ASSEMBLY BIOSCIENCES INC

NOTES TO THE CONDENSED CONSOLID ATED FINANCIAL STATEMENTS

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 biotechnology company developing innovative therapeutics. The Company's pipeline includes two clinical-stage helicase-primase inhibitors (HPI) for the treatment of recurrent genital herpes, an orally bioavailable hepatitis delta virus (HDV) entry inhibitor, a clinical-stage capsid assembly modulator candidate designed to disrupt the replication cycle of hepatitis B virus (HBV) and research programs focused on a non-nucleoside polymerase inhibitor (NNPI) targeting transplant-related herpesviruses and a small molecule interferon-α (IFN-α) receptor (IFNAR) agonist targeting HBV and HDV. The Company operates inone segment and is headquartered in South San Francisco, California.

Liquidity

The Company has not derived any revenue from product sales to date and currently hasno 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 through the sale of equity securities, the proceeds from the exercise of warrants and stock options, the issuance of debt, and upfront payments related to collaboration agreements. 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 these unaudited condensed consolidated financial statements are issued. The Company 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. Market volatility, inflation or other factors could also adversely impact the Company’s ability to access capital when and as needed.

If the Company is unable to secure additional sources of funding or generate enough revenue from its collaborations, 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

Basis of Presentation

The accompanying unaudited 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 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 SEC. In management’s opinion, the unaudited 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, 2023, which are contained in the 2023 Annual Report. The results for the three and nine months ended September 30, 2024 are not necessarily indicative of results to be expected for the entire year ending December 31, 2024 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 estimates for revenue recognition and costs incurred but not yet invoiced for research and development accruals.

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

Other Risks and Uncertainties

U.S. and global financial markets have experienced volatility and disruption due to macroeconomic and geopolitical events such as rising inflation, changes in interest rates to combat inflation, the war between Russia and Ukraine, the Israel-Hamas war and the Israel-Hezbollah war in Lebanon. The Company cannot predict at this time to what extent, if at all, it and its employees, contract research organizations, vendors and/or collaborators could potentially be negatively impacted by these events.

Reverse Stock Split

In September 2023, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying the Company, as the bid price for its common stock had closed below $1.00 per share for the last 30 consecutive business days, it was not in compliance with Nasdaq Listing Rule 5450(a)(1), which is the minimum bid price requirement for continued listing on the Nasdaq Global Select Market. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided a 180-calendar day period, or until March 25, 2024, to regain compliance with the minimum bid price requirement. The continued listing standard would be met once the closing bid price of the Company’s common stock was at least $1.00 per share for a minimum of ten consecutive business days during the 180-calendar day period. In January 2024, the Company's stockholders approved a reverse stock split of its common stock at a range of ratios between 1-for-7 to 1-for-17, and the Company's board of directors approved the implementation of the reverse stock split at a ratio of 1-for-12 (the Reverse Stock Split). The Reverse Stock Split was effective as of February 9, 2024 and the Company regained compliance with the minimum bid price requirement in February 2024.

As of the effective time of the Reverse Stock Split, every 12 issued and outstanding shares of the Company’s common stock was automatically reclassified into one issued and outstanding share of the Company’s common stock. This reduced the number of shares outstanding from 65.8 million shares to 5.5 million shares. The Reverse Stock Split did not affect the number of authorized shares of common stock or the par value of the common stock. No fractional shares of common stock were issued in connection with the Reverse Stock Split and all fractional shares were rounded down to the nearest whole share with respect to outstanding shares of common stock. Any holders of common stock who would have otherwise received a fractional share of common stock pursuant to the Reverse Stock Split, received cash in lieu of the fractional share. All prior period share and per share amounts of the Company's common stock presented have been retroactively adjusted to reflect the 1-for-12 Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

Net Loss per Share

Basic net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock 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. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss for each period presented.

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 for share and per share amounts):

Securities excluded from the computation of diluted net loss per share because including them would have been antidilutive are as follows:

Note 3 – Related Party

In October 2023, the Company entered into an Option, License and Collaboration Agreement (the Gilead Collaboration Agreement), and a Common Stock Purchase Agreement and an Investor Rights Agreement (collectively, the Gilead Equity Agreements) under which it received aggregate gross proceeds of $100.0 million from Gilead Sciences, Inc. (Gilead). During thethree and nine months ended September 30, 2024, the Company recognized$6.8 million and$21.2 million of collaboration revenue under the Gilead Collaboration Agreement, respectively (see Note 8).

Pursuant to the Investor Rights Agreement, Gilead designated two directors to the Company’s board of directors, who were appointed in December 2023 and February 2024.

In June 2024, the Company entered into a Securities Purchase Agreement with Gilead for the issuance and sale of 179,500 shares of the Company’s common stock and a warrant to purchase up to 179,500 shares of the Company’s common stock in a private placement (see Note 6). The common stock and warrant were sold at a combined offering price of $15.46, for aggregate gross proceeds to the Company of approximately $2.8 million. Also in June 2024, the Gilead Equity Agreements were amended to extend deadlines relating to the Company’s efforts to complete an equity financing and its ability to require Gilead to purchase additional shares of the Company’s common stock by three months. The extended deadlines lapsed in October 2024. The amendments also explicitly include the shares of the Company's common stock and warrant sold to Gilead in June 2024 in the definition of registrable securities. The amendments to the Gilead Equity Agreements did not have an impact to the Company's condensed consolidated financial statements.

As of September 30, 2024, Gilead held approximately 19.9% of the Company’s outstanding voting common stock. Under the Gilead Equity Agreements, Gilead may elect to purchase additional shares to increase its holdings up to a maximum of 29.9% of the Company’s then-outstanding voting common stock. The purchase price per share for additional shares purchased by Gilead under the Gilead Common Stock Purchase Agreement will be equal to the lesser of (1) a 35% premium to the 30 trading day volume weighted average price immediately prior to the date of purchase or (2) a 35% premium to the 30 trading day volume weighted average price immediately prior to delivery by Gilead of notice of the anticipated closing date.

Note 4 – Fair Value Measurements and 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 and accrued expenses.

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):

There wereno realized gains and losses for thethree and nine months ended September 30, 2024 and 2023. As of September 30, 2024, there wereno investments in an unrealized loss position. The Company did not recognize any credit losses related to its investments and all unrealized gains and losses on available-for-sale securities are recorded in accumulated other comprehensive loss on the condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023.

Accrued interest receivable was$0.4 million and$0.3 million as of September 30, 2024 and December 31, 2023, respectively, and was recorded in prepaid expenses and other current assets on the condensed consolidated balance sheets. The Company did not write off any accrued interest receivable during the three and nine months ended September 30, 2024 and 2023.

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

The Company estimates the fair value of its investments in marketable securities 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 wereno transfers between Level 1, Level 2 or Level 3 investments during the periods presented.

Note 5 – Other Accrued Expenses

Other accrued expenses consist of the following (in thousands):

Note 6 – Sale of Common Stock and Warrants

In June 2024, the Company entered into a Securities Purchase Agreement with an investor for the issuance and sale of 634,500 shares of the Company's common stock and a warrant to purchase up to 634,500 shares of the Company's common stock in a registered direct offering, pursuant to its shelf registration statement on Form S-3 on file with the SEC. The common stock and warrant were sold at a combined offering price of $15.46 for aggregate gross proceeds to the Company of approximately $9.8 million. The Company also entered into a Securities Purchase Agreement with Gilead for the issuance and sale of 179,500 shares of the Company's common stock and a warrant to purchase up to 179,500 shares of the Company's common stock in a private placement. The common stock and warrant were sold at a combined offering price of $15.46 for aggregate gross proceeds to the Company of approximately $2.8 million. The sale of common stock to Gilead maintains Gilead's ownership of approximately 19.9%of the Company's outstanding voting common stock as of the date of closing pursuant to the terms of Gilead's existing Investor Rights Agreement with the Company entered into in October 2023 and amended in June 2024 (see Note 3). The warrants sold to both parties have an exercise price equal to $17.00 per share, became immediately exercisable on the date of issuance and expire on June 18, 2029. Neither party may exercise any portion of the warrants to the extent it would beneficially own more than the limits defined in the warrant agreements. The exercise price and number of shares of common stock issuable upon the exercise of the warrants are subject to adjustment in the event of any stock dividends and distributions, stock splits, stock combinations or stock reclassifications, as described in the respective warrant agreements. Under certain circumstances, the warrants may be exercised on a “cashless” basis.

The warrants were classified as a component of permanent stockholders’ equity within additional paid-in-capital and were recorded at the issuance date. The 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 warrants do not provide any guarantee of value or return. There wereno warrants exercised during thethree and nine months ended September 30, 2024.

In August 2020, 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 $100.0 million through “at-the-market” offerings (2020 ATM), pursuant to its shelf registration statement on Form S-3 on file with the SEC. During thethree months ended September 30, 2024 and 2023 and during the nine months ended September 30, 2024, the Company didnot sell any shares of common stock under the 2020 ATM. During thenine months ended September 30, 2023, the Company sold 261,170 shares of common stock under the 2020 ATM, for which the Company received net proceeds of$4.5 million, after deducting commissions, fees and expenses.

Note 7 – Stock-Based Compensation

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 September 30, 2024, there was $2.9 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 1.6 years.

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

Note 8 - Collaboration Agreements

Gilead Agreement

In October 2023, the Company entered into the Gilead Collaboration Agreement and the Gilead Equity Agreements under which it received total proceeds of $100.0 million. Under the Gilead Collaboration Agreement, Gilead exclusively licensed to the Company its HPI program and NNPI program, while retaining opt-in rights to these programs and has an option to take an exclusive license, on a program-by-program basis, to all of the Company’s other current and future pipeline programs. During the 12-year collaboration term (subject to payment of certain extension fees) and for a specified period thereafter, Gilead may exercise its opt-in rights, on a program-by-program basis, at one oftwo timepoints—completion of a certain Phase 1 study or completion of a certain Phase 2 study for the first product within the program—upon payment of an opt-in fee ranging from $45.0 million to $125.0 million per program depending on the type of program and when the option is exercised.

If Gilead exercises its opt-in right to any current or future program under the collaboration, the Company is eligible to receive up to $330.0 million in potential regulatory and commercial milestones on that program, in addition to royalties ranging from the high single-digits to high teens, depending on the clinical stage of the program at the time of the opt-in. Following Gilead’s exercise of its option for each of the Company’s programs, the Company may opt in to cover 40% of the research and development costs in the United States and share 40% of the profits and operating loss in the United States for products within the program in lieu of receiving milestones and royalties for that program in the United States, unless the Company later opts out of the cost/profit share for the program. Prior to Gilead’s potential exercise of its opt-in, the Company will be primarily responsible for all discovery, research and development on its programs and thetwo Gilead-contributed programs. Following Gilead’s opt-in, Gilead will control the further discovery, research, development, and commercialization on any optioned programs. During the term, Gilead will continue to support the collaboration through extension fees of $75.0 million in each of the third, fifth and seventh years of the collaboration.

The Gilead Collaboration Agreement is subject to termination by either party for the other party’s uncured, material breach or insolvency. Subject to certain limitations, the Company and Gilead both have certain termination for convenience rights, upon sufficient prior written notice, with respect to programs that one party in-licenses from the other (subject to Gilead’s option rights), and with respect to Gilead, for programs it has option rights to (subject to certain time limitations with respect to existing Company programs). Gilead also has a right to terminate the collaborative activities under the Gilead Collaboration Agreement at certain specified points during the collaboration term. Other customary termination rights are further provided in the Gilead Collaboration Agreement.

The Company concluded Gilead is a customer and accordingly, the Gilead Collaboration Agreement is within the scope of the revenue from contracts with customers guidance. The Company identified a single combined performance obligation for the discovery, research and development services during the collaboration term (the R&D Services). As of September 30, 2024, the total transaction price of the Gilead Collaboration Agreement was determined to be $90.7 million. The Company will reevaluate the transaction price in each reporting period as uncertain events are resolved or other changes in circumstances occur.

The transaction price is reflected as collaboration revenue when realized in the Company’s condensed consolidated statements of operations. The Company will recognize revenue over time using a cost-based input method over the initial non-cancellable term ofthree years since this method best reflects the transfer of services to Gilead. In applying a cost-based input method of revenue recognition, the Company uses actual costs incurred relative to estimated total costs to fulfill each performance obligation.

The Company recognized collaboration revenue of$6.8 million and$21.2 million during the three and nine months ended September 30, 2024. The transaction price for future collaborative activities was recorded as deferred revenue on the condensed consolidated balance sheet as of September 30, 2024, of which$32.6 million was short-term and$32.5 million was long-term. The reimbursable expenses incurred by the Company during the three months ended September 30, 2024 were insignificant. During the nine months ended September 30, 2024, the Company incurred$0.3 million in reimbursable expenses due to Gilead.

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

Arbutus Biopharma Agreement

In August 2020, the Company and Arbutus Biopharma Corporation (Arbutus Biopharma) entered into a Clinical Trial Collaboration Agreement (the Arbutus Biopharma Agreement) to conduct a randomized, multi-center, open-label Phase 2 clinical trial to explore the safety, pharmacokinetics and antiviral activity of the triple combination of vebicorvir (VBR), AB-729 and a nucleos(t)ide analog reverse transcriptase inhibitor (NrtI) compared to the double combinations of VBR with a NrtI and AB-729 with a NrtI. Under the Arbutus Biopharma Agreement, Assembly and Arbutus Biopharma shared responsibility for the costs of the trial equally, excluding manufacturing supply which were the burden of each company to supply their respective drugs, VBR and AB-729. Assembly was responsible for conducting this clinical trial with Arbutus Biopharma reimbursing Assembly its share of expenses. In February 2023, Assembly and Arbutus Biopharma terminated the Phase 2 clinical trial early, at the end of the 48-week on-treatment period.

Reimbursements and cost-sharing portions from Arbutus Biopharma are reflected as a reduction of research and development expense when realized in the Company’s condensed consolidated statements of operations. During the three and nine months ended September 30, 2024, the Company recognized research and development expenses of$0.3 million for net amounts refundable to Arbutus Biopharma after the final reconciliation of clinical trial costs. Amounts refundable to Arbutus Biopharma are recorded as accrued research and development expenses on the condensed consolidated balance sheet as of September 30, 2024. During the three and nine months ended September 30, 2023, the Company recognized a reduction of research and development expenses of$0.1 million and$1.2 million, respectively, under the Arbutus Biopharma Agreement.

Note 9 - Milestones and Research Agreements

HBV Research Agreement with Indiana University

Since September 2013, the Company was party to an exclusive License Agreement dated September 3, 2013 with Indiana University Research and Technology Corporation (IURTC) from whom it licensed aspects of the Company’s HBV program held by IURTC. The license agreement required 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, if all milestones through development were met, was $0.8 million, with a portion having been paid. The Company was obligated to pay IURTC royalty payments based on net sales of the licensed technology as well as a portion of any sublicensing revenue Assembly received. The Company was also required to pay diligence maintenance fees each year to the extent that the royalty, sublicensing, and milestone payments to IURTC were less than such fees for that year. Following its decision to discontinue further development or partnering for ABI-H3733, the Company terminated the IURTC license agreement effective April 2024. There wereno fees paid to IURTC during thethree months ended September 30, 2024 or 2023. The Company paid IURTC $0.1 million in diligence maintenance fees during both thenine months ended September 30, 2024 and 2023.