ASSEMBLY BIOSCIENCES, INC. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2020

OR

For the transition period from ___________to___________.

Commission file number: 001-35005

ASSEMBLY BIOSCIENCES, INC.

(Exact name of Registrant as specified in its charter)

(833) 509-4583

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     ☒    No       ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes        ☒    No       ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐     No   ☒

As of May 4, 2020, there were 32,722,365 shares of the registrant’s common stock outstanding.

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except for share amounts and par value)

See Accompanying Notes to Condensed Consolidated Financial Statements

1

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands except for share and per share amounts)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

2

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

3

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands except for share amounts)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

4

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Nature of Business

Overview

Assembly Biosciences, Inc., together with its subsidiaries (Assembly or the Company), incorporated in Delaware in October 2005, is a clinical-stage biotechnology company advancing two innovative programs: a novel class of oral therapeutic candidates targeting chronic hepatitis B virus (HBV) infection and a novel class of oral live microbial biotherapeutic candidates, which are designed to treat disorders associated with the microbiome. The Company operates in one segment and is headquartered in South San Francisco, California, with operations in South San Francisco, California and Groton, Connecticut. Prior to January 1, 2020, the Company was headquartered in Carmel, Indiana, and the Company expects to continue maintaining this office for a period of time.

The Company’s HBV Cure program is pursuing multiple drug candidates that inhibit the HBV lifecycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of increasing the current low cure rates for patients with chronic HBV infection. Assembly has discovered several novel core inhibitors, which are small molecules that directly target and allosterically modify the HBV core protein.

The Company’s Microbiome program is centered on a fully integrated platform that includes a biological function-based strain isolation, identification, characterization and selection process, methods for strain purification and growth under conditions compliant with current Good Manufacturing Practice (cGMP) requirements. That platform is complemented by a licensed patented delivery system that the Company calls GEMICEL®, which is designed to allow for targeted oral delivery of live biologic and conventional therapies to the lower gastrointestinal (GI) tract. Using the Company’s microbiome platform, the Company is exploring product candidates for multiple disease indications, including ulcerative colitis (UC), Crohn’s disease and irritable bowel syndrome (IBS) with Allergan Pharmaceuticals International Limited (Allergan) in connection with its Research, Development, Collaboration and License Agreement (the Collaboration Agreement). Assembly is also exploring the microbiome in connection with immune-mediated and metabolic disorders and oncology, which indications the Company will either pursue internally or in collaboration with other parties.

Liquidity

The Company has not derived any revenue from product sales to date and currently has no approved products. Once a product has been developed, it will need to be approved for sale by the U.S. Food and Drug Administration (FDA) or an applicable foreign regulatory agency. Since inception, the Company’s operations have been financed primarily through the sale of equity securities, proceeds from the exercise of warrants and stock options, issuance of debt and an upfront payment related to the Collaboration Agreement. The Company has incurred losses from operations since inception and expects to continue to incur substantial losses for the next several years as it continues its product development efforts. Management believes the Company currently has sufficient funds to meet its operating requirements for at least the next 12 months following the date that these unaudited condensed consolidated interim financial statements are issued. If the Company cannot generate significant cash from its operations, it intends to obtain any additional funding it requires through strategic relationships, public or private equity or debt financings, grants or other arrangements (see Note 6 for recent sales of common stock). The Company cannot assure such funding will be available on reasonable terms, if at all. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact the Company’s ability to access capital when and as needed.

If the Company is unable to generate sufficient revenue from the Collaboration Agreement, secure additional sources of funding or receive full and timely collections of amounts due, it may be necessary to significantly reduce the current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs, including more costly clinical trials.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 2 - Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and include normal recurring adjustments necessary for the fair presentation of the Company’s financial position and its results of operations and comprehensive loss and its cash flows for the periods presented. These statements do not include all disclosures required by U.S. GAAP and should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended December 31, 2019, which are contained in the Company’s Annual Report on Form 10-K as filed with the SEC on March 4, 2020. The results for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the entire year ending December 31, 2020 or future operating periods.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates inherent in the preparation of the accompanying unaudited condensed consolidated financial statements include revenue recognition, clinical trial accruals, recoverability and useful lives (indefinite or finite) of intangible assets, assessment of impairment of goodwill, provisions for income taxes, amounts receivable and recognized as revenue under the Collaboration Agreement, measurement of operating lease liabilities, and the fair value of stock options, stock appreciation rights, and restricted stock units (RSUs) granted to employees, directors and consultants.

The Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions.

Other Risks and Uncertainties

In March 2020, the World Health Organization declared the global novel coronavirus disease (COVID-19) outbreak a pandemic. To date, the Company’s operations have not been significantly impacted by the COVID-19 outbreak. However, the Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on its condensed consolidated financial condition and operations. The impact of the COVID-19 coronavirus outbreak on the financial performance of the Company will depend on future developments, including the duration and spread of the outbreak and related governmental advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results may be adversely affected.

Income Taxes

On March 18, 2020, the Families First Coronavirus Response Act (“FFCR Act”), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The FFCR Act and CARES Act did not

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

have a material impact on the Company’s condensed consolidated financial statements as of March 31, 2020; however, the Company continues to examine the impacts the FFCR Act and CARES Act may have on its business, results of operations, financial condition and liquidity.

Net Loss per Share

Basic net loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only incurred losses, basic and diluted net loss per share is the same.

In December 2019, the Company sold 6,287,878 shares of common stock as well as pre-funded warrants to purchase up to 2,424,242 shares of common stock (see Note 6). The pre-funded warrants are exercisable for shares of common stock at a price of $0.001 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing earnings per share because the shares may be issued for little or no consideration, they are fully vested, and are exercisable after the original issuance date.

A reconciliation of the numerators and the denominators of the basic and diluted net loss per common share computations is as follows (in thousands, except per share amounts):

Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share  because including them would have been antidilutive are as follows:

Adoption of Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (ASU 2019-10), which deferred the effective

7

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

date of this standard for all entities except SEC filers that are not smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 effective January 1, 2020. The adoption of this standard had no impact on the Company’s condensed consolidated financial statements.

On January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820):  Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The adoption of this standard had no impact on the Company’s condensed consolidated financial statements and related disclosures.

On January 1, 2020, the Company adopted ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. The standard adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606 and requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. Amendments in the standard should be applied retrospectively to the date of initial application of Topic 606, but entities may elect to apply the amendments in Topic 808 retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of Topic 606, and should disclose the election. An entity may also elect to apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in Topic 606. The adoption of this standard had no impact on the Company’s condensed consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12). The ASU eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted in an interim or annual period. Entities that elect to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, entities that elect early adoption must adopt all the amendments in the same period. Entities will apply the guidance prospectively, except for certain amendments. The Company early adopted ASU 2019-12 effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. In April, May and November 2019, the FASB issued additional amendments to the new guidance related to transition and clarification. In November 2019, the FASB issued ASU 2019-10, which deferred the effective date of this standard for all entities except SEC filers that are not smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating this new accounting standard but currently does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements and related disclosures.

8

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 3 – Investments in Marketable Securities

The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable, accounts payable, accrued expenses, lease liability-short term and deferred revenue-short term.

The Company uses the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial instruments:

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.

Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace.

Level 3: Significant unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

Investments in marketable securities consisted of the following (in thousands):

9

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The contractual term to maturity of short-term marketable securities held by the Company as of March 31, 2020 is less than one year. There were no long-term marketable securities held by the Company as of March 31, 2020.

Realized gains and losses for the three months ended March 31, 2020 and 2019 were not significant. None of the Company’s investments have been in a continuous unrealized loss position for more than 12 months as of March 31, 2020.

The following tables present the fair value of the Company’s financial assets measured at fair value on a recurring basis (in thousands):

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company estimates the fair value of its U.S. and foreign corporate debt securities, asset-backed securities, U.S. treasury securities and U.S. and foreign commercial paper by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data, and other observable inputs.

There were no transfers between Level 1, Level 2 or Level 3 during the periods presented.

Note 4 - Property and Equipment, Net

Property and equipment consist of the following (in thousands):

Depreciation expense was $0.1 million for both the three months ended March 31, 2020 and 2019 and was recorded in both research and development expense and general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss. Primarily all of property and equipment of the Company is located in the U.S.

11

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 5 – Accrued Expenses

Accrued expenses consist of the following (in thousands):

Accrued restructuring charges relate to the Company’s decision to relocate its headquarters and key personnel to South San Francisco, California as approved by the Board of Directors in November 2019 and effective January 1, 2020. The Company accrued restructuring charges of $2.1 million in 2019 related to one-time severance payments and other employee-related costs associated with the relocation plan. This represents the total amount expected to be incurred in connection with the relocation and is expected to be fully paid in 2020.

Note 6 – Stockholders’ Equity

The Company is authorized to issue 5,000,000 shares of preferred stock as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, no shares of preferred stock were issued and outstanding. The Company is authorized to issue 100,000,000 shares of common stock as of March 31, 2020 and December 31, 2019, respectively.

Sale of Common Stock and Pre-Funded Warrants

In December 2017, the Company filed a registration statement on Form S-3 with the SEC using a “shelf” registration statement, file No. 333-222366, which became effective January 10, 2018 (the Registration Statement). Under this shelf registration process, the Company may from time to time sell any combination of the securities described in the Registration Statement in one or more offerings up to an aggregate offering price of $250.0 million. In connection with the filing of this Registration Statement, the Company entered into a sales agreement under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $75.0 million through “at the market offerings” (ATM). As of March 31, 2020, no shares have been sold under the ATM program and $21.4 million remains available for sale under this Registration Statement.

In December 2019, the Company sold to various investors an aggregate of 6,287,878 shares of common stock at a public offering price of $16.50 per share, which included the exercise in full by the underwriters of their option to purchase 1,136,363 additional shares of common stock, and pre-funded warrants to purchase 2,424,242 shares of common stock at a public offering price of $16.499 per warrant. The Company received aggregate net proceeds of $134.7 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The pre-funded warrants are exercisable immediately upon issuance at an exercise price of $0.001 per share. Per their terms, the outstanding pre-funded warrants to purchase shares of the Company’s common stock generally may not be exercised if the holder’s ownership of the Company’s common stock would exceed 19.99% following such exercise. The exercise price and number of shares of common stock issuable upon the exercise of the pre-funded warrants (Warrant Shares) are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the pre-funded warrant agreements. Under certain circumstances, the pre-funded warrants may be exercisable on a “cashless” basis. Both the pre-funded warrants and the Warrant Shares are registered securities.

The pre-funded warrants were classified as a component of permanent stockholders’ equity within additional paid-in-capital and were recorded at the issuance date using a relative fair value allocation method. The pre-funded warrants are equity classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, permit the holders to receive a fixed number of common shares upon exercise, are indexed to the Company’s common stock and meet the equity classification criteria. In addition, such pre-funded warrants do not provide any guarantee of value or return. The Company valued the pre-funded warrants at issuance, concluding their sales price approximated their fair value, and allocated net proceeds from the sale proportionately to the common stock and pre-funded warrants of which $37.5 million was allocated to the pre-funded warrants and recorded as a component of additional paid-in-capital.

12

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Common Stock Warrants

As of, March 31, 2020 and December 31, 2019 the following warrants to purchase shares of the Company’s common stock were issued and outstanding:

There were no warrants exercised during the three months ended March 31, 2020 or 2019.

Note 7 – Stock Plans and Stock-Based Compensation

Equity Incentive Plans

In May 2018, the Company’s stockholders approved (1) the Assembly Biosciences, Inc. 2018 Stock Incentive Plan (the 2018 Plan) pursuant to which the Company reserved 1,900,000 shares of its common stock for issuance in connection with equity incentive awards and (2) the Assembly Biosciences Inc. Employee Stock Purchase Plan (the 2018 ESPP) pursuant to which the Company reserved 400,000 shares of its common stock for issuance in connection with purchases by employees pursuant to this plan.

In May 2019, the Company’s stockholders approved an amendment to the 2018 Plan that increased the aggregate shares of common stock reserved under the 2018 Plan to 3,000,000.

As of March 31, 2020, the Company had awards outstanding under the following shareholder-approved plans: 2010 Equity Incentive Plan (the 2010 Plan), which has been frozen;the Amended and Restated 2014 Stock Incentive Plan (the 2014 Plan); and the 2018 Plan. Shares of common stock underlying awards that are forfeited under the 2010 Plan on or after June 2, 2016 will become available for issuance under the 2014 Plan. As of March 31, 2020, the Company also had awards outstanding under the Assembly Biosciences, Inc. 2017 Inducement Award Plan (the 2017 Plan), the Assembly Biosciences, Inc. 2019 Inducement Award Plan (the 2019 Plan) and the Assembly Biosciences, Inc. 2020 Inducement Award Plan (the 2020 Plan).

The Company issues new shares of common stock to settle options exercised and vested RSUs. The Company also issues new shares of common stock in connection with purchases of shares of common stock by eligible employees under the Company’s 2018 ESPP.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Stock Plan Activity

Stock Options

A summary of the Company’s option activity and related information for the three months ended March 31, 2020 is as follows:

The weighted-average grant-date fair value of options granted was $9.74 and $13.71 during the three months ended March 31, 2020 and 2019, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2020 and 2019 was $0.2 million and $0.3 million, respectively.

RSUs

A summary of the Company’s RSUs and related information for the three months ended March 31, 2020 is as follows:

The total fair value of RSUs vested and settled during the three months ended March 31, 2020 and 2019 as $2.4 million and $2.2 million, respectively. The total intrinsic value of RSUs vested and settled during the three months ended March 31, 2020 and 2019 was $1.5 million and $1.3 million, respectively.

As of March 31, 2020, RSUs outstanding include 45,000 RSUs granted in December 2017 and 100,000 RSUs granted in September 2019 to executives of the Company, each with performance-based conditions. The total fair value of these awards is $0.7 million and $1.2 million, respectively. The performance conditions upon which these awards will vest are not yet deemed probable of being met, and accordingly no compensation expense has been recognized as of March 31, 2020 for these awards.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Valuation Assumptions

The fair value of the stock options granted or modified during the periods indicated was estimated using the Black-Scholes option pricing model, based on the following assumptions:

The fair value of RSUs granted is determined based on the price of the Company’s common stock on the date of grant.

The fair value of ESPP purchase rights were not material for any period presented.

Stock-Based Compensation Expense

The following table summarizes the components of total stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive loss (in thousands):

As of March 31, 2020, there was $34.5 million of total unrecognized stock-based compensation related to outstanding equity awards which is expected to be recognized over a weighted average remaining amortization period of 1.8 years.

Note 8 - Collaboration Agreement

Allergan

In January 2017, the Company entered into the Collaboration Agreement with Allergan to develop and commercialize select microbiome gastrointestinal disease therapies. Pursuant to the Collaboration Agreement, the Company granted to Allergan an exclusive worldwide license to certain of its intellectual property, including its intellectual property arising under the Collaboration Agreement, to develop and commercialize licensed compounds for UC, Crohn’s disease, and two compounds for IBS. Allergan and the Company also agreed to collaborate on research and development activities with respect to the licensed compounds in accordance with a mutually agreed upon research and development plan. Per the terms of the Collaboration Agreement, Allergan can select backups and additional target indications to add to the licenses granted for additional consideration and also has the ability to enter into a contract manufacturing agreement with the Company for compound supply at cost plus an agreed upon margin. In addition, the Company will participate on a Joint Development Committee (JDC) and Joint Patent Committee (JPC).

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Allergan paid the Company an upfront non-refundable payment of $50.0 million, which was received in 2017. Additionally, the Company is eligible to receive variable consideration in the form of research and development cost reimbursements, up to $631.0 million related to seven development milestones and up to $2.14 billion related to 12 commercial development and sales milestones in connection with the successful development and commercialization of licensed compounds. In addition, the Company is eligible to receive tiered royalties at rates ranging from the mid-single digits to the mid-teens based on net sales.

Allergan and the Company have agreed to share research and development costs up to an aggregate of $75.0 million through proof-of-concept (POC) studies on a ⅔, ⅓ basis, respectively, and Allergan has agreed to assume all post-POC development costs. In the event any pre-POC development costs exceed $75.0 million in the aggregate, the Company may elect either (a) to fund ⅓ of such costs in excess of $75.0 million or (b) to allow Allergan to deduct from future development milestone payments ⅓ of the development costs funded by Allergan in excess of $75.0 million plus a premium of 25%. The Company has an option to co-promote the licensed programs in the U.S. and China, subject to certain conditions set forth in the Collaboration Agreement.

Allergan may terminate the Collaboration Agreement at any time upon 90 days’ (prior to the initiation of the first POC trial of a licensed product) or 120 days’ (after the initiation of the first POC trial of a licensed product), as applicable, advance written notice to the Company. Unless terminated early, the Collaboration Agreement has a term that ends on the earlier of the (i) the period when POC studies have been completed and no further licensed compounds or licensed products are in development, and (ii) expiration of the last to exist valid claim covering the manufacture, use and sale of the licensed products. The Collaboration Agreement also contains customary provisions for termination by either party, including in the event of breach of the Collaboration Agreement, subject to cure. Upon termination for convenience, the licenses granted by the Company and its know-how all revert to the Company.

The Company concluded that Allergan is a customer, and the contract is not subject to accounting literature on collaborative arrangements. This is because the Company granted to Allergan licenses to its intellectual property and research and development services, all of which are outputs of the Company’s ongoing activities, in exchange for consideration. The Company identified the following material promises under the Collaboration Agreement: (1) grant of licenses to intellectual property for the four initial indications, inclusive of the related technology know-how (Licenses) and (2) the obligation to perform research development services through POC (Development Services). The Company’s participation on the JDC and JPC were considered to be immaterial in the context of the contract. The Company’s co-promotion option was not considered to be a performance obligation. Allergan’s selection of backups or additional target indications to add to the licenses granted for additional consideration and ability to enter into a contract manufacturing agreement with the Company for compound supply at cost plus an agreed upon margin were not considered to be performance obligations as the Company concluded the options were not offered at a discount that exceeds discounts available to other customers, and therefore were not material rights. The grant of additional licensing rights upon option exercises and contract manufacturing agreements will be accounted for as separate contracts when they occur.

The Company concluded the Licenses each were considered to be functional as they have significant standalone functionality and were capable of being distinct. However, the Company determined that each of the Licenses individually were not distinct from the Development Services within the context of the agreement. This is because Allergan is dependent on the Company to execute the Development Services, which it is uniquely able to perform, in order for Allergan to benefit from the Licenses. As such, the Company determined that it has four performance obligations under the Collaboration Agreement associated with the grant of the four compound Licenses combined with the performance of the Development Services for each of the four compound indications. The Company determined that the four performance obligations will be performed over the duration of the contract, which began in February 2017 and ends upon completion of the Development Services which is currently estimated to occur in 2025. The Company is using a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of progress because other measures do not reflect how the Company transfers its performance obligation to Allergan. In applying the cost-based input method of revenue recognition, the Company measures costs incurred relative to budgeted costs to fulfill the four performance obligations. These costs consist primarily of third-party contract costs and internal labor costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligations.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

To allocate transaction price among the four performance obligations, the Company estimated their standalone selling price (SSP) using an income-based valuation approach for the estimated value a licensor of the compounds would receive considering the stage of the compounds’ development. The Company believes that a change in the assumptions used to determine its best estimate of selling price for the four performance obligations would not have a significant effect on the allocation of consideration received to the four performance obligations.

The transaction price at the inception of the agreement and upon adoption of ASC 606 was limited to $50.0 million upfront payment. Of this amount, the Company allocated $12.5 million to each of the four performance obligations. Research and development cost reimbursement payments are included in the transaction price in the reporting period that the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. The variable consideration related to the remaining development and commercialization milestone payments has not been included in the transaction price as these were fully constrained at September 30, 2019. As part of the Company’s evaluation of the development and commercialization milestones constraint, the Company determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals which are not within its control and uncertain at this stage. Any variable consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Allergan. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

The Company did not incur any significant incremental costs of obtaining the Allergan contract.

For the three months ended March 31, 2020 and 2019, the Company recognized $4.1 million and $3.9 million, respectively, in revenue associated with the Collaboration Agreement. Short-term and long-term deferred revenue contract liabilities related to the Collaboration Agreement were $6.7 million and $29.3 million at March 31, 2020 and $6.4 million and $30.6 million at December 31, 2019.

On the unaudited condensed consolidated balance sheets, contract asset balances of $3.1 million and $3.4 million were recorded as accounts receivable from collaboration as of March 31, 2020 and December 31, 2019, respectively.

The following table presents changes in the Company’s contract liabilities (in thousands):

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 9 - Milestones and Research Agreements

HBV Research Agreement with Indiana University

Since September 2013, the Company has been party to an exclusive License Agreement dated September 3, 2013 with Indiana University Research and Technology Corporation (IURTC) from whom it has licensed aspects of the Company’s HBV program held by IURTC. The license agreement requires the Company to make milestone payments based upon the successful accomplishment of clinical and regulatory milestones. The aggregate amount of all performance milestone payments under the IURTC license agreement, should all milestones through development be met, is $0.8 million, with a portion related to the first performance milestone having been paid. The Company is obligated to pay IURTC royalty payments based on net sales of the licensed technology. The Company is also required to pay diligence maintenance fees each year to the extent that the royalty, sublicensing, and milestone payments to IURTC are less than such fees for that year. Amounts paid in the three months ended March 31, 2020 and 2019 were insignificant.

Microbiome Targeted Colonic Delivery Platform

In November 2013, the Company entered into a License and Collaboration Agreement with Therabiome, LLC (Therabiome), for all intellectual property and know-how owned or controlled by Therabiome relating to the oral delivery of pharmaceutical drugs to specific sites in the intestine, using a pH sensitive controlled release capsule-in-capsule technology. The Company will be solely responsible for all research and development activities with respect to any product it develops under the license.

The Company must pay Therabiome clinical and regulatory milestones for each product or therapy advanced from the platform for U.S. regulatory milestones. In addition, the Company must pay Therabiome lesser amounts for foreign regulatory milestones, which vary by country and region. The Company is also required to pay Therabiome royalties on annual net sales of a product in the low to mid-single digit percentages plus, once annual net sales exceed certain thresholds, a one-time cash payment upon reaching such thresholds.

Therabiome must pay the Company royalties on annual net sales of any product Therabiome is permitted to develop using the intellectual property in the low double to mid-double-digit percentages, depending on the level of development or involvement the Company had in the product.

No amounts were accrued for this agreement as of and for the three months ended March 31, 2020. A regulatory milestone was determined to have occurred and $0.1 million was paid under this agreement as of and during the three months ended March 31, 2019.

Note 10 - Leases

Operating Leases

The Company leases office space for corporate, administrative and laboratory functions in South San Francisco, California under a sub-sublease that expires in December 2023. The Company also leases office space in Carmel, Indiana under a lease agreement that expires in August 2023 as well as office and laboratory space in Groton, Connecticut under a lease that expires in March 2021. The Company’s China subsidiary leases office space in Shanghai that expires in May 2021 and rents lab space in Shanghai under a lease agreement that expires in December 2020. Additionally, the Company’s China subsidiary leases office space in Beijing under a lease agreement that expires in December 2020. Certain lease contracts contain renewal clauses that the Company assesses on a case by case basis. The Company also leases certain laboratory equipment accounted for as operating leases. Certain equipment leases continue to expire in 2020, with the final lease expiring in 2022.

When the Company cannot determine the implicit rate in its leasing arrangements, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

At March 31, 2020, the Company had operating lease liabilities of $11.8 million and ROU assets of $11.5 million, which were included in the condensed consolidated balance sheet.

The following summarizes quantitative information about the Company’s operating leases (in thousands):

As of March 31, 2020 and December 31, 2019, the weighted-average remaining lease term for operating leases was 3.4 years and 2.7 years, respectively. As of both March 31, 2020 and December 31, 2019, the weighted-average discount rate for operating leases was 9.4%.

As of March 31, 2020, the maturities of the Company’s operating lease liabilities were as follows (in thousands):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The interim condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission on March 4, 2020 (2019 Annual Report). In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements are subject to risks and uncertainties, including those set forth under “Part I. Item 1A. Risk Factors” in our 2019 Annual Report, “Part II. Item 1A. Risk Factors” in this report, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical-stage biotechnology company developing innovative therapeutics targeting chronic hepatitis B virus (HBV) infection and disorders associated with the microbiome. Our HBV Cure program is focused on advancing a new class of potent, oral core inhibitors that have the potential to increase cure rates for chronically infected patients. Our Microbiome program is developing novel oral live microbial biotherapeutic candidates with our fully integrated platform, including a robust process for strain identification and selection, current Good Manufacturing Practice (cGMP) manufacturing expertise and targeted delivery to the lower gastrointestinal tract with the GEMICEL® technology.

Like most companies, the spread of the novel coronavirus, SARS-CoV-2, which causes coronavirus disease (COVID-19), and the ongoing COVID-19 pandemic has affected certain aspects of our business. As further detailed below, those effects have been primarily limited to where and how our employees work in our labs and offices. To date, our current and future planned trials have not been subject to significant impact.

Business Highlights

During the first quarter of 2020, we continued to grow our business and advance our development pipeline of product candidates in both our HBV Cure and Microbiome programs. Key highlights and accomplishments during the quarter and upcoming milestones include:

HBV Cure Program

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Microbiome Program

Corporate Highlights

HBV Cure Program

Over 250 million people worldwide are chronically infected with HBV. Our HBV Cure program is pursuing multiple drug candidates that inhibit the HBV lifecycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of increasing the current low cure rate for patients with HBV. We have discovered several novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core protein.

ABI-H0731

H0731, our lead core inhibitor product candidate in the HBV Cure program, is licensed from Indiana University. In the fourth quarter of 2019, we presented final 24-week data from HBeAg positive patients enrolled in our Phase 2 studies of H0731, Study 201, which enrolled NrtI-treated patients, and ABI-H0731-202 (Study 202), which enrolled treatment-naïve patients. In addition, we presented interim data from Study 211. The conduct of Study 201 and 202 is now complete, and Study 211 is ongoing. Most currently enrolled patients are continuing with normal study visits. For those patients unable to come to the clinic as a result of COVID-19, study drug is being shipped to their homes, and sites are conducting telehealth visits.

We presented certain top-line information and other updates regarding Study 201 and Study 211 in May 2020, and we expect to report additional data from Study 201 as well as further interim data from Study 211 at EASL 2020 in August 2020.

In addition, we recently determined the stopping criteria by which we will begin transitioning patients off therapy in Study 211. These criteria have been discussed with our lead investigators and reviewed and agreed upon by the FDA. Later this year, we expect to begin transitioning patients off treatment to observe for sustained virologic response. At this time, the ongoing COVID-19 pandemic has not impacted our timeline for the upcoming transition of patients off treatment or completion of Study 211, but we will continue to monitor the situation closely.

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ABI-H2158

H2158, our second-generation core inhibitor product candidate in the HBV Cure program, was internally discovered and developed and is chemically distinct from H0731.

In the second quarter of 2019, we presented final data from the Phase 1a portion of a Phase 1a/1b dose-ranging clinical study. The Phase 1a study assessed safety, tolerability and pharmacokinetics (PK) in 48 healthy volunteers. In the fourth quarter of 2019, we reported interim data from the first, low-dose cohort of the Phase 1b portion of the Phase 1a/1b dose-ranging clinical study, which enrolled HBeAg positive patients.

We presented additional top-line data from the dose-ranging cohorts of the Phase 1b portion of the Phase 1a/1b dose-ranging clinical study in May 2020, and we expect to report the final data from these cohorts at EASL 2020.

Based on data from the Phase 1b dose-ranging study, we expect to initiate a Phase 2 clinical study in the second quarter of 2020 using a 300 mg dose of H2158. This study will be conducted in approximately ten countries in Asia, North America and Europe. While we will continue to monitor the situation closely, at this time, we do not expect our timelines for this study to be significantly impacted by the COVID-19 pandemic.

ABI-H3733

H3733, our third core inhibitor product candidate in the HBV Cure program, has completed Investigational New Drug (IND) enabling studies. H3733 has a novel chemical scaffold separate from both H0731 and H2158. We presented a preclinical profile of this candidate in the first quarter of 2019.

In the first quarter of 2020, we initiated a Phase 1 clinical study to evaluate safety, tolerability and PK following single ascending dose and multiple ascending dose administration of H3733 in healthy subjects in New Zealand. Enrollment of the study has been delayed as a result of the government mandated shutdown of all clinical studies unrelated to COVID-19. We expect to resume enrollment in the second quarter of this year and do not expect this delay to have a significant impact on our clinical development timelines for H3733.

Other Product Candidates

In addition to our three clinical-stage product candidates, our research discovery team is actively focused on identifying and creating additional product candidates for our HBV Cure program.

Microbiome Program

In recent years, there has been increasing scientific evidence suggesting the therapeutic potential of the human microbiome—the billions of microbes living in and on people—to impact health and disease. Our Microbiome program builds upon experience reported in the literature of successfully treating various disease indications with fecal microbiota transplants (FMT) and seeks to provide a pharmacologically relevant therapy using a “drug like” approach that delivers targeted and specific microbiome therapies in an oral capsule.

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

ABI-M201

Our Microbiome program’s lead candidate, M201, is in a multi-center, randomized, double-blind, placebo-controlled Phase 1b clinical trial to evaluate its safety and efficacy in patients with mildly to moderately active UC who are being treated with mesalamine. The study’s primary objective is safety and tolerability, and its secondary objectives focus on the effect of M201 treatment on disease activity measures in patients with UC.

This Phase 1b study is ongoing; however, continued enrollment has been delayed as a result of the COVID-19 pandemic and the limitations placed on some trial sites to conduct certain procedures as part of the patient screening

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process. We expect enrollment activities to resume in mid-2020, and we continue to monitor the situation closely. For currently enrolled patients who are unable to come to the clinic, study drug or placebo is being shipped to their homes and sites are conducting telehealth monitoring and home health nurse visits.

M201 is being developed as part of the Research, Development, Collaboration and License Agreement (the Collaboration Agreement) with Allergan. The Collaboration Agreement provides for the development and commercialization of microbiome gastrointestinal programs.

Preclinical data from the M201 program was selected for presentation as a poster at DDW 2020.

Additional Product Candidates

Using our microbiome platform capabilities, we are also exploring additional product candidates for other disease indications, including Crohn’s disease (CD) and IBS in connection with the Collaboration Agreement, as well as immune-mediated and metabolic disorders and oncology, which indications we will pursue either internally or in collaboration with other third parties. Preclinical data from our immuno-oncology microbiome program have been selected for presentation as a poster at AACR.

Operations

We currently have corporate and administrative offices and research laboratory space in South San Francisco, California, research, development and small-scale manufacturing activities in Groton, Connecticut and administrative offices in Carmel, Indiana. We also currently have an administrative office and research laboratory space in Shanghai, China and a regulatory office in Beijing, China.

Since our inception, we have had no revenue from product sales and have funded our operations principally through equity financings and collaborations. Our operations to date have been primarily limited to organizing and staffing our company, licensing our product candidates, discovering and developing our product candidates, establishing small-scale manufacturing capabilities for certain of our product candidates, maintaining and improving our patent portfolio and raising capital.

We have generated significant losses to date, and we expect to continue to generate losses as we continue to develop our product candidates. As of March 31, 2020, we had an accumulated deficit of $466.1 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.

While our employees in the United States are currently under stay-at-home or shelter-in-place orders under state and local laws in response to the COVID-19 pandemic, as a biotechnology company, we qualify as a Healthcare Operation and are exempted under such orders. This exemption allows our employees to perform essential activities at our offices, including work in our laboratories in both South San Francisco and Groton 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. In addition, substantially all of our non-research employees have been working from their homes since mid-March 2020. Clinical study-related impacts of the COVID-19 pandemic to date have been limited to enrollment delays for both our Phase 1 study of H3733 and our Phase 1b study of M201, which are the only studies that are currently enrolling. 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 trials and other business operations. We continue to monitor the situation regularly for additional potential delays, or modifications to our ongoing and planned trials and, if circumstances warrant, we may adjust our budget and operating plan.

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Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States (U.S. GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.

We evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation, 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.

Our critical accounting policies and significant estimates are detailed in our 2019 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our 2019 Annual Report, except for those accounting subjects discussed in the section of Note 2 to the unaudited condensed consolidated financial statements titled Adoption of Recent Accounting Pronouncements included in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

Collaboration Revenue

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

Collaboration revenue includes the recognition of deferred revenue and reimbursements incurred under the Collaboration Agreement. Revenue for the three months ended March 31, 2020 as compared to the same period in 2019 increased as a result of increased reimbursement activities associated with our development activities under the Collaboration Agreement.

Research and Development Expense

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

Research and development expense were $23.0 million for the three months ended March 31, 2020 compared to $22.7 million for the same period in 2019. The increase was primarily due to an increase of $0.4 million in gross research and development expenses related to the Microbiome programs and a decrease of $0.1 million in research and development expenses related to the HBV programs. Research and development expenses include non-cash stock-based compensation expenses of $1.9 million for the three months ended March 31, 2020 and $ 2.7 million for the same period in 2019.

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General and Administrative Expense

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

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

General and administrative expenses were $8.7 million for the three months ended March 31, 2020 compared to $9.5 million for the same period in 2019. An increase in employee-related expenses of $0.5 million was largely offset due to a decrease of $0.2 million in professional fees and a decrease of $0.3 million in rent expense due to the move of our leased office and laboratory space from San Francisco to South San Francisco in February 2019. General and administrative expenses include non-cash stock-based compensation expenses of $3.0 million for the three months ended March 31, 2020 and $3.8 million for the same period in 2019.

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 March 31, 2020 principally through equity financings, raising an aggregate of $546.4 million in net proceeds, and a strategic collaboration raising an aggregate of $50.0 million through an upfront payment.

Cash Flows for the Three Months Ended March 31, 2020 and 2019

The following table summarizes our cash flow activities (in thousands):

Net Cash from Operating Activities

Net cash used in operating activities was $25.2 million for the three months ended March 31, 2020. This was primarily due to a $26.7 million net loss, $0.1 million of accretion of discount of marketable securities and a decrease of $4.6 million of operating assets and liabilities, which were offset by $4.9 million non-cash expense recorded for stock-based compensation, $1.2 million of amortization of operating lease right-of-use (ROU) assets and $0.1 million of depreciation and amortization expense.