ASSEMBLY BIOSCIENCES, INC. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the Exchange Act), that is designed to provide reasonable assurance that information, which is required to be disclosed in our reports filed pursuant to the Exchange Act, is accumulated and communicated to management in a timely manner. At the end of fiscal year ending December 31, 2022, we carried out an evaluation, under the supervision, and with the participation of, our management, including our Chief Executive Officer, who serves as our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures for the fiscal year ending as of December 31, 2022 were effective at reasonable assurance levels. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all error and all fraud. Under the supervision and with the participation of our management, including our Chief Executive Officer, who serves as our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2022. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting in the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable. Ite m 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 48 PART III Item 10. Directors, Executive Of ficers and Corporate Governance Except as set forth below, the information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with the Annual Meeting of Stockholders (Proxy Statement) within 120 days after the conclusion of our fiscal year ended December 31, 2022 and is incorporated in this Annual Report on Form 10-K by reference. Code of Ethics Our Board has adopted a Code of Ethics for our principal executive officer and all senior financial officers and a Code of Conduct applicable to all of our employees and our directors. Both Codes are available under the “Investors—Corporate Governance” section of our website at www.assemblybio.com. If we make any substantive amendments to, or grant any waivers from, the Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions, or any officer or director, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K. Item 11. Execut ive Compensation The information required by this item will be contained in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. Item 12. Security Ownership of Certain Beneficial Ow ners and Management and Related Stockholder Matters Except for the table regarding equity compensation plans, the information required by this item will be contained in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth the indicated information as of December 31, 2022 with respect to our equity compensation plans. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted average exercise price of outstanding options, warrants and rights (1) (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by securityholders 9,118,366 (2) $ 4.49 2,828,469 (3) Equity compensation plans not approved by securityholders 1,672,263 (4) $ 14.00 364,465 (5) Total 10,790,629 3,192,934 (1) The weighted average exercise price is calculated solely based on the exercise prices of the outstanding stock options and does not reflect the shares that will be issued upon the vesting of outstanding awards of restricted stock units (RSUs), which have no exercise price. 49 (2) This number includes the following: 248,369 shares subject to stock options granted under the 2010 Equity Incentive Plan (2010 Plan); 1,543,737 shares subject to outstanding awards granted under the Assembly Biosciences, Inc. Amended and Restated 2014 Stock Incentive Plan (2014 Plan), of which 1,541,237 were subject to outstanding stock options and 2,500 were subject to outstanding RSUs; 6,864,632 shares subject to outstanding awards granted under the Assembly Biosciences, Inc. 2018 Stock Incentive Plan, as amended (2018 Plan), of which 5,214,008 were subject to outstanding stock options, 1,646,014 were subject to outstanding RSUs and 4,610 are underlying stock appreciation rights (which are not included in column (a) but are reflected in column (c)); and 466,238 options assumed by us in connection with our merger with Assembly Pharmaceuticals. This number excludes purchase rights currently accruing under the Assembly Biosciences, Inc. Amended and Restated 2018 Employee Stock Purchase Plan (2018 ESPP). (3) This number includes: no shares under the 2010 Plan, which has been frozen; 966,303 shares available for issuance under the 2014 Plan; 1,044,483 shares available for issuance under the 2018 Plan; and 817,683 shares reserved for issuance under the 2018 ESPP. As of March 9, 2023, assuming each participant purchases the maximum number of shares in the current offering period, no more than 107,500 shares are subject to purchase in the current offering, which ends on May 12, 2023. (4) This number includes 575,640 shares subject to outstanding awards granted under the 2017 Inducement Award Plan (2017 Inducement Plan), of which 571,890 were subject to outstanding stock options and 3,750 were subject to outstanding RSUs; 500,000 shares subject to stock options granted under the 2019 Inducement Award Plan (2019 Inducement Plan); and 596,623 shares subject to outstanding awards granted under the 2020 Inducement Award Plan (2020 Inducement Plan), of which 549,123 were subject to outstanding stock options and 47,500 were subject to outstanding RSUs. (5) This number includes: 208,588 shares available for issuance under the 2017 Inducement Plan, no shares under the 2019 Inducement Plan and 155,877 shares available for issuance under the 2020 Inducement Plan. Our stockholder-approved equity compensation plans consist of the 2018 Plan, 2014 Plan, the 2010 Plan, stock options assumed in our merger with Assembly Pharmaceuticals and the 2018 ESPP. Effective on June 2, 2016, the 2010 Plan was frozen, and no further grants will be made under the 2010 Plan. Shares that are forfeited under the 2010 Plan on or after June 2, 2016 will become available for issuance under the 2014 Plan. An “Award” under the 2018 Plan, 2014 Plan or 2010 Plan is any right to receive our common stock consisting of non-statutory stock options, incentive stock options, stock appreciation rights, RSUs, or any other stock award. In May 2018, our stockholders approved the 2018 ESPP and was amended and restated in May 2021. The 2018 ESPP provides for the purchase by employees of up to an aggregate of 1,300,000 shares of the Company’s common stock. Eligible employees can purchase shares of our common stock at the end of a predetermined offering period at 85% of the lower of the fair market value at the beginning or end of the offering period. Our outstanding equity compensation arrangements that have not been approved by our stockholders consist of the 2017 Inducement Plan, the 2019 Inducement Plan and the 2020 Inducement Plan. In April 2017, our board of directors adopted the 2017 Inducement Plan and reserved 800,000 shares of our common stock for issuance under 2017 the Inducement Plan. In August 2019, our board of directors adopted the 2019 Inducement Plan and reserved 500,000 shares of our common stock for issuance under the 2019 Inducement Plan. In March 2020, our board of directors adopted the 2020 Inducement Plan and reserved 800,000 shares of our common stock for issuance under the 2020 Inducement Plan. The only persons eligible to receive grants of awards under the 2017 Inducement Plan, the 2019 Inducement Plan or the 2020 Inducement Plan are individuals who satisfy the standards for inducement grants under Nasdaq Marketplace Rule 5635(c)(4) and the related guidance under Nasdaq IM 5635-1-that is, generally, a person not previously an employee or director of ours, or following a bona fide period of non-employment, as an inducement material to the individual's entering into employment with us. An “Award” is any right to receive our common stock pursuant to the Inducement Plan, consisting of nonstatutory stock options, stock appreciation rights, restricted stock awards, RSUs, or any other stock award. Item 13. Certain Relationships and Related P arty Transactions, and Director Independence The information required by this item will be contained in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. 50 Item 14. Principal Acco untant Fees and Services The information required by this item will be contained in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. 51 Item 15. Exhibits, Finan cial Statement Schedules (a) Exhibits. The following exhibits are filed as part of this Annual Report on Form 10-K: Exhibit Number Description of Document Registrant’s Form Dated Exhibit No. Filed Herewith 3.1 Sixth Amended and Restated Certificate of Incorporation dated May 25, 2022. 8-K 05/27/2022 3.1 3.2 Amended and Restated Bylaws as amended through December 7, 2022. 8-K 12/12/2022 3.1 4.1 Specimen of Common Stock Certificate. S-3 12/30/2015 4.1 4.2 Description of Securities. X 10.1 Sub-Sublease, dated as of July 18, 2018, between Prothena Biosciences, Inc., as Sub-Sublandlord, and Assembly Biosciences, Inc., as Sub-Subtenant. 10-Q 11/08/2018 10.1 10.2* Exclusive License Agreement dated September 3, 2013 by and between The Indiana University Research and Technology Corporation and Assembly Pharmaceuticals, Inc. 10-Q 11/17/2014 10.29 10.3† Amendment No. 1 to Exclusive License Agreement, by and between Assembly Biosciences, Inc. and the Indiana University Research and Technology Corporation. 10-Q 11/05/2020 10.1 10.4† Amendment No. 2 to Exclusive License Agreement, by and between Assembly Biosciences, Inc. and the Indiana University Research and Technology Corporation. 10-Q 11/05/2020 10.2 10.5†‡ Collaboration Agreement, dated as of July 17, 2020, by and between Assembly Biosciences, Inc. and BeiGene, Ltd. 10-Q 11/05/2020 10.3 10.7# Amended and Restated Employment Agreement, dated December 12, 2023, between Assembly Biosciences, Inc. and Jason A. Okazaki. X 10.8# Employment Agreement, dated May 1, 2020, between Assembly Biosciences, Inc. and William E. Delaney IV, Ph.D., effective as of May 27, 2020. 10-K 02/25/2021 10.12 10.9# 2010 Equity Incentive Plan. S-1/A 10/4/2010 10.14 10.10# Assembly Biosciences, Inc. Amended and Restated 2014 Stock Incentive Plan. 8-K 06/06/2016 10.1 10.11# Omnibus Amendment to Assembly Biosciences, Inc. Stock Incentive Plans. 10-Q 05/08/2020 10.2 10.12# Form of Notice of Stock Option Grant and Stock Option Agreement under Amended and Restated 2014 Stock Incentive Plan. X 10.13# Form of Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement under the Amended and Restated 2014 Stock Incentive Plan. 10-Q 11/01/2017 10.1 10.14# Assembly Biosciences, Inc. 2017 Inducement Award Plan. 10-Q 08/09/2017 10.1 10.15# Form of Notice of Stock Option Grant and Stock Option Agreement under the 2017 Inducement Award Plan. 10-Q 08/09/2017 10.2 10.16# Form of Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement under the 2017 Inducement Award Plan. 10-Q 08/09/2017 10.3 10.17# Assembly Biosciences, Inc. 2018 Stock Incentive Plan. 8-K 06/01/2018 10.1 52 Exhibit Number Description of Document Registrant’s Form Dated Exhibit No. Filed Herewith 10.18# Amendment No. 1 to Assembly Biosciences, Inc. 2018 Stock Incentive Plan. 8-K 05/21/2019 10.2 10.19# Amendment No. 3 to Assembly Biosciences, Inc. 2018 Stock Incentive Plan. 8-K 06/16/2020 10.1 10.20# Amendment No. 4 to Assembly Biosciences, Inc. 2018 Stock Incentive Plan. 8-K 05/25/2021 10.1 10.21# Amendment No. 5 to Assembly Biosciences, Inc. 2018 Stock Incentive Plan. 8-K 05/27/2022 10.1 10.22# Form of Notice of Stock Option Grant and Stock Option Agreement under the 2018 Stock Incentive Plan. X 10.23# Form of Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement under the 2018 Stock Incentive Plan. 8-K 06/01/2018 10.3 10.24# Form of Stock Appreciation Right Award Agreement for Non-U.S. Grantees under the Assembly Biosciences, Inc. 2018 Stock Incentive Plan. 8-K 10/12/2018 10.4 10.25# Form of Performance-Based Stock Appreciation Right Award Agreement for Non-U.S. Grantees under the Assembly Biosciences, Inc. 2018 Stock Incentive Plan. 10-K 03/11/2022 10.24 10.26# Amended and Restated Assembly Biosciences, Inc. 2018 Employee Stock Purchase Plan. 8-K 05/25/2021 10.4 10.27# Assembly Biosciences, Inc. 2019 Inducement Award Plan. 10-Q 11/07/2019 10.4 10.28# Form of Notice of Stock Option Grant and Stock Option Agreement under the 2019 Inducement Award Plan. 10-Q 11/07/2019 10.5 10.29# Assembly Biosciences, Inc. 2020 Inducement Award Plan. 10-Q 05/08/2020 10.3 10.30# Form of Notice of Stock Option Grant and Stock Option Agreement under the 2020 Inducement Award Plan. 10-Q 05/08/2020 10.4 10.31# Form of Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement under the 2020 Inducement Award Plan. 10-Q 05/08/2020 10.5 10.32# Assembly Biosciences, Inc. 2022 Corporate Bonus Plan. 8-K 02/17/2021 10.1 10.33 Open Market Sale Agreement by and between Assembly Biosciences, Inc. and Jefferies LLC. S-3 08/28/2020 1.2 10.34# Assembly Biosciences, Inc. 2022 Corporate Bonus Plan. 8-K 02/04/2022 10.1 21.1 List of Subsidiaries of Assembly Biosciences, Inc. X 23.1 Consent of Independent Registered Public Accounting Firm. X 24.1 Power of Attorney (included on signature page). X 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1** Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definitions Linkbase Document. 53 Exhibit Number Description of Document Registrant’s Form Dated Exhibit No. Filed Herewith 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). * Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request. † The schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. ‡ Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. # Represents management contracts or compensatory plans or arrangements. ** The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K is to be deemed furnished and shall not be deemed “filed” with the SEC and is not to be incorporated by reference into any filing of Assembly Biosciences, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. Item 16. Form 10-K Summary None. 54 SIGNA TURES In accordance with Section 13 or 15(d) of the Securities Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASSEMBLY BIOSCIENCES, INC. Date: March 22, 2023 By: /s/ Jason A. Okazaki Name: Jason A. Okazaki Title: Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jason A. Okazaki and John O. Gunderson, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date /s/ Jason A. Okazaki. Chief Executive Officer, President and Director March 22, 2023 Jason A. Okazaki (Principal Executive Officer and Principal Financial Officer) /s/ Jeanette M. Bjorkquist Executive Director, Accounting and Treasury March 22, 2023 Jeanette M. Bjorkquist (Principal Accounting Officer) /s/ William R. Ringo, Jr. Chairman of the Board March 22, 2023 William R. Ringo, Jr. /s/ Anthony E. Altig Director March 22, 2023 Anthony E. Altig /s/ Gina Consylman Director March 22, 2023 Gina Consylman /s/ Richard D. DiMarchi, Ph.D. Director March 22, 2023 Richard D. DiMarchi, Ph.D. /s/ Sir Michael Houghton, Ph.D. Director March 22, 2023 Sir Michael Houghton, Ph.D. /s/ Lisa R. Johnson-Pratt, M.D. Director March 22, 2023 Lisa R. Johnson-Pratt, M.D. /s/ Susan Mahony, Ph.D. Director March 22, 2023 Susan Mahony, Ph.D. /s/ John G. McHutchison, A.O., M.D. Director March 22, 2023 John G. McHutchison, A.O., M.D. 55 ASSEMBLY BIOSCIENCES, INC. FINANCIAL S TATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) F- 2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F- 4 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2022 and 2021 F- 5 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 F- 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F- 7 Notes to Consolidated Financial Statements F- 8 F- 1 Re port of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Assembly Biosciences, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Assembly Biosciences, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F- 2 Accrued research and development expenses Description of the Matter For the year ended December 31, 2022, the Company incurred $70.0 million of research and development expenses and recorded $3.1 million of accrued research and development expenses at December 31, 2022. As described in Note 2 to the consolidated financial statements, the Company’s accrued research and development expenses are based on estimates of the services received and efforts expended pursuant to contracts with multiple contract research organizations and manufacturing vendors that conduct and manage these activities on its behalf. When billing terms under such contracts do not coincide with the timing of when the work is performed, management is required to make estimates of outstanding obligations to those third parties as of period end. The accrual is based on a number of factors, including the time period over which services will be performed, enrollment of subjects, number of sites activated, and the level of effort expended in each period. At period end, accrued research and development expenses are recorded based upon estimates of the proportion of work completed over the term of the individual clinical trial and manufacturing activities in accordance with signed agreements with the third parties. The Company obtains information directly from these service providers and performs procedures to challenge these estimates based on their internal understanding of the services provided to date. However, the Company may also be required to estimate these services based on information available to its internal clinical or administrative staff if such information is not able to be obtained timely from its services providers. Auditing accrued research and development expenses is complex because of the judgments applied by management to determine the commencement and completion date of vendor tasks and the cost and extent of work performed during the reporting period for services not yet billed by contracted third-party vendors. The testing of the Company’s accrued research and development expense models also involves a high level of effort to test the high volume of data used to determine the estimated accrual. How We Addressed the Matter in Our Audit To test the completeness of accrued research and development expenses, we performed audit procedures that included, among others, direct confirmation of contract terms and conditions with a sample of the Company’s third-party vendors. We also confirmed the progress of contracted clinical activities with these third-party vendors and compared such data to the Company’s estimates of progress as reflected in their accrual models. We further tested the accuracy of the calculations, the completeness of the data utilized, and the reasonableness of the inputs used in management’s accrual models by testing actual invoices paid to date, agreeing inputs back to contractual terms and holding discussions with clinical or administrative staff outside of the finance function. Procedures were performed to evaluate the reliability, completeness and relevance of management’s data by testing actual invoices paid and holding discussions with clinical or administrative staff outside of the finance function to corroborate progress and estimated level of expended effort incurred by the Company’s third-party vendors. Further, we inspected material invoices received from third parties after the balance sheet date and evaluated whether services performed prior to the consolidated balance sheet date had been properly included in the accrual. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2015. San Jose, California March 22, 2023 F- 3 ASSEMBLY BIOSCIENCES, INC. CONSOLIDATED B ALANCE SHEETS (In thousands except for share amounts and par value) As of December 31, 2022 2021 ASSETS Current assets Cash and cash equivalents $ 52,418 $ 45,627 Marketable securities - short-term 39,192 101,000 Accounts receivable from collaboration 944 336 Prepaid expenses and other current assets 4,413 7,241 Total current assets 96,967 154,204 Marketable securities - long-term — 27,972 Property and equipment, net 743 1,139 Operating lease right-of-use (ROU) assets 3,195 6,042 Other assets 889 1,703 Total assets $ 101,794 $ 191,060 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 2,493 $ 2,659 Accrued research and development expenses 3,122 3,400 Other accrued expenses 7,317 6,863 Operating lease liabilities - short-term 3,364 3,151 Total current liabilities 16,296 16,073 Deferred revenue 2,733 2,733 Operating lease liabilities - long-term 101 3,325 Total liabilities 19,130 22,131 Commitments and contingencies Stockholders' equity Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding — — Common stock, $ 0.001 par value; 150,000,000 and 100,000,000 shares authorized as of December 31, 2022 and December 31, 2021, respectively; 48,894,973 and 48,120,437 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively 49 48 Additional paid-in capital 807,938 800,728 Accumulated other comprehensive loss ( 803 ) ( 419 ) Accumulated deficit ( 724,520 ) ( 631,428 ) Total stockholders' equity 82,664 168,929 Total liabilities and stockholders' equity $ 101,794 $ 191,060 See Accompanying Notes to the Consolidated Financial Statements F- 4 ASSEMBLY BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF OPER ATIONS AND COMPREHENSIVE LOSS (In thousands except for share and per share amounts) Year Ended December 31, 2022 2021 Collaboration revenue $ — $ 6,254 Operating expenses Research and development 69,980 68,524 General and administrative 24,134 28,780 Impairment of goodwill and indefinite-lived intangible asset — 41,638 Total operating expenses 94,114 138,942 Loss from operations ( 94,114 ) ( 132,688 ) Other income Interest and other income, net 1,022 302 Total other income 1,022 302 Loss before income taxes ( 93,092 ) ( 132,386 ) Income tax benefit — 2,531 Net loss $ ( 93,092 ) $ ( 129,855 ) Other comprehensive loss Unrealized loss on marketable securities ( 384 ) ( 149 ) Comprehensive loss $ ( 93,476 ) $ ( 130,004 ) Net loss per share, basic and diluted $ ( 1.92 ) $ ( 3.00 ) Weighted average common shares outstanding, basic and diluted 48,409,265 43,280,383 See Accompanying Notes to the Consolidated Financial Statements F- 5 ASSEMBLY BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF CHA NGES IN STOCKHOLDERS’ EQUITY (In thousands except for share amounts) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Capital Loss Deficit Equity Balance as of December 31, 2020 34,026,680 $ 34 $ 742,387 $( 270 ) $( 501,573 ) $ 240,578 Issuance of common stock under at-the-market (ATM) equity offering program, net of issuance costs 11,234,207 11 52,795 — — 52,806 Issuance of common stock under Employee Stock Purchase Plan (ESPP) 88,820 — 258 — — 258 Issuance of common stock for settlement of restricted stock units (RSUs) 347,096 1 ( 1 ) — — — Issuance of common stock upon cashless exercise of pre-funded warrants 2,423,634 2 ( 2 ) — — — Unrealized loss on marketable debt securities — — — ( 149 ) — ( 149 ) Stock-based compensation — — 5,291 — — 5,291 Net loss — — — — ( 129,855 ) ( 129,855 ) Balance as of December 31, 2021 48,120,437 $ 48 $ 800,728 $( 419 ) $( 631,428 ) $ 168,929 Issuance of common stock under ATM equity offering program, net of issuance costs 300,827 1 324 — — 325 Issuance of common stock under ESPP 225,832 — 289 — — 289 Issuance of common stock for settlement of RSUs 247,877 — — — — — Unrealized loss on marketable debt securities — — — ( 384 ) — ( 384 ) Stock-based compensation — — 6,597 — — 6,597 Net loss — — — — ( 93,092 ) ( 93,092 ) Balance as of December 31, 2022 48,894,973 $ 49 $ 807,938 $( 803 ) $( 724,520 ) $ 82,664 See Accompanying Notes to the Consolidated Financial Statements F- 6 ASSEMBLY BIOSCIENCES, INC. CONSOLIDATED STATEM ENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities Net loss $ ( 93,092 ) $ ( 129,855 ) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of goodwill and indefinite-lived intangible asset — 41,638 Depreciation and amortization 498 466 Stock-based compensation 6,593 5,237 Net amortization of investments in marketable debt securities 155 586 Non-cash rent expense 3,505 3,840 Deferred income tax benefit — ( 2,531 ) Loss on disposal of property and equipment — 1,624 Gain on the sale of Microbiome assets — ( 3,000 ) Changes in operating assets and liabilities: Accounts receivable from collaboration ( 608 ) 894 Prepaid expenses and other current assets 1,328 1,109 Other assets 814 4,689 Accounts payable ( 166 ) ( 1,939 ) Accrued research and development expenses ( 278 ) ( 1,044 ) Other accrued expenses 458 ( 5,070 ) Deferred revenue — ( 6,254 ) Operating lease liabilities ( 3,670 ) ( 3,786 ) Net cash used in operating activities ( 84,463 ) ( 93,396 ) Cash flows from investing activities Proceeds from maturities of marketable securities 88,000 175,200 Proceeds from sale of marketable securities 28,825 12,500 Proceeds from the sale of Microbiome assets 1,500 1,500 Purchases of property and equipment ( 102 ) ( 3,096 ) Purchases of marketable securities ( 27,583 ) ( 160,446 ) Proceeds from sale of property and equipment — 857 Net cash provided by investing activities 90,640 26,515 Cash flows from financing activities Proceeds from the issuance of common stock under ATM equity offering program, net of issuance costs 325 52,806 Proceeds from the issuance of common stock under ESPP 289 258 Net cash provided by financing activities 614 53,064 Net increase (decrease) in cash and cash equivalents 6,791 ( 13,817 ) Cash and cash equivalents at the beginning of the period 45,627 59,444 Cash and cash equivalents at the end of the period $ 52,418 $ 45,627 Supplemental non-cash investing and financing activities Operating lease liabilities arising from obtaining ROU assets $ 171 $ 126 Remeasurement of lease liabilities arising from modification of ROU assets $ — $ ( 788 ) Receivable from sale of Microbiome assets included in prepaid expenses and other current assets $ — $ ( 1,500 ) See Accompanying Notes to the Consolidated Financial Statements F- 7 ASSEMBLY BIOSCIENCES, INC. Notes to Consolidated Financial Statements Note 1 - Nature of Business Overview Assembly Biosciences, Inc., together with its subsidiaries (Assembly or the Company), incorporated in Delaware in October 2005, is a biopharmaceutical company advancing clinical candidates for the treatment of chronic hepatitis B virus (HBV) infection, an early-stage development program targeting high-recurrence genital herpes and research programs focused on the discovery of novel antivirals to treat viral diseases, including hepatitis delta virus (HDV), herpes simplex virus type 2 (HSV-2) and transplant related herpesviruses. The Company operates in one segment and is headquartered in South San Francisco, California. Prior to the Company’s wind-down of its Microbiome program in January 2021, the Company also had operations in Connecticut. Liquidity The Company has not derived any revenue from product sales to date and currently has no approved products. Once a product has been developed, it will need to be approved for sale by the U.S. Food and Drug Administration (FDA) or an applicable foreign regulatory agency. Since inception, the Company’s operations have been financed primarily through the sale of equity securities, the proceeds from the exercise of warrants and stock options, the issuance of debt, and upfront payments related to collaboration agreements. The Company has incurred losses from operations since inception and expects to continue to incur substantial losses for the next several years as it continues its product development efforts. Management believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months following the date that these consolidated financial statements are issued. If the Company cannot generate significant cash from its operations, it intends to obtain any additional funding it requires through strategic relationships, public or private equity or debt financings, grants or other arrangements. The Company cannot assure such funding will be available on reasonable terms, if at all. Market volatility, inflation or other factors could also adversely impact the Company’s ability to access capital when and as needed. If the Company is unable to secure additional sources of funding, generate revenue from collaborations, or receive full and timely collections of amounts due, it may be necessary to significantly reduce the current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs, including more costly clinical trials. Note 2 - Summary of Significant Accounting Policies and Recent Accounting Pronouncements Basis of Presentation These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include estimates of costs incurred but not yet invoiced for research and development accruals as well as the estimated fair value of the Company's indefinite-lived intangible asset and the estimated fair value of the Company's reporting unit for purposes of evaluating goodwill impairment, both of which were fully impaired in 2021. The Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions. F- 8 Other Risks and Uncertainties The Company relies on contract research organizations (CROs), including one located in Ukraine which shut down operations due to Russia’s invasion. Though this CRO has resumed operations, the Company has reallocated certain work to other global CROs in case the CRO shuts down operations again. U.S. and global financial markets have experienced volatility and disruption due to other macroeconomic and geopolitical events such as rising inflation, the risk of a recession, the ongoing conflict between Russia and Ukraine, as well as the ongoing impact of the COVID-19 pandemic. The Company cannot predict at this time to what extent, if at all, it and its employees, CROs, vendors and/or collaborators could potentially be negatively impacted by these events. Cash and Cash Equivalents All highly liquid investments, including money market funds, with original maturities of three months or less at the time of purchase are considered to be cash equivalents. All of the Company’s cash equivalents have liquid markets and high credit ratings. The Company maintains its cash in bank deposits and other accounts, the balances of which, at times as of and during the years ended December 31, 2022 and 2021 , exceed federally insured limits. Investments in Marketable Securities The Company invests its excess cash in debt securities with high credit ratings including but not limited to money market funds classified as cash equivalents, asset backed securities, securities issued by the U.S. government and its agencies, corporate debt securities and commercial paper. The Company has designated its investments in marketable securities as available-for-sale and measures these securities at their respective fair values. Marketable securities are classified as short-term or long-term based on the maturity date and their availability to meet current operating requirements. Marketable securities that mature in one year or less from the consolidated balance sheet date are classified as short-term available-for-sale securities, while marketable securities with maturities in one year or beyond one year from the consolidated balance sheet date are classified as long-term. Securities that are classified as available-for-sale are measured at fair value with temporary unrealized gains and losses reported in other comprehensive loss, and as a component of stockholders' equity until their disposition. The Company reviews all available-for-sale securities at each period end to determine if they remain available-for-sale based on their current intent and ability to sell the security if it is required to do so. Realized gains and losses from the sale of marketable securities, if any, are calculated using the specific-identification method. Marketable securities are subject to a periodic impairment review. The Company may recognize an impairment charge when a decline in the fair value of investments below the cost basis is determined to be other-than-temporary. In determining whether a decline in market value is other-than-temporary, various factors are considered, including the cause, duration of time and severity of the impairment, any adverse changes in the investees’ financial condition, and the Company’s intent and ability to hold the security for a period of time sufficient to allow for an anticipated recovery in market value. To date, there have been no declines in value deemed to be other than temporary for any of the Company’s investments in marketable securities. Goodwill and Indefinite-Lived Intangible Asset Prior to their full impairment in 2021, goodwill and indefinite-lived intangible assets were reviewed for impairment at least annually in the fourth quarter, and more frequently if events or other changes in circumstances indicated that the carrying amount of the assets may not have been recoverable. Goodwill The difference between the purchase price and the fair value of assets acquired and liabilities assumed in a business combination is allocated to goodwill. Goodwill was evaluated for impairment on an annual basis as of October 1, and more frequently if indicators were present or changes in circumstances suggested impairment may have existed. In performing each annual impairment assessment and any interim impairment assessment, the Company determined if it should qualitatively assess whether it was more likely than not the fair value of goodwill was less than its carrying amount (the qualitative impairment test). If the Company concluded it was more likely than not the fair value of the F- 9 reporting unit was less than its carrying amount, or elected not to use the qualitative impairment test, a quantitative impairment test was performed. The Company’s annual or interim quantitative impairment testing was performed by comparing the estimated fair value of the reporting unit to its carrying value. An impairment charge was recognized for the amount by which the carrying amount exceeded the reporting unit’s fair value, not to exceed the carrying value of goodwill. Indefinite-Lived Intangible Asset The Company’s indefinite-lived intangible asset consisted of in-process research and development (IPR&D) associated with small molecule core inhibitors that directly target and allosterically inhibit core protein functions associated with HBV which were acquired with the acquisition of Assembly Pharmaceutics, Inc. in 2014. IPR&D represented the fair value assigned to incomplete research projects the Company acquired through a business combination which, at the time of acquisition, had not reached technological feasibility, regardless of whether they had alternative future use. The primary basis for determining the technological feasibility or completion of these projects was obtaining regulatory approval to market the underlying products in an applicable geographic region. The Company classified IPR&D acquired in a business combination as an indefinite-lived intangible asset until the associated research and development efforts were either completed or abandoned. Upon completion of the associated research and development efforts, the Company would perform a final test for impairment and would determine the useful life of the technology and would begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, the Company would write-off the remaining carrying amount of the associated IPR&D intangible asset. Indefinite-lived intangible assets were not amortized, but instead were reviewed for impairment at least annually, or more frequently if events occurred or circumstances changed that would indicate the carrying amount may be impaired. In performing each annual impairment assessment and any interim impairment assessment, the Company determined if it should qualitatively assess whether it was more likely than not the fair value of its IPR&D asset was less than its carrying amount (the qualitative impairment test). If the Company concluded that was the case, or elected not to use the qualitative impairment test, the Company would proceed with quantitatively determining the fair value of the IPR&D asset and compared its fair value to its carrying value to determine the amount of impairment, if any (the quantitative impairment test). In performing the qualitative impairment test, the Company considered the results of the most recent quantitative impairment test and identified the most relevant drivers of the fair value for the IPR&D asset. The most relevant drivers of fair value identified were consistent with the assumptions used in the quantitative estimate of the IPR&D asset. Using these drivers of fair value, the Company identified events and circumstances which may have had an effect on the fair value of the IPR&D asset since the last time the IPR&D’s fair value was quantitatively determined. The Company then weighed these factors to determine and conclude if it was not more likely than not the IPR&D asset was impaired. If it was more likely than not the IPR&D asset was impaired, the Company proceeded with quantitatively determining the fair value of the IPR&D asset. When performing the quantitative impairment test, the Company used the income approach to determine the fair value of its IPR&D asset. This approach calculates fair value by estimating the after-tax cash flows attributable to an in-process project over its useful life and then discounting these after-tax cash flows back to a present value. This estimate included judgmental assumptions regarding the estimates that market participants would make in evaluating the IPR&D asset, including the probability of successfully completing clinical trials and obtaining regulatory approval to market the IPR&D asset, the timing of and the expected costs to complete IPR&D projects, future net cash flows from potential drug sales, which were based on estimates of the sales price of the drug, the size of the patient population and cure rate, the Company's competitive position in the marketplace, and appropriate discount and tax rates. Any F- 10 impairment to be recorded was calculated as the difference between the estimated fair value and the carrying value of the IPR&D asset on the Company’s consolidated balance sheet. Leases All of the Company’s leases are operating leases for facilities and equipment. The Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement is or contains a lease at contract inception. Operating leases with a duration greater than one year are included in operating lease ROU assets, operating lease liabilities - short-term, and operating lease liabilities - long-term in the Company’s consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the expected lease term. Variable lease expenses are recorded when incurred. The Company has elected not to separate lease and non-lease components for its leased assets and accounts for all lease and non-lease components of its agreements as a single lease component. Impairment of Long-Lived Assets The Company monitors the carrying value of long-lived assets, including ROU operating lease assets, for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value. There were no indicators of impairment of long-lived assets during the years ended December 31, 2022 and 2021 . Property and Equipment, Net Property and equipment are stated at cost and consist of lab and office equipment and leasehold improvements. The Company records depreciation under the straight-line method over the estimated useful lives of its property and equipment ranging from three to seven years . Leasehold improvements are amortized over the remaining terms of the respective leases or the estimated useful life of the leasehold improvements, whichever is less. Maintenance and repair costs are expensed as incurred. Fair Value Measurements The Company follows accounting guidance on fair value measurements for financial instruments measured on a recurring basis, as well as for certain assets and liabilities that are initially recorded at their estimated fair values. Fair value is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial instruments: Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments. Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace. Level 3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar F- 11 techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires the Company to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount the Company or holders of the instruments could realize in a current market exchange. The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts which approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable, accounts payable and accrued expenses. The following tables present the fair value of the Company’s financial assets measured at fair value on a recurring basis using the above input categories (in thousands): December 31, 2022 Level 1 Level 2 Level 3 Fair Value Cash equivalents Money market fund $ 49,676 $ — $ — $ 49,676 Total cash equivalents 49,676 — — 49,676 Short-term marketable securities U.S. and foreign corporate debt securities — 18,597 — 18,597 U.S. treasury securities — 11,744 — 11,744 U.S. and foreign commercial paper — 8,851 — 8,851 Total short-term marketable securities — 39,192 — 39,192 Total assets measured at fair value $ 49,676 $ 39,192 $ — $ 88,868 December 31, 2021 Level 1 Level 2 Level 3 Fair Value Cash equivalents Money market fund $ 42,507 $ — $ — $ 42,507 Total cash equivalents 42,507 — — 42,507 Short-term marketable securities U.S. and foreign corporate debt securities — 7,013 — 7,013 Asset-backed securities — 29,059 — 29,059 U.S. and foreign commercial paper — 64,928 — 64,928 Total short-term marketable securities — 101,000 — 101,000 Long-term marketable securities U.S. and foreign corporate debt securities — 19,043 — 19,043 U.S. treasury securities — 8,929 — 8,929 Total long-term marketable securities — 27,972 — 27,972 Total assets measured at fair value $ 42,507 $ 128,972 $ — $ 171,479 F- 12 Money market funds are highly liquid and actively traded marketable securities that generally transact at a stable $1.00 net asset value representing its estimated fair value. The Company estimates the fair value of its U.S. and foreign corporate debt securities, asset backed securities, U.S. treasury securities and U.S. and foreign commercial paper by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs. The Company recognized an impairment charge of $ 41.6 million for its goodwill and indefinite-lived asset in 2021. The Company considered the fair value used to determine the impairment charge to be a Level 3 measurement. See additional discussion relating to the Company’s impairment of goodwill and indefinite-lived asset in Note 6. There have been no transfers between Level 1, Level 2 or Level 3 for any of the periods presented. See Note 3 for further information regarding the carrying value of the Company’s investments in marketable securities. Revenue Recognition and Accounts Receivable from Collaboration The Company analyzes its collaboration arrangements to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, the Company considers whether the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaborative arrangement accounting standard and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of the revenue with contracts with customers accounting standard. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For elements of collaboration arrangements that are not accounted for pursuant to the revenue from contracts with customers accounting standard, an appropriate recognition method is determined and applied consistently, generally by analogy to the revenue from contracts with customers accounting standard. Amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer are presented as collaboration revenue and on a separate line item from revenue recognized from contracts with customers, if any, in the Company’s consolidated statements of operations and comprehensive loss. Under certain collaborative arrangements, the Company has been reimbursed for a portion of its research and development expenses or participates in the cost-sharing of such research and development expenses. Such reimbursements and cost-sharing arrangements are reflected as a reduction of research and development expense in the Company’s consolidated statements of operations and comprehensive loss, as the Company does not consider performing these activities for reimbursement to be a part of its ongoing major or central operations. For arrangements or transactions between arrangement participants determined to be within the scope of the contracts with customers accounting standard, the Company evaluates the term of the arrangement and recognizes revenue when the customer obtains control of promised goods or services in a contract for an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For contracts with customers, the Company applies the following five-step model in order to determine this amount: (1) identification of the promised goods or services in the contract; (2) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (3) measurement of the transaction price, including the constraint on variable consideration; (4) allocation of the transaction price to the performance obligations; and (5) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company has provided standard indemnification and protection of licensed intellectual property for its customer. These provisions are part of assurance that the licenses meet the agreements, representations and are not obligations to provide goods or services. The Company only applies the five-step model to contracts when it is probable the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. As part of the accounting for contracts with customers, the Company must develop assumptions that require judgment to determine the estimated relative standalone selling price (SSP) of each performance obligation identified in the contract. The Company then allocates the total transaction price to each performance obligation based on the SSP of each performance obligation. F- 13 The Company recognizes the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied as revenue. Upfront License Fees If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Development and Regulatory Milestone Payments Depending on facts and circumstances, the Company may record revenues from certain milestones in a reporting period before the milestone is achieved if the Company concludes achievement of the milestone is probable and recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. The Company re-evaluates the probability of achievement of such milestones and any related constraint each reporting period. The Company adjusts its estimate of the overall transaction price, including the amount of collaborative revenue that was recorded, if necessary. Sales-based Milestone and Royalty Payments The Company’s customer may be required to pay the Company sales-based milestone payments or royalties on future sales of commercial products. The Company recognizes revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the Company’s licensed intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate. The Company receives payments from its customer based on billing schedules established in the contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under the arrangement. If the related performance obligation is expected to be satisfied within the next twelve months, these amounts will be classified in current liabilities. The Company recognizes a contract asset relating to its conditional right to consideration that is not subject to a constraint. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. A net contract asset or liability is presented for each contract with a customer. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. At December 31, 2022 and 2021, all accounts receivable from collaboration are deemed collectible. F- 14 Contract Liabilities The following tables present changes in the Company’s contract liabilities (in thousands): Balance at Beginning of Period Additions Deductions Balance at End of Period Year Ended December 31, 2022 Contract liabilities: Deferred revenue $ 2,733 $ — $ — $ 2,733 Balance at Beginning of Period Additions Deductions Balance at End of Period Year Ended December 31, 2021 Contract liabilities: Deferred revenue $ 8,987 $ — $ ( 6,254 ) $ 2,733 Year Ended December 31, 2022 2021 Collaboration revenue recognized in the period from Amounts included in deferred revenue at the beginning of the period $ — $ 6,254 Performance obligations satisfied in previous period $ — $ — Stock-Based Compensation The Company measures stock-based compensation to employees, consultants, Board members, and non-employees at fair value on the grant date of the award. The fair value of RSUs is determined based on the number of shares granted and the quoted market price of the Company’s common stock on the date of grant. If stock-based awards are granted in contemplation of or shortly before a planned release of material nonpublic information, and such information is expected to result in a material increase in the Company’s share price, the Company considers whether an adjustment to the observable market price is required when estimating fair values. Compensation cost is recognized as expense on a straight-line basis over the requisite service period of the award. Stock-based awards with graded vesting schedules are recognized using the accelerated attribution method on a straight-line basis over the requisite service period for each separately vesting portion of the award. For awards that have a performance condition, compensation cost is measured based on the fair value of the award on the grant date, the date performance targets are established, and is expensed over the requisite service period for each separately vesting tranche when achievement of the performance condition becomes probable. The Company assesses the probability of the performance conditions being met on a continuous basis. For awards that have a market condition, compensation cost is measured based on the grant-date fair value of the award and is expensed over the derived service period regardless of whether the underlying market condition is met. Forfeitures are recognized when they occur. The Company estimates the fair value of stock option grants that do not contain market-based vesting conditions using the Black-Scholes option pricing model. The assumptions used in estimating the fair value of these awards, such as expected term, expected dividend yield, volatility and risk-free interest rate, represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The Company uses the Monte-Carlo model to calculate the fair value on the date of grant of awards which contain market-based vesting conditions. This pricing model uses multiple simulations to evaluate the probability of achieving the market condition to calculate the fair value of the awards which includes the recent market price and volatility of the Company's shares. The Company is also required to make estimates as to the probability of achieving the specific performance conditions. If actual results are not consistent with the Company’s assumptions and judgments used in making these estimates, the Company may be required to increase or decrease compensation expense, which could be material to the Company’s consolidated results of operations. Research and Development Expense and Accruals Research and development costs include personnel-related costs, outside contracted services including clinical study costs, facilities costs, fees paid to consultants, milestone payments prior to FDA approval, license fees prior to FDA F- 15 approval, professional services, travel costs, dues and subscriptions, depreciation and materials used in clinical trials and research and development and costs incurred under the Company’s collaboration agreements. Research and development costs are expensed as incurred unless there is an alternative future use in other research and development projects. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Such payments are evaluated for current or long-term classification based on when they will be realized or consumed. The Company records expenses related to clinical studies and manufacturing development activities based on its estimates of the services received and efforts expended pursuant to contracts with multiple contract research organizations and manufacturing vendors that conduct and manage these activities on its behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to the Company’s vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical study milestones. In amortizing or accruing service fees, the Company estimates the time period over which services will be performed, enrollment of subjects, number of sites activated and the level of effort expended in each period. If the actual timing of the performance of services or the level of effort varies from the Company’s estimate, the Company will adjust the accrued or prepaid expense balance accordingly. To date, there have been no material differences from the Company’s estimates to the amounts actually incurred. The Company has entered and may continue to enter into license agreements to access and utilize certain technology. In each case, the Company evaluates if the license agreement results in the acquisition of an asset or a business. To date, none of the Company’s license agreements have been considered to be acquisitions of businesses. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments, are immediately recognized as research and development expense when paid, provided there is no alternative future use of the rights in other research and development projects. These license agreements may also include contingent consideration in the form of cash payments to be made for future milestone events. The Company assesses whether such contingent consideration meets the definition of a derivative and to date the Company has determined that such contingent consideration are not derivatives. Restructuring Charges The Company recognizes restructuring charges related to reorganization plans that have been committed to by management and when liabilities have been incurred. In connection with these activities, the Company records restructuring charges at fair value for (1) contractual employee termination benefits when obligations are associated to services already rendered, rights to such benefits have vested, and payment of benefits is probable and can be reasonably estimated, (2) one-time employee termination benefits when management has committed to a plan of termination, the plan identifies the employees and their expected termination dates, the details of termination benefits are complete, it is unlikely changes to the plan will be made or the plan will be withdrawn and communication to such employees has occurred, and (3) contract termination costs when a contract is terminated before the end of its term. One-time employee termination benefits are recognized in their entirety when communication has occurred, and future services are not required. If future services are required, the costs are recorded ratably over the remaining period of service. Contract termination costs to be incurred over the remaining contract term without economic benefit are recorded in their entirety when the contract is canceled. The recognition of restructuring charges requires the Company to make certain judgments and estimates regarding the nature, timing and amount of costs associated with the reorganization plan. To the extent the Company’s actual results differ from its estimates and assumptions, the Company may be required to revise the estimates of future accrued restructuring liabilities, requiring the recognition of additional restructuring charges or the reduction of accrued restructuring liabilities already recognized. Such changes to previously estimated amounts may be material to the consolidated financial statements. Changes in the estimates of the restructuring charges are recorded in the period the change is determined. During the years ended December 31, 2022 and 2021, changes to previous estimates for restructuring charges were not material. At the end of each reporting period, the Company evaluates the remaining accrued restructuring balances to ensure that no excess accruals are retained, and the utilization of t he provisions are for their intended purpose in accordance with developed restructuring plans. F- 16 For gains and losses on the derecognition of nonfinancial assets the Company determines if a contract exists, identifies the distinct non-financial assets, and determines when control transfers and, therefore, when to derecognize the asset. Additionally, the Company applies the measurement principles of revenue from contracts with customers within U.S. GAAP to determine the amount of consideration to include in the calculation of the gain or loss for the non-financial asset. Any gains or losses have been included within research and development expenses. Variable Interest Entities The Company reviews agreements it enters into with third party entities, pursuant to which it may have a variable interest in the entity, in order to determine if the entity is a variable interest entity (VIE). If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If the Company were to determine it is the primary beneficiary of a VIE, the Company would consolidate the statements of operations and financial condition of the VIE into its consolidated financial statements. The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation event. Income Taxes The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company establishes a valuation allowance if it is more likely than not that the deferred tax assets will not be realized based on an evaluation of objective verifiable evidence. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit. The Company recognizes and measures uncertain tax positions using a two-step approach set forth in authoritative guidance. The first step is to evaluate the tax position taken or expected to be taken by determining whether the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. The provision for income taxes includes the effects of any accruals which the Company believes are appropriate. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. No interest or penalties related to uncertain tax positions has been incurred or accrued for any periods presented. In June 2020, Assembly Bill 85 (A.B. 85) was signed into California law. A.B. 85 provides for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5.0 million of tax per year. A.B. 85 suspends the use of net operating losses for taxable years 2020, 2021 and 2022 for certain taxpayers with taxable income of $1.0 million or more. The carryover period for any net operating losses that are suspended under this provision will be extended. A.B. 85 also requires that business incentive tax credits including carryovers may not reduce the applicable tax by more than $5.0 million for taxable years 2020, 2021 and 2022. On February 9, 2022, Senate Bill No. 113 was enacted that removed the limitations on the use of NOLs and the cap on the business incentive tax credits that were suspended in accordance with AB 85 effective for tax year 2022. In March 2021, the American Rescue Plan (H.R. 1319) was signed into law. This legislation extends and enhances a number of current-law tax incentives for businesses, but also expands the definition of a “covered employee” as defined by Section 162(m)(1) of the Internal Revenue Code. F- 17 Effective January 1, 2022, a provision of the Tax Cuts and Jobs Act (TCJA) took effect creating a significant change to the treatment of research and experimental expenditures under Section 174 of the Internal Revenue Code (Sec. 174 expenses). Historically, businesses have had the option of deducting Sec. 174 expenses in the year incurred or capitalizing and amortizing the costs over five years . The new TCJA provision, however, eliminates this option and will require Sec. 174 expenses associated with research conducted in the United States to be capitalized and amortized over a five-year period. For expenses associated with research outside of the United States, Sec. 174 expenses are required to be capitalized and amortized over a 15 -year period. The A.B. 85, H.R. 1319 and TCJA provision did not have a material impact on the Company’s consolidated financial statements. In August 2022, the Inflation Reduction Act (IRA) was enacted into law. The IRA establishes a 15 % corporate alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1 billion and a 1% excise tax on stock repurchases made by certain publicly traded U.S. corporations. These provisions are effective for tax years beginning after December 31, 2022. The Company does not currently qualify for the corporate alternative minimum tax, and these provisions are not expected to have a material impact to the Company's consolidated financial statements. Net Loss per Share Basic net loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only incurred losses, basic and diluted net loss per share is the same. A reconciliation of the numerators and the denominators of the basic and diluted net loss per common share computations is as follows (in thousands, except per share amounts): Year Ended December 31, 2022 2021 Numerator: Net loss $ ( 93,092 ) $ ( 129,855 ) Denominator: Weighted average common shares and pre-funded warrants outstanding - basic and diluted 48,409,265 43,280,383 Net loss per share - basic and diluted $ ( 1.92 ) $ ( 3.00 ) Securities excluded from the computation of diluted loss from per share because including them would have been antidilutive are as follows: December 31, 2022 2021 Options to purchase common stock 9,090,865 6,161,901 Common stock subject to purchase under ESPP 71,653 78,740 Unvested RSUs 1,699,764 970,339 Total 10,862,282 7,210,980 Comprehensive Loss Comprehensive loss is comprised of net loss and adjustments for the change in unrealized gains and losses on investments in available-for-sale marketable securities. The Company displays comprehensive loss and its components in the consolidated statements of operations and comprehensive loss, net of tax effects if any. F- 18 Concentrations of Risk Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of cash, cash equivalents and marketable securities. The Company holds these investments in highly rated financial institutions, and, by policy, limits the amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Supplier Risk Certain materials and key components the Company utilizes in its operations are obtained through single suppliers. Since the suppliers of key components and materials must be named in a New Drug Application (NDA) filed with the FDA for a product, significant delays can occur if the qualification of a new supplier is required. If delivery of material from the Company’s suppliers were interrupted for any reason, the Company may be unable to supply any of its product candidates for clinical trials. Accounting Pronouncements to Be Adopted In June 2016, the Financial Accounting Standards Board (the FASB) issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. In April, May and November 2019, the FASB issued additional amendments to the new guidance related to transition and clarification. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326) , Derivatives and Hedging (Topic 815) , and Leases (Topic 842): Effective Dates , which deferred the effective date of this standard for all entities except SEC filers that are not smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect ASU 2016-13 to have a material impact on its consolidated financial statements and related disclosures. Note 3 - Investments in Marketable Securities Investments in marketable available-for-sale securities consisted of the following (in thousands): December 31, 2022 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value Cash equivalents Money market fund $ 49,676 $ — $ — $ 49,676 Total cash equivalents 49,676 — — 49,676 Short-term marketable securities U.S. and foreign corporate debt securities 18,903 — ( 306 ) 18,597 U.S. treasury securities 11,968 — ( 224 ) 11,744 U.S. and foreign commercial paper 8,851 — — 8,851 Total short-term marketable securities 39,722 — ( 530 ) 39,192 Total cash equivalents and marketable securities $ 89,398 $ — $ ( 530 ) $ 88,868 F- 19 December 31, 2021 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value Cash equivalents Money market fund $ 42,507 $ — $ — $ 42,507 Total cash equivalents 42,507 — — 42,507 Short-term marketable securities U.S. and foreign corporate debt securities 7,015 — ( 2 ) 7,013 Asset-backed securities 29,097 — ( 38 ) 29,059 U.S. and foreign commercial paper 64,929 — ( 1 ) 64,928 Total short-term marketable securities 101,041 — ( 41 ) 101,000 Long-term marketable securities U.S. and foreign corporate debt securities 19,117 — ( 74 ) 19,043 U.S. treasury securities 8,960 — ( 31 ) 8,929 Total long-term marketable securities 28,077 — ( 105 ) 27,972 Total cash equivalents and marketable securities $ 171,625 $ — $ ( 146 ) $ 171,479 Short-term marketable securities held as of December 31, 2022 and 2021 had contractual maturities of less than one year . Long-term marketable securities held as of December 31, 2021 had contractual maturities of at least one year but less than two years . Realized gains and losses for the years ended December 31, 2022 and 2021 were not material. As of December 31, 2022, investments which were in a continuous unrealized loss position for more than 12 months were determined to be temporary. None of the Company’s investments had been in a continuous unrealized loss position for more than 12 months as of December 31, 2021. The Company determined it has the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity of recovery and that the gross unrealized losses above were caused by changes in interest rates. See Note 2 for further information regarding the fair value of the Company's investments in marketable securities. Note 4 - Property and Equipment, Net Property and equipment, net consists of the following (in thousands): December 31, 2022 2021 Lab equipment 102 18 Office equipment 699 699 Leasehold improvement 1,629 1,629 Total property and equipment 2,430 2,346 Less: Accumulated depreciation ( 1,687 ) ( 1,207 ) Property and equipment, net $ 743 $ 1,139 Depreciation expense was $ 0.5 million for each of the years ended December 31, 2022 and 2021 and was recorded in both research and development expense and general and administrative expense in the consolidated statements of operations and comprehensive loss. F- 20 Note 5 – Other Accrued Expenses Other accrued expenses consist of the following (in thousands): December 31, 2022 2021 Accrued expenses: Accrued compensation $ 6,228 $ 6,426 Accrued restructuring charges 599 — Accrued professional fees and other 490 437 Total accrued expenses $ 7,317 $ 6,863 Note 6 – Goodwill and Indefinite-Lived Intangible Asset Impairment Goodwill In 2021, the Company recognized a full impairment of goodwill after performing a quantitative impairment assessment for its single reporting unit in 2021 due to a sustained decline in its market capitalization, an increase in negative economic outlook for biotech markets and a fourth quarter unfavorable clinical trial result for a competitor’s curative combination therapy for HBV infection. The Company estimated and reconciled the fair value of its reporting unit using both a market approach, utilizing the Company’s market capitalization adjusted for an estimated control premium, and the income approach, discounting future cash flows based on management’s expectations of timelines to complete clinical trials, regulatory and commercial probabilities of technical success as well as future earnings forecast. Based on this analysis, and after completing an impairment assessment of its indefinite-lived and long-lived assets, the Company concluded the fair value of its single reporting unit was less than its carrying value and therefore recognized a goodwill impairment charge of $ 12.6 million during the year ended December 31, 2021. The goodwill impairment charge is reflected in impairment of goodwill and indefinite-lived intangible asset in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2021. Indefinite-Lived Intangible Asset In 2021, the Company recognized a full impairment of its indefinite-lived intangible asset after completing a quantitative impairment test for its IPR&D asset associated with the Assembly Pharmaceuticals, Inc. acquisition prior to the goodwill impairment test. The Company utilized the discounted cash flow model of the income approach and determined the carrying value of its IPR&D asset was fully impaired resulting in an impairment charge of $ 29.0 million during the year ended December 31, 2021. This was primarily driven by a higher discount rate applied to future cash flows based on a market participant’s view of increased risk associated with a negative economic outlook for biotech markets and a fourth quarter unfavorable clinical trial result for a competitor’s curative combination therapy for HBV infection. More significant assumptions inherent in the development of the model included the estimated annual cash flows, particularly net revenues, the appropriate discount rate to select in order to measure the risk inherent in the future cash flows, cost to complete the IPR&D project as well as other factors. The impairment charge recorded is reflected in impairment of goodwill and indefinite-lived intangible asset in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2021. Note 7 – Restructurings In December 2020, the Company and its Board of Directors approved the wind-down of its Microbiome program, which was completed in 2021. The Company incurred cumulative restructuring costs of $ 4.3 million in connection with the wind-down of its Microbiome program, $ 3.2 million of which relate to asset impairment and other costs and $ 1.1 million of which relate to employee severance and related benefits. In July 2022, the Company and its Board of Directors approved a strategic plan to align with its refocused pipeline on its next generation core inhibitors and research programs and reduced its workforce by approximately 30 %. The Company expects to incur total restructuring charges of $ 1.1 million. Restructuring charges consist solely of employee severance and related benefits which include $ 1.0 million in severance payments to executive officers impacted by the restructuring, $ 0.8 million in one-time termination severance payments and other employee-related costs associated with the restructuring and a reversal of $ 0.7 million for previously recognized stock-based compensation F- 21 expense related to forfeited awards based on the Company's policy of recognizing stock-based awards with graded vesting schedules using an accelerated attribution method on a straight-line basis over the requisite service period for each separately vesting portion of the award and to recognize forfeitures when they occur. The following table presents where the restructuring charges were recognized on the Company's consolidated statements of operations and comprehensive loss (in thousands): Year Ended December 31, 2022 2021 Research and development $ 869 $ ( 1,625 ) General and administrative 228 277 Total $ 1,097 $ ( 1,348 ) The following table presents the activity in accrued restructuring charges, included as a component of other accrued expenses on the Company's consolidated balance sheet, during the period (in thousands): Employee Severance and Related Benefits Asset Impairment and Other Costs Total Accrued Restructuring Charges Accrued balance as of December 31, 2020 $ 4,164 $ — $ 4,164 Costs incurred — 1,611 1,611 Reductions for cash payments ( 4,164 ) ( 1,611 ) ( 5,775 ) Accrued balance as of December 31, 2021 $ — $ — $ — Costs incurred 1,879 — 1,879 Reductions for cash payments ( 1,280 ) — ( 1,280 ) Accrued balance as of December 31, 2022 $ 599 $ — $ 599 F- 22 The Company expects the accrued restructuring charges to be fully paid by mid-2023. Microbiome Purchase Agreement In December 2021, the Company entered into an asset purchase agreement (the Microbiome Purchase Agreement) with a third party pursuant to which the Company sold know-how, patents, materials and regulatory filings for the Company’s Microbiome program. The sale included ABI-M201 (M201), which had been the Company’s lead candidate in its Microbiome program. As consideration for the sale, the Company was entitled to receive $ 3.0 million, of which $ 1.5 million was received in 2021 and the remaining $ 1.5 million was received in 2022. The Company is also entitled to receive a $ 10.0 million milestone payment upon the achievement of a regulatory approval milestone as defined in the purchase agreement. The Microbiome Purchase Agreement is within the scope of gains and losses from the derecognition of nonfinancial assets guidance since the Company had previously wound-down the Microbiome program, M201 was no longer a part of the Company’s ongoing major or central operations. The Company determined all assets sold under the Microbiome Purchase Agreement represent one distinct nonfinancial asset as individually, they do not have standalone value. The transaction price at the inception of the agreement was limited to the $ 3.0 million upfront payments. The variable consideration relating to the $ 10.0 million milestone has not been included in the transaction price as it was fully constrained as of December 31, 2022 and 2021 . As part of the Company’s evaluation of the development milestone constraint, it determined the achievement of the milestone is contingent upon success in future clinical studies and regulatory approvals which are not within its control and uncertain at this stage. The assets sold had no carrying value and the full $ 3.0 million transaction price resulted in the recognition of a gain upon the transfer of control of the assets sold in the year ended December 31, 2021 . The $ 3.0 million gain is included as a reduction of research and development expenses in the Company’s consolidated statements of operations and comprehensive loss for the year ended December 31, 2021. The $ 1.5 million due as of December 31, 2021 was included in prepaid expenses and other current assets on the Company’s consolidated balance sheet. Note 8 - Stockholders’ Equity The Company is authorized to issue 5,000,000 shares of preferred stock as of December 31, 2022 and 2021. As of December 31, 2022 and 2021 , no shares of preferred stock were issued and outstanding. In May 2022, the Company's stockholders approved the Sixth Amended and Restated Certificate of Incorporation, which increased the authorized number of shares of common stock from 100,000,000 to 150,000,000 . Sale of Common Stock In August 2020, the Company filed a shelf registration statement on Form S-3 with the SEC, File No. 333-248469, that became effective on September 4, 2020 (the 2020 Registration Statement). The Company may from time to time sell any combination of the securities described in the 2020 Registration Statement in one or more offerings up to an aggregate offering price of $ 300.0 million. In connection with the filing of the 2020 Registration Statement, the Company entered into a sales agreement under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $ 100.0 million through “at-the-market” offerings (2020 ATM), which shares are included in the $ 300.0 million of securities registered pursuant to the 2020 Registration Statement. During the year ended December 31, 2021, the Company issued and sold 11,234,207 shares of common stock under the 2020 ATM, for which the Company received net proceeds of $ 52.8 million , after deducting commissions, fees and expenses. During the year ended December 31, 2022, the Company issued and sold 300,827 shares of common stock under the 2020 ATM, for which the Company received net proceeds of $ 0.3 million , after deducting commissions, fees and expenses. Common Stock Warrants In December 2019, the Company sold to various investors an aggregate of 6,287,878 shares of common stock as well as pre-funded warrants to purchase 2,424,242 shares of common stock. The pre-funded warrants were immediately exercisable upon issuance at an exercise price of $ 0.001 per share and were recorded at the issuance date using a relative fair value allocation method as a component of permanent stockholders' equity within additional paid-in capital. During the year ended December 31, 2021, all 2,424,242 pre-funded warrants were exercised through a cashless exercise, resulting in the issuance of 2,423,634 shares of the Company’s common stock. F- 23 Note 9 - Stock-Based Compensation Equity Incentive Plans In May 2021, the Company’s stockholders approved an amendment to the 2018 Stock Incentive Plan (the 2018 Plan) that increased the aggregate number of shares of common stock reserved under the 2018 Plan to 6,600,000 and to the Assembly Biosciences, Inc. Employee Stock Purchase Plan (the 2018 ESPP) that, among other things, increased the number of shares of common stock reserved to an aggregate of 1,300,000 . In May 2022, the Company’s stockholders approved an amendment to the 2018 Plan that increased the aggregate number of shares of common stock reserved under the 2018 Plan to 8,600,000 . As of December 31, 2022, the Company had awards outstanding under the following shareholder approved plans: 2010 Equity Incentive Plan (the 2010 Plan), which has been frozen; the Amended and Restated 2014 Stock Incentive Plan (the 2014 Plan); and the 2018 Plan. Shares of common stock underlying awards that are forfeited under the 2010 Plan on or after June 2, 2016 will become available for issuance under the 2014 Plan. As of December 31, 2022, the Company also had awards outstanding under the Assembly Biosciences, Inc. 2017 Inducement Award Plan, the 2019 Inducement Award Plan and the Assembly Biosciences, Inc. 2020 Inducement Award Plan. The Company issues new shares of common stock to settle options exercised or vested RSUs. The Company also issues new shares of common stock in connection with purchases of shares of common stock by eligible employees under the Company’s 2018 ESPP. Stock Plan Activity Stock Options The following table summarizes the stock option activity and related information for 2022: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (Years) Total Intrinsic Value (in thousands) Outstanding as of December 31, 2021 6,161,901 $ 11.77 6.4 $ 53 Granted 4,087,350 2.09 Forfeited ( 1,158,386 ) 14.43 Outstanding as of December 31, 2022 9,090,865 $ 7.08 7.1 $ — Options vested and exercisable as of December 31, 2022 4,262,287 $ 11.32 4.9 $ — The weighted-average grant-date fair value of options granted was $ 1.48 and $ 3.05 during the years ended December 31, 2022 and 2021 , respectively. There were no options exercised in 2022 or 2021. RSUs The following table summarizes RSU activity and related information for 2022: Number of RSUs Weighted Average Fair Value Per RSU at Grant Price Nonvested as of December 31, 2021 970,339 $ 7.04 Granted 1,255,275 2.06 Vested ( 249,376 ) 8.88 Forfeited ( 276,474 ) 5.26 Nonvested as of December 31, 2022 1,699,764 $ 3.39 F- 24 The total fair value of RSUs vested and settled during 2022 and 2021 was $ 2.2 million and $ 3.7 million , respectively. The total intrinsic value of RSUs vested and settled during 2022 and 2021 was $ 0.5 million and $ 1.4 million , respectively. In September 2019, the Company granted 100,000 RSUs with performance-based vesting conditions to its then-chief executive officer. In 2021, 50,000 of these awards were forfeited back to the Company due to the expiration of the time period to complete certain performance conditions. In 2022, the remaining 50,000 awards were forfeited back to the Company due to the expiration of the time period to complete the remaining performance conditions. No stock based compensation expense was ever recognized for these awards as achievement of the performance conditions was never deemed probable. In July 2021, the Company granted a total of 324,214 RSUs with performance-based vesting conditions upon the achievement of clinical milestones to the majority of employees, including executive officers. The awards had a grant date fair value of $ 1.2 million and vest upon performance conditions which were deemed probable of being met as of December 31, 2022. Accordingly, the Company recognized a cumulative catch-up adjustment to stock-based compensation expense of $ 0.7 million for the year ended December 31, 2022 . There was no stock-based compensation expense recognized for these RSUs during the year ended December 31, 2021. In March 2022, the Company granted 255,000 RSUs with market-based vesting conditions to members of management, including its executive officers. The awards had a grant date fair value of $ 0.4 million and are being recognized over the derived service period of 1.5 years and vest upon the achievement of certain market-based conditions which have not been achieved as of December 31, 2022. The Company recognized stock-based compensation expense of $ 0.2 million for these RSUs for the year ended December 31, 2022. In August 2022, the Company granted 525,000 RSUs with performance-based vesting conditions upon the achievement of clinical milestones to its executive officers. The awards had a grant date fair value of $ 1.1 million. Some of the performance conditions were deemed probable of being met as of December 31, 2022, and the Company recognized stock-based compensation expense of $ 0.1 million for these awards for the year ended December 31, 2022 . No stock based-compensation expense was recognized for the awards with performance conditions not yet deemed probable of being met as of December 31, 2022. Employee Stock Purchase Plan The 2018 ESPP provides for the purchase by employees of up to an aggregate of 1,300,000 shares of the Company’s common stock at a discount to the market price. Eligible employee may participate through payroll deductions of up to 15 % of such employee’s compensation for each pay period subject to annual statutory limits and the 2018 ESPP’s limit, which the Company’s stockholders approved in May 2021 to increase from 1,000 to 2,500 shares of common stock per offering. Eligible employees can purchase the Company’s common stock at the end of a predetermined offering period at 85 % of the lower of the fair market value at the beginning or end of the offering period. Under the 2018 ESPP, the offering periods end on the last business day occurring on or before May 14 or November 14. The ESPP is compensatory and results in stock-based compensation expense. In May and November 2021, employees purchased 42,803 and 46,017 shares of common stock, respectively, under the 2018 ESPP. In May and November 2022, employees purchased 134,888 and 90,944 shares of common stock, respectively, under the 2018 ESPP. As of December 31, 2022, 817,683 shares of common stock are available for future sale under the Company’s 2018 ESPP. Stock-based compensation expense recorded in connection with the 2018 ESPP was $ 0.1 million for both the years ended December 31, 2022 and 2021. F- 25 Valuation Assumptions The Company used the Black-Scholes option-pricing model for determining the estimated fair value and stock-based compensation related to stock options and ESPP purchase rights. A summary of the assumptions used to estimate the fair values of stock options grants for the years presented is as follows: Year Ended December 31, 2022 2021 Exercise price $ 1.53 - $ 2.45 $ 2.24 - $ 5.79 Expected volatility 78.49 % - 81.72 % 79.74 % - 91.18 % Risk-free rate 1.41 % - 4.15 % 0.50 % - 1.37 % Expected term (years) 5.5 - 7.5 5.5 - 7.5 Expected dividend yield 0 % 0 % The risk-free interest rate assumption was based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the stock option being valued. The expected dividend yield was zero as the Company currently does not intend to pay dividends in the foreseeable future. The weighted average expected term of options was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation due to the Company’s limited history of relevant stock option exercise activity. The expected volatility was calculated based on the Company’s historical stock prices. The fair value of ESPP purchase rights and stock appreciation rights were not material for any period presented. Stock-Based Compensation Expense The Company recognized stock-based compensation expense included in the consolidated statement of operations and comprehensive loss for the years presented (in thousands): Year Ended December 31, 2022 2021 Research and development $ 3,024 $ 548 (1) General and administrative 3,569 4,689 Total stock-based compensation expense $ 6,593 $ 5,237 (1) Includes the reversal of previously recognized stock-based compensation expense of $ 4.8 million related to forfeited awards of terminated employees, $ 2.7 million of which resulted from the wind-down of the Company’s Microbiome program in January 2021. As of December 31, 2022, there was $ 7.7 million of total unrecognized stock-based compensation related to outstanding equity awards which is expected to be recognized over a weighted average remaining amortization period of 1.6 years. Note 10 - Collaboration Agreements BeiGene Agreement In July 2020, the Company and BeiGene, Ltd. (BeiGene) entered into a Collaboration Agreement (the BeiGene Agreement) to develop and commercialize the Company’s novel core inhibitor product candidates vebicorvir (VBR), ABI-H2158 (2158) and ABI-H3733 (3733) for chronic HBV infection (the Licensed Product Candidates) in the People’s Republic of China, Hong Kong, Taiwan and Macau (the Territory). Under the agreement, the Company and BeiGene are collaborating on certain global clinical studies and both the Company and BeiGene will independently conduct other clinical studies in their own respective territories. BeiGene agreed to pay all development and regulatory costs for the Licensed Product Candidates in the Territory up to an aggregate of $ 45.0 million. Development and regulatory costs for the Licensed Product Candidates for the Territory in excess of $ 45.0 million will be shared equally by the Company and BeiGene. If the Company conducts F- 26 certain ancillary trials outside of the plan to develop these candidates in the Territory, BeiGene may elect to obtain access to the know-how and clinical data resulting for such ancillary trials and shall reimburse the Company proportionally for the Territory of the costs of such trials. Activities under the BeiGene Agreement will be governed by a joint steering committee (JSC) consisting of equal representatives from each party to the agreement. All decisions of the JSC are to be made by consensus with final decision-making authority granted to each party based on key areas of the collaboration for which they are responsible. During the term of the BeiGene Agreement, neither party will commercialize any competing products in the Territory. The Company will be responsible for manufacturing and supply of the candidates to be used in and outside of the Territory, although the parties may approve BeiGene to take on some or all of the commercial supply activities of the applicable Licensed Products in the Territory. The Company is not obligated to perform pre-phase 3 clinical trial development work outside the Territory but must provide BeiGene pre-Phase 3 clinical trial know-how and development results on the Licensed Product Candidates if and when such development efforts are completed. BeiGene may terminate the BeiGene Agreement for convenience at any time upon 90 days’ advance written notice to Assembly. Such a termination would result in the Company regaining all rights to the Licensed Product Candidates in the Territory. The BeiGene Agreement also contains customary provisions for termination by either party, including in the event of breach of the BeiGene Agreement, subject to cure. Pursuant to the terms of the BeiGene Agreement, the Company received an upfront cash payment of $ 40.0 million from BeiGene for the delivery of exclusive, royalty-bearing licenses to develop and commercialize the Licensed Product Candidates in the Territory, and the Company was eligible to receive up to approximately $ 500.0 million in cash milestone payments, comprised of up to $ 113.8 million for development and regulatory milestones and up to $ 385.0 million in net sales milestones. In addition, the Company is eligible to receive tiered royalties at percentages ranging from the mid-teens to the low thirties of net sales. In September 2021, the Company discontinued development of 2158 following the observation of elevated alanine transaminase levels in the Phase 2 clinical study consistent with drug-induced hepatotoxicity, and in July 2022, the Company discontinued clinical development of VBR because it did not achieve functional cure or finite treatment in its two- and three-drug combination studies. Due to the discontinuation of development of VBR and 2158, the maximum cash milestone payments the Company is eligible to receive for 3733 is $ 285.0 million, comprised of up to $ 65.0 million for development and regulatory milestones and up to $ 220.0 million in net sales milestones. The BeiGene Agreement is within the scope of the collaborative arrangements guidance as both parties are active participants and are exposed to significant risks and rewards dependent on the success of commercializing the Licensed Product Candidates in the Territory but that the unit of account related to the delivery of Licensed Product Candidates is within the scope of the contract with customers guidance. The remaining units of account related to participation on the JSC and subcommittees, clinical supply and other in Territory and global development activities (the Collaboration Activities) are within the scope of the collaborative arrangements guidance. Commercial supply will be evaluated as a separate contract when the agreement is executed and a purchase order is received from BeiGene. The Company identified the following material promises related to the contract with customers unit of account under the BeiGene Agreement: 1) the transfer of the VBR License, 2) the transfer of the 2158 License, and 3) the transfer of the 3733 License. The Company concluded each of these licenses to be functional as they have significant standalone functionality and grants BeiGene the right to use the Company’s intellectual property as it exists on the effective date of the license. The 2158 and 3733 Licenses have a continuing technology transfer obligation that is considered to be an attribute of these licenses. The agreed upon prices for the clinical and commercial supply of the Licensed Product Candidates to BeiGene do not represent material rights, and therefore are not performance obligations, and such pricing on an aggregate basis represents the SSP an entity would typically pay for such a product in that region or market. There are also no minimum purchase commitments. The Company estimated the SSP of the licenses using an income-based valuation approach for the estimated value a licensor of the compounds would receive considering the stage of the compound’s development. The Company believes a change in the assumptions used to determine its best estimate of SSP would not have a significant value or significant impact on the allocation of consideration received. The transaction price at the inception of the agreement was limited to the $ 40.0 million upfront payment. The variable consideration related to the remaining development and commercialization milestone payments has not been included in the transaction price as these were fully constrained as of December 31, 2022 and 2021. As part of the Company’s F- 27 evaluation of the development and commercialization milestones constraint, the Company determined the achievement of such milestones are contingent upon success in future clinical trials and regulatory approvals which are not within its control and uncertain at this stage. Any variable consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the Licensed Product Candidates granted to BeiGene. The Company will reevaluate the transaction price in each reporting period as uncertain events are resolved or other changes in circumstances occur. Following the discontinuation of development of 2158 in September 2021, the obligation related to the technology transfer associated with the license of 2158 was considered to be complete. Accordingly, the Company recognized $ 6.3 million as collaboration revenue for the amount allocated to 2158 during the year ended December 31, 2021. No revenue was recognized during the year ended December 31, 2022. As of December 31, 2022 and 2021, the only remaining performance obligation under the BeiGene Agreement not considered to be complete is the transfer of the 3733 License. The transaction price allocated to 3733 of $ 2.7 million was recorded as a long-term deferred revenue contract liability on the consolidated balance sheet as of December 31, 2022 and 2021. Revenue for the remaining performance obligation will be recognized when the Company provides pre-Phase 3 clinical study know-how and development results for 3733 to BeiGene or a termination of the BeiGene Agreement for 3733. Payments to, or reimbursements from, BeiGene related to the Collaboration Activities will be accounted for as an increase to or reduction of research and development expenses when incurred or realized, respectively. During the years ended December 31, 2022 and 2021 , the Company did no t recognize any increase or reduction of research and development expense under the BeiGene Agreement. The Company incurred $ 3.5 million in incremental costs of obtaining the BeiGene Agreement. These contract costs have been capitalized and are being recognized consistent with the pattern of recognition of revenue associated with the Licensed Product Candidates. As of both December 31, 2022 and 2021, the remaining unamortized contract costs are $ 0.2 million and are included in other assets on the consolidated balance sheet. Arbutus Biopharma Agreement In August 2020, the Company and Arbutus Biopharma Corporation (Arbutus Biopharma) entered into a Clinical Trial Collaboration Agreement (Arbutus Biopharma Agreement) to conduct a randomized, multi-center, open-label Phase 2 clinical trial to explore the safety, pharmacokinetics and antiviral activity of the triple combination of VBR, AB-729 and an NrtI compared to the double combinations of VBR with an NrtI and AB-729 with an NrtI. Under the Arbutus Biopharma Agreement, Assembly and Arbutus Biopharma share responsibility for the costs of the trial equally, excluding manufacturing supply which are the burden of each company to supply their respective drugs, VBR and AB-729. Assembly is responsible for conducting this clinical trial with Arbutus reimbursing Assembly its share of expenses. The Arbutus Biopharma Agreement is within the scope of the collaborative arrangements guidance as both parties are active participants and are exposed to significant risks and rewards dependent on the success of the collaborative activity. Arbutus is not a customer as it does not obtain an output from the collaborative activities as they were not provided an exclusive license to VBR or the ability to manufacture VBR, and the Company does not consider performing such collaborative activities to be a part of its ongoing activities. The revenue from contracts with customers guidance was considered by analogy in determining the unit of account, and the recognition and measurement of such unit of account for collaborative activities under the Arbutus Biopharma Agreement. The Company concluded there is one activity, to run an open-label Phase 2 clinical trial, which is akin to a performance obligation related to collaborative activities. Reimbursements and cost-sharing portions from Arbutus Biopharma are reflected as a reduction of research and development expense when realized in the Company’s consolidated statements of operations, as the Company does not consider performing research and development services for reimbursement to be a part of its ongoing major or central operations. The Company recognized a reduction of research and development expense of $ 2.7 million and $ 2.0 million under the Arbutus Biopharma Agreement during the years ended December 31, 2022 and 2021, respectively. In February 2023, in consultation with Arbutus Biopharma, the companies decided to terminate the Phase 2 clinical trial early, at the end of the 48-week on-treatment period, and are in the process of closing the study. F- 28 Antios Agreement In July 2021, the Company and Antios Therapeutics, Inc. (Antios) entered into a Clinical Trial Collaboration Agreement (the Antios Agreement) to collaborate on a triple combination therapy using VBR and Antios’s active site polymerase inhibitor nucleotide ATI-2173 for the treatment of HBV. Assembly and Antios were individually responsible for the study’s manufacturing costs but equally shared the remaining costs of the study. Antios was responsible for conducting the clinical trial with Assembly reimbursing Antios its share of expenses. In May 2022, the Company was notified by Antios that ATI-2173 had been placed on clinical hold by the U.S. Food and Drug Administration following submission of a safety report involving a patient who received a triple combination of VBR, ATI-2173 and a nucleos(t)ide analog reverse transcriptase inhibitor. Due to the clinical hold, the Company terminated the Antios Agreement effective May 2022. During the year ended December 31, 2022, the Company incurred $ 0.4 million in research and development expenses under the Antios Agreement. There were no costs incurred during the year ended December 31, 2021. Note 11 – Milestones and Research Agreements HBV Research Agreement with Indiana University Since September 2013, the Company has been party to an exclusive License Agreement dated September 3, 2013 with Indiana University Research and Technology Corporation (IURTC) from whom it has licensed aspects of the Company’s HBV program held by IURTC. The license agreement requires the Company to make milestone payments based upon the successful accomplishment of clinical and regulatory milestones. The aggregate amount of all performance milestone payments under the IURTC license agreement, should all milestones through development be met, is $ 0.8 million, with a portion related to the first performance milestone having been paid. The Company is obligated to pay IURTC royalty payments based on net sales of the licensed technology as well as a portion of any sublicensing revenue Assembly receives. The Company is also required to pay diligence maintenance fees each year to the extent that the royalty, sublicensing, and milestone payments to IURTC are less than such fees for that year. The Company paid IURTC $ 0.1 million in diligence maintenance fees during the year ended December 31, 2022 which are included in research and development expenses in the consolidated statements of operations and comprehensive loss. No amounts were paid during the year ended December 31, 2021. Door Pharma Agreement In November 2020, the Company and Door Pharmaceuticals, LLC (Door Pharma) entered into an exclusive, two-year Collaboration Agreement and Sublicense Agreement (collectively, the Door Pharma Agreement) focused on the development of a novel class of HBV inhibitors. The Company terminated the Door Pharma Agreement in May 2022, which became effective September 2022, to focus its resources on its other internal HBV programs and its programs targeting other viruses. Under the terms of the Door Pharma Agreement, the Company was obligated to continue to reimburse Door Pharma for certain research and development costs through September 2022 following which such reimbursements ceased. Under the consolidation accounting standard, the Company determined that Door Pharma was a VIE. The Company did not have the power to direct the activities that most significantly affected the economic performance of Door Pharma and as such the Company was not the primary beneficiary and consolidation was not required prior to the termination of the agreement in May 2022. During the years ended December 31, 2022 and 2021, the Company incurred research and development funding of $ 1.6 million and $ 1.8 million , respectively. Additionally, a performance milestone totaling $ 0.2 million was determined to have occurred under this agreement and was paid during the year ended December 31, 2021. F- 29 Note 12 - Income Taxes Income tax benefit is as follows (in thousands): As of December 31, 2022 2021 Federal: Current $ — $ — Deferred — 1,160 Foreign — — — 1,160 State: Current — — Deferred — 1,371 Foreign — — — 1,371 Income tax benefit $ — $ 2,531 During the year ended December 31, 2021, the Company recognized a $ 2.5 million income tax benefit, with a corresponding reduction to the Company’s valuation allowance, due to the reversal of the IPR&D deferred tax liability recorded in connection with the merger with Assembly Pharmaceuticals, Inc. in 2014. The impairment of the Company's IPR&D in 2021 resulted in the deferred tax liability related to this indefinite-lived intangible asset no longer being considered a source of income when assessing the realizability of the Company’s deferred tax assets. The effective tax rate of the Company's provision for income taxes differs from the federal statutory rate as follows: As of December 31, 2022 2021 Statutory federal income tax rate 21.0 % 21.0 % State taxes, net of federal tax benefit 8.3 5.8 Research and development tax credits 3.3 2.3 Return to provision adjustments — ( 0.2 ) Uncertain tax positions ( 0.7 ) ( 0.5 ) Impairment of goodwill — ( 2.0 ) Stock-based compensation ( 2.9 ) ( 4.5 ) Other ( 0.2 ) ( 0.6 ) Change in valuation allowance ( 28.8 ) ( 19.4 ) Income taxes benefit 0.0 % 1.9 % F- 30 Significant components of the Company’s deferred taxes are as follows (in thousands): As of December 31, 2022 2021 Deferred tax assets: Federal and state-operating loss carryforwards $ 144,165 $ 133,671 Stock-based compensation 9,919 11,082 Capitalized research expense 15,004 — Operating lease liabilities 880 1,656 Research and development credits 13,471 11,106 Other 1,372 1,125 Total deferred tax assets 184,811 158,640 Valuation allowance ( 184,000 ) ( 157,095 ) Deferred tax asset, net of valuation allowance $ 811 $ 1,545 Deferred tax liabilities: Operating lease right-of-use assets $ ( 811 ) $ ( 1,545 ) Total deferred tax liabilities ( 811 ) ( 1,545 ) Net deferred tax liability $ — $ — The Company maintains a valuation allowance on deferred tax assets due to the uncertainty regarding the ability to utilize these deferred tax assets in the future. The valuation allowance increased by $ 26.9 million and $ 25.8 million for the years ended December 31, 2022 and 2021, respectively, primarily due to an increase in the Company’s federal and state-operating loss carryforwards. Net operating loss and tax credit carryforwards as of December 31, 2022 are as follows (in thousands): Amount Expiration Years Net operating losses, federal (post December 31, 2017) $ 370,940 Indefinite Net operating losses, federal (pre January 1, 2018) 123,552 2027 - 2037 Net operating loss, state (Indefinite) 880 Indefinite Net operating loss, state (Definite) 625,852 2031 - 2041 Research and development tax credits, federal 12,952 2028 - 2041 Research and development tax credits, state 5,247 Indefinite Pursuant to Internal Revenue Code (IRC), Section 382 and 383, use of the Company’s U.S. federal and state net operating loss and research and development income tax credit carryforwards may be limited in the event of a cumulative change in ownership of more than 50.0% within a three-year period. The Company has performed an ownership change study through December 31, 2021 and has determined that a “change in ownership” as defined by IRC Section 382 and the rules and regulations promulgated thereunder, did occur in December 2010, January 2013 and October 2014. The Company has adjusted its net operating loss carryovers to appropriately reflect any attributes which will expire due to the limitation. The Company has not performed any additional analysis for IRC Sections 382 and 383 and there is a risk that additional changes in ownership could have occurred since December 31, 2021. If a change in ownership were to have occurred, additional net operating loss and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. The following table summarizes activity related to the Company’s gross unrecognized tax benefits (in thousands): As of December 31, 2022 2021 Balances as of beginning of year $ 3,237 $ 2,655 Increases related to prior year tax positions — 1 Decreases related to prior year tax positions ( 36 ) ( 82 ) Increases related to current year tax positions 672 663 Balances as of end of year $ 3,873 $ 3,237 F- 31 The unrecognized tax benefits, if recognized, would not have an impact on the Company’s effective tax rate assuming the Company continues to maintain a full valuation allowance position. Based on prior year’s operations and experience, the Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next year for unexpected or unusual items for items that arise in the ordinary course of business. In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income tax expense. The Company files income tax returns in the U.S. federal, California and other state and foreign jurisdictions and is not currently under examination by federal, state, or local taxing authorities for any open tax years. Due to net operating loss carryforwards, all years effectively remain open for income tax examination by tax authorities in the U.S. and states in which the Company files tax returns. Note 13 - Leases Operating Leases The Company leases office and laboratory space in South San Francisco, California under a sub-sublease that expires in December 2023. The sub-sublease contains scheduled rent increases over the lease term. The Company also leases office space in Carmel, Indiana under a lease agreement that expires in August 2023. In February 2021, the Company subleased substantially all of the office space under lease in Carmel, Indiana for the remainder of its term. The Company also leased office and laboratory space in Groton, Connecticut that supported the Microbiome program under a lease that expired in June 2021. Due to the wind-down of the Microbiome program, the lease was not renewed. The Company’s China subsidiary leased office space in Shanghai, which the Company let expire in March 2021. The Company also leased office space in Beijing under a lease agreement which the Company let expire in December 2021. The Company’s China subsidiary leases registrational offices in Shanghai under a lease which expires in May 2023 and in Beijing which is month-to-month. Certain lease contracts contain renewal clauses that the Company assesses on a case-by-case basis. The Company also leases certain laboratory equipment accounted for as operating leases expiring at various dates, with the final lease expiring in 2025. In February 2021, the Company purchased substantially all of the leased equipment used for the Microbiome program from its leasing agency and sold this equipment to third parties. When the Company cannot determine the implicit rate in its leasing arrangements, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. At December 31, 2022, the Company had operating lease liabilities of $ 3.5 million and ROU assets of $ 3.2 million . The following summarizes quantitative information about the Company’s operating leases (in thousands): Year Ended December 31, 2022 2021 Lease cost Operating lease cost $ 3,505 $ 3,840 Short-term lease cost 23 268 Variable lease cost 1,573 1,317 Sublease income ( 153 ) ( 142 ) Total lease cost, net $ 4,948 $ 5,283 Year Ended December 31, 2022 2021 Operating cash flows from operating leases $ 3,670 $ 3,786 ROU assets exchanged for new operating lease liabilities $ 171 $ 126 As of December 31, 2022, the weighted-average remaining lease term for operating leases was 1.0 years and the weighted-average discount rate for operating leases was 9.8 % . F- 32 As of December 31, 2022, the maturities of the Company’s operating lease liabilities were as follows (in thousands): 2023 $ 3,554 2024 73 2025 37 Total 3,664 Less: present value discount ( 199 ) Operating lease liabilities $ 3,465 Note 14 - Employee Benefit Plan In January 2018, the Company established a defined contribution 401(k) plan (the Plan) for all employees who are at least 21 years of age. Employees are eligible to participate in the Plan upon commencement of employment. Under the terms of the Plan, employees may make voluntary contributions as a percentage of compensation. The Plan also permits the Company to make discretionary matching contributions. During the years ended December 31, 2022 and 2021, the Company made discretionary matching contributions of $ 0.8 million and $ 0.9 million , respectively. Note 15 - Subsequent Event Subsequent to December 31, 2022, the Company sold 3,050,446 shares of common stock through its 2020 ATM resulting in net proceeds of $ 4.5 million. The Company maintains its U.S. cash in deposit accounts with Silicon Valley Bank (SVB). On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. On March 12, 2023, the U.S. Department of the Treasury, Federal Reserve and FDIC announced SVB depositors will have access to all of their money starting March 13, 2023 through a newly created, full-service FDIC-operated ‘bridge bank’ in an action designed to fully protect all depositors of SVB. Additionally, all of the Company’s cash equivalents and marketable securities are held by a separate custodian bank. Accordingly, the Company does not anticipate the closure of SVB to have a material impact on its financial condition or operations. F- 33