ASSEMBLY BIOSCIENCES, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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 the discovery and development of innovative therapies 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 main goal: targeting the core protein of HBV 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 CongressTM in June 2021 (EASL 2021). At the American
Association for the Study of Liver Diseases (AASLD) Annual Meeting in November
2021 (AASLD 2021), we presented additional follow-up data from Study 211
demonstrating that patients had increases of HBV DNA and pgRNA after
discontinuation of VBR despite continued NrtI treatment, further supporting 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.

Additionally, at EASL 2021, we presented observations of increased potency of 3733 and target coverage for both antiviral activity and inhibition of cccDNA generation compared to VBR and 2158.

We plan 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 goal of completing the Investigative New Drug (IND) enabling studies and initiating a Phase 1a clinical study in the second half of 2022.

                                       38
--------------------------------------------------------------------------------

ABI-2158

In September 2021we have discontinued development of 2158 following the observation of elevated levels of alanine transaminase (ALT) 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 on its previous efforts to lead and conduct new discovery research, which we will fund. In exchange for an upfront payment and success-based milestones and royalties, we will be granted an exclusive option to license the compounds resulting from the collaboration and will be responsible for the further development and commercialization of the optional 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 costs

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

remuneration expenses;

• expenses incurred under agreements with third parties, including CROs that

conduct research and development, non-clinical and clinical activities on

our name and cost of consultants, and contracts

                                       40
--------------------------------------------------------------------------------
        manufacturing organizations (CMOs) that manufacture all of our drug
        substance and the drug product used in our HBV program;

• the cost of laboratory supplies and acquisition, development 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 expenses and

expenses allocated 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 Cancellation of $2.7 million of

previously recognized stock-based compensation expense related to the loss

rewards for employees made redundant due to progressive reduction 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;

• establishment of an appropriate safety profile with a toxicology allowing the IND

sufficient studies to advance other product candidates into the clinic

development;

• successful enrollment and completion of clinical studies;

• enter into agreements 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 life 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 includes interest earned on our cash and cash equivalents and our 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.

Good will and intangible asset with indefinite useful life

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 will be less than its carrying value, or choose 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 life 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 costs and accrued expenses

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:

• CRO and other service providers in connection with clinical studies;

• CMO in connection with the production of clinical trial material; 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.

Operating results

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, excluding 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 costs

The following table summarizes the period-over-period changes in our research and development expenditures (in thousands, excluding 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 costs

The following table summarizes the period-over-period change in our general and administrative expenses (in thousands, excluding 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 Good will and intangible asset with indefinite useful life

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, excluding 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 $0.3 million for the year ended December 31, 2021compared to $2.6 million for the year ended December 31, 2020. The decrease is mainly due to lower interest income earned on marketable securities

                                       46
--------------------------------------------------------------------------------

securities, corporate bonds and money market funds due to lower yields and a decrease in the total amount invested in marketable securities in 2021.

Tax benefit

The following table summarizes the period-over-period changes in our tax benefit (in thousands, excluding 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.

Cash 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 2020we sold a total of 892,840 common shares through “in-the-market” (ATM 2020) offerings, generating net proceeds of $5.5 million.

In 2021, we sold a total of 11,234,207 shares of common stock through ATM 2020, resulting in net proceeds of $52.8 million.

Future funding needs

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,

non-clinical 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 acquire or license other products

        candidates and technologies;


    •   our ability to manufacture, and to contract with third parties to

manufacturing, adequate supplies of our product candidates for our clinical

studies and any possible marketing;

• the costs, timing and results 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

        property rights and defending intellectual property-related claims; and


    •   our ability to establish and maintain collaborations on favorable terms,

if not 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

(Decrease) net 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

————————————————– ——————————

© Edgar Online, source Previews