Notes to Condensed Consolidated Financial Statements
(Tabular amounts in thousands of US Dollars, except share and per share amounts)
1.
Nature of business and future operations
Arbutus Biopharma Corporation (the “Company” or “Arbutus”) is a biopharmaceutical business dedicated to discovering, developing, and commercializing a cure for patients suffering from chronic hepatitis B infection, a disease of the liver caused by the hepatitis B virus (“HBV”). To pursue its strategy of developing a curative combination regimen, the Company has assembled a pipeline of multiple drug candidates with differing and complementary mechanisms of action targeting HBV.
The success of the Company is dependent on obtaining the necessary regulatory approvals to bring its products to market and achieving profitable operations. The Company's research and development activities and commercialization of its products are dependent on its ability to successfully complete these activities and to obtain adequate financing through a combination of financing activities and operations. It is not possible to predict either the outcome of the Company's existing or future research and development programs or the Company’s ability to continue to fund these programs in the future.
2.
Significant accounting policies
Basis of presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and accordingly, do not include all disclosures required for annual financial statements. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended
December 31, 2017
included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments and reclassifications necessary to fairly present the financial position, results of operations and cash flows as of
September 30, 2018
and for all other periods presented. The results of operations for the three and
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively, are not necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company for the year ended
December 31, 2017
, except as described below under Recent Accounting Pronouncements.
Principles of Consolidation
These unaudited condensed consolidated financial statements include the accounts of the Company and its
two
wholly-owned subsidiaries, Arbutus Biopharma Inc. ("Arbutus Inc.") and Protiva Biotherapeutics Inc. ("Protiva"). On January 1, 2018, Protiva was amalgamated with the Company. All intercompany transactions and balances have been eliminated in consolidation.
Income or loss per share
The Company follows the two-class method when computing net loss attributable to common shareholders per share as the Company has issued Series A participating convertible preferred shares (the "Preferred Shares" (as further described in note 6) that meet the definition of participating securities. The Preferred Shares entitle the holders to participate in dividends but do not require the holders to participate in losses of the Company. Accordingly, if the Company reports a net loss attributable to common shareholders net losses are not allocated to holders of the Preferred Shares.
Loss per share is calculated based on the weighted average number of common shares outstanding. Diluted loss per share does not differ from basic loss per share since the effect of the Company’s stock options, liability-classified stock option awards, and warrants are anti-dilutive. During the
nine
months ended
September 30, 2018
, potential common shares of
24,211,817
, (
nine
months ended
September 30, 2017
–
5,339,714
), consisting of the as-if converted number of Preferred shares, warrants and stock options, were excluded from the calculation of loss per common share because their inclusion would be anti-dilutive.
The following table sets out the computation of basic and diluted net income (loss) attributable to shareholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2018
|
|
2018
|
Numerator:
|
Common Shares
|
Preferred Shares
|
|
Common Shares
|
Preferred Shares
|
Allocation of distributable earnings
|
$
|
—
|
|
$
|
2,567
|
|
|
$
|
—
|
|
$
|
7,444
|
|
Allocation of undistributed loss
|
(27,040
|
)
|
—
|
|
|
(46,255
|
)
|
—
|
|
Allocation of income (loss) attributed to shareholders
|
$
|
(27,040
|
)
|
$
|
2,567
|
|
|
$
|
(46,255
|
)
|
$
|
7,444
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average number of shares - basic and diluted
|
55,421,504
|
|
1,164,000
|
|
|
55,241,284
|
|
1,134,813
|
|
Basic and diluted net income (loss) attributable to shareholders per share
|
$
|
(0.49
|
)
|
$
|
2.21
|
|
|
$
|
(0.84
|
)
|
$
|
6.56
|
|
Fair value of financial instruments
The Company measures certain financial instruments and other items at fair value.
To determine the fair value, the Company uses the fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use to value an asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs based on assumptions about the factors market participants would use to value an asset or liability. The three levels of inputs that may be used to measure fair value are as follows:
|
|
•
|
Level 1 inputs are quoted market prices for identical instruments available in active markets.
|
|
|
•
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. If the asset or liability has a contractual term, the input must be observable for substantially the full term. An example includes quoted market prices for similar assets or liabilities in active markets.
|
|
|
•
|
Level 3 inputs are unobservable inputs for the asset or liability and will reflect management’s assumptions about market assumptions that would be used to price the asset or liability.
|
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
September 30, 2018
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
21,933
|
|
|
—
|
|
|
—
|
|
|
$
|
21,933
|
|
Short-term investments
|
120,085
|
|
|
—
|
|
|
—
|
|
|
120,085
|
|
Total
|
$
|
142,018
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
142,018
|
|
Liabilities
|
|
|
|
|
|
|
|
Liability-classified options
|
—
|
|
|
—
|
|
|
$
|
2,738
|
|
|
$
|
2,738
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
4,161
|
|
|
4,161
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,899
|
|
|
$
|
6,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
December 31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
54,292
|
|
|
—
|
|
|
—
|
|
|
$
|
54,292
|
|
Short-term investments
|
72,060
|
|
|
—
|
|
|
—
|
|
|
72,060
|
|
Restricted cash
|
12,601
|
|
|
—
|
|
|
—
|
|
|
12,601
|
|
Total
|
$
|
138,953
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
138,953
|
|
Liabilities
|
|
|
|
|
|
|
|
Liability-classified options
|
—
|
|
|
—
|
|
|
$
|
1,239
|
|
|
$
|
1,239
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
10,424
|
|
|
10,424
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,663
|
|
|
$
|
11,663
|
|
The following table presents the changes in fair value of the Company’s liability-classified stock option awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at beginning of the period
|
|
Fair value of liability-classified options exercised in the period
|
|
Increase in fair
value of liability
|
|
Liability at end
of the period
|
Nine months ended September 30, 2017
|
$
|
553
|
|
|
$
|
(103
|
)
|
|
$
|
1,367
|
|
|
$
|
1,817
|
|
Nine months ended September 30, 2018
|
$
|
1,239
|
|
|
$
|
—
|
|
|
$
|
1,499
|
|
|
$
|
2,738
|
|
The following table presents the changes in fair value of the Company’s contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at beginning of the period
|
|
Increase (decrease) in fair value of Contingent Consideration
|
|
Liability at end of the period
|
Nine months ended September 30, 2017
|
$
|
9,065
|
|
|
$
|
1,146
|
|
|
$
|
10,211
|
|
Nine months ended September 30, 2018
|
$
|
10,424
|
|
|
$
|
(6,263
|
)
|
|
$
|
4,161
|
|
Equity method investment
The Company accounts for its investment in associated companies in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 323,
Investments - Equity Method and Joint Ventures
("ASC
323"). In accordance with ASC 323, associated companies are accounted for as equity method investments. Results of associated companies are presented on a one-line basis. Investments in, and advances to, associated companies are presented on a one-line basis in the caption “Investment in Genevant” in the Company's condensed consolidated balance sheets, net of allowance for losses, which represents the Company's best estimate of probable losses inherent in such assets. The Company's proportionate share of any associated companies' net income or loss is presented on a one-line basis in the caption "Equity investment loss" in the Company's condensed consolidated statement of operations Transactions between the Company and any associated companies are eliminated on a basis proportional to the Company's ownership interest. Financial results of Genevant are recorded on a one-quarter lag basis.
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company's financial position or results of operations upon adoption.
ASC 606,
Revenue From Contracts with Customers
("ASC 606") became effective for the Company on January 1, 2018, and was adopted using the modified retrospective method under which previously presented financial statements are not restated and the cumulative effect of adopting ASC 606 on contracts in process is recognized by an adjustment to retained earnings at the effective date. The adoption of ASC 606 did not change the Company’s recognized revenue under its ongoing significant collaboration and license agreements and no cumulative effect adjustment was required.
The new guidance in ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under a five-step model: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as a performance obligation is satisfied.
The Company generates revenue primarily through collaboration agreements and license agreements. Such agreements may require the Company to deliver various rights and/or services, including intellectual property rights or licenses and research and development services. Under such agreements, the Company is generally eligible to receive non-refundable upfront payments, funding for research and development services, milestone payments, and royalties.
In contracts where the Company has more than one performance obligation to provide its customer with goods or services, each performance obligation is evaluated to determine whether it is distinct based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative stand-alone selling prices. The estimated stand-alone selling price of each deliverable reflects the Company’s best estimate of what the selling price would be if the deliverable was regularly sold on a stand-alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if the selling price on a stand-alone basis is not available.
The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to the customer for the related goods or services. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies certain aspects of the statement of cash flows, and aims to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. ASU 2016-15 was effective as of January 1, 2018 and was adopted by the Company in the first quarter of 2018. The adoption of ASU 2016-15 did not have a material impact on the Company's condensed consolidated balance sheets or condensed consolidated statements of operations and comprehensive income (loss).
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18") that clarifies how entities should present restricted cash in the statement of cash flows. Under ASU 2015-18, changes in total cash, inclusive of restricted cash, should be reflected in the statement of cash flows. As a result, transfers between cash and restricted cash are no longer reflected as activity within the statement of cash flows. The Company adopted ASU 2016-18 on January 1, 2018. The adoption of ASU 2018-18 did not have a material impact on the Company's condensed consolidated statements of cash flows.
In October 2016 the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the income tax consequences from the intra-entity transfer of an asset other than inventory and associated changes to deferred taxes will be recognized when the transfer occurs. The Company adopted ASU 2016-16 in the first quarter of 2018. The adoption of ASU 2016-16 did not have a material impact on the Company's condensed consolidated balance sheets or condensed consolidated statements of operations and comprehensive income (loss).
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-02"). ASU 2016-02 supersedes Topic 840, Leases and requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 retains a distinction between finance leases and operating leases, with cash payments from operating leases classified within operating activities in the statement of cash flows. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018 for public business entities, which for the Company means January 1, 2019. The Company does not plan to early adopt ASU 2016-02 and the extent of the impact of its adoption has not yet been determined.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). ASU 2018-07 provides guidance about aligning nonemployee and employee share-based payment accounting. ASU 2018-07 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company early adopted the new standard as of January 1, 2018. The adoption of ASU 2018-07 did not have a material impact on the Company's condensed consolidated balance sheets or condensed consolidated statements of operations and comprehensive income (loss).
3.
Equity method investment
On April 11, 2018, the Company entered into an agreement (the "Genevant Agreement") with Roivant Sciences Ltd.("Roivant") to launch Genevant Sciences Ltd. ("Genevant"), a jointly-owned company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by the Company's proprietary lipid nanoparticle ("LNP") and ligand conjugate delivery technologies.
Under the terms of the Genevant Agreement, the Company contributed a license for the delivery technologies and fixed assets with a carrying value of
$600,000
. The contributed license provides Genevant with exclusive rights to the LNP and ligand conjugate delivery platforms for RNA-based applications outside of HBV. Roivant contributed $
37,500,000
in transaction-related seed capital to Genevant, consisting of an initial capital contribution of
$22,500,000
and a subsequent investment of
$15,000,000
at a pre-determined, stepped-up valuation. The Company retains all rights to the LNP and ligand conjugate delivery platforms for HBV, and is entitled to a tiered low single-digit royalty from Genevant on future sales of products enabled by those delivery platforms. The Company also retains the entirety of its royalty entitlement on the commercialization of Alnylam Pharmaceutical, Inc.'s ("Alnylam") Onpattro.
The Company determined that, since the Genevant Agreement stipulates that significant decisions relating to the management of Genevant must be shared between the Company and Roivant, the Company does not control Genevant but does exercise significant influence over it and, will therefore, account for its investment in Genevant using the equity method. On April 11, 2018, the Company and Roivant each received a
50%
ownership interest in Genevant. As a result of a subsequent investment in Genevant by Roivant and other parties, as of September 30, 2018, the Company owned approximately
40%
of the common equity of Genevant.
The Company determined that the transfer of assets, license and fixed assets to Genevant did not constitute a discontinuance of operations.
The Company's contribution of licenses to the delivery technologies and fixed assets in exchange for an equity interest in Genevant resulted in a gain of
$24,884,000
during the second quarter of 2018. The gain reflects the fair value of the equity in Genevant received by the Company less the
$600,000
carrying value of the fixed assets contributed by the Company and
$1,893,000
of goodwill allocated to Genevant based upon the relative fair value of Genevant to the Company as of April 11, 2018. The fair value of equity in Genevant received by the Company was based on a valuation performed by external valuation experts.
The following table provides a summary of the Company's investment in Genevant for the three and nine months ended
September 30, 2018
, in thousands:
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
Nine months ended September 30, 2018
|
Beginning balance
|
$
|
27,446
|
|
$
|
—
|
|
Investment in Genevant
|
—
|
|
27,377
|
|
Stock based compensation expense
|
69
|
|
138
|
|
Share of loss
|
(2,838
|
)
|
(2,838
|
)
|
Share of comprehensive loss - currency translation adjustment
|
(12
|
)
|
(12
|
)
|
Ending balance
|
$
|
24,665
|
|
$
|
24,665
|
|
The basis difference between the Company’s carrying value in Genevant and the Company’s share of Genevant's net assets is attributed primarily to definite-lived intangible assets (the delivery technology transferred to Genevant) and is being amortized over 11 years.
4.
Intangible assets and goodwill
All in-process research and development ("IPR&D") acquired is currently classified as indefinite-lived and is not currently being amortized. IPR&D becomes definite-lived upon the completion or abandonment of the associated research and development efforts, and will be amortized from that time over an estimated useful life based on respective patent terms. The Company evaluates the recoverable amount of intangible assets on an annual basis and performs an annual evaluation of goodwill as of December 31 of each year, unless there is an event or change in the business that could indicate impairment, in which case earlier testing is performed.
Intangible assets impairment evaluation
During the three months ended
September 30, 2018
, the Company recorded an intangible assets impairment charge of
$14,811,000
and a corresponding income tax benefit of $
4,282,000
related to the decrease in deferred tax liability for the indefinite delay of further development of its AB-423 program in the Antigen Inhibitor drug class as a result of the Company's decision to advance its second generation capsid agent into the HBV patient portion of its phase 1 clinical trial.
The following table summarizes the carrying values of the intangible assets as of
September 30, 2018
, in thousands:
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
IPR&D – Immune Modulators
|
$
|
—
|
|
$
|
—
|
|
IPR&D – Antigen Inhibitors
|
—
|
|
14,811
|
|
IPR&D – cccDNA Sterilizers
|
43,836
|
|
43,836
|
|
Total Intangible Assets
|
$
|
43,836
|
|
$
|
58,647
|
|
Goodwill
The Company has one reporting unit for goodwill purposes due to the fact that resource allocation and performance is largely driven by consolidated metrics. In addition, there is limited discrete financial information available and reviewed below the consolidated level.
In the nine months ended
September 30, 2018
, the Company allocated
$1,893,000
of goodwill to its investment in Genevant based upon the relative fair value of Genevant to the Company as of April 11, 2018 (see note 3 above), as a result of which the carrying value of goodwill decreased by this same amount. As of September 30, 2018, the Company performed a qualitative assessment and had not identified any indicators of impairment of goodwill, and therefore
no
impairment charge on goodwill was recorded during the three and nine months then ended (three and
nine
months ended
September 30, 2017
-
$0
). The intangible impairment charge of
$14,811,000
described above represents a discrete, program specific event and was not considered to be an indicator of impairment of goodwill.
5.
Collaborations, contracts and licensing agreements
The following table set forth revenue recognized under collaborations, contracts and licensing agreements, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Alexion (a)
|
$
|
—
|
|
|
$
|
6,859
|
|
|
$
|
—
|
|
|
$
|
7,956
|
|
Gritstone (b)
|
313
|
|
|
—
|
|
|
2,400
|
|
|
—
|
|
Gritstone milestone (c)
|
1,250
|
|
|
—
|
|
|
1,250
|
|
|
—
|
|
Other milestone and royalty payments
|
24
|
|
|
33
|
|
|
617
|
|
|
210
|
|
Total revenue
|
$
|
1,587
|
|
|
$
|
6,892
|
|
|
$
|
4,267
|
|
|
$
|
8,166
|
|
The following table sets forth deferred collaborations and contracts revenue:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Gritstone (b)
|
$
|
649
|
|
|
$
|
2,727
|
|
Other deferred revenue
|
—
|
|
|
15
|
|
Total deferred revenue
|
$
|
649
|
|
|
$
|
2,742
|
|
(a) License Agreement with Alexion Pharmaceuticals, Inc. ("Alexion")
On March 16, 2017, the Company entered into a license agreement with Alexion that entitles Alexion to research, develop, manufacture, and commercialize products with the Company's "LNP" technology in their single orphan disease target. In consideration for the rights granted under the agreement, the Company received a
$7,500,000
non-refundable upfront cash payment, as well as payments for services provided. This upfront payment was amortized over the period of expected benefit.
On July 27, 2017, the Company received notice of termination from Alexion for the Company's LNP license agreement. The termination was driven by a strategic review of Alexion's business and research and development portfolio, which included a decision to discontinue development of mRNA therapeutics. The
$7,500,000
upfront payment received in March 2017 is non-
refundable and the Company recorded the remaining deferred revenue balance, as well as any revenue and costs related to closeout procedures, in the condensed consolidated statement of operations and comprehensive loss for the period ended September 30, 2017.
(b) License agreement with Gritstone Oncology, Inc. ("Gritstone")
On October 16, 2017, the Company entered into a license agreement with Gritstone that entitles Gritstone to research, develop, manufacture and commercialize products with the Company’s LNP technology. The Company received an upfront payment in November 2017, and is eligible to receive future potential payments including research services, development and commercial milestone payments and royalty payments on future product sales. As a result of the Company's agreement with Genevant (see note 3 for details), from April 11, 2018 going forward Genevant is entitled to
50%
of the revenues earned by the Company from Gritstone and the Company will record revenues on a net basis.
The Company determined the promised goods and services under the license agreement included the rights and license granted, involvement in the joint steering committee, and other services provided, as determined under the research plan. The license and involvement in the joint steering committee have been determined by the Company to be distinct. Therefore, these promised goods and services are treated as one performance obligation and recognized as revenue over the performance period as the Company transfers the technical "know-how" for the customized formulations.
The Company has determined that other materials and services provided have standalone value. The relative fair values are estimated upon the execution of each activity and charged at rates comparable to market with embedded margins on each service activity.
(c) Gritstone Milestone
During the three months ended September 30, 2018, Gritstone paid a milestone payment of
$2,500,000
pursuant to the license agreement, half of which went to the Company and half of which ($
1,250,000
) was paid to Genevant.
6. Share capital
Series A participating convertible preferred shares
On October 2, 2017, the Company announced that it entered into a subscription agreement with Roivant for the sale of
1,164,000
Preferred Shares to Roivant for gross proceeds of
$116,400,000
. The Preferred Shares are non-voting and are convertible into common shares at an initial conversion price of
$7.13
per share. The purchase price for the Preferred Shares plus an amount equal to
8.75%
per annum, compounded annually, will be subject to mandatory conversion into
22,589,601
common shares on October 16, 2021 (subject to limited exceptions in the event of certain fundamental corporate transactions relating to Arbutus’ capital structure or assets, which would permit earlier conversion at Roivant’s option). After conversion of the Preferred Shares into common shares, based on the number of common shares outstanding on October 2, 2017, Roivant would hold
49.90%
of the Company's common shares. Roivant agreed to a
four
year lock-up period for this investment and its existing holdings in the Company. Roivant also agreed to a
four
year standstill whereby Roivant will not acquire greater than
49.99%
of the Company's common shares or securities convertible into common shares.
The initial investment of
$50,000,000
closed on October 16, 2017, and the remaining amount of
$66,400,000
closed on January 12, 2018 following regulatory and shareholder approvals.
The Company records the Preferred Shares wholly as equity under ASC 480,
Distinguishing Liabilities From Equity,
with no bifurcation of conversion feature from the host contract, given that the Preferred Shares cannot be cash settled and the redemption features are within the Company's control, which include a fixed conversion ratio with predetermined timing and proceeds. The Company accrues for the
8.75%
per annum compounding coupon at each reporting period end date as an increase to preferred share capital, and an increase to deficit (see Condensed Consolidated Statement of Stockholders' Equity).
7. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are comprised of the following, in thousands:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Trade accounts payable
|
$
|
3,075
|
|
|
$
|
1,987
|
|
Research and development accruals
|
4,178
|
|
|
4,937
|
|
Professional fee accruals
|
722
|
|
|
429
|
|
Deferred lease inducements
|
18
|
|
|
42
|
|
Payroll accruals
|
514
|
|
|
2,893
|
|
Other accrued liabilities
|
4
|
|
|
358
|
|
|
$
|
8,511
|
|
|
$
|
10,646
|
|
8. Loan payable
On December 27, 2016, the Company obtained a
three
-year loan of
$12,001,000
from Wells Fargo in the form of a promissory note for the purpose of financing its operations, including the expansion of laboratory facilities for its U.S. operations. The loan accrued interest daily. The variable component was the one-month London Interbank Offered Rate (LIBOR), and a margin of
1.25%
per annum. The carrying value of the loan was recorded at the principal plus any accrued interest not yet paid. The loan was due on December 27, 2019.
The loan was secured by the Company's cash of
$12,601,000
, that was restricted from use until the loan was settled in full. The Company invested the restricted cash in a
two
-year fixed certificate of deposit with Wells Fargo (see note 2).
In March 2018, the Company repaid the loan and accrued interest in full, resulting in the release of
$12,601,000
from restricted cash to short-term investments on the Company's condensed consolidated balance sheet.
9. Site consolidation
On February 8, 2018, the Company announced a site consolidation and organizational restructuring to align its HBV business in Warminster, PA, by reducing its global workforce by approximately
35%
and by closing its Burnaby facility. In March 2018, the Company began executing its site consolidation plan and began to incur related costs.
The Company estimates that the total expenses to complete the site consolidation will be approximately
$5,000,000
. Included in the site consolidation plan is the payment of one-time employee termination benefits, employee relocation costs, and site closure costs, which were primarily paid in cash in the second quarter of 2018. In addition, as of June 30, 2018 the Company ceased to use its Burnaby facility. The Company entered into a sublease with its equity investee, Genevant (refer to note 3) for a portion of its facility, during the three months ended June 30, 2018. During the three months ended September 30, 2018, the Company entered into two additional subleases, which, together with the Genevant sublease, represents 80% of the available space now under sublease. The Company does not expect the subleasing income to completely cover the costs under the head lease to which the Company remains the primary obligor. Therefore, the Company has recognized the remaining committed cost, less sublease income currently under contract, in site consolidation expenses.
The Company accounts for site consolidation expense in accordance with ASC 420,
Exit or Disposal Cost Obligations ("ASC 420")
. ASC 420 specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, except for a liability where employees are required to render service until they are terminated in order to receive termination benefits and will be retained to render service beyond the minimum retention period. A liability for such one-time termination benefits shall be measured initially at the communication date based on the fair value of the liability as of the termination date and recognized ratably over the future service period.
The following table shows expenses recorded in the
three and nine
months ended
September 30, 2018
and the liability as of
September 30, 2018
, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of expense
|
Jan 1, 2018 - March 31, 2018
|
April 1, 2018 - June 30, 2018
|
July 1, 2018 - Sept 30, 2018
|
Nine months ended September 30, 2018
|
Employee severance
|
$
|
1,381
|
|
$
|
1,285
|
|
$
|
50
|
|
$
|
2,716
|
|
Employee relocation
|
240
|
|
295
|
|
148
|
|
683
|
|
Lease and facility
|
—
|
|
1,001
|
|
(690
|
)
|
311
|
|
Total site consolidation expense
|
1,621
|
|
2,581
|
|
(492
|
)
|
3,710
|
|
Amounts paid during the period
|
592
|
|
2,520
|
|
(172
|
)
|
2,940
|
|
Adjustment to accrual
|
$
|
1,029
|
|
$
|
61
|
|
$
|
(320
|
)
|
$
|
770
|
|
10. Contingencies and commitments
Product development partnership with the Canadian Government
The Company entered into a Technology Partnerships Canada ("TPC") agreement with the Canadian Federal Government on November 12, 1999. Under this agreement, TPC agreed to fund
27%
of the costs incurred by the Company, prior to March 31, 2004, in the development of certain oligonucleotide product candidates up to a maximum contribution from TPC of
$7,179,000
(
C$9,256,000
). As at
September 30, 2018
, a cumulative contribution of
$2,848,000
(
C$3,702,000
) had been received and the Company does not expect any further funding under this agreement. In return for the funding provided by TPC, the Company agreed to pay royalties on the share of future licensing and product revenue, if any, that are received by the Company on certain non-siRNA oligonucleotide product candidates covered by the funding under the agreement. These royalties are payable until a certain cumulative payment amount is achieved or until a pre-specified date. In addition, until a cumulative amount equal to the funding actually received under the agreement has been paid to TPC, the Company agreed to pay
2.5%
royalties on any royalties the Company receives from Spectrum Pharmaceuticals, Inc., for licensing Marqibo®. For the three and nine months ended
September 30, 2018
, the Company earned royalties on Marqibo sales in the amount of
$30,000
and
$93,000
respectively
(three and nine months ended
September 30, 2017
–
$33,000
and
$156,000
, respectively) resulting in
$2,000
being recorded by the Company as royalty payable to TPC (
September 30, 2017
-
$4,000
). The cumulative amount paid or accrued as of
September 30, 2018
was
$24,000
, therefore the remaining contingent amount due to TPC is
$2,824,000
(
C$3,671,000
).
Arbitration with the University of British Columbia (“UBC”)
Certain early work on lipid nanoparticle delivery systems and related inventions was undertaken at the Company and assigned to the UBC. These inventions are licensed to the Company by UBC under a license agreement, initially entered into in 1998 and subsequently amended in 2001, 2006 and 2007. The Company has granted sublicenses under the UBC license to Alnylam. Alnylam has in turn sublicensed back to the Company under the licensed UBC patents for discovery, development and commercialization of siRNA products. Certain sublicenses to other parties were also granted.
On November 10, 2014, UBC filed a notice of arbitration against the Company and on January 16, 2015, filed a Statement of Claim, which alleges entitlement to
$3,500,000
in allegedly unpaid royalties based on publicly available information, and an unspecified amount based on non-public information. UBC also seeks interest and costs, including legal fees. The Company filed its Statement of Defense to UBC's Statement of Claims, as well as a Counterclaim involving a patent application that the Company alleges UBC wrongly licensed to a third party. The proceedings have been divided into
three
phases, with a first hearing that took place in June 2017. In the first phase, the arbitrator determined which agreements are sublicense agreements within UBC's claim. No finding was made as to whether any licensing fees are due to UBC under these agreements; this will be the subject of the second phase of arbitration. The second phase of the Arbitration is set for February 2019.
Arbitration and related matters are costly and may divert the attention of the Company’s management and other resources that would otherwise be engaged in other activities. The Company continues to dispute UBC's allegations, and seeks license payments for said application, and an exclusive worldwide license to said application. However, arbitration is subject to inherent uncertainty and an arbitrator could rule against the Company. The Company has not recorded an estimate of the possible loss associated with this arbitration, due to the uncertainties related to both the likelihood and amount of any possible loss or range of loss. Costs related to the arbitration are recorded by the Company as incurred.
Acquisition of Enantigen Therapeutics, Inc. ("Enantigen")
In October 2014, Arbutus Inc. acquired all of the outstanding shares of Enantigen pursuant to a stock purchase agreement. Through this transaction, Arbutus Inc. acquired an HBV surface antigen secretion inhibitor program and a capsid assembly inhibitor program, each of which are now assets of the Company, following the Company’s merger with Arbutus Inc.
Under the stock purchase agreement, Arbutus Inc. agreed to pay up to a total of
$21,000,000
to Enantigen’s selling stockholders upon the achievement of certain triggering events related to Enantigen’s
two
programs in pre-clinical development related to HBV therapies. The first triggering event, which would trigger a
$3,000,000
milestone, is the enrollment of the first patient in a Phase 1b clinical trial in HBV patients.
The regulatory, development and sales milestone payments had an initial estimated fair value of approximately
$6,727,000
as of the date of acquisition of Arbutus Inc., and have been treated as contingent consideration payable in the purchase price allocation, based on information available at the date of acquisition, using a probability weighted assessment of the likelihood the milestones would be met and the estimated timing of such payments, and then the potential contingent payments were discounted to their present value using a probability adjusted discount rate that reflects the early stage nature of the development program, time to complete the program development, and market comparative data.
Contingent consideration is recorded as a financial liability, and measured at its fair value at each reporting date, based on an updated consideration of the probability-weighted assessment of expected milestone timing, with any changes in fair value from the previous reporting date recorded in the statement of operations and comprehensive loss (see note 2). The decrease in contingent consideration for the three and nine months ended September 30, 2018 was primarily due to the Company's decision in the third quarter 2018 to indefinitely defer further development of AB-423 thereby reducing the probability of achieving future development milestones, as well as a recalibration in the timing of future sales milestones being achieved, resulting in a reduction in the estimated fair value of the liability.
License Agreement with the Baruch S. Blumberg Institute ("Blumberg") and Drexel University ("Drexel")
In February 2014, Arbutus Inc. entered into a license agreement with Blumberg and Drexel that granted Arbutus Inc. an exclusive, worldwide, sub-licensable license to
three
different compound series: cccDNA inhibitors, capsid assembly inhibitors and HCC inhibitors.
In partial consideration for this license, Arbutus Inc. paid a license initiation fee of
$150,000
and issued warrants to Blumberg and Drexel. The warrants were exercised in 2014. Under this license agreement, Arbutus Inc. also agreed to pay up to
$3,500,000
in development and regulatory milestones per licensed compound series, up to
$92,500,000
in sales performance milestones per licensed product, and royalties in the mid-single digits based upon the proportionate net sales of licensed products in any commercialized combination. The Company is obligated to pay Blumberg and Drexel a double digit percentage of all amounts received from the sub-licensees, subject to customary exclusions.
In November 2014, Arbutus Inc. entered into an additional license agreement with Blumberg and Drexel pursuant to which it received an exclusive, worldwide, sub-licensable license under specified patents and know-how controlled by Blumberg and Drexel covering epigenetic modifiers of cccDNA and STING agonists. In consideration for these exclusive licenses, Arbutus Inc. made an upfront payment of
$50,000
. Under this agreement, the Company is required to pay up to
$1,200,000
for each licensed product upon the achievement of a specified regulatory milestone and a low single digit royalty, based upon the proportionate net sales of compounds covered by this intellectual property in any commercialized combination. The Company is also obligated to pay Blumberg and Drexel a double digit percentage of all amounts received from its sub-licensees, subject to exclusions.
Research Collaboration and Funding Agreement with Blumberg
In October 2014, Arbutus Inc. entered into a research collaboration and funding agreement with Blumberg under which the Company will provide
$1,000,000
per year of research funding for
three
years, renewable at the Company’s option for an additional
three
years, for Blumberg to conduct research projects in HBV and liver cancer pursuant to a research plan to be agreed upon by the parties. Blumberg has exclusivity obligations to Arbutus with respect to HBV research funded under the agreement. In addition, the Company has the right to match any third party offer to fund HBV research that falls outside the scope of the research being funded under the agreement. Blumberg has granted the Company the right to obtain an exclusive, royalty bearing, worldwide license to any intellectual property generated by any funded research project. If the Company elects to exercise its right to obtain such a license, the Company will have a specified period of time to negotiate and enter into a mutually agreeable license agreement with Blumberg. This license agreement will include the following pre-negotiated upfront, milestone and royalty payments: an upfront payment in the amount of
$100,000
; up to
$8,100,000
upon the achievement of specified development and regulatory milestones; up to
$92,500,000
upon the achievement of specified commercialization milestones; and royalties at a low single to mid-single digit rates based upon the proportionate net sales of licensed products from any commercialized combination.
On June 5, 2016, the Company and Blumberg entered into an amended and restated research collaboration and funding agreement, primarily to: (i) increase the annual funding amount to Blumberg from
$1,000,000
to
$1,100,000
; (ii) extend the initial term through to October 29, 2018; (iii) provide an option for the Company to extend the term past October 29, 2018 for
two
additional
one
year terms; and (iv) expand the Company's exclusive license under the Agreement to include the sole and exclusive right to obtain and exclusive, royalty-bearing, worldwide and all-fields license under Blumberg's rights in certain other inventions described in the agreement.
11.
Concentrations of credit risk
Credit risk is defined by the Company as an unexpected loss in cash and earnings if a collaborative partner is unable to pay its obligations on a timely basis. The Company’s main source of credit risk is related to its accounts receivable balance which principally represents temporary financing provided to collaborative partners in the normal course of operations.
The Company does not currently maintain a provision for bad debts as the majority of accounts receivable are from collaborative partners or government agencies and are considered low risk.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk as of
September 30, 2018
was the accounts receivable balance of
$538,000
(
December 31, 2017
-
$402,000
).
All accounts receivable balances were current at
September 30, 2018
and at
December 31, 2017
.
12.
Related Party Transactions
During 2018, the Company purchased certain research and development services from Roivant, which are billed at agreed hourly rates and reflective of market rates for such services. The total cost of these services was $
0
and
$644,000
for the
three and nine
months ended
September 30, 2018
, respectively and is included in the income statement under research, development, collaborations and contracts expenses.
During 2018, the Company purchased certain research and development services from Genevant. These services are billed at agreed hourly rates and reflective of market rates for such services. The total cost of these services was
$104,000
and
$227,000
for the
three and nine
months ended
September 30, 2018
, respectively and are included in the income statement under research, development, collaborations and contracts expenses. Conversely, Genevant purchased certain administrative and transitional services from the Company and has a sublease for
17,900
square feet in the Company's Burnaby facility. The total income for these services was
$147,000
and
$318,000
for the three and
nine
months ended
September 30, 2018
, respectively and is netted against research, development, collaborations and contracts expenses in the income statement.