Quarterly Report (10-q)

Date : 08/05/2019 @ 9:09PM
Source : Edgar (US Regulatory)
Stock : Assembly Biosciences Inc (ASMB)
Quote : 17.2402  0.4402 (2.62%) @ 3:33PM

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM  10-Q

       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________to___________.

Commission file number: 001-35005

ASSEMBLY BIOSCIENCES, INC.

(Exact name of Registrant as specified in its charter)

Delaware

20-8729264

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

11711 N. Meridian St., Suite 310

 

Carmel , Indiana

46032

(Address of principal executive offices)

(zip code)

( 833 ) 509-4583

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001

ASMB

The Nasdaq Global Select Market

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.

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging growth company

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 July 31, 2019, there were 25,711,781 shares of the registrant’s common stock outstanding.

Index

Page
Number

PART I:

FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

Condensed Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018

1

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

2

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)

3

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

4

Notes to the Condensed Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

Item 4.

Controls and Procedures

28

PART II:

OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3.

Defaults Upon Senior Securities

64

Item 4.

Mine Safety Disclosures

64

Item 5.

Other Information

64

Item 6.

Exhibits

65

SIGNATURES

66

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands except for share and per share amounts)

June 30, 

December 31, 

    

2019

    

2018

 

(Unaudited)

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

34,258

$

41,471

Marketable securities

 

139,553

 

176,609

Accounts receivable from collaboration

 

2,903

 

2,430

Prepaid expenses and other current assets

 

6,746

 

1,992

Total current assets

 

183,460

 

222,502

 

 

  

Property and equipment, net

 

2,048

 

557

Operating lease right-of-use assets

 

12,672

 

Other assets

 

1,693

 

3,348

Indefinite-lived intangible asset

 

29,000

 

29,000

Goodwill

 

12,638

 

12,638

Total assets

$

241,511

$

268,045

 

  

 

  

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

3,414

$

3,693

Accrued expenses

 

7,585

 

9,679

Deferred revenue - short-term

 

6,082

 

5,100

Operating lease liabilities - short-term

 

2,854

 

Total current liabilities

 

19,935

 

18,472

 

  

 

  

Deferred rent

 

 

108

Deferred tax liabilities

 

3,252

 

3,252

Deferred revenue - long-term

 

33,582

 

35,560

Operating lease liabilities - long-term

 

10,035

 

Total liabilities

 

66,804

 

57,392

 

  

 

  

Commitments and contingencies

 

  

 

  

 

  

 

  

Stockholders' equity

 

  

 

  

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 25,646,783 and 25,495,425 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

26

 

25

Additional paid-in capital

 

562,210

 

552,762

Accumulated other comprehensive loss

 

(187)

 

(347)

Accumulated deficit

 

(387,342)

 

(341,787)

Total stockholders' equity

 

174,707

 

210,653

Total liabilities and stockholders' equity

$

241,511

$

268,045

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)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2019

    

2018

    

2019

    

2018

Collaboration revenue

$

3,080

$

3,218

$

6,966

$

6,783

 

  

 

  

 

 

  

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

 

18,700

 

17,840

 

41,405

 

32,381

General and administrative

 

4,080

 

12,544

 

13,597

 

18,240

Total operating expenses

 

22,780

 

30,384

 

55,002

 

50,621

Loss from operations

 

(19,700)

 

(27,166)

 

(48,036)

 

(43,838)

 

  

 

  

 

  

 

  

Other income (expenses)

 

  

 

  

 

  

 

  

Interest and other income

 

1,182

 

453

 

2,458

 

899

Other income (expense), net

 

4

 

(127)

 

5

 

(150)

Total other income

 

1,186

 

326

 

2,463

 

749

Loss before income taxes

 

(18,514)

 

(26,840)

 

(45,573)

 

(43,089)

 

 

  

 

  

 

  

Income tax benefit

 

11

 

34

 

18

 

34

Net loss

$

(18,503)

$

(26,806)

$

(45,555)

$

(43,055)

 

  

 

  

 

  

 

  

Other comprehensive (loss) income

 

  

 

  

 

  

 

  

Unrealized gain on marketable securities, net of tax

 

52

 

87

 

160

 

20

Comprehensive loss

$

(18,451)

$

(26,719)

$

(45,395)

$

(43,035)

 

  

 

  

 

  

 

  

Net loss per share, basic and diluted

$

(0.72)

$

(1.30)

$

(1.77)

$

(2.11)

 

  

 

  

 

 

Weighted average common shares outstanding, basic and diluted

 

25,740,500

 

20,541,549

 

25,690,617

 

20,387,532

See Accompanying Notes to Condensed Consolidated Financial Statements.

2

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(Unaudited)

Six Months Ended June 30, 

    

2019

    

2018

Cash flows from operating activities

 

  

 

  

Net loss

$

(45,555)

$

(43,055)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Depreciation and amortization

 

260

 

312

Stock-based compensation

 

8,645

 

15,672

Net accretion and amortization of investments in marketable securities

 

(1,141)

 

Non-cash rent expense

2,208

Deferred income tax benefit

 

(18)

 

(34)

Loss on disposal of fixed assets

 

102

 

Other

 

(5)

 

150

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable from collaboration

 

(473)

 

148

Prepaid expenses and other current assets

 

(5,068)

 

(1,834)

Other assets

 

1,655

 

Accounts payable

 

(279)

 

415

Accrued expenses

 

(2,180)

 

(1,059)

Deferred revenue

 

(996)

 

(2,195)

Deferred rent

 

 

(67)

Operating lease liabilities

 

(2,099)

 

Net cash used in operating activities

 

(44,944)

 

(31,547)

 

  

 

  

Cash flows from investing activities

 

  

 

  

Purchases of property and equipment

 

(1,539)

 

(92)

Purchases of marketable securities

 

(93,667)

 

(32,167)

Proceeds from maturities of marketable securities

 

131,591

 

32,621

Proceeds from sale of marketable securities

 

500

 

Net cash provided by investing activities

 

36,885

 

362

 

  

 

  

Cash flows from financing activities

 

  

 

  

Net proceeds from issuance of common stock through equity plans

 

846

 

3,344

Net cash provided by financing activities

 

846

 

3,344

 

 

  

Net decrease in cash and cash equivalents

 

(7,213)

 

(27,841)

Cash and cash equivalents at the beginning of the period

 

41,471

 

82,033

Cash and cash equivalents at the end of the period

$

34,258

$

54,192

See Accompanying Notes to Condensed Consolidated Financial Statements.

3

ASSEMBLY BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands except share amounts)

(Unaudited)

Three Months Ended June 30, 2019

Accumulated

Additional Paid-

Other

Total

Common Stock

in

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balance as of March 31, 2019

 

25,549,757

$

26

$

559,453

$

(239)

$

(368,839)

$

190,401

Issuance of common stock upon exercise of stock options

 

29,875

 

 

191

 

 

 

191

Issuance of common stock under Employee Stock Purchase Plan (ESPP)

 

36,804

 

 

515

 

 

 

515

Issuance of shares of common stock for settlement of restricted stock units (RSUs)

 

30,347

 

 

 

 

 

Unrealized gain on marketable securities, net of tax

 

 

 

 

52

 

 

52

Stock-based compensation

 

 

 

2,051

 

 

 

2,051

Net loss

 

 

 

 

 

(18,503)

 

(18,503)

Balance as of June 30, 2019

 

25,646,783

$

26

$

562,210

$

(187)

$

(387,342)

$

174,707

Three Months Ended June 30, 2018

Accumulated

Additional Paid-

Other

Total

Common Stock

in

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balance as of March 31, 2018

 

20,386,736

$

20

$

370,105

$

(459)

$

(267,285)

$

102,381

Issuance of common stock upon exercise of stock options

 

227,762

 

1

 

1,849

 

 

 

1,850

Unrealized gain on marketable securities, net of tax

 

 

 

 

87

 

 

87

Stock-based compensation

 

 

 

11,589

 

 

 

11,589

Net loss

 

 

 

 

 

(26,806)

 

(26,806)

Balance as of June 30, 2018

 

20,614,498

$

21

$

383,543

$

(372)

$

(294,091)

$

89,101

4

Six Months Ended June 30, 2019

Accumulated

Additional Paid-

Other

Total

Common Stock

in

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balance as of December 31, 2018

 

25,495,425

$

25

$

552,762

$

(347)

$

(341,787)

$

210,653

Issuance of common stock upon exercise of stock options

 

50,875

 

 

331

 

 

 

331

Issuance of common stock under ESPP

 

36,804

 

 

515

 

 

 

515

Issuance of shares of common stock for settlement of RSUs

 

63,679

 

1

 

(1)

 

 

 

Reclassification of stock-based awards from equity to accrued expenses

 

 

 

(4)

 

 

 

(4)

Unrealized gain on marketable securities, net of tax

 

 

 

 

160

 

 

160

Stock-based compensation

 

 

 

8,607

 

 

 

8,607

Net loss

 

 

 

 

(45,555)

 

(45,555)

Balance as of June 30, 2019

25,646,783

$

26

$

562,210

$

(187)

$

(387,342)

$

174,707

Six Months Ended June 30, 2018

Accumulated

Additional Paid-

Other

Total

Common Stock

in

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balance as of December 31, 2017

 

20,137,974

$

20

$

364,528

$

(392)

$

(251,036)

$

113,120

Issuance of common stock upon exercise of stock options

 

476,524

 

1

 

3,343

 

 

 

3,344

Unrealized gain on marketable securities, net of tax

 

 

 

 

20

 

 

20

Stock-based compensation

 

 

 

15,672

 

 

 

15,672

Net loss

 

 

 

 

 

(43,055)

 

(43,055)

Balance as of June 30, 2018

 

20,614,498

$

21

$

383,543

$

(372)

$

(294,091)

$

89,101

See Accompanying Notes to Condensed Consolidated Financial Statements

5

Table of Contents

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 developing innovative therapeutics targeting chronic hepatitis B virus (HBV) and diseases associated with the microbiome. The Company operates in one segment and is headquartered in Carmel, Indiana with operations in South San Francisco, California and Groton, Connecticut.

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 HBV. Assembly has discovered several novel core inhibitors, which are small molecules that directly target and allosterically modify the HBV core (HBc) protein.

The Company’s Microbiome program consists of a fully integrated platform that includes a strain isolation, identification, characterization and function-based selection process, methods for strain purification and growth under current Good Manufacturing Practice (cGMP) conditions, and a licensed patented delivery system, 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 capabilities, 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 the Research, Development, Collaboration and License Agreement (the Collaboration Agreement), as well as non-alcoholic steatohepatitis (NASH) and immuno-oncology, which indications the Company will pursue either 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, the proceeds from the exercise of warrants and stock options, the 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 twelve 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. The Company cannot assure such funding will be available on reasonable terms, if at all.

If the Company is unable to generate enough revenue from the Collaboration Agreement when needed or to secure additional sources of funding and receive related 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.

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.

6

Table of Contents

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 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, 2018, which is contained in the Company’s Annual Report on Form 10-K as filed with the SEC on February 28, 2019. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the entire year ending December 31, 2019 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.

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, other than as set forth below.

Stock-Based Compensation

The Company expenses stock-based compensation to employees and Board members over the requisite service period based on the estimated grant-date fair value of the awards. Stock-based awards with graded-vesting schedules are recognized using the accelerated attribution method over the requisite service period for each separately vesting portion of the award.

Prior to the adoption of Accounting Standards Update (ASU) 2018-07 (ASU 2018-07) on January 1, 2019, the Company remeasured the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. Changes in the estimated fair value of these non-employee awards were recognized as compensation expense in the period of change. Subsequent to the adoption of ASU 2018-07, the Company recognizes non-employee compensation costs over the requisite service period based on a measurement of fair value for each stock award.

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Forfeitures are recognized when incurred.

7

Table of Contents

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The fair value of restricted stock units is determined based on the number of shares granted and the quoted market price of the Company’s common stock on the date of grant. The fair value of restricted stock units with performance conditions deemed probable of being achieved and vesting are amortized to expense over the requisite service period using the accelerated attribution method of expense recognition.

Leases

All of the Company’s leases are operating leases for facilities and equipment. Prior to January 1, 2019, the Company recognized related rent expense on a straight-line basis over the term of the lease. Incentives granted under the Company’s facilities lease, including allowances for leasehold improvements and rent holidays, were recognized as reductions to rental expense on a straight-line basis over the term of the lease. Deferred rent consisted of the difference between cash payments and the rent expense recognized.

Subsequent to the adoption of the new leasing standard on January 1, 2019, the Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement is or contains a lease at contract inception. Operating leases are included in operating lease right-of-use assets, operating lease liabilities - short-term, and operating lease liabilities - long-term in our condensed consolidated balance sheet at June 30, 2019. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents 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. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option.

The operating lease right-of-use assets also include any lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the expected lease term. Variable lease expenses are recorded when incurred. The Company has elected to not separate lease and non-lease components for its leased assets and account for all lease and non-lease components of its agreements as a single lease component.

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. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share are as follows:

Six Months Ended June 30, 

    

2019

    

2018

Warrants to purchase common stock

 

15,296

15,296

Options to purchase common stock

 

5,203,935

4,740,674

Common stock subject to purchase under ESPP

5,976

Unvested RSUs

 

489,857

350,059

Total

 

5,715,064

5,106,029

8

Table of Contents

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Numerator:

 

  

 

  

 

  

 

  

Net loss (in thousands)

$

(18,503)

$

(26,806)

$

(45,555)

$

(43,055)

Denominator:

 

  

 

  

 

  

 

  

Weighted average common shares outstanding for diluted net loss per share

 

25,740,500

 

20,541,549

 

25,690,617

 

20,387,532

Net loss per share:

 

  

 

  

 

  

 

  

Basic

$

(0.72)

$

(1.30)

$

(1.77)

$

(2.11)

Diluted

$

(0.72)

$

(1.30)

$

(1.77)

$

(2.11)

Adoption of Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02,  Leases (ASU 2016-02). Under this standard, which applies to both lessors and lessees, lessees will be required to recognize all leases (except for short-term leases) as a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and as a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. In January, July and December 2018 and March 2019, the FASB issued additional amendments to the new lease guidance related to transition and clarification.

The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective approach and elected the package of practical expedients permitted under transition guidance, which allowed the Company to carry forward its historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company did not elect the use-of-hindsight practical expedient, which would require the Company to reassess the lease term of its leases based on all facts and circumstances through the effective date, and the Company did not elect the practical expedient pertaining to land easements as this is not applicable to the Company’s current contract portfolio. The Company elected the post-transition practical expedient to not separate lease components from nonlease components for all existing lease classes. The Company also elected a policy of not recording leases on its condensed consolidated balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect an option to purchase the leased asset.

The adoption of this standard resulted in the recognition of right of use (ROU) assets and lease liabilities of $13.8 million and $14.0 million, respectively, and the derecognition of the deferred rent balance of $0.1 million as of January 1, 2019. The adoption of the standard had no impact on the Company’s condensed consolidated statements of operations and comprehensive loss or to its cash flows from or used in operating, financing, or investing activities on its condensed consolidated statements of cash flows. No cumulative-effect adjustment within accumulated deficit was required to be recorded as a result of adopting this standard.

On January 1, 2019, the Company adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income, (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the federal corporate income tax rate enacted under the Tax Cuts and Jobs Act (the Tax Act). The amount of the reclassification would be the difference between the historical corporate income tax rate and the Tax Act’s 21% corporate income tax rate. The Company’s adoption of this standard did not have a material impact on its condensed consolidated financial statements.

9

Table of Contents

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On January 1, 2019, the Company adopted ASU 2018-15,  Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.

On January 1, 2019, the Company adopted ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation – Stock Compensation to include share-based payment transactions for acquiring goods and services from nonemployees. The Company’s adoption of this standard did not have a material impact on its condensed consolidated financial statements.

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification . The amendments became effective on November 5, 2018 and impact the Company’s condensed consolidated financial statements through, among other things, the addition of a requirement to present a statement of stockholders’ equity for interim periods. As a result of adopting this guidance, the Company is presenting comparative interim statements of stockholders’ equity in this Form 10-Q for the quarters ended June 30, 2019 and 2018. Additionally, the guidance also simplified certain non-material disclosures in its SEC filings.

Recent Accounting Pronouncements

In November 2018, the FASB issued 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. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, including adoption in any interim period for public business entities for periods in which financial statements have not been issued. 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 Company is currently assessing the impact of this standard on its condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued 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. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements and related disclosures.

10

Table of Contents

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, 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 is currently evaluating the timing and impact of adopting this new accounting standard on its condensed consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments , 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 2019, the FASB issued ASU 2014-04, Codification Improvements to Topic 326 Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments , which clarifies certain aspects of the accounting for credit losses, hedging activities and financial instruments. In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief , which provides transition relief for entities adopting the Board’s credit losses standard. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of the credit losses guidance in Accounting Standards Codification (ASC) 326-20, (3) are eligible for the fair value option under ASC 825-10, and (4) are not held-to-maturity debt securities. The new standard will be effective on January 1, 2020. Early adoption is available. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.

Note 3 – Investments in Marketable Securities

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

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

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

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

Level 3: Significant unobservable inputs which 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.

11

Table of Contents

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Investments in marketable securities consisted of the following:

June 30, 2019

    

    

Gross Unrealized 

    

Gross Unrealized 

    

($ in thousands)

Amortized Cost

Gain  (1)

Loss  (1)

Fair Value

Short-term available-for-sale debt securities

 

  

 

  

 

  

 

  

U.S. and foreign corporate debt securities

$

43,279

$

52

$

$

43,331

Asset-backed securities

 

38,082

 

27

 

 

38,109

U.S. treasury securities

 

20,948

 

18

 

 

20,966

U.S. and foreign commercial paper

 

37,147

 

 

 

37,147

Total

$

139,456

$

97

$

$

139,553

(1)

Gross unrealized gain (loss) is pre-tax.

December 31, 2018

    

    

Gross Unrealized

    

Gross Unrealized

    

($ in thousands)

Amortized Cost

Gain  (1)

Loss  (1)

Fair Value

Short-term available-for-sale debt securities

 

  

 

  

 

  

 

  

U.S. and foreign corporate debt securities

$

73,251

$

$

(92)

$

73,159

Asset-backed securities

 

28,450

 

 

(31)

 

28,419

U.S. treasury securities

 

19,898

 

 

(3)

 

19,895

U.S. and foreign commercial paper

55,136

55,136

Total

$

176,735

$

$

(126)

$

176,609

(1)

Gross unrealized gain (loss) is pre-tax.

The contractual term to maturity of short-term marketable securities held by the Company as of June 30, 2019 is less than one year. There were no long-term marketable securities held by the Company as of June 30, 2019.

Realized gains and losses for the three and six months ended June 30, 2019 and 2018 were not significant.

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

June 30, 2019

($ in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Cash equivalents

 

  

 

  

 

  

 

  

Money market fund

$

30,082

$

$

$

30,082

Total cash equivalents

 

30,082

 

 

 

30,082

 

  

 

  

 

  

 

  

Short-term investments

 

  

 

  

 

  

 

  

U.S. and foreign corporate debt securities

 

 

43,331

 

 

43,331

Asset-backed securities

 

 

38,109

 

 

38,109

U.S. treasury securities

 

 

20,966

 

 

20,966

U.S. and foreign commercial paper

 

 

37,147

 

 

37,147

Total short-term investments

 

 

139,553

 

 

139,553

Total assets measured at fair value

$

30,082

$

139,553

$

$

169,635

12

Table of Contents

ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

December 31, 2018

($ in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

39,345

$

$

$

39,345

Total cash equivalents

 

39,345

 

 

 

39,345

Short-term investments:

 

  

 

  

 

  

 

  

U.S. and foreign corporate debt securities

 

 

73,159

 

 

73,159

Asset-backed securities

 

 

28,419

 

 

28,419

U.S. treasury securities

 

 

19,895

 

 

19,895

U.S. and foreign commercial paper

 

 

55,136

 

 

55,136

Total short-term investments

 

 

176,609

 

 

176,609

Total assets measured at fair value

$

39,345

$

176,609

$

$

215,954

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:

    

    

June 30, 

    

December 31, 

($ in thousands)

 

Useful life (Years)

 

2019

 

2018

Computer hardware and software

 

3

$

$

194

Lab equipment

 

3 to 5

 

215

 

407

Office equipment

 

7

 

705

 

70

Leasehold improvement

 

1 to 5

 

2,091

 

790

Total property and equipment

 

  

 

3,011

 

1,461

Less: Accumulated depreciation and amortization

 

  

 

(963)

 

(1,057)

Construction in progress

 

N/A

 

 

153

Property and equipment, net

 

  

$

2,048

$

557

Depreciation expense was approximately $0.1 million and $0.3 million for the three and six months ended June 30, 2019, respectively and approximately $0.1 million and $0.3 million for the three and six months ended June 30, 2018, respectively and was recorded in both research and development expense and general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 5 – Accrued Expenses

Accrued expenses consist of the following:

    

June 30, 

    

December 31, 

($ in thousands)

 

2019

 

2018

Accrued expenses:

 

  

 

  

Accrued compensation

$

2,786

$

5,011

Accrued clinical trial expenses

 

3,809

 

3,561

Accrued professional fees and other

 

990

 

1,107

Total accrued expenses

$

7,585

$

9,679

Note 6 – Stock Plans and Stock-Based Compensation

Equity Incentive Plans

In May 2018, the Company’s stockholders approved 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 in May 2019, the Company’s stockholders approved Amendment No. 1 (the Amendment) to the 2018 Plan to increase the number of shares reserved for issuance thereunder from 1,900,000 shares of common stock to 3,000,000. In May 2018, the Company’s stockholders also approved the Assembly Biosciences, Inc. Employee Stock Purchase Plan (the 2018 ESPP), pursuant to which eligible employees can purchase an aggregate of up to 400,000 shares of the Company’s common stock at the end of predetermined offering periods at 85% of the lower of the fair market value at the beginning or end of the offering period.

As of June 30, 2019, the Company had awards outstanding under the following shareholder approved plans:

2010 Equity Incentive Plan (the 2010 Plan), which has been frozen;
the Amended and Restated 2014 Stock Incentive Plan (the 2014 Plan); and
the 2018 Plan.

Shares of common stock underlying awards that are forfeited under the 2010 Plan on or after June 2, 2016 will become available for issuance under the 2014 Plan. As of June 30, 2019, the Company also had awards outstanding under the Assembly Biosciences, Inc. 2017 Inducement Award Plan (the 2017 Plan).

The Company issues new shares of common stock to settle options exercised and upon settlement of 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 six-month period ended June 30, 2019 is as follows:

    

    

Weighted Average

    

Total Intrinsic

 

Exercise Price

 

Value (in

Number of Shares

 

Per Share

 

thousands)

Outstanding as of December 31, 2018

 

4,637,145

$

17.21

$

48,179

Granted

 

826,350

 

18.40

 

Exercised

 

(50,875)

 

6.51

 

655

Forfeited

 

(208,685)

 

45.81

 

117

Outstanding as of June 30, 2019

 

5,203,935

$

16.36

$

19,511

Options vested and exercisable

 

3,482,129

$

12.58

$

18,398

Restricted Stock Units (RSU)

A summary of the Company’s RSUs and related information for the six-month period ended June 30, 2019 is as follows:

    

    

Weighted

 

average

Number of RSUs

 

grant price

Outstanding as of December 31, 2018

 

568,005

$

37.18

Granted

 

235,928

 

19.34

Vested and settled

 

(63,920)

 

46.03

Forfeited

 

(121,822)

 

24.14

Outstanding as of June 30, 2019

 

618,191

(1)  

$

32.03

(1)

Includes 128,334 RSUs that have vested but are subject to deferred settlement.

As of June 30, 2019, RSUs outstanding include 45,000 RSUs granted in December 2017 with performance-based conditions to an executive of the Company. The 45,000 RSUs with a grant date fair value of $1.9 million vest upon the performance conditions not yet deemed probable and accordingly, no compensation expense has been recognized as of June 30, 2019 for these awards. In the second quarter of 2019, 100,000 RSU’s granted to a former officer were forfeited due to his departure. The RSU’s had a grant date fair value of $2.4 million and were vesting over time but would have accelerated upon the achievement of certain performance conditions. The Company reversed the previously recognized expense of $0.4 million related to these forfeited awards upon the departure of the former officer.

As of June 30, 2019, the Company had unrecognized stock-based compensation expense related to all unvested RSUs of $9.7 million, which is expected to be recognized over the remaining weighted average amortization period of 1.8 years.

In May 2019 employees purchased 36,804 shares of common stock under the 2018 ESPP.

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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:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2019

    

2018

    

2019

    

2018

Exercise price

$15.22 - $57.33

$41.36 - $46.75

$15.22 - $57.33

$41.36 - $57.53

Expected volatility

66.2% - 83.0%

 

75.7% - 85.5%

66.2% - 83.2%

 

76.7% - 86.1%

Risk-free rate

2.17% - 2.47%

 

2.56% - 2.93%

2.17% - 2.65%

 

2.56% - 2.93%

Expected term (years)

5.0 - 9.0

 

5.5 - 7.0

5.0 - 9.0

 

5.5 - 7.0

Dividend yield

0%

 

0%

0%

 

0%

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

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:

Three Months Ended June 30, 

Six Months Ended June 30, 

($ in thousands)

    

2019

    

2018

    

2019

    

2018

Research and development

$

3,116

$

3,689

$

5,845

$

6,214

General and administrative

 

(1,048)

(1)

 

7,900

 

2,800

 

9,458

Total stock-based compensation expense

$

2,068

$

11,589

$

8,645

$

15,672

(1)

Includes the reversal of previously recognized expense of $3.6 million related to forfeited awards resulting from the departure of one of our former officers during the period.

Note 7 - 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 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). The Company provided to Allergan standard indemnification and protection of licensed intellectual property, which is part of assurance that the license meets the contract’s specifications and is not an obligation to provide goods or services.

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 approximately $631.0 million related to seven development milestones and up to approximately $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.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 120 days’ 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 that the Collaboration Agreement 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) transfer of a 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, that it is only 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 transfer 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. We originally estimated the completion of the Development Services to be in 2024. During the second quarter of 2019, the completion of the Development Services was extended to 2025 based on updated estimates of effort associated with our and Allergan’s development plans. This change in estimate did not have a material impact on our revenue recognition. 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.

To allocate transaction price among the four performance obligations, the Company estimated their standalone selling price (SSP) using income-based valuation approach for the estimated value a licensor of the compounds would receive

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 June 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 six months ended June 30, 2019 and 2018, the Company recognized approximately $7.0 million and $6.8 million, respectively, in revenue associated with the Collaboration Agreement. Short-term and long-term deferred revenue contract liabilities related to the Collaboration Agreement were approximately $6.1 million and approximately $33.6 million at June 30, 2019 and approximately $5.1 million and approximately $35.6 million at December 31, 2018.

On the unaudited condensed consolidated balance sheets, contract asset balances of approximately $2.9 million and approximately $2.4 million were recorded as accounts receivable from collaboration as of June 30, 2019 and December 31, 2018, respectively.

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

    

Balance at

    

    

    

 

Beginning

 

Balance at

 

of Period

Additions

Deductions

End of Period

Six Months Ended June 30, 2019

 

  

 

  

 

  

 

  

Contract liabilities:

 

  

 

  

 

  

 

  

Deferred revenue

$

40,660

$

$

(996)

$

39,664

    

Balance at

    

    

    

 

Beginning

 

Balance at

 

of Period

Additions

Deductions

End of Period

Six Months Ended June 30, 2018

 

  

 

  

 

  

 

  

Contract liabilities:

 

  

 

  

 

  

 

  

Deferred revenue

$

45,785

$

$

(2,195)

$

43,590

Three Months Ended June 30, 

Six Months Ended June 30, 

($ in thousands)

    

2019

    

2018

    

2019

    

2018

Collaboration revenue recognized in the period from:

 

  

 

  

 

  

 

  

Amounts included in deferred revenue at the beginning of the period

$

137

$

893

$

996

$

2,195

Performance obligations satisfied in previous period

$

$

$

$

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 8 - 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 approximately $0.8 million, with a portion related to the first performance milestone having been paid. The Company also is obligated to pay IURTC royalty payments based on net sales of the licensed technology. The Company is also obligated to pay diligence maintenance fees each year to the extent that the royalty, sublicensing, and milestone payments to IURTC are less than the diligence maintenance fee for that year. Amounts paid in the six months ended June 30, 2019 and 2018 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. The Company also must pay Therabiome lesser amounts for foreign regulatory milestones, which vary by country and region. The Company also must 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 the 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.

Two regulatory milestones were determined to have occurred under this agreement, and approximately $0.3  million was accrued and included in accrued expenses as of and during the six months ended June 30, 2019. No amounts were accrued for this agreement as of and for the six months ended June 30, 2018.

Note 9 - Leases

Operating Leases

The Company leases office space for corporate and administrative functions in Carmel, Indiana under a lease agreement that expires in August 2023. The Company leases office and laboratory space in South San Francisco, California under a sub-sublease that expires in December 2023. Prior to moving into the South San Francisco office and laboratory space in February 2019, the Company leased office and laboratory space in San Francisco, California, under a sublease that expired on February 28, 2019. The Company also leases office and laboratory space in Groton, Connecticut under a lease that expires in March 2020. The Company’s China subsidiary leases office space in Shanghai that expires in May 2020 and rents lab space in Shanghai under a lease agreement that expires in December 2019. Additionally, the Company’s China subsidiary leases office space in Beijing under a lease agreement that expires in December 2019. 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. These equipment leases began to expire in 2017, with the final lease expiring in 2021.

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ASSEMBLY BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

At June 30, 2019, the Company had operating lease liabilities of $12.9 million and right-of-use assets of $12.7 million, which were included in the condensed consolidated balance sheet.

The following summarizes quantitative information about the Company’s operating leases:

    

Three Months Ended

    

Six Months Ended

($ in thousands)

June 30, 2019

June 30, 2019

Lease cost

 

  

 

  

Operating lease cost

$

1,117

$

2,208

Short-term lease cost

 

112

 

433

Variable lease cost

 

300

 

599

Total lease cost

$

1,529

$

3,240

    

Three Months Ended

    

Six Months Ended

 

($ in thousands)

June 30, 2019

June 30, 2019

Cash paid for amounts included in the measurement of lease liabilities

$

1,062

<