ASSEMBLY BIOSCIENCES, INC. 10-Q

Item 1. Financial Statements ASSEMBLY BIOSCIENCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except for share amounts and par value) June 30, December 31, 2020 2019 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 96,709 $ 46,732 Marketable securities 130,005 227,311 Accounts receivable from collaboration 3,315 3,374 Prepaid expenses and other current assets 5,059 5,363 Total current assets 235,088 282,780 Property and equipment, net 2,063 1,830 Operating lease right-of-use (ROU) assets 10,780 11,975 Other assets 5,232 1,684 Indefinite-lived intangible asset 29,000 29,000 Goodwill 12,638 12,638 Total assets $ 294,801 $ 339,907 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 3,640 $ 1,731 Accrued clinical expenses 4,362 4,826 Other accrued expenses 6,019 8,286 Deferred revenue - short-term — 6,411 Operating lease liabilities - short-term 3,250 3,186 Total current liabilities 17,271 24,440 Deferred tax liabilities 2,531 2,531 Deferred revenue - long-term — 30,637 Operating lease liabilities - long-term 7,884 9,082 Total liabilities 27,686 66,690 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; 100,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 32,807,519 and 32,558,307 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively 33 32 Additional paid-in capital 725,784 712,807 Accumulated other comprehensive income (loss) 104 ( 201 ) Accumulated deficit ( 458,806 ) ( 439,421 ) Total stockholders' equity 267,115 273,217 Total liabilities and stockholders' equity $ 294,801 $ 339,907 See Accompanying Notes to Condensed Consolidated Financial Statements 1 ASSEMBLY BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands except for share and per share amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Collaboration revenue $ 39,376 $ 3,080 $ 43,457 $ 6,966 Operating expenses: Research and development 23,327 18,700 46,373 41,405 General and administrative 9,470 4,080 18,199 13,597 Total operating expenses 32,797 22,780 64,572 55,002 Income (loss) from operations 6,579 ( 19,700 ) ( 21,115 ) ( 48,036 ) Other income Interest and other income, net 691 1,186 1,730 2,463 Total other income 691 1,186 1,730 2,463 Income (loss) before income taxes 7,270 ( 18,514 ) ( 19,385 ) ( 45,573 ) Income tax benefit — 11 — 18 Net income (loss) $ 7,270 $ ( 18,503 ) $ ( 19,385 ) $ ( 45,555 ) Other comprehensive income Unrealized gain on marketable securities, net of tax 190 52 305 160 Comprehensive income (loss) $ 7,460 $ ( 18,451 ) $ ( 19,080 ) $ ( 45,395 ) Net income (loss) per share, basic $ 0.21 $ ( 0.72 ) $ ( 0.55 ) $ ( 1.77 ) Weighted average common shares outstanding, basic 35,307,669 25,740,500 35,229,570 25,690,617 Net income (loss) per share, diluted $ 0.19 $ ( 0.72 ) $ ( 0.55 ) $ ( 1.77 ) Weighted average common shares outstanding, diluted 37,291,474 25,740,500 35,229,570 25,690,617 See Accompanying Notes to Condensed Consolidated Financial Statements 2 ASSEMBLY BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 2020 2019 Cash flows from operating activities Net loss $ ( 19,385 ) $ ( 45,555 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 237 260 Stock-based compensation 12,058 8,645 Net accretion and amortization of investments in marketable debt securities ( 101 ) ( 1,141 ) Non-cash rent expense 2,308 2,208 Deferred income tax benefit — ( 18 ) Loss on disposal of fixed assets — 102 Other — ( 5 ) Changes in operating assets and liabilities: Accounts receivable from collaboration 59 ( 473 ) Prepaid expenses and other current assets 304 ( 5,068 ) Other assets ( 2,155 ) 1,655 Accounts payable 516 ( 279 ) Accrued clinical expenses ( 464 ) 248 Other accrued expenses ( 2,416 ) ( 2,428 ) Deferred revenue ( 37,048 ) ( 996 ) Operating lease liabilities ( 2,247 ) ( 2,099 ) Net cash used in operating activities ( 48,334 ) ( 44,944 ) Cash flows from investing activities Purchases of property and equipment ( 470 ) ( 1,539 ) Purchases of marketable securities ( 44,240 ) ( 93,667 ) Proceeds from maturities of marketable securities 119,252 131,591 Proceeds from sale of marketable securities 22,700 500 Net cash provided by investing activities 97,242 36,885 Cash flows from financing activities Proceeds from the exercise of stock options 602 331 Proceeds from the issuance of common stock under Employee Stock Purchase Plan (ESPP) 467 515 Net cash provided by financing activities 1,069 846 Net increase (decrease) in cash and cash equivalents 49,977 ( 7,213 ) Cash and cash equivalents at the beginning of the period 46,732 41,471 Cash and cash equivalents at the end of the period $ 96,709 $ 34,258 Supplemental non-cash investing and financing activities Operating lease liabilities arising from obtaining ROU assets $ 545 $ 14,225 See Accompanying Notes to Condensed Consolidated Financial Statements 3 ASSEMBLY BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands except for share amounts) (Unaudited) For the Three Month Period Common Stock Additional Accumulated Other Total Shares Amount Paid-in Capital Comprehensive Income (Loss) Accumulated Deficit Stockholders' Equity Balance as of March 31, 2020 32,624,725 $ 32 $ 717,898 $ ( 86 ) $ ( 466,076 ) $ 251,768 Issuance of common stock upon exercise of stock options 74,879 1 482 — — 483 Issuance of common stock under ESPP 42,266 — 467 — — 467 Issuance of shares of common stock for settlement of restricted stock units (RSUs) 65,649 — — — — — Unrealized gain on marketable debt securities — — — 190 — 190 Stock-based compensation — — 6,937 — — 6,937 Net income — — — — 7,270 7,270 Balance as of June 30, 2020 32,807,519 $ 33 $ 725,784 $ 104 $ ( 458,806 ) $ 267,115 Common Stock Additional Accumulated Other Total Shares Amount Paid-in Capital Comprehensive Loss Accumulated Deficit Stockholders' Equity Balance as of March 31, 2019 25,549,757 $ 26 $ 559,453 $ ( 239 ) $ ( 368,839 ) $ 190,401 Issuance of common stock upon exercise of stock options 29,875 — 191 — — 191 Issuance of common stock under ESPP 36,804 — 515 — — 515 Issuance of shares of common stock for settlement of RSUs 30,347 — — — — — Unrealized gain on marketable debt securities, net of tax — — — 52 — 52 Stock-based compensation — — 2,051 — — 2,051 Net loss — — — — ( 18,503 ) ( 18,503 ) Balance as of June 30, 2019 25,646,783 $ 26 $ 562,210 $ ( 187 ) $ ( 387,342 ) $ 174,707 4 For the Six Month Period Common Stock Additional Accumulated Other Total Shares Amount Paid-in Capital Comprehensive Income (Loss) Accumulated Deficit Stockholders' Equity Balance as of December 31, 2019 32,558,307 $ 32 $ 712,807 $ ( 201 ) $ ( 439,421 ) $ 273,217 Issuance of common stock upon exercise of stock options 91,713 1 601 — — 602 Issuance of common stock under ESPP 42,266 — 467 — — 467 Issuance of shares of common stock for settlement of RSUs 115,233 — — — — — Reclassification of stock-based awards from equity to accrued expenses — — — — — — Unrealized gain on marketable debt securities — — — 305 — 305 Stock-based compensation — — 11,909 — — 11,909 Net loss — — — — ( 19,385 ) ( 19,385 ) Balance as of June 30, 2020 32,807,519 $ 33 $ 725,784 $ 104 $ ( 458,806 ) $ 267,115 Common Stock Additional Accumulated Other Total Shares Amount Paid-in Capital Comprehensive Loss Accumulated Deficit Stockholders' Equity Balance as of December 31, 2018 25,495,425 $ 25 $ 552,762 $ ( 347 ) $ ( 341,787 ) $ 210,653 Issuance of common stock upon exercise of stock options 50,875 — 331 — — 331 Issuance of common stock under ESPP 36,804 — 515 — — 515 Issuance of shares of common stock for settlement of RSUs 63,679 1 ( 1 ) — — — Settlement of RSUs for cash — — ( 4 ) — — ( 4 ) Unrealized gain on marketable debt securities, net of tax — — — 160 — 160 Stock-based compensation — — 8,607 — — 8,607 Net loss — — — — ( 45,555 ) ( 45,555 ) Balance as of June 30, 2019 25,646,783 $ 26 $ 562,210 $ ( 187 ) $ ( 387,342 ) $ 174,707 See Accompanying Notes to Condensed Consolidated Financial Statements 5 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 clinical-stage biotechnology company advancing two innovative programs: a novel class of oral therapeutic candidates targeting chronic hepatitis B virus (HBV) infection and a novel class of oral live microbial biotherapeutic candidates, which are designed to treat disorders associated with the microbiome. The Company operates in one segment and is headquartered in South San Francisco, California, with operations in California, Connecticut and China. The Company’s HBV Cure program is pursuing multiple drug candidates that inhibit the HBV lifecycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of increasing the current low cure rates for patients with chronic HBV infection. Assembly has discovered several novel core inhibitors, which are small molecules that directly target and allosterically modify the HBV core protein. The Company’s Microbiome program is centered on a fully integrated platform that includes a biological function-based strain isolation, identification, characterization and selection process, methods for strain purification and growth under conditions compliant with current Good Manufacturing Practice (cGMP) requirements. That platform is complemented by a licensed patented delivery system that the Company calls GEMICEL®, which is designed to allow for targeted oral delivery of live biologic and conventional therapies to the lower gastrointestinal (GI) tract. Using the Company’s microbiome platform, the Company is exploring product candidates for multiple disease indications, including ulcerative colitis (UC), Crohn’s disease and irritable bowel syndrome (IBS) in connection with its Research, Development, Collaboration and License Agreement (the Allergan Collaboration Agreement) with Allergan Pharmaceuticals International Limited (Allergan), which was acquired by AbbVie Inc. (AbbVie) in May 2020. In June 2020, AbbVie made a strategic portfolio decision to terminate the Allergan Collaboration Agreement effective on October 10, 2020 (see Note 8). Assembly is also exploring the microbiome in connection with immune-mediated and metabolic disorders and oncology. 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, proceeds from the exercise of warrants and stock options, issuance of debt and an upfront payment related to the Allergan Collaboration Agreement. 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 12 months following the date that these unaudited condensed consolidated interim 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 (see Note 6 for recent sales of common stock). The Company cannot assure such funding will be available on reasonable terms, if at all. Market volatility resulting from the global novel coronavirus disease (COVID-19) pandemic or other factors could also adversely impact the Company’s ability to access capital when and as needed. If the Company is unable to generate sufficient revenue from its collaborations, secure additional sources of funding 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. 6 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 2 - Summary of Significant Accounting Policies and Recent Accounting Pronouncements Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and include normal recurring adjustments necessary for the fair presentation of the Company’s financial position and its results of operations and comprehensive loss and its cash flows for the periods presented. These statements do not include all disclosures required by U.S. GAAP and should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended December 31, 2019, which are contained in the Company’s Annual Report on Form 10-K as filed with the SEC on March 4, 2020. The results for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the entire year ending December 31, 2020 or future operating periods. Use of Estimates The preparation of the unaudited condensed 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 unaudited condensed consolidated financial statements include revenue recognition, clinical trial accruals, recoverability and useful lives (indefinite or finite) of intangible assets, assessment of impairment of goodwill, provisions for income taxes, amounts receivable and recognized as revenue under the Allergan Collaboration Agreement, measurement of operating lease liabilities, and the fair value of stock options, stock appreciation rights, and restricted stock units (RSUs) granted to employees, directors and consultants. 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 materially from those estimates and assumptions. Other Risks and Uncertainties In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. To date, the Company’s operations have not been significantly impacted by the COVID-19 pandemic. However, the Company cannot at this time predict the specific extent, duration, or full impact the COVID-19 pandemic will have on its business, operations, strategy, prospects and financial condition and results. The impact of the COVID-19 pandemic on the financial performance of the Company will depend on future developments, including the duration and spread of the outbreak and related governmental advisories and restrictions. These developments and the impact of the COVID-19 pandemic on the financial markets and the overall economy are highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results may be adversely affected. Income Taxes In March 2020, the Families First Coronavirus Response Act (FFCR Act) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. 7 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. The FFCR Act, CARES Act and A.B. 85 did not have a material impact on the Company’s condensed consolidated financial statements as of June 30, 2020; however, the Company continues to examine the impacts the FFCR Act, CARES Act and A.B. 85 may have on its business, results of operations, financial condition and liquidity. Net Income (Loss) per Share Basic net income (loss) per common share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (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. In December 2019, the Company sold 6,287,878 shares of common stock as well as pre-funded warrants to purchase up to 2,424,242 shares of common stock (see Note 6). The pre-funded warrants are exercisable for shares of common stock at a price of $ 0.001 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing earnings per share because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date. A reconciliation of the numerators and the denominators of the basic and diluted net income (loss) per common share computations is as follows (in thousands, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Net income (loss) 7,270 ( 18,503 ) ( 19,385 ) ( 45,555 ) Denominator: Shares used in per share calculation - basic 35,307,669 25,740,500 35,229,570 25,690,617 Dilutive effect of securities 1,983,805 - - - Shares used in per share calculation - diluted 37,291,474 25,740,500 35,229,570 25,690,617 Net income (loss) per share: Basic 0.21 ( 0.72 ) ( 0.55 ) ( 1.77 ) Diluted 0.19 ( 0.72 ) ( 0.55 ) ( 1.77 ) Securities excluded from the computation of diluted income (loss) per share because including them would have been antidilutive are as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Warrants to purchase common stock 15,296 15,296 15,296 15,296 Options to purchase common stock 3,521,778 5,203,935 6,652,076 5,203,935 Common stock subject to purchase under our ESPP 8,991 5,976 8,991 5,976 Unvested RSUs 41,762 489,857 978,879 489,857 Total 3,587,827 5,715,064 7,655,242 5,715,064 As of June 30, 2020, 145,000 performance-based RSUs granted by the Company were excluded from the table above because they are subject to contingencies that were not achieved as of this date. 8 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Adoption of Recent Accounting Pronouncements In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. 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 (ASU 2019-10), 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 for goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 effective January 1, 2020. The adoption of this standard had no material impact on the Company’s condensed consolidated financial statements. On January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The adoption of this standard had no material impact on the Company’s condensed consolidated financial statements and related disclosures. On January 1, 2020, the Company adopted ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 , which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. The standard adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606 and requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. Amendments in the standard should be applied retrospectively to the date of initial application of Topic 606, but entities may elect to apply the amendments in Topic 808 retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of Topic 606, and should disclose the election. An entity may also elect to apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in Topic 606. The adoption of this standard had no impact on the Company’s condensed consolidated financial statements and related disclosures. In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted in an interim or annual period. Entities that elect to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, entities that elect early adoption must adopt all the amendments in the same period. Entities will apply the guidance prospectively, except for certain amendments. The Company early adopted ASU 2019-12 effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures. 9 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Recent Accounting Pronouncements In June 2016, 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 also 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, 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 is evaluating this new accounting standard but currently does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements and related disclosures. Note 3 – Investments in Marketable Securities 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 that approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable, accounts payable, accrued expenses, lease liability-short term and deferred revenue-short term. 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 that 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 techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. Investments in marketable securities consisted of the following (in thousands): June 30, 2020 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value Cash equivalents Money market funds $ 94,524 $ — $ — $ 94,524 Total cash equivalents 94,524 — — 94,524 Short-term investments U.S. and foreign corporate debt securities 32,958 161 — 33,119 Asset-backed securities 22,183 72 — 22,255 U.S. treasury securities 36,080 176 — 36,256 U.S. and foreign commercial paper 38,375 — — 38,375 Total short-term investments 129,596 409 — 130,005 Total cash equivalents and investments $ 224,120 $ 409 $ — $ 224,529 10 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) December 31, 2019 Amortized Cost Gross Unrealized Gain (1) Gross Unrealized Loss (1) Fair Value Cash equivalents Money market funds $ 33,095 $ — $ — $ 33,095 U.S. and foreign corporate debt securities 5,000 — ( 1 ) 4,999 U.S. and foreign commercial paper 4,484 — — 4,484 Total cash equivalents 42,579 — ( 1 ) 42,578 Short-term investments U.S. and foreign corporate debt securities 72,452 38 ( 4 ) 72,486 Asset-backed securities 34,008 17 — 34,025 U.S. treasury securities 44,692 24 ( 2 ) 44,714 U.S. and foreign commercial paper 76,086 — — 76,086 Total short-term investments 227,238 79 ( 6 ) 227,311 Total cash equivalents and investments $ 269,817 $ 79 $ ( 7 ) $ 269,889 (1) Gross unrealized gain (loss) is pre-tax. The contractual term to maturity of short-term marketable securities held by the Company as of June 30, 2020 is less than one year . There were no long-term marketable securities held by the Company as of June 30, 2020. Realized gains and losses for the three and six months ended June 30, 2020 and 2019 were not significant. None of the Company’s investments have been in a continuous unrealized loss position for more than 12 months as of June 30, 2020. The following tables present the fair value of the Company’s financial assets measured at fair value on a recurring basis (in thousands): June 30, 2020 Level 1 Level 2 Level 3 Fair Value Cash equivalents Money market fund $ 94,524 $ — $ — $ 94,524 Total cash equivalents 94,524 — — 94,524 Short-term investments U.S. and foreign corporate debt securities — 33,119 — 33,119 Asset-backed securities — 22,255 — 22,255 U.S. treasury securities — 36,256 — 36,256 U.S. and foreign commercial paper — 38,375 — 38,375 Total short-term investments — 130,005 — 130,005 Total assets measured at fair value $ 94,524 $ 130,005 $ — $ 224,529 11 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) December 31, 2019 Level 1 Level 2 Level 3 Fair Value Cash equivalents Money market fund 33,095 — — 33,095 U.S. and foreign corporate debt securities — 4,999 — 4,999 U.S. and foreign commercial paper — 4,484 — 4,484 Total cash equivalents 33,095 9,483 — 42,578 Short-term investments U.S. and foreign corporate debt securities — 72,486 — 72,486 Asset-backed securities — 34,025 — 34,025 U.S. treasury securities — 44,714 — 44,714 U.S. and foreign commercial paper — 76,086 — 76,086 Total short-term investments — 227,311 — 227,311 Total assets measured at fair value $ 33,095 $ 236,794 $ — $ 269,889 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. There were no transfers between Level 1, Level 2 or Level 3 during the periods presented. Note 4 - Property and Equipment, Net Property and equipment consist of the following (in thousands): Useful life June 30, December 31, (Years) 2020 2019 Lab equipment 3 to 5 $ 290 $ 247 Office equipment 7 699 699 Leasehold improvement 1 to 5 2,084 2,084 Total property and equipment 3,073 3,030 Less: Accumulated depreciation and amortization ( 1,437 ) ( 1,200 ) Construction in progress N/A 427 — Property and equipment, net $ 2,063 $ 1,830 Depreciation expense was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2020, respectively and $ 0.1 million and $ 0.3 million for the three and six months ended June 30, 2019, respectively and was recorded in both research and development expense and general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss. Primarily all of property and equipment of the Company is located in the U.S. 12 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 5 – Accrued Expenses Accrued expenses consist of the following (in thousands): June 30, December 31, 2020 2019 Accrued expenses: Accrued compensation $ 4,186 $ 5,312 Accrued restructuring charges 1,019 2,094 Accrued professional fees and other 814 880 Total accrued expenses $ 6,019 $ 8,286 Accrued restructuring charges relate to the Company’s decision to relocate its headquarters to South San Francisco, California as approved by the Board of Directors in November 2019 and effective January 1, 2020. The Company accrued restructuring charges of $ 2.1 million in 2019 related to one-time severance payments and other employee-related costs associated with the relocation plan. This represents the total amount expected to be incurred in connection with the relocation and is expected to be fully paid in 2020. Note 6 – Stockholders’ Equity The Company is authorized to issue 5,000,000 shares of preferred stock as of June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020 and December 31, 2019, no shares of preferred stock were issued and outstanding. The Company is authorized to issue 100,000,000 shares of common stock as of June 30, 2020 and December 31, 2019, respectively. Sale of Common Stock and Pre-Funded Warrants In December 2017, the Company filed a registration statement on Form S-3 with the SEC using a “shelf” registration statement, file No. 333-222366, which became effective January 10, 2018 (the Registration Statement). Under this shelf registration process, the Company may from time to time sell any combination of the securities described in the Registration Statement in one or more offerings up to an aggregate offering price of $ 250.0 million. In connection with the filing of this 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 $ 75.0 million through “at the market offerings” (ATM). As of June 30, 2020, no shares have been sold under the ATM program and $ 21.4 million remains available for sale under this Registration Statement. In December 2019, the Company sold to various investors an aggregate of 6,287,878 shares of common stock at a public offering price of $ 16.50 per share, which included the exercise in full by the underwriters of their option to purchase 1,136,363 additional shares of common stock, and pre-funded warrants to purchase 2,424,242 shares of common stock at a public offering price of $ 16.499 per warrant. The Company received aggregate net proceeds of $ 134.7 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The pre-funded warrants became immediately exercisable upon issuance at an exercise price of $ 0.001 per share, but under their terms, the outstanding pre-funded warrants to purchase shares of the Company’s common stock generally may not be exercised if the holder’s ownership of the Company’s common stock would exceed 19.99 % following such exercise. The exercise price and number of shares of common stock issuable upon the exercise of the pre-funded warrants (Warrant Shares) are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the pre-funded warrant agreements. Under certain circumstances, the pre-funded warrants may be exercisable on a “cashless” basis. Both the pre-funded warrants and the Warrant Shares are registered securities. 13 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The pre-funded warrants were classified as a component of permanent stockholders’ equity within additional paid-in-capital and were recorded at the issuance date using a relative fair value allocation method. The pre-funded warrants are equity classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, permit the holders to receive a fixed number of common shares upon exercise, are indexed to the Company’s common stock and meet the equity classification criteria. In addition, such pre-funded warrants do not provide any guarantee of value or return. The Company valued the pre-funded warrants at issuance, concluding their sales price approximated their fair value, and allocated net proceeds from the sale proportionately to the common stock and pre-funded warrants of which $ 37.5 million was allocated to the pre-funded warrants and recorded as a component of additional paid-in-capital. Common Stock Warrants As of June 30, 2020 and December 31, 2019 the following warrants to purchase shares of the Company’s common stock were issued and outstanding: Issue date Expiration date Exercise Price per Share Number of warrants outstanding September 10, 2010 September 10, 2020 $ 30.000 15,296 December 16, 2019 None $ 0.001 2,424,242 2,439,538 There were no warrants exercised during the three and six months ended June 30, 2020 or 2019. Note 7 – Stock Plans and Stock-Based Compensation Equity Incentive Plans In May 2018, the Company’s stockholders approved (1) the Assembly Biosciences, Inc. 2018 Stock Incentive Plan (the 2018 Plan) pursuant to which the Company reserved 1,900,000 shares of its common stock for issuance in connection with equity incentive awards and (2) the Assembly Biosciences Inc. Employee Stock Purchase Plan (the 2018 ESPP) pursuant to which the Company reserved 400,000 shares of its common stock for issuance in connection with purchases by employees pursuant to this plan. In May 2019, 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 3,000,000 . In June 2020, 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 4,600,000 . As of June 30, 2020, 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 June 30, 2020, the Company also had awards outstanding under the Assembly Biosciences, Inc. 2017 Inducement Award Plan (the 2017 Plan), the Assembly Biosciences, Inc. 2019 Inducement Award Plan (the 2019 Plan) and the Assembly Biosciences, Inc. 2020 Inducement Award Plan (the 2020 Plan). The Company issues new shares of common stock to settle options exercised and 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. 14 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Stock Plan Activity Stock Options A summary of the Company’s option activity and related information for the six months ended June 30, 2020 is as follows: 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, 2019 5,613,353 $ 15.90 Granted 1,275,180 15.92 Exercised ( 91,713 ) 7.38 Forfeited ( 144,744 ) 25.57 Outstanding as of June 30, 2020 6,652,076 $ 15.81 7.3 $ 63,186 Options vested and exercisable as of June 30, 2020 3,440,092 $ 14.22 5.6 $ 39,923 The weighted-average grant-date fair value of options granted was $ 10.52 and $ 12.68 during the six months ended June 30, 2020 and 2019, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2020 and 2019 was $ 1.0 million and $ 0.7 million, respectively. RSUs A summary of the Company’s RSUs and related information for the six months ended June 30, 2020 is as follows: Number of RSUs Weighted Average Fair Value Per RSU at Grant Price Nonvested as of December 31, 2019 758,718 $ 25.47 Granted 531,164 16.31 Vested ( 99,224 ) 33.59 Forfeited ( 54,279 ) 25.90 Nonvested as of June 30, 2020 1,136,379 (1) $ 20.45 (1) Includes 157,500 RSUs that have vested but are subject to deferred settlement, which have a weighted average remaining contractual term of 1.7 years. The total fair value of RSUs vested and settled during the six months ended June 30, 2020 and 2019 was $ 3.1 million and $ 2.9 million, respectively. The total intrinsic value of RSUs vested and settled during the six months ended June 30, 2020 and 2019 was $ 1.6 million and $ 1.3 million, respectively. As of June 30, 2020, RSUs outstanding include 45,000 RSUs granted in December 2017 and 100,000 RSUs granted in September 2019 to executives of the Company with performance-based conditions vesting conditions. As of June 30, 2020, the performance condition for the 45,000 RSUs granted in December 2017 was deemed probable of being met and was subsequently achieved in July 2020. The Company recognized $ 0.7 million as a cumulative catch-up adjustment of stock-based compensation expense for this award for the three and six months ended June 30, 2020. The remaining 100,000 awards with an aggregate fair value of $ 1.2 million vest upon performance conditions not yet deemed probable and accordingly no stock-based compensation expense has been recognized as of June 30, 2020. 15 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ESPP Employees purchased 42,266 and 36,804 shares of common stock under the 2018 ESPP during the six months ended June 30, 2020 and 2019, respectively. Valuation Assumptions The fair value of the stock options granted or modified during the periods indicated was estimated using the Black-Scholes option pricing model, based on the following assumptions: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Exercise price $14.57 - $20.52 $15.22 - $57.33 $14.45 - $20.52 $15.22 - $57.33 Expected volatility 69.13% - 82.24% 66.2% - 83.0% 66.38% - 82.24% 66.2% - 83.2% Risk-free rate 0.36% - 0.60% 2.17% - 2.47% 0.36% - 1.44% 2.17% - 2.65% Expected term (years) 5.5 - 7.5 5.0 - 9.0 5.5 - 7.5 5.0 - 9.0 Expected dividend yield 0 % 0 % 0 % 0 % The fair value of RSUs granted is determined based on the price of the Company’s common stock on the date of grant. The fair value of ESPP purchase rights were not material for any period presented. Stock-Based Compensation Expense The following table summarizes the components of total stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive loss (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Research and development $ 3,607 $ 3,116 $ 5,551 $ 5,845 General and administrative 3,527 ( 1,048 ) (1) 6,507 2,800 Total stock-based compensation expense $ 7,134 $ 2,068 $ 12,058 $ 8,645 (1) Includes the reversal of previously recognized stock-based compensation expense of $ 3.6 million related to forfeited awards resulting from the departure of one of the Company’s former officers during the period. As of June 30, 2020, there was $ 32.2 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 1.8 years. 16 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 8 - Collaboration Agreement Termination of Allergan Collaboration Agreement In January 2017, the Company entered into the Allergan Collaboration Agreement with Allergan to develop and commercialize select microbiome gastrointestinal disease therapies. Pursuant to the Allergan Collaboration Agreement, the Company granted to Allergan an exclusive worldwide license to certain of its intellectual property, including its intellectual property arising under the Allergan Collaboration Agreement, to develop and commercialize licensed compounds for UC, Crohn’s disease, and two compounds for IBS. Allergan and the Company also agreed to collaborate on research and development activities with respect to the licensed compounds in accordance with a mutually agreed upon research and development plan. Per the terms of the Allergan Collaboration Agreement, Allergan could select backups and additional target indications to add to the licenses granted for additional consideration and also had the ability to enter into a contract manufacturing agreement with the Company for compound supply at cost plus an agreed upon margin. In addition, the Company participated in a Joint Development Committee (JDC) and Joint Patent Committee (JPC). Allergan had the right to terminate the Allergan Collaboration Agreement at any time upon advance written notice. In June 2020, following its acquisition of Allergan, AbbVie, on behalf of Allergan, gave written notice of termination of the Allergan Collaboration Agreement, effective 120 days following the delivery of notice, on October 10, 2020. Upon termination, the licenses granted by the Company and its know-how will revert to the Company. Under the terms of the Allergan Collaboration Agreement, AbbVie is obligated to continue to reimburse the Company for certain research and development costs through October 10, 2020. Upon effectiveness of the termination, such reimbursements will cease. Due to the delivery of the termination notice, the Company determined that there were no further enforceable rights and obligations under the Allergan Collaboration Agreement beyond June 2020 and the remaining $ 36.0 million of deferred revenue was recognized in the period. History of the Allergan Collaboration Agreement Allergan paid the Company an upfront non-refundable payment of $ 50.0 million, which was received in 2017. Additionally, the Company is eligible to receive variable consideration in the form of research and development cost reimbursements, up to $ 631.0 million related to seven development milestones and up to $ 2.14 billion related to 12 commercial development and sales milestones in connection with the successful development and commercialization of licensed compounds. In addition, the Company was eligible to receive tiered royalties at rates ranging from the mid-single digits to the mid-teens based on net sales. Allergan and the Company agreed to share research and development costs up to an aggregate of $ 75.0 million through proof-of-concept (POC) studies on a ⅔, ⅓ basis, respectively, and Allergan agreed to assume all post-POC development costs. In the event any pre-POC development costs exceed $ 75.0 million in the aggregate, the Company could have elected either (a) to fund ⅓ of such costs in excess of $ 75.0 million or (b) to allow Allergan to deduct from future development milestone payments ⅓ of the development costs funded by Allergan in excess of $ 75.0 million plus a premium of 25 %. The Company had an option to co-promote the licensed programs in the U.S. and China, subject to certain conditions set forth in the Allergan Collaboration Agreement. The Company concluded that Allergan was a customer, and the contract was not subject to accounting literature on collaborative arrangements. This is because the Company granted to Allergan licenses to its intellectual property and research and development services, all of which are outputs of the Company’s ongoing activities, in exchange for consideration. The Company identified the following material promises under the Allergan Collaboration Agreement: (1) grant of licenses to intellectual property for the four initial indications, inclusive of the related technology know-how (Licenses) and (2) the obligation to perform research development services through POC (Development Services). The Company’s participation on the JDC and JPC were considered to be immaterial in the context of the contract. The Company’s co-promotion option was not considered to be a performance obligation. Allergan’s selection of backups or additional target indications to add to the licenses granted for additional consideration and ability to enter into a contract manufacturing agreement with the Company for compound supply at cost plus an agreed upon margin were not considered to be performance obligations as the Company concluded the options were not offered at a discount that exceeds discounts available to other customers, and therefore were not material rights. The grant of additional licensing rights upon option exercises and contract manufacturing agreements were to be accounted for as separate contracts when or if they occurred. 17 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company concluded the Licenses each were considered to be functional as they ha d significant standalone functionality and were capable of being distinct. However, the Company determined that each of the Licenses individually were not distinct from the Development Services within the context of the agreement. This is because Allergan wa s dependent on the Company to execute the Development Services, which it wa s uniquely able to perform, in order for Allergan to benefit from the Licenses. As such, the Company determined that it ha d four performance obligations under the Allergan Collaboration Agreement associated with the grant of the four compound Licenses combined with the performance of the Development Services for each of the four compound indications. The Company determined that the four performance obligations would have been performed over the duration of the contract, which began in February 2017 and ended upon receipt of the termination notice . The Company used a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. The Company believe d this was the best measure of progress because other measures do not reflect how the Company transfers its performance obligation to Allergan. In applying the cost-based input method of revenue recognition, the Company measure d costs incurred relative to budgeted costs to fulfill the four performance obligations. These costs consist ed primarily of third-party contract costs and internal labor costs. Revenue was recognized based on actual costs incurred as a percentage of total budgeted costs as the Company complete d its performance obligations. To allocate transaction price among the four performance obligations, the Company estimated their standalone selling price (SSP) using an income-based valuation approach for the estimated value a licensor of the compounds would receive considering the stage of the compounds’ development. A change in the assumptions used to determine its best estimate of selling price for the four performance obligations would not have had a significant effect on the allocation of consideration received to the four performance obligations. The transaction price at the inception of the agreement and upon adoption of the revenue from contracts with customers guidance was limited to $ 50.0 million upfront payment. Of this amount, the Company allocated $ 12.5 million to each of the four performance obligations. Research and development cost reimbursement payments are included in the transaction price in the reporting period that the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. 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 at June 30, 2020. As part of the Company’s evaluation of the development and commercialization milestones constraint, the Company determined that the achievement of such milestones is 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) would have been recognized when the related sales occur as they were determined to relate predominantly to the license granted to Allergan. The Company re-evaluated the transaction price in each reporting period and as uncertain events were resolved or other changes in circumstances occur. The Company did not incur any significant incremental costs of obtaining the Allergan contract. For the six months ended June 30, 2020 and 2019, the Company recognized $ 43.5 million and $ 7.0 million, respectively, in revenue associated with the Allergan Collaboration Agreement. Short-term and long-term deferred revenue contract liabilities related to the Allergan Collaboration Agreement were $ 6.4 million and $ 30.6 million at December 31, 2019. There were no deferred revenue contract liabilities as of June 30, 2020 due to the Company recognizing a cumulative catch-up adjustment of the remaining deferred revenue balance during the three months ended June 30, 2020 for the determined completion of the Company’s performance obligations under the Allergan Collaboration Agreement upon receipt of the notice of termination from AbbVie. On the unaudited condensed consolidated balance sheets, contract asset balances of $ 3.3 million and $ 3.4 million were recorded as accounts receivable from collaboration as of June 30, 2020 and December 31, 2019, respectively. 18 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table presents changes in the Company’s contract liabilities (in thousands): Balance at Beginning of Period Additions Deductions Balance at End of Period Six Months Ended June 30, 2020 Contract liabilities: Deferred revenue $ 37,048 $ — $ ( 37,048 ) $ — Balance at Beginning of Period Additions Deductions Balance at End of Period Six Months Ended June 30, 2019 Contract liabilities: Deferred revenue $ 40,660 $ — $ ( 996 ) $ 39,664 Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Collaboration revenue recognized in the period from Amounts included in deferred revenue at the beginning of the period $ 36,041 $ 137 $ 37,048 $ 996 Performance obligations satisfied in previous period — — — — Note 9 - 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. 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. Amounts paid in the six months ended June 30, 2020 and 2019 were insignificant. Microbiome Targeted Colonic Delivery Platform In November 2013, the Company entered into a License and Collaboration Agreement with Therabiome, LLC (Therabiome), for all intellectual property and know-how owned or controlled by Therabiome relating to the oral delivery of pharmaceutical drugs to specific sites in the intestine, using a pH sensitive controlled release capsule-in-capsule technology. The Company will be solely responsible for all research and development activities with respect to any product it develops under the license. The Company must pay Therabiome clinical and regulatory milestones for each product or therapy advanced from the platform for U.S. regulatory milestones. In addition, the Company must pay Therabiome lesser amounts for foreign regulatory milestones, which vary by country and region. The Company is also required to pay Therabiome royalties on annual net sales of a product in the low to mid-single digit percentages plus, once annual net sales exceed certain thresholds, a one-time cash payment upon reaching such thresholds. Therabiome must pay the Company royalties on annual net sales of any product Therabiome is permitted to develop using the intellectual property in the low double to mid-double-digit percentages, depending on the level of development or involvement the Company had in the product. 19 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) No amounts were accrued for this agreement as of and for the six months ended June 30, 2020. Two regulatory milestones were determined to have occurred under this agreement and $ 0.3 million was accrued and included in accrued expenses during the six months ended June 30, 2019. Note 10 - Leases Operating Leases The Company leases office space for corporate, administrative and laboratory functions in South San Francisco, California under a sub-sublease that expires in December 2023. The Company also leases office space in Carmel, Indiana under a lease agreement that expires in August 2023, which the Company has subleased. The Company also leases office and laboratory space in Groton, Connecticut under a lease that expires in March 2021. The Company’s China subsidiary leases office space in Shanghai that expires in May 2021 and rents lab space in Shanghai under a lease agreement that expires in December 2020. Additionally, the Company’s China subsidiary leases office space in Beijing under a lease agreement that expires in December 2020. 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. Certain equipment leases continue to expire in 2020, with the final lease expiring in 2023. 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 June 30, 2020, the Company had operating lease liabilities of $ 11.1 million and ROU assets of $ 10.8 million, which were included in the condensed consolidated balance sheet. The following summarizes quantitative information about the Company’s operating leases (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Lease cost Operating lease cost $ 1,158 $ 1,117 $ 2,308 $ 2,208 Short-term lease cost 100 112 200 433 Variable lease cost 408 300 692 599 Total lease cost $ 1,666 $ 1,529 $ 3,200 $ 3,240 Six Months Ended June 30, 2020 2019 Operating cash flows from operating leases $ 2,247 $ 2,099 ROU assets exchanged for new operating lease liabilities $ 545 $ 14,225 As of June 30, 2020 and December 31, 2019, the weighted-average remaining lease term for operating leases was 3.3 years and 2.7 years, respectively. As of June 30, 2020 and December 31, 2019, the weighted-average discount rate for operating leases was 9.5 % and 9.4 %, respectively. 20 ASSEMBLY BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of June 30, 2020, the maturities of the Company’s operating lease liabilities were as follows (in thousands): Six months ending December 31, 2020 $ 2,356 Year Ending December 31, 2021 3,991 Year Ending December 31, 2022 3,627 Year Ending December 31, 2023 3,325 Total 13,299 Less: present value discount ( 2,165 ) Operating lease liabilities $ 11,134 Note 11 – Subsequent Events On July 17, 2020, the Company entered into a Collaboration Agreement (China Collaboration Agreement) with BeiGene, Ltd. (BeiGene), granting BeiGene an exclusive, royalty-bearing license to develop and commercialize the Company’s novel core inhibitor product candidates ABI-H0731, ABI-H2158 and ABI-H3733 for chronic HBV infection (the Licensed Product Candidates) in the People’s Republic of China, Hong Kong, Taiwan and Macau (the Territory). Pursuant to the terms of the China Collaboration Agreement, the Company received an upfront cash payment of $ 40.0 million from BeiGene, and the Company is 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. BeiGene also 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. The China Collaboration Agreement also contains provisions such as representations and warranties of the parties, terms as to governance of the collaboration, commercialization and regulatory responsibilities of the parties, and manufacturing and supply, including potential adjustments in the event supply costs exceed certain levels. In addition, during the term of the China Collaboration Agreement, neither party will commercialize any competing products in the Territory. If, after ABI-H2158 and ABI-H3733 reach the end of Phase 2 clinical trials, the Company and BeiGene are unable to mutually agree on the terms of a Phase 3 global study, BeiGene may elect to terminate the China Collaboration Agreement solely as it relates to that compound, as applicable. Such a termination would result in the Company regaining all rights to the applicable compound in the Territory. In addition, BeiGene may terminate the China Collaboration Agreement for convenience at any time upon 90 days’ advance written notice to us. The China Collaboration Agreement also contains customary provisions for termination by either party, including in the event of breach of the China Collaboration Agreement, subject to cure. 21