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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, 2020
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: 001-34949
ARBUTUS BIOPHARMA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
British Columbia, Canada 98-0597776
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
701 Veterans Circle, Warminster, PA 18974
(Address of Principal Executive Offices and Zip Code)
267-469-0914
(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 Shares, without par value ABUS        The Nasdaq Stock Market LLC

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 the definitions 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 the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ☐     No ☒
As of August 5, 2020, the registrant had 80,909,259 common shares, without par value, outstanding.



ARBUTUS BIOPHARMA CORPORATION
TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
June 30, 2020 December 31, 2019
Assets
Current assets:
Cash and cash equivalents $ 45,899    $ 31,799   
Investments in marketable securities, current 36,489    59,035   
Accounts receivable 1,108    1,204   
Prepaid expenses and other current assets 2,040    1,790   
Total current assets 85,536    93,828   
Property and equipment, net of accumulated depreciation of $6,643 (December 31, 2019: $5,642)
7,741    8,676   
Investments in marketable securities, non-current 1,600    —   
Right of use asset 2,575    2,738   
Other non-current assets 173    293   
Total assets $ 97,625    $ 105,535   
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities $ 5,813    $ 7,235   
Liability-classified options 150    253   
Lease liability, current 364    340   
Total current liabilities 6,327    7,828   
Liability related to sale of future royalties 19,739    18,992   
Contingent consideration 3,181    2,953   
Lease liability, non-current 2,867    3,018   
Total liabilities 32,114    32,791   
Stockholders’ equity    
Preferred shares
Authorized: unlimited number without par value
Issued and outstanding: 1,164,000 (December 31, 2019: 1,164,000)
143,258    137,285   
Common shares
Authorized: unlimited number without par value
Issued and outstanding: 71,256,579 (December 31, 2019: 64,780,314
916,066    898,535   
Additional paid-in capital 58,300    55,246   
Deficit (1,004,014)   (970,093)  
Accumulated other comprehensive loss (48,099)   (48,229)  
Total stockholders equity
65,511    72,744   
Total liabilities and stockholders’ equity $ 97,625    $ 105,535   

See accompanying notes to the condensed consolidated financial statements.
1


ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Revenue
Collaborations and licenses $ 825    $ 398    $ 1,660    $ 814   
Non-cash royalty revenue 689    255    1,345    $ 518   
Total Revenue 1,514    653    3,005    1,332   
Operating expenses    
Research and development 10,465    12,740    20,881    27,452   
General and administrative 3,566    8,189    7,119    12,601   
Depreciation and amortization 501    505    1,001    1,014   
Change in fair value of contingent consideration 116    130    228    255   
Site consolidation   (266)   64    (149)  
Total operating expenses 14,655    21,298    29,293    41,173   
Loss from operations (13,141)   (20,645)   (26,288)   (39,841)  
Other income (loss)
Interest income 200    606    545    1,206   
Interest expense (1,099)   (2)   (2,140)   (14)  
Foreign exchange gain (loss) (47)   60    (65)   68   
Equity investment loss —    (3,334)   —    (7,985)  
Total other loss (946)   (2,670)   (1,660)   (6,725)  
Loss before income taxes (14,087)   (23,315)   (27,948)   (46,566)  
Income tax benefit —    —    —    —   
Net loss (14,087)   (23,315)   (27,948)   (46,566)  
Items applicable to preferred shares:
Dividend accretion of convertible preferred shares (2,995)   (2,762)   (5,973)   (5,477)  
Net loss attributable to common shares $ (17,082)   $ (26,077)   $ (33,921)   $ (52,043)  
Loss per share    
Basic and diluted $ (0.25)   $ (0.46)   $ (0.49)   $ (0.92)  
Weighted average number of common shares    
Basic and diluted 69,604,726    56,805,583    68,656,566    56,275,795   
Comprehensive income (loss)
Unrealized gain on available-for-sale securities $ 122    $ —    $ 130    $ —   
Currency translation adjustment —    (52)   $ —    (74)  
Comprehensive loss $ (13,965)   $ (23,367)   $ (27,818)   $ (46,640)  
See accompanying notes to the condensed consolidated financial statements.
2


ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
Convertible Preferred Shares Common Shares
  Number of Shares Share Capital Number of Shares Share Capital Additional Paid-In Capital Deficit Accumulated Other Comprehensive Loss Total Stockholders' Equity
Balance December 31, 2019 1,164,000    $ 137,285    64,780,314    $ 898,535    $ 55,246    $ (970,093)   $ (48,229)   $ 72,744   
Accretion of accumulated dividends on Preferred Shares —    2,978    —    —    —    (2,978)   —    —   
Stock-based compensation —    —    —    —    1,460    —    —    1,460   
Certain fair value adjustments to liability stock option awards —    —    —    —    180    —    —    180   
Issuance of common shares pursuant to the Open Market Sales Agreement —    —    4,147,081    12,315    —    —    —    12,315   
Issuance of common shares pursuant to exercise of options —    —    34,000    249    (83)   —    —    166   
Unrealized gain on available-for-sale securities —    —    —    —    —    —    252    252   
Net loss —    —    —    —    —    (13,861)   —    (13,861)  
Balance March 31, 2020 1,164,000    $ 140,263    68,961,395    $ 911,099    $ 56,803    $ (986,932)   $ (47,977)   $ 73,256   
Accretion of accumulated dividends on Preferred Shares —    2,995    —    —    —    (2,995)   —    —   
Stock-based compensation —    —    —    —    1,597    —    —    1,597   
Certain fair value adjustments to liability stock option awards —    —    —    —    (92)   —    —    (92)  
Issuance of common shares pursuant to the Open Market Sales Agreement —    —    2,291,184    5,045    —    —    —    5,045   
Issuance of common shares pursuant to exercise of options —    —    4,000    (78)   (8)   —    —    (86)  
Unrealized gain on available-for-sale securities —    —    —    —    —    —    (122)   (122)  
Net loss —    —    —    —    —    (14,087)   —    (14,087)  
Balance June 30, 2020 1,164,000    $ 143,258    71,256,579    $ 916,066    $ 58,300    $ (1,004,014)   $ (48,099)   $ 65,511   


See accompanying notes to the condensed consolidated financial statements.



















3





ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
Convertible Preferred Shares Common Shares
  Number of Shares Share Capital Number of Shares Share Capital Additional Paid-In Capital Deficit Accumulated Other Comprehensive Loss Total Stockholders' Equity
Balance December 31, 2018 1,164,000    126,136    55,518,800    $ 879,405    $ 48,084    $ (805,221)   $ (48,170)   $ 200,234   
Accretion of accumulated dividends on Preferred Shares —    2,715    —    —    —    (2,715)   —    —   
Stock-based compensation —    —    —    —    1,665    —    —    1,665   
Certain fair value adjustments to liability stock option awards —    —    —    —    47    —    —    47   
Issuance of common shares pursuant to the Open Market Sales Agreement —    —    614,401    2,248    —    —    —    2,248   
Issuance of common shares pursuant to exercise of options —    —    122,603    490    (202)   —    —    288   
Currency translation adjustment —    —    —    —    —    —    (22)   (22)  
Net loss —    —    —    —    —    (23,251)   —    (23,251)  
Balance March 31, 2019 1,164,000    $ 128,851    56,255,804    $ 882,143    $ 49,594    $ (831,187)   $ (48,192)   $ 181,209   
Accretion of accumulated dividends on Preferred Shares —    2,762    —    —    —    (2,762)   —    —   
Stock-based compensation —    —    —    —    3,915    —    —    3,915   
Certain fair value adjustments to liability stock option awards —    —    —    —    230    —    —    230   
Issuance of common shares pursuant to the Open Market Sales Agreement —    —    593,689    2,477    —    —    —    2,477   
Issuance of common shares pursuant to exercise of options —    —    679      (1)   —    —     
Currency translation adjustment —    —    —    —    —    —    (52)   (52)  
Net loss —    —    —    —    —    (23,315)   —    (23,315)  
Balance June 30, 2019 1,164,000    $ 131,613    56,850,172    $ 884,623    $ 53,738    $ (857,264)   $ (48,244)   $ 164,466   

See accompanying notes to the condensed consolidated financial statements.
4


ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands of U.S. Dollars)
  Six Months Ended June 30,
  2020 2019
OPERATING ACTIVITIES
Net loss $ (27,948)   $ (46,566)  
Non-cash items:
Depreciation 1,001    1,014   
Gain on sale of property and equipment —    (11)  
Stock-based compensation expense 3,042    5,306   
Unrealized foreign exchange losses (gains) 56    (95)  
Change in fair value of contingent consideration 228    255   
Net equity investment loss —    7,985   
Non-cash royalty revenue (1,345)   (518)  
Non-cash interest expense 2,092    —   
Net accretion and amortization of investments in marketable securities 40    —   
Net change in operating items:
Accounts receivable 96    (100)  
Prepaid expenses and other assets 33    759   
Accounts payable and accrued liabilities (1,398)   (2,637)  
Other liabilities (151)   423   
Net cash used in operating activities (24,254)   (34,185)  
INVESTING ACTIVITIES
Purchase of investments (25,912)   (484)  
Disposition of investments 46,948    71,749   
Proceeds from sale of property and equipment —    11   
Acquisition of property and equipment (66)   (271)  
Net cash provided by investing activities 20,970    71,005   
FINANCING ACTIVITIES
Issuance of common shares pursuant to the Open Market Sale agreement 17,360    4,725   
Issuance of common shares pursuant to exercise of options 80    290   
Net cash provided by financing activities 17,440    5,015   
Effect of foreign exchange rate changes on cash and cash equivalents (56)   95   
Increase in cash and cash equivalents 14,100    41,930   
Cash and cash equivalents, beginning of period 31,799    36,942   
Cash and cash equivalents, end of period $ 45,899    $ 78,872   
Supplemental cash flow information
Preferred shares dividends accrued (5,973)   (5,477)  
See accompanying notes to the condensed consolidated financial statements.





5



ARBUTUS BIOPHARMA CORPORATION

Notes to Condensed Consolidated Financial Statements
(Tabular amounts in thousands of U.S. Dollars, except share and per share amounts) 

1.      Nature of business and future operations

Arbutus Biopharma Corporation (the “Company” or “Arbutus”) is a clinical-stage biopharmaceutical company primarily focused on developing a cure for people with chronic hepatitis B virus (“HBV”) infection. The Company is advancing multiple drug product candidates that may be combined into a potentially curative regimen for chronic HBV infection. Arbutus has also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19.

The Company’s pipeline includes:

AB-729, a subcutaneously-delivered RNA interference (“RNAi”) product candidate currently in a Phase 1a/1b clinical trial. Preliminary positive safety data in single-dose cohorts of healthy subjects and safety and efficacy data in the 60 mg and 180 mg single-dose cohorts in subjects with chronic HBV infection were reported in March 2020. Additional follow-on week 12 data for the 60 mg single-dose cohort were reported in May 2020. The Company is dosing two 60 mg multi-dose cohorts of subjects with chronic HBV infection with dosing intervals of every four and eight weeks, respectively. The Company is also dosing subjects in a 90 mg single-dose cohort and has initiated an additional AB-729 90 mg single-dose cohort in HBV positive subjects. Results from all of these cohorts are expected in the second half of 2020. Additionally, the Company intends to initiate two 90 mg multi-dose cohorts in the second half of 2020. As the Company awaits data from the 90 mg single-dose cohorts, the Company anticipates that the dose interval for the planned 90 mg multi-dose cohorts will be every eight and twelve weeks, respectively;
AB-836, a next-generation capsid inhibitor product candidate currently advancing through IND-enabling studies, which the Company expects to be completed by the end of 2020; and
other compounds early in the development process, including oral compounds that inhibit PD-L1 and next-generation oral HBV RNA destabilizers.

The Company’s research and development activities and commercialization of its products are dependent on its ability to successfully obtain adequate financing through a combination of financing activities and operations. The success of the Company is dependent on progressing its pipeline and subsequently obtaining the necessary regulatory approvals to bring its products to market and achieving profitable 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, nor to predict whether it will be successful in obtaining the necessary regulatory approvals to bring its products to market.

COVID-19

In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) was identified in Wuhan, China. This virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to nearly every country in the world. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society. The pandemic has resulted in and will likely continue to result in significant disruptions to businesses. A number of countries and other jurisdictions around the world have implemented extreme measures in an attempt to slow the spread of the virus.  These measures include the closing of businesses and requiring people to stay in their homes, the latter of which raises uncertainty regarding the ability to travel to hospitals in order to participate in clinical trials. Additional measures that have had, and will likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, and prohibitions in certain countries on enrolling subjects in new clinical trials.  Despite the challenges of COVID-19, we have not had to alter our objectives for 2020.  However, future disruptions related to the COVID-19 pandemic could negatively impact our plans and timelines, including enrolling and monitoring subjects in our clinical trials.

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While Arbutus’ core mission is to find a cure for hepatitis B, the magnitude of the coronavirus pandemic is undeniable. Given the Company’s proven expertise in the discovery of new antiviral therapies, Arbutus feels compelled to work towards the discovery of a new treatment. To that end, the Company has assembled an internal team of expert scientists under the direction of Arbutus’ Chief Scientific Officer, Dr. Michael Sofia, to identify novel small molecule therapies to treat COVID-19 and future coronavirus outbreaks. Dr. Sofia, who was awarded the Lasker-DeBakey Award for his discovery of sofosbuvir, brings extensive antiviral drug discovery experience to this new program. The Company has also recently joined forces with the COVID R&D consortium to further support and expedite efforts to address the SARS-CoV-2 pandemic and any future coronavirus outbreaks. At this time, Arbutus’ COVID-19 research program will focus on the discovery and development of new molecular entities that address specific viral targets including the nsp12 viral polymerase and the viral protease. These targets are essential viral proteins which Arbutus has experience in targeting. The establishment of the COVID-19 effort does not materially impact the Company’s cash guidance for 2020 of $54 million to $58 million.

2.      Significant accounting policies

Basis of presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles 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, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments and reclassifications necessary to fairly present the Company’s financial position as of June 30, 2020, the Company’s results of operations for the three and six months ended June 30, 2020 and the Company’s cash flows for the six months ended June 30, 2020. The results of operations for the three and six months ended June 30, 2020 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, 2019, 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 Arbutus Biopharma US Holdings, Inc. All intercompany transactions and balances have been eliminated in consolidation.

Net loss attributable to common shareholders 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 11, 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 holders of the Company’s common shares, net losses are not allocated to holders of the Preferred Shares.

Net loss attributable to common shareholders per share is calculated based on the weighted average number of common shares outstanding. The calculation of diluted net loss attributable to common shareholders per share does not differ from the calculation of basic net loss attributable to common shareholders per share, as the effect of the Company’s dilutive potential common shares was anti-dilutive. During the six months ended June 30, 2020 and 2019, potential common shares of 31.3 million and 27.5 million, respectively, consisting of the “if-converted” number of Preferred Shares and outstanding stock options, were excluded from the calculation of diluted net loss per common share because their inclusion would be anti-dilutive.

Revenue recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (”ASC 606”), which 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.

7


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.

Segment information

The Company operates as a single segment.

Recent accounting pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC 326). The guidance is effective for the Company beginning January 1, 2023 and it changes how entities account for credit losses on financial assets and other instruments that are not measured at fair value through net income, including available-for-sale debt securities. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.

3. 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.

8


Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The carrying values of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturity of these financial instruments.

To determine the fair value of the contingent consideration (note 8), the Company uses 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 overall biotech indices. The Company determined the fair value of the contingent consideration was $3.2 million as of June 30, 2020 and the increase of $0.2 million has been recorded as a component of total operating expenses in the statement of operations and comprehensive loss for the six months ended June 30, 2020. The assumptions used in the discounted cash flow model are level 3 inputs as defined above. The Company assessed the sensitivity of the fair value measurement to changes in these unobservable inputs, and determined that changes within a reasonable range would not result in a materially different assessment of fair value.  

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 Total
As of June 30, 2020 (in thousands)
Assets
Cash and cash equivalents $ 45,899    $ —    $ —    $ 45,899   
Short-term investments 36,489    —    —    36,489   
Long-term investments 1,600    —    —    1,600   
Total 83,988    —    —    83,988   
Liabilities
Liability-classified options —    —    150    150   
Contingent consideration —    —    3,181    3,181   
Total $ —    $ —    $ 3,331    $ 3,331   

Level 1 Level 2 Level 3 Total
As of December 31, 2019 (in thousands)
Assets
Cash and cash equivalents $ 31,799    $ —    $ —    $ 31,799   
Short-term investments 59,035    —    —    59,035   
Total 90,834    —    —    90,834   
Liabilities
Liability-classified stock option awards —    —    253    253   
Contingent consideration —    —    2,953    2,953   
Total $ —    $ —    $ 3,206    $ 3,206   
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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 (decrease) in fair value of liability Liability at end of the period
(in thousands)
Six Months Ended June 30, 2020 $ 253    $ —    $ (103)   $ 150   
Six Months Ended June 30, 2019 $ 479    $ —    $ (338)   $ 141   


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 liability Liability at end of the period
(in thousands)
Six Months Ended June 30, 2020 $ 2,953    $ 228    $ 3,181   
Six Months Ended June 30, 2019 $ 3,126    $ 255    $ 3,381   

4. Investments in marketable securities 

Investments in marketable securities consisted of the following:
Amortized Cost
Gross Unrealized Gain(1)
Gross Unrealized Loss(1)
Fair Value
As of June 30, 2020 (in thousands)
Cash equivalents
Money market fund 28,606    $ —    $ —    28,606   
US government agency bonds —    —    —    —   
US treasury bills —    —    —    —   
Total $ 28,606    $ —    $ —    $ 28,606   
Investments in marketable securities
US government agency bonds $ 15,357    $ 52    $ —    $ 15,409   
US treasury bills 4,494      —    4,500   
US government bonds 18,108    72    —    18,180   
Total $ 37,959    $ 130    $ —    $ 38,089   
 
(1) Gross unrealized gain (loss) is pre-tax and is reported in other comprehensive loss.

Amortized Cost
Gross Unrealized Gain(1)
Gross Unrealized Loss(1)
Fair Value
As of December 31, 2019 (in thousands)
Cash equivalents
Money market fund $ 4,106    $ —    $ —    $ 4,106   
US government agency bonds 1,511    —    —    1,511   
US treasury bills 1,499    —    —    1,499   
Total $ 7,116    $ —    $ —    $ 7,116   
Investments in marketable securities
US government agency bonds $ 19,863    $   $ (1)   $ 19,864   
US treasury bills 15,926      (1)   15,927   
US government bonds 23,246    —    (2)   23,244   
Total $ 59,035    $   $ (4)   $ 59,035   

(1) Gross unrealized gain (loss) is pre-tax and is reported in other comprehensive loss.
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The contractual term to maturity of the $36.5 million of short-term marketable securities held by the Company as of June 30, 2020 is less than one year. As of June 30, 2020, the Company held $1.6 million of long-term marketable securities with contractual maturities of more than one year, but less than five years. As of December 31, 2019, the Company’s $59.0 million of marketable securities had contractual maturities of less than one year.

There were no realized gains or losses for the three and six months ended June 30, 2020 or 2019.

5.      Equity method investment

In April 2018, Arbutus entered into an agreement with Roivant Sciences Ltd. (“Roivant”), its largest shareholder, to launch Genevant Sciences Ltd. (“Genevant”), a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by Arbutus’ lipid nanoparticle (“LNP”) and ligand conjugate delivery technologies. Arbutus licensed exclusive rights to its LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties. Arbutus retained all rights to its LNP and conjugate delivery platforms for HBV. Arbutus is entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents. If Genevant sub-licenses the intellectual property licensed by Arbutus to Genevant, Arbutus would receive upon the commercialization of a product developed by such sub-licensee the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee. As of June 30, 2020, the carrying value of Arbutus’ investment in Genevant was zero and Arbutus owned approximately 40% of the common equity of Genevant.

On July 23, 2020, the United States Patent and Trademark Office before the Patent Trial and Appeal Board ("PTAB") announced their decision in Moderna Therapeutics, Inc.'s challenge of the validity of U.S. Patent 8,058,069 ("the '069 Patent"). In this decision, the PTAB determined no challenged claims were unpatentable. While Arbutus is the patent holder, this patent has been licensed to Genevant. The '069 Patent was included in this license agreement between Genevant and Arbutus. Arbutus is gratified by the recent decision of the Patent Trademark and Appeals Board, upholding the validity of one of the patents protecting its LNP technology that was licensed to Genevant. This decision reinforces Arbutus’ continuing belief in the potential of this technology.

On July 31, 2020, Roivant recapitalized Genevant through an equity investment and conversion of previously issued convertible debt securities held by Roivant. Arbutus participated in the recapitalization of Genevant with an equity investment of $2.5 million. Following the recapitalization, Arbutus owns approximately 16% of the common equity of Genevant. In connection with the recapitalization, the three parties entered into an Amended and Restated Shareholders Agreement that provides Roivant with substantial control of Genevant. Arbutus has a non-voting observer seat on Genevant’s Board of Directors. Arbutus’ entitlement to receive future royalties or sublicensing revenue from Genevant was not impacted by the recapitalization.

6.      Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are comprised of the following:
  June 30, 2020 December 31, 2019
(in thousands)
Trade accounts payable $ 1,182    $ 2,398   
Research and development accruals 2,732    1,433   
Professional fee accruals 304    809   
Payroll accruals 1,589    2,314   
Site consolidation accrual —    137   
Other accrued liabilities   144   
Total accounts payable and accrued liabilities $ 5,813    $ 7,235   

7. Sale of future royalties
On July 2, 2019, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with the Ontario Municipal Employees Retirement System (or “OMERS”), pursuant to which the Company sold to OMERS part of its royalty interest on future global net sales of ONPATTRO® (Patisiran) (“ONPATTRO”), an RNAi therapeutic currently being sold by Alnylam Pharmaceuticals, Inc. (“Alnylam”).
11



ONPATTRO utilizes Arbutus’ LNP technology, which was licensed to Alnylam pursuant to the Cross-License Agreement, dated November 12, 2012, by and between the Company and Alnylam (the “LNP License Agreement”). Under the terms of the LNP License Agreement, the Company is entitled to tiered royalty payments on global net sales of ONPATTRO ranging from 1.00% to 2.33% after offsets, with the highest tier applicable to annual net sales above $500 million. This royalty interest was sold to OMERS, effective as of January 1, 2019, for $20 million in gross proceeds before advisory fees. OMERS will retain this entitlement until it has received $30 million in royalties, at which point 100% of such royalty interest on future global net sales of ONPATTRO will revert to the Company. OMERS has assumed the risk of collecting up to $30 million of future royalty payments from Alnylam and Arbutus is not obligated to reimburse OMERS if they fail to collect any such future royalties.

The $30 million in royalties to be collected by OMERS is accounted for as a liability, with the difference between the liability and the gross proceeds received accounted for as a discount. The discount, as well as $1.5 million of transaction costs, will be amortized as interest expense based on the projected balance of the liability as of the beginning of each period. Over the course of the Agreement, the actual interest rate will be affected by the amount and timing of royalty revenue recognized and changes in the timing of forecasted royalty revenue. On a quarterly basis, the Company will reassess the expected timing of the royalty revenue, recalculate the amortization and effective interest rate and adjust the accounting prospectively as needed. As of June 30, 2020, the effective annual interest rate was approximately 22%.

The Company will recognize non-cash royalty revenue related to the sales of ONPATTRO during the term of the Agreement. As royalties are remitted to OMERS from Alnylam, the balance of the recognized liability will be effectively repaid over the life of the Agreement. From the inception of the royalty sale through June 30, 2020, the Company has recorded an aggregate of $3.0 million of non-cash royalty revenue for royalties earned by OMERS. There are a number of factors that could materially affect the amount and timing of royalty payments from Alnylam, none of which are within the Company’s control.

During the three and six months ended June 30, 2020, the Company recognized non-cash royalty revenue of $0.7 million and $1.3 million, respectively, and $1.1 million and $2.1 million of related non-cash interest expense, respectively.

The table below shows the activity related to the net liability for 2020:
Six Months Ended June 30, 2020
(in thousands)
Net liability related to sale of future royalties - beginning balance $ 18,992   
Non-cash royalty revenue (1,345)  
Non-cash interest expense 2,092   
Net liability related to sale of future royalties - ending balance $ 19,739   

In addition to the royalty from the LNP License Agreement, the Company is also receiving a second, lower royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas Therapeutics, Inc. (“Acuitas”). The royalty from Acuitas has been retained by the Company and was not part of the royalty sale to OMERS.

12


8.      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 $7.2 million (C$9.3 million).  The Company received a cumulative contribution of $2.7 million (C$3.7 million).  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 is received by the Company on certain non-RNAi 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 on sales of Acrotech Biopharma LLC’s Marqibo® (formerly Spectrum Pharmaceuticals, Inc.). For the six months ended June 30, 2020 and 2019, the Company earned royalties on Marqibo sales in the amounts of $0.1 million and $0.1 million, respectively. The resulting royalties payable by the Company to TPC were not material in either period. The cumulative amount paid or accrued up to June 30, 2020 was less than $0.1 million, resulting in the contingent amount due to TPC being $2.7 million (C$3.7 million).

Arbitration with the University of British Columbia

Certain early work on lipid nanoparticle delivery systems and related inventions was undertaken at the University of British Columbia (“UBC”), as well as by us that was subsequently assigned to UBC. These inventions are licensed to the Company by UBC under a license agreement, initially entered into in 1998 and amended in 2001, 2006 and 2007. The Company has granted sublicenses under the UBC license to certain third parties, including Alnylam.  In November 2014, UBC filed a demand for arbitration against the Company and in January 2015, filed a Statement of Claim, which alleged entitlement to $3.5 million in allegedly unpaid royalties based on publicly available information, and an unspecified amount based on non-public information. UBC also sought 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 alleged UBC wrongly licensed to a third party. The proceedings were divided into three phases, with the first hearing taking place in June 2017. In the first phase, the arbitrator determined which agreements are sublicense agreements within UBC’s claim. Also in the first phase, UBC updated its alleged entitlement from $3.5 million originally claimed to seek $10.9 million in alleged unpaid royalties, plus interest arising from payments as early as 2008. The arbitrator also held in the first phase of the arbitration that the patent application that is the subject of the Counterclaim was not required to be licensed to the Company. The second phase of the arbitration took place in the second quarter of 2019. In August 2019, the arbitrator issued his decision for the second phase of the arbitration, awarding UBC $5.9 million, which includes interest of approximately $2.6 million. The Company paid the $5.9 million award to UBC in September 2019. The arbitrator also held that the third phase of the arbitration, which would address patent validity, should the Company choose to pursue a third phase, would not provide a defense to the award. An award for costs and attorneys’ fees is still to be determined. The Company has accrued $0.4 million for an estimate of a potential award for costs and attorneys’ fees as of June 30, 2020.

Stock Purchase Agreement with Enantigen

In October 2014, Arbutus Inc., our wholly-owned subsidiary, acquired all of the outstanding shares of Enantigen Therapeutics, Inc. (“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.

Under the stock purchase agreement, Arbutus Inc. agreed to pay up to a total of $21.0 million to Enantigen’s selling stockholders upon the achievement of specified development and regulatory milestones for (a) the first two products that contain either a capsid compound or an HBV surface antigen compound that is covered by a patent acquired under this agreement, or (b) a capsid compound from an agreed upon list of compounds. The development milestones are tied to programs which are no longer under development by the Company, and therefore the contingency related to these milestones has been reduced to zero.

An additional $102.5 million may also be paid to Enantigen’s selling stockholders related to the achievement of certain sales performance milestones in connection with the sale of the first commercialized product by Arbutus Inc. for the treatment of HBV, regardless of whether such product is based upon assets acquired under this agreement, and a low single-digit royalty on net sales of such first commercialized HBV product, up to a maximum royalty payment of $1.0 million that, if paid, would be offset against Arbutus Inc.’s milestone payment obligations.
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The contingent consideration for this acquisition is a financial liability, which is measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statements of operations and comprehensive loss (see note 3). The fair value of the contingent consideration was $3.2 million as of June 30, 2020.

9.      Collaborations, contracts and licensing agreements

Revenue contracts are described in detail in the Overview section of Part II, Item 8, “Financial Statements and Supplementary Data” in the Company’s 2019 Form 10-K.

Alnylam Pharmaceuticals, Inc. and Acuitas Therapeutics, Inc.

The Company has two royalty entitlements to Alnylam’s global net sales of ONPATTRO.

In 2012, the Company entered into a license agreement with Alnylam that entitles Alnylam to develop and commercialize certain identified products with the Company’s LNP technology.  During the third quarter of 2018, Alnylam’s ONPATTRO, which utilizes the Company’s LNP technology, was approved by the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency. The Company is entitled to tiered low to mid single-digit royalty payments on global net sales of ONPATTRO. In July 2019, the Company sold this portion of its royalty entitlement for Alnylam’s ONPATTRO to OMERS. The Company recognizes non-cash royalty revenue for royalties on global net sales of ONPATTRO collected by OMERS. See note 7 for further details.

The Company also has rights to a second royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas Therapeutics, Inc. (“Acuitas”).  This royalty entitlement from Acuitas has been retained by us and was not part of the royalty entitlement sale to OMERS.

Revenues are summarized in the following table:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Revenue from collaborations and licenses
Acuitas Therapeutics, Inc. $ 761    $ 288    $ 1,514    $ 645   
Other milestone and royalty payments 63    110    146    169   
Non-cash royalty revenue
Alnylam Pharmaceuticals, Inc. 690    255    1,345    518   
Total revenue $ 1,514    $ 653    $ 3,005    1,332   

10. Stockholders’ equity
 
Open Market Sales Agreement

In December 2018, the Company entered into an Open Market Sale Agreement with Jefferies LLC (“Jefferies”) (the “Sale Agreement”), under which it could issue and sell common shares, from time to time, for an aggregate sales price of up to $50.0 million. For the three and six months ended June 30, 2019, the Company issued 593,689 and 1,208,090 common shares pursuant to the Sale Agreement resulting in net proceeds of approximately $2.5 million and $5.2 million, respectively.

In December 2019, the Company entered into an amendment to the Sale Agreement with Jefferies (the “Amended Sale Agreement”) in connection with the filing of a new shelf registration statement on Form S-3 (File No. 333-235674), filed with the SEC on December 23, 2019 (the “New Shelf Registration Statement”). The amendment revised the original Sale Agreement to reflect that the Company may sell its common shares, without par value, from time to time, for an aggregate sales price of up to $50.0 million, under the New Shelf Registration Statement. During the three and six months ended June 30, 2020, the Company issued 2,291,184 and 6,438,265 common shares pursuant to the Sale Agreement and the Amended Sale Agreement, resulting in net proceeds of approximately $5.0 million and $17.4 million, respectively. During July 2020, Arbutus fully utilized the remaining availability under the Amended Sale Agreement resulting in an additional $36.5 million of net proceeds from the issuance of 9,548,780 common shares.

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Stock-based compensation

The table below summarizes information about the Company’s stock based compensation for the three and six months ended June 30, 2020 and 2019 and the expense recognized in the condensed consolidated statements of operations:
Three Months Ended June 30, 2020 Three Months Ended June 30, 2019 Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
(in thousands, except share and per share data)
Options granted during period 566,513    1,171,100    2,667,550    2,775,600   
Weighted average exercise price $ 3.00    $ 2.21    $ 3.27    3.57
Research and development $ 681    $ 817    $ 1,533    1,544   
General and administrative 916    2,967    1,509    3,762   
Total stock compensation expense $ 1,597    $ 3,784    $ 3,042    5,306   

Series A Preferred Shares

In October 2017, the Company entered into a subscription agreement with Roivant for the sale of 1,164,000 Preferred Shares for gross proceeds of $116.4 million. These Preferred Shares are non-voting and accrue an 8.75% per annum coupon in the form of additional Preferred Shares, compounded annually, until October 16, 2021, at which time all the Preferred Shares will be subject to mandatory conversion into common shares (subject to limited exceptions in the event of certain fundamental corporate transactions relating to Arbutus’s capital structure or assets, which would permit earlier conversion at Roivant’s option). The conversion price is $7.13 per share, which will result in the Preferred Shares being converted into approximately 23 million common shares. After conversion of the Preferred Shares into common shares, based on the number of common shares outstanding as of June 30, 2020, Roivant will hold approximately 41% 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 $50.0 million closed in October 2017, and the remaining amount of $66.4 million closed in January 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).

11.      Related Party Transactions

Through the first quarter of 2019, the Company purchased certain research and development services from Genevant. These services were billed at agreed hourly rates and were reflective of market rates for such services.  The total cost of these services during 2019 was less than $0.1 million, which was included in the Condensed Consolidated Statement of Operations under research and development. There were no such costs incurred during 2020.

Conversely, Genevant purchased certain administrative and transitional services from the Company totaling $19.3 thousand and $38.5 thousand for the three and six months ended June 30, 2020, respectively. The total income from these services was $73 thousand and $189 thousand for the three and six months ended June 30, 2019, which were netted against research and development expenses in the condensed consolidated statements of operations.

In addition, during 2019 Genevant had a sublease for 17,900 square feet in the Company’s Burnaby facility. Sublease income from Genevant was $62 thousand and $124 thousand for the three and six months ended June 30, 2019, and was netted against site consolidation costs and lease liability. The Company’s Burnaby facility lease and the corresponding sublease to Genevant expired on July 31, 2019.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis by our management of our financial position and results of operations in conjunction with our audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2019 and our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2020. Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles and are presented in U.S. dollars.

REFERENCES TO ARBUTUS BIOPHARMA CORPORATION.
Throughout this Quarterly Report on Form 10-Q (“Form 10-Q”) , the “Company,” “Arbutus,” “we,” “us,” and “our,” except where the context requires otherwise, refer to Arbutus Biopharma Corporation and its consolidated subsidiaries, and “our board of directors” refers to the board of directors of Arbutus Biopharma Corporation.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 
This Form 10-Q contains “forward-looking statements” or “forward-looking information” within the meaning of applicable United States and Canadian securities laws (we collectively refer to these items as “forward-looking statements”). Forward-looking statements are generally identifiable by use of the words “believes,” “may,” “plans,” “will,” “anticipates,” “intends,” “budgets,” “could,” “estimates,” “expects,” “forecasts,” “projects” and similar expressions that are not based on historical fact or that are predictions of or indicate future events and trends, and the negative of such expressions. Forward-looking statements in this Form 10-Q, including the documents incorporated by reference, include statements about, among other things:

our strategy, future operations, pre-clinical research, pre-clinical studies, clinical trials, prospects and the plans of management;
the potential impact of the COVID-19 pandemic on our business;
our expectations regarding the technology that we licensed to Genevant Sciences Lt. (“Genevant”);
the discovery, development and commercialization of a curative combination regimen for chronic hepatitis B infection, a disease of the liver caused by the hepatitis B virus (“HBV”);
our beliefs and development path and strategy to achieve a curative combination regimen for HBV;
obtaining necessary regulatory approvals;
obtaining adequate financing through a combination of financing activities and operations;
using the results from our HBV studies to adaptively design additional clinical trials to test the efficacy of the combination therapy and the duration of the result in patients;
the expected timing of and amount for payments related to the Enantigen Therapeutics, Inc.’s transaction and its programs;
the potential of our drug candidates to improve upon the standard of care and contribute to a curative combination treatment regimen;
the potential benefits of the reversion of the Ontario Municipal Employees Retirement System (“OMERS”) royalty monetization transaction for our ONPATTRO® (Patisiran) (“ONPATTRO”) royalty interest;
developing a suite of products that intervene at different points in the viral life cycle, with the potential to reactivate the host immune system;
using pre-clinical results to adaptively design clinical trials for additional cohorts of patients, testing the combination and the duration of therapy;
selecting combination therapy regimens and treatment durations to conduct Phase 3 clinical trials intended to ultimately support regulatory filings for marketing approval;
expanding our HBV drug candidate pipeline through internal development, acquisitions and in-licenses;
our expectation for AB-729 for preliminary results from a single-dose 90 mg cohort and multi-dose 60 mg cohorts in our Phase 1a/1b trial to be available in the second half of 2020;
our expectation for AB-729 for preliminary results from a 90 mg single-dose cohort in HBV DNA positive subjects to be available in the second half of 2020;
our expectation that AB-729 could be combined with our lead capsid inhibitor candidate, AB-836, and approved NAs, in our first combination therapy for HBV patients;
our expectations regarding the dose interval for the planned AB-729 90 mg multi-dose cohorts;
the potential for an oral HBsAg-reducing agent and potential all-oral combination therapy;
our objective to complete IND/CTA-enabling studies for AB-836 by the end of 2020;
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the potential for AB-836 to be low-dose regimen with a wide therapeutic window and to address known capsid resistant variants T33N and 1105T;
the potential for AB-836 to have increased potency and an enhanced resistance profile, compared to our previous capsid inhibitor candidate, AB-506;
the potential for AB-836 to be once-daily dosing;
our expectation to pursue development of a next generation oral HBV RNA-destabilizer;
our expectations regarding our ability to develop a potential COVID-19 therapy;
payments from our license agreement with Gritstone Oncology, Inc.;
the expected return from strategic alliances, licensing agreements, and research collaborations;
statements with respect to revenue and expense fluctuation and guidance;
having sufficient cash resources to fund our operations through mid-2022; and
obtaining funding to maintain and advance our business from a variety of sources including public or private equity or debt financing, collaborative arrangements with pharmaceutical companies, other non-dilutive commercial arrangements and government grants and contracts;
as well as other statements relating to our future operations, financial performance or financial condition, prospects or other future events. Forward-looking statements appear primarily in the sections of this Form 10-Q entitled “Part I, Item 1- Financial Statements (Unaudited),” and “Part I, Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Forward-looking statements are based upon current expectations and assumptions and are subject to a number of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially and adversely from those expressed or implied by such statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”), and in particular the risks and uncertainties discussed under “Item 1A-Risk Factors” of this Form 10-Q and the Form 10-K. As a result, you should not place undue reliance on forward-looking statements.
Additionally, the forward-looking statements contained in this Form 10-Q represent our views only as of the date of this Form 10-Q (or any earlier date indicated in such statement). While we may update certain forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if new information becomes available in the future. However, you are advised to consult any further disclosures we make on related subjects in the periodic and current reports that we file with the Securities and Exchange Commission.
The foregoing cautionary statements are intended to qualify all forward-looking statements wherever they may appear in this Form 10-Q. For all forward-looking statements, we claim protection of the safe harbor for the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
This Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.
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OVERVIEW

Arbutus is a clinical-stage biopharmaceutical company primarily focused on developing a cure for people with chronic hepatitis B virus (“HBV”) infection. We are advancing multiple drug product candidates that may be combined into a potentially curative regimen for chronic HBV infection. Arbutus has also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19.

Hepatitis B is a potentially life-threatening liver infection caused by HBV. HBV can cause chronic infection which leads to a higher risk of death from cirrhosis and liver cancer. Chronic HBV infection represents a significant unmet medical need. The World Health Organization estimates that over 250 million people worldwide suffer from chronic HBV infection, while other estimates indicate that approximately 2 million people in the United States suffer from chronic HBV infection. Approximately 900,000 people die every year from complications related to chronic HBV infection despite the availability of effective vaccines and current treatment options.

Today’s current treatment options include nucleos(t)ide analogs (“NA”) and pegylated interferon regimens (“Peg-IFN”). However, less than 5% of patients are cured by these current treatment options after a finite treatment duration. With such low cure rates, most patients with chronic HBV infection are required to take NA therapy daily for the rest of their lives.

Our focus is on developing new HBV treatment regimens with finite treatment durations and higher cure rates. We define a cure as a functional cure where HBV DNA replication and hepatitis B surface antigen (“HBsAg”) expression are reduced to undetectable levels and this level of expression is sustained six months after a finite duration of therapy. Our HBV product pipeline includes RNA interference (“RNAi”) therapeutics, oral capsid inhibitors, oral compounds that inhibit PD-L1 and oral HBV RNA destabilizers. We believe a combination of these product candidates could lead to a curative treatment regimen with a finite duration for patients with chronic HBV infection.

There is a compelling market opportunity for an HBV curative regimen. Currently, an estimated 27 million (10.5%) of a total of over 250 million people worldwide with chronic HBV infection are diagnosed and approximately 4.5 million (1.8%) are on treatment. We believe that the introduction of an HBV curative regimen with a finite duration would substantially increase diagnosis and treatment rates for patients with chronic HBV.
 
Strategy

Our business strategy is to develop a curative combination regimen for patients with chronic HBV infection. We believe this can best be achieved by:

developing a broad portfolio of proprietary therapeutic assets that target multiple elements of the HBV viral lifecycle, most importantly suppressing HBV replication and HBsAg expression;
developing compounds that reawaken the host immune response;
identifying a combination of therapeutic assets with complementary mechanisms of action that can deliver higher cure rates with a finite treatment duration; and
advancing a curative combination regimen through clinical development, regulatory approval and commercial launch.

Additionally, we have initiated an internal research program to identify new small molecule antiviral medicines to treat COVID-19 and future coronavirus outbreaks.

Our product candidates are first evaluated in Phase 1 clinical trials as a monotherapy or in combination with other currently-marketed therapies to assess patient safety and antiviral activity. We are currently conducting a Phase 1a/1b clinical trial and performing pre-clinical and investigational new drug (“IND”)-enabling studies for our HBV product candidates. Results from our Phase 1 clinical trials and other studies will inform the design of future Phase 2 and Phase 3 clinical trials that will evaluate a combination of our therapeutic agents in a potentially curative combination regimen.

Our Product Candidates

Given the biology of HBV, we believe therapeutic success will require a combination of agents with complementary mechanisms of action. We are developing product candidates that have the potential to reduce HBsAg expression, suppress HBV DNA replication and reawaken the immune response in patients with chronic HBV.
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Our HBV product pipeline consists of the following programs:
         ABUS-20200630_G1.JPG

We believe that AB-729, our subcutaneously administered RNAi product candidate, may be combinable with AB-836, our lead capsid inhibitor product candidate, and other currently-marketed or investigational therapies, in our first combination therapy for chronic HBV patients. In parallel, we are in lead optimization with several oral compounds for our PD-L1 program and our next-generation HBV RNA destabilizer program. We continue to explore expansion of our HBV pipeline through internal discovery and development activities and through potential strategic alliances.

GalNAc RNAi (AB-729)

RNAi therapeutics represent a recent significant advancement in drug development. RNAi therapeutics utilize a natural pathway within cells to silence genes by eliminating the disease-causing proteins that they code for. We are developing RNAi therapeutics that are designed to reduce HBsAg expression and other HBV antigens in patients chronically infected with HBV. Reducing HBsAg is widely believed to be a key prerequisite to enable a patient’s immune system to reawaken and respond against the virus.

AB-729 is a subcutaneously-delivered RNAi therapeutic targeted to hepatocytes using our novel covalently conjugated GalNAc delivery technology. AB-729 inhibits viral replication and reduces all HBV antigens. In July 2019, we initiated a single- and multi-dose Phase 1a/1b clinical trial for AB-729, designed to investigate the safety, tolerability, pharmacokinetics, and pharmacodynamics of AB-729 in healthy volunteers and in chronic HBV subjects.

The ongoing first-in-human clinical trial of AB-729 consists of three parts:
In Part 1, three cohorts of healthy subjects were randomized 4:2 to receive single doses (60 mg, 180 mg or 360 mg) of AB-729 or placebo.
In Part 2, non-cirrhotic, HBeAg positive or negative, chronic hepatitis B subjects (n=6) currently taking nucleos(t)ide antiviral therapy with HBV DNA below the limit of quantitation received single doses (60 mg, 90 mg or 180 mg) of AB-729. All subjects continued their nucleos(t)ide antiviral therapy throughout the trial. Part 2 will also include dosing of AB-729 in HBV DNA positive chronic hepatitis B subjects.
In Part 3, chronic hepatitis B subjects, HBV DNA negative first and HBV DNA positive later, will receive multiple doses of AB-729 for up to six months at four and eight week dosing intervals.

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In March 2020, we announced positive preliminary results in the three cohorts of healthy subjects, all of whom received a single subcutaneous injection of AB-729 with no serious adverse events (“SAEs”) observed and most adverse events (“AEs”) were mild and considered unrelated to AB-729. Two subjects in the 360 mg cohort had asymptomatic, reversible Grade 3 ALT elevations assessed as related to AB-729. Neither subject had meaningful changes in any other laboratory parameter excepting Grade 1 or 2 AST elevation. There were no other clinically relevant abnormalities in laboratory tests, ECGs, or vital signs.

In March 2020, we also announced positive preliminary results in two cohorts (60 mg and 180 mg dose groups) of chronic hepatitis B subjects and, in May 2020, we announced additional Week 12 follow-up data on the 60 mg cohort. All chronic hepatitis B subjects were on nucleos(t)ide antiviral therapy and received a single subcutaneous injection of AB-729.

Mean HBsAg changes from baseline:
60 mg Single-Dose Cohort (N=6)
180 mg Single-Dose Cohort (N=4)
Day 29 mean log10 IU/mL
 (Standard Error of the Mean)
-0.24 (0.13)
-0.8 (0.38)
Week 12 (day 84) mean log10 IU/mL (Standard Error of the Mean)
-0.99 (0.24)
-0.98 (0.22)


The Week 12 mean log10 (SE) HBsAg decline for the 60 mg single-dose cohort was equivalent to the 180 mg single-dose cohort. AB-729 dosed at either 60 mg or 180 mg in chronic hepatitis B subjects was generally safe and well tolerated and there were no SAEs.  Most AEs were mild (13/15) and considered unrelated (12/15) to AB-729. One subject receiving the 180 mg dose who experienced the highest HBsAg decline also experienced a Grade 3 ALT/AST flare. Notably, this subject experienced an unrelated gastroenteritis and self-medicated. 

We are dosing two 60 mg multi-dose cohorts of subjects with chronic HBV infection with dosing intervals of every four and eight weeks, respectively. We are also dosing subjects in a 90 mg single-dose cohort and we have initiated an additional AB-729 90 mg single-dose cohort in HBV positive subjects. Results from all of these cohorts are expected in the second half of 2020. Additionally, we intend to initiate two 90 mg multi-dose cohorts in the second half of 2020. As we await data from the 90 mg single-dose cohorts, we anticipate that the dose interval for the planned 90 mg multi-dose cohorts will be every eight and twelve weeks, respectively. While we have been able to progress with our clinical and pre-clinical activities to date, it is not possible to predict if the COVID-19 pandemic will negatively impact our plans and timelines, including enrolling and monitoring subjects in the trial.

HBV RNA Destabilizers

HBV RNA destabilizers are small molecule orally active agents that cause the destabilization and ultimate degradation of HBV RNAs. These agents result in the reduction of HBsAg and other viral proteins in both whole cell systems and animal models. They have the potential to selectively impact HBV versus other RNA or DNA viruses and demonstrate pangenotypic characteristics. HBV RNA destabilizers have demonstrated additive effects in combination with other anti-HBV mechanisms of action. HBV RNA destabilizers have the potential to complement or replace subcutaneously delivered RNAi agents with an oral therapy in combination with a capsid inhibitor and an approved NA.

In February 2020, we discontinued the development of AB-452, our first-generation oral HBV RNA destabilizer product candidate following extensive preclinical evaluations. However, oral HBV RNA destabilizers have shown compelling anti-viral effects in multiple HBV pre-clinical models and we believe this target offers potential for an oral HBsAg reducing agent and potentially an all oral combination HBV therapy. Given this, we continue to advance next-generation oral HBV RNA-destabilizers with chemical scaffolds distinct from AB-452 through lead optimization.
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Capsid Inhibitors (AB-836)

HBV core protein assembles into a capsid structure, which is required for viral replication. The current commercially available therapies (NAs or Peg-IFN) significantly reduce HBV DNA levels in the serum, but HBV replication continues in the liver, thereby enabling HBV infection to persist. More effective therapies for patients require new agents which will further block viral replication. We are developing capsid inhibitors (also known as core protein inhibitors) as oral therapeutics which, in combination with NAs, could further reduce HBV replication. By inhibiting assembly of functional viral capsids, the ability of HBV to replicate is impaired. Capsid inhibitor molecules also inhibit the uncoating step of the viral life cycle and thus reduce the formation of cccDNA, the viral reservoir which resides in the cell nucleus, and which is believed to play a role in viral persistence.

Our oral capsid inhibitor discovery effort generated promising next-generation compounds, which led to the nomination of AB-836 in January 2020. AB-836 has the potential for increased potency and an enhanced resistance profile compared to our previous capsid inhibitor product candidates, including AB-506. AB-836 is a novel chemical series differentiated from AB-506 and other competitor compounds in the capsid inhibitor space. AB-836 leverages a novel binding site within the core protein dimer-dimer interface, has shown to be active against NA resistant variants and has the potential to address certain known capsid resistant variants. AB-836 is anticipated to be combinable with other mechanisms of action and is also anticipated to be dosed once daily. We anticipate completing IND/CTA-enabling studies for AB-836 by the end of 2020.

Immune Reawakening

We are in lead optimization with oral compounds which are potentially capable of reawakening patients’ HBV-specific immune response by inhibiting PD-L1. These compounds complement our pipeline of agents and could potentially be an important part of a combination therapy for the treatment of HBV.

COVID-19

In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) was identified in Wuhan, China. This virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to nearly every country in the world. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society. The pandemic has resulted in and will likely continue to result in significant disruptions to businesses. A number of countries and other jurisdictions around the world have implemented extreme measures to try and slow the spread of the virus.  These measures include the closing of businesses and requiring people to stay in their homes, the latter of which raises uncertainty regarding the ability to travel to hospitals in order to participate in clinical trials. Additional measures that have had, and will likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, and prohibitions in certain countries on enrolling subjects in new clinical trials.  Despite the challenges of COVID-19, we have not had to alter our objectives for 2020.  However, future disruptions related to the COVID-19 pandemic could negatively impact our plans and timelines, including enrolling and monitoring subjects in the trial.

While our core mission is to find a cure for hepatitis B, the magnitude of the coronavirus pandemic is undeniable. Given our proven expertise in the discovery of new antiviral therapies, we feel compelled to work towards the discovery of a new treatment. To that end, we have assembled an internal team of expert scientists under the direction of our Chief Scientific Officer, Dr. Michael Sofia, to identify novel small molecule therapies to treat COVID-19 and future coronavirus outbreaks. Dr. Sofia, who was awarded the Lasker-DeBakey Award for his discovery of sofosbuvir, brings extensive antiviral drug discovery experience to this new program. We have also recently joined forces with the COVID R&D consortium to further support and expedite efforts to address the SARS-CoV-2 pandemic and any future coronavirus outbreaks. At this time, our COVID-19 research program will focus on the discovery and development of new molecular entities that address specific viral targets including the nsp12 viral polymerase and the viral protease. These targets are essential viral proteins which we have experience in targeting. We are actively screening multiple new oral molecular entities. The establishment of the COVID-19 effort does not materially impact our cash guidance for 2020 of $54 million to $58 million.

Royalty Entitlements

Alnylam Pharmaceuticals, Inc. and Acuitas Therapeutics, Inc.

The Company has two royalty entitlements to Alnylam’s global net sales of ONPATTRO®.

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In 2012, we entered into a license agreement with Alnylam Pharmaceuticals, Inc. (“Alnylam”) that entitles Alnylam to develop and commercialize products with our lipid nanoparticle delivery (“LNP”) technology. Alnylam’s ONPATTRO, which represents the first approved application of our LNP technology, was approved by the United States Food and Drug Administration (“FDA”) and the European Medicines Agency (“EMA”) during the third quarter of 2018 and was launched by Alnylam immediately upon approval in the United States. Under the terms of this license agreement, we are entitled to tiered royalty payments on global net sales of ONPATTRO ranging from 1.00% - 2.33% after offsets, with the highest tier applicable to annual net sales above $500 million. This royalty interest was sold to OMERS, effective as of January 1, 2019, for $20 million in gross proceeds before advisory fees. OMERS will retain this entitlement until it has received $30 million in royalties, at which point 100% of this royalty entitlement on future global net sales of ONPATTRO will revert to us. OMERS has assumed the risk of collecting up to $30 million of future royalty payments from Alnylam and we are not obligated to reimburse OMERS if they fail to collect any such future royalties. If this royalty entitlement reverts to us, it has the potential to provide an active royalty stream or to be otherwise monetized again in full or in part.
We also have rights to a second royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas.  This royalty entitlement from Acuitas has been retained by us and was not part of the royalty entitlement sale to OMERS.

Genevant Sciences, Ltd.

In April 2018, we entered into an agreement with Roivant Sciences Ltd. (“Roivant”), our largest shareholder, to launch Genevant, a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by Arbutus’ lipid nanoparticle (“LNP”) and ligand conjugate delivery technologies. We licensed exclusive rights to our LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties. We retained all rights to our LNP and conjugate delivery platforms for HBV. We are entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents. If Genevant sub-licenses the intellectual property licensed by us to Genevant, we would receive upon the commercialization of a product developed by such sub-licensee the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee. As of June 30, 2020, the carrying value of our investment in Genevant was zero and we owned approximately 40% of the common equity of Genevant.

On July 23, 2020, the United States Patent and Trademark Office before the Patent Trial and Appeal Board ("PTAB") announced their decision in Moderna Therapeutics, Inc.'s challenge of the validity of U.S. Patent 8,058,069 ("the '069 Patent"). In this decision, the PTAB determined no challenged claims were unpatentable. While Arbutus is the patent holder, this patent has been licensed to Genevant. The '069 Patent was included in this license agreement between Genevant and Arbutus. We are gratified by the recent decision of the PTAB, upholding the validity of one of the patents protecting our LNP technology that we have licensed to Genevant. This decision reinforces our continuing belief in the potential of this technology.

On July 31, 2020, Roivant recapitalized Genevant through an equity investment and conversion of previously issued convertible debt securities held by Roivant. We participated in the recapitalization of Genevant with an equity investment of $2.5 million. Following the recapitalization, we own approximately 16% of the common equity of Genevant. In connection with the recapitalization, the three parties entered into an Amended and Restated Shareholders Agreement that provides Roivant with substantial control of Genevant. We have a non-voting observer seat on Genevant’s Board of Directors. Our entitlement to receive future royalties or sublicensing revenue from Genevant was not impacted by the recapitalization.


CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGEMENTS AND ESTIMATES
This management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  
We believe there have been no significant changes in our critical accounting policies and estimates as discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019.

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RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Please refer to note 2 to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements applicable to our business.

RESULTS OF OPERATIONS
The following summarizes the results of our operations for the periods shown:
  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
(in thousands)
Total revenue $ 1,514    $ 653    $ 3,005    $ 1,332   
Operating expenses 14,655    21,298    29,293    41,173   
Loss from operations (13,141)   (20,645)   (26,288)   (39,841)  
Other income (loss) (946)   (2,670)   (1,660)   (6,725)  
Net loss $ (14,087)   $ (23,315)   $ (27,948)   $ (46,566)  
Dividend accretion of convertible preferred shares (2,995)   (2,762)   (5,973)   (5,477)  
Net loss attributable to common shares $ (17,082)   $ (26,077)   $ (33,921)   $ (52,043)  

Revenue

Revenues are summarized in the following tables:
Three Months Ended June 30,
2020 % of Total 2019 % of Total
(in thousands, except percentages)
Revenue from collaborations and licenses
Acuitas Therapeutics, Inc. $ 761    50  % $ 288    44  %
Other milestone and royalty payments 63    % 110    17  %
Non-cash royalty revenue
Alnylam Pharmaceuticals, Inc. 690    46  % 255    39  %
Total revenue $ 1,514    100  % $ 653    100  %


Six Months Ended June 30,
2020 % of Total 2019 % of Total
(in thousands, except percentages)
Revenue from collaborations and licenses
Acuitas Therapeutics, Inc. $ 1,514    50  % $ 645    48  %
Other milestone and royalty payments 146    % 169    13  %
Non-cash royalty revenue
Alnylam Pharmaceuticals, Inc. 1,345    45  % 518    39  %
Total revenue $ 3,005    100  % $ 1,332    100  %

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Revenue contracts are addressed in detail in the Overview section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K.

Revenue increased $0.9 million and $1.7 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2019, due primarily to an increase in royalties from the growth of Alnylam’s sales of ONPATTRO.

Operating expenses

Operating expenses are summarized in the following tables:
Three Months Ended June 30,
2020 % of Total 2019 % of Total
(in thousands, except percentages)
Research and development $ 10,465    71  % $ 12,740    60  %
General and administrative 3,566    24  % 8,189    38  %
Depreciation 501    % 505    %
Change in fair value of contingent consideration 116    % 130    %
Site consolidation   —  % (266)   (1) %
Total operating expenses $ 14,655    100  % $ 21,298    100  %

Six Months Ended June 30,
2020 % of Total 2019 % of Total
(in thousands, except percentages)
Research and development $ 20,881    71  % $ 27,452    67  %
General and administrative 7,119    24