ASSEMBLY BIOSCIENCES, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth in this Form 10-K under “Item 1A. Risk Factors.” Overview We are a clinical-stage biotechnology company focused on discovery and development of innovative therapeutics targeting hepatitis B virus (HBV) and other viral diseases. The World Health Organization (WHO) estimates that 296 million people worldwide are chronically infected with HBV as of 2019. Our research and development organizations 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 chronic HBV infection. We have discovered several novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core protein in a way that affects assembly and stability of HBV nucleocapsids. In addition, our research organization is working on discovering and developing cccDNA disruptors and small molecules targeting two novel undisclosed HBV targets, While we continue our efforts to develop finite and curative therapies for patients with chronic HBV infection, our research organization recently launched an exploratory virology discovery program for compounds directed at a number of non-HBV viral targets. These targets, currently expected to be disclosed in mid-2022, were selected to leverage the deep antiviral expertise and experience of our research and development organizations against diseases with significant unmet medical need. The ongoing COVID-19 pandemic and its broad, global impacts, including supply chain disruptions, have impacted certain aspects of our business, including where and how our employees work in our labs and offices and how and when our nonclinical and clinical studies are conducted. Early in the pandemic, our current and future planned clinical trials and preclinical studies were largely unaffected, but as the pandemic has continued, we have experienced enrollment delays for our current clinical studies, particularly our two ongoing multi-drug combination studies. As previously announced, in January 2021, we wound down our Microbiome program to prioritize and focus our resources on our virology programs. 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 viral 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 viral protein 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 Vebicorvir (VBR), our lead core inhibitor product candidate, is licensed from Indiana University. The conduct of our initial Phase 2 studies, Study 201 and 202, is complete. In these studies, VBR administered with NrtI therapy demonstrated a favorable safety profile and led to greater viral suppression of both HBV DNA and viral pgRNA than NrtI therapy alone. Our most recently completed study for VBR, Study 211, involved transitioning patients who met the requisite stopping criteria, as determined in collaboration 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 LLOQ and would be consistent with a successful finite treatment for chronic HBV infection. During the trial, it became clear that patients who stopped therapy in Study 211 37 had not achieved SVR , as all patients relapsed, meaning they had detectable HBV and the dual combination therapy of VBR + NrtI was insufficient to cure chronic HBV infection in the studied population. Based on these results, we terminated Study 211 in the fourth quarter of 2020. We presented follow-up data from Study 211 related to virologic response, safety and resistance following treatment discontinuation, at the European Association for the Study of the Liver’s (EASL) International Liver Congress TM in June 2021 (EASL 2021). A t the American Association for the Study of Liver Diseases (AASLD) Annual Meeting in November 2021 (AASLD 2021) , we presented a dditional follow-up data from Study 211 demonstrat ing that patients ha d increases of HBV DNA and pgRNA after discontinuation of VBR despite continued NrtI treatment , further support ing that core inhibitors deepen viral suppression in combination with NrtIs . 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), in early 2021, we decided to not move forward with the global registrational studies for VBR as a 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 terminated Study 205 and began to focus our efforts with VBR in combination with NrtI and additional mechanisms targeting finite and curative combination therapy. We currently have two Phase 2 triple combination studies involving VBR ongoing, with a third expected to be initiated in the first half of 2022. These studies are detailed below. See “—Multi-Drug Combination Studies.” Next-Generation Core Inhibitors In pursuit of our goal of developing finite and curative therapies for patients with chronic HBV infection, we plan to advance the optimal core inhibitor in our portfolio for use as the antiviral backbone with NrtI. While we currently have VBR, our first-generation core inhibitor product candidate, and 3733, a next-generation product candidate, in clinical studies, we expect to initiate Phase 1a studies of 4334, our most potent next-generation product candidate in the second half of 2022. Based on the clinical progress of these candidates, we will apply disciplined, data-driven analyses to identify the optimal candidate to advance into late-stage clinical trials to produce potentially higher cure rates than are currently obtainable for patients with chronic HBV infection under the current standard of care. ABI-H3733 Our first of two next-generation core inhibitor product candidates, 3733, was internally discovered and developed. The chemical scaffold of 3733 is novel and distinct from each of VBR, 4334 and our discontinued core inhibitor product candidate, ABI-H2158 (2158). In 2020, we initiated and completed a Phase 1a clinical study of 3733 to evaluate safety, tolerability and pharmacokinetics (PK) following single ascending dose and multiple ascending dose administration in healthy subjects in New Zealand. Preliminary data indicate that 3733 was generally well-tolerated and had favorable PK. Results detailing 3733’s safety and PK from this study were presented in a poster presentation at AASLD 2021. In addition, at EASL 2021, we presented observations on 3733’s enhanced potency and target coverage for both antiviral activity and inhibition of cccDNA generation as compared to VBR and 2158. We expect to initiate a Phase 1b study with an improved formulation of 3733 in patients with chronic HBV infection in the first half of 2022. ABI-4334 In mid-2021, we announced the selection of 4334, our other next-generation core inhibitor product candidate. As with all of our core inhibitor product candidates nominated after VBR, 4334 was internally discovered and developed. In addition, the chemical scaffold of 4334 is also novel and distinct from each of VBR, 3733 and 2158. We nominated 4334 based on a preclinical target drug profile that indicates enhanced target coverage and potency to prevent both formation of new virus and cccDNA, which is responsible for maintaining the HBV viral reservoir. We believe that 4334 has a best-in-class preclinical profile, with single-digit nanomolar potency against the production of new virus and the formation of cccDNA. Preclinically to date, 4334 has also demonstrated pan-genotypic activity, an improved resistance profile and a favorable safety profile. Preclinical characterization of 4334 was shared in a poster presentation at AASLD in November 2021. Our preclinical work on 4334 is ongoing, with the aim of completing Investigational New Drug (IND) enabling studies and initiating a Phase 1a clinical study in the second half of 2022. 38 ABI-2158 In September 2021, we discontinued development of 2158 following the observation of elevated alanine transaminase (ALT) levels in the Phase 2 clinical study consistent with drug-induced hepatotoxicity. 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 nonoverlapping mechanisms of action to the core inhibitor + NrtI antiviral backbone. We currently have two ongoing triple combination studies and a third triple combination study expected to start in the first half of 2022 to study VBR in combination with NrtI and a third mechanism of action. Our first triple combination study is being conducted pursuant to a Clinical Trial Agreement with Arbutus Biopharma Corporation (Arbutus Biopharma) and consists of a randomized, multi-center, open-label Phase 2 clinical study to explore the safety, PK and antiviral activity of the triple combination of VBR, NrtI and AB-729 (Arbutus Biopharma’s investigational RNAi candidate) compared to the double combinations of VBR + NrtI and AB-729 + NrtI in virologically suppressed patients. This clinical study initiated in the first quarter of 2021 and completed enrollment in February 2022. We expect to share interim on-treatment results from this study in the second half of 2022. Our second triple combination study evaluates VBR and NrtI in combination with interferon in treatment-naïve HBeAg positive subjects. This study was also initiated in the first quarter of 2021, and we expect enrollment to be complete in March 2022. We expect to share interim on-treatment results from this study in the second half of 2022. Our third triple combination study will be conducted pursuant to a Clinical Trial Collaboration Agreement with Antios Therapeutics, Inc. (Antios) and will evaluate ATI-2173, Antios’s investigational proprietary active site polymerase inhibitor nucleotide (ASPIN), VBR and tenofovir disoproxil fumarate, an NrtI. This multi-center, double-blinded, placebo-controlled study will evaluate the safety, PK and antiviral activity of this all-oral triple combination. We expect to initiate this study, which will enroll ten treatment-naïve or off-treatment HBeAg negative or positive patients in a 12-week treatment study, in the first half of 2022. The study plan initially included a site in Ukraine, but we will no longer be conducting the study there due to the instability resulting from Russia’s recent invasion of Ukraine. We expect these changes to our study plan to result in a delayed data readout. Both our first and second triple combination studies have experienced enrollment delays due to the ongoing COVID-19 pandemic. The pandemic has impacted patients and study sites through patient screening delays, travel restrictions and hesitancy to travel to study sites. The pandemic has also impacted our vendors, as our central laboratories have been unable to meet their contractual obligations, and our vendors have experienced staffing constraints and supply chain challenges as they seek to obtain lab kits, reagents and other items necessary to enroll patients in our studies. As a result, we were unable to fully enroll our first and second triple combination studies in 2021 as initially planned; however, based on enrollment to date, we do not believe these delays will impact interim data readouts for these studies, which remains on schedule in 2022. 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 cccDNA disruptors and small molecules targeting two novel undisclosed HBV targets, which we expect to announce in the first half of 2022, to complement our HBV cure strategy. In November 2020, we entered into an exclusive, two-year collaboration and option agreement with Door Pharmaceuticals , LLC (Door Pharma) focused on the development of a novel class of HBV inhibitors. Door Pharma’s discovery platform targets functions of core protein distinct from viral assembly and have the potential to interfere with viral nucleic acid including intra-nuclear cccDNA, providing a strong complement to our current portfolio. Together with Door Pharma, we are working on identifying cccDNA disruptors, which will be aimed at inhibiting different intra-nuclear steps in the viral replication cycle that complement the activity of our core inhibitors. Under the terms of the agreement, Door Pharma will build upon its previous efforts to lead and conduct new discovery research, which we will fund. In return for an up-front payment and success-based milestones and royalties, we will be granted an exclusive option to license compounds arising from the collaboration and will be responsible for the continued development and commercialization of optioned compounds. 39 Additional Antiviral Opportunities In addition to our work toward developing finite and curative therapies for patients with chronic HBV infection, we have expanded our research and development organizations’ reach by pursuing exploratory research on novel compounds targeting other viruses. Our expanded focus leverages the depth and breadth of virology expertise of our research and development organization to diversify our pipeline into areas of high unmet medical need. We expect to disclose more information regarding these discovery programs on additional viral targets in mid-2022. Operations We currently have corporate and administrative offices and research laboratory space in South San Francisco, California as well as registrational offices 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, maintaining and improving our patent portfolio and raising capital. We have generated significant losses to date, and we expect to continue to generate losses as we develop our product candidates. As of December 31, 2021, we had an accumulated deficit of $631.4 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. As a result, our operating losses are likely to be substantial over the next several years as we continue the development of our product candidates and thereafter if none are approved or successfully launched. We are unable to predict the extent of any future losses or when we will become profitable, if at all. In mid-March 2020, as a result of the COVID-19 pandemic, six San Francisco Bay Area counties announced a shelter-in-place order, restricting all residents to their homes, with few exceptions. Within a week, California issued a statewide stay-at-home order. As a biotechnology company, we were exempt from such orders. On June 15, 2021, California reopened its economy, and all applicable local orders were also lifted on June 15, 2021. In addition, we have taken the additional step of requiring that all of our employees be fully vaccinated against COVID-19. There has not been any significant interruption to date of essential activities at our offices, including work in our laboratories with proper protections and procedures in place. While we have experienced some shipping delays or shortages of personal protective equipment (PPE) that are important to maintaining normal workflows in our laboratories, we have been able to continue our critical research activities through schedule shifts, use of PPE on-hand and reallocation of certain resources that allow our employees to practice “social distancing” and comply with applicable laws. Substantially all of our U.S.-based non-research employees have been working from their homes since mid-March 2020. Early in the pandemic, our current and future planned clinical trials and preclinical studies were largely unaffected, but as the pandemic has continued, we have experienced enrollment delays in our current clinical studies, particularly our two ongoing multi-drug combination studies. We continually work with our contract research organizations (CROs) and other vendors to ensure, to the extent possible, that services are provided in a timely manner while also identifying alternative vendors and strategies to utilize in the event that COVID- or third party-related delays threaten our ability to meet our timelines. We cannot currently predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our ongoing and planned research efforts, clinical studies and other business operations. We continue to monitor the situation regularly for additional potential delays, or modifications to our ongoing and planned studies and, if circumstances warrant, we may adjust our budget and operating plan. Financial Operations Overview Research and Development Expense Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, target validation, lead optimization and the development of our product candidates, which include: • employee-related expenses including salaries, benefits, and stock-based compensation expense; • expenses incurred under agreements with third parties, including CROs that conduct research and development, nonclinical and clinical activities on our behalf and the cost of consultants, and contract 40 manufacturing organizations (CMOs) that manufacture all of our drug substance and the drug product used in our HBV 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; • fees related to our license agreements; and • facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs. Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are rendered. We use our employee and infrastructure resources across multiple research and development programs, and we allocate internal employee-related and infrastructure costs, as well as certain third-party costs, to each of our programs based on the personnel resources allocated to such program. Our research and development expenses, by major program, are outlined in the table below (in thousands): Year Ended December 31, 2021 2020 HBV $ 72,616 $ 71,957 Microbiome (4,092 ) (1) 34,866 Total $ 68,524 $ 106,823 ( 1 ) Expenses presented for Microbiome for the year ended December 31, 2021 include a gain of $3.0 million on the sale of assets under the Asset Purchase Agreement (Microbiome Purchase Agreement) and the reversal of $2.7 million of previously recognized stock-based compensation expense related to forfeited awards of terminated employees due to the wind-down of the Microbiome program . The successful discovery and development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate, or know the nature, timing and estimated costs, of the efforts that will be necessary to complete the remainder of their development. We are also unable to predict when, if ever, material net cash inflows will commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of: • 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; • making arrangements with third-party manufacturers; and • obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates. A change in the outcome of any of these variables or variables discussed in “Item 1A. Risk Factors” with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate. Research and development activities are central to our business model. 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. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and 41 various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans. General and administrative expenses General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development, legal and human resources functions. 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 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. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with exchange listing and U.S. Securities and Exchange Commission (SEC) requirements, insurance, and investor relations costs. Impairment of goodwill and indefinite-lived intangible asset Goodwill and our indefinite-lived intangible asset are reviewed for impairment at least annually in the fourth quarter and more frequently if events or other changes in circumstances indicate the carrying amount of the assets may not be recoverable. Impairment of goodwill and an indefinite-lived intangible assets is determined to exist when the fair value is less than the carrying value of the asset being tested. In the fourth quarter of 2021, we concluded both goodwill and our indefinite-lived intangible asset were fully impaired resulting in the full write-off of these balances to the statement of operations and comprehensive loss. Interest income Interest income consists of interest earned on our cash and cash equivalents and available-for-sale securities. Critical Accounting Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. 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. Actual results may differ from these estimates under different assumptions or conditions. Goodwill and Indefinite-Lived Intangible Asset Goodwill and our indefinite-lived intangible asset are reviewed for impairment at least annually in the fourth quarter and more frequently if events or other changes in circumstances indicate the carrying amount of the assets may not be recoverable. Goodwill We have one operating segment and reporting unit. Accordingly, our review of goodwill impairment indicators is performed at the entity-wide level. In performing each annual impairment assessment and any interim impairment assessment, we determine if we should qualitatively assess whether it is more likely than not the fair value of goodwill is less than its carrying amount (the qualitative impairment test). 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 42 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 . 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 stockholder to benefit from synergies and other intangible assets which arise from control might cause the fair value of our reporting unit as a whole to exceed our market capitalization. However, we believe 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 which 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 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. When we use an income approach, we establish a fair value by estimating the present value of our projected future cash flows, adjusted for probabilities of technical success, expected to be generated from our business. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Our discounted cash flow methodology considers projections of financial performance for a period of several years combined with an estimated residual value. We elected to perform a quantitative impairment assessment of goodwill for our single reporting unit in the fourth quarter of 2021 due to a sustained decline in our market capitalization, an increase in negative economic outlook for biotech markets and a fourth quarter unfavorable clinical trial result for a competitor’s curative combination therapy for HBV infection. We estimated and reconciled the fair value of our reporting unit using both a market approach, utilizing our market capitalization adjusted for an estimated control premium, and the income approach, discounting future cash flows based on management’s expectations of timelines to complete clinical trials, regulatory and commercial probabilities of technical success as well as future earnings forecast. Before completing our goodwill impairment test, we first tested our indefinite-lived intangible asset then our remaining long-lived assets for impairment. We concluded our indefinite-lived intangible asset was fully impaired and included that impairment within the net carrying value of our reporting unit for purposes of our goodwill impairment test. No impairment was identified for our long-lived assets. We concluded the fair value of our single reporting unit was less than its carrying value and therefore recognized an impairment charge of $12.6 million to write off the entire balance of our goodwill. This was primarily due to an increase in discount rates from the standpoint of a market participant and their views on how such aforementioned events increase the risks associated with the Company. The fair value measurements were primarily based on Level 3 inputs. The calculation of the impairment charge includes substantial fact-based determinations and estimates including discount rates, future revenues, profitability, cash flows, probabilities of technical success, and fair values of assets and liabilities, and any changes to these assumptions could result in changes to the fair value of our single reporting unit. The goodwill impairment charge is reflected in impairment of goodwill and indefinite-lived intangible asset in the consolidated statements of operations and comprehensive loss. Indefinite-Lived Intangible Asset Our indefinite-lived intangible asset consist of in-process research and development (IPR&D) associated with small molecule core inhibitors that directly target and allosterically inhibit core protein functions associated with HBV that were acquired with the acquisition of Assembly Pharmaceuticals, Inc. in 2014. IPR&D represents the fair value assigned to incomplete research projects we acquired through a business combination which, at the time of acquisition, had not reached technological feasibility, regardless of whether they had alternative 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. 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. Upon completion of the associated research and development efforts, we perform a final test for impairment and will determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, we would write off the remaining carrying amount of the associated IPR&D intangible asset. In performing each annual impairment assessment and any interim impairment assessment, we determine if we should qualitatively assess whether it is more likely than not the fair value of our IPR&D asset is less than its carrying amount (the qualitative impairment test). If we conclude that is the case, or elect not to use qualitative impairment test, we 43 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 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. Using these drivers, we identify events and circumstances that may have an effect on the fair value of the IPR&D asset since the last time the IPR&D’s fair value was quantitatively determined. We then weigh these factors to determine and conclude if it is more likely than not the IPR&D asset is impaired. If it is more likely than not the IPR&D asset is impaired, we proceed with quantitatively determining the fair value of the IPR&D asset. We use the income approach to determine the fair value of our IPR&D asset. This approach calculates fair value by estimating the after-tax, probability of technical success adjusted, cash flows attributable to an in-process project over its useful life and then discounting these after-tax cash flows back to a present value. This estimate includes significant assumptions regarding the estimates market participants would make in evaluating the IPR&D asset, including the probability of successfully completing clinical trials and obtaining regulatory approval to market the IPR&D asset, the timing of and the expected costs to complete IPR&D projects, future net cash flows from potential drug sales, which are based on estimates of the sales price of the drug, the number of patients who will be diagnosed and treated and our competitive position in the marketplace, and appropriate discount and income tax rates. The fair value of our IPR&D asset could vary based on the significant assumptions described. 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. During the fourth quarter of 2021 and prior to the goodwill impairment test, we also completed a quantitative impairment test for our IPR&D asset associated with the Assembly Pharmaceuticals, Inc. acquisition. We utilized the discounted cash flow model of the income approach and determined the carrying value of our IPR&D asset was fully impaired resulting in an impairment charge of $29.0 million. This was primarily driven by a higher discount rate applied to future cash flows based on a market participant’s view of increased risk associated with a negative economic outlook for biotech markets and a fourth quarter unfavorable clinical trial result for a competitor’s curative combination therapy for HBV infection. The fair value measurements were primarily based on Level 3 inputs. Some of the more significant assumptions inherent in the development of the model included the estimated annual cash flows, particularly net revenues, the appropriate discount rate to select in order to measure the risk inherent in the future cash flows, cost to complete the IPR&D project as well as other factors. The impairment charge recorded is reflected in impairment of goodwill and indefinite-lived intangible asset in the consolidated statements of operations and comprehensive loss. 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 as well as research and development and costs incurred under our collaboration agreements. 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. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Such payments are evaluated for current or long-term classification based on when they will be realized or consumed. Examples of estimated amortized or accrued research and development expenses include fees to: • CROs and other service providers in connection with clinical studies; • CMOs in connection with the production of clinical trial materials; and • vendors in connection with preclinical development activities. 44 We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In either amortizing or accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the related prepayment or accrual accordingly. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period. Adjustments to prior period estimates have not been material for the years ended December 31, 2021 and 2020 . 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. Results of Operations General At December 31, 2021, we had an accumulated deficit of $631.4 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 in the clinical stage of development or in varying stages of nonclinical 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. Comparison of the Years Ended December 31, 2021 and 2020 Collaboration Revenue The following table summarizes the period-over-period changes in our collaboration revenue (in thousands, except for percentages): Year Ended December 31, $ Change % Change 2021 2020 2021 vs. 2020 2021 vs. 2020 Collaboration revenue $ 6,254 $ 79,105 $ (72,851 ) (92 %) Collaboration revenue for the year ended December 31, 2021 consists of the recognition of deferred revenue allocated to 2158 under the BeiGene Agreement upon discontinuing development of 2158. Collaboration revenue for the year ended December 31, 2020 consists of $31.0 million recognized for the transfer of the VBR License upon entering into the BeiGene Agreement and the remaining deferred revenue balance of $37.0 million and reimbursements incurred under the Allergan Agreement, for which AbbVie Inc. (formerly Allergan) gave written notice of termination in June 2020 following its acquisition of Allergan. Research and Development Expense The following table summarizes the period-over-period changes in our research and development expenses (in thousands, except for percentages): Year Ended December 31, $ Change % Change Program/Description 2021 2020 2021 vs. 2020 2021 vs. 2020 HBV program $ 72,616 $ 71,957 $ 659 1 % Microbiome program (4,092 ) 34,866 (38,958 ) (112 %) Total research and development expenses $ 68,524 $ 106,823 $ (38,299 ) (36 %) 45 Research and development expenses were $68.5 million for the year ended December 31, 2021 compared to $106.8 million for the year ended December 31, 2020 . The $38.3 million decrease in research and development expenses was primarily related to the wind-down of the Microbiome program and includes a $3.0 million gain on the sale of Microbiome assets. The decrease was partially offset by an increase of $0.7 million in research and development expenses related to the HBV program, which were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support clinical development of our compounds and increased salary and benefits due to our hiring of additional employees. Research and development expenses include stock-based compensation expenses of $0.5 million and $11.4 million for the years ended December 31, 2021 and 2020, respectively. The decrease in stock-based compensation expense is primarily due to a decrease in the grant date fair value of stock option awards and reversals of $4.8 million of previously recognized stock-based compensation expense related to awards forfeited by terminated employees. General and Administrative Expense The following table summarizes the period-over-period change in our general and administrative expenses (in thousands, except for percentages): Year Ended December 31, $ Change % Change 2021 2020 2021 vs. 2020 2021 vs. 2020 General and administrative expenses $ 28,780 $ 37,058 $ (8,278 ) (22 %) General and administrative expenses were $28.8 million for the year ended December 31, 2021, compared to $37.1 million for the year ended December 31, 2020 . General and administrative expenses include stock-based compensation expense of $4.7 million and $10.5 million for the years ended December 31, 2021 and 2020, respectively. The decrease in stock-based compensation expense of $5.8 million was due to a decrease in the grant date fair value of recent stock option awards and a reversal of $2.1 million of previously recognized stock-based compensation expense during the year ended December 31, 2021 related to awards forfeited by terminated employees. Additionally, during the year ended December 31, 2020 , we recognized $0.7 million as a cumulative catch-up adjustment of stock-based compensation expense for RSUs with performance-based vesting conditions granted to an executive officer for which the underlying performance condition was deemed probable. We also experienced a decrease of $2.6 million in professional fees during the year ended December 31, 2021 compared to the same period in 2020 due to the amortized incremental contract costs associated with entering into the BeiGene Agreement in 2020. Impairment of Goodwill and Indefinite-Lived Intangible Asset The following table summarizes the period-over-period change in our impairment of goodwill and indefinite-lived intangible asset (in thousands, except for percentages): Year Ended December 31, $ Change % Change 2021 2020 2021 vs. 2020 2021 vs. 2020 Impairment of goodwill and indefinite-lived intangible asset $ 41,638 $ — $ 41,638 100 % In the fourth quarter of 2021, we concluded our goodwill and IPR&D asset were impaired due to a sustained decline in our stock price as well as industry and market factors which caused an increase in the estimated discount rate applied to future cash flows. This resulted in the entire write-off of our goodwill and IPR&D asset of $12.6 million and $29.0 million, respectively. Interest and Other Income, Net The following table summarizes the period-over-period changes in our interest and other income, net (in thousands, except for percentages): Year Ended December 31, $ Change % Change 2021 2020 2021 vs. 2020 2021 vs. 2020 Interest and other income, net $ 302 $ 2,624 $ (2,322 ) -88 % Interest and other income, net was $0.3 million for the year ended December 31, 2021, compared to $2.6 million for the year ended December 31, 2020. The decrease was primarily due to less interest income earned on marketable 46 securities, corporate bonds and money market fund s caused by lower yields and a decrease in the total amount invested in marketable securities in 202 1 . Income Tax Benefit The following table summarizes the period-over-period changes in our income tax benefit (in thousands, except for percentages): Year Ended December 31, $ Change % Change 2021 2020 2021 vs. 2020 2021 vs. 2020 Income tax benefit $ 2,531 $ — $ 2,531 100 % During the year ended December 31, 2021, we recognized an income tax benefit of $2.5 million due to the reversal of deferred tax liabilities associated with our in-process research and development which was fully impaired in 2021. Liquidity and Capital Resources Sources of Liquidity 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, 2021 principally with debt prior to our initial public offering, and thereafter with equity financing, raising an aggregate of $604.6 million in net proceeds from public offerings and private placements from inception to December 31, 2021. 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 $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. In 2021, we sold an aggregate of 11,234,207 shares of common stock through the 2020 ATM, resulting in net proceeds of $52.8 million. Future Funding Requirements We expect our expenses related to HBV program to increase in 2022 and 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 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. From time to time, we opportunistically raise capital and have done so numerous times since our initial public offering by issuing equity securities, most recently in November 2021. We expect to continue to raise capital when and as needed and at the time and in the manner most advantageous to us. We expect our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. Our contractual obligations include operating lease obligations totaling $6.5 million as of December 31, 2021, of which $3.6 million are short-term. We are subject to paying milestone, royalty and other contingent fees associated with certain collaboration and license agreements upon the successful achievement of development and regulatory milestones of our core inhibitor product candidates. We also 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. Since our inception, we have not engaged in any off-balance sheet arrangements as defined in Item 303(a )(4) of Regulation S-K . 47 Our future capital requirements will depend on many factors, including: • the scope, progress, results and costs of our ongoing drug discovery, nonclinical development, laboratory testing and clinical studies of our product candidates and any additional clinical studies we may conduct in the future; • the extent to which we further acquire or in-license other product candidates and technologies; • our ability to manufacture, and to contract with third parties to manufacture, adequate supplies of our product candidates for our clinical studies and any eventual commercialization; • the costs, timing and outcome of regulatory review of our product candidates; • the costs of preparing, filing and prosecuting patent applications in the United States and abroad, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and • our ability to establish and maintain collaborations on favorable terms, if at all. Identifying potential product candidates and conducting nonclinical testing and clinical studies is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. 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 years, if at all. Accordingly, we will need to continue to rely on additional financings to achieve our business objectives. Adequate additional financings may not be available to us on acceptable terms, or at all. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Cash Flows A summary of our cash flows for the periods presented was as follows (in thousands): Year Ended December 31, 2021 2020 Operating activities $ (93,396 ) $ (62,957 ) Investing activities 26,515 68,070 Financing activities 53,064 7,599 Net (decrease) increase in cash and cash equivalents $ (13,817 ) $ 12,712 48 Net Cash Used in Operating Activities Net cash used in operating activities was $93.4 million for the year ended December 31, 2021. This was primarily due to our net loss of $129.9 million, partially offset by the $41.6 million we recognized for the impairment of our goodwill and indefinite-lived intangible asset. 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 $28.1 million decrease in deferred revenue from recognition of deferred revenue under the Allergan Agreement, partially offset by an increase in deferred revenue under the BeiGene Agreement. These were offset by non-cash adjustments of $21.9 million of stock-based compensation and $5.2 million of amortization of operating lease right-of-use assets. Net Cash Provided by Investing Activities Net cash provided by investing activities for the year ended December 31, 2021 was $26.5 million. This was primarily due to proceeds of $27.3 million from sales and maturities of marketable securities, net of purchases, and proceeds of $1.5 million from the sale of Microbiome assets. This was partially offset by our purchase of leased equipment for $3.1 million that we then sold for $0.9 million in connection with the wind-down of the Microbiome program. Net cash provided by investing activities for the year ended December 31, 2020 was $68.1 million. This was due to proceeds of $70.3 million from sales and maturities of marketable securities, net of purchases, used to fund our operations, offset by $1.8 million from the purchase of in-process research and development. Net Cash Provided by Financing Activities Net cash provided by financing activities for the year ended December 31, 2021 was $53.1 million resulting from the net proceeds of $52.8 million from the sale of 11,234,207 shares of our common stock under the 2020 ATM and $0.3 million from the issuance of 88,820 shares of common stock under the Assembly Biosciences Amended and Restated 2018 Employee Stock Purchase Plan (2018 ESPP). 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. 49 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable.