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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-03-04 · 228 added, 206 removed, 217 unchanged (67% of the section changed)

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Risk Factors.”

We are a clinical-stage biotechnology company advancing two innovative programs:

a novel class of oral therapeutic candidates for the treatment of 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.

HBV Cure Program

Over 250 million people worldwide are chronically infected with HBV.

Our HBV Cure program is pursuing multiple drug candidates designed to inhibit the HBV lifecycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of increasing the current low cure rate for patients with HBV.

We have discovered several novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core (HBc) protein.

2019 Developments

In November 2019, at the American Association for the Study of Liver Diseases Annual Meeting (The Liver Meeting®), we presented final 24-week data from HBV e antigen (HBeAg) positive patients in our Phase 2 studies of ABI-H0731 (731), our lead HBV core inhibitor product candidate—ABI-H0731-201 (Study 201 in nucleos(t)ide reverse transcriptase inhibitor (NrtI) suppressed patients) and ABI-H0731-202 (Study 202 NrtI-naïve patients).

In addition, we presented interim data from an ongoing open-label extension study ABI-H0731-211 (Study 211), where all patients received a combination of 731 and NrtI therapy.

In this analysis, of the 97 patients completing Study 201 or Study 202, 87 were currently receiving a combination of 731 and NrtI therapy and had been treated for at least 16 weeks in Study 211 (cumulative duration of treatment with 731 and NrtI therapy of 16 to more than 40 weeks).

731 was well-tolerated when administered in combination with NrtI therapy with no patients discontinuing treatment due to adverse events (AEs).

As previously reported in the literature, the vast majority of long-term NrtI treated HBeAg positive patients continue to have low level infectious virus, which was confirmed in Study 201 patients at the time of their enrollment.

Final Week 24 results from the HBeAg-positive patients (n=47) demonstrated that, among those with detectable HBV DNA at baseline, 22 out of 27 (81%) of patients treated with 731 and NrtI therapy achieved target not detected (TND) by Week 24 compared to zero out of 12 (0%) patients treated with NrtI therapy only (p<0.001), as measured with a highly sensitive PCR assay (lower limit of quantification (LLOQ) 5 = IU/mL).

These results indicate that the addition of 731 to ongoing NrtI therapy reduced viral burden to levels not achieved by NrtI therapy alone.

Final Week 24 results from treatment-naïve HBeAg-positive patients in Study 202 (n=25) demonstrated faster and deeper HBV DNA declines in patients receiving 731 and entecavir (ETV) than those receiving ETV alone.

Statistically significant reductions of viral pre-genomic RNA (pgRNA) were observed by Week 2 with 731 and ETV (p<0.001).

Longer-term treatment with 731 and NrtI therapy resulted in deeper reductions in HBV DNA and pgRNA.

In the analysis, 21 out of 25 patients from Study 202 who were in treatment in Study 211 demonstrated mean HBV DNA and pgRNA declines from baseline of 6.3 logs and 3.0 logs, respectively, at Week 48.

Of the 27 NrtI-suppressed HBeAg-positive patients who had received 731 and NrtI therapy for at least 40 weeks in Study 201 and were on treatment in Study 211, 18 (67%) achieved HBV DNA TND + pgRNA less than 35 U/mL, along with significant declines in HBeAg and HBcrAg levels in some of these patients.

An important finding based on interim data from Study 211 is the observed correlation between pgRNA and viral antigen s .

Eleven out of 21 (52%) patients from Study 202 that are now on Study 211 who have been treated with 731 and NrtI therapy for 16 to 60 weeks have achieved decreases in pgRNA of greater than 3 logs.

The results in the table below demonstrate that these larger declines in pgRNA were associated with observed reductions in viral antigens.

As cccDNA is the only known source of pgRNA, significant declines in pgRNA, coupled with multi-log declines in viral antigens in some patients , suggests that cccDNA pool levels may be decreasing .

Log 10 Decrease

Mean Log Reductions at Last Time Point (range)

Patients Exhibiting ≥0.5 Log Decline (%)

1.03 (0.0-2.5)

1.42 (0.0-3.1)

0.86 (0.0-3.6)

0.34 (0.1-0.7)

0.45 (0.1-1.0)

0.14 (0.0-0.5)

0.15 (0.9-1.8)

0.29 (0.3-0.3)

0.17 (0.0-0.3)

From the final summary of safety findings in Study 201 and Study 202, 731 when administered with a NrtI therapy for 24 weeks was well-tolerated in both HBeAg-positive and -negative patients with no AEs leading to discontinuation, no Grade 3 or 4 AEs and no serious AEs reported.

Five patients receiving 731 and NrtI reported a rash (four Grade 1 and one Grade 2).

No associated systemic signs or laboratory abnormalities were observed, and all patients continued treatment through Week 24.

Overall, laboratory abnormalities observed were of Grade 1 or 2 severity and occurred in similar proportions of patients across the two treatment groups.

With longer-term ongoing treatment in Study 211, interim data indicated that the nature, frequency and severity of AEs and laboratory abnormalities observed were similar to those observed during the initial 24-week treatment period.

Study 211 is ongoing, and we expect to continue to report interim, as well as final, data from this study.

We presented final data from the Phase 1a portion of the Phase 1a/1b dose-ranging clinical study of ABI-H2158 (2158) at the Annual Meeting of the European Association for the Study of the Liver (EASL) in April 2019.

The Phase 1a study assessed safety, tolerability and pharmacokinetics (PK) in 48 healthy volunteers.

2158 was well tolerated following single and multiple ascending doses.

There were no dose dependent treatment-emergent AEs and no pattern of clinical safety or laboratory abnormalities observed within or across any cohorts.

Once daily administration is projected to result in trough liver concentrations in excess of the in vitro EC50 of 334 nM at which cccDNA establishment is inhibited by 50%.

We initiated the Phase 1b dose-ranging portion of this study in April 2019 to assess the safety, PK and antiviral activity of 2158 in patients with chronic HBV infection.

In November 2019, at The Liver Meeting®, we reported interim data from the first, low-dose cohort of the Phase 1b portion of the Phase 1a/1b dose-ranging clinical study, which is currently enrolling HBeAg-positive patients in sequential dose cohorts of nine patients, with each cohort randomized to receive oral 2158 or placebo (7:2) once daily for 14 days.

The interim data from the initial cohort receiving the lowest dose of 2158 at 100 mg demonstrated potent antiviral activity at this initial dose level, reflected by mean declines from baseline to day 15 of 2.3 log 10 [range 1.7 – 3.0] and 2.1 log 10 [range 1.5 – 2.7] in HBV DNA and pgRNA, respectively.

No serious AEs, dose limiting toxicities or premature discontinuations have been reported to date.

All AEs were Grade 1.

One patient assigned to placebo and three patients on 2158 reported AEs that resolved without intervention:

dizziness, fatigue, rash, headache and upper abdominal pain.

Observed steady-state exposures were in excess of the EC90 for in vitro antiviral and cccDNA assays.

We believe that the safety and PK data and parameters from this interim analysis support once daily administration and the continued evaluation of 2158 across the planned dose cohorts in patients with chronic HBV infection.

Following completion of the Phase 1b dose-ranging study, we expect to initiate a Phase 2 clinical study in the second quarter of 2020.

Microbiome Program

In recent years, there has been increasing scientific evidence suggesting the therapeutic potential of the human microbiome—the billions of microbes living in and on people-to impact health and disease.

Our Microbiome program builds upon experience reported in the literature of successfully treating various disease indications with fecal microbiota transplants (FMT) and seeks to provide a pharmacologically relevant therapy using a “drug like” approach that delivers targeted and specific microbiome therapies in an oral capsule.

Our Microbiome program consists of a fully integrated platform that includes a strain isolation, identification, characterization and function based selection process, methods for strain purification and growth under conditions compliant with Good Manufacturing Practice (cGMP) requirements, and a licensed patented delivery system that we call GEMICEL®, which is designed to allow for targeted oral delivery of live biologic and conventional therapies to the lower gastrointestinal (GI) tract.

2019 Developments

In February 2019, we initiated a Phase 1b human clinical study of ABI-M201 (M201) to evaluate the safety of M201 and its effects on disease activity measures in patients with mildly to moderately active ulcerative colitis (UC) and ongoing treatment with mesalamine.

The study’s primary objective is safety and tolerability, and its secondary objectives focus on the effect of M201 treatment in patients with UC.

The study will consist of two sequential, non-overlapping cohorts of patients, separated by intervening interim analysis.

Both cohorts will involve eight weeks of study drug treatment.

Interim data from the initial treatment cohort (Cohort A), consisting of 20 patents, will inform the decision to advance to the second cohort (Cohort B), consisting of 24 patients, and its dose selection.

The patients in Cohort A will be randomized 1:1 to receive either one daily capsule of M201 or placebo in addition to their treatment with mesalamine.

The patients in Cohort B will be randomized 3:1 to receive between one to five daily capsules of M201 or placebo in addition to their treatment with mesalamine.

In June 2019, we initiated dosing of the first patient in this clinical study.

Collaboration Agreement

On January 6, 2017, we entered into the Research, Development, Collaboration and License Agreement (the Collaboration Agreement) with Allergan to develop and commercialize select microbiome gastrointestinal programs.

Pursuant to the terms of the Collaboration Agreement, Allergan paid us an upfront payment of $50.0 million in February 2017.

Additionally, we are eligible to receive up to approximately $631.0 million in payments related to seven development milestones and up to approximately $2.14 billion in payments related to 12 commercial development and sales milestones in connection with the successful development and commercialization of licensed compounds for up to six different indications.

We have agreed with Allergan to share development costs up to an aggregate of $75.0 million through proof-of-concept (POC) studies on a ⅓, ⅔ basis, respectively, and Allergan has agreed to assume all post-POC development costs.

Additionally, we have an option to co-promote the licensed programs in the United States and China, subject to certain conditions set forth in the Collaboration Agreement.

We currently have corporate and administrative offices and research laboratory space in South San Francisco, California and research, development and small-scale manufacturing activities in Groton, Connecticut and administrative offices in Carmel, Indiana.

We are a clinical-stage biotechnology company advancing a novel class of oral therapeutic candidates for the treatment of chronic hepatitis B virus (HBV) infection.

According to the World Health Organization (WHO), approximately 270 million people worldwide are chronically infected with HBV.

Our research and development programs are pursuing multiple drug candidates designed to inhibit the HBV replication cycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of discovering and developing finite and curative therapies for patients with HBV.

We have discovered several novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core (HBc) protein in a way that affects assembly and stability of HBV nucleocapsids.

The ongoing COVID-19 pandemic has affected certain aspects of our business.

As further detailed below, those effects have been primarily limited to where and how our employees work in our labs and offices.

To date, our current and future planned clinical trials and pre-clinical studies have not been subject to significant impact as a result of the COVID-19 pandemic.

As previously announced, in January 2021, we wound down our Microbiome program to prioritize and focus our resources on discovering and developing finite and curative therapies for HBV.

Our Microbiome program had been developing a novel class of oral live microbial biotherapeutics candidates designed to treat disorders associated with the microbiome.

Our Primary Focus:

Targeting HBV Core Protein to Achieve a Cure

HBV is a DNA virus that infects hepatocytes and establishes a reservoir of cccDNA, a unique DNA moiety that resides in the cell nucleus of HBV-infected hepatocytes and is associated with viral persistence and chronic infection.

No currently approved oral therapies target cccDNA activity directly, which makes molecules that can modulate cccDNA generation or disrupt its function highly sought in the HBV field.

As a result, most of our research and development efforts to date have focused on discovering and developing compounds targeting the core protein, a highly conserved viral structural protein that has no human homologue and is involved in numerous aspects of the HBV replication cycle, including the generation of HBV cccDNA.

Through our research efforts, we have discovered several chemically distinct series of small molecule core inhibitors that directly target and allosterically inhibit core protein functions.

Vebicorvir (VBR), our lead core inhibitor product candidate, is licensed from Indiana University.

The conduct of the Phase 2 studies, Study 201 and 202 and our open-label extension study, Study 211, are all complete.

We presented interim updates on our clinical studies at a variety of conferences, including at the European Association for the Study of the Liver’s (EASL) Digital International Liver Congress TM in August 2020 and the American Association for the Study of Liver Diseases (AASLD) Annual Meeting in November 2020.

Our most recently completed study for VBR, Study 211, involved transitioning patients who met the requisite stopping criteria, as determined with our lead investigators and the U.S.

Food and Drug Administration (FDA), off of therapy to test for sustained virologic response (SVR).

SVR refers to sustained viral suppression (more than six months) of HBV DNA below the lower limit of quantification (LLOQ) and would be consistent with a successful finite treatment for HBV.

In November 2020, it became clear that patients who stopped therapy in Study 211 had not achieved meaningful SVR rates as 39 of 41 patients relapsed, meaning they had detectable HBV.

We continue to collect and analyze Study 211 data and intend to submit more detailed findings to a future medical meeting;

however, it is clear that combination therapy of VBR plus nucelos(t)ide analog reverse transcriptase inhibitors (NrtI) alone is not sufficient to cure HBV.

Based on these results, we terminated Study 211 prior to its completion.

Based on discussions with leading viral hepatitis experts, global regulatory discussions and feedback, and, with respect to the China territory, discussions and agreement with our collaboration partner, BeiGene, Ltd.

(BeiGene), we

recently decided to not move forward with the global registrational studies for VBR as a chronic suppressive treatment (CST) with NrtI.

The decision was made to focus on the greatest unmet medical need of patients, which lies predominantly in cure, rather than CST.

As a result, we also expect to terminate Study 205, as we focus our efforts with VBR moving forward in combination with NrtI and additional mechanisms targeting finite and curative combination therapy.

Our second-generation core inhibitor product candidate, ABI-H2158 (2158), was internally discovered and developed and is chemically distinct from VBR.

We reported the final data from dose-ranging cohorts of the Phase 1b portion of the Phase 1a/1b dose-ranging clinical study at EASL in August 2020.

Based on data from the Phase 1b dose-ranging study, we initiated a Phase 2 clinical study in June 2020 using a 300 mg daily dose of 2158.

This study is being conducted in approximately ten countries in Asia, North America and Europe.

We expect interim data from this study in the second half of 2021.

While we will continue to monitor the situation closely, at this time, we do not expect our timelines for this study to be significantly impacted by the COVID-19 pandemic.

Our third core inhibitor product candidate, ABI-H3733 (3733), has completed Investigational New Drug (IND) enabling studies.

3733 has a novel chemical scaffold separate from both VBR and 2158.

We presented a preclinical profile of this candidate in the first quarter of 2019.

In the first quarter of 2020, we initiated a Phase 1a clinical study to evaluate safety, tolerability and pharmacokinetics (PK) following single ascending dose and multiple ascending dose administration of 3733 in healthy subjects in New Zealand.

Conduct for the study was completed in the fourth quarter of 2020 and preliminary data indicate that 3733 was generally well-tolerated and had favorable PK.

Additional Product Candidates

In addition to our three clinical-stage product candidates, our research discovery team is actively focused on identifying and selecting a fourth-generation core inhibitor candidate, which we anticipate in the first half of 2021.

Multi-Drug Combination Studies

We believe that core inhibitors and NrtI will be central to finite and curative therapies for chronic HBV infection.

Therefore, as we continue to develop and advance our current and future core inhibitors through clinical studies, we plan to conduct multi-drug combination studies in parallel that add additional drugs (or compounds) with non-overlapping mechanisms of action to the core inhibitor + NrtI antiviral backbone.

Specifically, we plan on only incorporating our current and future core inhibitors that have demonstrated they are well-tolerated and effective in clinical studies in dual combination with NrtI.

As the 300 mg daily dose of VBR has been observed to be well-tolerated in all studies conducted to date, with no serious adverse effects or dose-limiting toxicities identified and no pattern of treatment-emergent clinical or laboratory abnormalities observed and has progressed beyond dual combination studies, we currently have two triple combination studies planned to study VBR in combination with NrtI and a third mechanism of action.

Beyond Core Inhibitors

In addition to the development and advancement of our core inhibitor portfolio and our current and future multi-drug combination studies, our research and development team is working on discovering and developing a potent fourth-generation core inhibitor, cccDNA disruptors and small molecules targeting novel undisclosed targets to add to the core inhibitor + NrtI antiviral backbone to achieve cure.

We currently have corporate and administrative offices and research laboratory space in South San Francisco, California, Groton, Connecticut and a small office in China.

Since our inception, we have had no revenue from product sales and have funded our operations principally through debt financings prior to our initial public offering in 2010 and through equity financings and collaborations since then.

Our operations to date have been primarily limited to organizing and staffing our company, licensing our product candidates, discovering and developing our product candidates, establishing small-scale manufacturing capabilities for certain of our product candidates, maintaining and improving our patent portfolio and raising capital.

raising capital.

We have generated significant losses to date, and we expect to continue to generate losses as we continue to develop our product candidates.

As of December 31, 2019, we had an accumulated deficit of approximately $439.4 million.

As of December 31, 2020 , we had an accumulated deficit of $ 501.6 million .

Because we do not generate revenue from any of our product candidates, our losses will continue as we further develop and seek regulatory approval for, and commercialize, our product candidates.

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employee-related expenses including salaries, benefits, and stock-based compensation expense;

expenses incurred under agreements with third parties, including contract research organizations (CROs) that conduct research and development, nonclinical and clinical activities on our behalf and the cost of consultants, and contract manufacturing organizations (CMOs) that manufacture all of our drug substance and the drug product used in our HBV-cure program;

the cost of lab supplies and acquiring, developing, and manufacturing nonclinical and, in the case of our Microbiome program, early stage clinical study materials;

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Microbiome ( 2 )

Stock- based compensation

Expenses presented for Microbiome do not reflect reimbursement of expenses under the Collaboration Agreement with Allergan as discussed in Note 8 to the Consolidated Financial Statements.

Expenses presented for HBV include reimbursement of expenses of $0.2 million under the Clinical Trial Collaboration Agreement (Arbutus Agreement) with Arbutus Biopharma Corporation (Arbutus), as discussed in Note 9 to the Consolidated Financial Statements.

Expenses presented for Microbiome do not reflect reimbursement of expenses under the Research, Development, Collaboration and License Agreement (Allergan Agreement) with Allergan Pharmaceuticals International Limited (Allergan), as discussed in Note 9 to the Consolidated Financial Statements.

The successful discovery and development of our product candidates is highly uncertain.

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This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of:

the timing, progress and success of our Phase 2 clinical development of 731, our Phase 1 and potential Phase 2 clinical development of 2158, our Phase 1 clinical development of M201, and our nonclinical and planned clinical development activities for 3733 and other product candidates we may identify in each of the HBV Cure and Microbiome programs;

the timing, progress and success of our clinical trials and research discovery team in identifying new product candidates;

establishing an appropriate safety profile with IND-enabling toxicology studies sufficient to advance additional product candidates into clinical development;

successful enrollment in, and completion of, clinical studies;

receipt of marketing approvals from applicable regulatory authorities;

establishing internal commercial manufacturing capabilities or making arrangements with third-party manufacturers;

making arrangements with third-party manufacturers;

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates.

launching commercial sales of the products, if and when approved, whether alone or in collaboration with others;

maintaining a continued acceptable safety profile of the products following approval and wide use.

A change in the outcome of any of these variables or variables discussed in “Item 1A.

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Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical studies.

We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress.

However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization.

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Other significant costs include facility costs not otherwise included in research and development expenses, insurance costs, legal fees relating to patents and corporate matters and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company.

These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses.

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We evaluate our estimates and judgments, including those described in greater detail below, on an ongoing basis.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

We base our estimates on historical experience and on various other factors that we believe are

reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

At the inception of an arrangement, we evaluate if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract.

We recognize revenue when the customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services.

Revenue Recognition and Accounts Receivable from Collaboration

We analyze our 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, we consider 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 our consolidated statements of operations and comprehensive loss.

Under certain collaborative arrangements, we are reimbursed for a portion of our research and development expenses or participate 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 our consolidated statements of operations and comprehensive loss, as we do not consider performing these activities for reimbursement to be a part of our 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, we evaluate the term of the arrangement and recognize revenue when the customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services.

For contracts with customers, we apply the following five-step model in order to determine this amount:

(i) identification of the promised goods or services in the contract;

(ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract;

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when (or as) we satisfy each performance obligation.

Our performance obligations under these arrangements may include licenses of intellectual property, options to license additional intellectual property, research and

development services, delivery of manufactured product, and/or participation on joint steering committees.

Allergan can select backups and additional target indications to add to the licenses granted and also has the ability to enter into a contract manufacturing agreement with us for compound supply, and we have concluded that these rights are options.

We evaluated whether such options contained material rights and concluded they 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 will be accounted for as separate contracts when they occur.

We provide standard indemnification and protection of licensed intellectual property for our customer.

These provisions are part of assurance that the licenses meet the agreement’s, representations and are not obligations to provide goods or services.

We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer.

(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) we satisfy each performance obligation.

We have provided standard indemnification and protection of licensed intellectual property for our customers.

These provisions are part of assurance that the licenses meet the agreements, representations and are not obligations to provide goods or services.

We only apply the five-step model to contracts when it is probable we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer.

As part of the accounting for contracts with customers, we must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract.

We then allocate the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation.

We estimated standalone selling prices of our performance obligations using income-based valuation approach for the estimated value a licensor of the compounds would receive.

We recognize as revenue 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.

We recognize revenues for each of our distinct performance obligations as the related research and development services are performed because our customer consumes the benefit of research and development work simultaneously as we perform these services.

We recognize 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

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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, we utilize 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.

For licenses that are not distinct from other obligations identified in the arrangement, we utilize 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, we apply an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees.

We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Research and Development Service Payments

Under the Allergan Agreement, we were reimbursed at a certain percentage for performing research and development services based on hours worked by our employees at a fixed contractual rate per hour and third-party pass-through costs we incurred on a quarterly basis.

Research and development service payments were included in the transaction price in the reporting period we concluded it was probable that recording revenue in the period would not result in a significant reversal in amounts recognized in future periods.

Accounts receivable were recorded when the right to the research and development service payment consideration became unconditional.

We recorded the full reimbursed portion of these expenses accounted for under the contract with customer accounting standard as collaboration revenue in our consolidated statements of operations as we consider performing research and development services to be a part of our ongoing and central operations.

Development and Regulatory Milestone Payments

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We adjust our estimate of the overall transaction price, including the amount of collaborative revenue that was recorded, if necessary.

Research and Development Service Payments

We are reimbursed at a certain percentage for performing research and development services based on hours worked by our employees at a fixed contractual rate per hour and third-party pass-through costs we incur on a quarterly basis.

Research and development service payments are included in the transaction price in the reporting period that we conclude that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods.

Accounts receivable are recorded when the right to the research and development service payment consideration becomes unconditional.

We record the full reimbursed portion of these expenses as collaboration revenue in our consolidated statements of operations as we consider performing research and development services to be a part of our ongoing and central operations.

Sales-based Milestone and Royalty Payments

Our customer may be required to pay us sales-based milestone payments or royalties on future sales of commercial products.

We recognize 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 our licensed intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

We recognize revenues related to sales-based milestone and royalty payments upon the later to occur of (1) achievement of the collaborator’s underlying sales or (2) satisfaction of any performance obligation(s) related to these sales, in each case assuming our licensed intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

We receive payments from our customer based on billing schedules established in each contract.

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We also elected to use the practical expedient that allows an entity to expense the incremental cost of obtaining a contract as an expense when incurred if the amortization period of the asset that an entity otherwise would have recognized is less than one year.

Results for the year ended December 31, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under previous revenue recognition guidance.

Results for the year ended December 31, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in

accordance with historic accounting under the previous revenue recognition accounting standard .

As of the adoption date of ASC 606, we had only one contract with a customer, Allergan, that had not been completed.

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Some of the factors considered in the assessment include general macroeconomic conditions, conditions specific to the industry and market, cost factors, the overall financial performance and whether there have been sustained declines in our share price.

If we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or elect not to use the qualitative impairment test, a quantitative impairment test is performed using a two-step process.

The first step of the goodwill qualitative impairment assessment compares the fair value of the reporting unit to its carrying value.

If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required.

Effective January 1, 2020, we early adopted 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.

Under this accounting standard, annual or interim quantitative impairment testing is performed by comparing the estimated fair value of the reporting unit to its carrying value.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.

We use our market capitalization as an indicator of fair value.

We believe that since our reporting unit is publicly traded, the ability of a controlling shareholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of

our reporting unit as a whole to exceed our market capitalization.

We believe that since our reporting unit is publicly traded, the ability of a controlling stockholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of our reporting unit as a whole to exceed our market capitalization.

However, we believe that the fair value measurement need not be based solely on the quoted market price of an individual share of our common stock, but also can consider the impact of a control premium in measuring the fair value of its reporting unit.

The control premium utilized is based on control premiums observed in recent acquisitions of entities similar to us that were made on a non-minority basis.

Should our market capitalization be less than our total stockholders’ equity as of our annual test date or as of any interim impairment testing date, we would also consider market comparables, recent trends in our stock price over a reasonable period and, if appropriate, use an income approach (discounted cash flow) to determine whether the fair value of our reporting unit is greater than our carrying amount.

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The most significant assumptions we would use in a discounted cash flow methodology are the discount rate, the residual value and expected future revenues, gross margins and operating costs, along with considering any implied control premium.

The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.

If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess.

Implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities.

In 2020, we elected to bypass the qualitative goodwill impairment assessment.

As of October 1, 2020, we have determined through a quantitative impairment test that the fair value significantly exceeded the carrying value of our single reporting unit, and concluded that goodwill was not impaired.

In November 2020, after our public announcement that it became clear that patients who stopped therapy in Study 211 had not achieved meaningful SVR rates as 39 of 41 patients relapsed, our stock price declined 152% closing on November 5 at $15.90 and opening on November 6 at $6.30.

Due to a sustained decline in our stock price during the remainder of the fourth quarter of 2020, we determined these factors were an indication of a triggering event of impairment and an interim goodwill impairment test was performed as of December 31, 2020.

However, our interim quantitative impairment test still determined the fair value exceeded the carrying value of our single reporting unit and concluded that goodwill was still not impaired.

We did not recognize any goodwill impairment in any of the years presented.

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Our indefinite-lived intangible asset consists of in-process research and development (IPR&D) projects acquired in a business combination that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use.

The primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region.

The primary basis for determining the technological

feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region.

We classify in-process research and development acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts.

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If we conclude that is the case, or elect not to use qualitative impairment test, we would proceed with quantitatively determining the fair value of the IPR&D asset and comparing 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, we consider the results of the most recent quantitative impairment test and identifies the most relevant divers of the fair value for the IPR&D asset.

In performing the qualitative impairment test, we consider the results of the most recent quantitative impairment test and identify the most relevant drivers of the fair value for the IPR&D asset.

The most relevant drivers of fair value we have identified are consistent with the assumptions used in the quantitative estimate of the IPR&D asset discussed below.

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Any impairment to be recorded is calculated as the difference between the fair value of the IPR&D asset as of the date of the assessment with the carrying value of the IPR&D asset on our consolidated balance sheet.

For 2019 , we elected to perform a qualitative impairment test and concluded that it is more likely than not that the fair value of our IPR&D asset exceeded the carrying value and no further testing was required.

For our 2020 impairment test, we performed a qualitative test and concluded it was more-likely-than-not that the fair value of our IPR&D asset exceeded its carrying value and no further testing was required.

This was based on a decrease in the probability of success based on the impact of the Study 211 and dual combination VBR and NrtI therapy’s ability to serve as a finite and curative therapy for chronic HBV infection offset by an increase in the probability of success of 2158 and 3733 based on their advancement into Phase 2 and Phase 1 trials during 2020, respectively and the significance of the future net cash flows from potential drug sales for a finite and curative therapy for chronic HBV infection as primarily driven by the number of patients who will be diagnosed and treated and our competitive position in the marketplace.

We did not recognize any IPR&D impairment in any of the years presented.

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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 approval, professional services, travel costs, dues and subscriptions, depreciation and materials used in clinical trials and research and development and costs incurred under the Collaboration Agreement.

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 approval, professional services, travel costs, dues and subscriptions, depreciation and materials used in clinical trials as well as research and development and costs incurred under our collaboration agreements.

Research and development costs are expensed as incurred unless there is an alternative future use in other research and development projects.

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As part of the process of preparing our consolidated financial statements, we are required to estimate certain research and development expenses.

This process involves reviewing quotations and contracts, reviewing the terms of our license agreements, communicating with our vendors and applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

when we have not yet been invoiced or otherwise notified of the actual cost.

The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met.

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Adjustments to prior period estimates have not been material for the years ended December 31, 2020 and 2019.

Stock-Based Compensation

For equity awards that vest subject to the satisfaction of service requirements, compensation expense is measured based on the fair value of the award on the date of grant and is recognized as expense on a straight-line basis over the requisite service period.

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 stock awards which have a performance condition, compensation cost is measured based on the fair value 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 objective becomes probable.

We assess the probability of the performance conditions being met on a continuous basis.

Forfeitures are recognized when incurred.

The fair value of restricted stock units (RSUs) is determined based on the number of shares granted and the quoted market price of our common stock on the date of grant.

The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model (Black-Scholes Model).

The fair value of stock-based payment awards as determined by the Black-Scholes Model are affected by our stock price as well as other assumptions.

These assumptions include, but are not limited to, the expected term, the expected stock price volatility, the risk-free interest rate and the expected dividend yield.

We have, due to insufficient historical data, used the “simplified method” to determine the expected term of stock options granted with a service condition.

If any of the assumptions used in the Black-Scholes Model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

We account for stock-based compensation arrangements with non-employees, which primarily consist of consultants, using a fair value approach.

The fair value of these options is measured using the Black-Scholes Model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the expected life, which is assumed to be the remaining contractual life of the option.

The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned.

We expect to continue to grant stock options and other equity awards in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

We have and may continue to enter into license agreements to access and utilize certain technology.

In each case, we evaluate if the license agreement results in the acquisition of an asset or a business.

To date, none of our 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.

We assess whether such contingent consideration meets the definition of a derivative and to date we have determined that such contingent consideration are not derivatives.

Restructuring Charges

We recognize restructuring charges related to reorganization plans that have been committed to by us and when liabilities have been incurred.

In connection with these activities, we record 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 we have 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 us to make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reorganization plan.

To the extent the actual results differ from its estimates and assumptions, we 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 previously recognized.

Such changes to previously estimated amounts may be material to our consolidated financial statements.

Changes in the estimates of the restructuring charges are recorded in the period in which the change is determined.

At the end of each reporting period, we evaluate the remaining accrued restructuring balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed restructuring plans.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Since our inception, we have not engaged in any off-balance sheet arrangements.

Contractual Obligations

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Operating lease obligations

License obligations

Total contractual obligations

In general, milestone and royalty payments associated with certain license agreements have not been included in the above table of contractual obligations, because we cannot reasonably estimate if or when they will occur.

In general, milestone, royalty and other contingent fees associated with certain collaboration and license agreements have not been included in the above table of contractual obligations, because we cannot reasonably estimate if or when they will occur.

The milestone payments included in the table of contractual obligations above are payments we believe are reasonably likely to occur during the indicated time periods.

Excluded from the table are future research and development expenses under the Collaboration Agreement of up to $25.0 million.

We enter into contracts in the normal course of business with CROs for clinical trials and CMO’s for clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes, which generally provide for termination within 30 days of notice, and therefore, are cancelable contracts and not included in the table above.

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Results of Operations

At December 31, 2019, we had an accumulated deficit of approximately $439.4 million primarily as a result of research and development expenses and general and administrative expenses.

While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our product candidates are at an early stage of development and may never be successfully developed or commercialized.

At December 31, 2020, we had an accumulated deficit of $501.6 million primarily as a result of research and development expenses and general and administrative expenses.

While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our product candidates are in the clinical stage of development and may never be successfully developed or commercialized.

Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.

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Collaboration Revenue

During the year ended December 31, 2019, we generated approximately $16.0 million of collaboration revenue, which included the amortization of deferred revenue and reimbursement revenue in each case incurred under the Collaboration Agreement, an increase of approximately $1.2 million from approximately $14.8 million for the same period in 2018.

The increase was based on increased research efforts performed during 2019 for our Microbiome program.

The following table summarizes the period-over-period changes in our collaboration revenue (in thousands, except for percentages):

Year ended December 31,

Collaboration revenue

Collaboration revenue for the year ended December 31, 2020 includes the remaining deferred revenue balance of $37.0 million and reimbursements incurred under the Allergan Agreement, for which AbbVie Inc.

gave written notice of termination in June 2020 following its acquisition of Allergan, and $31.0 million recognized for the transfer of the VBR License upon entering into the Collaboration Agreement with BeiGene (BeiGene Agreement).

Research and Development Expense

Research and development expense, excluding stock-based compensation expense, was approximately $74.4 million for the year ended December 31, 2019, an increase of approximately $13.5 million from approximately $60.9 million for the same period in 2018.

The increase in research and development expenses was primarily due to an increase of approximately $9.4 million in research expenses for our HBV-cure program and an increase of approximately $4.1 million in research expenses for our Microbiome program.

Stock-based compensation expense was approximately $11.4 million for the year ended December 31, 2019, a decrease of approximately $0.4 million from approximately $11.8 million for the year ended December 31, 2018.

The following table summarizes the period-over-period changes in our research and development expenses (in thousands, except for percentages):

Year ended December 31,

Program/Description

Microbiome (2)

Total research and development expenses

Expenses presented for HBV include reimbursement of expenses of $0.2 million under the Arbutus Agreement, as discussed in Note 9 to the Consolidated Financial Statements.

Expenses presented for the Microbiome program exclude collaboration revenue related to expense reimbursements under the Allergan Agreement as discussed in Note 9 to the Consolidated Financial Statements.

Research and development expenses were $106.8 million for the year ended December 31, 2020 compared to $85.8 million for the year ended December 31, 2019 .

The increase was due to an increase of $14.4 million in research and development expenses related to the HBV program and an increase of $6.6 million in research and development expenses related to the Microbiome program.

These increases were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support VBR, 2158, 3733 and Microbiome clinical trials and increased salary and benefits due to additional employees.

In December 2020, we and our Board of Directors determined that it was in our best interest to wind down the Microbiome program, enabling us to prioritize resources and focus on the advancement of our pipeline of novel core inhibitors for chronic HBV infection.

We expect to complete the wind-down of the Microbiome program in early 2021.

Microbiome expenses for the year ended December 31, 2020 includes $5.5 million in restructuring costs related to the wind-down, which consists of $3.9 million in employee severance and related benefits and $1.6 million in asset impairment and other costs.

Refer to Note 6 to the Consolidated Financial Statements for additional information.

Research and development expenses include non-cash stock-based compensation expenses of $ 11.4 million for both the years ended December 31, 2020 and 2019 .

General and Administrative Expense

General and administrative expense, excluding stock-based compensation expense, was approximately $23.7 million for the year ended December 31, 2019, an increase of approximately $5.6 million from approximately $18.1 million for the same period in 2018.

The increase in general and administrative expenses was primarily due to an increase of approximately $3.5 million in employee related expenses due to the addition of employees in executive management, finance and human resources.

This increase also includes a one-time expense of $1.7 million for severance packages in conjunction with the relocation of our corporate headquarters to South San Francisco, California effective January 1, 2020, the departure of one of our former executives, $0.9 million in rent expenses for our new office in South San Francisco and $0.3 million in professional expenses.

Stock-based compensation expense was approximately $9.2 million for the year ended December 31, 2019, a decrease of approximately $7.5 million from approximately $16.7 million for the year ended December 31, 2018.

The decrease was primarily due to a $4.3 million one-time expense related to the departure and transition to consultant of one of our former executive officers in 2018 coupled with the reversal of previously recognized expense of $3.6 million related to forfeited awards resulting from the departure of one of our former executive officers in 2019.

The following table summarizes the period-over-period change in our general and administrative expenses (in thousands, except for percentages):

Year ended December 31,

General and administrative expenses

General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services, accounting and tax services, insurance and travel expenses, as well as stock-based compensation expense associated with equity awards to our employees, consultants and directors.

General and administrative expenses were $37.1 million for the year ended December 31, 2020, compared to $32.9 million for the year ended December 31, 2019 .

The increase in general and administrative expenses was primarily due to an increase of $3.1 million in professional expenses mostly attributable to the amortized incremental contract costs associated with entering into the BeiGene Agreement, $1.3 million in stock-based compensation expense, $0.5 million in equipment rental and $0.3 million in recruitment costs due to an increase in headcount partially offset by a decrease of $0.9 million in travel related expenses due to state and local laws restricting travel in response to the COVID-19 pandemic.

General and administrative expenses includes non-cash stock-based compensation expense of $10.5 million and $9.2 million for the years ended December 31, 2020 and 2019, respectively.

Stock-based compensation expense for the year ended December 31, 2020 includes the reversal of previously recognized expense of $1.7 million related to forfeited awards resulting from the departure of one of our former officers during the period, while stock-based compensation expense for the year ended December 31, 2019 includes the reversal of previously recognized expense of $3.6 million related to forfeited awards resulting from another our former officers during the period.

Interest and Other Income

Interest and other income was approximately $4.3 million for the year ended December 31, 2019 compared to approximately $3.1 million for the same period in 2018.

Interest income for the years ended December 31, 2019 and 2018 was primarily related to interest income earned on marketable securities, corporate bonds and money market funds as a result of higher balances carried in 2019.

The following table summarizes the period-over-period changes in our interest and other income (in thousands, except for percentages):

Year ended December 31,

Interest and other income

Interest and other income was $2.6 million for the year ended December 31, 2020 compared to $4.3 million for the same period in 2019.

Interest income for the years ended December 31, 2020 and 2019 was primarily related to interest income earned on marketable securities, corporate bonds and money market funds and the decrease is a result of lower balances and lower yields carried in 2020.

Income Tax (Expense) Benefit

Income tax benefit for the year ended December 31, 2019 was approximately $0.8 million compared to an income tax expense for year ended December 31, 2018 of $1.1 million.

The income tax benefit in the current year is primarily due to a change in the Company’s state and local effective tax rate and recording the impact of certain indefinite-lived deferred tax asset carryforwards.

The income tax expense recognized in the prior year is primarily due to a change in our state and local effective tax rate.

The following table summarizes the period-over-period change in our income tax benefit (in thousands, except for percentages):

Year ended December 31,

Income tax benefit

Income tax benefit for the year ended December 31, 2020 was nominal compared to an income tax benefit for year ended December 31, 2019 of $0.8 million.

The income tax benefit in the prior year is primarily due to a change in our state and local effective tax rate and recording the impact of certain indefinite-lived deferred tax asset carryforwards.

Comparison of the Years Ended December 31, 2019 and 2018

Collaboration Revenue

The following table summarizes the period-over-period changes in our collaboration revenue (in thousands, except for percentages ):

Year ended December 31,

Collaboration revenue

During the year ended December 31, 2019, we generated $16.0 million of collaboration revenue, which included the amortization of deferred revenue and reimbursement revenue in each case incurred under the Allergan Agreement, an increase of $1.2 million from $14.8 million for the same period in 2018.

The increase was based on increased research efforts performed during 2019 for our Microbiome program.

Research and Development Expense

Research and development expense, excluding stock-based compensation expense, was approximately $60.9 million for the year ended December 31, 2018, an increase of approximately $22.1 million from approximately $38.8 million for the same period in 2017.

The increase in research and development expenses was primarily due to an increase of approximately $18.3 million in research expenses for our HBV-cure program and an increase of approximately $3.9 million for nonclinical development of our Microbiome program.

Stock-based compensation expense was approximately $11.8 million for the year ended December 31, 2018, an increase of approximately $6.4 million from approximately $5.4 million for the year ended December 31, 2017.

The following table summarizes the period-over-period changes in our research and development expenses (in thousands, except for percentages):

Year ended December 31,

Program/Description

Microbiome (2)

Total research and development expenses

(1) Expenses presented for the Microbiome program exclude collaboration revenue related to expense reimbursements under the Allergan Agreement as discussed in Note 9 to the Consolidated Financial Statements.

Research and development expense s were $ 85.8 million for the year ended December 31, 2019 compared to $ 72.7 million for the year ended December 31, 2018 .

The increase was due to an increase of $ 8.1 million in research and development expenses related to the HBV program and an increase of $4.

9 million in research and development expenses related to the Microbiome program.

These increases were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support VBR, 2158 and M icrobiome clinical trials and increased salary and benefits due to additional employees.

Research and development expenses include non-cash stock based compensation expenses of $11.4 million for the year ended December 31, 2019, a decrease of $0.4 million from $11.8 million for the year ended December 31, 2018.

General and Administrative Expense

General and administrative expense, excluding stock-based compensation expense, was approximately $18.1 million for the year ended December 31, 2018, an increase of approximately $4.3 million from approximately $13.8 million for the same period in 2017.

The increase in general and administrative expenses was primarily due to an increase of approximately $2.1 million in salary and benefits expenses due to additional employees in information technology, human resources and finance, $0.6 million in office and equipment rent expenses, $0.4 million in professional expenses, $0.4 million in recruitment expenses, $0.3 million in tax expenses, $0.2 million in insurance expenses and $0.2 million in legal expenses.

Stock-based compensation expense was approximately $16.7 million for the year ended December 31, 2018, an increase of approximately $13.5 million from approximately $3.2 million for the year ended December 31, 2017.

The increase was due, in part, to a $4.3 million one-time expense related to the departure and transition to consultant of one of our former executive officers and an incremental expense of approximately $5.0 million was recognized due to the addition of a new executive officer in 2017.

The following table summarizes the period-over-period change in our general and administrative expenses (in thousands, except for percentages):

Year ended December 31,

General and administrative expenses

General and administrative expenses were $32.9 million for the year ended December 31, 2019, compared to $34.8 million for the year ended December 31, 2018.

The increase in general and administrative expenses was primarily due to an increase of $3.5 million in employee related expenses due to the addition of employees in executive management, finance and human resources.

Stock-based compensation expense was $9.2 million for the year ended December 31, 2019, a decrease of $7.5 million from $16.7 million for the year ended December 31, 2018.

Interest and Other Income

Interest and other income was approximately $3.1 million for the year ended December 31, 2018 compared to approximately $1.0 million for the same period in 2017.

Interest income for the years ended December 31, 2018 and 2017 was primarily related to interest income on marketable securities, corporate bonds and money market funds.

The following table summarizes the period-over-period changes in our interest and other income (in thousands, except for percentages):

Year ended December 31,

Interest and other income

Interest and other income was $4.3 million for the year ended December 31, 2019 compared to $3.1 million for the same period in 2018.

Interest income for the years ended December 31, 2019 and 2018 was primarily related to interest income earned on marketable securities, corporate bonds and money market funds, and the increase is a result of higher balances carried in 2019.

Income Tax (Expense) Benefit

Income tax expense for the year ended December 31, 2018 was approximately $1.1 million compared to an income tax benefit for year ended December 31, 2017 of $9.1 million.

The income tax expense in the current year is primarily due to a change in the Company’s realizability of its state and local effective tax rate.

The income tax benefit recognized in the prior year is primarily due to the Tax Cuts and Jobs Act of 2017 (the Tax Act) enacted on December 22, 2017, which reduced the U.S.

federal corporate tax rate to 21%.

The changes effected by the Tax Act resulted in tax benefit of $9.1 million, of which $8.6 million relates to the Tax Act.

The following table summarizes the period-over-period change in our income tax benefit (in thousands, except for percentages):

Year ended December 31,

Income tax benefit (expense)

Income tax benefit for the year ended December 31, 2019 was $ 0.8 million compared to an income tax expense for year ended December 31, 2018 of $1.1 million.

The income tax benefit in 2019 is primarily due to a change in our state and local effective tax rate and recording the impact of certain indefinite-lived deferred tax asset carryforwards.

The income tax expense recognized in 2018 is primarily due to a change in our state and local effective tax rate.

Liquidity and Capital Resources

As a result of our significant research and development expenditures and the lack of any FDA-approved products to generate product sales revenue, we have not been profitable and have generated operating losses since we were incorporated in October 2005.

We have funded our operations through December 31, 2019 principally with debt prior to our initial public offering, and thereafter with equity financing, raising an aggregate of approximately $546.4 million in net proceeds from public offerings and private placements from inception to December 31, 2019.

Additionally, in February 2017, we received a $50.0 million upfront payment in connection with the execution of the Collaboration Agreement.

In November 2017, we sold to various investors an aggregate of 2,541,000 shares of common stock in a public offering at $27.25 per share, which included the exercise in full by the underwriters of their option to purchase 331,500 additional shares of common stock.

We received aggregate net proceeds of approximately $64.8 million from the offering and option exercise, after deducting underwriting discounts and commissions and offering expenses.

I n July 2018, we sold to various investors an aggregate of 4,600,000 shares of common stock in a public offering at $36.00 per share, which included the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock.

We received aggregate net proceeds of approximately $155.4 million from the offering and the option exercise, afte r deducting underwriting discounts and commissions and offering expenses payable.

We have funded our operations through December 31, 2020 principally with debt prior to our initial public offering, and thereafter with equity financing, raising an aggregate of $551.8 million in net proceeds from public offerings and private placements from inception to December 31, 2020.

Additionally, in February 2017, we received a $50.0 million upfront payment in connection with the execution of the Allergan Agreement and in July 2020, we received a $40.0 million upfront payment in connection with the execution of the BeiGene Agreement.

In July 2018, we sold to various investors an aggregate of 4,600,000 shares of common stock in a public offering at $36.00 per share, which included the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock.

We received aggregate net proceeds of $155.4 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable.

In December 2019, we 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 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.

We received aggregate net proceeds of approximately $134.7 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable.

A summary of our cash flows for the periods presented was as follows:

We 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.

In December 2020, we sold an aggregate of 892,840 shares of common stock through “at-the-market” offerings (2020 ATM), resulting in net proceeds of $5.5 million.

A summary of our cash flows for the periods presented was as follows (in thousands):

Year Ended December 31,

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Net increase (decrease) in cash and cash equivalents

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities was approximately $84.1 million for the year ended December 31, 2019.

This was primarily due to approximately $97.6 million of net loss, a decrease of $9.5 million of operating assets and liabilities, approximately $0.8 million of deferred income tax benefit and $1.7 million of amortization of discount on marketable securities, which were offset by a $20.6 million non-cash expense recorded for stock-based compensation, $4.5 million of amortization of operating lease right-of-use assets and approximately $0.5 million of depreciation and amortization expense.

Net cash used in operating activities was approximately $65.0 million for the year ended December 31, 2018.

This was primarily due to approximately $90.8 million of net loss, a decrease of $4.2 million of operating assets and liabilities and $0.2 million of amortization of discount on marketable securities, which were offset by a $28.5 million non-cash expense recorded for stock-based compensation, $0.6 million of depreciation and amortization expense and approximately $1.1 million of deferred income tax expenses.

Net cash provided by operating activities was approximately $1.9 million for the year ended December 31, 2017 and funded our research and development program build out and general and administrative expenses.

Net cash provided by continuing operations for the year ended December 31, 2017 was primarily driven by approximately $8.6 million non-cash expenses recorded for the stock-based compensation, an approximately $44.3 million increase in cash from changes in operating assets and liabilities (primarily due to an increase in deferred revenue of $45.8 million related to the Collaboration Agreement) and $0.6 million realized loss from marketable securities, and offset by an approximately $42.8 million net loss and $9.1 million deferred income tax benefit.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2019 was approximately $50.3 million primarily due to a purchase of approximately $281.3 million marketable securities and $1.6 million of fixed assets, which were offset by approximately $203.9 million for the redemption of marketable securities and $28.7 million for the sale of marketable securities.

Net cash used in investing activities for the year ended December 31, 2018 was approximately $135.4 million primarily due to a purchase of approximately $183.9 million marketable securities and $0.3 million of fixed assets and construction in progress, which were offset by approximately $48.9 million for the redemption of marketable securities.

Net cash used in investing activities for the year ended December 31, 201 7 was approximately $15.6 million primarily due to the purchase of approximately $48.2 million of marketable securities and $0.9 million of fixed assets, and offset by a $33.5 million redemption of marketable securities during the year.

Net Cash Used in Operating Activities

Net cash used in operating activities was $63.0 million for the year ended December 31, 2020.

This was primarily due to $62.2 million of net loss and a decrease of $30.3 million of operating assets and liabilities, which were offset by a $21.9 million non-cash expense recorded for stock-based compensation, $5.2 million of amortization of operating lease right-of-use assets, $1.8 million in non-cash expense for acquired IPR&D and $0.7 million of depreciation and amortization expense.

Net cash used in operating activities was $84.1 million for the year ended December 31, 2019.

This was primarily due to $97.6 million of net loss, a decrease of $9.5 million of operating assets and liabilities, $0.8 million of deferred income tax benefit and $1.7 million of amortization of discount on marketable securities, which were offset by a $20.6 million non-cash expense recorded for stock-based compensation, $4.5 million of amortization of operating lease right-of-use assets and $0.5 million of depreciation and amortization expense.

Net cash used in operating activities was $65.0 million for the year ended December 31, 201 8 .

This was primarily due to $90.8 million of net loss, a decrease of $4.2 million of operating assets and liabilities and $0.2 million of amortization of discount on marketable securities, which were offset by a $28.5 million non-cash expense recorded for stock-based compensation, $0.6 million of depreciation and amortization expense and $1.1 million of deferred income tax expenses.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the year ended December 31, 2020 was $68.1 million primarily due to a purchase of $193.2 million marketable securities, $0.5 million of fixed assets and $1.8 million of IPR&D, which were offset by $221.6 million for the redemption of marketable securities and $41.9 million for the sale of marketable securities.

Net cash used in investing activities for the year ended December 31, 2019 was $50.3 million primarily due to a purchase of $281.3 million marketable securities and $1.6 million of fixed assets, which were offset by $203.9 million for the redemption of marketable securities and $28.7 million for the sale of marketable securities.

Net cash used in investing activities for the year ended December 31, 2018 was $135.4 million primarily due to a purchase of $183.9 million marketable securities and $0.3 million of fixed assets and construction in progress, which were offset by $48.9 million for the redemption of marketable securities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2019 was approximately $139.6 million resulting from the net proceeds of approximately $134.7 million from our public offering of 6,287,878 shares of common stock and 2,424,242 pre-funded warrants to purchase 2,424,242 shares of common stock at a public offering price of $16.499, including 1,136,363 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, approximately $4.2 million from the exercise of stock options to purchase 585,292 shares of common stock and approximately $0.7 million from the issuance of 59,370 shares of common stock under our 2018 ESPP .

Net cash provided by financing activities for the year ended December 31, 2018 was approximately $159.8 million, resulting from the net proceeds of approximately $155.4 million from our public offering of 4,600,000 shares of common stock, including 600,000 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, and approximately $4.0 million from the exercise of stock options to purchase 775,224 shares of common stock.

Net cash provided by financing activities in the year ended December 31, 2017 was approximately $67.2 million, resulting from the net proceeds of approximately $64.8 million from our public offering of 2,541,500 shares of common stock, including 331,500 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, and approximately $2.4 million from the exercise of stock options to purchase 353,612 shares of common stock resulting in 349,720 shares issued due to utilization of net exercise provisions by some option holders.

Net cash provided by financing activities for the year ended December 31, 2020 was $7.6 million resulting from the net proceeds of $5.5 million from the sale of 892,840 shares of our common stock under the 2020 ATM, $1.5 million from the exercise of stock options to purchase 175,579 shares of common stock and $0.7 million from the issuance of 86,812 shares of common stock under our 2018 ESPP.

Net cash provided by financing activities for the year ended December 31, 2019 was $139.6 million resulting from the net proceeds of $134.7 million from our public offering of 6,287,878 shares of common stock and 2,424,242 pre-funded warrants to purchase 2,424,242 shares of common stock at a public offering price of $16.499, including 1,136,363 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, $4.2 million from the exercise of stock options to purchase 585,292 shares of common stock and $0.7 million from the issuance of 59,370 shares of common stock under our 2018 ESPP.

Net cash provided by financing activities for the year ended December 31, 2018 was $159.8 million, resulting from the net proceeds of $155.4 million from our public offering of 4,600,000 shares of common stock, including 600,000 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, and $4.0 million from the exercise of stock options to purchase 775,224 shares of common stock.

Future Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical studies of our product candidates and pursue our intellectual property strategy.

Furthermore, we expect to continue to incur additional costs associated with operating as a public company.

We expect our expenses related to HBV program to remain flat in 2021 but to generally increase over time in connection with our ongoing activities, particularly as we continue the research, development and clinical studies of our product candidates and pursue our intellectual property strategy.

Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations.

If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

We monitor our cash needs and the status of the capital markets on a continuous basis.

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In addition, our product candidates, if approved, may not achieve commercial success.

Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for many years, if at all.

Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for years, if at all.

Accordingly, we will need to continue to rely on additional financings to achieve our business objectives.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis