or enhance the value of our common shares. The failure by our management to appl could result in financial losses that could have a material adverse effect decline, and delay the development of our product candidates. Pending their use, we may invest our cash reserves in a manner that does not producdd e income or that loses value. s effectively a on our business, cause the price of our common shares to y these fund ff ff We Are An “Emerging Growth CoCC mpany,”n Discii Companies MayMM Makekk Our ComCC mon Shares Less Attractive To Investors.rr And TheTT Reduced dd losure Requirements Applica pp ble To Emergir ng Growth We are an “emerging growth company,” as defined in the Jumpstart Our Business Startuptt s Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (i) the last day of the fisca revenue of $1 billion or more; (ii) December 31, 2021, being the last day of the fiscal year following the fifth anniversary of the date of the completion of the IPO; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, which means the market value of our common shares that is held by non-affilff June 30th. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions fromff disclosure requirements that are appa include: licable to other public companies that are not emerging growth companies. These exemptions l year in which we have total annual gross iates exceeds $700 million as of the prior certain ff • • • not being required to comply with the auditor attestation requirements of Section 404 of SOX; not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; being permitted to present only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reducdd ed “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus; 70 • • reducdd ed disclosure obligations regarding executive compensation; and the “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements forff Dodd-Frank Wall Street Reform and Protection Act, or Dodd-Frank Act, and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of our chief executive officer. certain executive officers in connection with mergers and certain other business combinations) of the We may choose to take advantage of some, but not all, of the available exemptions. We cannot predict whether investors will find our common shares less attractive if we rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market forff our common shares and our common share price may be more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period forff complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocablya elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other publiu c companies that are not emerging growth companies. We Do Not Expect To PTT ay Dividends In The ForeFF seeable Future. ff ively be at the discretion of our board of directors and shareholders after taking into account various facff We have not paid any dividends since our incorporation. Even if future operations lead to significant levels of distributable profits, we currently intend that any earnings will be reinvested in our business and that no dividends will be paid prior to the time we have an established revenue stream to support continuing dividends. The proposal to pay future dividends to shareholders will in addition effect our business prospects, cash requirements, financial performff dividends is subjecb dividend income from our common shares and any returns on an investment in our common shares will likely depend entirely upon any future appreciation in the price of our common shares. Dividends, if any, paid on our common shares are subject to Swiss federal withholding tax, except if paid out of reserves fromff t to certain limitations pursuant to Swiss law or by our articles of association. Accordingly, investors cannot rely on ance and new product development. In addition, payment of futff urett contributions (“Kapitaleinlagen”). tors including a capital We Are A Swiss SS Corporation. The Rights Of Our Shareholders ll May Be Different FromFF The Rights Of Shareholders In Companies Governed By The Laws Of U.S. Jurisdictions. We are a Swiss corpor rr ation. Our business and corporate affairs are governedrr by our articles of association and by Swiss law. The rights of our shareholders and the responsibilities of members of our board of directors may be different from the rights and obligations of shareholders and directors of companies governed by the laws of U.S. jurisdictions. In the performance of its duties, our board of directors is required by Swiss law to consider the interests of our Company, our shareholders and our employees with due observation of the principles of reasonableness and fairnes s. It is possible that the board of directors will consider interests that are differeff nt from, or in addition to, your interests as a shareholder. Swiss corporate law limits the abia lity of our shareholders to challenge resolutions made or other actions taken by our board of directors in court. Our shareholders generally are not permitted to filff e a suit to reverse a decision or an action taken by our board of directors but are instead only permitted to seek damages forff breaches of the duty of care and loyalty. As a matter of Swiss law, shareholder claims against a member of our board of directors for breach of the duty of care and loyalty would have to be brought in Basel, Switzerland, or where the relevant member of our board of directors is domiciled. In addition, under Swiss law, any claims by our shareholders against us must be brought exclusively in Basel, Switzerland. rr Our Common Shares Are Issued Under The Laws Of Switzerland, ll Which May Not Protect Investors Irr n AII Similar Fashion Afforded By IB ncoII rporation In A U.S.UU State. We are a Swiss corpor future or that it will serve to protect investors in a similar fashion affordff changes or differences in corporate law principles could adversely affect the rights of U.S. investors. ation subject to the laws of Switzerland. There can be no assurance that Swiss law will not change in the ed under corpor ate law principles in the U.S. Any future rr rr 71 Our Status As A Swiss Corporation Means That Our Shareholders Enjoy Certain Right stt That Maya Limit Our Flexibility To i Raise Capital, Issue Dividends Distributions Without Subjecti dd b l NeedNN And Otherwise Manage Ongoing Capita ng Our Shareholders To Swiss Withholding Tax. CC s Add nd May Cause Us To Be Unable To Makekk Swiss law reserves for appro aa val by shareholders certain corpor rr ate actions over which a board of directors would have authority in some other jurisdictions. For example, the payment of dividends and cancellation of treasury srr shareholders. Swiss law also requires that our shareholders themselves resolve to, or authorize our board of directors to, increase our share capital. While our shareholders may authorize share capital that can be issued by our board of directors without additional shareholder approval, Swiss law limits this authorization to 50% of the issued share capital at the time of the authorization. The time to time authorization, furthermore, has a limited duration of up to two years and must be renewed by the shareholders fromff thereafter in order to be availablea xx for raising capital. Additionally, subju ect to specified exceptions, including exceptions explicitly described in our articles of association, Swiss law grants pre-emptive rights to existing shareholders to subscribe for new issuances of shares. Swiss law also does not provide as much flexibility in the various rights and regulations that can attach to different categories of shares as do the laws of some other jurisdictions, such as in the United States. These Swiss law requirements relating to our cuu apital management may limit our flexibility, and situatt shareholders. tions may arise where greater flexibility would have provided benefits to our hares must be appro ved by a Under Swiss law, we, as a Swiss corporation, may pay dividends only if we have sufficient distributable profits from previous reserves, each as evidenced by its audited statuttt ory balance sheet, and after allocations to fiscal years, or if we have distributablea reserves required by Swiss law and our articles of association have been deducted. Freely distributabla e reserves are generally booked either as “free reserves” or as “capital contributions” (Kapita , contributions received froff m shareholders) in the “reserve froff m ll leinlagen capital contributions.” Distributions may be made out of registered share capital—the aggregate nominal value of our registered share capa ital—only by way of a capital reduction. We will not be able to pay dividends or make other distributions to shareholders on a Swiss withholding tax-freff e basis in excess of our aggregate qualifying contributions and registered share capital unless we increase our share capital or our reserves fromff or freely distributablea will have suffiff cient distributable profitff s, free reserves, reserves from capita or effect a capital reduction, that our shareholders will appro to meet the other legal requirements for dividend payments or distributions as a result of capital reductions. reserves, if any, such dividends would be subjeb ct to Swiss withholding taxes. There can be no assurance that we l contributions or registered share capital to pay a dividend ve dividends or capital reductions proposed by us or that we will be ablea al contributions. While we would also be able to pay dividends out of distributable profitsff capitaa a a (( Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to our shareholders, regardless of the ff ion of registered share capital or ). There can be no assurance that we will have sufficff place of residency of the shareholder, unless the distribution is made to shareholders out of (i) a reductdd under the (ii) assuming certain conditions are met, qualifying capital contribution reserves. A U.S. holder that qualifies for benefitsff Convention between the United States of America and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income, or the U.S.-Swiss Treaty, may apply forff a refunff d of the tax withheld in excess of the 15% treaty rate (or in excess of the 5% reduced treaty rate for qualifying corporate shareholders with at least 10% participation in our voting shares, or for a fulff case of qualified pension funds from Swiss withholding tax, or that Swiss withholding rulrr es will not be changed in the future. In addition, we cannot dividends freeff provide assurance that the current Swiss law with respect to distributions out of qualifyiff ng capital contribution reserves will not be changed or that a change in Swiss law will not adversely affecff qualifying capital contribution reserves becoming subjeb ct to additional corporate law or other restrictions. There are currently motions pending in the Swiss Parliament that may limit the distribution of qualifying capital contributions. In addition, over the long term, the amount of registered share capital availablea to us for registered share capital reductions or qualifying capital contributions available to us to pay out as distributions is limited. If we are unable to make a distribution through a reduction in nominal value of our registered share capital or out of qualifying capital contributions, we may not be ablea cting our shareholders to Swiss withholding taxes. l refund in the ient qualifying capital contribution reserves to pay t us or our shareholders, in particular as a result of distributions out of to make distributions without subjeu Under present Swiss tax laws, repurchases of shares for the purpos es of cancellation are treated as a partial liquidation subjeb ct to 35% Swiss withholding tax on the difference between the repurchase price and the nominal value except, since January 1, 2011, to the extent attributabla e to qualifying capital contributions (Kap italeinlagen) if any, and to the extent that, the repurchase of shares is out of retained earnirr ngs or other taxabla e reserves, the Swiss withholding becomes due.dd withholding tax is triggered if the shares are not repurchased forff should the Company not resell such treasury shares within six years, the withholding tax becomes due at the end of the six year period. cancellation but held by the Company as treasury shares. However, No partial liquidation treatment applies and no (( rr 72 Certain U.S.SS Shareholdersdd May Be Subject To Adverse U.S.SS Federal Income Tax Consequences If We Are A Controll tt ed Foreign Corporation. Each “Ten Percent Shareholder” (as defined below) in a non-U.S. corporation that is classified as a “controlled foreign ation,” or a CFC, for United States federal income tax purposes generally is required to include in income for U.S. fedff the sale of securities and income from certain transactions with related parties. In addition, a Ten Percent corpor rr purposes such Ten Percent Shareholder’s pro rata share of the CFC’s “Subpart F income” and investment of earnings in U.S. property, even if the CFC has made no distributions to its shareholders. Subpart F income generally includes dividends, interest, rents and royalties, gains fromff Shareholder that realizes gain from the sale or exchange of shares in a CFC may be required to classify a p dividend income rather than capital gain. A non-U.S. corporation generally will be classified as a CFC for United States fedff income tax purposes if Ten Percent Shareholders own, directly or indirectly, more than 50% of either the total combined voting power of all classes of stock of such corprr oration entitled to vote or of the total value of the stock of such corporation. A “Ten Percent Shareholder” is a United States person (as defined by the U.S. Internal Revenue Code of 1986, as amended (the “Code”)) who owns or is considered to own 10% or more of the total combined voting power of all classes of stock entitled to vote of such corporation. The determination of CFC status is complex and includes attribution rules, the appaa ortion of such gain as eral lication of which is not entirely certain. eral tax ff During our 2016 taxablea year we believe that we had certain shareholders that were Ten Percent Shareholders for United States the taxable year ended December 31, 2016 and our current taxable year is federal income tax purposes. However, our CFC status forff uncertain and we may be a CFC for the taxable year ended December 31, 2016, our current taxablea holders should consult their own tax advisors with respect to the potential adverse U.S. tax consequences of becoming a Ten Percent Shareholder in a CFC. If we are classifiedff as both a CFC and a PFIC, we generally will not be treated as a PFIC with respect to those U.S. holders that meet the definition of a Ten Percent Shareholder during the period in which we are a CFC. lowing year. U.S. year or a folff Certain U.S. Shareholders May Be Subject to Adverse Tax Consequences If We Are A Passive Foreigngg Investmen tt t Company.n Generally, if, for any taxablea to assets that producedd year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets passive income or are held forff is attributablea characterized as a PFIC, forff U.S. federal income tax purpos and gains froff m the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. If we are characterized as a PFIC, U.S. holders of our common shares may suffer adverse tax consequences, including having gains realized on the sale of the common shares treated as ordinary i licabla e to dividends received on the common shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of sales of the common shares. es. For purposes of these tests, passive income includes dividends, interest, ncome, rather than capiaa tal gain, the loss of the preferential rate appaa the production of passive income, including cash, we would be rr rr Our statustt as a PFIC will depend on the composition of our income and the composition and value of our assets which may be determined in part by refereff depend, in part, on how, and how quickly, we utilize the cash proceeds fromff intensive determination made on an annual basis and we cannot provide any assurances regarding our PFIC statustt or future taxable years. nce to the quarterly market value of our common shares, which may be volatile. Our status may also the IPO in our business. Our statustt as a PFIC is a facff for any past, curreuu nt t- Because it is possible we were a PFIC for the 2016 taxable year, we intend to provide the inforff mation that is necessary f rr the 2016 taxable year. We intend to provide such information on our website to make a QEF election with respect to us forff (www.crisprtx.com). However, we have not determined whether any of our subsidiaries are lower-tier PFICs and we do not intend to make the necessary information available to you with respect to any lower-tier PFICs. You are urged to consult your own tax advisors regarding the availability, and advisability, of, and proceduredd PFICs. for making, a QEF election, including, with respect to any lower-tier you orff SS holdersdd May Na U.S. SSS hare f OO ur Board OfO Directors. Members Orr otNN Be Able To Obtain Judgments Or Enforce Civil Liabilities Against Us OUU r Our Executive Officff ers Orr r We are a Swiss corporation organized under the laws of Switzerland and our registered offiff ce and domicile is located in Basel, Switzerland. Moreover, certain of our directors and executive officers and a number of directors of each of our subsidiaries are not residents of the United States, and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon our directors and officers residing as our agent to effect service of process outside the United States. Additionally, even though we have appo upon us in the United States, investors may be unablea to enforce against us or our directors and officers residing outside the United States judgments obtained in U.S. courts, including judgments in actions predicated upon the civil liabia lity provisions of the federal securities laws of the United States. We have been advised by our Swiss counsel that there is doubt as to the enforceability in inted CT Systems Corp.rr a 73 Switzerland of original actions, or in actions for enforcement of judgments of U.S. courts, of civil liabilities to the extent solely predicated upouu n the federal and state securities laws of the United States. Original actions against persons in Switzerland based solely upon the U.S. federal or state securities laws are governed, among other things, by the principles set forth in the Swiss Federal Act on Private International Law. This statute provides that the application of provisions of non-Swiss law by the courts in Switzerlandaa shall be precluded if the result is incompatible with Swiss public policy. Also, mandatory prr rovisions of Swiss law may be applicablea regardless of any other law that would otherwise apply. Switzerland and the United States do not have a treaty providing for reciprocal recognition and enforcement of judgments in civil and commercial matters. The recognition and enforcement of a judgment of the courts of the United States in Switzerland is governed by the principles set forth in the Swiss Federal Act on Private International Law. This statute provides in principle that a judgment rendered by a non-Swiss court may be enforced in Switzerland only if: • • • • • the non-Swiss court had jurisdiction pursuant to the Swiss Federal Act on Private International Law; the judgment of such non-Swiss court has become final and non-appe aa alable; the judgment does not contravene Swiss public policy; the court procedures and the service of documents leading to the judgment were in accordance with the due process of law; and no proceeding involving the same position and the same subjeu Switzerland, or was earlier adjudicated in a third state and this decision is recognizable in Switzerland. ct matter was first brought in Switzerland, or adjudicated in Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Our principal executive offices are located in Basel, Switzerland, where we occupy approximately 365 square feeff t of officeff space on a month-to month lease. We also have facilities in Cambridge, Massachusetts, where we occupy appr square feet of laboratory and office space under a sublease that expires in December 2026. We also lease approximately 19,817 square a feet of additional officeff and labora and maintain approximately 350 square feet of office London, England, we occupyuu with a term that renews every six months. We believe that our facilities are adequate for our current needs and that suitabla e additional or substitute space would be available if needed. pace in Cambridge, Massachusetts pursuant to a lease that expires in February 2022. In space pursuant to a real estate license agreement oximately 65,376 tory srr a ff Item 3. Legal Proceedings. From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary ications we have in-licensed from Dr. Charpenrr nce between one of the pending U.S. patent appl , or USPTO, declared tier and twelve issued U.S. course of business. There are currently no claims or actions pending against us that, in the opinion of our management, are likely to have a material adverse effect on our business. In January 2016, the United States Patent and Trademark Officeff an interfereff aa patents and one U.S. patent application owned jointly by The Broad Institute, Massachusetts Instituttt e of Technology, President and Fellows of Harvard College, or Broad. The interference was redeclared in March 2016 to add a U.S. patent application owned by Broad. An interference is a proceeding conducted at the USPTO by the Patent Trial and Appeal Board, or PTAB, to determine which t matter by at least two parties. There are currently two parties to this interference. Our in-licensed party was first to invent subjecb patent application is co-owned among Dr. Charpentier, the Regents of the University of Califorff niarr , and the University of Vienna, whom the USPTO designated collectively as “Senior Party”; Broad was designated as “Junior Party.” Following motions by the parties and other procedurdd al matters, the PTAB concluded in Februarr because the claim sets of the two parties were not directed to the same patentable invention in accordance with the PTAB’s two-way test for patent interferen while the Senior Party’s claims in the interfereff party can appeal an adverse decision to the U.S. Court of Appeals for the Federal Circuit. In parallel, either party can also pursue existing or new patent appli interferenc ff could be the subject of other challenges to their validity of enforceability. In the context of a second interference or in other proceedings, a determination could be reached regarding that the Senior Party was not the first to invent, or it could be concluded that the contested subject preclude our U.S. patent applications from issuing as patents, in which case the proceedings would result in our losing the right to ces. In particular, the Junior Party’s claims in the interference were all limited to uses in eukaryotic cells, matter is not patentable to the Senior Party and is patentable to the Junior Party, which in this case could cations in the U.S. and elsewhere. Going forward, either party as well as other parties could seek a new e related to the uses of the technology in eukaryotic cells or other aspects of the technology, and any existing or new patents nce were not limited to uses in eukaryotic cells but included uses in all settings. Either ry 2017 that the declared interferen ce should be dismissed u aa ff ff 74 protect core innovations and our freedom to practice our core gene editing technology. If there is a second interference, either party could again appeal an adverse decision to the U.S. Court of Appeals for the Federal Circuit. In any case, it may be years beforff e there is a finff al determination on priority. In addition, both the Broad and Toolgen Inc. have fileff d international counterpart applications, some of which were granted in Europe and/odd r other jurisdictions, and Vilnius University and other third parties also have international counterparts of U.S. patent appli proceedings against some of these grants, and we may in the futurtt e oppose other grants to these or other applicants. Similarly, if we should obtain patent grants in the U.S., Europe and other jurisdictions, these could also be the subjeu grant proceduredd s sought by third parties in order to revoke the grants or narrow the scope of granted claims. Going forwff existing and new challenges being filed against CRISPR/Cas9 cases in the U.S., Europe and elsewhere, and considering the number of interested parties, it is reasonable to expect that patents directed to the underlying technology will continue to be the subject of ongoing disputes over at least the next several years, and potentially beyond as decisions in favor or against particular parties may be the subju ect of appaa cations that could proceed to grant. We and third parties have initiated opposition ct of oppositions or other post- s of their U.S. ard, with eals. aa rr For further information regarding risks regarding the interferenc ff e and patent rights held by third parties, please see “Risk Factors—Risks Related to Our Intellectual Property” contained in Item 1A of this report. Item 4. Mine Safety Disclosures. Not appaa licable. 75 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common shares trade on the NASDAQ Global Market under the symbol “CRSP” since our initial public offering on October 18, 2016. Prior to this time, there was no public market for our common shares. As a result, the following table shows the high and low sale prices per share of our common shares as reported on the Nasdaq Global Market forff the period indicated: Fourth Quarter (beggginninggg October 19, 2016) $ 23.97 $ 13.75 Market Price High Low Stock Performance Graph The graph set forth below compares the cumulative total stockholder return orr n our common stock between October 18, 2016 ff (the date of our initial public offer ing) and December 31, 2016, with the cumulative total returtt n orr Index and (b) the Nasdaq Composite Index, over the same period. This graph assumes the investment of $100 on October 18, 2016 in our common stock, the Nasdaq Biotechnology Index and the Nasdaq Composite Index and assumes the reinvestment of dividends, if any. The graph assumes our closing sales price on October 19, 2016 of $14.09 per share as the initial value of our common shares and not the initial offering price to the public of $14.00 per share. f (a) the Nasdaq Biotechnology The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performa shares. Information used in the graph was obtained from the Nasdaq Stock Market LLC, a financial data provider and a source believed to be reliable. The Nasdaq Stock Market LLC is not responsible for any errors or omissions in such information. nce of our common a ff Comparison of Total Return Among CRISPR Therapeutics AG, the NASDAQ Composite Index, and the NASDAQ Biotechnology Index 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 10/19/2016 10/26/2016 11/2/2016 11/9/2016 11/16/2016 11/23/2016 11/30/2016 12/7/2016 12/14/2016 12/21/2016 12/28/2016 CRSP NASDAQ Composite NASDAQ Biotech Holders As of March 1, 2017, we had approximately 49 holders of record of our common shares. This number does not include beneficial owners whose shares were held in street name. 76 Dividends We have not paid any cash dividends on our common shares since inception and do not anticipate paying cash dividends in the foreseeable future. Securities authorized for issuance under equity compensation plans Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K. Use of Proceeds from Registered Securities On October 24, 2016, we closed the sale of 4,429,311 of our common shares in our initial public offering, or the IPO, inclusive of 429,311 common shares sold by us pursuant to the partial exercise of an overallotment option granted to the underwriters in connection with the offering, at a price to the public of $14.00 per share. The aggregate net proceeds received by us from the offering ing expenses payable by us. None of these were $53.7 million, after deducting underwriting discounts and commissions and other offer expenses consisted of payments made by us to directors, officers or persons owning 10% or more of our common shares or to their associates, or to our affiliates. Concurrent with the IPO, we issued and sold 2,500,000 common shares to Bayer BV, at the IPO price $14.00 per share, or (the “Concurrent Private Placement”), resulting in aggregate net proceeds of $35.0 million in accordance with the terms of our subscription agreement with Bayer BV. ff The offer ff and sale of the shares in the IPO was registered under the Securities Act pursuant to registration statements on Form S-1 (File No. 333-213577), which was filed with the SEC, on September 9, 2016 and amended subsequently and declared effective on October 18, 2016. Citigroup Guu lobal Markets Inc., Piper Jaffray & Co. and Barclays Capital Inc. acted as joint book- running managers of the offering. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on October 19, 2016 pursuant to Rule 424. We invested the unused proceeds from the offering in cash equivalents in accordance with our investment policy. Purchase of Equity Securities There were no repurchases of our common shares made during the year ended December 31, 2016. During 2016, Fay ation transferred 274,184 shares to us which are reflected as treasury shares on the consolidated balance sheet as of Corpor rr December 31, 2016. Common shares totaling 170,689, which represents the balance of the 600,000 shares granted to the underwriters pursuant to the overallotment option that were not sold in the IPO, were transferredrr shares on the consolidated balance sheet as of December 31, 2016. to the Company and are reflected as treasury 77 Item 6. Selected Financial Data. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and related notes, and other financial information included in this Annual Report on Form 10-K. The consolidated statements of operations data forff the years ended December 31, 2016, 2015, and 2014 and the consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in future periods. Consolidated Statements of Operations Data: Collabor a Operating expenses: ation revenue Research and development General and administrative Total operating expenses Loss from operations Other income (expense), net NNNet loss before (provision for) benefit from income taxes (Provision for) benefit from income taxes NNNet loss Foreign currency translation adjustment Comprehensive loss Reconciliation of net loss to net loss attributable to common shareholders: Net loss Loss attributablea Loss on extinguishment of redeemable convertible to noncontrollingg interest preferred shares Net loss attributablea Net loss per share attributable to common shareholders, to common shareholders basic and diluted Weighted-average common shares outstanding, basic and $ $ $ $ 2016 Years Ended December 31, 2015 (in thousands, except share and per share amounts) 2014 $ 5,164 $ 247 $ — 42,238 31,056 73,294 (68,130) 45,412 (22,718) (484) (23,202) (18) (23,220) $ 12,573 13,403 25,976 (25,729) (92) (25,821) (7) (25,828) (6) (25,834) $ (23,202) $ 25 (25,828) $ 325 — (23,177) $ — (25,503) $ 1,513 5,114 6,627 (6,627) (236) (6,863) 63 (6,800) (2) (6,802) (6,800) 536 (745) (7,009) (1.89) $ (5.06) $ (1.97) diluted 12,257,483 5,037,404 3,559,985 Consolidated Balance Sheet Data: Cash Working capital Total assets Redeemable convertible preferred shares Total shareholders’ deficit December 31, 2016 2015 (in thousands) $ $ 315,520 298,190 344,962 — 232,846 155,961 146,685 159,423 64,521 (29,124) 78 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discdd ussion and analysis of our financial conditidd on and results of operations together tt nnual Report on Form 10-K. SKK omSS section entitled “Selected Consolidated Financial Data” and our consolidated elsewhere in this Aii elsewhere in this Annual Report on Form 10-K, includingdd ff related financ those factor s srr ff from the results described in or implm ied by tb he forward-looking statements contained in the following discussion and analysis. information with respect to our plans and strategy for our business and ors, including iffdd erff materially ff forward-looking statements that involve risks and uncertainties. As a result of many fn act ould dll financial statements and related notes appea rs" section of to his Annual Report on FormFF e of to he information contained in this dii isdd cussion and analysis or set forth ing, includesdd et forth in thett 10-K, our actual results ctt "Risk FactoFF dd with the aring Overview We are a leading gene editing company focused on the development of CRISPR/Cas9-based therapeut a ics. CRISPR/Cas RR 9 is a revolutionary gene editing technology that allows for precise, directed changes to genomic DNA. The application of CRISPR/Cas9 for gene editing was co-invented by one of our scientificff published work elucidating how CRISPR/Cas use in gene editing. We are applying this technology to potentially treat a broad set of rare and common diseases by disrupt correcting or regulating the genes related to the disease. We believe that our scientific expertise, together with our approach, may enable an entirely new class of highly active and potentially curative treatments for patients for whom current biopharmaceutical approaches have had limited success. founders, Dr. Emmanuelle Charpentier, who, along with her collaborators, in bacteria, can be adapteaa se mechanism found ing, 9, a naturally occurring viral defenff d forff RR rr ff Since our inception in October 2013, we have devoted substantially all of our resources to initiating the conduct of our research nd preclinical development activities, and development efforts, identifying potential productdd building and protecting our intellectual property portfolio, organizing and staffing our company, business planning, raising capital, and providing general and administrative support for these operations. To date, we have primarily financed our operations through private placements of our preferr ed shares, convertible loans and collaboration agreements with strategic partners. From our inception through December 31, 2016, we raised an aggregate of $308.4 million, of which $125.2 million consisted of gross proceeds fromff placements of our preferred shares, $73.2 million from the issuance of convertible loans, $75.0 million fromff a technology access feeff ation with Vertex Pharmaceuticals, Incorporated, or Vertex, and $35.0 million fromff our collabor license of technology to Casebia Therapeutics, LLP, our joint venture with Bayer HealthCare LLC, or Bayer HealthCare. an upfront payment under related to our candidates, undertaking drug discovery arr private a ff ff In October 2016, we issued and sold 4,429,311 of our common shares, including 429,311 common shares sold pursuant to the underwriters’ partial exercise of their option to purchase additional common shares, in our initial public offerin public offering price of $14.00 per share, for aggregate gross proceeds of approximately $62.0 million. Concurrent with the IPO, we issued and sold an aggregate of 2,500,000 common shares to Bayer Global Investments BV, or Bayer BV, in a private placement, at the IPO price of $14.00 a share, for aggregate net proceeds of $35.0 million. g, or the IPO, at a ff ff a ation revenue. We have incurred significaff All of our revenue to date has been collabor the next several years. Our net losses may fluctuate significantly fromff ear since our inception and expect to continue to incur net operating losses for the foreseeable future. As of December 31, 2016, we had $315.5 million in cash and an accumulated deficit operating losses forff anticipate that our expenses will increase significantly as we continue our current research programs and development activities; seek to identify additional research programs and additional producdd t candidates, conducdd t initial drugrr studies and initiate clinical trials for our product candidates; initiate preclinical testing and clinical trials for any other product candidates we identify aff platforff m; hire additional research, clinical and scientific personnel; and incur additional costs associated with operating as a public company. nd develop, maintain, expand and protect our intellectual property portfolio, further develop our gene editing of $57.1 million. We expect to continue to incur significant expenses and increasing quarter to quarter and year to year. We application supporting preclinical nt net operating losses in every yrr Collaboration Agregg ement and Joint VenVV ture Agregg ement In October 2015, we entered into a strategic research collaboa ration agreement with Vertex focused on the development of CRISPR/CaRR and $30.0 million in convertible loan proceeds. s9-based therapies. Under the terms of our agreement, we received an upfroff nt, nonrefundablea payment of $75.0 million In December 2015, we entered into an agreement, the JV Agreement, with Bayer HealthCare to create a joint venturtt e, Casebia Therapeutics LLP, (“Casebia” or “the JV”), to discover, develop and commercialize new breakthrough therapeuaa disorders, blindness and heart disease. We and Bayer HealthCare each have a 50% interest in the JV. Under the JV Agreement, Bayer HealthCare is making available its protein engineering expertise and relevant disease know-how and we are contributing our proprietary CRISPR/Cas9 gene editing technology and intellectual property. Bayer HealthCare will also provide up to $300.0 million in research and development investments to the JV over the first five years, subjeu ct to specifieff d conditions. tics to cure blood 79 In connection with the JV Agreement, the JV was required to pay us an aggregate amount of $35.0 million technology access fee, consisting of an upfront payment of $20.0 million, which was paid at the closing of the JV Agreement in March 2016, and another payment of $15.0 million for specified intellectual property rights relating to our CRISPR/Cas9 technology outside of the United States, which was paid in December 2016. In January 2016, we also issued a convertible loan to Bayer BV (the “Bayer Convertible Loan”) for gross proceeds of $35.0 million which was immediately converted to Series B Preferred Shares at a conversion price of $13.43 per share. Concurrent with the IPO in October 2016, we issued and sold 2,500,000 common shares to Bayer BV, at the IPO price of $14.00 per share resulting in aggregate net proceeds of $35.0 million. ff Financial Overview Revenue We have not generated any revenue to date from product sales and do not expect to do so in the near future. During the year ended December 31, 2016, and 2015, we recognized $5.2 million and $0.2 million, respectively, of revenue related to our collaboration agreements with Vertex and Casebia. As of December 31, 2016, we had not received any milestone or royalty payments under the Vertex collaboration agreement. For additional information about our revenue recognition policy, see the “Critical Accounting Policies and Estimates—Re— venue.” Research and Developme o nt Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery err fforts and the development of our product candidates, which include: • • • • • • employee-related expenses, including salaries, benefitff s and equity-based compensation expense; costs of services performed by third parties that conducdd t research and development and preclinical activities on our behalf; costs of purchasing lab supplies and non-capital equipment used in our preclinical activities and in manufact preclinical study materials; ff urtt ing consultant fees; facility costs, including rent, depreciation and maintenance expenses; and fees and other payments related to acquiring and maintaining licenses under our third-party licensing agreements. Research and development costs are expensed as incurred. Nonrefundable advance payments for research and development goods or services to be received in the future are deferr are delivered or the services are performff of the effort to the numerous risks and uncertainties associated with developing such productdd ed and capitalized. The capitalized amounts are expensed as the related goods , timing or estimated costs s that will be necessary to complete the development of any product candidates we may identify and develop. This is due ed. At this time, we cannot reasonably estimate or know the naturett candidates, including the uncertainty of: ff ff • • • • • • • • • • • successful completion of preclinical studie tt s and Investigational New Drug-e rr nabling studies; successful enrollment in, and completion of, clinical trials; receipt of marketing appaa rovals fromff applicable regulatory arr uthorities; establishing commercial manufactu ff ring capabilities or making arrangements with third-party manufacturers; obtaining and maintaining patent and trade secret protection and non-patent exclusivity; launching commercial sales of the product, if and when approved, whether alone or in collaboration with others; acceptance of the product, if and when approved, by patients, the medical community and third-party payors; effecff tively competing with other therapies and treatment options; a continued acceptable safetyff profile following appr aa oval; enforcing and defending intellectual property and proprietary r rr ights and claims; and achieving desirable medicinal properties forff the intended indications. A change in the outcome of any of these variabla es with respect to the development of any producdd t candidates we may develop could significff antly change the costs, timing and viabia lity associated with the development of that producdd t candidate. 80 Except forff activities we perform in connection with our collaborations with Vertex and Casebia, we do not track research and development costs on a program-by-program basis. We plan to track research and development costs for individual development programs when we identify a p the program that we believe we can advance into clinical trials. roduct candidate fromff ff Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our current development programs progress and new programs are added. General and Administrat ii ivett Expenses General and administrative expenses consist primarily of employee related expenses, including salaries, benefitff s, and equity- tions. Other based compensation, forff significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to pateaa nt and corporate matters, and fees for accounting and consulting services. personnel in executive, finance, accounting, business development and human resources func ff We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company. We anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with exchange listing and SEC requirements, insurance costs and investor relations costs, the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. We also anticipate increased expenses related to the reimbursements of third-party patent related expenses in connection with the ongoing interference proceeding with respect to certain of our in-licensed intellectuatt l property. Results of Operations Comparison of Years Err ndeEE d December 31, 2016, a6 nd 2015 The following table summarizes our results of operations forff the years ended December 31, 2016 and 2015, together with the dollar change in those items: Collaboration revenue Operating expenses: Research and development General and administrative Total operating expenses Loss from operations Other income (expense), net NNet loss before (provision for) benefit from income taxes (Provision for) benefit from income taxes NNet loss Year Ended December 31, 2016 $ 5,164 2015 (in thousands) 247 $ Period-to- Period Change $ 4,917 42,238 31,056 73,294 (68,130) 45,412 (22,718) (484) (23,202) $ 12,573 13,403 25,976 (25,729) (92) (25,821) (7) (25,828) $ 29,665 17,653 47,318 (42,401) 45,504 3,103 (477) 2,626 $ Collaboration Revenue Collaboration revenue for the year ended December 31, 2016 was $5.2 million, compared to $0.2 million forff the year ended ff to a full the collaboration with Vertex of $4.0 million, and research and development service revenue of $1.2 million under a December 31, 2015. The increase of $5.0 million was primarily duedd revenue fromff collaboration agreement with Casebia. During the year ended December 31, 2015, we recognized $0.2 million of research and development service revenue related to the collaboration with Vertex. year’s worth of research and development service Research and Development ExpeEE nses Research and development expenses for the year ended December 31, 2016 was $42.2 million, compared to $12.6 million forff the year ended December 31, 2015. The increase of $29.7 million in research and development expenses was primarily attributabla e to approximately $10.6 million in increased facilities costs including rent and utilities, $9.0 million in increased research and development variable process and platform development costs, $10.4 million in increased research and development employee compensation costs, partially offset by a $0.4 million reduction of license feeff s and consulting expenses. 81 General and Administii rat tt ive Expenses General and administrative expenses were $31.1 million for the year ended December 31, 2016, compared to $13.4 million forff the year ended December 31, 2015. The increase of $17.7 million was primarily duedd million of employee-related costs to support our overall growth; $3.9 million of intellectual to procure the issuance of patents in jurisdictions outside the United States and costs related to an interfereff to our in-licensed intellectual property, $2.0 million in non-recurring shareholder PFIC settlements, $1.1 million in facff including rent and utilities, $1.6 million in capital and franchise taxes related to finff ancing rounds, and $0.5 million of profess consulting fees to support the requirements of being a public company. property costs including third-party costs nce proceeding with respect to the following increases in expenses: $8.5 ilities costs ional and ff tt Other Income (ExpeEE nse), Net Other income (expense), net, was $45.4 million of income forff the year ended December 31, 2016, compared to $0.1 million of expense for the year ended December 31, 2015. The increase of $45.5 million was primarily due to a $78.6 million gain recognized in connection with the formation of Casebia which equaled the value of cash consideration received fromff Casebia and the fair the Company’s equity interest in Casebia as of the formation of the JV, combined with an $11.5 million gain recognized on extinguishment of convertible loans with Vertex, all of which was partially offset by $36.5 million in 2016 equity method losses, and $8.1 million of interest expense related to a convertible loan with Bayer. value of ff Comparison of Years Err ndeEE d December 31, 2015, and 2014 The following table summarizes our results of operations forff the years ended December 31, 2015 and 2014, together with the dollar change in those items: Collaboration revenue Operating expenses: Research and development General and administrative Total operating expenses Loss from operations Other expense, net NNet loss before (provision for) benefit from income taxes (Provision for) benefit from income taxes Year Ended December 31, 2015 2014 (in thousands) Period-to- Period Change $ 247 — $ 247 12,573 13,403 25,976 (25,729) (92) (25,821) (7) 1,513 5,114 6,627 (6,627) (236) (6,863) 63 (6,800) $ 11,060 8,289 19,349 (19,102) 144 (18,958) (70) (19,028) NNet loss $ (25,828) $ Collaboration Revenue We recognized collabora a tion revenue during the year ended December 31, 2015 of $0.2 million, related to our collaboration agreement with Vertex. We did not record any revenue during the year ended December 31, 2014. Research and Development Expens EE es Research and development expenses increased by $11.1 million to $12.6 million for the year ended December 31, 2015, from $1.5 million for the year ended December , 2014. The increase in research and development expenses was primarily attributable to an increase in employee costs of $4.8 million associated with salaries, benefits and equity-based compensation expenses from hiring additional personnel, an increase in professional service expense of $2.0 million, an increase in facilities expense of $2.3 million, principally associated with the establishment in February 2015 of our research and development center in Cambridge, Massachusetts, and an increase in licensing fees and related payments of $1.4 million. 82 General and Administrat ii ive Expenses General and administrative expenses increased by $8.3 million to $13.4 million for the year ended December 31, 2015, from $5.1 million for the year ended December 31, 2014. The increase in general and administrative expenses was primarily attributable to increase in employee costs of $1.9 million associated with salaries, benefits and equity-based compensation expenses from hiring additional senior personnel, increased consulting and professional fees of $3.2 million, including directors’ fees, audit and accounting fees, and consultant fees; and increased intellectual property costs of $1.9 million, including third-party costs to procure the issuance of patents in jurisdictions outside the United States and costs related to the ongoing interference proceedings with respect to our in- licensed intellectual property. Othett r Expen EE se, Net Other expense, net decreased by $0.1 million for the year ended December 31, 2015 due to a decrease in the loss on foreign currency remeasurement of $0.2 million, offset by an increase in non-cash interest expense related to the convertible loans of $0.1 million. Liquidity and Capital Resources From our inception through December 31, 2016, we raised an aggregate of $308.4 million, of which $125.2 million consisted of t payment of $35.0 million from Casebia, pursuant gross proceeds from private placements of preferred shares, $73.2 million from the issuance of convertible loans, an up-fron under our collaboration agreement with Vertex of $75.0 million, and a technology access feeff to our JV Agreement with Bayer HealthCare. uu On October 24, 2016, we completed our IPO whereby we sold 4,429,311 common shares, inclusive of 429,311 common shares ring, at a sold by us pursuant to the partial exercise of an overallotment option granted to the underwri price to the public of $14.00 per share. The aggregate net proceeds received by us fromff deducting underwri and sold 2,500,000 common shares to Bayer BV, at the IPO price $14.00 per share, or the Concurrent Private Placement, resulting in aggregate net proceeds of $35.0 million in accordance with the terms of our subscription agreement with Bayer BV. ting discounts and commissions and other offering expenses payable by us. Concurrent with the IPO, we issued ters in connection with the offeff rr the offering were $53.7 million, after rr As of December 31, 2016, we had $315.5 million in cash, of which appro aa ximately $309.8 million was held outside of the United States. Funding Requirementstt Our primary uses of capital are, and we expect will continue to be, research and development activities, compensation and related expenses, laboratory and related suppluu for our licensed intellectual property and general overhead costs. We expect our expenses to increase compared to prior periods in connection with our ongoing activities, particularly as we continue research and development and preclinical activities, initiate preclinical studies to support initial drug applications, and as we begin in 2017 to occupyuu addition, we expect to incur additional costs associated with operating as a public company. xpenses, patent prosecution filing and maintenance costs ies, legal and other regulatory err e and laboratory facility. In our new officff Because our research programs are still in preclinical development and the outcome of these efforts ff is uncertain, we cannot rr o successfully complete the development and commercialization of any futurtt e product basis under the JV Agreement and our collaboration with Vertex and Casebia. Except forff estimate the actual amounts necessary t candidates or whether, or when, we may achieve profitability. Until such time as we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity or debt finaff entitled to research payments under our collaboration with Vertex. Additionally, we are eligible to earn payments, in each case, on a these sources of funding, we do per-productdd not have any committed external source of liquidity. To the extent that we raise additional capital through the future sale of equity or debt securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affecff arrangements in the futurett candidates or grant licenses on terms that may not be favorabla e to us. If we are unable to raise additional funds through equity ott financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise preferff t the rights of our existing shareholders. If we raise additional funds through collabor , we may have to relinquish valuabla e rights to our technologies, futff urett ncings and collaboration arrangements. We are to develop and market ourselves. revenue streams or producdd t r debt aa ation a 83 Outlook Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that the net proceeds from our IPO, including the proceeds from the Concurrent existing cash, will enable us to fundff effect to any additional proceeds we may receive under our collaboration agreement with Vertex and the JV. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. our operating expenses and capital expenditures forff Private Placement with Bayer BV, together with our at least the next 24 months, without giving r tt Our ability to generate revenue and achieve profitability depends significant developing our delivery technologies and our CRISPR/Cas9 technology platform; completing research and preclinical and clinical development of selected productdd marketing authorizations forff manufacturi approvals and marketing authorizations, either directly or with a collaboa productdd collaboa licensors; maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and attracting, hiring and retaining qualified personnel. candidates; addressing any competing technological and market developments; negotiating favorable terms in any ration, licensing or other arrangements into which we may enter; maintaining good relationships with our collaborators and ly on our success in many areas, including: selecting appropriate product candidates to develop; candidates; obtaining regulatory approvals and ng process for product candidates; launching and commercializing product candidates forff which we obtain regulatory product candidates for which we complete clinical trials; developing a sustainable and scalable rator or distributor; obtaining market acceptance of our ff ff ytt Sources of Liquidit ii Cash FloFF ws The following table provides information regarding our cash flows for each of the period below: NNNet cash (used in) provided by operating activities NNet cash provided by (used in) investing activities NNNet cash provided by financing activities t of exchange rate changes on cash Effecff Net increase in cash and cash equivalents $ $ Net Cash (Used in) Provideddd by Operating Activities Year Ended December 31, 2015 (in thousands) 59,428 (1,154) 96,733 9 155,016 2016 (55,310) $ 31,884 183,220 (235) 159,559 $ 2014 (4,793) — 5,123 254 584 $ $ Net cash used in operating activities was $55.3 million for the year ended December 31, 2016 and primarily consisted of a net loss of $23.2 million adjusted for non-cash items (including equity-based compensation expense of $10.8 million, non-cash interest expense of $8.1 million, depreciation and amortization expense of $0.9 million, loss from equity method investment of $36.4 million, other income of $78.6 million recognized in connection with the formation of our JV with Bayer HealthCare, and a gain on extinguishment of the Vertex convertible loan of $11.5 million), an increase in prepaid expenses and other current assets of $1.1 million, and an increase in accounts receivable of $2.8 million, and an increase in restricted cash of $2.5 million, partially offset by an increase in accounts payablea expenses of $3.9 million, deferred revenue of $1.9 million, and deferred rent of $2.4 million. and accruedrr ff The net cash provided by operating activities was $59.4 million for the year ended December 31, 2015, and consisted primarily non-cash items (including equity-based compensation expense of $3.7 million), depreciation of a net loss of $25.8 million adjusted forff of $0.1 million, along with an increase in prepaid expenses and other assets of $1.0 million and an increase of restricted cash of $0.7 million, offset by an increase in accounts payablea deferred rent of $0.2 million. and accrued expenses of $7.7 million, deferred revenue of $75.1 million, and Net cash used in operating activities was $4.8 million for the year ended December 31, 2014 and consisted primarily of a net loss of $6.8 million adjusted forff of $38 thousand and foreign currency remeasurement loss of $0.3 million), along with an increase in accounts payable and accrued expenses of $1.6 million non-cash items (including equity-based compensation expense of $0.7 million, amortization expense 84 Net Cash Provideddd by (Used in) Investing Activities Net cash provided by investing activities for the year ended December 31, 2016 was $31.9 million and consisted primarily of consisted of proceeds of $35.0 million from our contribution of intellectual property to the JV, offset by our contributions to the JV of $0.1 million, and the purchase of property and equipment of $3.0 million primarily associated with the commencement of internal research and development. We expect purchases of property and equipment to continue to increase in each of 2017 and 2018 as we build-out and outfit the office and laboratory space we began to occupy in December 2016. Net cash used in investing activities was $1.2 million during the year ended December 31, 2015, compared to $0 during dd the year ended December 31, 2014, which resulted solely from the purchase of property and equipment primarily associated with the commencement of internal research and development operations in Cambridge, Massachusetts. Net Cash Provided by Financing Activities Net Cash provided by financing activities for the year ended December 31, 2016 was $183.2 million and consisted of net proceeds of $54.1 million from the issuance of common shares in the IPO, proceeds of $35.0 million from the issuance of common shares in a private placement with Bayer, gross proceeds of $22.9 million from the issuance of Series A-3 preferredrr proceeds of $38.1 million from the issuance of Series B preferred shares and $35.0 million in proceeds from the issuance of a convertible loan to Bayer, offset by the issuance costs on preferredrr share financings of $1.8 million. shares, gross Net cash provided by financing activities was $96.7 million for the year ended December 31, 2015, compared to $5.1 million for the year ended December 31, 2014. The cash provided by financing activities forff consisted of net proceeds of $5.3 million related to a subscription receivablea issuance of Series A-3 Preferred Shares, $30.5 million from the issuance of Series B Preferred Shares and $38.2 million from the issuance of a convertible loan with Vertex and certain existing shareholders. The cash provided by finaff ended December 31, 2014 primarily consisted of net proceeds of $5.1 million from the issuance of Series A-2 Preferred Shares. the year ended December 31, 2015 primarily for Series A-2 Preferred Shares, $22.9 million from the ncing activities for the year tt Contrac tual Obligations The following table summarizes our significant contractual obligations as of payment due date by period at December 31, 2016 (in thousands): Operating lease and sublease commitments (1) (2) $ 6,685 $ 13,055 $ 44,185 $ 63,925 Year 1 Year 2-3 More than 3 Years Total (1) We lease additional office and laboratory space in Cambridge, Massachusetts under a non-cancelable operating lease that (2) ff 022, with one optional five- year extension period. We also lease office facil t to a six month renewal, and corporate housing in Cambridge, Massachusetts which expires in expires in February 2rr expires in July 2017 and is subjecb November 2017 subjecb t to a one year renewal. In May 2016, we entered into an agreement to sublease primary officeff initial term of ten years with an option to extend the lease forff an additional five years. We have the option to extend the term of the sublease by five years if the sublessor does not desire to utilize the space for itself or its affiliates at the time of expiration of the initial term. The sublease contains escalating rent clauses which require higher rent payments in future years. We recognize rent expense on a straight-line basis over the term of the lease, including any rent-free periods. and laboratory space in Cambridge, Massachusetts, for an ities in London, England that ff We enter into agreements in the normal course of business with vendors forff preclinical research studies and other services and products for operating purposes. We have engaged several research institutions to identify nff ew delivery strategies and applications of the CRISPR/Cas9 technology. As a result of these efforts, we sponsored five research programs during 2016. We have committed spending in three of these programs through 2018. We have long-term liabilities associated with uncertain tax positions recorded under ASC 740, Income TaxeTT s totaling $0.2 million. Due to the complexity associated with tax uncertainties, we cannot reasonabla y make a reliabla e estimate of the period in which we expect to settle these non-current liabia lities. See Note 14 to our consolidated financial statements contained in Item 15 of this Annual Report forff more information on our unrecognized tax benefits. 85 Under the Invention Management Agreement (“IMA”) signed on December 15, 2016, the Company is obligated to share costs related to patent maintenance, defense and their licensees including Caribou Biosciences, Inc. and Caribou’s licensee Intellia Therapeutics, Inc. and prosecution for the CRISPR/CRR as9 gene editing intellectual property with Califorff nirr a, Vienna ff Off-Baff lance Sheet Arrangements As of December 31, 2016, we do not have any off-balance sheet arrangements, as defineff d under appl a icable SEC rules. Critical Accounting Policies and Significant Judgments and Estimates This discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and futff urtt e performance. We referff generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carryinrr from these estimates under different assumptions or conditions. to these policies as critical because these specific areas ities that are not readily apparent fromff g value of assets and liabila other sources. Actual results may differff tt While our significant accounting policies are described in more detail in the notes to our financial statements included elsewhere in this prospectus, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations. Revenue We recognize revenue for each unit of accounting when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable and (iv) collectability is reasonablya assured. The terms of our collaboration and license agreements contain multiple deliverables, which include licenses to CRISPR/CRR as9- based therapeutic products directed to specific targets, referff to be performed by us on behalf of the collaboa agreements include nonrefundff specified milestones and royalties on any resulting net product sales. able technology access fees, ff red to as exclusive licenses, as well as research and development activities ration partner related to the licensed targets. Payments that we may receive under these research activities, payments based upouu n the achievement of payments forff Multiptt le Element Arrangen mentstt We evaluate multiple-element arrangements to determine (i) the deliverables included in the arrangement and (ii) whether the s represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. as a single unit of accounting, we must determine the period over which the performance obligations will be individual deliverablea When deliverabla es are separabla e, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When we determine that an arrangement should be accounted forff performed and revenue will be recognized. This evaluation requires us to make judgments about the individual deliverabla es and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverablea units of accounting provided that (i) the delivered item has value to the customer on a standalone basis and (ii) the arrangement includes a general right of return with respect to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. In assessing whether an item has standalone value, we consider factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated ration partner can use any other deliverabla e forff expertise in the general marketpltt ace. In addition, we consider whether the collaboa intended purpos e without the receipt of the remaining deliverable, item, and whether there are other vendors that can provide the undelivered items. whether the value of the deliverable is dependent on the undelivered s are considered separate its a rr The consideration received under an arrangement that is fixed or determinabla e is then allocated among the separate units of accounting based on the relative selling prices of the separate units of accounting. We determine the selling price of a unit of accounting within each arrangement using (i) vendor-specific objeb ctive evidence of selling price, if available; (ii) third-party evidence of selling price if vendor-specific objective evidence is not available; or (iii) best estimate of selling price, if neither vendor-specificff objective evidence nor third-party evidence is available. Determining the best estimate of selling price for a unit of accounting requires significant judgment. In developing the best estimate of selling price forff a unit of accounting, we consider appl icable market aa 86 conditions and relevant entity-specificff customer and estimated costs. We validate the best estimate of selling price for units of accounting by evaluating whether changes in t on the allocation of arrarr ngement the key assumptions used to determine the best estimate of selling price will have a significaff consideration between multiple units of accounting. factors, including factors that were contemplated in negotiating the agreement with the nt effecff We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, we recognize revenue from the combined unit of accounting over the contractual or estimated performance period forff items, which is typically the term of our research and development obligations. If there is no discernible pattern orr objectively measurable perforff mance measures do not exist, then we recognize revenue under the arrangement on a straight-line basis over the period we are expected to complete our performance obligations. Conversely, if the pattern orr service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earnedrr proportional performance method, as applicable, as of the period ending date. the undelivered nce or ff f performa , as determined using the straight-line method or f performance over which the Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. Steering committee services that are not inconsequential or perfunff performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which we expect to complete our aggregate performance obligations. ctory and that are determined to be performance obligations are combined with other research services or Recognigg tiii on of Mileii stontt es and Royaltill es Our collaboration and license agreements include contingent milestone payments related to specificff development, regulatory and sales-based milestones. Development and regulatory milestones are typically payable when a product candidate initiates or advances in clinical trial phases, upon submission forff marketing appro uthorities, and upon receipt of actuatt marketing appro aa reach specified levels. ic or for additional indications. Sales-based milestones are typically payable when annual sales val with regulatory arr vals for a therapeut a a l We evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent naturtt e of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) the consideration relates solely to past performance and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone and the level of effort and investment required to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is subsu tantive. We will recognize revenue in its entirety upon successful accomplishment of any substantive milestones, assuming all other revenue recognition criteria are met. Milestones that are not considered subsu tantive are recognized as earnerr d if there are no remaining performance obligations or over the remaining period of performff performance, assuming all other revenue recognition criteria are met. eing recognized for the elapsed portion of the period of ance, with a cumulative catch-up buu Nonrefunff dable research, development and regulatory mrr s duridd the period of our performff ance obligations under the collaboration and license agreements are generally considered to be substantive and are recognized as revenue upon the achievement of the milestone, assuming all other revenue recognition criteria are met. If not red and recognized over the remaining term of considered to be substantive, revenue from achievement of milestones is initially deferff our performance obligations. Milestones that are not considered substu to their achievement are recognized as revenue upon achievement, assuming all other revenue recognition criteria are met, as there are no undelivered elements remaining and no continuing performance obligations on our part. ilestones that are expected to be achieved as a result of our effort antive because we do not contribute effort ff ff ng Amounts received prior to satisfying the revenue recognition criteria listed above are recorded as deferred revenue in the accompanying balance sheets. Although we follow detailed guidelines in measuring revenue, certain judgments affeff ct the appa of our revenue policy. For example, in connection with our existing collabor short-term and long-term deferr estimate is based on our current research plan and, if our research plan should change in the futurett amount of deferred revenue over the following 12-month period. ed revenue based on our best estimate of when such revenue will be recognized. However, this lication ation agreement, we have recorded on the balance sheet , we may recognize a differff ent a a ff 87 The estimate of deferff red revenue also reflects management’s estimate of the periods of our involvement in the collaboa ration. Our primary performance obligations under this collaboration consist of research and development services. In certain instances, the timing of satisfying these obligations can be diffiff cult to estimate. Accordingly, our estimates may change in the future. Such changes to estimates would result in a change in prospective revenue recognition amounts. If these estimates and judgments change over the course of our collaboa periods. rative agreement, it may affect the timing and amount of revenue that we will recognize and record in future Variable Ill ntII ertt est Entittt iett s tt We review each legal entity formed by parties related to the Company to determine whether or not the entity is a Variablea Interest Entity, or VIE, in accordance with FASB ASC Topic 810, Consolidation. If the entity is a VIE, we assesses whether or not we are the primary beneficiary of that VIE based on a number of factors, including (i) which party has the power to direct the activities that most significantly affeff ct the VIE’s economic perforff mance, (ii) the parties’ contractual rights and responsibilities pursuant to any contractual determine that we are the primary brr eneficiary of a VIE, we treat the VIE as a business combination and consolidate the financial statements of the VIE into our consolidated financial statements at the time that determination is made. On a quarterly basis, we evaluate whether it continues to be the primary brr ry of any consolidated VIEs. If we determine that we are no longer the primary benefici that the determination is made. agreements and (iii) which party has the obligation to absorb l interest in the VIE, we deconsolidate the VIE in the period ary of a consolidated VIE, or no longer have a variablea osses or the right to receive benefits fromff the VIE. If we ff eneficia ff r tt If we determine that we are the primary brr eneficiary of a VIE that meets the defini ff tion of a business, we measure the assets, liabia lities and non-controlling interests of the newly consolidated entity at faiff Business Combinations on the date we become the primary brr eneficff iary. r value in accordance with FASB ASC Topic 805, aa ics LLP, a limited liabili In February 2016, Casebia Therapeut ty partnership, was formed in the United Kingdom. In March 2016 upon consummation of the JV, we and Bayer each received a 50% equity interest in the entity in exchange for our contributions to the entity. We determined that Casebia was considered a VIE and concluded that we are not the primary beneficff iary of the VIE. As such, we did not consolidate Casebia’s results into the consolidated finaff Casebia under the equity method of accounting. The formation of Casebia was accounted forff consolidated finaff formation. further details relating to the evaluation of Casebia as a VIE as well as our accounting for the ncial statements. We account forff at fair value. See Note 9 to the our 50% investment share of ncial statements forff a As of December 31, 2016, TRACR RR is our wholly-owned subsidiary.rr See Note 4 to the consolidated finaff ncial statements for RR further details relating to the consolidation of TRACR statements of TRACR into our consolidated finaff ncial statements as it was both a VIE and a majority owned subsidiary. For the year ended December 31, 2014, we consolidated TRACRR as a VIE. For the year ended December 31, 2015, we consolidated the financial R as a VIE. Equity-Based CompCC ensatiott n We recognize equity-based compensation expense for awards of equity instrumrr ents to employees and non-employee directors based on the grant date fair value of those awards in accordance with FASB ASC Topic 718, Stock Compensation (“ASC 718”). ASC 718 requires all equity-based compensation awards to employees and non-employee directors, including grants of restricted shares and stock options, to be recognized as expense in the statements of operations based on their grant date fair values. We estimate the fair value of stock options using the Black-Scholes option pricing model. We use the fair value of its Common Shares to determine the fair ff value of restricted share awards. ff We account for stock options issued to non-employees under FASB ASC Topic 505-50, Equity Based Payments to Non- Employees (“ASC 505-50”). As such, the value of such options is periodically remeasured and income or expense is recognized over their vesting terms. Compensation cost related to awards with service-based vesting scheduledd method. s is recognized using the straight-line The Black-Scholes option pricing model requires the input of certain subjeu price volatility, (ii) the calculation of expected term of the award, (iii) the risk-freeff Due to the lack of a public market for the trading of our Common Shares prior to its IPO and a lack of company-specific historical and implied volatility data, we based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group of representative companies have characteristics similar to us, including stage of product development and focus on the life science industry. We use the simplified method, which is the average of the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees as it does not have sufficie nt historical exercise data to provide a ff ctive assumptions, including (i) the expected share interest rate and (iv) the expected dividend yield. 88 reasonabla e basis upouu n which to estimate the expected term. For options granted to non-employees, we utilize the contractuatt the arrangement as the basis forff is consistent with the expected term of the stock options. We use an assumed dividend yield of zero as we have never paid dividends and has no current plans to pay any dividends on its Common Shares. the expected term assumption. The risk-free interest rate is based on a treasury i l term of ent whose term nstrumrr rr We expense the fair value of its equity-based compensation awards granted to employees on a straight-line basis over the associated service period, which is generally the period in which the related services are received. We measures equity-based compensation awards granted to non-employees at fair value as the awards vest and recognizes the resulting value as compensation expense at each financial reporting period. We record the expense for equity-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probablea the achievement of a performance-based milestone is probabla e based on the expected satisfacff the reporting date. There have only been eight such awards to date. . Management evaluates when tion of the performance conditions as of Recent Accounting Pronouncements Refer to Note 2, “Summary orr f Significant Accounting Policies,” in the accompanying notes to the consolidated finaff ncial statements for a discussion of recent accounting pronouncements. There were no new accounting pronouncements adopted during 2016 that had a material effecff t on our financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Foreigni Exchange Marketkk Riskii As a result of our foreign operations, we faceff exposure to movements in foreign currency exchange rates, primarily the Swiss Franc and British Pound, against the U.S. dollar. The current exposures arise primarily from cash, accounts payable, and intercompany receivables s. Changes in foreign exchange rates affect our consolidated statement of operations and distort comparisons a between periods. We do not engage in any foreign exchange rate hedging activities and therefore we are subject to foreign currency impacts. and payablea Taxation We are subju ect to corporate taxation in Switzerland. Under Swiss law, we are entitled to carry forward losses we incur for a period of seven years and we can offset future profits, if any, against such losses. As of December 31, 2016, we reported tax loss carry forwards from inception through 2015 for purposes of Swiss federal direct taxes in the aggregate amount of CHF 22.0 million. Due to the accepted mixed company status (the tax rulin g with respect to the mixed company status was accepted in February 2rr 017 with retroactive effect as from 2013/2014) the tax losses available to offset the year in which they occurred. Due to our limited income, there is a high risk that the tax loss carry forwards will expire partly or entirely. For 2016, the tax return has – in accordance with Swiss tax law – not yet been filed. Therefore, for 2016 the loss carried rr forwar r future income at cantonal level amount to CHF 4.1 million. If not used, these tax losses will expire seven years afteff d will only be claimed with filiff ng of the tax returtt n f the tax year 2016. orff rr rr ff The statutory corpor rr ate profitff tax rate in the Canton of Basel-Stadt where we are domiciled amounts (federal and cantonal) currently to a maximum of 28.5% on the profit after tax (taxes are deductible). We applied for a tax privilege as a mixed company for the years 2013/2014, 2015 and ongoing years. This appli the corporate profit tax rate as mixed company amounts to 11.5% (federal and cantonal) on the profit after tax. The Canton does from time to time amend the level of taxation levied on corporr change in the future. cation was confirmed in February 2017. According to the ruling confirmation, rations and there is no certainty that the tax rate currently in effect will not aa ff The privileges for mixed companies are under pressure and new tax legislations abol a ish mixed companies but at the same time lowering the ordinary t February 12, 2017, the scope and timing of such new tax legislation is uncertain. ax rate is in preparation. Following the negative outcome of a revised tax legislation by a public vote on rr Item 8. Financial Statements and Supplementary Data. The consolidated financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found ff in Item 15. 89 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and proceduredd s,” as defined in RulRR es 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonabla e assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefitff relationship of possible controls and proceduredd s are designed to provide reasonable assurance s. Our disclosure controls and proceduredd of achieving their control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial offff iceff 2016. Based upon such evaluation, our Chief Executive Officff 31, 2016, our disclosure controls and proceduredd er and Vice President of Finance have concluded that, as of December tiveness of our disclosure controls and procedures as of December 31, tive at the reasonabla e assurance level. r, respectively), evaluated the effecff s were effecff Management’s Annual Report on Internal Controls Over Financial Reporting This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. Changes in Internal Control over Financial Reporting There was no change in our internarr l control over financial reporting (as defined in Rules 13a-15(f) aff nd 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonabla y likely to materially affecff l control over finff ancial reporting. t, our internarr Item 9B. Other Information. On March 8, 2017, the Board of Directors of the Company appaa executive officers, based upon the achievement of 95% of the corpor $235,940; Marc Becker - $114,700; Samarth Kulkarni - $135,360; and Sven Ante (Bill) Lundberg - $131,600. roved the payout of annual incentive compensation to our ate objectives set forth forff 2016, as follows: Rodger Novak - rr In addition, the Board of Directors also approved the metrics of the 2017 performance bonus program (the "2017 Program"). The 2017 Program is designed to motivate, retain and reward the Company's executive officers based on the achievement of both individuadd l objectives and corporate objectives in 2017, including the achievement of certain intellectual property and budgetary grr as well as clinical, research and development milestones. Each executive officer will be eligible to earn up to 135% of his or her target incentive annual compensation, which target is a percentage of his or her base salary.rr oals, 90 Item 10. Directors, Executive Officers and Corporate Governance. PART III The information required by this item is incorporated by reference to our Proxy Statement for our 2017 Annual General Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016. Item 11. Executive Compensation. The inforff mation required by this item is incorporated by reference to our Proxy Statement forff our 2017 Annual General Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The inforff mation required by this item is incorporated by reference to our Proxy Statement forff our 2017 Annual Meeting off Stockholkk ders to be filff ed with the SEC within 120 ydays after the end of the fiscal yyear ended December 31, 2016. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference to our Proxy Statement for our 2017 Annual General Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016. Item 14. Principal Accounting Fees and Services. The information required by this item is incorporated by reference to our Proxy Statement for our 2017 Annual General Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016. 91 Item 15. Exhibits, Financial Statement Schedules. (a)(1) Financial Statements. PART IV See the “Index to Consolidated Financial Statements” on page F-1 below for the list of financial statements fileff d as part of this report. (a)(2) Financial Statement Schedules. I. Financial Statements of Casebia Therapeuti aa cs LLP (financial statements required by Regulation S-X) Scheduldd es other than that listed above have been omitted because of the absence of conditions under which they are required or because the required informa ff tion is included in the financial statements or the notes thereto. (a)(3) Exhibits. See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. The exhibits listed in the Exhibit Index below are filed or incorporat rr ed by reference as part of this Annual Report on Form 10-K. Item 16. Form 10-K Summary None. 92 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: March 10, 2017 CRISPR Therapeaa utics AG By: /s/ Rodger Novak Rodger Novak Chief Executive Officer SIGNATURES AND POWER OF ATTORNEY We, the undersigned directors and officers of CRISPR Therapeuaa tics AG (the “Company”), hereby severally constitute and appoint Rodger Novak and Marc A. Becker, and each of them singly, our true and lawful attorneys, with full power to them, and to each of them singly, to sign for us and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of us might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or tt substitutes, shall do or cause to be done by virtue of this Power of Attorney. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name /s/ Rodger Novak Rodger Novak /s/ Marc A. Becker Marc A Becker /s/ Anthony N. Coles y y Anthony N Coles /s/ Kurt Von Emster Kurt Von Emster /s/ Ali Behbahani Ali Behbahani y /s/ Bradley Bolzon Bradl yey Bolzon /s/ Pablo Cagnoni Pablo Cagnoni /s/ Simeon J. George Simeon J. George /s/ Thomas Woiwode Thomas Woiwode /s/ Marc A. Becker Marc A. Becker Title r Chief Executive Officeff r) (Principal Executive Office ff Chief Financial Officer (Principal Financial and Accounting Officer) Director Director Director Director Director Director Director Date March 10, 2017 March 10, 2017 March 10, 2017 March 10, 2017 March 10, 2017 March 10, 2017 March 10, 2017 March 10, 2017 March 10, 2017 Authorized Representative in the United States March 10, 2017 93 Exhibit Number 3.1 4.1 10.1† 10.2† 10.3† 10.4† 10.5† 10.6† 10.7† 10.8 10.9 10.10# 10.11# 10.12# 10.13# Exhibit Index Description Articles of Association (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 8, 2016). Subscription Agreement, dated December 19, 2015, by and between CRISPR Therapeutics AG and Bayer Global Investments B.V. (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed on September 9, 2016). Joint Venture Agreement, dated December 19, 2015, between CRISPR Therapeutics AG and Bayer HealthCare LLC (incorporated herein by refereff October 7, 2016). nce to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 filff ed on IP Contribution Agreement, dated March 16, 2016, by and between CRISPR Therapeutics AG, Bayer HealthCare LLC and Casebia Therapeutics LLP (incorpor Statement on Form S-1 filed on October 7, 2016). ated herein by reference to Exhibit 10.2 to the Company’s Registration rr Option Agreement, dated March 16, 2016, by and between CRISPR Therapeutics AG, Bayer HealthCare LLC and Casebia Therapeaa utics LLP (incorporated herein by referff ence to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on October 7, 2016). a ion, Option and License Agreement, dated October 26, 2015, by and among CRISPR Therapeutics Strategic Collaborat aa AG, CRISPR Therapeuti Pharmaceuticals, Incorporated and Vertex Pharmaceuticals (Europe) Limited (incorporated herein by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 filed on October 7, 2016). ics, Inc., TRACR Hematology Limited, Vertex cs Limited, CRISPR Therapeut aa License Agreement, dated April 15, 2014, by and between CRISPR Therapeuti Charpenrr filed on October 7, 2016). tier (incorporr aa rated herein by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 cs AG and Emmanuelle Marie License Agreement, dated April 15, 2014, by and between TRACR Hematology Limited and Emmanuelle Marie rr Charpenti filed on October 7, 2016). ed herein by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 er (incorporat rr Patent Assignment Agreement, dated November 7, 2014, by and between CRISPR Therapeutics AG, Emmanuelle Marie Charpentier, the University of Vienna and Ines Fonfara (incorporated herein by reference to Exhibit 10.7 to the Comp yany’s gRegistration Statement on Form S-1 filff ed on October 7, 2016). Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 filed on October 7, 2016). Registration Rights Agreement, dated June 10, 2016, by and among CRISPR Therapeutics AG and certain shareholders (incorporated herein by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 filed on September 9, 2016). Employment Agreement, dated October 6, 2016, by and between CRISPR Therapeutics AG and Rodger Novak rr (incorpor October 7, 2016). ated herein by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 filed on Amended and Restated Employment Agreement, dated October 6, 2016, by and between CRISPR Therapeutics, Inc. and Marc A. Becker (incorporated herein by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 filed on October 7, 2016). Employment Agreement, dated October 6, 2016, by and between CRISPR Therapeutics, Inc. and Samarth Kulkarni (incorpor rr October 7, 2016). ated herein by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 filed on Amended and Restated Employment Agreement, dated October 6, 2016, by and between CRISPR Therapeutics, Inc. and Sven Ante Lundberg (incorporated herein by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed on October 7, 2016). Exhibit Number Description 10.14# 10.15# 10.16# 10.17 10.18 † 21.1* 23.1* 23.2* 31.1* 31.2* 32.1+ CRISPR Therapeutics AG 2015 Stock Option and Grant Plan (incorporated herein by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 filed on September 9, 2016). CRISPR Therapeutics AG 2016 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed on September 9, 2016). CRISPR Therapeutics AG 2016 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.16 to the Company’s gRegistration Statement on Form S-1 filed on September 9, 2016). Consent to Sublease, dated May 16, 2016, by and between CRISPR Therapeutics, Inc and Pfizer Inc. (incorporated herein by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 filed on September 9, 2016). DNA Restriction Enzyme for Genome Editing, dated December 15, 2016, by and among CRISPR Consent to Assignments, Licensing and Common Ownership and Invention Management Agreement for a Programmablea Therapeutics AG, The Regents of the University of Californff Intellia Therapeutics, Inc., Caribou Biosciences, Inc., ERS Genomics Ltd., and TRACR Hematology Ltd. (incorporated herein yby reference to Exhibit 10.1 to the Comp yany’s Current Report on Form 8-K filed on December 16, 2016). ia, University of Vienna, Dr. Emmanuelle Charperr ntier, Subsidiaries of the Registrant Consent of Ernst & Young LLP Consent of Ernst rr & Young LLP – Casebia Therapeutics, LLP Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxl yey Act of 2002. Certificaff Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. tion of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxon yomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase kk Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * + † # Filed herewith. Furnished herewith. Confidential treatment obtained as to certain portions. A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K. CRISPR Therapeutics AG Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations and Comprehensive Loss Consolidated Statements of Redeemable Convertible Preferred Shares and Shareholders’ (Deficit) Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements g Pages F-2 F-3 F-4 F-5 F-6 F-7 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders CRISPR Therapeut ics AG aa We have audited the accompanying consolidated balance sheets of CRISPR Therapeutics AG (the “Company”) as of December 31, red shares 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, redeemable convertible preferff and shareholders' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. ff We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perforff m the audit to obtain reasonabla e assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our designing audit procedures that are appropriate audits included consideration of internal control over financial reporting as a basis forff in the circumstances, but not for the purporr tiveness of the Company’s internal control over se of expressing an opinion on the effff ecff financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. rr In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CRISPR Therapeutics AG at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts March 10, 2017 F-2 CRISPR Therapeutics AG Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2016 2015 Assets Current assets: Cash Accounts receivable, including related partyy amounts of $752 and $0 as of December 31, 2016 and 2015, respective yly Prepaid expenses and other current assets assets Total current rr Property and equipment, net Intangible assets, net Restricted cash her non-current assets Total assets Liabilities, redeemable convertible preferred shares and shareholders’ eq Current liabilities: yuity Accounts payable Accrued expenses, including related party amounts of $537 and $1,055 as of December 31, 2016 and 2015, respectively Accrued tax liabia lities Deferred rent Other current liabilities Total current liabilities Convertible loan, including accruedrr interest of $0 and $97 as of December 31, 2016 and 2015, respectively Deferred revenue, including related party amounts of $527 and $0 as of December 31, 2016 and 2015, respectively Deferred ff Other non-current liabilities rent non-current Total liabilities Commitments and contingencies (Note 8) convertible preferred shares: Redeemablea Series A-1 redeemable convertible preferred shares, CHF 0.03 par value, 0 and 440,001 shares authorized, issued, and outstanding in share capital at December 31, 2016 and 2015, respectively, aggregate liquidation preference of CHF 0 and CHF 502 at December 31, 2016 and 2015, respectively Series A-2 redeemable convertible preferred shares, CHF 0.03 par value, 0 and 3,120,001 shares authorized, issued, and outstanding in share capital at December 31, 2016 and 2015, respectively, aggregate liquidation preference of CHF 0 and CHF 9,512 at December 31, 2016 and 2015, res Series A-3 redeemable convertible preferred shares, CHF 0.03 par value, 0 and 10,758,006 shares authorized, issued, and outstanding in share capital at December 31, 2016 and 2015, respectively, aggregate liquidation preference of $0 and $22,850 at December 31, 2016 and 2015, respectively Series B redeemablea outstanding in share capital at December 31, 2016 and 2015, aggregate liquidation preference of CHF 0 and CHF 28,000 at December 31, 2016 and 2015, respectively convertible preferred shares, CHF 0.03 par value, 0 and 4,519,016 shares authorized, issued, and pectively y Shareholders’ equity (deficit): shares, CHF 0.03 par value, 40,253,674, and 5,528,079 shares authorized at December 31, 2016 and 2015, respectively, 40,164,307 and 5,528,079 shares issued at December 31, 2016 and 2015, respectively, 39,719,434, and 5,528,079 shares outstanding at December 31, 2016 and 2015, respectively, 15,325,607 and 2,444,364 shares in conditional capital at December 31, 2016 and 2015, respectivelyy Treasury shares, at cost, 444,873 shares and no shares at December 31, 2016 and 2015, respectively Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total CRISPR Therapeutics AG shareholders’ equity (deficit) NNoncontrolling interest Total shareholders’ equity (deficit) Total liabilities, redeemable convertible preferred shares and shareholders’ equity (deficit) $ $ $ $ 315,520 3,157 1,511 320,188 21,027 399 3,150 198 344,962 4,569 16,320 23 1,027 59 21,998 — 77,646 12,283 189 112,116 — — — — 1,216 — 288,739 (57,083 ) (26 ) 232,846 — 232,846 344,962 $ $ $ $ 155,961 339 540 156,840 1,328 454 700 101 159,423 1,584 8,430 81 — 60 10,155 38,336 75,090 164 281 124,026 1,169 10,394 22,518 30,440 181 — 4,636 (33,906 ) (8 ) (29,097 ) (27 ) (29,124 ) 159,423 See accompanying n notes to these consolidated finff ancial statements. F-3 CRISPR Therapeutics AG Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Collaboration revenue (1) Operating expenses: Research and development (2) General and administrative Total operating expenses Loss from operations Other income (expense): Interest expense Loss from equity method investment Gain on extinguishment of convertible loan Other income (expense), net Total other income (expense), net NNNet loss before (provision for) benefit from income taxes (Provision for) benefit from income taxes NNNet loss Foreign currency translation adjustment Comprehensive loss Reconciliation of net loss to net loss attributablea NNNet loss to common shareholders: Loss attributable to noncontrolling interest Loss on extinguishment of redeemable convertible preferred shares NNet loss attributabla e to common shareholders NNNet loss per share attributable to common shareholders—basic and diluted Weighted-average common shares outstanding used in net loss per share attributabla e to common shareholders—ba— sic and diluted Including the following amounts of revenue from a related party, see (1) NNNote 16: (2) Including the follo related party, see Note 16: ff wing amounts of research and development from a 2016 Year Ended December 31, 2015 2014 $ 5,164 $ 247 $ — 42,238 31,056 73,294 (68,130) (8,050) (36,532) 11,482 78,512 45,412 (22,718) (484) (23,202) (18) (23,220) $ (23,202) $ 25 — (23,177) $ (1.89) $ 12,573 13,403 25,976 (25,729) (108) — — 16 (92) (25,821) (7) (25,828) (6) (25,834) $ (25,828) $ 325 — (25,503) $ (5.06) $ 1,513 5,114 6,627 (6,627) — — — (236) (236) (6,863) 63 (6,800) (2) (6,802) (6,800) 536 (745) (7,009) 1.97 12,257,483 5,037,404 3,559,985 1,190 1,755 $ $ — $ 1,055 $ — — $ $ $ $ $ $ See accompanying n notes to these consolidated finff ancial statements. F-4 l a t o T R P S I R C s c i t u e p a r e h T l a t o T ’ s r e d l o h e r a h S ’ s r e d l o h e r a h S r e h t O G A d e t a l u m u c c A ) t i c i f e D ( y t i u q E g n i l l o r t n o c n o N t s e r e t n I ) t i c i f e D ( y t i u q E ) s s o L ( e m o c n I t i c i f e D e v i s n e h e r p m o C d e t a l u m u c c A l a n o i t i d d A n i - d i a P l a t i p a C , t n u o m A t s o c t a s e r a h S 3 0 . 0 F H C e u l a V r a P s e r a h S t n u o m A s e r a h S t n u o m A s e r a h S t n u o m A s e r a h S t n u o m A s e r a h S s e r a h S y r u s a e r T s e r a h S n o m m o C s e r a h S d e r r e f e r P s e r a h S d e r r e f ff e r P s e r a h S d e r r e ff f e r P s e r a h S d e r r e f ff e r P B s e i r e S e l b a m e e d e R e l b i t r e v n o C 3 - A s e i r e S e l b a m e e d e R e l b i t r e v n o C 2 - A s e i r e S e l b a m e e d e R e l b i t r e v n o C 1 - A s e i r e S e l b a m e e d e R e l b i t r e v n o C G A s c i t u e p a r e h T R P S I R C y t i u q E ) t i c i ff f e D ( ’ s r e d l o h e r a h S d n a s e r a h S d e r r e f e r P e l b i t r e v n o C e l b a m e e d e R f o s t n e m e t a t S d e t a d i l o s n o C ) a t a d e r a h s r e p d n a e r a h s t p e c x e , s d n a s u o h t n I ( ) 1 8 5 ( $ — $ ) 1 8 5 ( $ — $ ) 9 3 1 , 2 ( $ 0 6 4 , 1 $ — 2 2 — ) 2 ( ) 5 4 7 ( 5 9 6 7 3 4 ) 0 0 8 , 6 ( ) 4 7 9 , 6 ( — — — — ) 6 ( 4 8 6 , 3 ) 8 2 8 , 5 2 ( ) 4 2 1 , 9 2 ( — — — — 2 8 5 3 5 6 5 , 5 8 1 — 4 6 6 , 8 8 ) 8 1 ( 4 4 8 , 0 1 ) 2 0 2 , 3 2 ( 6 4 8 , 2 3 2 — — — — 2 4 2 $ 3 4 1 7 3 4 ) 6 3 5 ( — — ) 2 6 ( — — 7 1 2 $ ) 7 2 ( ) 5 2 3 ( — — — 2 5 — — — — $ — ) 5 2 ( 2 2 — ) 2 ( ) 5 4 7 ( 3 5 4 — $ ) 7 1 1 , 7 ( ) 4 6 2 , 6 ( — — 2 6 — ) 6 ( 7 6 4 , 3 $ ) 7 9 0 , 9 2 ( ) 3 0 5 , 5 2 ( — — — ) 2 5 ( 4 6 6 , 8 8 5 6 5 , 5 8 1 — 2 8 5 3 ) 8 1 ( 4 4 8 , 0 1 $ 6 4 8 , 2 3 2 ) 7 7 1 , 3 2 ( — — ) 2 ( — — — — $ ) 2 ( — — — — — ) 6 ( — $ ) 8 ( — — — — — — ) 8 1 ( — $ ) 6 2 ( — — — — — — $ ) 3 0 4 , 8 ( ) 4 6 2 , 6 ( — — — — — — $ ) 6 0 9 , 3 3 ( ) 3 0 5 , 5 2 ( — — — — — — — $ ) 3 8 0 , 7 5 ( ) 7 7 1 , 3 2 ( — — ) 5 4 7 ( — 3 5 4 — — $ 8 6 1 , 1 $ — — 1 — — — 7 6 4 , 3 $ 6 3 6 , 4 $ — — — ) 2 6 ( 1 5 4 , 8 8 3 1 1 8 4 3 — — 4 4 8 , 0 1 2 4 7 , 4 8 1 $ 9 3 7 , 8 8 2 $ — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1 6 — — — — — — — 3 2 8 0 1 3 1 2 8 9 2 2 — — — — — — — — — — — — — $ 5 8 9 , 9 5 5 , 3 0 2 1 $ 5 8 9 , 9 5 5 , 3 — — — — — — — — — — — — — $ — — — — — — — — — — — — $ 3 7 8 , 4 4 4 ) 3 1 ( — — — — 1 1 — — — $ 3 7 8 , 4 4 4 6 1 2 , 1 $ 4 3 4 , 9 1 7 , 9 3 — — — 5 6 2 , 6 3 2 5 2 , 4 3 8 , 2 — 9 2 9 , 1 6 8 0 6 , 4 6 4 , 5 — — — 0 5 8 , 2 2 — — — — — — — — — — — — — — — t e n , s e r a h S d e r r e f e r P B s e i r e S f o e c n a u s s I n o i l l i m 8 . 1 $ f o s t s o c e c n a u s s i f o e l b i t r e v n o c e l b a m e e d e r f o n o i s r e v n o C n o i t p i r c s b u S 3 - A s e i r e S f o t p i e c e R s n a o L e l b i t r e v n o C f o n o i s r e v n o C e l b a v i e c e R 4 8 8 , 5 3 1 , 7 2 ) 4 3 6 , 8 2 1 ( ) 6 7 8 , 7 1 8 , 2 1 ( ) 8 6 3 , 5 4 ( ) 6 0 0 , 8 5 7 , 0 1 ( ) 4 9 3 , 0 1 ( ) 1 0 0 , 0 2 1 , 3 ( ) 9 6 1 , 1 ( ) 1 0 0 , 0 4 4 ( e r a h s n o m m o c o t n i s e r a h s d e r r e f e r p — — — 7 1 0 , 8 2 3 ) 3 7 8 , 4 4 4 ( 0 0 0 , 0 0 1 , 7 7 2 4 , 3 5 0 0 9 , 8 1 — — — — — — — — — — — — — — — — $ — — — — — — — — — — — — — — — — $ — — — — — — — — — — — — — — — — $ — — — — — — — — — — — — — — — — $ e c n a u s s i f o t e n , k c o t s n o m m o c f o e c n a u s s I t s e r e t n i g n i l l o r t n o c n o N o t t n e m t s u j d A R C A R T r o f ff e g n a h c x e e r a h s n o p u e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O s e r a h s y r u s a e r t f o e s a h c n o i l l i m 3 . 8 $ f o s t s o c s e r a h s d e t c i r t s e r f o g n i t s e V s n o i t p o d e t s e v f o e s i c r e x E 6 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B s s o l t e N 1 8 1 $ 9 7 0 , 8 2 5 , 5 0 4 4 , 0 3 $ 6 1 0 , 9 1 5 , 4 8 1 5 , 2 2 $ 6 0 0 , 8 5 7 , 0 1 4 9 3 , 0 1 $ 1 0 0 , 0 2 1 , 3 9 6 1 , 1 $ 1 0 0 , 0 4 4 5 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B 4 9 0 , 8 6 9 , 1 — — — — — — — — — — — 0 4 4 , 0 3 6 1 0 , 9 1 5 , 4 8 1 5 , 2 2 6 0 0 , 8 5 7 , 0 1 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — t e n , s e r a h s d e r r e f e r p 3 - A s e i r e S f o e c n a u s s I s e r a h s d e r rr r e f e r p 2 - A s e i r e S f o t p i e c e R e l b a v i e c e r n o i t p i r c s b u s 0 5 8 , 2 2 $ f o e l b a v i e c e r n o i t p i r c s b u s d n a 2 3 3 $ f o s t s o c e c n a u s s i f o n o p u t s e r e t n i g n i l l o r t n o c n o n o t t n e m t s u j d A R C A R T r o f n o i t c a s n a r t e g n a h c x e e r a h s d e t i i m L y g o l o t a m e H t e n , s e r a h s d e r r e f e r p B s e i r e S f o e c n a u s s I e s n e p x e n o i t a s n e p m o c d e s a b - y t i u q E ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O 8 3 $ f o s t s o c e c n a u s s i f o s s o l — — — — — — — — — $ — — — — — — — — — — $ 3 9 2 , 5 — — — $ — — — 1 0 1 , 5 1 0 0 , 0 2 1 , 3 — — — — — — — — — — — — — — 5 4 7 4 2 4 $ 1 0 0 , 0 4 4 3 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B — — — — — — — n o i t p i r c s b u s d n a 6 3 $ f o s t s o c e c n a u s s i f o t e n , s e r a h s d e r r e f e r p 2 - A s e i r e S f o e c n a u s s I 3 9 2 , 5 $ f o e l b a v i e c e r n o i t a d i l o s n o c n o p u t s e r e t n i g n i l l o r t n o c n o N ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O e s n e p x e n o i t a s n e p m o c d e s a b - y t i u q E 1 - A s e i r e S f o t n e m h s i u g n i t x e n o s s o L s e r a h s d e r rr r e f e r p n o i t p i r c s b u s s e r a h s n o m m o c f o t p i e c e R e l b a a v i e c e r d e t i i m L y g o l o t a m e H R C A R T f o s s o l t e N 1 0 1 , 5 $ 1 0 0 , 0 2 1 , 3 9 6 1 , 1 $ 1 0 0 , 0 4 4 4 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B . s t n e m e t a t s l a i c n a n i ff f d e t a d i l o s n o c e s e h t o t s e t o n g n i y n n a p m m o c c a e e S 5 - F CRISPR Therapeutics AG Consolidated Statements of Cash Flows (In thousands) Operating activities Net loss Reconciliation of net loss to net cash used in operating activities: 2016 Years Ended December 31, 2015 2014 $ (23,202) $ (25,828) $ (6,800) Depreciation and amortization expense Equity-based compensation expense Non-cash interest expense Unrealized foreign currency remeasurement loss Gain on extinguishment of convertible loan Other income - formation of joint venture Loss from equity method investment y Changes in: tricted cash Accounts receivable Prepaid expenses and other assets Accounts payable and accrued expenses Deferred revenue Deferred rent Other liabila ities, net Net cash (used in) provided by operating activities Investing activities Purchase of propertyy and equipment Proceeds from contribution of intellectual property to equity method investee Cash investment in equity method investee Net cash provided by (used in) investing activities Financing activities Proceeds from issuance of common shares in IPO, net of issuance costs Proceeds from issuance of common shares in private placement Proceeds from issuance of common shares Proceeds from exercise of options Proceeds from issuance of restricted shares Proceeds from issuance of Series A-2 preferred shares Proceeds from issuance of Series A-3 preferredrr shares Proceeds from issuance of Series B preferred shares Issuance costs for preferred share financings Proceeds from issuance of convertible loans Net cash provided by financing activities Effect of exchange rate changes on cash Increase in cash Cash, beginning of period Cash, end of period Supplemental disclosure of non-cash investing and financing activities Property and equipment purchases in accounts payable and accrued expenses Property and equipment related to lease incentives on extinguishment of Series A-1 preferred shares NNNoncontrolling interest upon consolidation of TRACR Conversion of preferred shares to common shares upon IPO Conversion of Vertex and Bayer convertible loans and accrued interest Issuance costs for public offering in accounts payable and accrued expenses Contribution of intellectual property to Casebia $ $ $ $ $ $ $ $ $ 925 10,844 8,050 2 (11,482) (78,608) 36,380 (2,450) (2,818) (1,071) 3,860 1,917 2,360 (17) (55,310) (3,016) 35,000 (100) 31,884 54,061 35,000 — 34 — — 22,850 38,075 (1,810) 35,010 183,220 (235) 159,559 155,961 315,520 $ 7,014 10,785 $ $ — $ — $ $ $ $ $ 185,565 61,929 397 36,380 127 3,684 97 (20) — — — (650) (339) (620) 7,708 75,090 165 14 59,428 (1,154) — — (1,154) — — — — 243 5,293 22,850 30,478 (370) 38,239 96,733 9 155,016 945 155,961 $ 246 $ — $ — $ — $ — $ — $ — $ — $ 38 695 — (260) — — — (16) — (12) 1,583 — — (21) (4,793) — — — — — — 22 — — 5,137 — — (36) — 5,123 254 584 361 945 — — 745 547 — — — — See accompanying n notes to these consolidated finff ancial statements. F-6 CRISPR Therapeutics AG Notes to Consolidated Financial Statements 1. Organization and Operations Nature of business CRISPR Therapeut a ics AG (“CRISPR” or the “Company”) was formed ff on October 28, 2013 in Basel, Switzerland. The Company was established to translate CRISPR/CRR as9, a genome editing technology, into transformff ative gene-based medicines for the treatment of serious human diseases. The foundational intellectual property underlying the Company’s operations was licensed to the Company and its subsidiaries in April 2014. The Company devotes substantially all of its effort s to product research and development activities, initial market development and raising capiaa tal. The Company’s principal officff es and operations are in Cambridge, Massachusetts. ff On Januaryrr 23, 2014, the founders of the Company formed TRACR RR Hematology Limited (“TRACR”) in the United Kingdom, to further the development of the CRISPR/Cas9 technology into medicines for the treatment of blood-bornerr ’s operations in 2014, it has been consolidated by the Company from the date that the Company was funding and managing TRACR established a variable interest in TRACR in April 2014. In March 2015, the Company acquired 82.1% of the outstanding equity of TRACR in a share exchange transaction. Concurrent with its initial public offer the outstanding non-controlling interest in TRACR as such, as of December 31, 2016 TRACR is a wholly-owned subsiu Company. ing (“IPO”) in October 2016, the Company acquired diary of the illnesses. As the Company RR ff The Company is subjeb ct to risks common to companies in the biotechnology industdd ry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully personnel, protection of proprietary technology, compliance with governme technological innovations and ability to transition froff m pilot-scale manufacturtt nt regulations, development by competitors of ing to large-scale producdd tion of producdd ts. commercialize and gain market acceptance of its productdd ff rr candidates, dependence on key The Company had an accumulated deficit of $57.1 million as of December 31, 2016 and has financed its operations to date from proceeds obtained from its initial public offerin under its collaboration and joint venture arrangements. The Company will require substantial additional capital to funff d its research and development and ongoing operating expenses. g a series of preferred shares and convertible loan issuances and upfront fees received ff Liquidityii In October 2016, the Company completed the IPO of its common shares (“Common Shares”), in which the Company sold 4,429,311 Common Shares, inclusive of 429,311 Common Shares sold by the Company pursuant to the partial exercise of an overallotment option granted to the underwriters in connection with the offering, at a price of $14.00 per share. The shares began trading on the NASDAQ Global Market on October 19, 2016. The aggregate net proceeds received by the Company from the offering were $53.7 million (see Note 2) after deducting underwri Company. Concurrent with the IPO, the Company issued and sold 2,500,000 Common Shares to Bayer Global Investments B.V. (“Bayer BV”), in a private placement, at the IPO price of $14.00 per share, for aggregate net proceeds of $35.0 million. Common Shares totaling 170,689 of the overallotment option granted by the underwri ing were reacquired by the Company and are reflected as treasury shares on the consolidated balance sheet as of December 31, 2016. The Company believes its cash of $315.5 million at December 31, 2016 will be sufficff at least the next 24 months. Thereafter, the Company will be required to obtain additional funding. There can be no assurances, ng will be available on terms acceptable to the however, that the current operating plan will be achieved or that additional fundi Company, or at all. ting discounts and commissions and other offering expenses payable by thett ters in connection with the initial publiu the Company’s current operating plan forff ient to fundff c offerff rr ff rr 2. Summary of Significaff nt Accounting Policies and basis of presentation Basis oii f Po tt rePP sentation and Use of Estimate tt s The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and include the accounts of (i) the Company, (ii) its wholly-owned subsidiaries, CRISPR Ltd., CRISPR Inc., and TRACR, eliminated. Any referff ence in these notes to applicable guidance is meant to referff accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”). as of December 31, 2016. All intercompany accounts and transactions have been to the authoritative United States generally accepted RR F-7 Investments in partnerships where the Company has significaff nt influence because it has a voting interest of 20% to 50%, are under the equity method. Results of associated companies are presented on a one-line basis. The Company accounts forff LLP (“Casebia”) under the equity method of accounting. See Note 9 forff further accounted forff its 50% investment share of Casebia Therapeutics details. aa The preparation of finff ancial statements in conformi ff ty with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, equity-based compensation expense, revenue recognition, equity method investments, and reported amounts of expenses during the reported period. Significant estimates in these consolidated finaff statements have been made in connection with the calculation of revenues, research and development expenses, valuation of equitytt method of investment, equity-based compensation expense, fair value of Common Shares, fair value of intangible assets, and the provision for or benefit from income taxes. The Company bases its estimates on historical experience and other market-specificff or other relevant assumptions that it believes to be reasonabla e under the circumstances. Actual results may differ assumptions. from those estimates or ncial ff The Company utilizes significaff nt estimates and assumptions in determining the fair value of its Common Shares. The Company utilized various valuation methodologies in accordance with the framework of the 2004 and 2013 American Institutett Publu ic Accountants Technical Practice Aids, Valuation of Privately-ll Held Cll estimate the fair value of its Common Shares. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subju ective fact market conditions affecff superior rights and prefereff such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date. Subsequent to becoming a public company, the Company uses the closing price of its stock on the Nasdaq Global Market as the faiff of Certified omCC pam ny Equity Securities Issued as Compensation, to nces of securities senior to the common stock at the time and the likelihood of achieving a liquidity ett ector, the prices at which the Company sold shares of preferred stock, the ting the biotechnology industry srr r value of its common stock. ors, including external vent, ff i Reclassi ll fica tions A change has been made to the presentation of deferred rent non-current as of December 31, 2015 to conform to the current year presentation. Stock Splitii In connection with preparing forff Company’s articles of association in July 2016. This amendment became effeff ctive uponuu register on July 27, 2016 and publication in the Swiss Official Gazette of Commerce on August 2, 2016. Pursuant to this amendment a 3 1/3-for-one share split was effeff cted. All share and per share amounts in the consolidated financial statements and notes thereto have been retrospectively adjusted for all periods presented to give effect to the share split. its IPO, the Company’s board of directors and shareholders appro ved an amendment to the registration in the Switzerland commercial aa gg Segmen t InfoII rmation Operating segments are definff ed as components of an enterprise about which separate discrete information is availabla e forff evaluation by the chief operating decision maker, or decision-making group,uu in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker, namely, the chief executive officff er, view the Company’s operations and manage its business in one operating segment, which is the business of discovering, developing and commercializing therapies derived from or incorporr rating genome-editing technology. Foreign Currency Tc ranTT slationtt and Transactions The Company’s reporting currency is the U.S. Dollar. The Company‘s consolidated entities have the U.S. dollar as their functional currency with the exception of CRISPR Ltd. which has the British Pound Sterling (“GBP”) as its functional currency. CRISPR Ltd. has assets and liabilities translated into U.S. dollars at exchange rates in effect at the end of the year. Revenue and expenses are translated using the average exchange rates for the period. Net unrealized gains and losses resulting fromff currency translation are included in accumulated other comprehensive income (loss), which is a separate component of shareholders’ (deficit) equity. Net forei ff denominated in currencies other than funff operations and comprehensive loss. gn currency exchange transaction gains and losses resulting from the remeasurement of transactions ctional currency are included in other (expense) income, net in the consolidated statements of foreign ff F-8 Cash and Cash Equivalentstt The Company considers all highly liquid investments with maturities of 90 days or less from the purchase date to be cash equivalents. As of December 31, 2016, and 2015, the Company had $315.5 million and $156.0 million in cash equivalents, respectively. All cash was held in depository accounts and is reported at fair value. ff Accounts Rtt eceivable Accounts receivable of $3.2 million at December 31, 2016 consist of receivables fromff ated (“Vertex”) and Casebia. As of December 31, 2015, the Company had accounts receivabla e of $0.3 million consisting of receivables from Vertex. Accounts receivables (see Note 9). Vertex and Casebia are creditworthy entities that maintain an ongoing relationship with the Company, as such the Company did not have an allowance for estimated losses recorded related to these receivables. under both the Vertex and Casebia collaboration agreements are recorded at invoiced amounts duedd Vertex Pharmaceuticals, Incorpor a rr Concentrati tt ons of Creditii Risk and Off-balance Sheet Riskii Financial instruments that potentially subju ect the Company to concentrations of credit risk are primarily cash. The Company’s cash is held in accounts with finff ancial instituttt credit losses in such accounts and does not believe it is exposed to any significan financial instruments with off-balance sheet risk of loss. ff ions that management believes are creditworthy. The Company has not experienced any t credit risk on these funds. The Company has no ff Deferr ed Public OffeO ring Cn ostCC stt Deferred public offering costs, which primarily consist of direct, incremental legal and accounting feeff s relating to the IPO, were capitalized within other non-current assets prior to our IPO. The issuance costs of $8.3 million, including underwriter’s commissions, were offset against the IPO proceeds upon the consummation of the offering in October 2016. Fair Value of Financial Instruments The Company’s financial instrumrr ents consist of accounts payablea , accruerr d expenses and other non-current liabilities. The ff shed a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair establia unobservable inputs by requiring that the observablea participants would use in pricing the financial instrument based on market data obtained from sources independent of the Company.nn Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the financial instrument and are developed based on the best information availablea values. FASB ASC Topic 820, Fair Value Measurement and Disclosures (“ASC 820”), inputs be used when available. Observable inputs are inputs that market in the circumstances. The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered , that may be used to measure fair value, which are the following: observable and the last unobservablea Level 1 — Quoted prices in active markets that are accessible at the market date for identical unrestricted assets or liabilities. Level 2 — Inputs other than Level 1 that are observablea similar assets or liabia lities; quoted prices in markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by observable market data for substantially the fulff , either directly or indirectly, such as quoted prices forff l term of the assets or liabia lities. Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liaba ilities. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest forff instruments categorized in Level 3. A finff ancial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The carrying amount of accounts receivable, accounts payable, and accrued expenses as reported on the consolidated balance sheets as of December 31, 2016 and 2015, approximate fair value, due to the short-term duration of these instruments. The fair value of the Company’s equity method investment in Casebia and convertible debt instrumrr ents were determined using level 3 inputs (See Note 9). F-9 Propeo rtytt and Equipme ii nt Property and equipment is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over the estimated usefulff lives of the respective assets, which are as folff lows: Asset Computer equipment and softwa ff Furnit urtt e, fixtures, and other rr Laboratory equipment Leasehold improvements re Impairmerr nt of Long-lived Assetstt Estimated useful life 3 years 5 years 5 years Shorter of usefulff life or remaining lease term The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the book value of the assets to the expected futff urtt e net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value. The Company has not recognized any impairment losses in the years ended December 31, 2016, 2015, and 2014. Revenue Recognition To date, the Company’s only source of revenue has been the collaboration and license agreement with Vertex as well as research and development services provided to Casebia under the joint venture with Bayer HealthCare LLC (“Bayer”) (see Note 9). The Company recognizes revenue in accordance with ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, revenue is recognized for each unit of accounting when all of the following criteria are met: • • • • Persuasive evidence of an arrangement exists; Delivery has occurred or services have been rendered; The seller’s price to the buyer is fixed or determinabla e; and Collectability is reasonabla y assured. Amounts received prior to satisfying recognized as revenue within the 12 months follo to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue within non- current liabilities. ed revenue. Amounts expected to be wing the balance sheet date are classified in current liabilities. Amounts not expected the revenue recognition criteria are recorded as deferr ff ff ff The Company evaluates multiple-element arrangements based on the guidance in FASB ASC Topic 605-25, Revenue Recognigg tion—MulMM tipli e-Element Arrangementstt (“ASC 605-25”). Pursuant to the guidance in ASC 605-25, the Company evaluates multiple-element arrangements to determine (i) the deliverables included in the arrangement and (ii) whether the individual deliverables represent separate units of accounting or whether they must be accounted forff as a combined unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When the Company determines that an arrangement should be accounted forff performance obligations will be performed and revenue will be recognized. This evaluation requires the Company to make judgments about the individual deliverabla es and whether such deliverables are separable from the other aspects of the contractual tt Deliverables are considered separate units of accounting provided that (i) the delivered item has value to the collaboa standalone basis and (ii) if the arrangement includes a general right of returtt n wrr performance of the undelivered item is considered probable and substantially in the Company’s control. In assessing whether an item has standalone value, the Company considers facff capabilities of the collaboration partner and the availability of the associated expertise in the general marketpltt ace. In addition, the se without the receipt of the Company considers whether the collaboa remaining deliverable, whether the value of the deliverable is dependent on the undelivered item, and whether there are other vendors that can provide the undelivered items. as a single unit of accounting, the Company must determine the period over which the tors such as the research, development, manufacturtt ith respect to the delivered item, delivery or ration partner can use any other deliverablea ing and commercialization relationship. ration partner on a for its intended purporr F-10 The consideration received under the arrangement that is fixed or determinable is then allocated among the separate units of units of accounting within each arrangement using vendor-specific objective evidence accounting based on the relative selling prices of the separate units of accounting. The Company determines the selling price of a unit of accounting within each arrangement following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, the Company determines the estimated selling price forff (“VSOE”) of selling price, if availabla e; third-party evidence (“TPE”) of selling price if VSOE is not available; or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company typically uses BESP to estimate the selling price as it generally does not have VSOE or TPE of selling price for its units of accounting. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP forff and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company periodically validates the BESP used for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effeff ct on the allocation of arrangement consideration between multiple units of accounting. a unit of accounting, the Company considers appli cabla e market conditions aa tt ff or determinable, and collectability is reasonably assured. In the event that a deliverablea The Company recognizes arrangement consideration allocated to each unit of accounting when all of the following criteria are met for that particular unit of accounting: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed does not represent a separate unit of accounting, the Company recognizes revenue from the combined unit of accounting over the or estimated performance period for the undelivered items, which is typically the term of the Company’s research and contractual development obligations. If there is no discernibrr ance or objectively measurable performance measures do not exist, then the Company recognizes revenue under the arrangement on a straight-line basis over the period the Company is expected to complete its performance obligations. Conversely, if the pattern of perforff mance over which the service is provided to the customer can be determined and objeb ctively measurabla e performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as appli cabla e, as of the period ending date. le pattern of performff a Significff ant management judgment is required in determining the level of efforff t required under an arrangement and the period over which the Company expects to complete its performff not inconsequential or perfunff performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which the Company expects to complete its aggregate performance obligations. ance obligations under an arrangement. Steering committee services that are ctory and that are determined to be perforff mance obligations are combined with other research services or At the inception of an arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent naturtt e of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either the Company’s perforff mance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting fromff milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates facff commercial and other risks that must be overcome to achieve the particular milestone and the level of effoff to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substa entirety upouu n successful accomplishment of any substa Milestones that are not considered substantive are recognized as earnedrr if there are no remaining perforff mance obligations or over the remaining period of performance, with a cumulative catch-up being recognized for the elapsed portion of the period of perforff mance, assuming all other revenue recognition criteria are met. ntive milestones, assuming all other revenue recognition criteria are met. ntive. The Company will recognize revenue in its tors such as the scientific, clinical, regulatory, the Company’s performance to achieve the rt and investment required u qq u The Company will recognize royalty revenue in the period of sale of the related producdd t(s), based on the underlying contract terms, provided that the reported sales are reliablya measurablea all other revenue recognition criteria are met. and the Company has no remaining performa ff nce obligations, assuming Research and Developme o nt Expenxx ses Research and development costs, which include employee compensation costs, facff upplies and materials, overhead, preclinical development, and other related costs, are charged to expense as incurred. Research and development costs also include the costs the Company incurs in its performance of services or provision of materials in connection with the funded research undertaken as a part of the Company’s collaborative agreement with Vertex and Casebia. See Note 9 forff further details. ilities, lab sa F-11 Operatintt gn Leases e and laboa ff ratory f acil rr The Company leases officff ities under a non-cancelabla e operating lease agreements. The lease agreements or escalating rent payment provisions. The Company recognizes rent expense under such leases on a straight-line basis contain freeff over the term of the lease with the differff ence between the expense and the payments recorded as deferr ed rent on the consolidated balance sheets. Lease renewal periods are considered on a lease-by-lease basis in determining the lease term. Funding of leasehold improvements by the Company’s landlord are accounted for as a tenant improvement allowance and are amortized as a reduction of rent expense over the term of the lease. Leasehold improvements are amortized straight-line over the shorter of the useful life or the remaining lease term. ff Equityii Based Compe CC nsationtt Expense The Company recognizes equity-based compensation expense for awards of equity instruments to employees and non-employee directors based on the grant date fair value of those awards in accordance with FASB ASC Topic 718, Stock Compensation (“ASC 718”). ASC 718 requires all equity-based compensation awards to employees and non-employee directors, including grants of restricted shares and stock options, to be recognized as expense in the statements of operations based on their grant date faiff The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The Company uses the fair value of its Common Shares to determine the fair value of restricted share awards. r values. The Company accounts for stock options issued to non-employees under FASB ASC Topic 505-50, Equity Btt tt o Non-EmpEE loyeo es (“ASC 505-50”). As such, the value of such options is periodically remeasured and income or expense is recognized over their vesting terms. Compensation cost related to awards with service-based vesting schedules is recognized using the straight- line method. ased Payments t The Black-Scholes option pricing model requires the input of certain subjeu ctive assumptions, including (i) the expected share price volatility, (ii) the calculation of expected term of the award, (iii) the risk-freff e interest rate and (iv) the expected dividend yield. Due to the lack of a public market for the trading of the Company’s Common Shares prior to its IPO and a lack of company-specififf c historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group ouu f representative companies have characteristics similar to the Company, including stage of product development and focus on the life science industry. The Company uses the simplifiedff method, which is the average of the options granted to employees as it does not have l term, to calculate the expected term forff final vesting tranche date and the contractuatt which to estimate the expected term. For options granted to non- uu ff suffici employees, the Company utilizes the contractuatt l term of the arrangement as the basis for the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company uses an assumed dividend yield of zero as the Company has never paid dividends and has no current plans to pay any dividends on its Common Shares. ent historical exercise data to provide a reasonable basis upon The Company expenses the fair value of its equity-based compensation awards granted to employees on a straight-line basis over the associated service period, which is generally the period in which the related services are received. The Company measures equity-based compensation awards granted to non-employees at fair value as the awards vest and recognizes the resulting value as compensation expense at each financial reporting period. The Company records the expense for equity-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a perforff mance-based milestone is probable based on the expected satisfaction of the perforff mance conditions as of the reporting date. Patent Coststt Costs to secure and prosecute patent application and other legal costs related to the protection of the Company’s intellectual property are expensed as incurred, and are classifieff d as general and administrative expenses in the Company’s consolidated statements of operations. F-12 Income Taxes Income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax reporting basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has evaluated availabla e evidence and concluded that the Company may not realize all the benefit of its deferff therefore a valuation allowance has been established for the amount of the deferre more likely than not to be realized. d tax assets that the Company does not believe is red tax assets; ff The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the availabla e fact significant uncertain tax positions. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. See Note 14 forff s and circumstances. As of December 31, 2016 and 2015, the Company does not have any further details. ff Comprm ehensive Loss Comprehensive loss consists of net income or loss and changes in equity during the period fromff transactions and other events and circumstances generated from non-owner sources. The Company’s net loss equals comprehensive loss, net of any changes in the foreign currency translation adjustment, forff interest equals net loss forff all periods presented. In addition, comprehensive loss attributable to the noncontrol all periods presented. ling tt Variable Intertt est Entitiett s ff The Company reviews each legal entity forme d by parties related to the Company to determine whether or not the Company has ion of a VIE in accordance with FASB ASC Topic eneficiary ntly affect a variable interest in the entity and whether or not the entity would meet the definit 810, Consolidation (“ASC 810”). If the entity is a VIE, the Company assesses whether or not the Company is the primary brr of that VIE based on a number of factors, including (i) which party has the power to direct the activities that most significaff the VIE’s economic performa nce, (ii) the parties’ contractual rights and responsibilities pursuant to any contractual agreements and (iii) which party has the obligation to absorb losses or the right to receive benefits from the VIE. If the Company determines it is the primary brr financial statements at the time that determination is made. The Company evaluates whether it continues to be the primary beneficff of any consolidated VIEs on a quarterly basis. If the Company were to determine that it is no longer the primary brr consolidated VIE, or no longer has a variabla e interest in the VIE, it would deconsolidate the VIE in the period that the determination is made. eneficiary of a VIE, the Company consolidates the financial statements of the VIE into the Company’s consolidated eneficiary of a iaryrr ff ff If the Company determines it is the primary benefici ff ary of a VIE that meets the definition of a business, the Company measures the assets, liabia lities and noncontrolling interests of the newly consolidated entity at faiff 805, Business Combinations (“ASC 805”) at the date the reporting entity first becomes the primary beneficiary.rr r value in accordance with FASB ASC Topic In February 2016, Casebia Therapeutics LLP, a limited liabili a upon consummation of the JV, Bayer and the Company each received a 50% equity interest in the entity in exchange for their contributions to the entity. The Company determined that Casebia was considered a VIE and concluded that it is not the primary beneficiary of the VIE. As such, the Company did not consolidate Casebia’s results into the consolidated finaff Note 4 for further details. ty partnership, was formed in the United Kingdom. In March 2016 ncial statements. See As of December 31, 2016, TRACR is a wholly-owned subsidiary of the Company. See Note 4 forff further details. For the year ncial ended December 31, 2015, the Company consolidated the financial statements of TRACR into the Company’s consolidated finaff statements as it was both a VIE and a majority owned subsidiary. For the year ended December 31, 2014, the Company consolidated TRACR as a VIE. F-13 Noncontrollinll gn Interest Upon the IPO date of the Company, the non-controlling interest of TRACR RR was acquired, and as of the year ended December 31, 2016 TRACR is a wholly-owned subsidiary orr recorded non-controlling interest, which was related to TRACR during 2015 and 2016. The Company recorded net loss attributabla e to non-controlling interest on its consolidated statements of operations, reflecting the loss from non-controlling interest for the reporting period. further details related to TRACR. The Company f the Company. See Note 4 forff Intantt gin blii e All ssetstt The Company’s intangible assets consist of acquired intellectual property rights and relate to the Company’s interest in TRACR. Intangible assets are recorded at fair value at the date of the business combination and are stated in the consolidated balance sheets net of accumulated amortization and impairments, if appa f intangible assets subju ect to amortization on a periodic basis to determine whether events and circumstances would indicate impairment or warrant a revision to the remaining useful life. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.ff licabla e. The Company evaluates the remaining useful life off Intangible assets related to the acquired intellectuatt l property rights are amortized over their estimated usefulff lives using the straight-line method as the pattern of revenues cannot be reasonabla y estimated. Amortization related to the acquired intellectual property rights is recorded in general and administrative expense in the consolidated statements of operations and comprehensive loss. Net Loss Per Share Attribtt tt utabl CC ll o Ctt e t ommo n Share SS srr holder ll Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing the net income attributablea period, including any dilutive effect from outstanding stock options and warrants using the treasury stock method. to common shareholders by the weighted-average number of common equivalent shares outstanding for the The Company follows the two-class method when computing net income per share in periods when participating securities are outstanding. The two-class method determines net income per share forff each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnirr ngs. The two-class method requires income availabla e to common shareholders for the period to be allocated between common and participating securities based on their respective rights to receive dividends as if all income for the period had been distributed. Accordingly, in periods in which the Company reports a net loss attributabla e to common shareholders when participating securities are outstanding, losses are not allocated to the participating securities because they have no contractual obligation to share in the losses of the Company. For purporr income per share attributablea are considered common share equivalents. red shares, convertible loans, stock options, and unvested restricted common shares ses of calculating diluted net to redeemable preferff The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares): Convertible preferred shares Conversion of convertible loans Dr. Emmanuelle Charpentier call option Outstanding options Unvested unissued restricted shares Total 2016 — — — 4,535,371 89,367 4,624,738 As of December 31, 2015 18,837,024 4,110,987 328,017 1,939,986 142,794 25,358,808 2014 3,560,002 — — — — 3,560,002 Subsequent Events The Company considered the events or transactions occurring after the balance sheet date, but prior to the issuance of the nt consolidated financial statements, for potential recognition or disclosure in its consolidated financial statements. All significaff subsequent events have been properly disclosed in the consolidated financial statements. F-14 Recent Accountingii Pronouncementstt In May 2014, the FASB issued ASU No. 2014-09, Revenue from ContCC racts wtt Contracts with Ctt Subsequently, the FASB also issued ASU 2015-14, Revenue fromff date of ASU 2014-09; ASU No. 2016-08, Revenue from ConCC tracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implementation guidance and illustrations in ASU 2014-09; ASU No. 2016-10, Revenue fromff Obligations and Licensing, which clarifies identifying performance obligation and licensing implementation guidance and illustrations in ASU 2014-09; and ASU No. 2016-12, Revenue froff m ConCC tracts with Ctt Practical Expedients, which addresses implementation issues and is intended to reduce the cost and complexity of applying the new revenue standard in ASU 2014-09 (collectively, the “Revenue ASUs”). usCC tomers (Topic 606): Narrow-Scope Improvements and ustCC omers (Topic 606), which adjusted the effective ith Customersrr (Topic 606): Identifying Performance ith Customers (Topic 606) (“ASU 2014-09”). Contracts wtt The Revenue ASUs provide an accounting standard for a single comprehensive model for use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The accounting standard is effective for interim and annual periods beginning after December 15, 2017, with an option to early adopt for interim and annual periods beginning after December 15, 2016. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect ff initial application (the modifieff d retrospective method). We currently anticipate adoption of the new standard effecff under the full retrospective method. The Company is in the process of determining the impact of the Revenue ASUs on its financial statements. lying the guidance recognized at the date of of initially appaa tive January 1rr , 2018 In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial StatSS ements—tt Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate whether there is substantial doubt abou nd to provide related footnote disclosures. This guidance is effective for the annual reporting period ending after December 15, 2016 and forff periods thereafter. effect on our consolidated financial statements or disclosures. annual and interim The Company adopted ASU 2014-15 on December 31, 2016 and the adoption of ASU 2014-15 did not have an ity to continue as a going concern arr t an entity’s abila a ff rr In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which appl a ies to all leases and will require ive forff fiscal years beginning after December 15, 2018 and interim periods within those years, which is the year ended December lessees to record most leases on the balance sheet, but recognize expense in a manner similar to the current standard. ASU 2016-02 is effect ff 31, 2019 for the Company. Entities are required to use a modifiedff entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is evaluating the new guidance and the expected effeff ct on its consolidated financial statements. retrospective approach of adoption for leases that exist or are In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stoc— k CompCC ensation (Top (( ic 718)8 (“ASU 2016-09”). The certain aspects of equity-based payments to employees. Entities will be required to ts of awards in the income statement when the awards vest or are settled. The guidance also allows an guidance changes how companies account forff recognize income tax effecff employer to repurchase more of an employee’s shares than it can under current guidance for tax withholding purposes providing forff withholding at the employee’s maximum rate as opposed to the minimum rate without triggering liability accounting and to make a policy election to account for forfeiturett 15, 2017. Early adoption is permitted. Under today’s guidance, the Company does not recognize the income tax effecff have vested or are settled until they actuatt lly reduce taxes payable. This standard will require the Company to recognize these effects when they are vested or are settled, subjeb ct to the assessment of the need for a valuation allowance. The adoption of this standard is not expected to have a material impact on the Company’s finaff ncial position, results of operations or statements of cash flows upon adoption, primarily because any tax effecff allowance. s as they occur. The updated guidance is effective for annual periods beginning after December ts of awards that ts the Company may be required to realize are expected to be subjeb ct to a full valuation ff In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash FlowFF (( s (ww Top ic 230):0 Restricted Cash (“ASU 2016- 08”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown on the statement of cash floff ws. The guidance is effecti ve in the first quarter of fiscal 2018 and early adoption is permitted. ASU 2016-18 must be applied retrospectively to all periods presented. Upon adoption, the Company’s 2016 statement of cash flowff an increase in operating cash flows resulting from the adoption of this new standard. The Company does not expect any ff reflect additional impact on its financial statements. s will ff F-15 3. Property and Equipment, net Property and equipment, net, consists of the following (in thousands): Computer equipment and software ff Furniture, fixtures, Laboratory equipment and other sehold improvements Construction work in process Accumulated Depreciation Property and equipment, net As of December 31, 2016 2015 $ $ 110 2,044 2,970 15,780 1,065 21,969 (942) 21,027 $ $ 118 238 861 88 95 1,400 (72) 1,328 Depreciation expense for the year ended December 31, 2016, 2015, and 2014 was $0.9 million, $0.1 million, and $0 million, respectively. 4. Variable Interest Entities TRACRRR tt Hematology d Limite ii On January 23, 2014, the founders of the Company formed TRACR in the United Kingdom, to further the development of the CRISPR/Cas9 technology into medicines for the treatment of blood-borne illnesses. On April 14, 2014, TRACR licensed certain foundational intellectual property rights under joint ownership from Dr. Emmanuelle Charpentier to develop and commercialize products for the treatment or prevention of human diseases related to hemoglobinopathies. See Note 9 forff technology license agreement with Dr. Charperr ntier. further details of the tt On April 14, 2014 the Company determined that it became the primary benefici ary of TRACR based on, among other facto the Company’s power to direct the activities that significantly impacted the economic performance of TRACRR R and the Company’s financing of contractual obligations on behalf of TRACR, and the period in which the Company began to benefit from research and development of TRACR technology. Accordingly, the Company consolidated TRACR’s finaff ncial statements as a consolidated VIE beginning on April 14, 2014. rs, ff ff On March 24, 2015, the Company acquired 4,600 ordinary shares of TRACR, representing 82.1% of the ordinary srr hare capital, pursuant to a share exchange transaction with the shareholders of TRACR. In exchange for 4,600 ordinary shares of TRACR and the assignment of certain rights to subscribe ordinary shares of TRACR, the Company issued 852,846 Common Shares to two founders of TRACR, 656,031 restricted Common Shares to certain employees and non-employees, and 459,217 Common Shares to Fay Participation Corporat issuance to certain employees and non- employees. As of December 31, 2015, the Company held 4,600 ordinary shares of TRACR, representing 82.1% of the ordinary share capiaa tal of TRACR. ion (“Fay Corp.”), an entity formed to hold Common Shares for futurett rr Upon the share exchange on March 24, 2015, the Company recorded an adjustment of $0.1 million to decrease the carrying amount of the noncontrolling interest in TRACRR adjustment was recognized directly in equity through additional paid-in capiaa tal and is attributabla e to the controlling interest. R and reflect the Company’s increased ownership interest in TRACR’s net assets. This Pursuant to the share exchange transaction on March 24, 2015, the Company also entered into a freeff standing call option 1,000 ordinary shares of TRACR, representing the remaining 17.9% of the ordinary share capital tier in exchange for 328,017 Common Shares of the Company. In the event the option is exercised by agreement with Dr. Charpentier forff of TRACR. Under the terms of the call option agreement, the Company has the option to acquire the remaining 1,000 shares of TRACR held by Dr. Charpenrr the Company prior to a liquidation event, the Company will indemnify Dr. Charpentier forff In addition, upon a bankrupt liquidation event, as defined in the call option agreement, the remaining 1,000 ordinary shares of TRACR held by Dr. Charpentier will automatically convert into 328,017 Common Shares of the Company. The call option was determined to have a faiff million at the time of the share exchange and was attributed to Dr. Charpentier’s for past services rendered to CRISPR and TRACR. Upon IPO, the call option was exercised and the remaining non-controlling interest of TRACR was acquired, resulting in a reduction of Noncontrolling interest of $0.1 million, stock based compensation of $0.2 million for original value of the call option, and additional paid-in capiaa tal of $0.1 million. f the Company, a change in control or other deemed cy, liquidation, closing of an IPO, winding up ouu all taxes owed as a result of the exchange. r value of $0.2 RR rr F-16 Joint Venture withii Bayer HeaHH lthtt care LLC In December 2015, the Company entered into an agreement with Bayer to create a joint venture to discover, develop and commercialize new therapeaa utics for genetically linked diseases, including blood disorders, blindness and heart disease. On February 12, 2016, Casebia, a limited liability partnership, was formed in the United Kingdom. In March 2016 upon consummation of the JV, Bayer and the Company each received a 50% equity interest in the entity in exchange for their contributions to the entity. The f the VIE. As such, the Company determined that Casebia was considered a VIE and concluded that it is not the primary benefici Company did not consolidate Casebia’s results into the consolidated financial statements. See Note 9 for further details. ary orr ff 5. Intangible Assets The Company’s intangible assets consist of acquired intellectual property rights related to the Company’s initial consolidation of TRACR in April 2014. Acquired intellectual property rights had an estimated life of 10 years. Intangible assets, net of accumulated amortization, are as follows (in thousands): q Acquired intangible asset g As of December 31, 2016 As of December 31, 2015 Cost 547 547 $ $ Accumulated Amortization $ $ (148) $ (93) $ Net 399 454 The Company recorded amortization expense of $0.1 million, $0.1 million, and $40 thousand for each of the years ended December 31, 2016, 2015, and 2014, respectively. As of December 31, 2016 and 2015, the remaining amortization period was 7.3 years and 8.3 years, respectively. The Company has not recorded any impairment charges for the years ended December 31, 2016, 2015 and 2014. The estimated futurett (in thousands): amortization of acquired intangible assets as of December 31, 2016 is expected to be as follows g Year Ending December 31: 2017 2018 2019 2020 Thereafter Total amortization 6. Accrued Expenses Accrued expenses consist of the following (in thousands): Payroll and employee-related costs Research costs Licensing fees ssional fees Intellectual property costs property and equipment Other Total Amount 55 55 55 55 179 399 $ $ As of December 31, 2016 2015 $ $ 2,585 $ 996 492 2,715 3,372 5,081 1,079 16,320 $ 773 910 1,055 2,412 2,592 — 688 8,430 F-17 7. Convertible Loans 2015 Convertible Loan Agreement with Vertex and certain existing shareholdersdd On October 26, 2015, the Company entered into a convertible loan agreement with Vertex and certain existing shareholders (the “Vertex Convertible Loan”) under which the Company could borrow up to $40.0 million. The Vertex Convertible Loan accruerr s interest at 2.5% per annum and had an initial maturity date of April 26, 2016 subject to acceleration upon the occurrence of certain ity Date”). On various dates between November 23 and December 7, 2015, the conditions stated in the loan agreement (the “Maturtt Company borrowed aggregate net proceeds of $38.2 million. The Vertex Convertible Loan included various embedded conversion, redemption and other features, as furth ASC 815. On January 29, 2016, all of the outstanding principal plus accrued interest of $0.2 million under the Vertex Convertible Loan was automatically converted into 2,859,278 Series B Preferred Shares in connection with a qualified financing described below. er described below, none of which required separate accounting froff m the host instrumrr ent under uu ff An event of default (“Event of Default”) is defined in the Vertex Convertible Loan Agreement and includes events of bankruptuu cy, insolvency or reorganization and, solely at the election of Vertex, a material breach that is not cured within the applicabla e notice and cure periods of the strategic collaboration, option and license agreement entered into by Vertex and the Company. See Note 9 forff further details of the strategic, option and license agreement. Conversion Terms On the Maturity Date, the outstanding principal plus accruerr d interest automatically converts into Series B Preferred Shares at $9.33 per share. In the event the Company issues equity securities prior to the Maturity Date with aggregate proceeds of not less than $50.0 million, of which $5.0 million is raised from investors other than Vertex or existing shareholders, the outstanding principal plus accrued interest under the Vertex Convertible Loan automatically converts into the newly issued equity securities at the price per share paid by the investors in the financing. In the event of an underwritten publiu c offering with shares of the Company listed on the New York Stock Exchange, the NASDAQ Global Market, or the NASDAQ Global Market, resulting in at least $50.0 million of proceeds to the Company closed prior to Maturity, the holders may elect, prior to the closing of the IPO, to convert the outstanding principal plus accrued interest into Series B Preferre d Shares at $9.33 per share. Any Vertex Convertible Loan not converted prior to the closing of the IPO, shall automatically ff convert into Common Shares at a price paid by the investors for such shares in the IPO. Upon a liquidation event prior to the Maturity Date, the holders may elect to convert the outstanding principal plus accrued interest into either Common Shares at a price of $9.33 per share or Series B Preferred Shares at a price of $9.33 per share. Redemption Terms Upon an Event of Default, all outstanding principal plus accrued interest becomes immediately due and payable. Upon a liquidation event, if the holders do not exercise their conversion right, the outstanding principal plus accruedrr interest lowing the date on which the Company or its shareholders receive the and payable in cash on the business day folff shall become duedd proceeds from the liquidation event. Contingii ent IntII ertt est Upon an Event of Defauff lt, the outstanding amount of the Vertex Convertible Loan shall bear, in addition to the base interest of 2.5% per annum, default interest at a rate of 7.5% per annum. Convertible Loan with Bayea r HeaHH lthCtt arCC e LLC Concurrent with the execution of the Bayer Joint Venture agreement, the Company also entered into a Convertible Loan Agreement (“Bayer Convertible Loan”) with Bayer forff and matured on January 29, 2016 (the “Maturity Date”). On January 2rr exchange for aggregate net proceeds of $35.0 million. The Bayer Convertible Loan included various embedded conversion, redemption and other features , none of which required separate accounting from the host instrument under ASC 815. 9, 2016, the Company issued the Bayer Convertible Loan in $35.0 million. The Bayer Convertible Loan accrued interest at 2.0% per annum tt F-18 Conversirr on of Convertible Loans to Series B Preferff red Shares rr On January 2rr 9, 2016, concurrent with the issuance of the Bayer Convertible Loan, all of the outstanding principal under the $35.0 million Bayer Convertible Loan automatically converted into 2,605,330 Series B Preferred Shares at $13.43 per share. The Company determined the fair value of the Bayer Convertible Loan to be $24.5 million based on the fair B Preferre d Shares that were exchanged as part of the immediate conversion. As the Bayer Convertible Loan was executed in ff contemplation of the joint venturtt e agreement with Bayer, the Company evaluated the Bayer Convertible Loan as part of one multiple- element arrangement and using a relative fair value allocation allocated $27.0 million of aggregate arrangement consideration to the Bayer Convertible Loan upon issuance (See Note 9). Upon conversion, the Company accreted the Bayer Convertible Loan to its face value of $35.0 million through a charge to interest expense of $8.0 million and converted the $35.0 million to Series B Preferr Shares under the conversion model. value of the underlying Series ed uu ff ff The receipt of $35.0 million in proceeds under the Bayer Convertible Loan in exchange for equity securities, combined with the $38.2 million in proceeds fromff Vertex Convertible Loan, triggered an automatic conversion provision of the Vertex Convertible Loan Agreement. Accordingly, on January 29, 2016, the Vertex Convertible Loan, including loans from existing shareholders, plus accruedrr interest also converted into 2,859,278 of Series B Preferred Shares at $13.43 per share. The Company determined the fair value of the Vertex Convertible Loan to be $26.9 million based on the fair value of the underlying Series B Preferred Shares that were exchanged as part of the conversion. Upon extinguishment, the Company recorded a gain on extinguishment of $11.5 million forff nce between the carrying value of the debt and the fair value of the Series B Preferred Shares issued to settle the debt under the general extinguishment model. ff the differe 8. Commitments and Contingencies Operatintt g Ln eases As of December 31, 2016, the Company had five non-cancellablea operating leases for officeff a , labor atory, and corpor rr ate housing spaces during the year ended December 31, 2016. Three of the leases expire in 2017. The lease of the Company’s research facility space expires in February 2022, with one optional five-year extension period. The sublease of the Company’s primary office and research facility space expires in December 2026. Rental expense for the years ended December 31, 2016, 2015, and 2014 was $4.2 million, $1.3 million, and $17 thousand, respectively. The Company expenses rent, including tenant improvement allowances received by the Company, on a straight-line basis over the term of the lease, including any rent-free periods. In April 2015, the Company entered into a lease for laboratory and officeff lease facilities in Cambridge, Massachusetts (the “200 Sidney Street Lease”). The 200 Sidney Street Lease lease expires in February 2022 with one additional five year extension period. The 200 Sidney Street Lease contains escalating rent clauses which require higher rent payments in futuff re years. In June 2015, the Company entered into an agreement pursuant to which it has the right to use certain office facff ilities in London England. The current term expires in July 2017. The Company’s obligations under this right to use agreement are secured by a cash deposit in the approximate amount of GBP 9 thousand held by the office space provider. In October 2015, the Company entered into a lease for corporate housing in Cambridge, Massachusetts. The term of the original lease was renewed in November 2016 and the current term expires in November 2017 subjecb Company’s obligations under the terms of this lease are secured by a cash deposit in the approximate amount of $10 thousand held by the lessor. t to additional one year renewals. The In April 2016, the Company entered into a sublease for officff e facil ff ities in Cambridge Massachusetts. The Company’ obligations under the terms of this lease were secured by a cash deposit in the approximate amount of $26 thousand held by the lessor. This lease term expired in January 2017. In May 2016, the Company entered into a sublease pursuant to which it subleases in Cambridge, Massachusetts (the “610 Main Street Sublease”) the Company’s primary research and US office facility. The initial term of the 610 Main Street will expire on December 22, 2026. The Company has an option to extend the term of the 610 Main Street Sublease for an additional five year period if, at the time of expiration of the initial term, the sublessor does not intend to utilize the space for itself or its affff ilff iates. The 610 Main Street Sublease contains escalating rent clauses which require higher rent payments in future years. F-19 The 610 Main Street Sublease included a $10.8 million tenant improvements allowance for normal tenant improvements, for tion began in June 2016. The date of the construction coincided with the lease commencement date for accounting which construcrr purposes under ASC 840, Leases. The Company recorded straight-line rent expense of $2.3 million during the year ended December 31, 2016 and a deferred rent liabia lity of $12.9 million, inclusive of a tenant improvement allowance of $10.2 million which the Company is amortizing as a reduction of rent expense over the sublease term. As of December 31, 2016, $1.0 million of the tenant improvement allowance was recorded within current deferr consolidated balance sheet. ed rent, and the remaining $11.9 million as non-current deferr ff ff ed rent on the In May 2016, the Company entered a $2.5 million letter of credit to secure the Company’s obligations under the 610 Main Street ccount. The deposit is recorded in restricted cash in the Sublease. The letter of credit is secured by cash held in a restricted depository arr accompanying consolidated balance sheet as of December 31, 2016. Futurett minimum payments required under the leases as of December 31, 2016, are as follows (in thousands): g Year Ending December 31: 2017 2018 2019 2020 2021 Thereafter Total minimum lease payments Amount 6,685 6,431 6,624 6,823 7,027 30,335 63,925 $ $ Letters of Creditdd As of December 31, 2016 and 2015, the Company had restricted cash of $3.2 million and $0.7 million, respectively, 00 representing letters of credit securing the Company’s obligations under certain leased facilities in Cambridge, Massachusetts at 2aa Sidney Street and the 610 Main Street as well as certain credit card arrangements. The letters of credit are secured by cash held in a restricted depository account. The cash deposit is recorded in restricted cash in the accompanying consolidated balance sheet as of December 31, 2016 and 2015. Shareholderdd Settlett ment Under the terms of a shareholder agreement existing prior to the IPO, if a U.S. common shareholder elected to fileff Electing Fund (“QEF”) and notified the Company of this election, the Company was required to make advance payments to the shareholder related to their individual tax liability. In September 2016, the Company forma $2.0 million to certain U.S common shareholders in order to release the Company from any and all obligations or claims concerning and/or arising out of the Company’s status as a PFIC or a Controlled Foreign Corporation (a “CFC”) for any taxablea year from 2013 through 2015, including for potential lack of timely notification of the Company’s PFIC statustt (an “Annual Information Statement”) for the year ended December 31, 2015. lly offered an aggregate settlement of up to a Qualified ff Following the formal settlement offer in September 2016, in the fourth quarter of 2016 the Company made payments to shareholders of $2.0 million, respectively, under the terms of the accepted settlements. The obligation to make advance payments under the shareholder agreement for tax years subsequent to 2015 terminated upon the closing of the IPO. The Company has made available a 2016 PFIC Annual Informff ation Statement on its website for its shareholders. Sponsored Research Agreements The Company has engaged several research institutions to identify new delivery srr trategies and applications of the CRISPR/Cas9 technology. As a result of these efforts, the Company sponsored five research programs during 2016, with two of these programs continuing through 2018. In association with these agreements, the Company has committed to making payments for related research and development services of $0.7 million, and $0.1 million in 2017 and 2018, respectively. F-20 License Agregg ement withii Anagenesis Biotechtt nologio es SAS On June 7, 2016, the Company entered into a license agreement with Anagenesis Biotechnologies SAS (“Anagenesis”) pursuant to which the Company received an exclusive worldwide license to Anagenesis’ proprietary technology for all human based muscle diseases. Pursuant to the license agreement, the Company made a one-time upfront payment of $0.5 million to Anagenesis and is required to pay Anagenesis up to $89.0 million upon the achievement of future clinical, regulatory and sales milestones forff first allogeneic and autologous licensed products developed pursuant to the license agreement, as well as low single digit royalty payments on futurett months ended December 31, 2016 as research and development expense on the consolidated statement of operations. sales of commercialized producdd t candidates. The Company recorded the $0.5 million payment during the twelve each of the Licensingii and PatPP entt t Assignmgg ent Agreementstt In April 2014, the Company and TRACRR R entered into technology license agreements with Dr. Emmanuelle Charpentier pursuant to which the Company licensed Dr. Charpentier’s interest to certain intellectual property rights jointly owned by Dr. Charpentier and others to develop and commercialize products for the treatment or prevention of human diseases. See Note 9 forff further details. Litigtt atiott n Under the Charpentier license agreement, the Company licenses a U.S. patent appaa lication that is currently subjeb ct to interferff ence proceedings declared by the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office. Following motions by the parties and other procedural matters, the PTAB concluded in February because the claim sets of the two parties were not directed to the same patentable invention in accordance with the PTAB’s two-way test for patent interferences. See Note 17 for further details. 2017 that the declared interference should be dismissed rr Under the Invention Management Agreement (“IMA”) signed on December 15, 2016, the Company is obligated to share costs related to patent maintenance, defense and prosecution. For the years ended December 31, 2016, 2015 and 2014, the Company incurred $3.0 million, $1.5 million and $1.1 million, respectively in shared costs. The Company recorded accruedrr cost sharing of $2.8 million and $2.6 million as of December 31, 2016 and 2015, respectively legal costs froff m the 9. Significant Contracts ll Intellectu al Property Agreements CRISPII R TPP heTT rapea utics AG—Charper ntier License Agregg ement In April 2014, the Company entered into a technology license agreement with Dr. Emmanuelle Charpentier pursuant to which l property rights under joint ownership from Dr. Charpentier to develop and commercialize the Company licensed certain intellectuatt products for the treatment or prevention of human diseases other than hemoglobinopathies (“CRISPR—CRR Agreement”). In consideration for the granting of the license, the Company paid Dr. Charperr ntier an upfront fee of CHF 0.1 million ($0.1 million), and agreed to pay an immaterial annual license maintenance fee if Dr. Charperr ntier is not otherwise engaged in a service arrangement with the Company. During the years ended December 31, 2016, 2015 and 2014, Dr. Charpenrr tier has been in a consulting arrangement with the Company, as such, no annual payments have been made under this provision. Dr. Charperr ntier is entitled to receive nominal clinical milestone payments. The Company is also obligated to pay Dr. Charpentier a low single digit percentage of sublicensing payments received under any sublicense agreement with a third party. In addition, the Company is also obligated to pay to Dr. Charpentier a low single-digit percentage royalty based on annual net sales of licensed producdd ts and licensed services by the Company and its affilff iates and sublicensees. harpentier License During the years ended December 31, 2016, 2015, and 2014 the Company recorded and accrued $0.5 million, $0.9 million, and $0 million, respectively, of subliu terms of the CRISPR—CRR the Bayer agreement. censing fees duedd to Dr. Emmanuelle Charpentier in research and development expense under the harperr ntier License Agreement that was triggered by the execution of the Vertex collaboration agreement and HH TRACR HCC emat ology Lgg imited—Charpentier License Agreement In April 2014, TRACR entered into a technology license agreement (“TRACR—Cha RR rpentier License Agreement”) with Dr. rr ier pursuant to which TRACR licensed certain intellectual property rights under joint ownership from Dr. Emmanuelle Charpent Charpent ier to develop and commercialize products for the treatment or prevention of human diseases related to hemoglobinopathies. rr In consideration for the granting of the license, Dr. Charpentier is entitled to receive nominal clinical milestone payments. TRACR is ier a low single digit percentage of sublicensing payments received under any sublicense agreement also obligated to pay Dr. Charpent rr F-21 with a third party. In addition, TRACR sales of licensed products and licensed services by the Company and its affiliates and sublicensees. is obligated to pay to Dr. Charpenrr RR tier low single digit percentage royalties based on annual net During the years ended December 31, 2016, 2015, and 2014 the Company recorded $0, $0.1 million, and $0, respectively, of sublicensing feeff Charpentier License Agreement that was triggered by the execution of the Vertex collaboration agreements. to Dr. Emmanuelle Charperr ntier in research and development expense under the terms of the TRACR—RR s duedd Invention ManaMM gema ent Agreement RR On December 15, 2016, we entered into a an IMA, with the University of Californff ia (“California”), the University of Vienna (“Vienna”), Dr. Charpentier, Intellia therapeaa utics, Inc. (“Intellia”), Caribou Biosciences, Inc. (“Caribou”), ERS Genomics Ltd., or (“ERS”), and TRACR . Under the IMA, Californirr a and Vienna retroactively consent to Dr. Charperr ntier’s licensing of her rights to the CRISPR/CRR as9 intellectual property, pursuant to the Charpentier License, to us, our wholly-owned subsidiary TRACR, and ERS, in the United States and globally. The IMA also provides retroactive consent of co-owners to sublicenses granted by us, TRACR licensees, prospective consent to sublicenses they may grant in futurtt e, retroactive approval of prior assignments by certain parties, and provides for, among other things, (i) good faith cooperation among the parties regarding patent maintenance, defense and prosecution, t patents and (ii) cost-sharing arrangements, and (iii) notice of and coordination in the event of third-party infriff ngement of the subjecb with respect to certain adverse claimants of the CRISPR/Cas9 intellectual property. Unless earlier terminated by the parties, thett IMA will continue in effect until the later of the last expiration date of the patents underlying the CRISPR/Cas9 technology, or the date on which the last underlying patent appaa lication is abandoned. and other RR Patent Assignment gg Agreement In November 2014, the Company entered into a patent assignment agreement (“Patent Assignment Agreement”) with Dr. Emmanuelle Charpentier, Dr. Ines Fonfara, and Vienna (collectively, the “Assignors”), pursuant to which the Company was assigned all rights, title and interest in and to certain patent rights claimed in the U.S. Patent Application No.61/905,835. In consideration for the assignment of such rights, the Assignors are entitled to receive clinical milestone payments totaling up tuu (approximately $0.4 million) in the aggregate for the first human therapeutic product. The Company is also obligated to pay to the Assignors low single digit royalties based on annual net sales of licensed products and licensed services by the Company and its affiliates and sublicensees. o €0.3 million During the years ended December 31, 2016, 2015, and 2014 the Company recorded $33 thousand, $0.1 million, $0, respectively, dudd e to the Assignors in research and development expense under the terms of the Patent Assignment Agreement of sublicensing fees that was triggered by the execution of the Vertex collaboa ff ration agreement and the Bayer Agreement. Collabll oration Agreement with Vertex Pharmaceutictt als, Is ncoII rporated Summary orr f Ao greement On October 26, 2015, the Company entered into a strategic collaboa ration, option, and license agreement (“Collabor a ation sed on the use of CRISPR’s gene editing technology, known as CRISPR/CaRR Agreement”) with Vertex, focuff s9, to discover and develop potential new treatments aimed at the underlying genetic causes of human disease. The collaboration will evaluate the use of CRISPR- Cas9 across multiple diseases where targets have been validated through human genetics. Vertex and CRISPR will focus their initial gene editing research on discovering treatments to address the mutations and genes known to cause and contribute to sickle cell disease, beta-thalessemia and cystic fibrosis. Vertex and CRISPR will also evaluate a specified number of other genetic targets as part o six targets, Vertex has an exclusive option to obtain: (1) an exclusive license to commercialize CRISPR of the collaboration. For up tuu technology (“Exclusive License”) or (2) a co-exclusive license with respect to hemoglobinopathy and beta-globin targets (“Co- exclusive License”). The collaborative program of research to be undertaken by the parties pursuant to the Collaboration Agreement will be conducdd ted in accordance with a mutuatt responsibilities across the three research areas. The Company’s research and development responsibilities under the research plan (“R&D Services”) are related to generating genome editing reagents that modify gff to the Company’s obligations under the mutuall worldwide research, development, manufacturing and commercialization of productdd y agreed upouu n research plan, Vertex has sole responsibility, at its own costs, for the s resulting from the exclusive licenses obtained. research plan which outlines each party’s research and development ene targets selected by Vertex. Except with respect lly agreed upon uu tt The research collaboration will end on the earlier of the date on which Vertex has exercised six options to obtain exclusive/co- rth anniversary of the effective date of the agreement. The research exclusive licenses with respect to a collaboration target, or the fouff F-22 term may be extended as mutually agreed by the parties up to nine additional months to complete any research activities under the approved research plan that are incomplete on the fourth anniversary of the effecff tive date. The Collabor a ation Agreement will be managed on an overall basis by a project leader fromff addition, the activities under the collaboration agreement during the research term will be governedrr (“JRC”) formed by an equal number of representatives froff m the Company and Vertex. Decisions by the JRC will be made by consensus of the group, however, Vertex will have final decision-making authority in the event of disagreement, provided it is in good faith and not contrary t o any explicit clause of the agreement. rr each of the Company and Vertex. In by a joint research committee In connection with the agreement, Vertex made a nonrefundab ff le upfront payment of $75.0 million. In addition, Vertex will fund ctivities conducdd ted pursuant to the agreement. For potential hemoglobinopathy treatments, including treatmett nts all of the discovery arr for sickle cell disease, the Company and Vertex will share equally all research and development costs and worldwide revenues. For other targets that Vertex elects to license, Vertex would lead all development and global commercialization activities. For each of up to six targets that Vertex elects to license, other than hemoglobinopathy and beta-globin targets, the Company has the potential to receive up tuu nd commercial milestones and royalties on net product sale. o $420.0 million in development, regulatory arr Vertex is entitled to terminate the Collaboa ration Agreement as a whole, or terminate the Collaboration Agreement in part with respect to a particular collaboration program, for convenience by providing the Company 90 days’ written notice of such termination; provided, however, that if any termination appl oval, Vertex will provide CRISPR no less than 270 days’ notice of such termination. If Vertex is in material breach of this Collaboration Agreement, the Company has the right to terminate the Collaboration Agreement in full Vertex. ies to a producdd t forff which Vertex has received marketing appr at its discretion 90 days after delivery orr f written notice to aa aa ff The Company evaluated the Collaboration Agreement in accordance with the provisions of ASC 605-25. The Company’s arrangement with Vertex contains the following initial deliverables: (i) a non-exclusive research license; (ii) the option to obtain an hemoglobinopathy or beta- exclusive license for up to six Collaboration Targets; (iii) the option to obtain a co-exclusive license forff globin targets (which would be included within the maximum number of the aforementioned six collabor ation targets); (iv) R&D Services; and (v) JRC participation. a Management considered whether any of these deliverables could be considered separate units of accounting. Regarding the non- exclusive research license, the Company concluded that it does not have stand-alone value separate from the option to exercise the exclusive or co-exclusive license since Vertex would not benefitff ity to obtain the license to commercialize the results of that research. As a result, the Company concluded that the research license should be combined with those options. from acquiring a research license without the abila Regarding the R&D Services, the Company concluded that there are other vendors in the market that could performff the related services. As such the Company concluded the R&D Services represent a separate unit of accounting. Regarding the JRC obligations, the Company concluded that the JRC obligations deliverable has standalone value from the option to license because the services could be perforff med by an outside party. As such the Company concluded the JRC obligations represent a separate unit of accounting. As a result, management concluded that there are four ff units of accounting at the inception of the agreement: (i) a combined unit of accounting representing the non-exclusive research license, and the option for up to six exclusive licenses to develop and commercialize the collabor representing the non-exclusive research license, and the option for a co-exclusive license (subjecb limit) to develop and commercialize the hemoglobinopathy or beta-globin targets as these options do not have stand-alone value; (iii) the perforff mance of R&D Services; and (iv) the participation in the JRC. ation targets as these options do not have stand- alone value; (ii) a combined unit of accounting t to the aforementioned six license a The Company has determined that neither VSOE of selling price nor TPE of selling price is available for any of the units of accounting identified at inception of the arrangement. Accordingly, the selling price of each unit of accounting was determined based on the Company’s BESP. The Company developed the BESP forff with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. all of the units of accounting included in the collaboration agreement The Company developed the BESP for the R&D Services and the JRC participation primarily based on the naturett of the services ed and estimates of the associated effort and cost of the services, adjusted forff to be performff expected to be realized under similar contracts. The Company’s BESP forff BESP forff travel forff the JRC participation services was de minimis based on an estimate of time spent on preparation, participation, review and the meetings. the R&D Services was $26.7 million. The Company’s a reasonablea profitff margin that would be F-23 The Company’s BESP for each combined unit of the non-exclusive research license and the option for an exclusive license to develop and commercialize a single collaboration target is $37.7 million. As the Company expects Vertex to exercise five of these this item was determined based on probability and present value adjusted cash options, the total BESP is $188.5 million. BESP forff flows from the royalties and milestones outlined in the Collaboration Agreement. BESP reflects the level of risk and expected probability of success inherent in the naturett of the associated research area. The Company’s BESP for a non-exclusive research license and the option for a co-exclusive license to develop and commercialize a single hemoglobinopathy or beta-globin collaboration target is $12.5 million. As the Company expects Vertex to exercise one of these options, the total BESP is $12.5 million. BESP forff this item was determined based on probability and present value adjusted cash flows from the equal sharing of project worldwide net profit or net loss. BESP reflects the level of risk and expected probabia lity of success inherent in the nature of the associated research area. Allocabla e arrangement consideration at inception is comprised of:ff (i) the up-front payment of $75.0 million, (ii) the estimated R&D services of $26.7 million and (iii) payments related to the estimated exercise of options on futff urtt e exclusive licenses for five targets of $50.0 million. The aggregate allocablea arrangement consideration of $151.7 million was allocated among the separate units of accounting using the relative selling price method as follows: (i) R&D Services: $17.8 million, (ii) non-exclusive research license, and the option forff exclusive research license, and the option for one Co-exclusive License to develop and commercialize one hematology target: $8.4 million. an Exclusive License to develop and commercialize the five collabora tion targets: $125.5 million, (iii) non- a The amount allocated to R&D Services will be recognized as the R&D Services are performed. The Company will recognize as license revenue an equal amount of the total arrangement consideration allocated to the exclusive licenses as each individual license is delivered to Vertex uponuu Vertex’s exercise of its options to such licenses. The Company will recognize $8.4 million as license revenue when the Co-exclusive License is delivered to Vertex upon Vertex’s exercise of its options to such license. The Company has evaluated all of the milestones that may be received in connection with the Collaboration Agreement. In evaluating if a milestone is subsu tantive, the Company assesses whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration relates solely to past perforff mance, and (iii) the consideration is reasonable relative to all of the deliverabla es and payment terms within the arrangement. The Companm y notes that the $10.0 million due upon the exercise of each option for an Exclusive License was determined to be part of the fixed and determinabla e consideration allocabla e at contract inception and is not subju ect to milestone method accounting. rr The first potential milestone the Company will be entitled to receive is the $10.0 million milestone duedd upon the filing of an Investigational New Drug Application (“IND”) forff agreement relates to the filing of an IND, the Company has considered it to be substantive. Accordingly, such amounts will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. There are no other substantive milestones. As such the total amount of substantive milestones subju ect to milestone each selected Exclusive License. method accounting treatment is $10.0 million forff a selected Exclusive License. As the first developmental milestone of the The remaining milestones are predominately related to the development and commercialization of a product resulting from the arrangement and are payable with respect to each selected Exclusive License. Each milestone is payabla e only once per collaboration target, regardless of the number of products directed to such collaboration target that achieve the relevant milestone event. There are nine remaining clinical development and regulatory arr a $235.0 million, respectively, for each selected Exclusive License, and two commercial milestones which may trigger proceeds of up tuu upon exercise of the exclusive $75.0 million forff option and the $10.0 million development milestone associated with an IND, total $420.0 million for each selected Exclusive License), as follows: each selected Exclusive License (which, when combined with the $10.0 million duedd oval milestones which may trigger proceeds of up tuu o $90.0 million and ppr o Developmental Milestone Events 1. 2. 3. 4. 5. Initiation of the firff st Clinical Trial of a Product Establishment of POC for a Producdd t Initiation of the firff st Phase 3 Clinical Trial of a Product Acceptance of Approval Application by the FDA for a Product Acceptance of Approval Application by the EMA for a Product F-24 6. Acceptance of Approval Application by a Regulatoryrr Authority in Japan for a Product 7. Marketing Approval in the US for a Product 8. Marketing Approval in the EU for a Product 9. Marketing Approval in Japan for a Product Commercial Milestone Events 1. 2. Annual Net Sales for Products with respect to a Collaboa ration Target exceed $500 million Annual Net Sales for Products with respect to a Collaboa ration Target exceed $1.0 billion After Vertex has exercised an Exclusive License option, Vertex will be solely responsible for all research, development, tt ng, and commercialization of licensed agents and producdd ts for the relevant target. As the Company’s involvement in this manufacturi process is limited to observer status, management determined that milestones are not considered subsu tantive because they do not relate solely to the past perforff mance of the Company. Upon the achievement of a milestone, management will evaluate whether the triggering event occurs during or after the research term. If the triggering event occurs during the research term, management has elected to treat the milestone similar to an up-front payment. In these cases, if and when any of these milestones are received, the amount will be included in the overall arrangement consideration and allocated to the remaining identified deliverables. To the extent all deliverables have been satisfied, any additional consideration allocated to them could be immediately recognized. If the triggering event occurs after the research term, the Company will recognize the associated revenue in the period in which the event occurs. The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining perforff mance obligations, assuming all other revenue recognition criteria are met. During the year ended December 31, 2016, 2015, and 2014, the Company recognized $4.0 million, $0.2 million, and $0 million of revenue with respect to the collaboration with Vertex. Research and development expense incurred by the Company in relation to its performance under the collaboration agreement forff million, respectively. As of December 31, 2016 and 2015, there is $77.1 million and $75.1 million of non-current deferred revenue related to the Company’s collaboration with Vertex, respectively. the years ended December 31, 2016 and 2015 was $7.0 million and $0.3 Joint Venture with Bayer Healthcare LLC On December 19, 2015, the Company entered into an agreement to establish a joint venture (“Bayer Joint Venture”) to research aa the development of new therapeut Company and Bayer completed the formation of the joint venturett ity partnership formed in the United Kingdom. Bayer and the Company each received a 50% equity interest in the entity in exchange for their contributions to the entity. The Company contributed $0.1 million in cash and licensed its proprietary CRISPR/CRR as9 gene editing technology and intellectuatt l property for selected disease indications. Bayer contributed its protein engineering expertise and relevant disease know-how. ics to cure blood disorders, blindness, and congenital heart disease. On February 12, 2016, the entity, Casebia, a limited liabila Bayer will provide up to $300.0 million in research and development fund ff ing to Casebia over the first five years, subjeb ct to certain conditions, of which the first $45.0 million was contributed upon formation in the first quarter of 2016. Under the joint venture agreement, the Company has no obligation to provide any additional funding and the Company’s ownership interest will not be diluted from future contributions from Bayer. The activities of Casebia are controlled by a management board under the joint control of the Company and Bayer. As Casebia is jointly controlled by the Company and Bayer, the Company accounts for its 50% interest using the equity method of accounting. Under the agreement, Casebia will pay the Company up tuu o $35.0 million in exchange for a worldwide, exclusive license to commercialize the Company’s CRISPR/CRR as9 technology specifically for the indications designated by Casebia. In March 2016, the roff nt payment of $20.0 million as a technology access fee. The remaining $15.0 million was Company received a non-refundable up-fuu paid on December 22, 2016 foll property. f the necessary consents from patent holders of the Company’s intellectual ff There are no milestone, royalties or other payments duedd that the contribution of the CRISRP/Cas9 technology by license to Casebia did not meet the definff to the Company under this aspect of the agreement. The Company determined ition of a business under ASC 805. owing delivery orr tt The Company will also provide to Casebia compensated research and development services through a separate agreement. Concurrent with the execution of the Bayer Joint Venture agreement, the Company also entered into the Bayer Convertible Loan for $35.0 million. F-25 As the Bayer Joint Venture (including the CRISPR/Cas9 technology license and the research and development services) and the Bayer Convertible Loan were executed at the same time, the Company determined that they should be evaluated as one multiple- sactions (“ASC 845”) did not element arrangement. Additionally, the Company also determined that ASC 845, Nonmonetary Trr apply to this arrangement given the Company’s significant continuing involvement with Casebia and the amount of cash involved in the arrangement. As a result, the Company analogized to ASC 605-25 in allocating the relative fair value of the consideration received to the differff ent elements of the arrangement. ranTT The Company allocated the fair value of the consideration received using a relative fair value allocation. The allocabla e arrangement consideration included (i) the total cash payment by Casebia for the technology access feeff million contribution, of $34.9 million, (ii) the fair value of the equity interest in the Joint Venture of $36.4 million, (iii) the $35.0 million received from the issuance of the Convertible Debt, and (iv) $6.3 million of estimated cash consideration to be received under the research and development service arrangement, accumulating to $112.6 million. , net of the Company’s $0.1 The Company identifiedff the following elements under the transaction: (i) Combined element of an exclusive, worldwide, royalty freeff indications designated by Casebia, and delivery orr technology to develop, manufacturett , license to the CRISPR/Cas9 technology specificaff f the consents of the assignors of the underlying patents to the lly forff the , and commercialize licensed products under that license (ii) Research and development services, and (iii) The issuance of the Bayer Convertible Loan. The Company determined the fair value of the license was $71.4 million based on the consideration paid and the faiff r value of s expected fromff the 50% interest in Casebia, which was determined utilizing discounted cash floff ws based on reasonablea cash flowff million. The fair value of the Bayer Convertible Loan was determined to be $24.5 million, based on the fair value of the underlying preferred shares that were exchanged as part of the immediate conversion. Using a relative fair value allocation, the Company allocated the aggregate arrangement consideration paid as follows: Casebia. The fair value of the separate research and development services was determined to be $6.3 estimates and assumptions of (i) (ii) $63.6 million was allocated to the license and patent holder consent combined element $0.6 million was allocated to the future research and development services (iii) $27.0 million was allocated to the Bayer Convertible Loan The difference between combined above amounts of $91.2 million and the total allocable arrangement consideration of $112.6 million is due to allocable arrangement consideration associated with the $6.3 million of estimated cash consideration to be received under the research and development service arrangement and the remaining $15.0 million of the license fee paid upon the delivery orr f the consent from the patent holders of the Company’s intellectual property. Following deliveryrr of the patent holders’ consent, which occurred on December 17, 2016, the combined amount attributed to the license and patent holder consent element and the remaining $15.0 million license fee, which amount to $78.6 million, was recognized as other income forff combined element did not meet the definition of revenue because the licensing of its technology in connection with the formation of a joint venture is not part of the Company’s majora the year ended December 31, 2016. The Company had determined that the license and patent holder consent ongoing or central operations. As the amount allocated to the Bayer Convertible Loan represents an $8.0 million discount to its $35.0 million face value, the Company recognized interest expense duridd Loan automatically converted into Series B preferff ng the twelve months ended December 31, 2016 equal to the discount. The Convertible 9, 2016 maturity date. red shares on its January 2rr During 2016, the Company recorded an equity method investment of $36.5 million equal to the fair value of the Company’s interest in Casebia (which was included in the allocabla e arrangement consideration described above). Following delivery of the patent holders consent element and realization of the described gain allocated to the license and patent holder consent combined element, the Company recorded unrealized equity method losses up tuu o the remaining amount of the $36.5 million investment. During the year ended December 31, 2016, the Company recognized $1.2 million, of revenue with respect to the collabor with Casebia. Research and development expense incurred by the Company in relation to its performance under the agreement for the year ended December 31, 2016 was $1.2 million. As of December 31, 2016, there is $0.5 million of non-current deferred revenue related to the Company’s collabor investment in Casebia totaled $4.0 million as of and for the year ended December 31, 2016. During 2016, the Company recorded $0.2 million of stock-based compensation expense related to Casebia employees. ation with Casebia, respectively. Unrecognized equity method losses in excess of the Company’s ation a a F-26 Total operating expenses, and net loss of Casebia for the twelve months ended December 31, 2016 was $80.8 million, which included research and development expenses equal to $77.4 million for the fair value of the CRISPR license acquired. Subscriptii iott n Agreement withii Bayea r GloGG bal InvII estments B.V. On December 19, 2015, the Company entered into a subscription agreement, (“Subscription Agreement”), with Bayer BV. Pursuant to the Subscription Agreement, Bayer BV was given the option, at its election, to purchase $35.0 million of the Company’s Common Shares in a private placement concurrent with the Company’s IPO at a per share price equal to the public offerff ing price, see Note 16 for further details. 10. Redeemable Convertible Preferred Shares Upon the closing of the Company’s IPO on October 24, 2016, all outstanding Preferred Shares of the Company were automatically converted into 27,135,884 Common Shares on a one-for-one basis. As of December 31, 2016, the Company had no ff Preferr ed Stock authorized, issued, or outstanding. As of December 31, 2015, the Company had 18,837,024 registered Preferred Shares issued and outstanding in share capital, which was comprised of (i) 440,001 Series A-1 Preferred Shares CHF 0.03 par value per share; (ii) 3,120,001 Series A-2 Preferred Shares, CHF 0.03 par value per share; (iii) 10,758,006 Series A-3 Preferred Shares, CHF 0.03 par value per share; and, (iv) 4,519,016 Series B Preferr ed Shares, CHF 0.03 par value per share, (collectively, the “Preferre d Shares”) . ff ff The Company’s redeemable convertible preferr ed shares were classified as temporary or mezzanine equity on the accompanying consolidated balance sheets in accordance with authoritative guidance for the classification and measurement of redeemabla e securities at the option of the holders. as the Preferr ed Shares are contingently redeemablea ff ff In October 2013, the Company issued 440,001 Series A-1 Preferred Shares for CHF 1.14 ($1.28) per share, resulting in gross d Shares Investment Agreement, the holders proceeds of CHF 0.5 million ($0.6 million). Under the terms of the Series A-1 Preferre had the right to purchase an additional 1,315,790 Series A-1 Preferred Shares at CHF 1.14 ($1.28) per share (the “Series A-1 Tranche Rights”) contingent upon two or more shareholders holding Series A-1 Preferred Shares. These rights were not legally detachabla e. The Series A-1 Tranche Rights were evaluated under ASC 480 and ASC 815 and it was determined that they did not meet the requirements for separate accounting from the initial issuance of Series A-1 Preferred Shares. In connection with the issuance of the Series A-1 Preferred Shares, the Company also issued 335,000 Common Shares to the Series A Preferred Shares investors. The Company recorded the difference of $0.1 million between the fair issuance cost discount to the Series A-1 Preferred Shares upon issuance. value of the Common Shares issued and the price paid by the investors as an ff ff In April 2014, the Company issued 3,120,001 Series A-2 Preferred Shares in exchange for CHF 3.05 ($3.47) per share of such amount CHF 1.45 ($1.65) per share was received upon issuance resulting in gross proceeds of CHF 4.5 million ($5.1 million) and the balance of CHF 1.60 ($1.82) per share was called in February 2015 by the Board of Directors of the Company resulting in additional gross proceeds of CHF 5.0 million ($5.3 million). In connection with the issuance of the Series A-2 Preferred Shares, the Series A-1 Tranche Rights were terminated without exercise in April 2014. The Company’s policy requires the evaluation of amendments to preferr whether they are considered a modification or extinguishment. Based on this approach, the amendment to the terms of the Series A-1 Preferred Shares was considered an extinguishment due to the significff ance of the modifications to the substantive contractual terms of the Series A-1 Preferred Shares. Accordingly, the Company recorded a loss of $0.7 million on the Series A-1 Preferred Shares within additional paid-in capital equal to the difference between the fair value of the Series A-1 Preferred Shares of $1.2 million and the carrying amount of the Series A-1 Preferr the calculation of net loss available to common stockholders in accordance with FASB ASC Topic 260, Earnings per Share (“ASC 260”). ed Shares of $0.4 million upon extinguishment. The loss on extinguishment is reflected in ed shares qualitatively to determine ff ff ff In April 2015, the Company issued 10,758,006 Series A-3 Preferred Shares in exchange for $4.24 per share whereby $2.12 per ed Shares. In connection with the issuance of the Series A-3 ff ed Shares, the Company amended the dividend and conversion terms of the Series A-1 and Series A-2 Preferred Shares. The share was received upon issuance, resulting in gross proceeds of $22.8 million and the balance of $2.12 per share was due upon meeting certain milestones. As of December 31, 2015, none of the milestones had occurred and the Company had an outstanding subscription receivable of $22.8 million related to the Series A-3 Preferr Preferr ff Company’s policy requires the evaluation of amendments to equity classifiedff are considered a modification or extinguishment. Based on this appr Preferred Shares was considered a modificaff 2 Preferre ff 2016 by the Board of Directors and gross proceeds of $22.8 million were received by May 27, 2016. d Shares. The balance of the Series A-3 Preferred Share subscription receivable of $2.12 per share was called on May 5, aa tion and as a result, there was no adjusd oach, the amendment to the terms of the Series A-1 and A-2 ed shares qualitatively to determine whether they tment to the carrying value of the Series A-1 and A- ff preferr F-27 In May 2015, the Company issued 4,519,016 Series B Preferr ff ed Shares in exchange for CHF 6.20 ($6.74) per share resulting in gross proceeds of CHF 28.0 million ($30.5 million). In January 2016, the Company issued 5,464,608 Series B Preferred Shares upon conversion of $38.4 million of Vertex Convertible Loans plus accrued interest and $35.0 million of Bayer Convertible Loans at a conversion price of $13.43 per share. In June 2016, the Company issued 2,834,252 Series B Preferred ff Shares in exchange for $13.43 per share resulting in gross proceeds of $38.1 million. 11. Share Capital The Company had 40,253,674 and 5,528,079 registered Common Shares as of December 31, 2016 and 2015, respectively, with a par value of CHF 0.03 per share. Included in the registered Common Shares as of December 31, 2016 is 89,367 shares of unvested restricted stock award and 444,873 treasury shares, which are legally outstanding, but are not considered outstanding for accounting purposes. uu e Conditional Capital Reserved forff FuFF ture Issuanc II The Company had the following conditional capital reserved forff future issuance: Type of Share Capital Common Shares Common Shares Common Shares Common Shares Common Shares Common Shares Conditional Capital Charpentier Call Option Unvested unissued restricted stock Outstandingg stock options Reserved forff Shares available for bonds and similar debt instruments Shares availablea future issuance under stock option plans for employee purchase plans Total Common Share Issuances As of December 31, 2016 — 166,667 4,535,371 5,290,643 4,919,700 413,226 15,325,607 2015 328,017 142,794 1,939,986 33,567 — — 2,444,364 In October 2016, the Company completed an IPO whereby the Company sold 4,429,311 of its Common Shares, inclusive of 429,311 Common Shares sold by the Company pursuant to the partial exercise of an overallotment option granted to the underwriters in connection with the offering. Concurrent with the IPO, the Company issued and sold 2,500,000 Common Shares to Bayer BV, in a private placement. Additionally, the Company issued and subsequently reacquired the unexercised overallotment Common Shares of 170,689 at no cost, which are held in treasury.rr In March 2015, the Company entered into an agreement to acquire 82.1% of the ordinary share capital of TRACR in a share ct to a right of repurchase at an escalating purchase price. If any of these holders of restricted Common Shares are terminated, exchange transaction. In connection with this share exchange transaction, the Company issued 852,846 Common Shares to two founders of TRACR, 459,217 Common Shares to Fay Corp. and 656,031 restricted Common Shares to certain employee and non- employee advisors of TRACR. If the holders of any restricted common shares terminates the service relationship the unvested shares are subjeu in certain circumstances, the vested and unvested shares are subject to a right of repurchase at the shareholder’s original purchase price. The Company recorded equity-based compensation expense in April 2015 for the incremental value received by the holders in exchange forff compensation expense for the exchange of TRACR form of CRISPR restricted share awards. See Note 12 for furth transaction. restricted share awards which will continue to vest over a remaining term in the er details of equity-based compensation related to this share exchange the vested TRACR shares as of the exchange date. The Company is also recognizing additional equity-based RR ff In April 2014, in conjunction with the sale of its Series A-2 Preferred Shares, the Company and its founders agreed to transferff 729,800 Founders’ Shares to several non-employees. The shares transferred were subject to service-based vesting conditions. If the holder of any restricted Common Shares terminates the service relationship, the unvested shares are subjeb ct to a right of repurchase at an escalating purchase price. Both vested and unvested shares are subjeu certain triggering events such as termination for cause, material breach of agreement, and insolvency of the holder. In addition, the founders and an investor also agreed to transfer 1,192,585 fully vested Common Shares to Fay Corp. The Company recorded equity- based compensation expense for the Founders Shares and the Common Shares issued with vesting restrictions froff m the founders and Fay Corp.rr See Note 12 for further details of equity-based compensation related to these transferff s. ct to a right of repurchase at the original purchase price upon F-28 The Common Shares have the following characteristics: Votingii Rights The holders of Common Shares are entitled to one vote for each Common Share held at all meetings of shareholders and written actions in lieu of meetings. Dividendsdd The holders of Common Shares are entitled to receive dividends, if and when declared by the Board of Directors. As of December 31, 2016, no dividends have been declared or paid since the Company’s inception. Liquidatdd iontt After payment to the holders of Preferred Shares of their liquidation preferences, the holders of the Common Shares are entitled to share ratablya liquidation, dissolution or winding up ouu in the Company’s assets availablea for distribution to shareholders in the event of any voluntary or involuntaryrr f the Company or upon the occurrence of a deemed liquidation event. 12. Equity-based Compensation Option and Grant Plans In July 2016, the shareholders approved the 2016 Share Option and Incentive Plan (the “2016 Plan”) and in April 2015, the a ved the 2015 option and grant plan (the “2015 Plan” collectively the “Plans”). Subsequent to the IPO, no further shareholders appro options shall be granted under the 2015 Plan. The Plans provide for the issuance of equity awards in the form of restricted shares, options to purchase Common Shares which may constitute incentive stock options (“ISOs”) or non-statutor unrestricted stock unit grants, and qualified performance-based awards to eligible employees, officers, directors, non-employee consultants, and other key personnel. Terms of the equity awards, including vesting requirements, are determined by the Board, t to the provisions of the Plans. Options granted by the Company typically vest over four years and have a contractuatt subjecb years. During the years ended December 31, 2016, 2015 and 2014, the Company also issued outstanding Common Shares previously held by Founders and Fay Corp. to employees and non-employees as equity-based compensation (“Founder Awards”), which are subject to repurchase by the Company upon termination of the holder’s service relationship with the Company as well as upon certrr ain triggering events such as termination for cause, material breach of agreement and insolvency of the holder that generally lapse over a requisite service period of four tock options (“NSOs”), l life off years. y srr ff ff tt f ten Equity-Based CompCC ensatiott n ExpeEE nse The Company uses the straight-line attribution method to recognize stock-based compensation expense for stock options and restricted stock awards. Stock options and restricted stock generally vests over four years with 25% vesting on the first anniversary, and the remaining vesting monthly thereafter. The following table presents stock-based compensation expense in the Company’s Consolidated Statements of Operations: Research and development General and administrative Loss from equity method investment Total Year Ended December 31, 2015 2014 2016 $ $ 4,848 $ 5,844 152 10,844 $ 1,924 $ 1,760 — 3,684 $ 487 208 — 695 F-29 Grant- Date Fairii Value There were no stock options granted prior to 2015. The Company estimated the fair value of each employee and non-employee stock option award on the grant date using the Black-Scholes option-pricing model based on the following assumptions: Employees: Options granted Weighted - average exercise price We gighted-ave grage ggrant date fair value Assumptions: Weighted-average expected volatility Expected term (in years) Weighted-average risk free interest rate Expected dividend yield Non employees: Options granted Weighted- average exercise price Weighted- average grant date fair value Assumptions: Weighted averagge expected volatility Expected term (in years) Weighted-average risk free interest rate Expected dividend yield $ $ $ $ Year Ended December 31 2015 2016 $ $ $ $ 2,411,240 12.19 8.47 81.0% 6.0 1.4% 0.0% 215,710 19.54 17.38 88.2% 10.0 2.4% 0.0% 1,913,319 2.32 3.11 76.4% 6.0 1.7% 0.0% 26,667 1.85 5.05 84.1% 10.0 2.2% 0.0% The fair value of the restricted stock awards was determined based on the fair value of Common Stock on the grant date. Non- employee stock options and restricted stock awards are marked-to-market at each reporting period. Share Based Payma ent Activityii Stock Options The following table summarizes stock option activity for employees and non-employees during the year ended December 31, 2016 (intrinsic value in thousands): Outstanding at December 31, 2015 Granted Exercised Cancelled or forfe ited ff Outstanding at December 31, 2016 Exercisable at December 31, 2016 Vested or expected to vest at December 31, 2016 (1) Stock Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value 1,939,986 2,626,950 (18,900) (12,665) 4,535,371 960,867 4,169,347 $ $ $ $ $ 2.31 12.79 1.81 4.98 8.38 3.24 8.23 9.7 9.1 8.8 9.1 $ $ $ $ $ 6,688 216 53,975 16,361 50,155 (1) This represents the number of vested stock options as of December 31, 2016 plus the unvested outstanding options at December 31, 2016 expected to vest in the future, adjusted for estimated forfeiturett s. The total unrecognized compensation cost for employee and non-employee stock options is adjusted for estimated forff feitures. As of December 31, 2016, the Company expects to recognize total unrecognized compensation cost related to stock options of $23.4 million over a remaining weighted-average period of 3.3 years. F-30 During 2016 and 2015, the Company granted options to purchase 123,333 and 261,389 Common Shares, respectively, subject to performance-based vesting conditions. As of December 31, 2016, options to purchase 262,538 Common Shares subject to performance-based vesting conditions were vested, as performance conditions were achieved, and options to purchase 12,500 Common Shares subject to performance-based vesting conditions were deemed probable of vesting. In addition, 686,665 options to purchase Common Shares, subjec ance conditions uponuu Company’s IPO on October 18, 2016, and will continue to vest over their requisite service periods. t to service and performance-based vesting conditions, satisfied the performff u the Restritt cted Stock SS The following table summarizes restricted stock activity for employees and non-employees duridd ng the year ended December 31, 2016: Unvested restricted Common Stock at December 31, 2015 Vested Unvested restricted Common Stock at December 31, 2016 Reflect ed as ff outstanding g upon vesting Reflect ed as ff outstanding upon grant date g Total 142,794 (53,427) 1,485,244 (834,388) 1,628,038 (887,815) $ 89,367 650,856 740,223 $ Weighted- Average Grant Date Fair Value 4.35 4.78 3.84 During the years ended December 31, 2016 and 2015, the total fair value of restricted stock vested was $9.9 million, $2.3 million, respectively. At December 31, 2016, total unrecognized compensation expense related to unvested restricted stock was $7.2 million which the Company expects to recognize over a remaining weighted-average period of 1.4 years. During 2016 and 2015, the Company granted 0 and 50,000 restricted Common Shares, respectively, subject to performance- based vesting conditions. As of December 31, 2016 and 2015, 50,000 and 0 restricted Common Shares subject to performance-based vesting conditions were vested, respectively. As of December 31, 2015, there were 15,000 restricted Common Shares subject to performff ance-based vesting conditions deemed probable of vesting. During the year ended December 31, 2016, the Company and Fay Corp. transferred 290,400 Common Shares to a Founder, r value of $12.65 per share. The unvested 268,093 of which are subject to vesting conditions with a weighted average grant date faiff Common Shares are subject well as uponuu Company recognized expense related to the Common Shares transferred to the Founder of $2.6 million during the year ended December 31, 2016. As of December 31, 2016, Fay Corp.rr no longer held outstanding Common Shares of the Company. certain triggering events such as termination for cause, material breach of agreement and insolvency of the holder. The to repurchase by the Company upouu n termination of the holder’s service relationship with the Company as b 13. 401(k) Savings Plan The Company establia shed a defined-contribution savings plan under Section 401(k) of the Internal rr Revenue Code (the “401(k) Plan”) in November 2016. The 401(k) Plan covers all employees who meet defined minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pretax basis. The Company contributed $0.1 million to the 401(k) Plan for the year ended December 31, 2016. 14. Income Taxes The Company is subject to U.S. feder ff the gn subsidiaries have been established. For the years ended December 31, 2016, 2015 and 2014, the loss al and various state corporate income taxes as well as taxes in foreign jurisdictions forff ff foreign parent and where forei before provision forff income taxes consist of the following (in thousands): Domestic Foreign Total Year ended December 31, 2015 2014 2016 $ $ $ 3,322 (26,040) (22,718) $ $ 593 (26,414) (25,821) $ — (6,863) (6,863) F-31 The provision for (benefit from) income taxes consist of the following (in thousands): Current income taxes: Federal State Foreign Total current income taxes Deferred income taxes: Federal State Foreign Total deferred income taxes Total income tax (provision) benefit Year ended December 31, 2015 2014 2016 $ $ (649) $ 11 17 (621) 30 105 2 137 (484) $ (23) $ (12) (26) (61) (37) 65 26 54 (7) $ — — (11) (11) — — 74 74 63 A reconciliation of income tax expense computed at the statuttt ory corporate income tax rate to the effective income tax rate for the years ended December 31, 2016, 2015 and 2014 is as follows: Income tax expense at statutory rate State income tax, net of federal benefit NNNondeductible expenses Foreign rate differential Statutory to US GAAP permanent differences Stock-based compensation Research credits Change in valuation allowance Effective income tax rate Year ended December 31, 2015 2014 2016 10.3% 1.3% 1.6% (3.3%) 6.6% (4.9%) 3.1% (16.8%) (2.1%) 10.3% 0.1% 0.0% (1.4%) 0.0% (1.4%) 0.6% (8.2%) 0.0% 10.3% 0.0% 0.0% 1.8% 0.0% (1.1%) 0.0% (10.1%) 0.9% The federal statutory rate reflects the Switzerland mixed company service rate. ff Deferr ed taxes are recognized for temporary differences between the basis of assets and liabia lities forff financial statement and income tax purposes. The significaff nt components of the Company’s deferred tax assets are comprised of the following (in thousands): Deferred tax assets: t operatingg loss Accruals and reserves carryforwards y ff ferred Rent Other deferred tax assets ferred revenue Research credit ff deferr ed tax assets Less valuation allowance NNet deferred tax assets Deferred tax liabilities: eciation Intangible assets Other deferredrr tax liabilities Total deferred tax liabilities Long term deferrerr d taxes F-32 Year ended December 31, 2016 2015 $ $ 3,934 791 5,228 7 2,525 425 12,910 (6,770) 6,140 (5,909) (68) — (5,977) 163 $ $ 2,600 189 — 72 406 104 3,371 (2,892) 479 (321) (80) (53) (454) 25 The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on f operating losses in its non-U.S. jurisdictions, the Company has concluded that it is more-likely-than-not that valuation allowance the Company’s history orr the benefitff of its non-U.S. deferred tax assets will not be realized. Accordingly, the Company has provided a full against its net deferred tax assets in Switzerland, and in the UK for its TRACR subsidiary,rr valuation allowance increased by $3.9 million during 2016, which is primarily attributablea Company has established a valuation allowance for certain U.S. deferr as of December 31, 2016 and 2015. The to losses in Switzerland. Additionally, the ed tax assets. ff ff As of December 31, 2016, the Company had availablea non-U.S. net operating loss carryforwarr to expire in 2020. As of December 31, 2016, the Company has U.S. domestic state research and development credit carryfrr orwff $0.2 million which begin to expire in 2031. rds of $41.7 million which begin ards of As of December 31, 2016, the Company has U.S. domestic federal research and development credit carryforr rwards of $0.3 million which expire in 2036. ASC 740 clarifies the accounting forff uncertainty in income taxes recognized in an enterprrr ise’s finff ancial statement by . prescribing the minimum recognition threshold and measurement of a tax position taken or expected to be taken in a tax returntt As of December 31, 2016 the Company had gross unrecognized tax benefits of $0.2 million of which $0.1 million would tive tax rate if recognized. The Company will recognize interest and penalties related to uncertain tax favorabla y impact the effecff positions in income tax expense. As of December 31, 2016, 2015 and 2014, the Company had no accruedrr to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive loss. interest or penalties related The aggregate changes in gross unrecognized tax benefitsff was as foll ff ows (in thousands): Year ended December 31, 2015 2014 2016 Balance at beginning of year Increases for tax positions taken during current period Increases for tax positions taken in prior periods Decreases for tax positions taken during current period Decreases for tax positions taken in prior periods Balance at end of year $ $ 49 134 — — (20) 163 $ $ — $ 49 — — — 49 $ — — — — — — The Company files income tax returns in the U.S. federal jurisdiction, Massachusetts, and certain non-U.S. jurisdictions. The Company is subject to U.S. federal, Massachusetts, and non-U.S. income tax examinations by authorities for all tax years. F-33 15. Selected Quarterly Financial Data (Unaudited) Prior to its IPO on October 18, 2016, the Company had outstanding participating Preferred Shares. During the fourth quarter of the year ended December 31, 2016, the Company had net income, although for the full year the Company had a net loss. Accordingly, the Company used the two-class method to calculate net income per share for the fourth quarter of 2016. For purposes of calculating basic net income per share forff attributable to participating securities. The Company calculated diluted net income per share under both the if-converted method and verted method. Accordingly, the two- the two-class method and concluded that the two-class method was more dilutive than the if-con class income allocations were reapplied after taking into account the dilutive effecff t of non-participating securities. This resulted in net income of $3.1 million being allocated to the participating securities and excluded from the numerator of the Common Stock dilutive net income per share calculation. the fourth quarter of 2016, the Company excluded fromff the numerator $3.1 million of net income ff Collaboration revenue Total operating expenses Loss from operations NNet (loss) income NNNet (loss) income attributable to common shareholders Net (loss) income per share attributable to common shareholders: Basic Diluted Weighted-average common shares outstanding used in net (loss) income per share attributable to common shareholders: Basic Diluted Collaboration revenue Total operating expenses Loss from operations NNet loss NNNet loss attributable to common shareholders NNet loss per share applicable to common shareholders- basic and diluted Weighted-average common shares outstanding used in net loss per share attributable to common shareholders - basic and diluted 2016 First Quarter Second Quarter Third Quarter Fourth Quarter (1) $ 476 12,128 (11,652) (8,442) (8,439) $ 795 17,353 (16,558) (17,164) (17,157) $ 1,549 16,159 (14,610) (14,694) (14,680) 2,344 27,654 (25,310) 17,098 17,099 (1.53) $ (1.53) $ (3.15) $ (3.15) $ (2.77) $ (2.77) $ 0.43 0.40 5,528,079 5,528,079 5,448,855 5,448,855 5,292,348 5,292,348 32,987,335 34,989,218 2015 First Quarter Second Quarter Third Quarter Fourth Quarter — $ 3,736 (3,736) (3,522) (3,237) $ — $ 3,625 (3,625) (3,666) (3,643) $ — $ 6,202 (6,202) (6,354) (6,353) $ 247 12,413 (12,166) (12,286) (12,270) (0.91) $ (0.80) $ (1.15) $ (2.22) 3,560,000 4,538,595 5,528,079 5,528,079 $ $ $ $ $ $ (1) During the fourth quarter the Company recorded an immaterial correction of an error of $1.2 million for rent expense related to the three months ended September 30, 2016. The Company determined that these errors are not material to the respective interim financial statements. 16. Related Party Transactions We had the following transactions with related parties during the period: In connection with the Series A-3 Preferred Share finaff ncing, the Company paid $0.2 million on behalf of investors for legal and consulting costs incurred for the preparation and completion of the transaction. tier is a The Company is a party to intellectual property license agreements with Dr. Charpentier. In addition, Dr. Charpenrr consultant to the Company. For the year ended December 31, 2016 and 2015, the Company paid Dr. Charpentier a total of $1.0 million and $34 thousand, respectively, in consulting, licensing and other fees. As of December 31, 2016 and 2015, the Company owed Dr. Charpenrr primarily related to the Vertex Collaboration Agreement and Bayer Joint Venture Agreement. roximately $0.5 million, and $1.0 million, respectively, of additional fees tier appaa ff F-34 During the year ended December 31, 2016, the Company formed a joint venturtt e with Bayer. As a part of the agreement to form the joint venture, the Company also issued a $35.0 million convertible loan to Bayer, which converted into Series B preferred stock and ultimately common stock upon the IPO. Bayer also purchased 2,500,000 common shares through a private placement of $35 million during 2016. During the year ended December 31, 2016 and 2015, the Company recognized $1.2 million and $0 million, respectively, related to the performance of R&D services for Casebia, the Company’s joint venture with Bayer. See Note 9 forff detail. furtuu her 17. Subsequent Events Under the Charpentie rr r license agreement, the Company licenses a U.S. patent appli aa cation that is currently subject b to interference proceedings declared by the PTAB of the U.S. Patent and Trademark Office. Following motions by the parties and other procedural matters, the PTAB concluded in Februaryrr 2017 that the declared interference should be dismissed because the claim sets of the two parties were not directed to the same patentable invention in accordance with the PTAB’s two-way test for patent interferences. F-35 Casebia Therapeutics, LLP and Subsidiary Consolidated Financial Statements As of December 31, 2016 and the Period From February 1rr 2, 2016 (Inception) Through December 31, 2016 Casebia Therapeutics, LLP and subsidiary Consolidated financial statements as of December 31, 2016 and the period from February 12, 2016 (inception) through December 31, 2016 Report of independent auditors Consolidated balance sheet Consolidated statement of operations and comprehensive loss Consolidated statement of cash flows Consolidated statement of changes in partners’ equity Notes to consolidated financial statements g y g Pages S-2 S-3 S-4 S-5 S-6 S-7 S-1 The Management Board and Stockholders Casebia Therapeutics LLP Report of Independent Auditors We have audited the accompanying consolidated financial statements of Casebia Therapeutics LLP and subsu idiary, which comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, comprehensive loss, changes in partners’ equity, and cash flowff February 12, 2016 (inception) through December 31, 2016, and the related consolidated notes to the consolidated financial statements. the period fromff s forff Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these finff ancial statements in conforff mity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conductdd with auditing standards generally accepted in the United States. Those standards require that we plan and performff reasonable assurance about whether the financial statements are freff e of material misstatement. ed our audit in accordance aa the audit to obtain An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether duedd to fraud or error. In making those risk assessments, the auditor considers internal entity’s preparation and faiff circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonabla eness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. control relevant to the cial statements in order to design audit procedures that are appropriate in the r presentation of the finan ff rr We believe that the audit evidence we have obtained is sufficient and appro aa priate to provide a basis for our audit opinion. Opinion In our opinion, the finff ancial statements referred to above present faiff Casebia Therapeutics, LLP and subsidiary arr for the period fromff principles. rly, in all material respects, the (consolidated) finff ancial position of t December 31, 2016, and the consolidated results of their operations and their cash flows ity with U.S. generally accepted accounting February 12, 2016 (inception) through December 31, 2016 in conformff ff /s/ Ernsrr t & Young LLP Boston, Massachusetts March 10, 2017 S-2 Casebia Therapeutics, LLP and subsidiary Consolidated balance sheet Assets Current assets: Cash Prepaid assets Tenant improvement allowance receivable Total current assets Property and equipment, net Restricted cash Total assets Liabilities and Equity Current liabilities: Accounts payabla e Due to partners Deferred rent Accrued expenses Total current liabia lities Deferred rent Total liabilities Commitments and contingencies Partners’ Equity: Partners’ equity Contribution receivablea from partner Total partners’ equity Total liabia lities and partners’ equity See accompanying notes to consolidated financial statements.tt December 31, 2016 2,216,490 36,948 1,299,007 3,552,445 4,560,488 1,225,768 9,338,701 397,441 1,881,160 722,977 302,137 3,303,715 5,043,355 8,347,070 60,991,631 (60,000,000) 991,631 9,338,701 $ $ $ $ S-3 Casebia Therapeutics, LLP and subsidiary Consolidated statement of operations and comprehensive loss Operating expenses: General and administrative (includes $1,157,496 of expenses fromff related parties) Research and development (includes $4,879,971 of expenses from related parties) Total operating expenses Loss from operations Net loss and comprehensive loss See accompanying notes to consolidated financial statements.tt Period from February 12, 2016 (inception) through December 31, 2016 $ $ 3,458,074 77,373,590 80,831,664 (80,831,664) (80,831,664) S-4 Casebia Therapeutics, LLP and subsidiary s Consolidated statement of cash flowff Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: reciation and amortization Equity-based compensation expense Non-cash contributions by partners Deferred rent expense Contribution of in-process research and development Changes in operating assets and liabilities: epaid expenses Restricted cash Accounts p yayablea Due to partners Accruedrr expenses Net cash used in operating activities Cash flows from investing activities: Additions to property and equipment cash used in investing activities Cash flows from financing activities: Capiaa tal contributions from partners Net cash provided by financing activities Net increase in cash Cash, begginningg of period Cash, end of period Non-cash investing activities: Purchases of property and equipment included in accounts payable and accrued expenses Property and equipment additions acquired under tenant improvement allowance Non-cash financi Capital contribution receivable from partner Contribution of in-process research and development from partner NNNon-cash contributions from partners ng activities: ff Period from February 12, 2016 (inception) through December 31, 2016 $ (80,831,664) 7,329 152,270 199,347 374,132 36,371,678 (36,948) (1,225,768) 372,258 1,881,160 297,137 (42,439,069) (444,441) (444,441) 45,100,000 45,100,000 2,216,490 — 2,216,490 30,183 4,093,193 60,000,000 36,371,678 199,347 $ $ $ $ $ $ See accompanying notes to consolidated financial statements.tt S-5 Casebia Therapeutics, LLP and subsidiary Consolidated statement of changes in partners’ equity Partners’ equity Contribution receivable froff m partner Total Partners’ equity partners Balance at February 12, 2016 (inception) Contributions fromff Contribution of in-process research and development from partner NNet loss Partner equity-based compensation Other non-cash contributions by partners Contribution receivable from partner (See Note 6) Balance at December 31, 2016 $ $ 105,100,000 36,371,678 (80,831,664) 152,270 199,347 — $ — $ — — — — — — (60,000,000) 60,991,631 $(60,000,000) $ — 105,100,000 36,371,678 (80,831,664) 152,270 199,347 (60,000,000) 991,631 See accompanying notes to consolidated financial statements.tt S-6 Casebia Therapeutics, LLP and subsidiary Notes to consolidated financial statements 1. Organization and Operations Organization Casebia Therapeutics, LLP (the “JV” or “Casebia”) is a joint venturett and Bayer HealthCare LLC (“Bayer HealthCare”) in February disorders, blindness and congenital heart disease. Bayer HealthCare and CRISPR each received a 50% equity interest in the entity in exchange for their contributions to Casebia. CRISPR contributed $0.1 million in cash and licensed its proprietary Crr l property forff editing technology and intellectuatt expertise and relevant disease know-how. Bayer HealthCare will also provide up tuu funding to Casebia over the first five years, subjeb ct to certain conditions. The activities of Casebia are controlled by a Management Board under the joint control of CRISPR and Bayer HealthCare. s9 gene selected disease indications. Bayer HealthCare has contributed its protein engineering o $300.0 million in research and development RISPR/CaRR rr tics AG (“CRISPR”) , 2016 to research the development of new therapeutics to cure blood formed between CRISPR Therapeuaa ii Liqii uidity Casebia’s net loss for 2016 was $80.8 million. As of December 31, 2016, Casebia had unrestricted cash of $2.2 million. In January, 2017, according to the terms of the Joint Venturett following the December 2016 receipt of consents necessary from patent holders of CRISPR’s intellectual made a capital contribution to Casebia of $60.0 million, which is recorded as a contribution receivable in the accompanying consolidated balance sheet. Casebia believes that its cash as of December 31, 2016, along with the capital contribution received in January 2rr Agreement between CRISPR and Bayer HealthCare (the “JV Agreement”), property, Bayer HealthCareaa its current operating plan for at least the next 12 months. 017, will be sufficff ient to fundff tt The JV Agreement sets forth the initial 24-month budget forff Casebia, which will be revised by the Management Board on a yearly basis for the following 24 months. Bayer HealthCare, subju ect to certain conditions, is solely responsible for providing Casebia with the necessary additional funding as determined by the Management Board until the earlier of (i) its aggregate remaining commitment amount of $255.0 million as of December 31, 2016 is fully funded, at which point all additional finaff approved by the Management Board or (ii) the termination of the JV Agreement in accordance with its terms. Any additional funding beyond the amounts initially committed by Bayer HealthCare in the JV Agreement up tuu amount, whether forff ses of an acquisition or otherwise, will not affect or dilute CRISPR’s 50% interest in Casebia. o the $300.0 million aggregate commitment ncing must be purporr There can be no assurances, however, that Casebia’s current operating plan will be achieved or that additional fund ff ing will be availablea on acceptable terms to Casebia, or at all. 2. Summary of significan ff t accounting policies Basis oii f po resentati tt on and consolidation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and include the accounts of Casebia and its subsidiary. All intercompany accounts and transactions have been eliminated. Any reference in these notes to appa authoritative United States generally accepted accounting principles as found Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”). licabla e guidance is meant to refer to the in the Accounting Standards Codification (“ASC”) and ff The preparation of financial statements in conformff ity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, Casebia’s management evaluates its estimates, which include, but are not limited to, equity-based compensation expense and reported amounts of expenses during the reporting period. In addition, significant estimates in these consolidated financial statements have been made in connection with the calculation of the value of contributed technology and research and development expenses. Casebia bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonabla e under the circumstances. Actual results may differff from those estimates or assumptions. S-7 Segmegg nt Information Operating segments are defined as components of an enterprise about which separate discrete information is available forff evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Casebia’s chief operating decision maker, the chief executive officff er, views Casebia’s operations and manages its business in one operating segment which is the business of researching the development of new breakthrough therapeutics to cure blood disorders, blindness and congenital heart disease. Cash Casebia considers all highly liquid investments with maturi tt ties of 90 days or less from the purchase date to be cash equivalents. As of December 31, 2016, Casebia had no cash equivalents. All cash was held in depository accounts and is reported at fair value. Concentrations of Credit Rii isk and Off-balance Sheet Risk Financial instruments that potentially subju ect Casebia to concentrations of credit risk are primarily cash. Casebia’s cash is held in accounts with financial institutions that management believes are creditworthy. Casebia has not experienced any credit losses in such accounts and does not believe it is exposed to any significaff off-balance sheet risk of loss. nt credit risk on these funff ds. Casebia has no financial instrumrr ents with Property and equipment Property and equipment is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over the estimated usefulff lives of the respective assets, which are as folff lows: Asset re ff Computer equipment and softwa Furnit urtt e, fixtures, and other rr Laboratory equipment Leasehold improvements Research and Development Expenses Estimated useful life 3 years 5 years 5 years Shorter of useful life or remaining lease term Research and development costs, which include employee compensation costs, facilities, lab suppli uu es and materials, overhead, preclinical development, and other related costs, are charged to expense as incurred. Operatintt g Ln eases Casebia leases offiff ce and labor a atory facilities under non-cancelabla e operating lease agreements. The lease agreements contain free or escalating rent payment provisions. Casebia recognizes rent expense under such leases on a straight-line basis over the term of the lease with the difference between the expense and the payments recorded as deferred rent on the consolidated balance sheet. Amounts received from lessors are accounted for as lease incentives, which are amortized as a reduction of rent expense over the term of the lease. Lease renewal periods are considered on a lease-by-lease basis in determining the lease term. tt Equity-bas e ed Compensation Expens EE Certain employees of Casebia have been granted options to purchase CRISPR common stock. In accordance with FASB ASC Topic 323-10, Investments – Equity Method and Joint Ventures (“ASC 323-10”), CRISPR expenses the cost of the stock options granted to employees of Casebia as incurred. Concurrently, Casebia will also recognize the same cost of the stock options as an expense and capital contribution from CRISPR. CRISPR accounts for stock options issued to non-employees under FASB ASC Topic 505-50, Equity-Based Payments to Non- Employees (“ASC 505-50”). As such, the value of such options is periodically remeasured and income or expense is recognized over their vesting terms. Compensation cost related to awards with service-based vesting schedules method. CRISPR estimates the fair value of stock options using the Black-Scholes option pricing model. is recognized using the straight-line dd S-8 The Black-Scholes option pricing model requires the input of certain subju ective assumptions, including (i) the expected share price volatility, (ii) the calculation of expected term of the award, (iii) the risk-freff e interest rate and (iv) the expected dividend yield. Due to the lack of sufficient public market data for the trading of CRISPR’s Common Shares and a lack of CRISPR-specific historical and implied volatility data, CRISPR has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group ouu development and focuff arrangement as the basis forff consistent with the expected term of the stock options. CRIPSR uses an assumed dividend yield of zero as CRISPR has never paid dividends and has no current plans to pay any dividends on its Common Shares. s on the life science industry. For options granted to non-employees, CRISPR utilizes the contractuatt f representative companies have characteristics similar to CRISPR, including stage of product interest rate is based on a treasury instrument whose term is the expected term assumption. The risk-freeff l term of the CRISPR measures equity-based compensation awards granted to non-employees at fair value as the awards vest and recognizes the resulting value as compensation expense at each financial reporting period. Patent Costs Costs to secure and prosecute patent application and other legal costs related to the protection of Casebia’s intellectual property as general and administrative expenses in Casebia’s consolidated statements of operations. are expensed as incurred, and are classifiedff Income taxtt es Casebia is a limited liability partnership. No provision for fedff Casebia because, as a partnership, it is not subjeb ct to federal income tax and the tax effecff eral income taxes is necessary in the finff ancial statements of t of its activities accrues to the partners. In certain circumstances, partnerships may be held to be associations taxable as corporr rations. The Internal Revenue Service has issued regulations specifyinff opinion of counsel based on those regulations that the partnership is not an association taxable as a corporation. A finding that the partnership is an association taxable as a corporation could have a material adverse effect on the financial position and results of operations of the partnership. g circumstances under current law when such a findff ing may be made, and management has obtained an Fair vii alue of fiff naii ncial insii truments Casebia’s financial instrumrr ents consist of accounts payable and accrued expenses. Casebia is required to disclose information r values. on all assets and liabilities reported at fair value that enabla es an assessment of the inputs used in determining the reported faiff FASB ASC Topic 820, Fair Value Measurement and Disclosures (“ASC 820”), established a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observabrr le inputs be used when available. Observablea based on market data obtained froff m sources independent of Casebia. Unobservable inputs are inputs that reflect assumptions about the inputs that market participants would use in pricing the financial instrume best information available in the circumstances. inputs are inputs that market participants would use in pricing the finff ancial instrument nt and are developed based on the Casebia’s rr ff The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered , that may be used to measure fair value, which are the following: observable and the last unobservablea Level 1 — Quoted prices in active markets that are accessible at the market date for identical unrestricted assets or liabia lities. Level 2 — Inputs other than Level 1 that are observablea similar assets or liabia lities; quoted prices in markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by observable market data for substantially the fulff , either directly or indirectly, such as quoted prices forff l term of the assets or liabilities. Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. To the extent that valuation is based on models or inputs that are less observablea or unobservable in the market, the r r value requires more judgment. Accordingly, the degree of judgment exercised by Casebia in determining faiff determination of faiff value is greatest for instruments categorized in Level 3. A finaff lowest level of any input that is significant to the fair value measurement. ncial instrument’s level within the fair value hierarchy is based on the S-9 The fair value of the CRISPR license which was written off following the formation of Casebia was calculated based on the consideration paid and the fair discounted cash flows based on reasonable estimates and assumptions of cash flows expected from Casebia, and thus considered a Level 3 input. The value of the intellectual property contributed by CRISPR was determined to be $36.4 million. value of CRISPR’s 50% interest in Casebia as of February 12, 2016, which was determined utilizing ff rr The carrying 31, 2016 approximate faiff instruments and certain other items at specifiedff amount of accounts payablea r value due to the short-term duradd election dates in the future. and accrued expenses as reporting in the consolidated balance sheet as of December tion of these instruments. Casebia may elect to measure financial Comprm ehensive Loss Comprehensive loss consists of net loss and changes in equity during the period from transactions and other events and non-owner sources. Casebia’s net loss equals comprehensive loss for the year ended December 31, circumstances generated fromff 2016. Subsequent Eventstt Casebia considers events or transactions that occur after the balance sheet date but prior to the date the finff ancial statements are available to be issued for potential recognition or disclosure in the financial statements. Casebia has completed an evaluation of all the audited balance sheet date of December 31, 2016 through March 10, 2017, to ensure that these financial subsequent events after statements include appr opriate disclosure of events recognized in the financial statements as of December 31, 2016, and events which occurred subsequently but were not recognized in the financial statements. ff aa Recent Accountintt g Pn roPP nouncementstt In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). Subsequently, the FASB also issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which adjusted the effective date of ASU 2014-09; ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implementation guidance and illustrations in ASU 2014-09; ASU No. 2016-10, Revenue fromff Obligations and Licensing, which clarifies identifying performance obligation and licensing implementation guidance and illustrations in ASU 2014-09; and ASU No. 2016-12, Revenue fromff Practical Expedients, which addresses implementation issues and is intended to reduce the cost and complexity of applying the new revenue standard in ASU 2014-09 (collectively, the “Revenue ASUs”). Contracts with Customers (Topic 606): Narrow-Scope Improvements and Contracts with Customers (Topic 606): Identifyinff g Perforff mance The Revenue ASUs provide an accounting standard for a single comprehensive model for use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The accounting standard is effective for interim and annual periods beginning after December 15, 2017, with an option to early adopt for interim and annual periods beginning after December 15, 2016. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modifieff d retrospective method). Casebia currently anticipates adoption of the new standard effeff ctive January 1, 2018 under the full retrospective method. Casebia is currently assessing all potential impacts of the standard on its consolidated financial statements. In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtou pic 205-40): Disclosure of Uncertainties aboa ut an Entity’s ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate whether there is substantial doubt abou nd to provide related footnote disclosures. This guidance is effective for the annual reporting period ending after December 15, 2016 and forff periods thereafter. Casebia adopted ASU 2014-15 on December 31, 2016 and the adoption of ASU 2014-15 did not have an effect on its consolidated financial statements or disclosures. ity to continue as a going concern arr annual and interim t an entity’s abila a In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require ive forff lessees to record most leases on the balance sheet, but recognize expense in a manner similar to the current standard. ASU 2016-02 is ff effect 31, 2019 for Casebia. Entities are required to use a modified retrospective appro after the beginning of the earliest comparative period in the financial statements. Full retrospective appaa is evaluating the new guidance and the expected effect on its consolidated financial statements. fiscal years beginning after December 15, 2018 and interim periods within those years, which is the year ended December ach of adoption for leases that exist or are entered into aa lication is prohibited. Casebia S-10 In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) (“ASU 2016-09”). The guidance changes how companies account forff certain aspects of equity-based payments to employees. Entities will be required to recognize income tax effects of awards in the income statement when the awards vest or are settled. The guidance also allows an employer to repurchase more of an employee’s shares than it can under current guidance for tax withholding purposes providing for withholding at the employee’s maximum rate as opposed to the minimum rate without triggering liability accounting and to make a policy election to account for forf 15, 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Casebia’s financial position, results of operations or statements of cash flows subject to federal income tax and the tax effect of its activities accrues to the partners. ff urtt es as they occur. The updated guidance is effective for annual periods beginning after eit upon adoption, primarily because as a partnership, Casebia is not ff ff ff December In November, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016- 18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown on the statement of cash flowff annual periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-18 must be applied retrospectively to all periods presented. Upon adoption, the 2016 period in Casebia’s three-year statements of cash flows will reflect an increase in operating cash flowff the increase in restricted cash during 2016. Casebia does not expect any additional impact on our financial statements. s. The guidance is effective forff s fromff 3. Property and Equipment, net Property and equipment, net, consists of the following: Construction work in process Laboratory equipment Computer hardware Accumulated Depreciation Property and equipment, net $ As of December 31, 2016 4,400,427 151,828 15,562 4,567,817 (7,329) 4,560,488 $ Depreciation expense for the period from February 12, 2016 (inception) through December 31, 2016 was $7,329. 4. Accrued Expenses Accrued expenses consist of the following: Professional fees Payroll and employee-related costs Total As of December 31, 2016 $ $ 225,438 76,699 302,137 5. Commitments and Contingencies Operatingii Leases In August, 2016, Casebia entered into an agreement with Pfizer, Inc. to sublease 32,688 square feet of office and laboratory space in Cambridge, MA. The sublease commenced in October, 2016, expires in March, 2024 and includes a tenant improvement allowance of $5.4 million, of which Casebia has recorded $4.1 million as leasehold improvements and $1.3 million as tenant improvement allowance receivable at December 31, 2016. Casebia has the option to extend the term of the sublease by fiveff years. S-11 The future minimum payments for non-cancelable leases as of December 31, 2016 is as follows: Year Ending December 31, 2017 2018 2019 2020 2021 Thereafter Total $ 1,838,700 2,506,761 2,582,025 2,659,577 2,739,418 6,459,639 $ 18,786,120 In April 2016, Casebia entered into a $1.2 million letter of credit to secure its obligations under this sublease. The letter of credit is secured by cash held in a restricted depository account. In addition, during 2016 Casebia occupied a portion of CRISPR’s and Bayer HealthCare’s office and laboratory space, forff which Casebia was not charged rent. Casebia estimated noncash expense for these spaces of $9,792 for 2016, which is recorded as Non-cash Contributions from Partners in the accompanying consolidated balance sheet. Total rent expense for the period from Februar rr y 1rr 2, 2016 (inception) through December 31, 2016 was $383,924. 6. Joint Venture Agreement On December 19, 2015, CRISPR and Bayer HealthCare entered into an agreement to establish Casebia with the purpose of 12, researching the development of new therapeaa utics to cure blood disorders, blindness and congenital heart disease. On February 2016, CRISPR and Bayer HealthCare completed the formation of Casebia, a limited liabia lity partnership formed in the United Kingdom. Bayer HealthCare and CRISPR each received a 50% equity interest in the entity in exchange forff their contributions to the entity. CRISPR contributed $0.1 million in cash and licensed its proprietary CRISPR/Cas9 gene editing technology and intellectual property for selected disease indications. Bayer HealthCare has also contributed its protein engineering expertise and relevant disease know-how. rr t to certain conditions, the first $45.0 million of which was contributed upon Bayer HealthCare is committed to provide up to $300.0 million in research and development funding to Casebia over the firff st formation in the first quarter of 2016 five years, subjecb and an additional $60.0 million of which was contributed in January, 2017, following the December, 2016 receipt of consents necessary from patent holders of CRISPR’s intellectuatt consolidated balance sheet. Under the joint venturett CRISPR’s ownership interest will not be diluted from futurett Management Board under the joint control of CRISPR and Bayer HealthCare. agreement, CRISPR has no obligation to provide any additional funding and contributions from Bayer. The activities of Casebia are controlled by a l property, which is recorded as a contribution receivable in the accompanying uu CRISPR and Bayer HealthCare will also provide to Casebia compensated services through separate agreements. Under the JV Agreement, Casebia has paid CRISPR $35.0 million in exchange for a worldwide, exclusive license to commercialize CRISPR’s CRISPR/CRR as9 technology specifically forff uu paid a non-refundable up-fr December 22, 2016 folff lowing delivery orr milestone, royalty or other payments duedd ont payment of $20.0 million as a technology access fee. The remaining $15.0 million was paid on f the consents necessary from patent holders of CRISPR’s intellectual property. There are no to CRISPR under this aspect of the agreement. the indications designated by Casebia. In March 2016, Casebia The fair value of the license was calculated to be $71.4 million based on the consideration paid and the faiff r value of the 50% interest in Casebia, which was determined utilizing discounted cash flows based on reasonabla e estimates and assumptions of cash flows expected from Casebia. As Casebia only paid $35.0 million in cash to acquire the license, the remaining $36.4 million of fair value received was accounted forff as contributed capital from CRISPR. Casebia determined that the contribution of the intellectual property represented an acquisition of in-process research and development with no alternative future use, which was expensed to research and development expenses at the time of its contribution in accordance with ASC 730, Research and Development. The JV Agreement can be terminated by Bayer HealthCare and CRISPR upon mutuatt l written consent. Either party may terminate the JV Agreement in the event of specified breaches by the other party or in the event the other party becomes subjecb specifieff d bankruprr party, as definff ed in the JV Agreement. Bayer HealthCare also has the right to terminate in the event (i) CRISPR is not ablea r similar circumstances. Either party may also terminate upon a change of control of the other tcy, winding up ouu uu t to to maintain S-12 the intellectual property rights licensed to Casebia pursuant to the CRISPR IP Contribution Agreement or (ii) CRISPR has not achieved preclinical proof of concept with a CRISPR/Cas9 product candidate in a specified period of time. The JV Agreement may also be terminated by either party if, subsu equent to the time that Bayer HealthCare has fundff ed its entire $300.0 million commitment, the Management Board is unable to approve and obtain suffiff cient funff ding, within the time specifieff d in the JV Agreement, to continue Casebia’s operations for the next 18 months. Subjecb t to certain exceptions, in the event of a termination, all Casebia owned patents, know-how and technology will be jointly owned by CRISPR and Bayer HealthCare, with the right to sublicense. Upon termination, subjecb HealthCare will receive an exclusive license to Casebia CRISPR/CRR as technology for all non-human therapeaa utic uses in cardiology, hematology and ophthalmology (the “Bayer Fields”) and a non-exclusive license for human therapeuaa CRISPR will receive an exclusive license to Casebia CRISPR/Cas technology in human therapeutic areas, other than in the Bayer Fields, and a non-exclusive license for human therapeutic uses in the Bayer Fields. Upon any termination, all rights licensed to Casebia pursuant to the CRISPR IP Contribution Agreement will terminate, except for any rights licensed to third parties or to a party who has exercised an option pursuant to the Option Agreement described below. tic uses. Upon such termination, t to certain exceptions, Bayer 7. Equity-based Compensation Certain employees of Casebia have been granted options to purchase CRISPR common stock. Terms of the equity awards, including vesting requirements, are determined by CRISPR’s Board of Directors, subject to the provisions of CRISPR’s stock option plans. Options granted by CRISPR typically vest over four years and have a contractual 10, CRISPR expenses the cost of the stock options granted to employees of Casebia as incurred. CRISPR accounts for these options in accordance with ASC 505-50. As such, the value of such options is periodically remeasured and income or expense and is recognized by CRISPR over their vesting terms. Concurrently, Casebia will also recognize the same cost of the stock options as expense and a capitaa al contribution from CRISPR. Compensation cost related to awards with service-based vesting schedules is recognized using the straight-line method. f ten years. In accordance with ASC 323- life off tt Equity-based CompCC ensatiott n ExpeEE nse Total equity-based compensation expense is recognized forff stock options granted to employees and has been reported in Casebia’s consolidated statement of operations as foll ff ows: Research and development General and administrative Total Period from February 12, 2016 (inception) through December 31, 2016 97,117 $ 55,153 152,270 $ Stock Option Awards The following table summarizes stock option activity forff CRISPR stock options granted to employees of Casebia: Outstanding at February 12, 2016 (inception) Granted Exercised Cancelled or forfe ited ff Outstanding at December 31, 2016 Exercisable at December 31, 2016 Vested or expected to vest at December 31, 2016(1) Weighted- Average Exercise Price Weighted- Average Remaining Contractual y Term (years) Aggregate Intrinsic Value $ $ $ $ 13.19 13.19 1.85 12.94 9.5 8.7 9.5 $ 2,377,144 786,769 $ $ 2,275,950 Stock Options — 336,353 — — 336,353 42,726 311,168 (1) Represents the number of vested options at December 31, 2016 plus the number of unvested options expected to vest based on the unvested options outstanding at December 31, 2016. S-13 The fair value of options vested from Februar ff rr weighted-average grant date fair 2, 2016 (inception) through December 31, 2016 was $18.17. As of December 31, 2016, the total unrecognized compensation cost related to CRISPR stock options was $4.7 million. The total unrecognized compensation cost will be adjusted for future forf tures. As of December 31, 2016, Casebia expects to recognize ff total unrecognized compensation cost over a remaining weighted-average period of 3.4 years. values of stock options granted from Februar y 1rr eiff rr yrr 12, 2016 (inception) through December 31, 2016 was $0.2 million. The CRISPR estimates the fair value of each stock award on the grant date using the Black-Scholes option-pricing model based on the following range of assumptions regarding the fair value of the underlying Common Shares on each measurement date: Weighted average expected volatility Expected term (in years) Risk free interest rate Expected dividend yield 8. Related Party Transactions Period fromff February 12, 2016 (inception) through December 31, 2016 88.2% 9.5 2.3% 0.0% Bayer HealthCare has agreed to provide to Casebia certain protein engineering knowhow as well as other administrative services. From February 12, 2016 (inception) through December 31, 2016, Casebia recorded $3.8 million and $1.1 million of expense related to these activities to research and development and general and administrative expenses, respectively, $1.1 million of which is included in Due to Partners in the accompanying balance sheet at December 31, 2016. Included in the above expenses, Bayer HealthCare provided management services to Casebia duridd were treated as a capital contribution in the accompanying financ ng 2016 that were not billed to Casebia. These expenses, totaling $189,555, ff ial statements. CRISPR has also agreed to provide Casebia with certain general and administrative and research and development services and Casebia has recorded expense from February 12, 2016 (inception) through December 31, 2016 related to those services of $1.1 million and $0.1 million to research and development and general and administrative expenses, respectively, $0.8 million of which is included in Due to Partners in the accompanying balance sheet at December 31, 2016. All amounts due to Partners are due within 30 days of receipt of the respective invoices. 9. Income Taxes Casebia is a pass through entity forff federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the partners. 10. Employee Benefit Plan Casebia maintains a defined contribution 401(k) plan (the “Plan”) in which substantially all of its permanent employees are eligible to participate. Employee contributions are voluntary and are determined on an individuadd l basis, limited by the maximum amounts allowable under federal tax regulations. The Company makes matching contributions of 100% of the first 3% and 50% of the next 2% of employees’ contributions to the Plan. Casebia recorded employer contribution expense of $2,622 for the period from February 12, 2016 (inception) through December 31, 2016. S-14 Report orr f the statutory arr uditor with consolidated financial statements as of 31 December 2016 of CRISPR Therapeutics AG, Basel Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basel Phone Fax www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the General Meeting of CRISPR Therapeutics AG, Basel Basel, 10 March 2017 Report of the statutory auditor on the consolidated financial statements As statutory auditor, we have audited the accompanying consolidated financial statements ofo CRISPR Therapeutics AG (F-2 through F-34), which comprise the consolidated balance sheets, the consolidated statements of operations and comprehensive loss, consolidated statements of convertible preferred shares and shareholders’ equity (deficit), consolidated statements of cash flows, and notes to the consolidated financial statements, for the year ended 31 December 2016. responsibility Board of Directors’rr The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with US Generally Accepted Accounting Principles (US GAAP) and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards, and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. rming procedures to obtain audit evidence about the amounts and An audit involves perforr disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effeff ctiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Page 2 Opinion In our opinion, the consolidated financial statements for the year ended 31 December 2016 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with US Generally Accepted Accounting Principles (US GAAP) and comply with Swiss law. Report orr n key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilit report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures perforr on the accompanying consolidated financial statements. rmed to address the matters below, provide the basis for our audit opinion yt section of our s Revenue from R&D services under collaboration agreements Risk CRISPR Therapeutics AG (CRISPR) has entered into material revenue generating collaboration agreements in 2015 (Vertex Pharmaceuticals) and 2016 (Casebia Therapeutics LLP). These arrangements were accounted for as multiple element arrangements and each contain separate Research and Development (R&D) servirr ce deliverables. R&D service revenue is recognized based on actual time incurred using a relative selling price and recorded within Collaboration Revenue on the Consolidated Statement of Operations. The R&D servirr ce revenue is primarily composed of R&D services performed by internal CRISPR R&D employees; the revenue is calculated using projeo ct based employee timesheets. Given the manual nature of the calculation, we identified a heightened risk related to the opportunity of management to overstate the internally sourced R&D service revenue, specifically through the inclusion of other employees not providing R&D servirr ces under the collaboration agreements in the Company’s calculation, which could result in a material revenue misstatement. Refer to Note 9 in the Consolidated Financial Statements for CRISPR’s accounting policy and further details. Page 3 Our audit response We analyzed the relevant agreements and discussed each with management to obtain a full understanding of CRISPR’s accounting process for the related R&D service deliverables, and the specific underlying terms and risks. ts for the period selected. For the selected For a sample of instances, we obtained confirmations directly from CRISPR employees related to their involvement in the R&D servirr ce revenue generating projeco samples, we reconciled the amount per the CRISPR employee timesheet to management’s collaboration revenue calculation. We tested each of the key contracts whereby we agreed the identified R&D programs and FTE rates to the related collaboration agreements, and recalculated revenue for the year based on the relative selling price allocated to the R&D servirr ce deliverable of the arrangement. We assessed R&D servirr ce revenue recognized by vouching subsequent payments made by Vertex and Casebia for amounts invoiced and confirmed outstanding receivables as of period end. Additionally, we analyzed the Company’s recognized collaboration revenue against expectations based on the status of the research programs tested. Accounting forff Healthcare) the establishment of Casebia (Joint Venture with Bayer Risk On December 19, 2015, CRISPR Therapeutics AG (CRISPR) entered into an agreement to establish a joint venture (“Bayer Joint Venture”) with Bayer Healthcare LLC (“Bayer”) to discover, develop and commercialize new breakthrough therapeutics to cure blood disorders, blindness, and congenital heart disease. During Q1 2016, the joint venture was legally formed and equity was contributed by the two parties. In addition to funding, CRISPR contributed a license of its proprietary CRISPR-Cas9 gene-editing technology and intellectual property for selected disease indications and Bayer contributed its protein engineering expertise and relevant disease know-how. The Bayer Joint Venture is accounted for under the equity method as disclosed in the Note 9 to the Consolidated Financial Statements. Given the multiple elements of the Bayer Joint Venture arrangement and various forms of consideration involved and the valuation considerations thereof, we have identified a significant risk associated with the complexities in applying the relevant accounting guidance for the formation of the joint venture. Page 4 audit response We analyzed the various clauses within the Bayer Joint Venture agreement. We evaluated management’s assessment of the variable interest considerations and their judgements in determining the primaryrr beneficiary.rr We tested management’s valuation of the fair 50% interest in the joint venture and the faiff license contributed to the entity. We involved our internal valuation specialists to assist in the assessment of the valuation methodology and assumptions used in determining the fair values. We evaluated the timing of the equity method accounting for losses in the joint venture considering the necessary elimination of intra-entity losses until such time that the related gain from contributing the CRISPR license is realized by CRISPR. ff r value of the CRISPR value of the Report orr n other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a para. 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. EEEEErrrrnnnnnnssssttttt && YYYYoooouuuuuunnnnnngggg LLLLtttttd ü Zürcher nsed audit experttttt (((((AAAAAAAAAAAAAAAAAAAAAAAuuddddiiiittttoooorrrr iiiinnnn cccchhhhaaaarrrrggggeeee)))) SSSShhhhaaaahhhhaaaarrrr LLLLiiiiiieeeebbbbeeeerrrrmmmmeeeennnnsch Certified Public Accountant Enclosures • Consolidated financial statements (consolidated balance sheet, consolidated statement of income, consolidated statement of changes in equity, consolidated statement of cash flows and notes) CRISPR Therapeutics AG Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2016 2015 Assets Current assets: Cash Accounts receivable, including related party amounts of $752 andaa Prepaid expenses and other current assets $0 as of Decembm er 31, 2016 and 2015, respectively Total current assets Property and equipment, net Intangible assets, net Restricted cash Other non-current assets Total assets Liabilities, redeemable convertible ppreferred shares and shareholders’ qequ yity Current liabilities: Accounts payable Accrued expenses, including related party amounts of $537 and $1,055 as of December 31, 2016 and 2015, respectively Accrued tax liabia lities Deferred rent Other current liabilities rr Total current liabilities Convertible loan, including accruedrr interest of $0 andaa $97 as of Decemberm 31, 2016 and 2015, respectively Deferred revenue, including related party amounts of $527 and $0 as of December 31, 2016 and 2015, respectively Deferred rent non-current Other non-current liabilities rr Total liabia lities Commitments and contingencies (Note 8) convertible preferred shares: Redeemablea Series A-1 redeemable convertible preferred shares, CHF 0.03 par value, 0 and 440,001 shares authorized, issued, and outstanding in share capital at December 31, 2016 and 2015, respectively, aggregate liquidation preference of CHF 0 and CHF 502 at December 31, 2016 and 2015, respectively Series A-2 redeemable convertible preferred shares, CHF 0.03 par value, 0 and 3,120,001 shares authorized, issued, and outstandin g in share capital at December 31, 2016 and 2015, respectively, aggregate liquidation preference of CHF 0 andaa aa CHF 9,512 at Decembem r 31, 2016 and 2015, respectively Series A-3 redeemable convertible preferred shares, CHF 0.03 par value, 0 and 10,758,006 shares authorized, issued, and outstanding in share capital at December 31, 2016 and 2015, respectively, aggregate liquidation preference of $0 and $22,850 at December 31, 2016 and 2015, respectively Series B redeemable convertible preferred shares, CHF 0.03 par value, 0 and 4,519,016 shares autaa horized, issued, and outstandaa aa at Decemberm 31, 2016 and 2015, respectively 2015, aggregate liquidation preference of CHF 0 andaa CHF 28,000 l at Decembem r 31, 2016 andaa ing in share capita Shareholders’ equity (deficit): Common shares, CHF 0.03 par value, 40,253,674, and 5,528,079 shares autaa horized at Decemberm 31, 2016 and 2015, respectively, 40,164,307 andaa 5,528,079 shares issued at December 31, 2016 and 2015, respectively, 39,719,434, and 5,528,079 shares outstanding at Decemberm 31, 2016 and 2015, respectively, 15,325,607 and 2,444,364 shares in conditional capital at Decemberm 31, 2016 and 2015, respectively Treasury shares, at cost, 444,873 shares and no shares at December 31, 2016 and 2015, respectively Additional paid-in capital Accumulated deficit Accumulatemm Total CRISPR Therapeutics AG shareholders’ equity (deficit) Noncontrolling interest d other comprehensive loss Total shareholders’ equity (deficit) Total liaba ilities, redeemable convertible preferred shares and shareholders’ equity (deficit) $ $ $ $ 315,520 3,157 1,511 320,188 21,027 399 3,150 198 344,962 4,569 16,320 23 1,027 59 21,998 —— 77,646 12,283 189 112,116 — —— — —— 1,216 — 288,739 (57,083 ) (26 ) 232,846 —— 232,846 344,962 $ $ $ $ 155,961 339 540 156,840 1,328 454 700 101 159,423 1,584 8,430 81 — 60 10,155 38,336 75,090 164 281 124,026 1,169 10,394 22,518 30,440 181 — 4,636 (33,906 ) (8 ) (29,097 ) (27 ) (29,124 ) 159,423 See accompanying notes to these consolidated financi ff al statements. F-2 CRISPR Therapeutics AG Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Collaboration revenue (1) Operating expenses: Research and development (2) General and administrative Total operating expenses from operations Other income (expense): Interest expense Loss from equity method investment Gain on extinguishment of convertible loan Other income (expense), net Total other income (expense), net Net loss before (provision for) benefit from income taxes (Provision for) benefitff from income taxes Net loss Foreign currency translation adjustment Comprehensive loss Reconciliation of net loss to net loss attributable to common shareholders: Net loss Loss attributable to noncontrolling interest Loss on extinguishment of redeemable convertible preferred shares Net loss attributable to common shareholders Net loss per share attributable to common shareholders—basic and diluted Weighted-average common shares outstanding used in net loss per share attributable to common shareholders—basic and diluted Including the following amounts of revenue from a related party, see Including the following amounts of research and development froff m a (1) Note 16: (2) related party, see Note 16: 2016 Year Ended December 31, 2015 2014 $ 5,164 $ 247 $ — 42,238 31,056 73,294 (68,130) (8,050) (36,532) 11,482 78,512 45,412 (22,718) (484) (23,202) (18) (23,220) $ (23,202) $ 25 — (23,177) $ (1.89) $ 12,573 13,403 25,976 (25,729) (108) — —— 16 (92) (25,821) (7) (25,828) (6) (25,834) $ (25,828) $ 325 — (25,503) $ (5.06) $ 1,513 5,114 6,627 (6,627) —— — —— (236) (236) (6,863) 63 (6,800) (2) (6,802) (6,800) 536 (745) (7,009) 1.97 12,257,483 5,037,404 3,559,985 1,190 1,755 $ $ — $ 1,055 $ — —— $ $ $ $ $ $ See accompanying notes to these consolidated financi ff al statements. F-3 l a t o T ’ s r e d l o h e r a h S ’ s r e d l o h e r a h S r e h t O G A d e t a l u m u c c A l a n o i t i d d A s e r a h S y r u s a e r T s e r a h S n o m m o C s e r a h S d e r r e f ff e r P s e r a h S d e r r e f ff e r P s e r a h S d e r r e f ff e r P s e r a h S d e r r e f ff e r P ) t i c i f ff e D ( y t i u q E g n i l l o r t n o c n o N t s e r e t n I ) t i c i f ff e D ( y t i u q E ) s s o L ( e m o c n I t i c i ff f e D e v i s n e h e r p m o C d e t a l u m u c c A n i - d i a P l a t i p a C , t n u o m A t s o c t a s e r a h S 3 0 . 0 F H C e u l a V r a P s e r a h S t n u o m A s e r a h S t n u o m A s e r a h S t n u o m A s e r a h S t n u o m A s e r a h S l a t o T R P S I R C s c i t u e p a r e h T B s e i r e S e l b a m e e d e R e l b i t r e v n o C 3 - A s e i r e S e l b a m e e d e R e l b i t r e v n o C 2 - A s e i r e S e l b a m e e d e R e l b i t r e v n o C 1 - A s e i r e S e l b a m e e d e R e l b i t r e v n o C G A s c i t u e p a r e h T R P S I R C y t i u q E ) t i c i f e D ( ’ s r e d l o h e r a h S d n a s e r a h S d e r r e f e r P e l b i t r e v n o C e l b a m e e d e R f o s t n e m e t a t S d e t a d i l o s n o C ) a t a d e r a h s r e p d n a e r a h s t p e c x e , s d n a s u o h t n I ( ) 1 8 5 ( $ — $ ) 1 8 5 ( $ — $ ) 9 3 1 , 2 ( $ 0 6 4 , 1 $ — 2 2 — ) 2 ( ) 5 4 7 ( 5 9 6 7 3 4 ) 0 0 8 , 6 ( ) 4 7 9 , 6 ( —— — —— — ) 6 ( 4 8 6 , 3 ) 8 2 8 , 5 2 ( ) 4 2 1 , 9 2 ( —— — —— —— 2 8 5 3 5 6 5 , 5 8 1 —— 4 6 6 , 8 8 ) 8 1 ( 4 4 8 , 0 1 ) 2 0 2 , 3 2 ( 6 4 8 , 2 3 2 —— — —— — 2 4 2 $ 3 4 1 7 3 4 ) 6 3 5 ( —— — ) 2 6 ( — 7 1 2 — $ ) 7 2 ( ) 5 2 3 ( —— — —— 2 5 —— —— — —— $ —— ) 5 2 ( 2 2 — ) 2 ( ) 5 4 7 ( 3 5 4 — $ ) 7 1 1 , 7 ( ) 4 6 2 , 6 ( —— — 2 6 — ) 6 ( 7 6 4 , 3 $ ) 7 9 0 , 9 2 ( ) 3 0 5 , 5 2 ( —— — —— ) 2 5 ( 4 6 6 , 8 8 5 6 5 , 5 8 1 —— 2 8 5 3 ) 8 1 ( 4 4 8 , 0 1 $ 6 4 8 , 2 3 2 ) 7 7 1 , 3 2 ( —— — ) 2 ( —— —— — —— $ ) 2 ( —— — —— — —— ) 6 ( —— $ ) 8 ( —— — —— —— —— — ) 8 1 ( — $ ) 6 2 ( —— — —— — —— — $ ) 3 0 4 , 8 ( ) 4 6 2 , 6 ( —— — —— — —— — $ ) 6 0 9 , 3 3 ( ) 3 0 5 , 5 2 ( —— — —— —— —— — —— $ ) 3 8 0 , 7 5 ( ) 7 7 1 , 3 2 ( —— — ) 5 4 7 ( — 3 5 4 — —— $ 8 6 1 , 1 $ —— — 1 — —— — 7 6 4 , 3 $ 6 3 6 , 4 $ —— — —— ) 2 6 ( 1 5 4 , 8 8 3 1 1 8 4 3 —— — 4 4 8 , 0 1 2 4 7 , 4 8 1 $ 9 3 7 , 8 8 2 $ —— — —— — —— — —— — —— — —— — —— — —— — —— — —— —— —— — —— — —— — —— — —— — —— — —— — —— — —— — —— — —— — —— — —— —— — 1 6 — —— — —— —— — —— 3 2 8 0 1 3 1 2 4 9 0 , 8 6 9 , 1 —— — —— — —— —— — —— —— — —— 0 4 4 , 0 3 6 1 0 , 9 1 5 , 4 8 1 5 , 2 2 6 0 0 , 8 5 7 , 0 1 — —— — —— — —— —— — —— — —— — — — — — — — — — — — — —— — —— — —— — —— — —— — —— 8 9 2 2 — —— — —— — —— —— — —— — —— — —— $ 5 8 9 , 9 5 5 , 3 0 2 1 $ 5 8 9 , 9 5 5 , 3 —— — — —— — —— — —— — —— — —— — $ — —— — —— — —— — —— — —— — —— $ — —— — —— — —— — — —— $ — —— — —— — —— — —— — —— $ — — $ — — —— —— 4 2 4 $ 1 0 0 , 0 4 4 3 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B 1 0 1 , 5 1 0 0 , 0 2 1 , 3 — — — — — — — — — — — —— — —— 5 4 7 — —— — —— — —— 3 9 2 , 5 — —— —— 1 0 1 , 5 $ 1 0 0 , 0 2 1 , 3 9 6 1 , 1 $ 1 0 0 , 0 4 4 4 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B n o i t p i r c s b u s d n a 6 3 $ f o s t s o c e c n a u s s i f t o e n n o i t a d i l o s n o c n o p u t s e r e t n i g n i l l o r t n o c n o N d e t i i m L y g o l o t a m e H R C A R T f o e s n e p x e n o i t a s n e p m o c d e s a b - y t i ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O 1 - A s e i r e S f o t n e m h s i u g n i t x e n o s s o L s e r a h s d e r r rr e ff f e r p 3 9 2 , 5 $ f o e l b a v i e c e r n o i t p i r c s b u s s e r a h s n o m m o c f o t p i e c e R e l b a v i e c e r , s e r a h s d e r r e f e r p 2 - A s e i r e S f o e c n a u s s I s s o l t e N s e r a h s d e r r e f e r p 2 - A s e i r e S f o t p i e c e R e l b a v i e c e r n o i t p i r c s b u s , s e r a h s d e r r e f e r p 3 - A s e i r e S f o e c n a u s s I d n a 2 3 3 $ f o s t s o c e c n a u s s i f t o e n n o p u t s e r e t n i g n i l l o r t n o c n o n o t t n e m t s u j d A R C A R T r o ff f n o i t c a s n a r t e g n a h c x e e r a h s 0 5 8 , 2 2 $ f o e l b a v i e c e r n o i t p i r c s b u s d e t i i m L y g o l o t a m e H t e n , s e r a h s d e r r e f e r p B s e i r e S f o e c n a u s s I e s n e p x e n o i t a s n e p m o c d e s a b - y t i u qq q E ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O 8 3 $ f o s t s o c e c n a u s s i f o s s o l 3 7 8 , 4 4 4 ) 3 1 ( —— — —— — 1 1 — —— — $ 3 7 8 , 4 4 4 6 1 2 , 1 $ 4 3 4 , 9 1 7 , 9 3 —— — —— 9 2 9 , 1 6 8 0 6 , 4 6 4 , 5 —— 5 6 2 , 6 3 2 5 2 , 4 3 8 , 2 —— — — 0 5 8 , 2 2 —— — —— — — — — — — —— — —— —— — —— t e n , s e r a h S d e r r e ff f e r P B s e i r e S f o e c n a u s s I n o i l l i m 8 . 1 $ f o s t s o c e c n a u s s i f o e l b i t r e v n o c e l b a m e e d e r f o n o i s r e v n o C n o i t p i r c s b u S 3 - A s e i r e S f o t p i e c e R s n a o L e l b i t r e v n o C f o n o i s r e v n o C e l b a v i e c e R 4 8 8 , 5 3 1 , 7 2 ) 4 3 6 , 8 2 1 ( ) 6 7 8 , 7 1 8 , 2 1 ( ) 8 6 3 , 5 4 ( ) 6 0 0 , 8 5 7 , 0 1 ( ) 4 9 3 , 0 1 ( ) 1 0 0 , 0 2 1 , 3 ( ) 9 6 1 , 1 ( ) 1 0 0 , 0 4 4 ( e r a h s n o m m o c o t n i s e r a h s d e r r e f e r p — —— — 7 1 0 , 8 2 3 ) 3 7 8 , 4 4 4 ( 0 0 0 , 0 0 1 , 7 7 2 4 , 3 5 0 0 9 , 8 1 —— — —— —— — —— — —— —— — —— —— — —— — —— $ —— — —— —— — —— — —— —— — —— —— — —— — —— $ — — — — — — — — — — — — — — — — $ —— — —— —— — —— — —— —— — —— —— — —— — —— $ e c n a u s s i f o t e n , k c o t s n o m m o c f o e c n a u s s I t s e r e t n i g n i l l o r t n o c n o N o t t n e m t s u j d A R C A R T r o f e g n a h c x e e r a h s n o p u e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O s e r a h s y r u s a e r t f o e s a h c r u p e R s e r a h s d e t c i r t s e r f o g n i t s e V s n o i t p o d e t s e v f o e s i c r e x E n o i l l i m 3 . 8 $ f o s t s o c 6 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B s s o l t e N 1 8 1 $ 9 7 0 , 8 2 5 , 5 0 4 4 , 0 3 $ 6 1 0 , 9 1 5 , 4 8 1 5 , 2 2 $ 6 0 0 , 8 5 7 , 0 1 4 9 3 , 0 1 $ 1 0 0 , 0 2 1 , 3 9 6 1 , 1 $ 1 0 0 , 0 4 4 5 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e s e h t o t s e t o n g n i y n a p m m o c c a e e S 4 - F CRISPR Therapeutics AG Consolidated Statements of Cash Flows (In thousands) Operating activities Net loss Reconciliation of net loss to net cash used in operating activities: Depreciation and amortization expense Equity-based compensation expense Non-cash interest expense Unrealized foreign currency remeasurement loss Gain on extinguishment of convertible loan Other income - formation of joint venture Loss from equity method investment Changes in: Restricted cash Accounts receivable expenses and other assets Accounts payable and accrued expenses ed revenue Deferred rent Other liabilities, net Net cash (used in) provided by operating activities Investing activities Purchase of property and equipment Proceeds from contribution of intellectual property t Cash investment in equity method investee tt o equity mtt ethod investee Net cash provided by (used in) investing activities Financing activities Proceeds from issuance of common shares in IPO, net of issuance costs Proceeds from issuance of common shares in private placement Proceeds from issuance of common shares Proceeds from exercise of options Proceeds from issuance of restricted shares Proceeds from issuance of Series A-2 preferred shares Proceeds froff m issuance of Series A-3 preferred shares Proceeds from issuance of Series B preferred shares Issuance costs for preferred share financings ff Proceeds from issuance of convertible loans cash provided by financing activities Effect of exchange rate changes on cash Increase in cash Cash, beginning of period Cash, end of period Supplemental disclosure of non-cash investing and financing activities Property and equipment purchases in accounts payable and accrued expenses Property and equipment related to lease incentives Loss on extinguishment of Series A-1 preferred shares Noncontrolling interest upon consolidation of TRACR Conversion of preferred shares to common shares upon IPO Conversion of Vertex and Bayer convertible loans and accrued interest Issuance costs for public offeff Contribution of intellectual property to Casebia ring in accounts payablea and accrued expenses 2016 Years Ended December 31, 2015 2014 $ (23,202) $ (25,828) $ (6,800) 925 10,844 8,050 2 (11,482) (78,608) 36,380 (2,450) (2,818) (1,071) 3,860 1,917 2,360 (17) (55,310) (3,016) 35,000 (100) 31,884 54,061 35,000 —— 34 —— — 22,850 38,075 (1,810) 35,010 183,220 (235) 159,559 155,961 315,520 $ 7,014 10,785 $ $ —— $ — $ $ $ $ $ 185,565 61,929 397 36,380 127 3,684 97 (20) —— — —— (650) (339) (620) 7,708 75,090 165 14 59,428 (1,154) —— — (1,154) —— — —— — 243 5,293 22,850 30,478 (370) 38,239 96,733 9 155,016 945 155,961 $ 246 $ — $ —— $ — $ —— $ — $ —— $ — $ 38 695 —— (260) —— — —— (16) — (12) 1,583 —— — (21) (4,793) — —— — —— —— — 22 — —— 5,137 —— — (36) — 5,123 254 584 361 945 —— — 745 547 —— — —— — $ $ $ $ $ $ $ $ $ See accompanying notes to these consolidated financi ff al statements. F-5 CRISPR Therapeutics AG Notes to Consolidated Financial Statements 1. Organization and Operations Nature of bo usines ii s CRISPR Therapeutics aa AG (“CRISPR” or the “Company”) mm was formed on October 28, 2013 in Basel, Switzerland. The the Compamm ny was established to translate CRISPR/Cas9, a genome editing technology, into transformative gene-based medicines forff treatment of serious human diseases. The fouff property underlying the Compamm ny’s operations was licensed to the Company and its subsidiaries in April 2014. The Company devotes substantially all of its efforts to product research and development , activities, initial market development and raising capital. The Company’s principal offices and operations are in Cambridge Massachusetts. ndational intellectual m tt the development of the CRISPR/Cas9 technology into medicines for the treatment of blood-borne illnesses. As the Company nders of thet Compamm ny formed TRACRR On January 23, 2014, the fouff to further t was funding and managing TRACR’ established a variablea TRACR the outstanding non-controlling interest in TRACR as such, as of Decemberm 31, 2016 TRACR Compamm ny. RR RR RR s operations in 2014, it has been consolidated by thet Compamm ny from the date that interest in TRACR in April 2014. In March 2015, the Compamm ny acquired 82.1% of the outstanding equity of t the Company in a share exchange transaction. Concurrent with its initial public offering (“IPO”) in October 2016, the Compamm ny acquired R Hematology Limited (“TRACR”) RR in the United Kingdom, is a wholly-owned subsidiary orr f thet The Compamm ny is subju ect to risks common to compamm nies in the biotechnology industry, including but not limited to, risks of candidate that it may failure of preclinical studies and clinical trials, the need to obtain marketing approval forff identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, complmm iance with government regulations, development by competitors of technological innovations and ability to transition from pilot-scale manufacturing to large-scale production of products. any drug productdd The Compamm ny had an accumulated mm deficit of $57.1 million as of Decemberm 31, 2016 and has financed its operations to date from proceeds obtained from its initial public offering a series of preferred shares and convertible loan issuances and upfront fees received under its collaboration and joint venture arrarr ngements. The Compamm ny will require substantial additional capital and development and ongoing operating expenses. to fund its research a Liquiditydd In October 2016, the Compamm ny completemm d the IPO of its common shares (“Common Shares”), in which the Company sold ff rr t with thet ters in connection with the offering, 4,429,311 Common Shares, inclusive of 429,311 Common Shares sold by the Companmm y pursuant to thet overallotment option granted to the underwri trading on the NASDAQ Global Market on October 19, 2016. The aggregate net proceeds received by the Compamm ny from the offeri were $53.7 million (see Note 2) after deducting underwriting discounts and commissions and other offering expenses payabla e by thett Compamm ny. Concurrenrr (“Bayer BV”), in a private placement, at the IPO price of $14.00 per share, forff Shares totaling 170,689 of the overallotment option granted by the underwriters in connection with the initial public offerff reacquired by thet Company and are reflected as treasury shares on the consolidated balance sheet as of Decemberm 31, 2016. The Companymm at least the next 24 months. Thereafter, the Compamm ny will be required to obtain additional funding. There can be no assurances, however, that the current operating plan will be achieved or that additional funding will be available on terms acceptable to thett Compamm ny, or at all. IPO, the Compamm ny issued and sold 2,500,000 Common Shares to Bayer Global Investments B.V. aggregate net proceeds of $35.0 million. Common ing were at a price of $14.00 per share. The shares began ff believes its cash of $315.5 million at Decemberm 31, 2016 will be sufficient to fund the Company’s current operating plan forff partial exercise of an ng ff 2. Summary of Significant Accounting Policies and basis of presentation Basis oii f Po rePP sentati tt on and Use of Eo ii stiEE mat estt The accompamm nying consolidated financial statements have been prepared in confoff rmity with accounting principles generally (ii) its wholly-owned subsidiar accepted in the United States of America (“GAAP”), and include the accounts of (i) the Company, CRISPR Ltd., CRISPR Inc., and TRACR, as of Decemberm 31, 2016. All intercompanymm eliminated. Any reference in these notes to applicable guidance is meant to refer to the autht oritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”). u accounts and transactions have been ies, mm F-6 Investments in partnett rships where the Company has significant influence because it has a voting interest of 20% to 50%, are accounted for under the equity method. Results of associated companies are presented on a one-line basis. The Compamm ny accounts for its 50% investment details. tics LLP (“Casebia”) under the equity method of accounting. See Note 9 for further share of Casebia Therapeuaa tt The preparation of financial statements in conformff ity with GAAP requires management to make estimates and assumptions notes. On an ongoing basis, the Company’s management affect the amounts reported in the financial statements and accompanying evaluates its estimates, which include, but are not limited to, equity-based compensation investments, and reported amounts of expenses during the reported period. Significant estimates in these consolidated financial statements have been made in connection with the calculation of revenues, research and development expenses, valuation of equitqq y r value of intangible assets, and the method of investment, equity-based compemm nsation expense, fair provision for or benefit froff m income taxes. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that mm assumptions. t it believes to be reasonabla e under the circumstances. Actuatt value of Common Shares, faiff expense, revenue recognition, equity method r froff m those estimates or l results may diffeff mm mm mm ff that The Compamm ny utilizes significant estimates and assumptmm ions in determining the fair value of its Common Shares. The Compamm ny utilized various valuation methodologies in accordance with the frameaa work of the 2004 and 2013 American Institute of Certified Public Accountants Technical Practice Aids, Valuation of Privately- Held Cll ty Securities Issued as Compensation, to estimate the fair value of its Common Shares. Each valuation methodology includes estimates and assumptions that require thet Company’s judgment. These estimates and assumptmm ions include a numberm of objective and subjective factors, including external market conditions affecting thet superior rights and preferences of securities senior to the common stock at the time and the likelihood of achieving a liquidity ett such as an initial public offering or sale. Significant changes to the key assumptmm ions used in the valuations could result in different fair values of common stock at each valuation date. Subsequent to becoming a public company, the Compamm ny uses the closing price of its stock on the Nasdaq Global Market as the fair value of its common stock. ector, the prices at which the Company sold shares of preferred stock, thet biotechnology industry srr omCC panm vent, quiEE y En ll Reclass s ificationtt A change has been made to the presentation of deferred rent non-current as of Decembem r 31, 2015 to conform to the current year presentation. Stoctt k SplSS itll In connection with preparing for its IPO, the Compamm ny’s board of directors and shareholders approved an amendment to the ive upon registration in the Switzerland commercial articles of association in July 2016. This amendment became effect ff mm Company’s register on July 27, 2016 and publication in the Swiss Offici ff 3 1/3-forff been retrospectively adjusted for all periods presented to give effect -one share split was effect ff ff to the share split. ed. All share and per share amounts in the consolidated financial statements and notes thereto have al Gazette of Commerce on August 2, 2016. Pursuant to this amendment a Segment gg Informarr tion Operating segments are defined as compomm nents of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker, namely, the chief executive officer, view the Compamm ny’s operations and manage its business in one operating segment, which is thet commercializing therapies derived from or incorporating genome-editing technology. business of discovering, developing and Foreign Currency Translatll iott n and Transactions The Company’s reporting currency is the U.S. Dollar. The Company‘s consolidated entities have the U.S. dollar as their functional currency with the exception of CRISPR Ltd. which has thet British Pound Sterling (“GBP”) as its functional currency. CRISPR Ltd. has assets and liabilities translated into U.S. dollars at exchange rates in effect at the end of the year. Revenue and expenses are translated using the average exchange rates for the period. Net unrealized gains and losses resulting from foreign slation are included in accumulmm ated otht er compremm hensive income (loss), which is a separate componemm currency trantt (deficit) equity. Net foreign currency exchange transaction gains and losses resulting from the remeasurement of transactions denominated in currencies other operations and comprehmm ctional currency are included in other (expense) income, net in the consolidated statements of t ensive loss. nt of shareholders’ than funff F-7 stt Cash and Cash Equivalent ll The Company considers all highly liquid investments with maturities of 90 days or less from the purchase date to be cash equivalents. As of Decemberm 31, 2016, and 2015, the Company had $315.5 million and $156.0 million in cash equival respectively. All cash was held in depository arr ccounts and is reported at fair value. qq ents, Accounts Receivable Accounts receivable of $3.2 million at Decembem r 31, 2016 consist of receivables from Vertex Pharmaceuticals, Incorporated of $0.3 million consisting of receivables (“Vertex”) and Casebia. As of Decemberm 31, 2015, the Company had accounts receivablea from Vertex. Accounts receivables are recorded at invoiced amounts due under both the Vertex and Casebia collabora (see Note 9). Vertex and Casebia are creditworthyt Companymm did not have an allowance for estimated losses recorded related to these receivables. entities that maintain an ongoing relationship with the Compamm ny, as such the a tion agreements a Concentrat tt iontt s of Co rediCC t Rii isk and Off-balance Sheet Risk Financial instruments that potentially subjeb ct the Compamm ny to concentrations of credit risk are primarily cash. The Company’s cash is held in accounts with financial credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no financial instruments with off-balance sheet risk of loss. institutions that management believes are creditworthy. The Companymm has not experienced any ff Deferred Public Offerin O g Cn osCC ts Deferred public offering costs, which primarily consist of direct, incremental legal and accounting fees relating to the IPO, were capitalized withit n other non-current assets prior to our IPO. The issuance costs of $8.3 million, including underwriter’s commissions, were offset against the IPO proceeds upon the consummation of the offering in October 2016. Fair Value of Fo inFF ancialii Instruments The Company’s finff ancial instrumtt ents consist of accounts payable, a accrued expenses and other non-current liabilities. The Compamm ny is required to disclose information on all assets and liaba ilities reported at fair value that used in determining the reported fair values. FASB ASC Topic 820, Fair Value Measurement and Disclosur established a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that participants would use in pricing the financi sources independent of the Compamm ny. Unobservable inputs are inputs that reflect the Compamm ny’s assumptions aboa ut the inputs that market participants would use in pricing the finff ancial instrument and are developed based on the best information available in the circumstances. t the observable inputs be used when available. Observable inputs are inputs that market al instrument based on market data obtained fromff t enables an assessment of the inputs es (“ASC 820”), aa ll The accounting standard describes a fair ff value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, a that may be used to measure fair value, which are the following: Level 1 — Quoted prices in active markets that are accessible at the market date for identical unrestricted assets or liabilities. Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices forff similar assets or liaba ilities; quoted prices in markets that are not active; or other inputs forff which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Unobservable inputs that are supported by little or no market activity and that t are significant ff to the fair ff value of the assets or liabilities. To the extent that valuation is based on models or inputs that are less observablea or unobservablea in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by thet Company in determining fair value is greatest forff value hierarchy is based on the lowest level of any input that is significff ant to the fair instrutt ments categorized in Level 3. A finff ancial instrument’s level within the fair value measurement. ff ff The carrying amount of accounts receivablea , accounts payable, and accrued expenses as reported on the consolidated balance sheets as of Decemberm 31, 2016 and 2015, approximate fair value, duedd to the short-term duration of these instruments. The faiff r value of the Company’s equity method investment in Casebia and convertible debt instrumrr ents were determined using level 3 inputs (See Note 9). F-8 Property and Equipment Property and equipment is stated at cost, less accumulated or extend the lives of the respective assets are expensed to operations as incurred. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over thet estimated useful lives of the respective assets, which are as follows: depreciation. Maintenance and repairs that do not improve mm mm mm Asset Computer equipment and software Furniture, Laboratory equipment Leasehold improvem and other tt fixtures, ents mm rr Estimated useful life 3 years 5 years 5 years Shorter of useful life or remaining lease term m Impairme nt of Long-lgg ivll ed Assets The Company evaluates long-lived assets for potential impamm irment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the book value of thet expected futff urett impairmm ment to be recognized is measured by the amount by which the book value of the assets exceed thet has not recognized any impairmm ment losses in the years ended Decemberm 31, 2016, 2015, and 2014. net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the ir fair value. The Company assets to the Revenue Recognitiott n To date, thet Company’s only source of revenue has been the collaboration and license agreement with Vertex as well as research and development services provided to Casebia under the joint venture with Bayer HealthCare LLC (“Bayer”) (see Note 9). The Compamm ny recognizes revenue in accordance with ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, revenue is recognized for each unit of accounting when all of the folff lowing criteria are met: (cid:2) (cid:2) (cid:2) (cid:2) Persuasive evidence of an arrangement exists; Delivery has occurred or services have been rendered; The seller’s price to the buyer is fixed or determinable; and Collectability is reasonably assured. Amounts received prior to satisfying the revenue recognition criteria are recorded as deferre ff recognized as revenue within the 12 months following the balance sheet date are classified in current liabilities. to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue within non- current liaba ilities. a d revenue. Amounts expected to be Amounts not expected The Company evaluates multiple-element arrangements based on the guidance in FASB ASC Topic 605-25, Revenue t a — appropriate revenuenn they must be accounted forff represent separate units of accounting or whether recognition principles are applied to each unit. When the Company determines that an e-Element Arrangements (“ASC 605-25”). Pursuant to the guidance in ASC 605-25, the Compamm ny evaluates Recognition—Multipl multiple-element arrangements to determine (i) the deliverables included in the arrangement and (ii) whether thet deliverables as a combim ned unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and thet arrangement should be accounted for as a single unit of accounting, the Companmm y musmm t determine the period over which the performance obligations will be perforff med and revenue will be recognized. This evaluation requires thet Compamm ny to make judgments about the individual deliverablea Deliverables standalone basis and (ii) if the arrangement includes a general right of return wrr performance of the undelivered item is considered probable and substant has standalone value, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collabora Companymm remaining deliverablea that can provide the undelivered items. receipt of the , whether the value of the deliveraba le is dependent on the undelivered item, and whether there are other vendors r such deliverabla es are separable from the other aspects of the contractual are considered separate units of accounting provided that (i) the delivered item has value to the collabora a considers whether the collaba oration partner of the associated expertise in the general marketplace. r deliverable for its intended purpose without thet ith respect to the delivered item, delivery or tion partner and the availability l. In assessing whether an item ially in the Company’s contrott relationship. tt tion partaa ner can use any othett In addition, the s and whethet individual u a a a tt tt tt on a F-9 The consideration received under the arrangement that is fixed or determinable is then allocated among the separate units of accounting based on the relative selling prices of the separate units of accounting. The Companymm of accounting within each arrangement following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, the Company determines the estimated selling price for units of accounting within each arrangement using vendor-specificff objective evidence (“VSOE”) of selling price, if available; third-party evidence (“TPE”) of selling price if VSOE is not availablea ; or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company typically uses BESP to estimate the selling price as it generally does not have VSOE or TPE of selling price for its units of accounting. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Compamm ny considers applicable market conditions and relevant entity-specific factors, including fact estimated costs. The Compamm ny periodically validates the BESP used forff assumptmm ions used to determine the BESP will have a significant effect multiple units of accounting. ors that were contemplamm ted in negotiating the agreement with the customer and on the allocation of arrangement consideration between units of accounting by evaluating whether changes in the key determines the selling price of a unit ff ff The Compamm ny recognizes arrangement consideration allocated to each unit of accounting when all of the following criteria are that particular unit of accounting: persuasive evidence of an arrangement exists, delivery has occurred or services have been d unit of accounting over thet ual or estimated performance period for the undelivered items, which is typically the term of the Compamm ny’s research and ance measures do not met forff rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. In the event that a deliverablea does not represent a separate unit of accounting, the Company recognizes revenue froff m the combinem contract tt development obligations. If there is no discernible pattern of performance or objectively measurablea exist, then thet Companmm y recognizes revenue under the arrangement on a straight-line basis over the period the Company is expected to complmm ete its performance obligations. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurablea using the proportional performarr received or thet method, as appaa e amount of payments cumulatmm ive amount of revenue earned, as determined using the straight-line method or proportional performance licable, as of the period ending date. performance measures exist, then the Compamm ny recognizes revenue under the arrangement nce method. Revenue recognized is limited to the lesser of the cumulativ performff mm Significant management judgment is required in determining the level of effoff rt required under an arrangement and the period over which the Compamm ny expects to complmm ete its performff ance obligations under an arrangement. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effor period over which the Company expects to complete its aggregate performance obligations. t required in an arrangement and the ff At the inception of an arrangement that includes milestone payments, the Companymm evaluates whether t each milestone is mm performance to achieve the milestone or the enhancement r: (i) the consideration is commensurate with either the Company’s arties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of subsu tantive and at risk to both pt whethet of the value of the delivered item as a result of a specific outcome resulting from the Compamm ny’s performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonablea deliverables and payment terms within the arrarr ngement. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether milestone satisfies all of the criteria required to conclude that a milestone is substantive. The Company will recognize revenue in its entirety upon successful accomplishm Milestones that are not considered substantaa ive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, with a cumulmm ative catch-up being recognized forff the elapsed portion of the period of performance, assuming all other ent of any substantive milestones, assuming all other revenue recognition criteria are met. t musmm t be overcome to achieve the particular milestone and the level of effoff revenue recognition criteria are met. nt required a relative to all of the rt and investmett mm t t The Company will recognize royalty revenue in the period of sale of the related produdd ct(s), based on the underlying contratt ct terms, provided that the reported sales are reliaba ly measurablea all other revenue recognition criteria are met. and the Compamm ny has no remaining performance obligations, assuming Research and Development Expenses Research and development costs, which include employmm ee compensation costs, facilities, lab supuu plies and materials, overhead, preclinical development, and other related costs, are charged to expense as incurred. Research and development costs also include the costs the Companymm as a part of the Compamm ny’s collaborative agreement with Vertex and Casebia. See Note 9 forff incurs in its performance of services or provision of materials in connection with the fundff ed research undertaken further details. F-10 Operating Leases term of the lease with t The Company leases office and laboratory facilities under a non-cancelable operating lease agreements. The lease agreements contain free or escalating rent payment provisions. The Company recognizes rent expense under such leases on a straight-line basis over thet red rent on the consolidated balance sheets. Lease renewal periods are considered on a lease-by-lease basis in determining the lease term. Funding of leasehold as a tenant improvement allowance and are amortized as a reduction of impmm rovements by the Company’s landlord are accounted forff rent expense over the term of the lease. Leasehold improvements are amortized straight-line over the shorter of the useful life or the remaining lease term. he difference between the expense and the payments recorded as deferff t Equity Based Compensation ExpEE ense The Company recognizes equity-based compensation expense for awards of equity qq instruments to emplmm oyees and non-employee directors based on the grant date fair value of those awards in accordance with FASB ASC Topic 718, Stock Compe 718”). ASC 718 requires all equity-based compemm nsation awards to employmm restricted shares and stock options, to be recognized as expense in the statements of operations based on their grant date fair values. The Compamm ny estimates the faiff value of its Common Shares to determine the fair r value of stock options using the Black-Scholes option pricing model. The Companmm y uses the fair CC ee directors, including grants of value of restricted share awards. ees and non-employmm nsation (“ASC ff The Company accounts forff tt o stock options issued to non-employees under FASB ASC Topic 505-50, Equity Based Payments t value of such options is periodically remeasured and income or expense is recognized r vesting terms. Compensation cost related to awards with service-based vesting schedules is recognized using the straight- see (“ASC 505-50”). As such, thet Non-EmpEE loyeeo over thei t line method. mm has based its estimate of expected volatility on the historical volatility of a group of The Black-Scholes option pricing model requires the input of certain subjective assumptions , including (i) the expected share award, (iii) the risk-free interest rate and (iv) the expected dividend yield. icff trading of the Company’s Common Shares prior to its IPO and a lack of company-specif development and focus on the life science industry. The Compmm any uses the simplmm ifiedff method, which is thet price volatility, (ii) the calculation of expected term of thet Due to thet lack of a public market for thet historical and implied volatility data, the Companymm similar compamm nies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the have characteristics similar to the Compamm ny, including stage of expected term assumption. productdd average of the final vesting tranche date and the contractua sufficient historical exercise data to provide a reasonablea employmm interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Compamm nyaa an assumed dividend yield of zero as thet Company has never paid dividends and has no current plans to pay any dividends on its Common Shares. l term, to calculate the expected term for options granted to employees as it does not have which to estimate the expected term. For options granted to non- ees, the Compamm ny utilizes the contractual term of the arrangement as the basis for the expected term assumption. The risk-freeff uses f representative companies The group ouu uu basis upon mm mm mm tt The Company expenses the faiff r value of its equity-based compemm nsation awards granted to emplomm yees on a straight-line basis associated service period, which is generally the period in which the related services are received. The Company measures at fair value as the awards vest and recognizes the resulting value as over thet equity-based compensation awards granted to non-employees compensa tion expense at each finaff ncial reporting period. mm mm The Company records the expense for equity-base qq d compenmm sation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. when the achievement of a performance-based milestone is probabla e based on the expected satisfaction of the performance conditions as of the reporting date. a Management evaluates tt Patent Coststt Costs to secure and prosecute patent application and other legal costs related to the protection of the Company’s intellectual property are expensed as incurred, and are classified as general and administrative expexx nses in the Company’s consolidated statements of operations. F-11 see Income TaxeTT Income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides forff taxes using an asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the finaff laws that are expected to be in effect when thet the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Companymm therefore a valuation allowance has been established forff more likely than not to be realized. has evaluated available evidence and concluded that the Company may not realize all the benefitff of its deferred tax assets; ncial reporting and tax reporting basis of assets and liabilities and are measured using enacted tax rates and differences are expected to reverse. Valuation allowances are provided if, based upouu n tax assets that the Compamm ny does not believe is the amount of the deferred deferred ff The Company accounts forff uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Compamm ny recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based uponuu the technical merits of the tax position as well as consideration of the available facts and circumstances. As of Decembem r 31, 2016 and 2015, the Company does not have any significant uncertain tax positions. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. See Note 14 for further details. Comprm ehensive Loss Comprehensive loss consists of net income or loss and changes in equity durdd ing thet non-owner sources. The Compamm ny’s net loss equalqq period from transactions and other events s compmm rehensive loss, net of any changes in the all periods presented. In addition, comprmm ehensive loss attributable to the noncontrott lling and circumstances generated fromff foreign currency translation adjustment, forff interest equals net loss for all periods presented. Variable Interest Entities tt ff The Compamm ny reviews each legal entity formed by parties related to the Company to determine whether or not the Company has or not the entity would meet the definition of a VIE in accordance with FASB ASC Topic on (“ASC 810”). If the entity is a VIE, the Compamm ny assesses whether or not the Compamm ny is the primary beneficiary rs, including (i) which party has the power to direct the activities that most significantly affect a variable interest in the entity and whether 810, Consolidatidd of that VIE based on a numbem r of facto the VIE’s economic performance, (ii) the partaa ies’ contractual rights and responsibilities pursuant to any contratt ctuatt (iii) which party has the obligation to absorb losses or the right to receive benefits from the VIE. If the Companymm primary brr eneficiary of a VIE, the Company consolidates the finff ancial statements of the VIE into the Company’s consolidated financial statements at the time that determination is made. The Compamm ny evaluates whether it continues to be the primary beneficiary of any consolidated VIEs on a quarterly basis. If the Compamm ny were to determine that it is no longer the primary beneficiary of a consolidated VIE, or no longer has a variabla e interest in the VIE, it would deconsolidate the VIE in the period that the determination is made. l agreements and determines it is the ff If the Compamm ny determines it is the primary brr eneficiary of a VIE that meets the definition of a business, the Company measures the assets, liabia lities and noncontroll 805, Business ComCC binations (“ASC 805”) at the date the reporting entity first becomes the primary beneficiary. ing interests of the newly consolidated entity at fair ff tt value in accordance with FASB ASC Topic In February 2016, Casebia Therapeutics LLP, a limited liability partnership, was formed in the United Kingdom. In March 2016 tt upon consummation of the JV, Bayer and the Companymm contributions beneficiary of the VIE. As such, thet Company did not consolidate Casebia’s results into the consolidated financia Note 4 forff to the entity. The Compamm ny determined that Casebia was considered a VIE and concluded that it is not the primaryrr each received a 50% equity interest in the entity in exchange for their further details. l statements. See aa As of Decemberm 31, 2016, TRACR is a wholly-owned subsidiary of the Company. details. For the year consolidated the finff ancial statements of TRACR into the Company’s consolidated financial ended Decemberm 31, 2015, the Companymm statements as it was both a VIE and a majority owned subsidiary. For the year ended Decembem r 31, 2014, the Compamm ny consolidated TRACR as a VIE. See Note 4 forff t further mm RR F-12 Noncontrollingll Interett st Upon the IPO date of the Compamm ny, the non-controlling interest of TRACR was acquired, and as of the year ended December 31, 2016 TRACR is a wholly-owned subsiu recorded non-contrott lling interest, which was related to TRACR during 2015 and 2016. The Company recorded net loss attributable to non-controlling interest on its consolidated statements of operations, reflecting the loss from non-controlling interest for the reporting period. further details related to TRACR. The Compamm ny diary of the Compamm ny. See Note 4 forff Intangible Assets The Company’s intangible assets consist of acquired intellectual property rights and relate to the Compamm ny’s interest in TRACR. value at the date of the business combim nation and are stated in the consolidated balance sheets net Intangible assets are recorded at fair of accumulated amortization and impairmm ments, if applicable. The Compamm ny evaluates the remaining useful life of intangible assets mm subject to amortization on a periodic basis to determine whether events and circumstances would indicate impairment or warrant a revision to the remaining usefulff life. If the estimate of an intangible asset’s remaining useful life i the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. s changed, the Compamm ny amortizes rr ff ff Intangible assets related to the acquired intellectual property rights are amortized over thet ir estimated useful lives using the straight-line method as the pattern of revenues cannot be reasonablya property rights is recorded in general and administrative expense in the consolidated statements of operations and compmm rehensive loss. estimated. Amortization related to the acquired intellectual ll Net Loss Per Share Attributable to Common Sharehol ders SS Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by thet weighted-average numberm of common shares outstanding duridd net income attributable to common shareholders by the weighted-average numbem r of common equivalent shares outstanding forff period, including any dilutive effect from outstanding stock options and warrantsaa ng the period. Diluted net income per share is calculated by dividing the using the treasury stock method. the The Compamm ny follows the two-class method when compumm ting net income per share in periods when participating securities are outstanding. The two-class method determines net income per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common and participating securities based on their respective rights to reports a net loss receive dividends as if all income for the period had been distributed. Accordingly, in periods in which the Companymm attributable to common shareholders when participating securities are outstanding, losses are not allocated to the participating securities because thet y have no contractual income per share attributable to redeemable preferred shares, convertible loans, stock options, and unvested restricted are considered common share equivalents. losses of the Company. For purposes of calculating diluted net obligation to share in thet common shares tt tt The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares): Convertible preferred shares Conversion of convertible loans Dr. Emmanuelle Charpentier call option Outstanding options Unvested unissued restricted shares l Subsequent Events 2016 — —— — 4,535,371 89,367 4,624,738 As of December 31, 2015 18,837,024 4,110,987 328,017 1,939,986 142,794 25,358,808 2014 3,560,002 —— — —— — 3,560,002 The Company considered the events or transactions occurring after the balance sheet date, but prior to the issuance of the consolidated financial statements, for potential recognition or disclosure in its consolidated financial statements. All significant subsequent events have been properly disclosed in the consolidated finaff ncial statements. ff F-13 Recent Accountingii Pronouncements In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Custom CC Subsu equently, the FASB also issued ASU 2015-14, Revenue from Contracts with CusCC tomers (Topic 606), which adjusted the effective date of ASU 2014-09; ASU No. 2016-08, Revenue from Contracts wtt Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implmm ementation guidance and illustrations in ASU 2014-09; ASU No. 2016-10, Revenue from Contracts wtt Obligations and Licensing, which clarifies identifying performance obligation and licensing implmm ementation guidance and illustrations in ASU 2014-09; and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Impromm vements and Practical Expedients, which addresses implemm mentation issues and is intended to reduce the cost and complmm exity of applying thet revenue standard in ASU 2014-09 (collectively, the “Revenue ASUs”). ith Customersrr (Topic 606): Identifying Performance ith Customers (Topic 606): Principal versus Agent new ersrr (Topic 606) (“ASU 2014-09”). ff The Revenue ASUs provide an accounting standard for a single comprehensive model for use in accounting for revenue arising sedes most current revenue recognition guidance. The accounting standard is effective for from contracts with customers and superuu interim and annual periods beginning after December 15, 2017, with an option to earlyaa interim and annual periods beginning after Decemberm 15, 2016. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrott initial applicat aa under the full retrospective method. The Companmm y is in the process of determining the impactmm statements. spective method), or retrospectively with the cumulmm ative effect of initially applying the guidance recognized at the date of ion (thet modified retrospective method). We currently anticipate adoption of the new standard effect of the Revenue ASUs on its financial ive January 1, 2018 adopt forff ff In August 2014, thet FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate whether there is substu antial doubt about an entity’s abia lity to continue as a going concern and to provide related footnote annual and interim disclosures. This guidance is effective for the annual reporting period ending after Decembem r 15, 2016 and forff periods thereafter. The Compamm ny adopted ASU 2014-15 on Decembem r 31, 2016 and the adoption of ASU 2014-15 did not have an effect on our consolidated finff ancial statements or disclosures. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require lessees to record most leases on the balance sheet, but recognize expense in a manner similar to the current standard. ASU 2016-02 is effective for fisff cal years beginning after Decembem r 15, 2018 and interim periods within thos 31, 2019 for the Compamm ny. Entities are required to use a modifieff d retrospective approach of adoption forff entered into after the beginning of the earliest compamm rative period in thet prohibited. The Compamm ny is evaluating the new guidance and the expected effecff t on its consolidated financial statements. e years, which is the year ended Decemberm financial statements. Full retrott spective application is leases that exist or are t In March 2016, the FASB issued ASU No. 2016-09, Compensation—St— ock CompCC TT certain aspects of equity-based payments to employee ensation (Topic mm mm to repurchase more of an emplomm yee’s shares than it can under current guidance forff s. Entities will be required to of awards in the income statement when the awards vest or are settled. The guidance also allows an s providing for maximummm rate as opposed to the minimummm rate without triggering liability accounting and to make a guidance changes how compamm nies account forff ff recognize income tax effects employer mm withholding at the employee’s ed guidance is effeff ctive for annual periods beginning after December policy election to account for forfeitures as they occur. The updat t 15, 2017. Early adoption is permitted. Under today’s guidance, the Compmm any does not recognize the income tax effects of awards that have vested or are settled until they actually reduce taxes payable. This standard will require the Compamm ny to recognize these effeff cts when they are vested or are settled, subject to the assessment of the need for a valuation allowance. The adoption of this standard is not expected to have a material impactmm on the Compamm ny’s financial position, results of operations or statements of cash floff ws upon adoption, primarily because any tax effects the Company may be required to realize are expected to be subjeb ct to a fulff allowance. tax withholding purpose l valuation uu rr 718) (“ASU 2016-09”). The In Novembem r 2016, the FASB issued ASU No. 2016-18, Statement tt of Cash FloFF ws (Topic TT 230):0 Restricted Cashaa (“ASU 2016- cash equivalents should be included with cash and cash equivalents when reconciling thet total cash, cash equivalents, and 08”). ASU 2016-18 requires that a statement of cash floff ws explain the change during the period in thet cash equivalents. Thereforff e, amounts generally described as restricted cash amounts generally described as restricted cash or restricted and restricted beginning and ending balances tt shown on the statement of cash flows. The guidance is effeff ctive in the firff st quarter of fiscal 2018 and early adoption is permitted. ASU 2016-18 must be applied retrosp tt reflect an increase in operating cash floff ws resulting fromff additional impact on its financial statements. ectively to all periods presented. Upon adoption, the Company’s 2016 statement of cash floff ws will the adoption of thit s new standard. The Company does not expect any tt F-14 3. Property and Equipment, net Property and equipment, net, consists of the following (in thousands): rr tt fixtures, Computer equipment and software Furniture, Laboratory equipment Leasehold improvem Construction work in process and other ents mm Accumulated Depreciation rty and equipment, net As of December 31, 2016 2015 $ $ 110 $ 2,044 2,970 15,780 1,065 21,969 (942) 21,027 $ 118 238 861 88 95 1,400 (72) 1,328 Depreciation expense for the year ended Decemberm 31, 2016, 2015, and 2014 was $0.9 million, $0.1 million, and $0 million, respectively. 4. Variable Interest Entities TRACR Hematology ll Limitedii On January 23, 2014, the fouff nders of the Compamm ny formed TRACR in the United Kingdom, to furff ther the development of the CRISPR/CRR as9 technology into medicines for the treatment of blood-borne illnesses. On April 14, 2014, TRACR licensed certain foundational intellectual property rights under joint ownership from Dr. Emmanuelle Charperr ntier to develop and commercialize producdd ts for thet technology license agreement with Dr. Charpentier. treatment or prevention of human diseases related to hemoglobinopathies. See Note 9 forff details of the t further On April 14, 2014 the Compamm ny determined that it became the primary beneficiary of TRACR RR based on, among other factors, ff the Compamm ny’s power to direct the activities that significantly impacted the economic performance of TRACR and thet Company’s financing of contractual obligations on behalf of TRACR, and the period in which the Compamm ny began to benefit from research and development of TRACR technology. Accordingly, the Company consolidated TRACR’s financial statements as a consolidated VIE beginning on April 14, 2014. mm RR On March 24, 2015, the Companmm y acquired 4,600 ordinary shares of TRACR, representing 82.1% of the ordinary share capital, and the pursuant to a share exchange transaction with the shareholders of TRACR. RR assignment of certain rights to subscribe ordinary shares of TRACR, the Compamm ny issued 852,846 Common Shares to two founders of TRACR, 656,031 restricted Common Shares to certain emplmm oyees and non-employmm ees, and 459,217 Common Shares to Fay Participation Corporation (“Fay Corp.”), an entity formed to hold Common Shares for future issuance to certain employees emplomm yees. As of Decemberm 31, 2015, the Company held 4,600 ordinary shares of TRACRR capitaa and non- R, representing 82.1% of the ordinary share In exchange for 4,600 ordinary shares of TRACR al of TRACRR R. mm RR Upon the share exchange on March 24, 2015, the Compamm ny recorded an adjustment of $0.1 million to decrease the carrying mm amount of the noncontrolling adjustment was recognized directly in equity through additional paid-in capital and is attributable to the controlling increased ownership interest in TRACR’s and reflect the Company’s interest in TRACR interest. RR RR tt tt net assets. This Pursuant to the share exchange transaction on March 24, 2015, the Compamm ny also entered into a freest ff anding call option RR R, representing the remaining 17.9% of the ordinary share capital held by Dr. Charpentier in exchange for 328,017 Common Shares of the Compamm ny. In the event the option is exercised by agreement with Dr. Charpentier for 1,000 ordinary shares of TRACRR of TRACR. Under the terms of the call option agreement, the Compamm ny has the option to acquire the remaining 1,000 shares of TRACR the Compamm ny prior to a liquidation event, the Company will indemnify Dff In addition, upon a bankruptuu cy, liquidation, closing of an IPO, winding up of the Company, a change in contrott liquidation event, as defined in the call option agreement, the remaining 1,000 ordinary shares of TRACRR automatically convert into 328,017 Common Shares of the Compamm ny. The call option was determined to have a fair share exchange and was attributed to Dr. Charpentier’s for past services rendered to CRISPR and TRACR. million at the time of thet Upon IPO, the call option was exercised and the remaining non-controlling interest of TRACR was acquired, resulting in a reduction of Noncontrolling interest of $0.1 million, stock based compenmm sation of $0.2 million for original value of the call option, and additional paid-in capital of $0.1 million. l or other deemed R held by Dr. Charpentie rr value of $0.2 r. Charpentier for all taxes owed as a result of the exchange. ff r will F-15 Joint VenVV ture with Bayer HeaHH lthcare LLC In December 2015, the Company entered into an agreement with Bayer to create a joint venture to discover, develop and commercialize new therapeaa utics for genetically linked diseases, including blood disorders, blindness and heart disease. On February 12, 2016, Casebia, a limited liability partnershi the JV, Bayer and the Compamm ny each received a 50% equity qq Compamm ny determined that Casebia was considered a VIE and concluded that Compamm ny did not consolidate Casebia’s results into the consolidated financial statements. See Note 9 forff p, was formed in the United Kingdom. In March 2016 upon consummation of ions to the entity. The their contribut t it is not the primary beneficiary of the VIE. As such, the interest in the entity in exchange forff further details. tt tt 5. Intangible Assets The Company’s intangible assets consist of acquired intellectual property rights related to the Compamm ny’s initial consolidation of TRACR in April 2014. Acquired intellectual amortization, are as follows (in thousands): tt property rights had an estimated life of 10 years. Intangible assets, net of accumulated Acquired intangible asset As of December 31, 2016 As of Decemberm 31, 2015 Cost Accumulated Amortization $ $ 547 $ 547 $ (148) $ (93) $ Net 399 454 The Company recorded amortization expense of $0.1 million, $0.1 million, and $40 thousand for each of the years ended Decemberm 31, 2016, 2015, and 2014, respectively. As of December 31, 2016 and 2015, the remaining amortization period was 7.3 years and 8.3 years, respectively. The Company has not recorded any impamm irment charges for the years ended Decemberm 31, 2016, 2015 and 2014. The estimated future amortization of acquired (in thousands): intangible assets as of Decemberm 31, 2016 is expected to be as follows qq Year Ending December 31: 2017 2018 2019 20 Thereafter l amortization 6. Accrued Expenses Accruerr d expenses consist of the following (in thousands): Payroll and employee-related costs Research costs Licensing fees Professional feeff Intellectual property costs Accruerr d property and equipment Other s Total Amount 55 55 55 55 179 399 $ $ As of December 31, 2016 2015 $ $ 2,585 $ 996 492 2,715 3,372 5,081 1,079 16,320 $ 773 910 1,055 2,412 2,592 —— 688 8,430 F-16 7. Convertible Loans 2015 Convertible Loan Agreement with Vertex and certain existing shareholders ll On October 26, 2015, the Compamm ny entered into a convertible loan agreement with Vertex and certain existing shareholders (the “Vertex Convertible Loan”) under which the Companymm interest at 2.5% per annum and had an initial maturity date of April 26, 2016 subject to acceleration upon the occurrence of certain conditions stated in the loan agreement (the “Maturity Date”). On various dates between Novemberm 23 and Decemberm 7, 2015, the Compamm ny borrorr wed aggregate net proceeds of $38.2 million. The Vertex Convertible Loan included various embedded conversion, redemptiomm n and other feat ASC 815. On January 29, 2016, all of the outstanding principal plus accrued interest of $0.2 million under the Vertex Convertible Loan waa s, as further described below, none of which required separate accounting from the host instrument under could borrow up to $40.0 million. The Vertex Convertible Loan accrues as automatically converted into 2,859,278 Series B Preferff red Shareaa s in connection with a qualified finaff ncing described below. urett ff An event of defauff lt (“Event of Default”) is defined in the Vertex Convertible Loan Agreement and includes events of bankrukk ptuu cy, insolvency or reorganization and, solely at the election of Vertex, a material breach that is not cured within the appl icable notice and cure periods of the strategic collaboration, option and license agreement entered into by Vertex and the Compamm ny. See Note 9 forff further details of the strategic, option and license agreement. aa Conversion TerTT ms rr On the Maturity Date, the outstanding principal plus accrued interest automatically converts into Series B Preferred Shares at $9.33 per share. In the event the Compamm ny issues equity securities prior to the Maturity Date with aggregate proceeds of not less than $50.0 than Vertex or existing shareholders, the outstanding principal plus million, of which $5.0 million is raised froff m investors other accruerr d interest under the Vertex Convertible Loan autaa omatically converts into the newly issued equity securities at the price per share paid by the investors in the finff ancing. t In the event of an underwritten publu ic offering with shares of the Compamm ny listed on the New York Stock Exchange, the NASDAQ Global Market, or the NASDAQ Global Market, resulting in at least $50.0 million of proceeds to the Compamm ny closed prior to Maturity, the holders may elect, prior to the closing of the IPO, to convert the outstanding principal plus accrued interest into Series B Preferred Shares at $9.33 per share. Any Vertex Convertible Loan not converted prior to the closing of the IPO, shall automatically convert into Common Shares at a price paid by the investors for such shares in thet IPO. Upon a liquidation event prior to the Maturity Date, the holders may elect to convert thet outstanding principal plus accrued interest into either Common Shares at a price of $9.33 per share or Series B Preferred Shares at a price of $9.33 per share. Redemptionm Terms Upon an Event of Default, aa all outstanding principal plus accrued interest becomes immediately due and payable. Upon a liquidation event, if the holders do not exercise their conversion right, the outstanding principal plus accrued interest or its shareholders receive the in cash on the business day following the date on which the Companymm and payablea shall become duedd proceeds from the liquidation event. Contingent Interest Upon an Event of Default, aa the outstanding amount of the Vertex Convertible Loan shall bear, in addition to the base interest of 2.5% per annum, default interest at a rate of 7.5% per annum. Convertible Loan with Bayer HealthCarCC e LLCLL Concurrent with t t he execution of the Bayer Joint Venturett agreement, the Companmm y also entered into a Convertible Loan Agreement (“Bayer Convertible Loan”) with Bayer for $35.0 million. The Bayer Convertible Loan accrued interest at 2.0% per annum and matured on January 29, 2016 (the “Maturity exchange for aggregate net proceeds of $35.0 million. The Bayer Convertible Loan included various embedde redemptionmm and other featurtt es, none of which required separate accounting from the host instrument under ASC 815. Date”). On January 29, 2016, the Compamm ny issued the Bayer Convertible Loan in d conversion, m tt F-17 Conversion of Convertible Loans to Series B Preferred Shares ff value of the Bayer Convertible Loan to be $24.5 million based on the fair value of the underlying Series On January 29, 2016, concurrerr nt with the issuance of the Bayer Convertible Loan, all of the outstanding principal under the $35.0 million Bayer Convertible Loan automatically converted into 2,605,330 Series B Preferred Shares at $13.43 per share. The Company determined the fair B Preferred Shares that were exchanged as part of the immediate conversion. As the Bayer Convertible Loan was executed in mm contemplation element arrangement and using a relative fair value allocation allocated $27.0 million of aggregate arrangement consideration to the Bayer Convertible Loan upon issuance (See Note 9). Upon conversion, thet Companymm accreted the Bayer Convertible Loan to its face value of $35.0 million through a charge to interest expense of $8.0 million and converted the $35.0 million to Series B Preferred Shares under thet of the joint venture agreement with Bayer, the Compamm ny evaluated the Bayer Convertible Loan as part of one multiple- conversion model. The receipt of $35.0 million in proceeds under the Bayer Convertible Loan in exchange for equity securities, combinem d with thet $38.2 million in proceeds from Vertex Convertible Loan, triggered an automatic conversion provision of the Vertex Convertible Loan Agreement. Accordingly, on January 29, 2016, the Vertex Convertible Loan, including loans from existing shareholders, plus accrued interest also converted into 2,859,278 of Series B Preferred Shares at $13.43 per share. The Company determined the fair value of the Vertex Convertible Loan to be $26.9 million based on the fair value of the underlying Series B Preferred Shares that were exchangaa ed as part of the conversion. Upon extinguishment, the Company recorded a gain on extinguishment of $11.5 million forff rence between the carrying value of the debt and the fair value of the Series B Preferred Shares issued to settle the debt under the general extinguishment model. the diffeff ff 8. Commitments and Contingencies Operating Leases As of Decemberm 31, 2016, the Companymm had fivff e non-cancellable operating leases for office, laboratory, and corporate housing spaces during the year ended Decemberm 31, 2016. Three of the leases expire in 2017. The lease of the Compamm ny’s research facff space expires in February 2rr research facff million, $1.3 million, and $17 thousand, respectively. The Companymm by the Company, on a straight-line basis over the term of the lease, including any rent-free periods. ility space expires in December 2026. Rental expense for the years ended Decembem r 31, 2016, 2015, and 2014 was $4.2 022, with one optional five-year extension period. The sublease of the Companmm y’s primary office and expenses rent, including tenant improvement allowances received ilitytt In April 2015, the Company entered into a lease for laboratory and office lease facilities in Cambridge, Massachusetts (the “200 Sidney Street Lease”). The 200 Sidney Street Lease lease expires in February 2022 with ot The 200 Sidney Street Lease contains escalating rent clausaa es which require higher rent payments in future years. ne additional five year extension period. In June 2015, the Compamm ny entered into an agreement pursuant to which it has the right to use certain officeff facilities in London England. The currerr nt term expires in July 2017. The Compamm ny’s obligations under this right to use agreement are secured by a cash deposit in the approximate amount of GBP 9 thousand held by the officeff space provider. In October 2015, the Compamm ny entered into a lease for corporate housing in Cambridge lease was renewed in Novembm er 2016 and the current term expires in November 2017 subject Company’s obligations under the terms of this lease are secured by a cash deposit in the appaa the lessor. m u , Massachusetts. The term of the original to additional one year renewals. The roximate amount of $10 thousand held by In April 2016, the Compamm ny entered into a subu lease for office facilities in Cambridge Massachusetts. The Company’ obligations under the terms of this lease were secured by a cash deposit in the appaa term expired in January 2017. roximate amount of $26 thousand held by the lessor. This lease In May 2016, the Company entered into a subu lease pursuant to which it subleases in Cambrm idge, Massachusetts (the “610 Main Street Sublease”) the Compamm ny’s primary research and US office facility. The initial term of the 610 Main Street will expire on December 22, 2026. The Company has an option to extend the term of the 610 Main Street Sublease for an additional fivff e year period if, at the time of expiration of the initial term, the subleu 610 Main Street Sublease contains escalating rent clausaa es which require higher rent payments in future years. ssor does not intend to utilize the space for itself or its affiliff ates. The tt F-18 The 610 Main Street Sublease u included a $10.8 million tenant impromm vements allowance for normal tenant improvmm ements, for which construction began in June 2016. The date of the construcrr purposes under ASC 840, Leases. The Company recorded straight-line rent expense of $2.3 million during the year ended Decemberm 31, 2016 and a deferred rent liability of $12.9 million, inclusive of a tenant imprmm ovement allowance of $10.2 million which the Compamm ny is amortizing as a reduction of rent expense over the sublease term. As of Decemberm 31, 2016, $1.0 million of the tenantaa improvem mm consolidated balance sheet. ent allowance was recorded within current deferrerr d rent, and the remaining $11.9 million as non-current deferrerr d rent on thet tion coincided with the lease commencement date for accounting In May 2016, the Company entered a $2.5 million letter of credit to secure the Compamm ny’s obligations under the 610 Main Street Sublease. The letter of credit is secured by cash held in a restricted depository account. The deposit is recorded in restricted cash in the accompanying consolidated balance sheet as of Decemberm 31, 2016. mm Future minimummm payments required under the leases as of Decemberm 31, 2016, are as follows ff (in thousands): Year Ending December 31: 2017 2018 2019 2020 2021 Thereafter Total minimum lease payments Amount 6,685 6,431 6,624 6,823 7,027 30,335 63,925 $ $ Lettertt s orr f Co reCC ditii As of Decemberm 31, 2016 and 2015, the Compamm ny had restricte tt d cash of $3.2 million and $0.7 million, respectively, Massachusetts at 200 representing letters of credit securing the Company’s obligations under certain leased facilities in Cambridge, Sidney Street and the 610 Main Street as well as certain credit card arrangements. The letters of credit are secured by cash held in a restricted depository account. The cash deposit is recorded in restricted cash in the accompanymm ing consolidated balance sheet as of Decemberm 31, 2016 and 2015. m Shareholdell r SettSS lett ment Under the terms of a shareholder agreement existing prior to the IPO, if a U.S. common shareholder elected to file a Qualified Electing Fund (“QEF”) and notified the Compamm ny of this election, the Compamm ny was required to make advance payments to the shareholder related to their individual tax liability. In Septembem r 2016, thet Compamm ny formally offered an aggregate settlett ment of up to $2.0 million to certain U.S common shareholders in order to release the Compamm ny from any and all obligations or claims concerning and/or arising out of the Compamm ny’s status as a PFIC or a Controlled any taxaba le year from 2013 through 2015, including forff potential lack of timely notification of the Company’s PFIC status (an “Annual Information Statement”) for the year ended Decembem r 31, 2015. Foreign Corporation (a “CFC”) forff tt Following the formal settlement offer in Septembem r 2016, in the fourth quarter of 2016 the Compamm ny made payments to shareholders of $2.0 million, respectively, under the terms of the accepted settlements. The obligation to make advance payments under the shareholder agreement for tax years subsequent to 2015 terminated upou n the closing of the IPO. The Company has made available a 2016 PFIC Annual Informff ation Statement on its website for its shareholders. Sponsored Research Agreements The Compamm ny has engaged several research institutions to identify nff ew delivery srr trategies and applications of the CRISPR/Cas9 technology. As a result of these efforts, the Company sponsored five research programs during 2016, with two of these programs continuing through 2018. In association with these agreements, the Companmm y has committed to making payments for related research and development services of $0.7 million, and $0.1 million in 2017 and 2018, respectively. F-19 License Agreement with Anagenesis Bioteii chnologio esii SAS On June 7, 2016, the Compamm ny entered into a license agreement with Anagenesis Biotechnologies SAS (“Anagenesis”) pursuant license agreement, the Company made a one-time upfront payment of $0.5 million to Anagenesis and is to which the Company received an exclusive worldwide license to Anagenesis’ proprietary technology for all human based musmm cle diseases. Pursuant to thet required to pay Anagenesis up to $89.0 million upon the achievement of future clinical, regulatory arr first allogeneic and autologous licensed products developed pursuant to the license agreement, as well as low single digit royaltytt payments on futff urett months ended Decemberm 31, 2016 as research and development expense on the consolidated statement of operations. sales of commercialized product candidates. The Company recorded the $0.5 million payment during the twelve nd sales milestones for each of the Licensing and Patent PP Assignment Agreements In April 2014, the Company and TRACR entered into technology license agreements with Dr. Emmanuelle Charpent ier pursuant to which the Company licensed Dr. Charpentier’s interest to certain intellectual property rights jointly owned by Dr. Charpent rr further details. ier and others to develop and commercialize products for the treatment or prevention of human diseases. See Note 9 forff rr Litigationtt Under the Charpentier license agreement, the Companymm ce proceedings declared by the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office. Following motions by the parties and other procedural matters, the PTAB concluded in Februarr because the claim sets of the twott test for patent interferences. See Note 17 for further details. parties were not directed to the same patentable invention in accordance with the PTAB’s two-way licenses a U.S. patent application that is currently subjeb ct to interferen declared interferff ence should be dismissed ry 2017 that thet ff Under the Invention Management Agreement (“IMA”) signed on December 15, 2016, the Compamm ny is obligated to share costs related to patent maintenance, defenff incurred $3.0 million, $1.5 million and $1.1 million, respectively in shared costs. The Companymm cost sharing of $2.8 million and $2.6 million as of Decemberm 31, 2016 and 2015, respectively se and prosecution. For the years ended Decemberm 31, 2016, 2015 and 2014, the Company recorded accrued legal costs from the 9. Significant Contracts Intellectual ll Property Agreements CRISPR TPP a heTT rapeutics AG—CGG harCC perr ntier License Agreement tt In April 2014, the Compamm ny entered into a technology license agreement with Dr. Emmanuelle Charpentier pursuant to which property rights under joint ownership froff m Dr. Charpentier to develop and commercialize the Compamm ny licensed certain intellectual the treatment or prevention of human diseases other than hemoglobinopathies (“CRISPR—Charpentier products forff Agreement”). In consideration for the granting of the license, the Company paid Dr. Charpentier an upfront fee of CHF 0.1 million ($0.1 million), and agreed to pay an immaterial annual license maintenancaa if Dr. Charpentier is not otherwise engaged in a service arrangement with the Company. During the years ended December 31, 2016, 2015 and 2014, Dr. Charpentier has been in a consulting arrangement with the Company, as such, no annual payments have been made under thit s provision. Dr. Charpentier is entitled to receive nominal clinical milestone payments. The Companymm subliu to Dr. Charpentier a low single-digit percentage royalty based on annual net sales of licensed products and licensed services by the Compamm ny and its affiliff ates and sublicensees. is also obligated to pay Dr. Charpentier a low single digit percentage of censing payments received under any sublu icense agreement with a third party. In addition, the Compamm ny is also obligated to pay License e feeff rr During the years ended December 31, 2016, 2015, and 2014 the Companmm y recorded and accrued $0.5 million, $0.9 million, and $0 million, respectively, of sublicensing fees due to Dr. Emmanuelle terms of the CRISPR—CRR the Bayer agreement. aa harpentier License Agreement that was triggered by the execution of the Vertex collaboration agreement and Charpentier in research and development expense under thet TRACR Hematoltt ogy Limited—Charperr ntier License Agreement In April 2014, TRACR entered into a technology license agreement (“TRACR—Charpentier License Agreement”) with Dr. Emmanuelle Charperr ntier pursuant to which TRACR licensed certain intellectual property r Charpentier to develop and commercialize products for the treatmtt ent or prevention of human diseases related to hemoglobinopathies. In consideration for the granting of the license, Dr. Charpentier is entitled to receive nominal clinical milestone payments. TRACR is also obligated to pay Dr. Charpentier a low single digit percentage of sublu icensing payments received under any sublu icense agreement ights under joint ownership from Dr. tt F-20 with a thit sales of licensed products and licensed services by the Companymm rd party. In addition, TRACR is obligated to pay to Dr. Charpentier low single digit percentage royalties based on annual nn net and its affiliates and sublicensees. During the years ended December 31, 2016, 2015, and 2014 the Compamm ny recorded $0, $0.1 million, and $0, respectively, of sublicensing fees Charpenrr ff due to Dr. Emmanuelle Charpentier in research and development expense under the terms of the TRACR RR —RR tier License Agreement that was triggered by the execution of the Vertex collaboration agreements. Invention Management Agreement On Decemberm 15, 2016, we entered into a an IMA, with the University of California (“California”), the University of Vienna (“Vienna”), Dr. Charperr ntier, Intellia therapeutics, Inc. (“Intellia”), Caribou Biosciences, Inc. (“Caribou”), ERS Genomics Ltd., or (“ERS”), and TRACR. Under the IMA, California and Vienna retroactively consent to Dr. Charpentier’s licensing of her rights to thet CRISPR/Cas9 intellectual property, pursuant to the Charpentier License, to us, our wholly-owned subsidiary TRACR, and ERS, in the United States and globally. The IMA also provides retroactive consent of co-owners to sublicenses licensees, prospective consent to sublicens t provides for, among other (ii) cost-sharing arrangements, and (iii) notice of and coordination in the event of third-party infringement of the subject patents and with respect to certain adverse claimants of the CRISPR/Cas9 intellectuatt l property. Unless earlier terminated by the parties, the IMA will continue in effect until the later of the last expiration date of the patents underlying thet CRISPR/Cas9 technology, or the date on which the last underlying patent application is abandoned. u es they may grant in future, retroactive approval of prior assignments by certain parties, and things, (i) good faith cooperation among the partirr es regarding patent maintenance, defense and prosecution, granted by us, TRACR r and othet RR u Patent Assignment Agreement In Novemberm 2014, the Company entered into a patent assignment agreement (“Patent Assignment Agreement”) with Dr. Emmanuelle Charpentier, Dr. Ines Fonfara, and Vienna (collectively, the “Assignors”), pursuant to which the Company was assigned all rights, title and interest in and to certain patent rights claimed in the U.S. Patent Application No.61/905,835. In consideration for the assignment of such rights, the Assignors are entitled to receive clinical milestone payments totaling up tuu (approximately $0.4 million) in the aggregate for the firff st human therapeaa utic product. The Company is also obligated to pay to the Assignors low single digit royalties based on annual net sales of licensed products and licensed services by the Compamm ny and its affiliff ates and sublicensees. o €0.3 million During the years ended Decembem r 31, 2016, 2015, and 2014 the Compamm ny recorded $33 thousand, $0.1 million, $0, respectively, of sublicensing fees due to the Assignors in research and development expense under the terms of the Patent Assignment Agreement that was triggered by the execution of thet Vertex collaboration agreement and the Bayer Agreement. Collaboration Agreement with Vtt ertVV extt Pharmaceuticals, Is ncoII rporatedtt Summary of Agff reement On October 26, 2015, the Company entered into a strategic collaboration, option, and license agreement (“Collaboration Agreement”) with Vertex, focused on the use of CRISPR’s gene editing technology, known as CRISPR/Cas9, to discover and develop potential new treatments aimed at the underlying genetic causes of human disease. The collaboration will evaluate the use of CRISPR- Cas9 across multiple diseases where targets have been validated through human genetics. Vertex and CRISPR will focus their initial gene editing research on discovering treatments to address the mutations and genes known to cause and contribute disease, beta-thal essemia and cystic fibrosis. Vertex and CRISPR will also evaluate a specifieff d numbem r of other genetic targets as part of the collaboration. For up to six targets, Vertex has an exclusive option to obtain: (1) an exclusive license to commercialize CRISPR technology (“Exclusive License”) or (2) a co-exclusive license with respect to hemoglobinopathy and beta-globin targets (“Co- exclusive License”). to sickle cell t tt The collabora a tive program of research to be undertaken by the parties pursuant to the Collaboa ration Agreement will be conducted in accordance with a mutmm utt ally agreed upon research plan which outlines each party’s research and development responsibilities across the three research areas. The Company’s research and development responsibilities under the research plan (“R&D Services”) are related to generating genome editing reagents that modify gene targets selected by Vertex. Except with respect to the Compamm ny’s obligations under thet mutually agreed upon research plan, Vertex has sole responsibility, at its own costs, for thet worldwide research, development, manufacturing and commercialization of products resulting froff m the exclusive licenses obtained. The research collaboration will end on the earlier of the date on which Vertex has exercised six options to obtain exclusive/co- nniversary of the effeff ctive date of the agreement. The research h at exclusive licenses with respect to a collaboration target, or the fourt ff F-21 term may be extended as mutually agreed by the parties up tuu approved research plan that are incompletemm on the fourth anniversary of the effective date. o nine additional months to complmm ete any research activities under the The Collaboration Agreement will be managed on an overall basis by a project leader fromff each of the Companymm and Vertex. In activities under the collaboration agreement duridd addition, thet (“JRC”) formed by an equal numbem r of representatives from the Company and Vertex. Decisions by the JRC will be made by consensus of the group,uu however, Vertex will have final decision-making authority in the event of disagreement, provided it is in good faith and not contrary t ng the research term will be governed by a joint research committeett o any explicit clause of the agreement. rr In connection with the agreement, Vertex made a nonrefundable upfront payment of $75.0 million. In addition, Vertex will funff d nts all of the discovery activities conducted pursuant to the agreement. For potential hemoglobinopathy trett atments, including treatmett for sickle cell disease, thet Company and Vertex will share equally all research and development costs and worldwide revenues. For other targets that Vertex elects to license, Vertex would lead all development and global commercialization activities. For each of upuu to six targets that Vertex elects to license, other than hemoglobinopathyt receive up to $420.0 million in development, regulatory and commercial milestones and royalties on net product sale. and beta-globin targets, the Compamm ny has the potential to Vertex is entitled to terminate the Collaba oration Agreement as a whole, or terminate the Collaboration Agreement in part with respect to a particular collaboration program, for convenience by providing the Compamm ny 90 days’ written notice of such termination; provided, however, that if any termination applies to a productdd for which Vertex has received marketing approval, Vertex will provide CRISPR no less than 270 days’ notice of such termination. If Vertex is in material breach of this Collaboration Agreement, the Compamm ny has the right to terminate the Collaboration Agreement in full at its discretion 90 days after delivery of written notice to Vertex. The Company evaluated the Collaboration Agreement in accordance a with the provisions of ASC 605-25. The Company’s arrangement with Vertex contains the following initial deliverables: (i) a non-exclusive research license; (ii) the option to obtain an exclusive license forff up to six Collaboration Targets; (iii) the option to obtain a co-exclusive license for hemoglobinopathy or beta- globin targets (which would be included within the maximum numberm of the aforemff Services; and (v) JRC participation. entioned six collaboration targets); (iv) R&D Management considered whether any of these deliverables could be considered separate units of accounting. Regarding the non- exclusive research license, the Companymm exclusive or co-exclusive license since Vertex would not benefit from acquiring a research license without thet license to commercialize the results of that research. As a result, the Compamm ny concluded that the research license should be combined with those options. concluded that it does not have stand-alone value separate from the option to exercise the ability to obtain the Regarding the R&D Services, the Company concluded that there are other vendors in the market that could perform the related services. As such the Companymm concluded thet R&D Services represent a separate unit of accounting. Regarding the JRC obligations, the Compamm ny concluded that t the JRC obligations deliverable has standalone value from the option to license becauseaa represent a separate unit of accounting. the services could be performed by an outside party. As such the Compamm ny concluded the JRC obligations As a result, management concluded that there are four units of accounting at the inception of the agreement: (i) a combined unit non-exclusive research license, and the option for up tuu of accounting representing thet commercialize the collaboration targets as thet representing the non-exclusive research license, and the option for a co-exclusive license (subject to the aforementioned six license limit) to develop and commercialize the hemoglobinopathyt the performff se options do not have stand- alone value; (ii) a combim ned unit of accounting or beta-globin targets as these options do not have stand-alone value; (iii) ance of R&D Services; and (iv) the participation in the JRC. o six exclusive licenses to develop and The Company has determined that neither VSOE of selling price nor TPE of selling price is availablea for any of the units of accounting identified at inception of the arrangement. Accordingly, the selling price of each unit of accounting was determined based on the Compamm ny’s BESP. The Compamm ny developed the BESP for all of the units of accounting included in the collaba oration agreementnn with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company developed thet BESP for the R&D Services and the JRC participation primarily based on the naturett of the services to be performed and estimates of the associated effort and cost of thet expected to be realized under similar contracts. The Company’s BESP for the JRC participation services was de minimis based on an estimate of time spent on preparation, participation, review and travel for the meetings. BESP for the R&D Services was $26.7 million. The Company’s a reasonable profit margin that would be services, adjusted forff mm F-22 The Company’s BESP for each combim ned unit of the non-exclusive research license and the option for an exclusive license to develop and commercialize a single collaboration target is $37.7 million. As the Compamm ny expects Vertex to exercise five of these options, the total BESP is $188.5 million. BESP for this item was determined based on probability and present value adjusted cash flows from the royalties and milestones outlined in the Collabora probability of success inherent in the naturtt e of the associated research area. tion Agreement. BESP refleff cts the level of risk and expected a The Company’s BESP for a non-exclusive research license and the option for a co-exclusive license to develop and commercialize a single hemoglobinopathy or beta-globin collaba oration target is $12.5 million. As the Companymm expects Vertex to exercise one of these options, the total BESP is $12.5 million. BESP for this item was determined based on probability and present value adjud sted cash flows from the equal sharing of project worldwide net profit or net loss. BESP reflects the level of risk andaa expected probability of success inherent in the nature of the associated research area. a Allocable arrangement consideration at inception is comprmm ised of: (i) the up-uu front payment of $75.0 million, (ii) the estimated R&D services of $26.7 million and (iii) payments related to the estimated exercise of options on future exclusive licenses for five targets of $50.0 million. The aggregate allocablea arrangement consideration of $151.7 million was allocated among the separate units of accounting using the relative selling price method as follows: (i) R&D Services: $17.8 million, (ii) non-exclusive research license, and the option for an Exclusive License to develop and commercialize the five collaboration targets: $125.5 million, (iii) non- exclusive research license, and the option for one Co-exclusive License to develop and commercialize one hematology target: $8.4 million. The amount allocated to R&D Services will be recognized as the R&D Services are performed. The Company will recognize as license revenue an equalqq amount of the total arrangement consideration allocated to the exclusive licenses as each individual license is delivered to Vertex upon Vertex’s exercise of its options to such licenses. The Compamm ny will recognize $8.4 million as license revenue when the Co-exclusive License is delivered to Vertex upon Vertex’s exercise of its options to such license. The Compamm ny has evaluated all of thet milestones that may be received in connection with the Collaboration Agreement. In mm performance to achieve the milestone or the enhancement of the value of thet evaluating if a milestone is substantive, the Compamm ny assesses whether: (i) the consideration is commensurate with either the Company’s outcome resulting from the Compamm ny’s performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company notes that the $10.0 million duedd determinable consideration allocable at contract inception and is not subju ect to milestone method accounting. upon the exercise of each option for an Exclusive License was determined to be part of the fixeff delivered item(s) as a result of a specificff d and The first potential milestone the Company will be entitled to receive is thet $10.0 million milestone due upon the filff ing of an Investigational New Drug Application (“IND”) for a selected Exclusive License. As the firff st developmental milestone of the agreement relates to the filing of an IND, the Companymm recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. There are no other substantive milestones. As such the total amount of substa method accounting treatment is $10.0 million forff has considered it to be substantive. Accordingly, such amounts will be each selected Exclusive License. ntive milestones subject to milestone u The remaining milestones are predominately related to the development and commercialization of a product resulting from the arrangement and are payable with respect to each selected Exclusive License. Each milestone is payable only once per collaboration target, regardless of the numberm of products directed to such collaboration target that t achieve the relevant milestone event. There are nine remaining clinical development and regulatory approval milestones which may trigger proceeds of up to $90.0 million and $235.0 million, respectively, forff $75.0 million forff option and the $10.0 million development milestone associated with an IND, total $420.0 million for each selected Exclusive License), as follows: each selected Exclusive License (which, when combim ned with the $10.0 million duedd each selected Exclusive License, and two commercial milestones which may trigger proceeds of up to upon exercise of the exclusive Developmental Milestone Events 1. 2. 3. 4. 5. Initiation of the first Clinical Trial of a Producdd t Establishment of POC for a Product Initiation of the first Phase 3 Clinical Trial of a Producdd t Acceptance of Approval Application by the FDA for a Product Acceptance of Approval Application by the EMA for a Product F-23 6. Acceptance of Approval Application by a Regulatory Authority in Japan forff a Product 7. Marketing Approval in the US forff a Producdd t 8. Marketing Approval in the EU forff a Producdd t 9. Marketing Approval in Japaaa n forff a Product Commercial Milestone Events 1. 2. Annual Net Sales for Products with respect to a Collaboration Target exceed $500 million Annual Net Sales for Products with respect to a Collaboration Target exceed $1.0 billion tt ng, and commercialization of licensed agents and products for the relevant target. As the Compamm ny’s involvement in this After Vertex has exercised an Exclusive License option, Vertex will be solely responsible for all research, development, dd manufacturi process is limited to observer status, management determined that milestones are not considered substantive becausaa e thet y do not relate solely to the past performance of the Compamm ny. Upon the achievement of a milestone, management will evaluate whethet triggering event occurs during or after the research term. If the triggering event occurs duridd ng the research term, management has elected to treat the milestone similar to an up-front payment. In these cases, if and when any of these milestones are received, the amount will be included in the overall arrangemaa To the extent triggering all deliverables have been satisfiedff event occurs after the research term, the Company will recognize the associated revenue in the period in which the event occurs. The Compamm ny will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contractt provided that the reported sales are reliablya measurable and the Compamm ny has no remaining performance obligations, assuming all other revenue recognition criteria are met. , any additional consideration allocated to them could be immediately recognized. If thett ent consideration and allocated to the remaining identified deliverables. t terms, r the a During the year ended December 31, 2016, 2015, and 2014, the Company recognized $4.0 million, $0.2 million, and $0 million of revenue with respect to the collaboration with Vertex. Research and development expense incurred by the Companymm its performance under thet million, respectively. As of Decemberm 31, 2016 and 2015, there is $77.1 million and $75.1 million of non-current deferredrr related to the Company’s collaboration with Vertex, respectively. collaboration agreement for the years ended December 31, 2016 and 2015 was $7.0 million and $0.3 revenuenn in relation to Joint VenVV ture with Bayer Healthtt care LLC On Decemberm 19, 2015, the Compamm ny entered into an agreement to establish a joint venture (“Bayer Joint Venture” tt ) to research the development of new therapeaa utics to cure blood disorders, blindness, and congenital heart disease. On February Compamm ny and Bayer complmm eted the formff Kingdom. Bayer and the Company each received a 50% equity interest in the entity in exchange forff The Company contributed property for selected disease indications. Bayer $0.1 million in cash and licensed its proprietary CRISPR/Cas9 entity, Casebia, a limited liability partnership formff contributed its protein engineering expertise and relevant disease know-how. ed in the United their contributions to the entity. gene editing technology and intellectual ation of the joint venturett 12, 2016, the RR aa rr tt tt Bayer will provide up tuu o $300.0 million in research and development funff ding to Casebia over the first five years, subject to certain conditions, of which the firff st $45.0 million was contributed upon formation in the firff st quarter of 2016. Under the joint ventutt re agreement, the Compamm ny has no obligation to provide any additional funding and the Companmm y’s ownership interest will not be diluted from future ff Compamm ny and Bayer. As Casebia is jointly contrott equity method of accounting. contributions froff m Bayer. The activities of Casebia are controlled by a management board under thet lled by the Compamm ny and Bayer, the Company accounts for its 50% interest using the joint control of the Under the agreement, Casebia will pay the Company up to $35.0 million in exchange for a worldwide, exclusive license to mm s CRISPR/Cas9 technology specifically forff commercialize the Company’ Company received a non-refundablea paid on December 22, 2016 folff There are no milestone, royalties or other payments due to the Compamm ny under thist that the contribution of the CRISRP/Cas9 technology by license to Casebia did not meet the definition of a business under ASC 805. the indications designated by Casebia. In March 2016, the up-front payment of $20.0 million as a technology access fee. The remaining $15.0 million was . propertyrr lowing delivery of the necessary consents from patent holders of the Company’s intellectual aspect of the agreement. The Compamm ny determined tt The Company will also provide to Casebia compensated research and development services through a separate agreement. Concurrent with t t he execution of the Bayer Joint Venturett agreement, the Compamm ny also entered into the Bayer Convertible Loan for $35.0 million. F-24 As the Bayer Joint Venture (including the CRISPR/Cas9 technology license and the research and development services) and the Bayer Convertible Loan were executed at thet element arrangement. Additionally, the Company also determined that ASC 845, Nonmonetary Tr apply to this arrangem the arrangement. As a result, the Compamm ny analogized to ASC 605-25 in allocating thet to the diffeff rent elements of the arrangement. rr same time, the Compamm ny determined that they should be evaluated as one multiple- raTT nsactions (“ASC 845”) did not ent given the Compamm ny’s significant continuing involvement with Casebia and the amount of cash involved in relative fair value of the consideration received The Company allocated the fair value of the consideration received using a relative fair value allocation. The allocable arrangement consideration included (i) the total cash payment by Casebia for the technology access fee, net of the Company’s $0.1 million contribution, of $34.9 million, (ii) the fair million received fromff the research and development service arrange the issuance of the Convertible Debt, and (iv) $6.3 million of estimated cash consideration to be received under equity interest in the Joint Venturtt e of $36.4 million, (iii) the $35.0 ment, accumulating to $112.6 million. value of thet rr ff The Company identified the following elements under the tratt nsaction: (i) Combinm ed element of an exclusive, worldwide, royalty free, license to the CRISPR/Cas9 technology specifically for the indications designated by Casebia, and delivery of the consents of the assignors of the underlying patents to thet technology to develop, manufacture, and commercialize licensed products under that license (ii) Research and development services, and (iii) The issuance of the Bayer Convertible Loan. The Company determined the fair value of the license was $71.4 million based on the consideration paid and the fair value of the 50% interest in Casebia, which was determined utilizing discounted cash floff ws based on reasonable estimates and assumptions of cash flows expected from Casebia. The fair million. The faiff preferred shares that were exchanged as part of the immediate conversion. Using a relative fair value allocation, the Compamm ny lows: allocated the aggregate arrangement consideration paid as folff r value of the Bayer Convertible Loan was determined to be $24.5 million, based on the fair value of the separate research and development services was determined to be $6.3 value of the underlying ff ff (i) (ii) $63.6 million was allocated to the license and patent holder consent combined element $0.6 million was allocated to the futur ff e research and development services (iii) $27.0 million was allocated to the Bayer Convertible Loan The differe nce between combinm ed above amounts of $91.2 million and the total allocable arrangement consideration of $112.6 ff $6.3 million of estimated cash consideration to be received million is duedd under the research and development service arrangement and the remaining $15.0 million of the license fee paid upon the delivery orr f the consent from the patent holders of the Company’s intellectual property.tt arrangement consideration associated with thet to allocablea Following delivery of the patent holders’ consent, which occurred on December 17, 2016, the combim ned amount attributed to the license and patent holder consent element and the remaining $15.0 million license fee, which amount to $78.6 million, was recognized as othet combinem joint venture is not part of the Compamm ny’s majoa r ongoing or central operations. d element did not meet the definition of revenue because the licensing of its technology in connection with t ad determined that the license and patent holder consent the year ended Decembem r 31, 2016. The Companmm y hnn he formation of a r income forff t As the amount allocated to the Bayer Convertible Loan represents an $8.0 million discount to its $35.0 million facff e value, the Compamm ny recognized interest expense during the twelve months ended Decemberm 31, 2016 equal to the discount. The Convertible Loan automatically converted into Series B preferred shares on its January 29, 2016 maturity date. During 2016, the Company recorded an equity method investment of $36.5 million equal to the fair value of the Company’s arrangement consideration described above). Following delivery of the patent interest in Casebia (which was included in the allocablea holders consent element and realization of the described gain allocated to the license and patent holder consent combined element, the Compamm ny recorded unrealized equity method losses up to the remaining amount of the $36.5 million investment. During the year ended December 31, 2016, the Compamm ny recognized $1.2 million, of revenue with respect to the collaboration with Casebia. Research and development expense incurred by the Company in relation to its performance under thet year ended Decemberm 31, 2016 was $1.2 million. As of Decemberm 31, 2016, there is $0.5 million of non-current deferff related to the Company’s collaboration with Casebia, respectively. Unrecognized equity method losses in excess of the Company’s investment in Casebia totaled $4.0 million as of andaa million of stock-based compensation expense related to Casebia empmm loyees. for the year ended Decembm er 31, 2016. During 2016, thet Company recorded $0.2 the a agreement forff red revenue mm F-25 Total operating expenses, and net loss of Casebia for the twelve months ended Decemberm 31, 2016 was $80.8 million, which included research and development expenses equal to $77.4 million for the fair value of the CRISPR license acquired. Subscription Agreement with Bayer Global Investments B.V. On December 19, 2015, the Compamm ny entered into a subscription agreement, (“Subscription Agreement”), with Bayer BV. Pursuant to the Subscription Agreement, Bayer BV was given the option, at its election, to purchase $35.0 million of the Compamm ny’s Common Shares in a private placement concurrent with thet Company’s IPO at a per share price equal to the public offering price, see Note 16 for further details. mm 10. Redeemable Convertible Preferred Shares Upon the closing of the Compamm ny’s IPO on October 24, 2016, all outstanding Preferred Shares of the Compamm ny were automatically converted into 27,135,884 Common Shares on a one-for-one basis. As of Decemberm 31, 2016, the Company had no Preferred Stock authorized, issued, or outstanding. As of Decemberm 31, 2015, the Companymm which was comprised of (i) 440,001 Series A-1 Preferrerr d Shares CHF 0.03 par value per share; (ii) 3,120,001 Series A-2 Preferff Shares, CHF 0.03 par value per share; (iii) 10,758,006 Series A-3 Preferred Shares, CHF 0.03 par value per share; and, (iv) 4,519,016 Series B Preferred Shares, CHF 0.03 par value per share, (collectively, the “Preferred Shares”) . had 18,837,024 registered Preferred Shares issued and outstanding in share capital, rerr d The Company’s redeemable convertible preferred shares were classified as tempormm ary orr r mezzanine equity on the accompanying consolidated balance sheets in accordance with authoritative guidance for the classification and measurement of redeemable securituu ies as the Preferred Shares are contingently redeemable at the option of the holders. mm In October 2013, the Compamm ny issued 440,001 Series A-1 Preferred Shares for CHF 1.14 ($1.28) per share, resulting in gross terms of the Series A-1 Preferred Shares Investment Agreement, the holders proceeds of CHF 0.5 million ($0.6 million). Under thet “Series A-1 Tranche had the right to purchase an additional 1,315,790 Series A-1 Preferred Shares at CHF 1.14 ($1.28) per share (thet . The Rights”) contingent uponuu Series A-1 Tranche Rights were evaluated under ASC 480 and ASC 815 and it was determined that they did not meet the requirements for separate accounting from the initial issuance of Series A-1 Preferred Shares. In connection with the issuance of the Series A-1 Preferred Shares, the Companymm recorded the diffeff issuance cost discount to the Series A-1 Preferred Shares upon issuance. rence of $0.1 million between the fair value of the Common Shares issued and the price paid by the investors as an two or more shareholders holding Series A-1 Preferred Shares. These rights were not legally detachablea also issued 335,000 Common Shares to the Series A Preferred Shares investors. The Companymm In April 2014, the Compamm ny issued 3,120,001 Series A-2 Preferred Shares in exchange for CHF 3.05 ($3.47) per share of such amount CHF 1.45 ($1.65) per share was received upon issuance resulting in gross proceeds of CHF 4.5 million ($5.1 million) and the 015 by thet Board of Directors of the Companmm y resulting in additional balance of CHF 1.60 ($1.82) per share was called in February 2rr gross proceeds of CHF 5.0 million ($5.3 million). In connection with the issuance of the Series A-2 Preferred Shares, thet Series A-1 Tranche Rights were terminated without exercise in April 2014. The Company’s policy requires the evaluation of amendments to preferred shares qualitatively to determine whethet Series A-1 r they are considered a modification or extinguishment. Based on this approach, the amendment to the terms of thet Preferred Shares was considered an extinguishment due to the significance of the modifications to the substantive contractual terms of the Series A-1 Preferred Shares. Accordingly, the Company recorded a loss of $0.7 million on thet Series A-1 Preferred Shares within additional paid-in capital equal to the differen carrying amount of the Series A-1 Preferred Shares of $0.4 million upon extinguishment. The loss on extinguishment is reflected in the calculation of net loss available to common stockholders in accordance with FASB ASC Topic 260, Earnings per ShaSS (“ASC 260”). Series A-1 Preferred Shares of $1.2 million and the ce between the fair value of thet re ff ff In April 2015, the Compamm ny issued 10,758,006 Series A-3 Preferred Shares in exchange for $4.24 per share whereby $2.12 per share was received upon issuance, resulting in gross proceeds of $22.8 million and the balance of $2.12 per share was due upon meeting certain milestones. As of Decemberm 31, 2015, none of the milestones had occurred and the Compamm ny had an outstanding subsu cription receivable of $22.8 million related to the Series A-3 Preferred Shares. In connection with the issuance of the Series A-3 Preferred Shares, the Compamm ny amended the dividend and conversion terms of the Series A-1 and Series A-2 Preferred Shares. The Compamm ny’s policy requires the evaluation of amendments to equity classified preferred shares qualitatively to determine whether they are considered a modification or extinguishment. Based on this approach, the amendment to the terms of the Series A-1 and A-2 Preferred Shares was considered a modification and as a result, there was no adjustment to the carrying value of the Series A-1 and A- 2 Preferred Shares. The balance of the Series A-3 Preferred Share subsu cription receivabla e of $2.12 per share was called on May 5, 2016 by the Board of Directors and gross proceeds of $22.8 million were received by May 27, 2016. F-26 In May 2015, the Compamm ny issued 4,519,016 Series B Preferred Shares in exchange for CHF 6.20 ($6.74) per share resulting in gross proceeds of CHF 28.0 million ($30.5 million). In January 2016, the Compamm ny issued 5,464,608 Series B Preferred Shares upon conversion of $38.4 million of Vertex Convertible Loans plus accruerr d interest and $35.0 million of Bayer Convertible Loans at a conversion price of $13.43 per share. In June 2016, the Company issued 2,834,252 Series B Preferred Shares in exchange for $13.43 per share resulting in gross proceeds of $38.1 million. 11. Share Capital The Company had 40,253,674 and 5,528,079 registered Common Shares as of Decemberm 31, 2016 and 2015, respectively, with a par value of CHF 0.03 per share. Included in the registered Common Shares as of December 31, 2016 is 89,367 shares of unvested restricted stock award and 444,873 treasury shares, which are legally outstanding, but are not considered outstanding for accounting . purposes rr Conditional Capita altt Reserved forff Future Issuance The Company had the following conditional capiaa tal reserved for futff urtt e issuance: Type of Share Capital Common Shares Common Shares Common Shares Common Shares Common Shares Common Shares Conditional Capital Charpentier Call Option Unvested unissued restricte tt Outstanding stock options Reserved forff Shares available for bonds and similar debt instruments Shares available forff future issuance under stock option plans e purchase plans mm employe d stock Total Common Share IssuII ances As of December 31, 2016 — 166,667 4,535,371 5,290,643 4,919,700 413,226 15,325,607 2015 328,017 142,794 1,939,986 33,567 — —— 2,444,364 In October 2016, thet Company complmm eted an IPO whereby the Company sold 4,429,311 of its Common Shares, inclusive of 429,311 Common Shares sold by the Company pursuant to the partial exercise of an overallotment option granted to the underwriters in connection with the offering. Concurrerr nt with the IPO, thet Company issued and sold 2,500,000 Common Shares to Bayer BV, in a private placement. Additionally, the Companymm issued and subsequently reacquired the unexercised overallotment Common Shares of 170,689 at no cost, which are held in treasury.rr ee advisors of TRACRR R. If the holders of any restricted common shares terminates the service relationship the unvested shares In March 2015, the Compamm ny entered into an agreement to acquire 82.1% of the ordinary share capital of TRACR exchange transaction. In connection with this share exchange transaction, the Compamm ny issued 852,846 Common Shares to two founders of TRACR, 459,217 Common Shares to Fay Corp. and 656,031 restricted Common Shares to certain emplmm oyee and non- employmm are subject to a right of repurchase at an escalating purchase price. If any of these holders of restricted Common Shares are terminated, in certain circumstances, the vested and unvested shares are subject to a right of repurchase at the shareholder’s original purchase price. The Companymm exchange for the vested TRACR shares as of the exchange date. The Company is also recognizing additional equity-based compemm nsation expense for the exchange of TRACR restricted share awards which will continue to vest over a remaining term in the form of CRISPR restricted share awards. See Note 12 for further details of equity-based compemm nsation related to this share exchange transaction. expense in April 2015 for the incremental value received by the holders in recorded equity-based compensation in a share mm RR tt In April 2014, in conjunction with the sale of its Series A-2 Preferred Shares, the Compamm ny and its fouff nders agreed to transfer 729,800 Founders’ Shares to several non-employees. The shares transferred were subject to service-based vesting conditions. If thett holder of any restricted Common Shares terminates the service relationship, the unvested shares are subjeb ct to a right of repurchase at an escalating purchase price. Both vested and unvested shares are subjeb ct to a right of repurchase at the original purchase price upon certain triggering events such as termination forff founders and an investor also agreed to transfer 1,192,585 fully vested Common Shares to Fay Corp. The Compamm ny recorded equity- based compenmm sation expense for the Founders Shares and the Common Shares issued with vt esting restrictions from the founders and Fay Corp. See Note 12 for further details of equity-based compemm nsation related to these transfers. cause, material breach of agreement, and insolvency of the holder. In addition, the F-27 The Common Shares have the following characteristics: Votingii Righi ts The holders of Common Shares are entitled to one vote for each Common Share held at all meetings of shareholders and written actions in lieu of meetings. Dividenii ds The holders of Common Shares are entitled to receive dividends, if and when declared by the Board of Directors. As of Decemberm 31, 2016, no dividends have been declared or paid since the Company’s inception. Liquidation After payment to the holders of Preferred Shares of their liquidation preferences, the holders of the Common Shares are entitled to share ratabla y in the Company’s assets availabla e forff liquidation, dissolution or winding up ouu distribution to shareholders in the event of any voluntary or involuntaryrr f thet Compamm ny or upon the occurrence of a deemed liquidation event. 12. Equity-based Compensation Option and GraGG nt Plans ll In July 2016, the shareholders approved the 2016 Share Option and Incentive Plan (the “2016 Plan”) and in April 2015, the the issuance of equitqq shareholders approved the 2015 option and grant plan (the “2015 Plan” collectively the “Plans”). Subsequent to the IPO, no further options shall be granted under the 2015 Plan. The Plans provide forff options to purchase Common Shares which may constitute incentive stock options (“ISOs”) or non-statuttt ory stock options (“NSOs”), performff unrestricted stock unit grants, and qualifiedff consultants, and other key personnel. Terms of the equity subject to the provisions of the Plans. Options granted by the Company typically vest over fouff years. During the years ended Decemberm 31, 2016, 2015 and 2014, the Compamm ny also issued outstanding Common Shares previously held by Founders and Fay Corp. to employees subject to repurchase by the Companmm y upon termination of the holder’s service relationship with the Compamm ny as well as upon certain triggering events such as termination for cause, material breach of agreement and insolvency of the holder that generally lapse over a requisqq ers, directors, non-emplmm oyee awards, including vesting requirements, are determined by the Board, ance-based awards to eligible emplmm oyees, officff qq y awards in the form of restricted shares, tion (“Founder Awards”), which are r years and have a contractual life of ten ite service period of four years. as equity-based compensa mm and non-employees mm mm uu nn Equity-Ba- sed Compensation ExpEE ense The Company uses the straight-line attribution method to recognize stock-based compensation expense forff stock options and restricted stock awards. Stock options and restricted stock generally vests over four years with 25% vesting on the firff st anniversary,rr and the remaining vesting monthly thereafteff Consolidated Statements of Operations: owing table presents stock-based compemm nsation expense in the Compamm ny’s r. The foll ff Research and development General and administrative Loss from equity method investment Total Year Ended December 31, 2015 2014 2016 $ $ 4,848 $ 5,844 152 10,844 $ 1,924 $ 1,760 — 3,684 $ 487 208 — 695 F-28 Grant- Date Fair Value There were no stock options granted prior to 2015. The Compamm ny estimated the fair value of each employee and non-employmm ee stock option award on the grant date using the Black-Scholes option-pricing model based on the following assumptions: mm Employees: Options granted Weighted - average exercise price Weighted-average grant date faiff Assumptions: r value Weighted-average expected volatility Expected term (in years) Weighted-average risk free interest rate Expected dividend yield Non employees: Options granted Weighted- average exercise price Weighted- average grant date fair value Assumptions: Weighted average expected volatility Expected term (in years) Weighted-average risk free interest rate Expected dividend yield $ $ $ $ Year Ended December 31 2015 2016 $ $ $ $ 2,411,240 12.19 8.47 81.0% 6.0 1.4% 0.0% 215,710 19.54 17.38 88.2% 10.0 2.4% 0.0% 1,913,319 2.32 3.11 76.4% 6.0 1.7% 0.0% 26,667 1.85 5.05 84.1% 10.0 2.2% 0.0% The faiff r value of the restricted stock awards was determined based on the fair value of Common Stock on the grant date. Non- mm employee stock options and restricted stock awards are marked-to-market at each reporting period. Share Based Payment Activity Stock Options The following table summarizes stock option activity for employees and non-employees mm during the year ended Decemberm 31, 2016 (intrinsic value in thousands): Outstanding at December 31, 2015 Granted Exercised Cancelled or forfeited Outstanding at December 31, 2016 Exercisable at Decemberm 31, 2016 Vested or expected to vest at December 31, 2016 (1) Stock Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value 1,939,986 2,626,950 (18,900) (12,665) 4,535,371 960,867 4,169,347 $ $ $ $ $ 2.31 12.79 1.81 4.98 8.38 3.24 8.23 9.7 9.1 8.8 9.1 $ $ $ $ $ 6,688 216 53,975 16,361 50,155 (1) This represents the numberm of vested stock options as of Decemberm 31, 2016 plus the unvested outstanding options at Decembem r 31, 2016 expected to vest in the futff urett , adjusted for estimated forfeitures. The total unrecognized compensation cost for employee As of Decemberm 31, 2016, the Companymm million over a remaining weighted-average period of 3.3 years. stock options is adjusted for estimated forfeitures. expects to recognize total unrecognized compemm nsation cost related to stock options of $23.4 and non-employee mm mm F-29 During 2016 and 2015, the Compamm ny granted options to purchase 123,333 and 261,389 Common Shares, respectively, subject to performance-based vesting conditions. As of Decemberm 31, 2016, options to purchase 262,538 Common Shares subject to performance-based vesting conditions were vested, as performance conditions were achieved, and options to purchase 12,500 Common Shares subject to performff purchase Common Shares, subject to service and perforff mance-based vesting conditions, satisfied the performance conditions upon the Compamm ny’s IPO on October 18, 2016, and will continue to vest over their requisite service periods. ance-based vesting conditions were deemed probable of vesting. In addition, 686,665 options to Restricted StoSS ck The following table summarizes restricted stock activity for employe mm es and non-employees mm during the year ended Decemberm 31, 2016: Unvested restricted Common Stock at December 31, 2015 Vested Unvested restricted Common Stock at December 31, 2016 Reflected as outstanding upon vesting Reflected as outstanding upon grant date Total 142,794 (53,427) 1,485,244 (834,388) 1,628,038 (887,815) $ 89,367 650,856 740,223 $ Weighted- Average Grant Date Fair Value 4.35 4.78 3.84 During thet years ended December 31, 2016 and 2015, the total fair value of restricted stock vested was $9.9 million, $2.3 million, respectively. At December 31, 2016, total unrecognized compemm nsation expense related to unvested restricted stock was $7.2 million which the Compamm ny expects to recognize over a remaining weighted-average period of 1.4 years. During 2016 and 2015, the Compamm ny granted 0 and 50,000 restricted Common Shares, respectively, subject to performance- based vesting conditions. As of Decemberm 31, 2016 and 2015, 50,000 and 0 restricted Common Shares subject to performance-based vesting conditions were vested, respectively. As of Decemberm 31, 2015, there were 15,000 restricted Common Shares subject to performance-based vesting conditions deemed probable of vesting. b During the year ended December 31, 2016, the Compamm ny and Fay Corp. transferred 290,400 Common Shares to a Founder, to vesting conditions with a weighted average grant date fair value of $12.65 per share. The unvested 268,093 of which are subject Common Shares are subject to repurchase by the Compamm ny upuu on termination of the holder’s service relationship with thet Company as well as upon certain triggering events such as termination forff Company recognized expense related to the Common Shares transferred to the Founder of $2.6 million during the year ended Decemberm 31, 2016. As of December 31, 2016, Fay Corp. no longer held outstanding Common Shares of the Company. cause, material breach of agreement and insolvency of the holder. The 13. 401(k) Savings Plan The Compamm ny established a definff ed-contribtt ution savings plan under Section 401(k) of thet Internal Revenue Code (the “401(k) Plan”) in November 2016. The 401(k) Plan covers all employmm allows participants to defer a portion of their annual compensation on a pretax basis. The Compamm ny contritt buted $0.1 million to the 401(k) Plan forff ees who meet defined minimummm age and service requirements, and the year ended Decembem r 31, 2016. 14. Income Taxes The Company is subject to U.S. federal and various state corporate income taxes as well as taxes in foreign jurisdictions for the hed. For the years ended Decemberm 31, 2016, 2015 and 2014, the loss ries have been establis a foreign parent and where foreign subsidia beforff e provision forff income taxes consist of the follo u ff Domestic Foreign Total Year ended December 31, 2015 2014 2016 $ $ $ 3,322 (26,040) (22,718) $ $ 593 (26,414) (25,821) $ — (6,863) (6,863) wing (in thousands): F-30 The provision for (benefit from) income taxes consist of the follow ff ing (in thousands): Current income taxes: Federal State Foreign Total current income taxes Deferred income taxes: Federal State Foreign Total deferred income taxes Total income tax (provision) benefit Year ended December 31, 2015 2014 2016 $ $ (649) $ 11 17 (621) 30 105 2 137 (484) $ (23) $ (12) (26) (61) (37) 65 26 54 (7) $ —— — (11) (11) — —— 74 74 63 A reconciliation of income tax expense computed mm at the statutory corporate income tax rate to the effeff ctive income tax rate for the years ended Decemberm 31, 2016, 2015 and 2014 is as follows: Income tax expense at statutory rate State income tax, net of federal benefitff Nondeductible expenses Foreign rate differential Statutory to US GAAP permanent differences Stock-based compensmm Research credits Change in valuation allowance Effective income tax rate ation Year ended December 31, 2015 2014 2016 10.3% 1.3% 1.6% (3.3%) 6.6% (4.9%) 3.1% (16.8%) (2.1%) 10.3% 0.1% 0.0% (1.4%) 0.0% (1.4%) 0.6% (8.2%) 0.0% 10.3% 0.0% 0.0% 1.8% 0.0% (1.1%) 0.0% (10.1%) 0.9% federal statutory rate reflects the Switzerland mixed companymm service rate. Deferred taxes are recognized forff tempomm rary drr ff iffer ences betwett en the basis of assets and liabia lities for financial statement and income tax purpose rr s. The significant compomm nents of the Compamm ny’s deferred tax assets are comprmm ised of the following (in thousands): Deferred tax assets: Net operating loss carryforwards Accruals and reserves Deferred Rent Other deferred tax assets Deferred revenue Research credit Total deferred tax assets Less valuation allowance et deferred tax assets Deferred tax liabilities: Depreciation Intangible assets ff Other deferred tax liabilities Total deferred tax liabilities ff Long term deferr ed taxes F-31 Year ended December 31, 2016 2015 $ 3,934 $ 791 5,228 7 2,525 425 12,910 (6,770) 6,140 (5,909) (68) —— (5,977) $ 163 $ 2,600 189 —— 72 406 104 3,371 (2,892) 479 (321) (80) (53) (454) 25 The Compamm ny has evaluated the positive and negative evidence bearing upon the realizabilit the Compamm ny’s history of operating losses in its non-U.S. jurisdictions, the Compamm ny has concluded that the benefit of its non-U.S. deferred against its net deferred tax assets in Switzerland, and in the UK forff valuation allowance increased by $3.9 million during 2016, which is primarily attributable to losses in Switzerland. Additionally, the Compamm ny has established a valuation allowance for certain U.S. deferff y of its deferred tax assets. Based on t it is more-likely-than-not that valuation allowance tax assets will not be realized. Accordingly, the Company has provided a full diary, as of December 31, 2016 and 2015. The its TRACR subsiu red tax assets. a ff ff As of Decemberm 31, 2016, the Companmm y had available non-U.S. net operating loss carryforwar ds of $41.7 million which begin to expire in 2020. As of December 31, 2016, the Company has U.S. domestic state research and development credit carryforwards of $0.2 million which begin to expire in 2031. ff As of Decemberm 31, 2016, the Companymm has U.S. domestic federal research and development credit carryforwards of $0.3 million which expire in 2036. ASC 740 clarifies the accounting forff uncertainty in income taxes recognized in an enterprise’s financial statement by prescribing the minimum recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. As of Decemberm 31, 2016 the Company had gross unrecognized tax benefits of $0.2 million of which $0.1 million would tive tax rate if recognized. The Compamm ny will recognize interest and penalties related to uncertain tax favorably impamm ct the effecff positions in income tax expense. As of Decemberm 31, 2016, 2015 and 2014, the Compamm ny had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Compamm ny’s consolidated statements of operations and comprehe nsive loss. mm The aggregate changes in gross unrecognized tax benefits was as follows (in thousands): Year ended December 31, 2015 2014 2016 Balance at beginning of year Increases for tax positions taken during current period Increases for tax positions taken in prior periods Decreases for tax positions taken during current period Decreases for tax positions taken in prior periods Balance at end of year $ $ 49 134 — —— (20) 163 $ $ — $ 49 — —— — 49 $ — —— — —— — —— The Company files income tax returns tt in the U.S. federal jurisdiction, Massachusetts, and certain non-U.S. jurisdictions. The Compamm ny is subject to U.S. federal, Massachusetts, and non-U.S. income tax examinations by authorities for all tax years. 15. Selected Quarterly Financial Data (Unaudited) Prior to its IPO on October 18, 2016, the Companmm y had outstanding participating Preferred Shares. During the fourth quarter of had a net loss. Accordingly, the year ended Decemberm 31, 2016, the Company had net income, although for the full year the Companymm the Compamm ny used the two-class method to calculate net income per share for the fourth qt basic net income per share for the fourth quarter of 2016, the Company excluded froff m the numerator $3.1 million of net income attributable to participating securities. The Company calculated diluted net income per share under both the if-converted method and the two-class method and concluded that the two-class method was more dilutive than the if-converted method. Accordingly, the two- of non-participating securities. This resulted in net class income allocations were reapplied after taking into account the dilutive effect uarter of 2016. For purposes of calculating ff F-32 income of $3.1 million being allocated to the participating securities and excluded from the numerator of the Common Stock dilutive net income per share calculation. Collaboration revenue Total operating expenses Loss from operations et (loss) income Net (loss) income attributable to common shareholders Net (loss) income per share attributable to common shareholders: Basic Diluted Weighted-average common shares outstanding used in net (loss) income per share attributable to common shareholders: Basic Diluted Collaboration revenue Total operating expenses Loss from operations Net loss Net loss attributable to common shareholders Net loss per share applicable to common shareholders- basic and diluted Weighted-average common shares outstanding used in net loss per share attributable to common shareholders - basic and diluted 2016 First Quarter Second Quarter Third Quarter Fourth Quarter (1) $ 476 12,128 (11,652) (8,442) (8,439) $ 795 17,353 (16,558) (17,164) (17,157) $ 1,549 16,159 (14,610) (14,694) (14,680) 2,344 27,654 (25,310) 17,098 17,099 (1.53) $ (1.53) $ (3.15) $ (3.15) $ (2.77) $ (2.77) $ 0.43 0.40 5,528,079 5,528,079 5,448,855 5,448,855 5,292,348 5,292,348 32,987,335 34,989,218 2015 First Quarter Second Quarter Third Quarter Fourth Quarter — $ 3,736 (3,736) (3,522) (3,237) $ — $ 3,625 (3,625) (3,666) (3,643) $ — $ 6,202 (6,202) (6,354) (6,353) $ 247 12,413 (12,166) (12,286) (12,270) (0.91) $ (0.80) $ (1.15) $ (2.22) 3,560,000 4,538,595 5,528,079 5,528,079 $ $ $ $ $ $ (1) During the fourth ff quarter the Compamm ny recorded an immaterial correctio rr n of an error of $1.2 million for rent expense related to the three months ended September 30, 2016. The Compamm ny determined that these errors are not material to the respective interim financial statements. 16. Related Party Transactions We had the following transactions with related parties durdd ing the period: In connection with the Series A-3 Preferrerr d Share financing, the Compamm ny paid $0.2 million on behalf of investors for legal and consulting costs incurred forff the preparation and complmm etion of the transaction. The Company is a party to intellectual property license agreements with Dr. Charpentier. In addition, Dr. Charperr ntier is a paid Dr. Charpentier a total of $1.0 consultant to the Compamm ny. For the year ended Decemberm 31, 2016 and 2015, the Companymm million and $34 thousand, respectively, in consulting, licensing and other fees. As of December 31, 2016 and 2015, the Compamm ny owed Dr. Charpentier approximately $0.5 million, and $1.0 million, respectively, of additional fees primarily related to the Vertex Collaboration Agreement and Bayer Joint Venture Agreement. F-33 During the year ended December 31, 2016, the Compamm ny formed a joint venture with Bayer. As a part of the agreement to form the joint venture, the Company also issued a $35.0 million convertible loan to Bayer, which converted into Series B preferred stock and ultimately common stock upon the IPO. Bayer also purchased 2,500,000 common shares through a private placement of $35 million during 2016. During the year ended Decemberm 31, 2016 and 2015, the Company recognized $1.2 million and $0 million, respectively, related to the performance of R&D services for Casebia, the Company’s r furthe uu detail. joint venture with Bayer. See Note 9 forff mm 17. Subsequent Events Under the Charpentier license agreement, the Company licenses a U.S. patent application that is currently subjeb ct to interferen l . Following motions by the parties and other proceduradd proceedings declared by the PTAB of the U.S. Patent and Trademark Office matters, the PTAB concluded in February 2017 that the declared interference should be dismissed becausaa e the claim sets of the two parties were not directed to the same patentable invention in accordance with the PTAB’s two-way test for patent interferences. ff ff ce F-34 Report orr f the statutory arr uditor with financial statements as of 31 December 2016 of CRISPR Therapeutics AG, Basel Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basel Phone Fax www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the General Meeting of CRISPR Therapeutics AG, Basel Basel, 10 March 2017 Report of the statutory auditor on the financial statements As statutory auditor, we have audited the accompanying financial statements of Co RISPR Therapeutics AG, which comprise the balance sheet, income statement and notes, for the year ended 31 December 2016. responsibility Board of Directors’rr The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of foo inancial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. rming procedures to obtain audit evidence about the amounts and An audit involves perforr disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended 31 December 2016 comply with Swiss law and the company’s articles of incorporation. Page 2 Report orr n key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. ies section of our We have fulfilled the responsibilities described in the Auditor’s responsibilit report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements. s Revenue from R&D services under collaboration agreements Risk CRISPR Therapeutics AG (CRISPR) has entered into material revenue generating collaboration agreements in 2015 (Vertex Pharmaceuticals) and 2016 (Casebia Therapeutics LLP). These arrangements were accounted for as multiple element arrangements and each contain separate Research and Development (R&D) servirr ce deliverables under Generally Accepted Accounting Principles in the United States (US GAAPAA ). R&D servirr ce revenue is recognized based on actual time incurred using a relative selling price and recorded within Collaboration Revenue on the Consolidated Statement of Operations. The R&D servirr ce revenue is primarily composed of R&D services performed by internal CRISPR R&D employees, the revenue is calculated using projeo ct based employee timesheets. Given the manual nature of the calculation, we identified a heightened risk related to the opportunity of management to overstate the internally sourced R&D service revenue, specifically through the inclusion of other employees not providing R&D servirr ces under the collaboration agreements in the Company’s calculation, which could result in a material revenue misstatement. Refer to Note 9 in the standalone statutory financial statements for CRISPR’s accounting policy and further details. Page 3 Our audit response We analyzed the relevant agreements and discussed each with management to obtain a full understanding of CRISPR’s accounting process for the related R&D service deliverables, and the specific underlying terms and risks. ts for the period selected. For the selected For a sample of instances, we obtained confirmations directly from CRISPR employees related to their involvement in the R&D servirr ce revenue generating projeco samples, we reconciled the amount per the CRISPR employee timesheet to management’s collaboration revenue calculation. We tested each of the key contracts whereby we agreed the identified R&D programs and FTE rates to the related collaboration agreements, and recalculated revenue for the year based on the relative selling price allocated to the R&D servirr ce deliverable of the arrangement. We assessed R&D servirr ce revenue recognized by vouching subsequent payments made by Verterr x and Casebia for amounts invoiced and confirmed outstanding receivables as of period end. Additionally, we analyzed the Company’s recognized collaboration revenue against expectations based on the status of the research programs tested. We tested the Company’s accounting and presentation of the Collaboration Revenue in accordance with US GAAP, as well as for the statutory standalone financials. Accounting forff Healthcare) the establishment of Casebia (Joint Venture with Bayer Risk On December 19, 2015, CRISPR Therapeutics AG (CRISPR) entered into an agreement to establish a joint venture investment (“Bayer Joint Venture”) with Bayer Healthcare LLC (“Bayer”) to discover, develop and commercialize new breakthrough therapeutics to cure blood disorders, blindness, and congenital heart disease. The joint venture investment into the partnership was legally formed during Q1 2016 and funding was contributed by the two partirr es. In addition to the funding, CRISPR contributed a license of its proprietary CRISPR-Cas9 gene-editing technology and intellectual property for selected disease indications and Bayer contributed its protein engineering expertirr se and relevant disease know-how. Per the underlying agreement the risk the Crispr Therapeutics AG bears is limited to the value of its contribution. The Bayer Joint Venture investment is disclosed in the Note 9 to the Consolidated Financial Statements. The principal considerations for our determination that accounting for the establishment of Casebia is a key audit matter are the materiality to the standalone statutory financial statements, multiple elements of the Bayer Joint Venture arrangement, as well as complexities in applying the relevant accounting guidance for the formation of the joint venture investment. Page 4 audit response We analyzed the various clauses within the Bayer Joint Venture agreement and discussed each with management to obtain an understanding for the accounting treatment. We evaluated management’s assessment of the variable interest considerations and their judgements in determining the primary brr eneficiary as well as the risks borne by each party. We obtained the underlying financial statements of Casebia in connection with the impairment recorded. We evaluated the accounting for the impairment in the participation value of the partnership in accordance with the agreement. Report orr n other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a para. 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We recommend that the financial statements submitted to you be approved. Ernst & Young Ltd ü Zürcher nsed audit experttttt itor in chargggge))))) (( SSSShhhhaaaahhhhaaaarrrrrr LLLLiiiiiieeeebbbbeeeerrrrrrmmmmmmmmeeeennnnnnsch Ceritfied Public Accountant Enclosures • Financial statements (balance sheet, income statement and notes) CRISPR THERAPEUTICS AG Compensation Report For the year ended December 31, 2016 Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basle Phone Fax www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the General Meeting of CRISPR Therapeutics AG, Basle Basle, 6 April 2017 Report of the statutory auditor on the remuneration report We have audited the remuneration report of CRISPR Therapeutics AG, Basle, for the year ended 31 December 2016. The audit was limited to the information according to articles 14 – 16 of the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance) contained in sections B.1 and C.1 of the remuneration report. Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the remuneration report in accordance with Swiss law and the Ordinance. The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages. Auditor’s responsibility Our responsibility is to express an opinion on the remuneration report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the remuneration report complies with Swiss law and articles 14 – 16 of the Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the remuneration report with regard to compensation, loans and credits in accordance with articles 14-16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the remuneration report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of remuneration, as well as assessing the overall presentation of the remuneration report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the remuneration report for the year ended 31 December 2016 of CRISPR Therapeutics AG complies with Swiss law and articles 14 – 16 of the Ordinance. Ernst & Young Ltd Jürg Zürcher Licensed audit expert (Auditor in charge) Helena Rosa Chartered Accountant (SA) A. General Due to the listing of our common shares on the NASDAQ Stock Market on October 18, 2016, we became subject as of that date to the Swiss Federal Ordinance Against Excessive Compensation with respect to Listed Stock Corporations (Ordinance). As a result, we are required to prepare a separate Swiss Statutory Compensation Report each year that contains specific items in a presentation format determined by these regulations. Our Board of Directors is comprised of one class with eight (8) members consisting of one management director, and seven (7) non-employee directors holding office for one year terms. The following persons are members of the Board of Directors: Name Position(s) Election Year Rodger Novak, M.D. President and Chief Executive Officer, Director N. Anthony Coles, M.D.(1)(2) Chairman and Director Bradley Bolzon, Ph.D.(2) Ali Behbahani, M.D.(1)(3) Kurt von Emster(4) Simeon J. George, M.D.(1)(3) Thomas Woiwode, Ph.D.(5) Pablo Cagnoni, M.D.(1)(6) Director Director Director Director Director Director (1) Member of the Compensation Committee. (2) Member of the Nominating and Corporate Governance Committee. (3) Member of the Audit Committee. (4) Chairman of the Audit Committee. (5) Chairman of the Compensation Committee. (6) Chairman of the Nominating and Corporate Governance Committee. 2013 2015 2013 2015 2015 2015 2013 2015 Our executive management (as defined under Swiss law) consists of the following six (6) executives: • Rodger Novak, Chief Executive Officer • Marc Becker, Chief Financial Officer • Samarth Kulkarni, Chief Business Officer • Kala Subramanian, Sr. Vice President, Strategic Development and Operations • Sven Ante Lundberg, Chief Scientific Officer • Tyler Dylan-Hyde, Chief Legal Officer The following sets forth the compensation for the year ended December 31, 2016 of the members of our Board of Directors and Executive Management for all of the functions that they have performed for CRISPR Therapeutics AG and each its subsidiaries, being CRISPR Therapeutics, Inc., CRISPR Therapeutics Limited, and Tracr Hematology Limited. For more detailed information about compensation for our Board of Directors and Executive Management, please review our Definitive Proxy Statement for our 2017 Annual Meeting of Shareholders. You may access this report on the Investor Relations section of our website at: ir.crisprtx.com/phoenix.zhtml?c=254376&p=irol-sec B. Compensation of the Board of Directors Our Board of Directors adopted a non-employee director compensation policy, which became effective upon the closing of our initial public offering in October 2016. Prior to that time, we did not compensate any directors, other than Drs. Coles and Cagnoni, for service on our Board of Directors. The non-employee director compensation policy currently in effect is designed to provide a total compensation package that enables us to attract and retain, on a long-term basis, high caliber non-employee directors. Under the non-employee director compensation policy, our non-employee directors are compensated as follows: • • • • • • each non-employee director receives an annual cash fee of $35,000 (CHF 34,466), $65,000 (CHF 64,009) for the chairman of the Board of Directors; each non-employee director who is a member of the Audit Committee receives an additional annual cash fee of $7,500 (CHF 7,386), $15,000 (CHF 14,771) for the Audit Committee chairman; each non-employee director who is a member of the Compensation Committee receives an additional annual cash fee of $5,000 (CHF 4,924), $10,000 (CHF 9,848) for the Compensation Committee chairman; each non-employee director who is a member of the Nominating Committee receives an additional annual cash fee of $4,000 (CHF 3,939), $8,000 (CHF 7,878) for the Nominating Committee chairman; upon initial election or appointment to our Board of Directors, each new non-employee director will be granted an option to purchase 30,000 common shares upon his or her initial election and appointment, which vest in substantially equal monthly installments during the 36 months following the grant date, subject to continued service as a director; and on the date of each annual meeting of stockholders, each non-employee director previously serving who is re-elected to the board will be granted a non-qualified stock option to purchase 15,000 common shares, which will vest in substantially equal monthly installments during the 12 months following his or her re-election as a director, subject to continued service as a director through such date. All cash fees are paid quarterly, in arrears, or upon the earlier resignation or removal of the non-employee director. The amount of each payment is prorated for any portion of a quarter that a non-employee director is not serving on our Board of Directors, based on the number of calendar days served by such non-employee director. The directors’ compensation is paid without regard to achievement of corporate goals or objectives and it is not conditioned or dependent upon the performance of the director. Each non-employee director is also entitled to reimbursement for reasonable travel and other expenses incurred in connection with attending meetings of the Board of Directors and any committee on which he or she serves. In connection with our initial public offering, each non-employee director serving on our Board of Directors at that time was granted (i) in the case of each non-employee director who had not received compensation for his service on the board of directors prior to the initial public offering, being Drs. Bolzon, Behbahini, George and Woiwode and Mr. von Emster, a stock option to purchase 30,000 common shares, which vests in substantially equal monthly installments during the 36 months following the initial public offering effective date, subject to continued service as a director through such date and (ii) in the case of non-employees director who has previously received equity compensation for services on the board of directors, being Dr. Coles and Cagnoni, a stock option to purchase 15,000 common shares, which vests in substantially equal monthly installments during the 12 months following the grant date, subject to continued service as a director through such date. The Compensation Committee reviews and proposes to the Board of Directors the resolution to be submitted to the Annual General Meeting of Shareholders for the total compensation of the Board of Directors. B.1 Annual Director Compensation Table – 2016 The following table sets forth a summary of the compensation for our non-employee directors during 2016. Dr. Novak, who serves as our Chief Executive Officer, was an employee during fiscal year 2016 and received no additional compensation for his service as a member of our Board of Directors. The following table sets forth a summary of the compensation paid to our non-employee directors in 2016: Name N. Anthony Coles . . . . Bradley Bolzon . . . . . . Ali Behbahani . . . . . . . Pablo Cagnoni . . . . . . Simeon J. George . . . . Kurt von Emster . . . . . Tom Woiwode . . . . . . Fees Earned or Paid in Cash (1)(2) 54,333(5) $ CHF 53,504 7,375 $ 7,263 CHF 8,896 $ 8,760 CHF 32,583(5) $ CHF 32,086 9,632 $ 9,485 CHF 10,139 $ 9,984 CHF 9,125 $ 8,986 CHF Option Awards (1)(3) 507,157(6) $ 147,855 CHF 145,600 295,710 $ CHF 291,201 $ 295,710 CHF 291,201 $ CHF 499,423 $ 295,710 CHF 291,201 295,710 $ CHF 291,201 $ 295,710 CHF 291,201 Number of Options 15,000 30,000 30,000 55,263(6) 30,000 30,000 30,000 Total . . . . . . . . . . $ 132,083 $ 2,133,562 CHF 130,069 CHF2,101,027 Total (1)(4) $ 202,188 CHF 199,105 303,085 $ CHF 298,463 $ 304,606 CHF 299,961 539,740 $ CHF 531,510 $ 305,342 CHF 300,686 305,849 $ CHF 301,185 $ 304,835 CHF 300,187 $ 2,265,645 CHF2,231,096 (1) The Company’s reporting currency is U.S. Dollar (USD). Amounts shown in CHF have been converted from USD at an exchange rate of CHF 0.984751 to USD 1 based on average noon buying rate at U.S. Federal Reserve for 2016. (2) Amounts reported represent fees earned by each director for their board service in 2016, including their respective roles as chairman of the board, chairman of a committee of the board and as members of one or more committees of the board. (3) Amounts represent the aggregate grant date fair value of option awards granted to our directors computed in accordance with FASB ASC Topic 718. Pursuant to FASB ASC Topic 718, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The amounts above reflect our aggregate accounting expense for these awards and do not necessarily correspond to the actual value that will be recognized by the directors. (4) Compensation is not subject to employer paid social contributions. (5) Prior to the effectiveness of our initial public offering on October 18, 2016, the annual retainer for service on the Board for each of Drs. Coles and Cagnoni was $30,000 (CHF 29,543) with Dr. Coles receiving an additional annual cash retainer in the amount of $20,000 (CHF 19,695) for his service as the Chairman of the Board. Fees earned for board service prior to October 18, 2016 were $39,861 (CHF 39,253) for Dr. Coles and $23,917 (CHF 23,552) for Dr. Cagnoni. In addition to the cash consideration for service in 2016 on the Board of Directors prior to our initial public offering, in August 2016 Dr. Cagnoni was granted options to purchase 40,263 Common Shares for his service on the board. (6) In 2016, the Company granted no loans to members or former members of the Board of Directors and as of December 31, 2016, no such loans of credit payments existed to present or former members of the Board of Directors, or to related parties of present or former members of the Board of Directors. As of December 31, 2016, no compensation was paid former members of the Board of Directors. C. Compensation of Executive Management The Compensation Committee evaluates annually the performance of the CEO and the Executive Management and submits the evaluation for review and discussion by the Board of Directors. Subject to and within the bounds of the compensation approved by the Annual General Meeting of Shareholders, the Compensation Committee reviews and recommends for approval by the Board of Directors the annual base salary, incentive compensation (bonus) and equity compensation of the CEO, and in consultation with the CEO, of the Executive Management, and the overall compensation of the CEO and the Executive Management. The Compensation Committee also requests approval by the Board of Directors regarding the determination of the compensation-related targets for the Executive Management and requests approval by the Board of Directors of the individual compensation packages to be paid to members of the Executive Management. C.1 Annual Compensation of Executive Management - 2016 The following table presents a summary of the Executive Management’s 2016 compensation. Name Year Salary (1) Bonus (1)(2) Share Awards (1)(3) Option Awards (1)(3) Number of Options Non-Equity Incentive Compensation (1)(4) All Other Compensation (1)(5) Total (1)(6) Rodger Novak, M.D. Chief Executive Officer . . . 2016 $ 436,888 $ — $ 3,674,722 $ 1,971,400 200,000 $ CHF 430,225 CHF — CHF 3,618,686 CHF 1,941,338 235,940 $ 6,357,880 CHF 232,342 CHF 38,336 CHF 6,260,928 38,930 $ All Other Members of Executive Management(7) . . . . . 2016 $ 1,460,941 $ 311,500 $ CHF 1,438,663 CHF 306,750 CHF — $ — CHF 4,423,523 4,492,022 688,591 $ 567,339 $ 6,853,207 CHF 558,687 CHF 21,119 CHF 6,748,703 21,446 $ Total . . . . . . . . . . . . 2016 $ 1,897,828 $ 311,500 $ 3,674,722 $ 6,463,422 $ 803,239 $ 59,324 $ 13,211,087 CHF 1,868,888 CHF 306,750 CHF 3,618,686 CHF 6,364,861 CHF 790,990 CHF 58,419 CHF 13,009,631 (1) The Company’s reporting currency is U.S. Dollar (USD). Amounts shown in CHF have been converted from USD at an exchange rate of CHF 0.984751 to USD 1 based on average noon buying rate at U.S. Federal Reserve for 2016. (2) Amounts represent bonuses earned and paid in the year ending December 31, 2016. (3) Amounts represent the aggregate grant date fair value of stock and option awards granted to our Executive Management computed in accordance with FASB ASC Topic 718. Pursuant to FASB ASC Topic 718, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The amounts above reflect our aggregate accounting expense for these awards and do not necessarily correspond to the actual value that will be recognized by the Executive Management. (4) Amounts represent non-equity incentive compensation paid to Executive Management for performance based upon achievement of certain corporate goals, business development objectives and research and development milestones. (5) Amounts reported reflect: contributions to private pension for Dr. Novak in the amount of USD 38,930 (CHF 38,336); employer matching contributions to U.S. tax qualified retirement plan (401(k)) for Dr. Lundberg in the amount of USD 3,122 (CHF 3,074), for Dr. Subramanian in the amount of USD 2,045 (CHF 2,014) and for Dr. Kulkarni in the amount of USD 1,052 (CHF 1,036); and for Dr. Dylan-Hyde contributions to private pension in the amount of USD 5,733 (CHF 5,646) and private medical insurance in the amount of USD 9,493 (CHF 9,348). (6) Excludes social charges consisting of: for Dr. Novak, old age and survivors insurance (AHV) and accident insurance (UVG) in the amount of aggregate amount of USD 45,171 (CHF 44,482); for Dr. Dylan-Hyde USD 55,303 (CHF 54,460) for UK National Insurance Contributions (NIC); and for Mr. Becker and Drs. Lundberg, Kulkarni and Dr. Subramanian, U.S. social security and medicare tax in the respective amounts of USD 13,029 (CHF 12,830), USD 17,731 (CHF 17,461), USD 11, 477 (CHF11,302) and USD 14,812 (CHF 14,586). (7) All other members of Executive Management consist of Mr. Becker and Drs. Kulkarni, Lundberg, Subramanian and Dylan-Hyde. In 2016, the Company granted no loans to members or former members of the Executive Management and as of December 31, 2016, no such loans or credit payments existed to present of former members of the Executive Management, or to related parties of present or former members of the Executive Management. In 2016, no compensation was paid to former members of the Executive Management. BOARD OF DIRECTORS SENIOR LEADERSHIP CORPORATE HEADQUARTERS Dr. N. Anthonyy CC loleses Chairman of thee Board Chief Executivee Offfificer, Yumam nity Therapeutics Dr. Rodger Novak Founder & Chief ExE ecutive Officer Dr. Ali Behbahani Partner, New Enttere prise AsA sociates Dr. Bradley Bolzon Managing Director, Versant Ventures Dr. Pablo Cagnoni Chief Executive Officec r, TTizona Managiing Director, MPM Capital Kurt von Emsts er, CFA Managing PPara tnerr, Abingworth Dr. Simeon J. GeGeGeoro ge Partner, SR Onee DrDr. ToTom WoWoW iwodeee MaaMananagigingng DDirirecectoor,r, VVererrsasanttnt VVenenentures Dr. Rodgeer NNovak Foundederr & & ChC ief Executive Officer DrDr. SvSvvenene AAnte (Bill) Lundberg Chief Scientific Officer Dr. Samarth Kulkarni Chief Business Officer Marc Becker Chief Financial Officer Dr. Tyler Dylalan-Hyde Chief Legal OfOffificer Dr. Kala Subbramanian Senior Vice PrP esidenntt, Sttrateggicic Development t && OpOpeerattioionss Megan Mennnere Senior Vice PPresident, Huumaman n ReR sourcces AeAescs henvvoro stadadt 36 404 51 Basell Switzerlaandd US OFFICES 616 00 Main Street Caambbridgd e, MA A 020213999 UK OFFICES 855 ToTottene hamm CoC urt Rooaada Loonddon W1W1T T 4TQQ TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS AAmAmericican SStoockck TTransnsffer r r & Truustt CoCompmpananyy, LLCLC 6262010 115t5thhh AvAvAvennenueue BrBrooklklynyn, NYNY 11121221999 Phone: ++11.800.939937.77.5449 www.ammsts ock.coccommm Ernst & Young Basel, Switzerland Boston, MA LEGAL COUNSEL VISCHEHER R AG Basel, Swiw tzerlaannd Gooddwiwin Prroccteter,r, LLPLP Bostonn, MA ANNUAL GENERAL MEETING The Annuall Gennererala MMeee ting of Shharareholo dders will be Wednesdaay,y, MMaay 31, 2017 at 22:000 P..MM. CCETE att the e officeess of VVISCHEH R AG, Schühüttzengagg sse 1,, 80001 Zuririccchch, Switzerland INVESTOR INFORMATION Copies of ouur r annualaa reports on Formm 10-K, proxy statements, qquuartterrlyly repeporortsts on Form 10-Q, and current reports onn Form 8-K are avaiaa labbble to shareholderrss upon request without cchahargrge.e. Plel asasee vivissit our website at www.crisprtx.com, send requests by y ee-mam il too ir@crisprtx.com or send a written requesstt too: CRRISI PR TTheerarapepeeutici s, Inc., 610 Main Street, Cambridge, MA 0021213939, ATTNTN:: Innvestor Relations STOCK INFORMATION OuOurr cocommmmonon sshares are trtradadeded on the NASDAQ Global Market under the symbol CRSP FORWARD LOOKING STATEMENTS Thhisi annual reportrt ccconono tatatainininss “ffororwawardrd--lookkining stattememennts”” wwhich are made pursuant too thehe ssafe hah rbor provisions of the Prrivvatate e Seecuc riititiese LLitittigigatatioion ReRefoform AAcct off 19959 , asas aamendndede . The forward-lookingg sttatateements in this annual report do not coconsnstititututete gguauararantees of future performaance. Investors arere cautioned that statatememenents in this annual report that are not t strictly historical statta ememenentsts, , ininclclududining,g buut not limitedd to, statements concerernningng: ththe therapeutic value, devele opment, anandd cocommercial potenntiala of CRCRISISPR/Cas-9 gene editing technologies and therappies anndd thhe intellectual property protecectit on of f ououur tetetechchnonologyg andd ttheerrapipiees. YoYou u ara ee cacautioned that forward-looking stattememeents are inherenently uncecertain. Such fforwwarardd-- lookookkining g stststatatemmenntsts aare suubjeectct to a a nun mbmberer oof f ririsks s and uncertainties that cououldld cause acttuau l results to differ mateririaallyy fromomm thooseseee antnticicipipi atatatededede ,, ini clc ududing,gg withhohout limititatatioion,, the risks identified in ourur aannual rereport on Form 10-K K andd our other filiingnggsss wiwiw ththhh ttthehe SSSeceeecuuurities and Exchangggege Commission. WWe assume no obligationon tto updatte any forwawardrd- lolooking information conttaiaiaiineennenedd innnn tthihisss anannual report. 

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