Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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.)
100-8900 Glenlyon Parkway, Burnaby, BC, Canada V5J 5J8
(Address of Principal Executive Offices)
604-419-3200
(Registrant’s Telephone Number, Including Area Code)
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 [X]        No [   ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]        No [   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [   ]
Accelerated filer [X]
Non-accelerated filer [   ]
Smaller reporting company [   ]
 
 
(Do not check if a smaller
 
 
 
reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]        No [X]
As of October 31, 2016, the registrant had 54,841,494 common shares, no par value, outstanding.

1



ARBUTUS BIOPHARMA CORP.
TABLE OF CONTENTS
 
 
Page
 
 
 
           ITEM 2.
           ITEM 3.
           ITEM 4.
 
 
 
           ITEM 1.
           ITEM 1A.
           ITEM 2.
           ITEM 3.
           ITEM 4.
           ITEM 5.
           ITEM 6.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)

(Expressed in thousands of U.S. dollars, except share and per share amounts)
(Prepared in accordance with US GAAP)
 
September 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Current assets:
 
 
 
 Cash and cash equivalents
$
26,630

 
$
166,779

 Short-term investments (note 2)
123,052

 
14,525

 Accounts receivable
395

 
1,008

 Accrued revenue
128

 
128

 Investment tax credits receivable
148

 
246

 Prepaid expenses and other assets
1,459

 
1,196

Total current assets
151,812

 
183,882

Long-term investments (note 2)

 
10,070

Property and equipment
14,555

 
12,912

Less accumulated depreciation
(10,469
)
 
(9,729
)
Property and equipment, net of accumulated depreciation
4,086

 
3,183

Intangible assets (note 3)
196,318

 
352,642

Goodwill (note 3)
162,514

 
162,514

Total assets
$
514,730

 
$
712,291

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
 Accounts payable and accrued liabilities (note 5)
$
7,132

 
$
8,827

 Deferred revenue (note 4)
15

 
868

 Liability-classified options (notes 2 and 6)
948

 

 Warrants (note 2)
297

 
883

Total current liabilities
8,392

 
10,578

Deferred revenue, net of current portion (note 4)

 
213

Contingent consideration (note 8)
8,253

 
7,497

Deferred tax liability
81,460

 
146,324

Total liabilities
98,105

 
164,612

Stockholders’ equity:
 
 
 
Common shares (note 6)
 

 
 

Authorized - unlimited number with no par value
 

 
 

      Issued and outstanding: 54,841,494
          (December 31, 2015 - 54,570,691)
864,375

 
834,240

 Additional paid-in capital
34,486

 
30,206

 Deficit
(432,454
)
 
(266,985
)
 Accumulated other comprehensive loss
(49,782
)
 
(49,782
)
Total stockholders' equity
416,625

 
547,679

Total liabilities and stockholders' equity
$
514,730

 
$
712,291


Nature of business and future operations (note 1)
Contingencies and commitments (note 8)
Subsequent event (note 9)
See accompanying notes to the condensed consolidated financial statements.

2



ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)

(Expressed in thousands of U.S. dollars, except share and per share amounts)
(Prepared in accordance with US GAAP)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016

 
2015

 
2016

 
2015

Revenue (note 4)
 
 
 
 
 
 
 
Collaborations and contracts
$
87

 
$
3,035

 
$
226

 
$
8,865

Licensing fees, milestone and royalty payments
687

 
1,030

 
1,460

 
3,322

Total revenue
774

 
4,065

 
1,686

 
12,187

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Research, development, collaborations and contracts
15,738

 
16,354

 
44,097

 
36,601

General and administrative
3,720

 
7,706

 
34,705

 
18,084

Depreciation of property and equipment
291

 
153

 
760

 
420

Acquisition costs

 

 

 
9,656

Impairment of intangible assets (note 3)

 
37,990

 
156,324

 
37,990

Total expenses
19,749

 
62,203

 
235,886

 
102,751

 
 
 
 
 
 
 
 
Loss from operations
(18,975
)
 
(58,138
)
 
(234,200
)
 
(90,564
)
 
 
 
 
 
 
 
 
Other income (losses)
 
 
 
 
 
 
 
Interest income
425

 
183

 
1,104

 
466

Foreign exchange gains (losses)
(795
)
 
11,801

 
2,180

 
16,268

Gain on disposition of financial instrument (note 4)

 

 
1,000

 

Decrease in fair value of warrant liability (note 2)
10

 
1,976

 
339

 
2,777

Increase in fair value of contingent consideration (note 8)
(260
)
 

 
(756
)
 

Total other income (losses)
(620
)
 
13,960

 
3,867

 
19,511

 
 
 
 
 
 
 
 
Loss before income taxes
(19,595
)
 
(44,178
)
 
(230,333
)
 
(71,053
)
Income tax benefit

 
15,196

 
64,864

 
15,196

 
 
 
 
 
 
 
 
Net loss
$
(19,595
)
 
$
(28,982
)
 
$
(165,469
)
 
$
(55,857
)
Loss per common share
 
 
 
 
 
 
 
Basic and diluted
$
(0.37
)
 
$
(0.57
)
 
$
(3.15
)
 
$
(1.28
)
Weighted average number of common shares
 
 
 
 
 
 
 
Basic and diluted
53,652,007

 
50,756,484

 
52,588,505

 
43,580,555

 
 
 
 
 
 
 
 
Comprehensive loss
 
 
 
 
 
 
 
Cumulative translation adjustment

 
(10,101
)
 

 
(19,275
)
Comprehensive loss
$
(19,595
)
 
$
(39,083
)
 
$
(165,469
)
 
$
(75,132
)
See accompanying notes to the condensed consolidated financial statements.

3



ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)

(Expressed in thousands of U.S. dollars, except share and per share amounts)
(Prepared in accordance with US GAAP)
 
Number
of shares
 
Share
capital
 
Additional paid-in
capital
 
Deficit
 
Accumulated other comprehensive
loss
 
Total  
stockholders'  
equity
December 31, 2015
54,570,691

 
$
834,240

 
$
30,206

 
$
(266,985
)
 
$
(49,782
)
 
$
547,679

Stock-based compensation

 
28,968

 
4,570

 

 

 
33,538

Reclassification of equity to liability stock option awards (notes 2 and 6)

 

 
(3,243
)
 

 

 
(3,243
)
Certain fair value adjustments to liability stock option awards (notes 2 and 6)

 


 
3,170

 

 

 
3,170

Issuance of common shares
    pursuant to exercise of options
100,303

 
475

 
(217
)
 

 

 
258

Issuance of common shares
    pursuant to exercise of warrants
170,500

 
692

 

 

 

 
692

Net loss

 

 

 
(165,469
)
 

 
(165,469
)
Balance, September 30, 2016
54,841,494

 
$
864,375

 
$
34,486

 
$
(432,454
)
 
$
(49,782
)
 
$
416,625

See accompanying notes to the condensed consolidated financial statements.

4


ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statements of Cash Flow
(Unaudited)

(Expressed in thousands of U.S. dollars)
(Prepared in accordance with US GAAP)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net loss for the period
$
(19,595
)
 
$
(28,982
)
 
$
(165,469
)
 
$
(55,857
)
Items not involving cash:
 
 
 
 

 

 Deferred income taxes

 
(15,196
)
 
(64,864
)
 
(15,196
)
 Depreciation of property and equipment
291

 
153

 
760

 
420

 Stock-based compensation - research, development,
  collaborations and contract expenses
2,759

 
2,671

 
8,225

 
5,376

 Stock-based compensation - general and administrative
  expenses
1,695

 
4,832

 
26,253

 
9,357

 Unrealized foreign exchange (gains) losses
826

 
(11,790
)
 
(2,130
)
 
(16,208
)
 Change in fair value of warrant liability
(10
)
 
(1,976
)
 
(339
)
 
(2,777
)
 Change in fair value of contingent consideration
260

 

 
756

 

 Impairment of intangible assets (note 3)

 
37,990

 
156,324

 
37,990

Net change in non-cash operating items:
 
 
 
 

 

 Accounts receivable
61

 
4,047

 
613

 
(577
)
 Accrued revenue

 
(164
)
 

 
14

 Investment tax credits receivable

 

 
98

 

 Prepaid expenses and other assets
584

 
469

 
(263
)
 
171

 Accounts payable and accrued liabilities
(887
)
 
2,408

 
(1,961
)
 
(2,935
)
 Deferred revenue
(696
)
 
3,011

 
(1,066
)
 
2,054

Net cash used in operating activities
(14,712
)
 
(2,527
)
 
(43,063
)
 
(38,168
)
INVESTING ACTIVITIES
 
 
 
 
 
 
 
Disposition (acquisition) of short and long-term investments, net
(712
)
 
(17,144
)
 
(98,457
)
 
10,275

Cash acquired through acquisition

 

 

 
324

Acquisition of property and equipment
(168
)
 
(589
)
 
(1,397
)
 
(1,113
)
Net cash provided by (used) in investing activities
(880
)
 
(17,733
)
 
(99,854
)
 
9,486

FINANCING ACTIVITIES
 
 
 
 
 
 
 
Proceeds from issuance of common shares, net of issuance costs

 

 

 
142,177

Issuance of common shares pursuant to exercise of options
76

 
116

 
192

 
1,675

Issuance of common shares pursuant to exercise of warrants

 

 
445

 
43

Net cash provided by financing activities
76

 
116

 
637

 
143,895

Effect of foreign exchange rate changes on cash and
cash equivalents
(824
)
 
(5,972
)
 
2,131

 
(6,311
)
(Decrease) Increase in cash and cash equivalents
(16,340
)
 
(26,116
)
 
(140,149
)
 
108,902

Cash and cash equivalents, beginning of period
42,970

 
207,205

 
166,779

 
72,187

Cash and cash equivalents, end of period
$
26,630

 
$
181,089

 
$
26,630

 
$
181,089

Supplemental cash flow information
 
 
 
 
 
 
 
Non-cash transactions:
 
 
 
 
 
 
 
Investment tax credit received

 
$

 
$

 
24

Acquisition of Arbutus Inc. excluding cash acquired

 
$

 
$

 
381,618

Acquired property and equipment in trade payables
(266
)
 

 
$
(266
)
 

See accompanying notes to the condensed consolidated financial statements.

5



ARBUTUS BIOPHARMA CORPORATION
(formerly Tekmira Pharmaceuticals Corporation)

Notes to 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”).

The success of the Company is dependent on obtaining the necessary regulatory approvals to bring its products to market and achieve profitable operations. The continuation of the research and development activities and the commercialization of its products are dependent on the Company’s 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 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 generally accepted accounting principles of the United States of America (“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, 2015 and included in the Company’s 2015 annual report on Form 10-K. The unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments and reclassifications necessary to present fairly the financial position, results of operations and cash flows at September 30, 2016 and for all periods presented. The results of operations for the three and nine months ended September 30, 2016 and September 30, 2015 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, 2015, except as described below.

Principles of Consolidation

These unaudited condensed consolidated financial statements include the accounts of the Company and two of its wholly-owned subsidiaries, Arbutus Biopharma Inc. ("Arbutus Inc.") and Protiva Biotherapeutics Inc. ("Protiva"). All intercompany transactions and balances have been eliminated on consolidation.

In addition to Arbutus Inc. and Protiva, the Company's former wholly-owned subsidiary, Protiva Agricultural Development Company Inc. ("PADCo"), was previously recorded by the Company using the equity method. On March 4, 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of PADCo, as described in note 4.

Foreign currency translation and functional currency conversion

Prior to January 1, 2016, the Company's functional currency was the Canadian dollar. Translation gains and losses from the application of the U.S. dollar as the reporting currency while the Canadian dollar was the functional currency are included as part of cumulative currency translation adjustment, which is reported as a component of shareholders' equity under accumulated other comprehensive loss.



6



The Company re-assessed its functional currency and determined as at January 1, 2016, its functional currency changed from the Canadian dollar to the U.S. dollar based on management's analysis of changes in the primary economic environment in which the Company operates. The change in functional currency is accounted for prospectively from January 1, 2016 and financial statements prior to and including the period ended December 31, 2015 have not been restated for the change in functional currency.

For periods prior to January 1, 2016, the effects of exchange rate fluctuations on translating foreign currency monetary assets and liabilities into Canadian dollars were included in the statement of operations and comprehensive loss as foreign exchange gain/loss. Revenue and expense transactions were translated into the U.S. dollar reporting currency at the balance sheet date at average exchange rates during the period, and assets and liabilities were translated at end of period exchange rates, except for equity transactions, which were translated at historical exchange rates. Translation gains and losses from the application of the U.S. dollar as the reporting currency while the Canadian dollar was the functional currency are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders’ equity in accumulated other comprehensive loss.

For periods commencing January 1, 2016, monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Opening balances related to non-monetary assets and liabilities are based on prior period translated amounts, and non-monetary assets and non-monetary liabilities incurred after January 1, 2016 are translated at the approximate exchange rate prevailing at the date of the transaction. Revenue and expense transactions are translated at the approximate exchange rate in effect at the time of the transaction. Foreign exchange gains and losses are included in the statement of operations and comprehensive loss as foreign exchange gains.

Income or loss per share

Income or 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 is anti-dilutive. During the nine months ended September 30, 2016, potential common shares of 4,978,101 (September 30, 20156,481,295) were excluded from the calculation of loss per common share because their inclusion would be anti-dilutive, of which 1,007,058 (September 30, 2015 - 3,625,411) relates to shares issued subject to repurchase provisions as part of consideration paid for the acquisition of Arbutus Inc.

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, in thousands, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value:

7



 
Level 1

 
Level 2

 
Level 3

 
September 30, 2016

Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
26,630

 

 

 
$
26,630

Short-term investments
123,052

 

 

 
123,052

Total
$
149,682

 

 

 
$
149,682

Liabilities
 
 
 
 
 
 
 
Liability-classified options

 

 
$
948

 
$
948

Warrants

 

 
297

 
297

Contingent consideration

 

 
8,253

 
8,253

Total

 

 
$
9,498

 
$
9,498


 
Level 1

 
Level 2

 
Level 3

 
December 31, 2015

Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
166,779

 

 

 
$
166,779

Short-term investments
14,525

 

 

 
14,525

Term deposit
10,070

 

 

 
10,070

Total
$
191,374

 

 

 
$
191,374

Liabilities
 
 
 
 
 
 
 
Warrants

 

 
$
883

 
$
883

Contingent consideration

 

 
7,497

 
7,497

Total

 

 
$
8,380

 
$
8,380


The following table presents the changes in fair value of the Company’s warrants:
 
Liability at beginning of the period
 
Fair value of warrants exercised in the period
 
Increase (decrease) in fair value of warrants
 
Foreign exchange (gain) loss
 
Liability at end of the period
Nine months ended September 30, 2015
$
5,099

 
$
(334
)
 
$
(2,777
)
 
$
(493
)
 
$
1,495

Nine months ended September 30, 2016
$
883

 
$
(247
)
 
$
(339
)
 
$

 
$
297


The change in fair value of warrant liability for the nine months ended September 30, 2016 is recorded in the statement of operations and comprehensive loss.

The weighted average Black-Scholes option-pricing assumptions and the resultant fair values, for warrants outstanding at September 30, 2016 and at December 31, 2015 are as follows:

8



 
September 30, 2016

 
December 31, 2015

Dividend yield
%
 
%
Expected volatility
49.69
%
 
49.07
%
Risk-free interest rate
0.51
%
 
0.48
%
Expected average term
0.4 years

 
0.6 years

Fair value of warrants outstanding
$
1.48

 
$
2.33

Aggregate fair value of warrants outstanding
$
297

 
$
883

Number of warrants outstanding
201,000

 
379,500


Contingent consideration is a liability assumed by the Company from its acquisition of Arbutus Inc. in March 2015. To determine the fair value of the contingent consideration, 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 are 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, as detailed in note 8. The Company revalues the contingent consideration at the end of each reporting period and records any change in value to the statement of operations and comprehensive loss.

 
Liability at beginning of the period1
 
Increase in fair value of Contingent Consideration
 
Liability at end of the period
Nine months ended September 30, 2015
$
4,736

 
$
1,929

 
$
6,665

Nine months ended September 30, 2016
$
7,497

 
$
756

 
$
8,253


1.
Contingent consideration was assumed by the Company as part of its acquisition of Arbutus Inc. As such, the beginning balance for the nine-months ended September 30, 2015 was the fair value as at the acquisition date of March 4, 2015. The beginning balance for the nine-months ended September 30, 2016 was the fair value as at December 31, 2015.

Liability-classified stock option awards

The Company accounts for liability-classified stock option awards ("liability options") under ASC 718 - Compensation - Stock Compensation ("ASC 718"), under which awards of options that provide for an exercise price that is not denominated in: (a) the currency of a market in which a substantial portion of the Company's equity securities trades, (b) the currency in which the employee's pay is denominated, or (c) the Company's functional currency, are required to be classified as liabilities. Due to the change in functional currency as of January 1, 2016, certain stock option awards with exercise prices denominated in Canadian dollars changed from equity classification to liability classification. As such, the historic equity classification of these stock option awards changed to liability classification effective January 1, 2016. The change in classification resulted in reclassification of these awards from, additional paid-in capital to liability-classified options.

Liability options are re-measured to their fair values at each reporting date with changes in the fair value recognized in share-based compensation expense or additional paid-in capital until settlement or cancellation. Under ASC 718, when an award is reclassified from equity to liability, if at the reclassification date the original vesting conditions are expected to be satisfied, then the minimum amount of compensation cost to be recognized is based on the grant date fair value of the original award. Fair value changes below this minimum amount are recorded in additional paid-in capital.


9



Revenue recognition

The Company earns revenue from research and development collaboration and contract services, licensing fees, milestone and royalty payments. In arrangements with multiple deliverables, the delivered item or items is considered a separate unit of accounting if: (1) the delivered item has value to the customer on a standalone basis; and (2) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the Company's control. If the elements of the arrangement do not meet both of the criteria above, they are recognized as a single unit of accounting. If the elements do meet the criteria above, arrangement consideration is allocated to the separate units of accounting based upon their relative selling price. Non-refundable payments received under collaborative research and development agreements are recorded as revenue as services are performed and related expenditures are incurred. Non-refundable upfront license fees from collaborative licensing and development arrangements are recognized as the Company fulfills its obligations related to the various elements within the agreements, in accordance with the contractual arrangements with third parties and the term over which the underlying benefit is being conferred. If non-refundable license fees have values to the customer on a standalone basis, separate from undelivered performance obligations, they are recognized upon delivery. To date, the Company has not recognized any non-refundable license fees upon delivery.

The Company evaluates new arrangements for any substantive milestones by considering: whether substantive uncertainty exists upon execution of the arrangement; if the event can only be achieved based in whole or in part on the Company’s performance, or occurrence of a specific outcome resulting from the Company’s performance; any future performance required, and payment is reasonable relative to all deliverables; and, the payment terms in the arrangement. Payments received upon the achievement of substantive milestones are recognized as revenue in their entirety. Payments received upon the occurrence of milestones that are non-substantive are deferred and recognized as revenue over the estimated period of performance applicable to the associated collaborative agreement.

Revenue earned under research and development manufacturing collaborations where the Company bears some or all of the risk of a product manufacturing failure is recognized when the purchaser accepts the product and there are no remaining rights of return.

Revenue earned under research and development collaborations where the Company does not bear any risk of product manufacturing failure is recognized in the period the work is performed. For contracts where the manufacturing amount is specified, revenue is recognized as product is manufactured in proportion to the total amount specified under the contract.

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.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The standard, as subsequently amended, is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS by creating a new Topic 606, Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The core principle of the accounting standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. The amendments should be applied by either (1) retrospectively to each prior reporting period presented; or (2) retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. The new guidance would be effective for fiscal years beginning after December 15, 2017, which for the Company means January 1, 2018. The Company has begun its evaluation and, at this time, does not expect adoption of this guidance to materially impact its financial statements.






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In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of the statement of cash flows. Under this update, there are five simplifications for public companies. All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Excess tax benefits should be classified along with other tax cash flows as an operating activity. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. Cash paid by an employee when directly withholding shares for tax withholding purposes should be classified as financing activity. The amendments in this update would be effective for annual periods beginning after December 15, 2016, which for the Company means January 1, 2017. Early application is permitted. The Company has begun its evaluation and, at this time, does not expect adoption of this guidance to materially impact its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities. The update 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. Topic 842 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 this update 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 this update. The extent of the impact of this adoption has not yet been determined.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Under this update, the classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in GAAP. In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The amendments in this update are effective for public business entities for fiscal years beginning after December 31, 2017, which for the Company means January 1, 2018, and interim periods within those fiscal years. The Company has begun its evaluation and, at this time, does not expect the update to materially impact its statement of cash flows.

3.      Impairment evaluations for 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 each year, unless there is an event or change in the business that could indicate impairment, in which case earlier testing is performed.

Impairment of intangible assets

During the three months ended June 30, 2016, the Company recorded an impairment charge of $156,324,000 and a corresponding income tax benefit of $64,864,000 related to the decrease in deferred tax liability for the discontinuance of the ARB-1598 program in the Immune Modulator drug class after extensive research and analysis, as well as a delay for additional exploration of the biology of the cccDNA Sterilizer drug class.


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As a result of the impairment in the carrying values of the specified intangibles, as set out above, the Company reassessed the fair value of all of the IPR&D, which fair values were calculated to be above the respective carrying values; therefore, no additional impairment was recorded. At September 30, 2016, the Company did not identify any new indicators of impairment therefore a quantitative assessment was not performed.

The following table summarizes the carrying values, net of impairment of the intangible assets as at September 30, 2016:

 
September 30, 2016

December 31, 2015

IPR&D – Immune Modulators
73,243

183,103

IPR&D – Antigen Inhibitors
36,437

36,437

IPR&D – cccDNA Sterilizers
86,638

133,102

Total IPR&D
$
196,318

$
352,642


Impairment evaluation of goodwill

The Company further determined that the impairment of the intangible assets triggers earlier evaluation of the carrying value of goodwill prior to the scheduled annual impairment testing date of December 31. As part of the evaluation of the recoverability of goodwill, the Company has identified only one reporting unit to which the total carrying amount of goodwill has been assigned. The income approach is used to estimate the fair value of the reporting unit, which requires estimating future cash flows and risk-adjusted discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value of the reporting unit and may result in impairment charges in future periods.

As at June 30, 2016, the fair value of the reporting unit exceeded the carrying value of the reporting unit, and as such the second step of the impairment test, which measures the amount of impairment charge if any, was not required. In estimating the fair value of the reporting unit, the Company prepared a discounted cash flow model using its current best estimates of future income and a discount rate appropriate to the business, as well as by considering the Company's market capitalization. At September 30, 2016, the Company did not identify any new indicators of impairment. No impairment charge on goodwill was recorded for the period ended September 30, 2016.

4.      Collaborations, contracts and licensing agreements

The following tables set forth revenue recognized under collaborations, contracts and licensing agreements, in thousands:

 
Three months ended September 30,
 
Nine months ended September 30,
 
2016

 
2015

 
2016

 
2015

Collaborations and contracts
 
 
 
 
 
 
 
DoD (a)
$

 
$
2,002

 

 
$
6,909

Monsanto (b)

 
309

 

 
826

Dicerna (c)
87

 
724

 
226

 
1,130

Total research and development collaborations and contracts
87

 
3,035

 
226

 
8,865

Licensing fees, milestone and royalty payments
 
 
 
 
 
 
 
Monsanto licensing fees and milestone payments (b)

 
727

 

 
2,374

Dicerna licensing fee (c)
640

 
263

 
1,066

 
789

Other milestone and royalty payments (d)
47

 
40

 
394

 
159

Total licensing fees, milestone and royalty payments
687

 
1,030

 
1,460

 
3,322

Total revenue
$
774

 
$
4,065

 
$
1,686

 
$
12,187


The following table sets forth deferred collaborations and contracts revenue:

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September 30, 2016

 
December 31, 2015

DoD (a)
$
15

 
$
15

Dicerna current portion (c)

 
853

Deferred revenue, current portion
15

 
868

Dicerna long-term portion (c)

 
213

Total deferred revenue
$
15

 
$
1,081


(a)      Contract with United States Government’s Department of Defense (“DoD”) to develop TKM-Ebola

On July 14, 2010, the Company signed a contract with the DoD to advance TKM-Ebola, an RNAi therapeutic utilizing the Company’s lipid nanoparticle technology to treat Ebola virus infection.

On October 1, 2015, the Company received formal notification from the DoD that, due to the unclear development path for TKM-Ebola and TKM-Ebola-Guinea, the Ebola-Guinea Manufacturing and the Ebola-Guinea IND submission statements of work had been terminated, subject to the completion of certain post-termination obligations. The TKM-Ebola portion of the contract was completed in November 2015. The Company is currently conducting contract close out procedures with the DoD.

(b)      Option and Services Agreements with Monsanto Company (“Monsanto”)

On January 13, 2014, the Company and Monsanto signed an Option Agreement and a Services Agreement (together, the “Agreements”). Under the Agreements, Monsanto had an option to obtain a license to use the Company’s proprietary delivery technology and related intellectual property for use in agriculture.

Under the Agreements, the Company established a wholly-owned subsidiary, PADCo. The Company determined that PADCo was a variable interest entity (“VIE”); however, Monsanto is the primary beneficiary of the arrangement. PADCo was established to perform research and development activities, which were funded by Monsanto in return for a call option to acquire the equity or all of the assets of PADCo. On March 4, 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of PADCo and paid the Company an option exercise fee of $1,000,000. From the acquisition of PADCo, Monsanto received a worldwide, exclusive right to use the Company’s proprietary delivery technology in the field of agriculture. The Company recorded the exercise fee received as gain on disposition of financial instrument on its consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2016.

(c)      License and Development and Supply Agreement with Dicerna Pharmaceuticals, Inc. (“Dicerna”)

On November 16, 2014, the Company signed a License Agreement and a Development and Supply Agreement (together, the “Agreements”) with Dicerna to develop, manufacture, and commercialize products directed to the treatment of Primary Hyperoxaluria 1 (“PH1”). In consideration for the rights granted under the Agreements, Dicerna paid the Company an upfront cash payment of $2,500,000. The Company is also entitled to receive payments from Dicerna on manufacturing and services provided, as well as further payments with the achievement of development and regulatory milestones of up to $22,000,000, in aggregate, and potential commercial royalties. Further, under the Agreements, a joint development committee has been established to provide guidance and direction on the progression of the collaboration.

The Company determined the deliverables under the Agreements included the rights granted, participation in the joint development committee, materials manufactured and other services provided, as directed under the joint development committee. The license and participation in the joint development committee have been determined by the Company to not have standalone value due to the uniqueness of the subject matter under the Agreements. Therefore, these deliverables are treated as one unit of accounting and recognized as revenue over the performance period. In September 2016, Dicerna announced the discontinuation of their DCR-PH1 program using the Company's technology. As such, the Company revised the estimated completion date of performance period from March 2017 to September 30, 2016, at which time the Company has no further remaining performance obligations. This resulted in the recognition of $640,000 and $1,066,000 in Dicerna license fee revenue for the three and nine months ended September 30, 2016, respectively.

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The Company has determined that manufacturing services and other services provided have standalone value, as a separate statement of work is executed and invoiced for each manufacturing or service work order. The relative fair values are determined as a batch price or fee is estimated upon the execution of each work order, with actual expenditures charged at comparable market rates with embedded margins on each work order.

Manufacturing work orders are invoiced at the time of execution of the work order, at the initiation of manufacture, and at the release of materials. The Company has deferred the recognition of revenue on all cash deposit payments received for manufacturing work orders until acceptance of inventory. Revenue from service work orders is recognized as the services are performed.

(d)      Agreements with Spectrum Pharmaceuticals, Inc. (“Spectrum”)

On May 6, 2006, the Company signed a number of agreements with Talon Therapeutics, Inc. (“Talon”, formerly Hana Biosciences, Inc.) including the grant of worldwide licenses (the “Talon License Agreement”) for three of the Company’s chemotherapy products, Marqibo®, Alocrest (Optisomal Vinorelbine) and Brakiva (Optisomal Topotecan).

On August 9, 2012, the Company announced that Talon had received accelerated approval for Marqibo from the FDA for the treatment of adult patients with Philadelphia chromosome negative acute lymphoblastic leukemia in second or greater relapse or whose disease has progressed following two or more anti-leukemia therapies. Marqibo is a liposomal formulation of the chemotherapy drug vincristine. In the year ended December 31, 2012, the Company received a milestone of $1,000,000 based on the FDA's approval of Marqibo and will receive royalty payments based on Marqibo's commercial sales. There are no further milestones related to Marqibo but the Company is eligible to receive total milestone payments of up to $18,000,000 on Alocrest and Brakiva.

Talon was acquired by Spectrum in July 2013. The acquisition does not affect the terms of the license between Talon and the Company. On September 3, 2013, Spectrum announced that they had shipped the first commercial orders of Marqibo. For the three and nine months ended September 30, 2016, the Company recorded $50,000 and $136,000 in Marqibo royalty revenue (three and nine months ended September 30, 2015 - $40,000 and $159,000 respectively). For the nine months ended September 30, 2016, the Company accrued 2.5% in royalties due to TPC in respect of the Marqibo royalty earned by the Company – see note 8, contingencies and commitments.

5.      Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are comprised of the following, in thousands:

 
September 30, 2016

 
December 31, 2015

Trade accounts payable
$
2,071

 
$
2,610

Research and development accruals
2,568

 
2,358

Professional fee accruals
264

 
640

Deferred lease inducements
244

 
297

Payroll accruals
1,252

 
2,331

Other accrued liabilities
733

 
591

 
$
7,132

 
$
8,827



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6.      Share Capital

(a)      Financing

On March 25, 2015, the Company announced that it had completed an underwritten public offering of 7,500,000 common shares, at a price of $20.25 per share, representing gross proceeds of $151,875,000. The Company also granted the underwriters a 30 day option to purchase an additional 1,125,000 shares for an additional $22,781,000 to cover any over-allotments. The underwriters did not exercise the option. The cost of financing, including commissions and professional fees, was $9,700,000, resulting in net proceeds of $142,175,000.

(b)      Stock-based compensation

At the Company’s annual general and special meeting of shareholders on May 19, 2016, the shareholders of the Company approved the adoption of the Company's 2016 Omnibus Share and Incentive Plan (the "2016 Plan") and the reserve of 5,000,000 shares of the Company issuable pursuant to awards under the 2016 Plan. These include both equity-classified and liability-classified stock options. The Company's 2011 Omnibus Share Compensation Plan, as amended, also remains in effect.

(c)      Liability-classified stock options

Valuation assumptions

Liability options are re-measured to their fair values at each reporting date, using the Black-Scholes valuation model. The methodology and assumptions prevailing at the re-measurement date used to estimate the fair values of liability options remain unchanged from the date of grant of equity classified stock option awards. Assumptions about the Company’s expected stock-price volatility are based on the historical volatility of the Company’s publicly traded stock. The risk-free interest rate used for each grant is equal to the zero coupon rate for instruments with a similar expected life. Expected life assumptions are based on the Company’s historical data. The weighted average Black-Scholes option-pricing assumptions and the resultant fair values as at the reclassification date of January 1, 2016, and as at September 30, 2016, are presented in the following table:

 
September 30,
 
January 1,
 
2016
 
2016
Dividend yield
%
 
%
Expected volatility
70.56
%
 
97.78
%
Risk-free interest rate
0.66
%
 
0.86
%
Expected average term (years)
3.9

 
5.3

Fair value of options outstanding
$
1.52

 
$
3.33

Aggregate fair value of options outstanding (in thousands)
$
948

 
$
1,909

Number of options outstanding
639,500

 
718,333


Stock option activity for liability options
 
Number of
optioned
common shares

 
Weighted
average exercise
price (C$)

 
Weighted
average exercise
price (US$)

 
Aggregate
intrinsic
value (US$)

Balance, January 1, 2016
718,333

 
$
7.24

 
$
5.23

 
$
604

Options exercised
(30,000
)
 
3.00

 
2.29

 
35

Options forfeited, canceled or expired
(48,833
)
 
8.19

 
6.24

 

Balance, September 30, 2016
639,500

 
$
7.36

 
$
5.61

 
$
251


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Liability options expire at various dates from August 6, 2017 to May 22, 2024.

The following table summarizes information pertaining to liability options outstanding at September 30, 2016:

 
 
Options outstanding September 30, 2016
 
Options exercisable September 30, 2016
Range of
Exercise prices (US$)
 
Number
of options
outstanding

 
Weighted
average
remaining
contractual
life (years)
 
Weighted
average
exercise
price (US$)

 
Number
of options
exercisable

 
Weighted
average
exercise
price (US$)

$1.30
 
to
 
$1.83
 
120,000

 
4.3
 
$
1.52

 
120,000

 
$
1.52

$2.94
 
to
 
$3.93
 
120,000

 
4.2
 
3.50

 
120,000

 
3.50

$4.06
 
to
 
$4.38
 
74,000

 
5.9
 
4.32

 
74,000

 
4.32

$4.96
 
to
 
$6.33
 
76,250

 
5.6
 
5.97

 
76,250

 
5.97

$6.95
 
to
 
$6.95
 
150,000

 
7.0
 
6.95

 
112,500

 
6.95

$9.55
 
to
 
$12.50
 
99,250

 
7.4
 
11.79

 
83,500

 
11.71

$1.30
 
to
 
$12.50
 
639,500

 
5.8
 
$
5.61

 
586,250

 
$
5.35


At September 30, 2016, there were 586,250 liability options exercisable with a weighted average exercise price of $5.35 (C$7.02). The weighted average remaining contractual life of exercisable liability options as at September 30, 2016 was 5.6 years.

A summary of the Company's non-vested liability stock option activity and related information at September 30, 2016 is as follows:
 
Number of
optioned
common shares

 
Weighted
average
fair value (US$)

Non-vested at January 1, 2016
134,000

 
$
3.61

Options vested
(55,750
)
 
0.72

Non-vested options forfeited
(25,000
)
 
0.16

Non-vested at September 30, 2016
53,250

 
$
1.77


The weighted average remaining contractual life for liability options expected to vest at September 30, 2016 was 7.1 years and the weighted average exercise price for these options was $8.50 (C$11.16) per share.

The total fair value of liability options that vested during the nine months ended September 30, 2016 was $40,300.

7.      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 at September 30, 2016 was the accounts receivable balance of $395,000 (December 31, 2015 -$1,008,000).

All accounts receivable balances were current as at September 30, 2016 and at December 31, 2015.

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8.      Contingencies and commitments

Property lease

On August 9, 2016, the Company signed a new lease agreement with a target renovation start date of November 1, 2016, subsequently amended to October 7, 2016. The new location, 701 Veterans Circle, Warminster, Pennsylvania, has approximately 35,000 square feet of laboratory facilities and office space. Once renovations are complete, this facility will replace the current Doylestown, Pennsylvania facility. The term of the lease is 10.6 years and expires on April 30, 2027, with the option to extend for up to two 5-year terms. The estimated total facility commitment, including operating costs, is approximately $6,900,000.

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$9,323,000). As at September 30, 2016, a cumulative contribution of $2,823,000 (C$3,702,000) has 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 is 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 for Marqibo. For the three and nine months ended September 30, 2016, the Company earned royalties on Marqibo sales in the amount of $50,000 and $136,000 respectively (three and nine months ended September 30, 2015$40,000 and $159,000 respectively) (see note 4(d)), resulting in $3,000 being recorded by the Company as royalty payable to TPC (September 30, 2015 -$4,000). The cumulative amount paid or accrued up to September 30, 2016 was $15,000, resulting in the contingent amount due to TPC being $2,808,000 (C$3,683,000)

License agreement with Marina Biotech, Inc. (“Marina”)

On November 29, 2012 the Company announced a worldwide, non-exclusive license to a novel RNAi payload technology called Unlocked Nucleobase Analog (“UNA”) from Marina for the development of RNAi therapeutics.

UNA technology can be used in the development of RNAi therapeutics, which treats disease by silencing specific disease causing genes. UNAs can be incorporated into RNAi drugs and have the potential to improve them by increasing their stability and reducing off-target effects.

Under the license agreement the Company paid Marina an upfront fee of $300,000. A further license payment of $200,000 was paid in 2013 and the Company will make milestone payments of up to $3,250,000 and royalties on each product developed by the Company that uses Marina’s UNA technology. The payments to Marina are expensed to research, development, collaborations and contracts expense.

Effective August 9, 2013, Marina’s UNA technology was acquired by Arcturus Therapeutics, Inc. (“Arcturus”) and the UNA license agreement between the Company and Marina was assigned to Arcturus. The terms of the license are otherwise unchanged.

Arbitration with the University of British Columbia (“UBC”)

Certain early work on lipid nanoparticle delivery systems and related inventions was undertaken at Inex Pharmaceuticals Inc and assigned to the University of British Columbia (UBC). These inventions are licensed to the Company by UBC under a license agreement, initially entered in 1998 as 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.

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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 continues to dispute UBC’s allegations, and no dates have been scheduled for this arbitration. However, the Company notes that 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. However, the defense of 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. Costs related to the arbitration are recorded by the Company as incurred.

Contingent consideration from Arbutus Inc. acquisition of Enantigen and License Agreements between Enantigen and the Baruch S. Blumberg Institute (“Blumberg”) and Drexel University (“Drexel”)

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 a HBV surface antigen secretion inhibitor program and a capsid assembly inhibitor program, each of which are now assets of Arbutus, 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 is the enrollment of first patient in Phase 1b clinical trial in HBV patients, which the Company does not expect to occur in the next twelve-month period.

The regulatory, development and sales milestone payments have an estimated fair value of approximately $6,727,000 as at 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 overall biotech indices.

Contingent consideration is recorded as a financial liability, and measured at its fair value at each reporting period with any changes in fair value from the previous reporting period recorded in the statement of operations and comprehensive loss (see note 2).

Drexel and Blumberg

In February 2014, Arbutus Inc. entered into a license agreement with Blumberg and Drexel that granted 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.


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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 our 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.

NeuroVive Pharmaceutical AB (“NeuroVive”)

In September 2014, Arbutus Inc. entered into a license agreement with NeuroVive that granted them an exclusive, worldwide, sub-licensable license to develop, manufacture and commercialize, for the treatment of HBV, oral dosage form sanglifehrin based cyclophilin inhibitors (including OCB-30).

In 2015, the Company discontinued the OCB-30 development program based on significant research and analysis. In July 2016, the Company provided NeuroVive with a notice of termination of the license agreement.The parties agreed to terminate the agreement in October 2016.

Cytos Biotechnology Ltd (“Cytos”)

On December 30, 2014, Arbutus Inc. entered into an exclusive, worldwide, sub-licensable (subject to certain restrictions with respect to licensed viral infections other than hepatitis) license to six different series of compounds. The licensed compounds are Qbeta-derived virus-like particles that encapsulate TLR9, TLR7 or RIG-I agonists and may or may not be conjugated with antigens from the hepatitis virus or other licensed viruses. The Company has an option to expand this license to include additional viral infections other than influenza and Cytos will retain all rights for influenza, all non-viral infections, and all viral infections (other than hepatitis) for which it has not exercised its option.


19



In partial consideration for this license, the Company is obligated to pay Cytos up to a total of $67,000,000 for each of the six licensed compound series upon the achievement of specified development and regulatory milestones; for hepatitis and each additional licensed viral infection, up to a total of $110,000,000 upon the achievement of specified sales performance milestones; and tiered royalty payments in the high-single to low-double digits, based upon the proportionate net sales of licensed products in any commercialized combination. In 2016, the Company discontinued the TLR9 development program based on significant levels of research and analysis (refer to note 3 above).

9.      Subsequent event

Termination of License Agreement with Acuitas

In December 2013, the Company entered into a cross-license agreement with Acuitas Therapeutics Inc., or Acuitas. The terms of the cross-license agreement provided Acuitas with access to certain of the Company's earlier intellectual property generated prior to April 2010 for a specific field. On August 29, 2016, the Company provided Acuitas with notice that it considered Acuitas to be in material breach of the cross-license agreement.  The cross-license agreement provides that it may be terminated upon any material breach by the other party 60 days after receipt of written notice of termination describing the material breach in reasonable detail. On October 25, 2016, Acuitas filed a Notice of Civil Claim in the Supreme Court of British Columbia seeking an order that the Company perform its obligations under the Cross License Agreement, for damages ancillary to specific performance, injunctive relief, interest and costs.  The Company disputes Acuitas’ position and have not recorded an estimate of the possible loss associated with this claim, due to the uncertainties related to both the likelihood and amount of any possible loss or range of loss. The Company will file its response within the time frame prescribed by the Court.
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, 2015 and our unaudited condensed consolidated financial statements for the three and nine month period ended September 30, 2016. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.

FORWARD-LOOKING STATEMENTS

The information in this report contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and forward looking information within the meaning of Canadian securities laws (collectively, “forward-looking statements”). Forward-looking statements in this report include statements about our strategy, future operations, clinical trials, prospects and the plans of management; the discovery, development and commercialization of a cure for HBV; our beliefs and development path and strategy to achieve a cure for HBV; evaluating combinations of two or more drug candidates in cohorts of patients with chronic HBV infection, and using the results to adaptively design additional treatment regimens for the next cohorts; closing out our contract with the DoD; the timing of triggering events with Enantigen; evaluating different treatment durations to determine the optimal finite duration of therapy, until we select combination therapy regimens and treatment durations to conduct Phase III clinical trials intended to ultimately support regulatory filings for marketing approval; multi-dose HBsAg reduction data on ARB-1467 in 2H16; filing an IND (or equivalent) for ARB-1740 in 2H16; filing an IND (or equivalent) for AB-423 in 2H16; discontinuing the ARB-1598 development program; not expecting adoption of new accounting guidance to materially impact our financial statements; the design of the ARB-1467 Phase II multi-dosing study; the effectiveness of surface antigen secretion inhibitors; the effectiveness of core protein inhibitors; exploring partnership opportunities to enable further study of TKM-PLK-1 in HCC; a New Drug Application filing for Alnylam's patisiran program in 2017; low-single-digit royalty payments as Alnylam’s LNP-enabled products are commercialized; mid-single digit royalty payments based on Marqibo’s commercial sales; and filing a response to the Acuitas Notice of Civil Claim within the time frame prescribed by the Court..


20


With respect to the forward-looking statements contained in this report, we have made numerous assumptions regarding, among other things: LNP’s status as a leading RNAi delivery technology; our research and development capabilities and resources; the effectiveness of our products as a treatment for chronic Hepatitis B infection or other diseases; the timing and quantum of payments to be received under contracts with our partners; assumptions related to our share price volatility, expected lives of warrants and options; and our financial position and its ability to execute its business strategy. While we consider these assumptions to be reasonable, these assumptions are inherently subject to significant business, economic, competitive, market and social uncertainties and contingencies.

Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of important factors, including the risk factors discussed in this report and the risk factors discussed in our Annual Report on Form 10-K under the heading “Risk Factors,” and the risks discussed in our other filings with the Securities and Exchange Commission and Canadian Securities Regulators. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. All forward-looking statements herein are qualified in their entirety by this cautionary statement, and we explicitly disclaim any obligation to revise or update any such forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments, except as required by law.

OVERVIEW

Arbutus Biopharma Corporation ("Arbutus", the "Company", "we", "us", and "our") is a publicly traded industry-leading Hepatitis B Virus (HBV) therapeutic solutions company. HBV represents a significant unmet medical need, and given the complex biology of the disease, we believe combination therapies are the key to HBV treatment and a potential cure, and development can be accelerated when multiple components of a combination therapy regimen are controlled by the same company. We have assembled an HBV pipeline consisting of multiple drug candidates with complementary mechanisms of action, and plan to continue to broaden our pipeline.
 
HBV Product Pipeline

Our product pipeline, like our business, is focused on finding a cure for chronic HBV infection, with the objective of developing a combination of products that intervene at different points in the viral life cycle, and reactivating the host immune system. Given our strong scientific and research capabilities in-house, we are able to conduct preclinical combination studies to evaluate combinations of our proprietary pipeline candidates. Once compounds within the portfolio with sufficient activity have been identified, we intend, subject to discussions with regulatory authorities, to evaluate combinations of two or more drug candidates in cohorts of patients with chronic HBV infection. We expect to use these results to adaptively design additional treatment regimens for the next cohorts. We also plan to evaluate different treatment durations to determine the optimal finite duration of therapy. We plan to continue this iterative process until we select combination therapy regimens and treatment durations to conduct Phase III clinical trials intended to ultimately support regulatory filings for marketing approval.


21



https://cdn.kscope.io/7ebe11de8d753c99fc9d8ccfefe66e3c-q3pipeline.jpg

We intend to continue to expand our HBV pipeline through internal development, acquisitions and in-licenses. We also have a research collaboration agreement with the Baruch S. Blumberg Institute that provides exclusive rights to in-license any intellectual property generated through the collaboration.

RNAi (ARB-1467 & ARB-1740)

Our lead RNAi HBV candidate, ARB-1467 (formerly TKM-HBV), is designed to reduce Hepatitis B surface antigen (HBsAg) expression in patients chronically infected with HBV. Reducing HBsAg is thought to be a key prerequisite to enable a patient’s immune system to raise an adequate immune response against the virus. The ability of ARB-1467 to inhibit numerous viral elements in addition to HBsAg increases the likelihood of affecting the viral infection.

ARB-1467 is a multi-component RNAi therapeutic that simultaneously targets three sites on the HBV genome, including the HBsAg coding region. Targeting three distinct and highly conserved sites on the HBV genome is intended to facilitate potent knockdown of all viral mRNA transcripts and viral antigens across a broad range of HBV genotypes and reduce the risk of developing antiviral resistance. In preclinical models, ARB-1467 treatment results in reductions in intrahepatic and serum HBsAg, HBV DNA, cccDNA, Hepatitis B e antigen (HBeAg) and Hepatitis B c antigen (HBcAg). ARB-1467 was evaluated in a Phase I Single Ascending Dose (SAD) trial designed to assess the safety, tolerability and pharmacokinetics of intravenous administration of the product in healthy adult subjects. In the Phase I SAD study, healthy volunteer subjects were dosed up to a dose of 0.4 mg/kg but a defined maximum tolerated dose was not reached.

The Phase II trial is a multi-dose study in chronic HBV patients who are also receiving nucleot(s)ide analog therapy. The trial consists of three cohorts, each enrolling eight subjects; six receiving three monthly doses of ARB-1467, and two receiving placebo. The first two cohorts include HBeAg- patients, followed by a third cohort in HBeAg+ patients. ARB-1467 is administered at 0.2 mg/kg and 0.4 mg/kg in the HBeAg- cohorts (Cohorts 1 and 2), and at 0.4 mg/kg in the HBeAg+ cohort (Cohort 3). Interim results from this trial based on single dose administration of ARB-1467 in Cohorts 1 and 2 demonstrate significant reductions in serum HBsAg levels, and multiple dose results from Cohort 1 show a step-wise, additive reduction in serum HBsAg. This trial is ongoing and additional data is expected by the end of 2016, and final data from Cohorts 1-3 is expected in the first half of 2017. In addition, we expect to add an additional cohort to evaluate an alternate dosing regimen.

While we are focused on development of our lead HBV product candidates, we believe in continuous innovation and will incorporate technological and product design advancements that may result in an improvement in safety and/or efficacy. An example of this is our follow-on RNAi HBV candidate, ARB-1740. ARB-1740 is more potent than ARB-1467 in preclinical studies and has the potential to be effective at lower clinical doses than ARB-1467. ARB-1740 is chemically distinct from ARB-1467 (includes different target sequences) and employs the same LNP formulation as ARB-1467. We plan to file an Investigational New Drug (IND) application (or equivalent filing) for ARB-1740 by the end of 2016.


22


Core Protein/ Capsid Assembly Inhibitor (AB-423)

HBV core protein, or capsid, is required for viral replication and core protein may have additional roles in cccDNA function. Current nucleot(s)side analog therapy significantly reduces HBV DNA levels in the serum but HBV replication continues in the liver, thereby enabling HBV infection to persist. Effective therapy for patients requires new agents which will effectively block viral replication. We are developing core protein inhibitors (also known as capsid assembly inhibitors) as oral therapeutics for the treatment of chronic HBV infection. By inhibiting assembly of the viral capsid, the ability of hepatitis B virus to replicate is impaired, resulting in reduced cccDNA. We presented preclinical combination data from our lead core protein/capsid assembly inhibitor AB-423 at scientific conferences in April 2016 and June 2016. We plan to file an IND (or equivalent filing) for AB-423 by the end of 2016. In addition to AB-423, our core protein/capsid assembly inhibitor discovery effort is active and ongoing and has already generated promising back-up compounds.

Our Proprietary Delivery Technology

Development of RNAi therapeutic products is currently limited by the instability of the RNAi trigger molecules in the bloodstream and the inability of these molecules to access target cells or tissues following administration. Delivery technology is necessary to protect these drugs in the bloodstream to allow efficient delivery and cellular uptake by the target cells. Arbutus has developed a proprietary delivery platform called Lipid Nanoparticle (LNP). The broad applicability of this platform to RNAi development has established Arbutus as a leader in this new area of innovative medicine.

Our proprietary LNP delivery technology allows for the successful encapsulation of RNAi trigger molecules in LNP administered intravenously, which travel through the bloodstream to target tissues or disease sites. LNPs are designed to protect the triggers, and stay in the circulation long enough to accumulate at disease sites, such as the liver or cancerous tumors. LNPs are then taken up into the target cells by a process called endocytosis. Subsequent activation by the changing environment inside the cell causes the LNP to release the trigger molecules, which can then successfully mediate RNAi.

Ongoing Advancements in LNP Technology
Our LNP technology represents the most widely adopted delivery technology in RNAi, which has enabled several clinical trials and has been administered to hundreds of human subjects. We continue to explore opportunities to generate value from our LNP platform technology, which is well suited to deliver therapies based on RNAi, mRNA, and gene editing constructs. We have also made progress in developing a proprietary GalNAc conjugate technology to enable subcutaneous delivery of an RNAi therapeutic targeting hepatitis B surface antigen and/or other HBV targets.

Suspended Non-HBV RNAi Assets
Our intent is to focus our efforts on discovering, developing and commercializing a cure for patients suffering from chronic HBV infection. As such, we have suspended further development of our non-HBV assets and are exploring different strategic options to maximize the value of these assets. Additional information on these programs can be found in Part I, Item 1, “— Business-Suspended Non-HBV RNAi Assets,” of the annual report on Form 10-K, filed on March 9, 2016.

TKM-PLK1
We have completed the Phase I/II TKM-PLK1 clinical study in patients with advanced Hepatocellular Carcinoma (HCC). Topline results from this study show that TKM-PLK1 was well-tolerated at a dose of 0.6 mg/kg, 51% of subjects showed overall stable disease (SD) according to RECIST criteria, 22% of subjects showed an overall partial response (PR) according to Choi response criteria, and tumor density was reduced by up to 59%. We intend to explore partnership opportunities to enable further study of TKM-PLK-1 in HCC.









23



Partner Programs

Patisiran (ALN-TTR02)
Alnylam has a license to use our intellectual property to develop and commercialize products and may only grant access to our LNP technology to its partners if it is part of a product sublicense. Alnylam’s license rights are limited to patents that we have filed, or that claim priority to a patent that was filed, before April 15, 2010. Alnylam's patisiran (ALN-TTR02) program represents the most clinically advanced application of our LNP delivery technology, and results demonstrate that multi-dosing with our LNP has been well-tolerated with treatments out to 25 months. A New Drug Application filing for Alnylam's patisiran program is expected in 2017. We are entitled to low to mid-single-digit royalty payments escalating based on sales performance as Alnylam’s LNP-enabled products are commercialized.

Marqibo®
Marqibo®, originally developed by Arbutus, is a novel, sphingomyelin/cholesterol liposome-encapsulated formulation of the FDA-approved anticancer drug vincristine. Marqibo’s approved indication is for the treatment of adult patients with Philadelphia chromosome-negative acute lymphoblastic leukemia (Ph-ALL) in second or greater relapse or whose disease has progressed following two or more lines of anti-leukemia therapy. Our licensee, Spectrum Pharmaceuticals, Inc. (Spectrum), launched Marqibo through its existing hematology sales force in the United States. Spectrum has ongoing trials evaluating Marqibo in three additional indications, which are: first line use in patients with Philadelphia Negative Acute Lymphoblastic Leukemia (Ph-ALL), Pediatric ALL and Non-Hodgkin’s lymphoma. We are entitled to mid-single digit royalty payments based on Marqibo’s commercial sales.

DCR-PH1
In November 2014, we signed a licensing and collaboration agreement with Dicerna Pharmaceuticals, Inc. to utilize our LNP delivery technology exclusively in Dicerna's primary hyperoxaluria type 1 (DCR-PH1) development program. Data from the DCR-PH1-102 clinical trial, in which 21 subjects were randomized to receive DCR-PH1 at doses of 0.005, 0.015 and 0.05 mg/kg or placebo, showed an increase in urine glycolate levels, a biomarker of DCR-PH1 treatment activity, in the top two DCR-PH1 dosing groups. In September 2016, Dicerna announced the discontinuation of its DCR-PH1 program.  

Recent Developments

Facility Lease Agreement
In August 2016, we entered into a lease agreement for approximately 35,155 square feet of space in Warminster, Pennsylvania. This facility includes a research and development laboratory and will represent Arbutus' primary U.S. site.

NeuroVive Pharmaceutical AB
In September 2014, Arbutus Inc. entered into a license agreement with NeuroVive that granted them an exclusive, worldwide, sub-licensable license to develop, manufacture and commercialize, for the treatment of HBV, oral dosage form sanglifehrin based cyclophilin inhibitors (including OCB-30). In 2015, we discontinued the OCB-30 development program based on significant research and analysis. In July 2016, we provided NeuroVive with a notice of termination of the license agreement. The parties agreed to terminate the agreement in October 2016.

Acuitas Therapeutics Inc.

In December 2013 we entered into a cross-license agreement with Acuitas Therapeutics Inc., or Acuitas. The terms of the cross-license agreement provided Acuitas with access to certain of our earlier intellectual property (IP) generated prior to April 2010 for a specific field.  On August 29, 2016, Arbutus provided Acuitas with notice that Arbutus considered Acuitas to be in material breach of the cross-license agreement.  The cross-license agreement provides that it may be terminated upon any material breach by the other party 60 days after receipt of written notice of termination describing the material breach in reasonable detail. On October 25, 2016, Acuitas filed a Notice of Civil Claim in the Supreme Court of British Columbia seeking an order that Arbutus perform its obligations under the Cross License Agreement, for damages ancillary to specific performance, injunctive relief, interest and costs.  We will file our response within the time frame prescribed by the Court.

Dicerna Pharmaceuticals, Inc.
In September 2016, Dicerna Pharmaceuticals Inc. announced the discontinuation of its DCR-PH1 program.

24



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Liability-classified stock option awards valuation / The valuation of liability-classified stock option awards is a critical accounting estimate due to the value of liabilities recorded and the many assumptions that are required to calculate the liability, resulting in the classification of our liability-classified stock option awards as level 3 financial instruments.

We account for liability-classified stock option awards ("liability options") under ASC 718 - Compensation - Stock Compensation, under which awards of options that provide for an exercise price that is not denominated in: (a) the currency of a market in which a substantial portion of the Company's equity securities trades, (b) the currency in which the employee's pay is denominated, or (c ) the Company's functional currency, are required to be classified as liabilities. Due to the change in functional currency as of January 1, 2016, certain stock option awards with exercise prices denominated in Canadian dollars changed from equity classification to liability classification. As such, the historic equity classification of these stock option awards changed to liability classification effective January 1, 2016. The change in classification resulted in reclassification of these awards from, additional paid-in capital to liability-classified options.

We classify liability options in our consolidated balance sheet as liabilities and revalue them at each balance sheet date. Any change in valuation is recorded in our statement of operations as increases or decreases in share-based compensation expense or additional paid-in capital until settlement or cancellation. We use the Black-Scholes pricing model to value the options. Determining the appropriate fair-value model and calculating the fair value of liability options requires considerable judgment. A small change in the estimates used may cause a relatively large change in the estimated valuation. Due to ongoing changes in our business and general stock market conditions, we continuously assess our fair value assumptions. We adjust the estimated expected life as appropriate, based on the pattern of exercises of our stock option awards. As at the reclassification date of January 1, 2016 and the balance sheet date of September 30, 2016, for the purpose of calculating the fair value, the weighed-average expected life of outstanding was 5.3 and 3.9 years, respectively; the weighted-average risk-free interest rate was 0.86% and 0.66%, respectively; the weighted-average volatility was 97.8% and 70.56%, respectively; and the dividend yield was 0% based on no history of dividend payment by the Company. For the nine month period ended September 30, 2016, we recorded a total share-based compensation expense related to the change in fair value of liability options of $940,000.

Share purchase warrant valuation / The valuation of share purchase warrants is a critical accounting estimate due to the value of liabilities recorded and the many assumptions that are required to calculate the liability, resulting in the classification of our warrant liability as a level 3 financial instrument.

We classify warrants in our consolidated balance sheet as liabilities and revalue them at each balance sheet date. Any change in valuation is recorded in our statement of operations. We use the Black-Scholes pricing model to value the warrants. Determining the appropriate fair-value model and calculating the fair value of registered warrants requires considerable judgment. A small change in the estimates used may cause a relatively large change in the estimated valuation. Due to ongoing changes in our business and general stock market conditions, we continuously assess our warrant fair value assumptions. We adjust the estimated expected life as appropriate, based on the pattern of exercises of our warrants. As at December 31, 2015, for the purpose of calculating the fair value, the expected life of outstanding warrants was three months for warrants expiring in June 2016, and eleven months for warrants expiring in February 2017. Based on the pattern of decreasing exercises of warrants, we increased the expected life to five and a half months for outstanding warrants expiring in June 2016 effective January 1, 2016. As at September 30, 2016, the remaining expected life is five months for outstanding warrants expiring in February 2017. The change in fair value from the previous balance sheet date relating to the warrants that expired in June 2016 has been included in our statement of comprehensive loss. For the three and nine month period ended September 30, 2016, we recorded a gain in earnings due to the decrease in fair value of warrant liability of $10,000 and $339,000 respectively.

Goodwill and intangible assets - Impairment / Intangible assets classified as indefinite-lived and goodwill are not amortized, but are evaluated for impairment annually using a measurement date of December 31. In addition, if there is a major event indicating that the carrying value of an intangible asset or goodwill may not be recoverable, management performs an interim impairment test by comparing the estimated fair value, calculated by reference to the asset's or reporting unit's discounted cash flow value, to each asset’s carrying value or to the reporting unit's carrying value, as applicable, to determine if a write down is necessary. Such indicators include, but are not limited to, on an ongoing basis: (a) industry and market considerations such as an increased competitive environment or an adverse change in legal factors including an adverse assessment by regulators; (b) an accumulation of costs significantly in excess of the amount originally expected for the development of the asset; (c) current period operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the asset or by the reporting unit; (d) if applicable, a sustained decrease in share price; and (e) adverse research and development program results.


25


In assessing impairment, significant judgments are required by management to estimate the timing and extent of future net cash flows, appropriate discount rates, probability of program success and other estimates and assumptions that could materially affect the determination of fair value. These judgments include the use of, but are not limited to: projected results of operations and forecast net cash flows based on our corporate model as approved by our Board of Directors, third party forecasts and data and other macroeconomic indicators that forecasts market conditions and our estimated future revenues and growth. As assumptions related to the probability of program success and timing and amount of potential future cash flows related to these programs is highly uncertain due to the unpredictable nature of these programs, management risk adjusts the estimated cash flows to reflect these uncertainties.

In June 2016, we disclosed in a webcast conference presentation that we would not be filing an IND (or equivalent filing) for our cccDNA formation inhibitor in the second half of 2016, due to additional exploration of the biology of this program. We continue to enhance our knowledge of this important factor in chronic HBV infection and we remain highly committed to developing new product candidates to impact cccDNA. In July 2016, based on extensive research and analysis, we decided to discontinue our development of ARB-1598, a product candidate within our immune modulator program. As a result of these program changes we conducted impairment testing on all of our intangible asset classes which resulted in an impairment charge of $156.3 million, $109.9 million for immune modulators and $46.4 million for cccDNA sterilizers, in our statement of operations and cumulative loss for the period ended June 30, 2016.

Goodwill is subject to a two-step impairment test. The first step compares the fair value of the reporting unit to the carrying amount, which includes goodwill. If the carrying amount exceeds the implied fair value of the goodwill, the second step measures the amount of the impairment loss. As part of the impairment evaluation of goodwill, we identified only one reporting unit to which the total carrying amount of goodwill has been assigned. The impairment of certain intangible assets was considered a triggering event requiring an impairment test of goodwill at June 30, 2016. In estimating the fair value of the reporting unit and the recoverable value of the intangible assets, management prepared a discounted cash flow model using its current best estimates of future net cash flows, probability of program success, and a discount rate appropriate to the business as well as considering the Company's market capitalization. The cash-flow projections are based on forecasts developed by management that include revenue and cost projections, capital spending trends, and investment in working capital to support anticipated revenue growth. These assumptions are updated at least annually and reviewed by management. The selected discount rate considers the risk and nature of the cash flows and the rates of return market participants would require. The probability of program success is determined based on management's best estimates and includes consideration of available industry data. Our methodology for determining fair values remained consistent for the periods presented.

Based on our analysis as at June 30, 2016, the fair value of the reporting unit exceeded its carrying value and step two of the impairment test is not required. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. A hypothetical decrease in the reporting unit's fair value as at June 30, 2016 of approximately 20% could trigger an impairment of goodwill. Although we believe our assumptions are reasonable, the significant level of judgment needed to determine our assumptions, the uncertainty inherent in these assumptions and the extended time frame over which we are required to make our estimates, increases the risk that actual results will vary significantly which, increases the risk of a material goodwill impairment charge in the future. Given the dependency of our cash flow models on the successful development, production and sale of products from our existing programs, if any significant programs are unsuccessful then, excluding other possible changes in our forecasts, our estimated future cash flows will be reduced and such reduction may be significant enough to result in an impairment of the carrying value of our intangible assets and goodwill. The outcome of our programs are subject to a variety of risks, including, but not limited to, technological risk associated with IPR&D assets, dependency on regulatory approval and competitive, legal and other regulatory forces. See "Risk Factors" in our annual report on Form 10-K for additional risk factors.

At September 30, 2016, we did not identify any new indicators of impairment to intangibles or goodwill therefore a quantitative assessment was not performed.

There are no other changes to our critical accounting policies and estimates from those disclosed in our annual MD&A contained in our 2015 Annual Report filed on Form 10-K.

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 its financial position or results of operations upon adoption.


26



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The standard, as subsequently amended, is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS by creating a new Topic 606, Revenue from Contracts with Customers, a clarification of ASU 2014-09 (see above). This guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The core principle of the accounting standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. The amendments should be applied by either (1) retrospectively to each prior reporting period presented; or (2) retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. The new guidance would be effective for fiscal years beginning after December 15, 2017, which for us means January 1, 2018. We have begun our evaluation and, at this time, do not expect adoption of this guidance to materially impact our financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of the statement of cash flows. Under this update, there are five simplifications for public companies. All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Excess tax benefits should be classified along with other tax cash flows as an operating activity. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. Cash paid by an employee when directly withholding shares for tax withholding purposes should be classified as financing activity. The amendments in this update would be effective for annual periods beginning after December 15, 2016, which for the Company means January 1, 2017. Early application is permitted. We do not plan to early adopt this update. We have begun our evaluation and, at this time, do not expect adoption of this guidance to materially impact our financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities. The update 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. Topic 842 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 this update are effective for fiscal years beginning after December 15, 2018 for public business entities, which for the Company means January 1, 2019. We do not plan to early adopt this update. The extent of the impact of this adoption has not yet been determined.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Under this update, the classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in GAAP. In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The amendments in this update are effective for public business entities for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. We do not expect the update to materially impact our statement of cash flows.

SUMMARY OF QUARTERLY RESULTS

The following table presents our unaudited quarterly results of operations for each of our last eight quarters. These data have been derived from our unaudited condensed consolidated financial statements, which were prepared on the same basis as our annual audited financial statements and, in our opinion, include all adjustments necessary, consisting solely of normal recurring adjustments, for the fair presentation of such information.


27



(in millions $ except per share data) – unaudited
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
Q4
 
2016
 
2016
 
2016
 
2015
 
2015
 
2015
 
2015
 
2014
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collaborations and contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       DoD
$

 
$

 
$

 
$
(0.1
)
 
$
2.0

 
$
1.9

 
$
3.0

 
$
2.8

       Monsanto

 

 

 
3.9

 
0.3

 
0.3

 
0.2

 
0.3

       Dicerna
0.1

 

 
0.1

 
0.7

 
0.7

 
0.2

 
0.2

 
0.3

 
0.1

 

 
0.1

 
4.5

 
3.0

 
2.4

 
3.4

 
3.4

Monsanto licensing fees and milestone payments

 

 

 
7.9

 
0.7

 
0.8

 
0.8

 
0.9

Dicerna licensing fee
0.6

 
0.2

 
0.2

 
0.3

 
0.3

 
0.3

 
0.3

 
0.1

Other milestone and royalty payments

 
0.1

 
0.3

 
0.1

 
0.1

 
0.1

 
0.1

 

Total revenue
0.7

 
0.3

 
0.6

 
12.7

 
4.1

 
3.6

 
4.6

 
4.4

Expenses
(19.7
)
 
(195.6
)
 
(20.6
)
 
(24.4
)
 
(62.2
)
 
(17.9
)
 
(22.7
)
 
(15.6
)
Other income (losses)
(0.6
)
 
0.4

 
4.1

 
5.5

 
14.0

 
(0.5
)
 
6.0

 
5.0

Loss before income taxes
(19.6
)
 
(194.9
)
 
(15.9
)
 
(6.2
)
 
(44.2
)
 
(14.8
)
 
(12.1
)
 
(6.2
)
Income tax benefit

 
64.9

 

 
1.0

 
15.2

 

 

 

Net loss
(19.6
)
 
(130.0
)
 
(15.9
)
 
(5.2
)
 
(29.0
)
 
(14.8
)
 
(12.1
)
 
(6.2
)
Basic and diluted net loss per share
$
(0.37
)
 
$
(2.47
)
 
$
(0.31
)
 
$
(0.10
)
 
$
(0.57
)
 
$
(0.27
)
 
$
(0.40
)
 
$
(0.27
)

Quarterly Trends

Revenue / Our revenue is derived from research and development collaborations and contracts, licensing fees, milestone and royalty payments. Over the past two years, our principal source of ongoing revenue has been our contract with the DoD to advance TKM-Ebola which began in July 2010 and terminated in October 2015.

In Q3 2010 we signed a contract with the DoD to develop TKM-Ebola and have since incurred significant program costs related to equipment, materials and preclinical and clinical studies. These costs are included in our research, development, collaborations and contracts expenses. These costs were fully reimbursed by the DoD, and this reimbursement amount was recorded as revenue. DoD revenue from the TKM-Ebola program also compensated us for labor and overheads and provided an incentive fee. As described in our critical accounting policies in our Annual Report, we estimated the labor and overhead rates to be charged under the TKM-Ebola contract and updated these rate estimates throughout the year. In July 2015, we announced that activities had been suspended and in Q4 2015 the DoD contract was terminated. We are currently conducting contract close out procedures with the DoD.

In January 2014, we signed an Option Agreement and a Services Agreement with Monsanto for the use of our proprietary delivery technology and related intellectual property in agriculture. Over the option period, which was expected to be approximately four years, Monsanto made payments to us to maintain their option rights. In Q1 2014, we received $14.5 million of the $17.5 million near term payments, of which $4.5 million relates to research services and $10.0 million for the use of our technology. In June 2014 and October 2014, we received further payments of $1.5 million each, following the completion of specified program developments. In 2015, we received an additional $1.3 million related to research services. The payments were being recognized as revenue on a straight-line basis over the option period. In Q4 2015, we did not receive further payments from Monsanto for the continuance of research activities under the arrangement. As such, we revised our estimated option period end date to December 31, 2015, resulting in the full release of Monsanto deferred revenue and recognition of $11.8 million in Monsanto revenue in Q4 2015. In March 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of Protiva Agricultural Development Company Inc. (PADCo), for which Monsanto paid us an exercise fee of $1.0 million in Q1 2016. We recorded this receipt in Q1 2016 as Other Income.


28


In November 2014, we signed a License Agreement and a Development and Supply Agreement with Dicerna for the use of our proprietary delivery technology and related technology intended to develop, manufacture, and commercialize products related to the treatment of PH1. In Q4 2014, we received an upfront payment of $2.5 million, which is being recognized over the period over which we provide services to Dicerna. In September 2016, Dicerna announced the discontinuation of their DCR-PH1 program using our technology. As such, in Q3 2016, we recognized the remaining balance of Dicerna license fee revenue of $0.6 million, as well as other Dicerna collaboration revenue for the provision of development services.

Under our licensing and collaboration arrangements with Alnylam and Acuitas, we earn licensing fee revenue from Acuitas as well as further potential development and commercial milestones and royalties from Alnylam for the use of our LNP technology.

In 2013, we began to earn royalties from Spectrum with respect to the commercial sales of Marqibo.

Expenses / Expenses consist primarily of clinical and pre-clinical trial expenses, personnel expenses, consulting and third party expenses, reimbursable collaboration expenses, consumables and materials, patent filing expenses, facilities, stock-based compensation and general corporate costs. Impairment of intangible assets is also included in operating expenses.

Our underlying expenses have increased in the past eight quarters due to an increase in our research and development activities as we seek to move more products into the clinic. In Q4 2014, we filed a Canadian Clinical Trial Application (CTA) for ARB-1467 and received clearance to conduct a Phase I Clinical Trial, as well as initiated manufacturing of TKM-Ebola-Guinea for emergency use in West Africa. In Q1 2015, we initiated a Phase I Clinical Trial for ARB-1467 and incurred significant material costs related to the TKM-Ebola-Guinea contract with the DoD. In addition, we incurred $9.3 million in costs for professional fees related to completing the merger with Arbutus Inc. (formerly OnCore Biopharma Inc.). In Q2 2015, we incurred an incremental $2.9 million R&D expenses related to our HBV programs acquired through the merger with Arbutus Inc. In Q3 2015, we incurred $5.5 million in incremental R&D expenses primarily related to an increase in HBV and HCC clinical trial expenses due to an increase in patient enrollment and a ramp up in spending on other Arbutus Inc. HBV programs. Also in Q3 2015, we recorded an estimated impairment charge of $38.0 million as we discontinued our cyclophilin inhibitor program based on our conclusion that cyclophilins do not play a meaningful role in HBV biology. From Q4 2015 to Q 2016, we continued to incur significant R&D expense related to our HBV programs, including initiation of our ARB-1467 in Phase II clinical trials. In Q2, 2016, we recorded an impairment charge of $156.3 million for the discontinuance of the ARB-1598 program in the Immune Modulators drug class after extensive research and analysis, as well as a delay for additional exploration of the biology of the cccDNA Sterilizer drug class. Following the merger with Arbutus Inc., we have recorded to date non-cash compensation expense of $46.0 million related to the expiry of repurchase rights on shares issued as part of the consideration paid for the merger with Arbutus Inc. - see "Results of Operations".

Other income (losses) / Other income (losses) consist primarily of changes in the fair value of our warrant liability and foreign exchange gains and losses. Increases in our share price from the previous reporting date results in an increase in the fair value of our warrant liability, and vice versa.

We have recorded large foreign exchange gains and losses over the past eight quarters including a gain of $11.8 million in Q3 2015. Up until December 31, 2015, our foreign exchange gains and losses largely related to U.S. dollar cash and investment holdings and fluctuations in the U.S./Canadian dollar exchange rate. We expect to record future foreign exchange gains and losses, on conversion from the Canadian dollar, to the U.S. dollar, as the functional currency for the company changed to the U.S. dollar effective January 1, 2016. This change in functional currency results in a smaller proportion of our cash and investments being held in a foreign currency and therefore reduces the level of gains and losses we expect to record in this respect.

In Q1 2016, other income included a $1.0 million gain on disposition of financial instrument related to the option exercise fee we received from Monsanto for the acquisition of PADCo in March 2016.

Income tax benefit / Income tax benefit relates to the decrease in deferred tax liability associated with the impairment charge recorded on acquired intangible assets. In Q3 2015, we recorded $15.2 million of income tax benefit for the estimated impairment of our cyclophilin inhibitor program, OCB-030. In Q4 2015, we recorded a further $1.0 million in income tax benefit due to the revision of fair value of cyclophilins. In Q2 2016, we recorded $64.9 million in income tax benefit associated with the impairment charge recorded as described above.

Net loss / Fluctuations in our net loss are explained by changes in revenue, expenses, other income (losses) and taxes as discussed above.


29


RESULTS OF OPERATIONS
The following summarizes the results of our operations for the periods shown, in thousands (except for per share figures):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Total revenue
$
774


$
4,065

 
$
1,686

 
$
12,187

Operating expenses
19,749


62,203

 
235,886

 
102,751

Loss from operations
(18,975
)
 
(58,138
)
 
(234,200
)
 
(90,564
)
Net loss
$
(19,595
)

$
(28,982
)
 
$
(165,469
)
 
$
(55,857
)
Basic and diluted loss per share
(0.37
)

(0.57
)
 
(3.15
)
 
(1.28
)

Revenue / Revenue is summarized in the following table, in thousands:
 
Three months ended September 30,
 
2016
 
% of Total
 
2015
 
% of Total
DoD
$

 
%
 
$
2,002

 
49
%
Monsanto

 
%
 
309

 
8
%
Dicerna
87

 
11
%
 
724

 
18
%
Total collaborations and contracts revenue
87

 
11
%
 
3,035

 
75
%
Monsanto licensing fee and milestone payments

 
%
 
727

 
18
%
Dicerna licensing fee
640

 
83
%
 
263

 
6
%
Other milestone and royalty payments
47

 
6
%
 
40

 
1
%
Total revenue
$
774

 
 
 
$
4,065

 
 

 
Nine months ended September 30,
 
2016
 
% of Total
 
2015
 
% of Total
DoD
$

 
%
 
$
6,909

 
57
%
Monsanto

 
%
 
826

 
7
%
Dicerna
226

 
13
%
 
1,130

 
9
%
Total collaborations and contracts revenue
226

 
13
%
 
8,865

 
73
%
Monsanto licensing fee and milestone payments

 
%
 
2,374

 
19
%
Dicerna licensing fee
1,066

 
63
%
 
789

 
6
%
Other milestone and royalty payments
394

 
23
%
 
159

 
1
%
Total revenue
$
1,686

 
 
 
$
12,187

 
 

Revenue contracts are covered in more detail in the overview section of this discussion.

DoD revenue

In July 2015, we announced that Ebola related activities were being suspended and, in Q4 2015, we received formal notification from the DoD terminating the contract, subject to the completion of certain post-termination obligations.


30


Monsanto revenue

In January 2014, we received $14.5 million, of which $4.5 million relates to research services and $10.0 million for the use of our technology. In June and October 2014, we received payments of $1.5 million each, following the completion of specified program developments. In May and September 2015, we received $1.05 million and $0.75 million for research services. We were recognizing this revenue on a straight-line basis over the option period. As we did not receive further payments from Monsanto for the continuance of research activities under the arrangement, we revised our estimated option period end date as at December 31, 2015, resulting in the full release of Monsanto deferred revenue of $11.8 million and a total of $15.0 million in Monsanto revenue for the year ended December 31, 2015. In March 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of the Company's wholly-owned subsidiary, Protiva Agricultural Development Company. We received $1.0 million exercise fee, which has been recorded as other income for the nine-months ended September 30, 2016.

Dicerna revenue

In November 2014, we signed a License Agreement and a Development and Supply Agreement with Dicerna for the use of our proprietary delivery technology and related technology intended to develop, manufacture, and commercialize products related to the treatment of PH1. In September 2016, Dicerna announced the discontinuance of their DCR-PH1 program using our technology. As such, we have no further performance obligations related to the licensing fee and recognized licensing revenue of $0.6 and $1.1 million for the three and nine months ended September 30, 2016. In addition, we recognized collaboration revenue of $0.09 million and $0.23 million respectively for the three and nine months ended September 30, 2016 earned on material manufactured for, and services provided to, Dicerna.

Other milestone and royalty payments

Under our licensing and collaboration arrangements with Alnylam and Acuitas, we earn licensing fee revenue from Acuitas as well as further potential development and commercial milestones from Alnylam for the use of our LNP technology.

In September 2013, Spectrum announced that they had shipped the first commercial orders of Marqibo. We continue to earn royalties on the sales of Marqibo, which uses a license to our technology.

Expenses / Expenses are summarized in the following table, in thousands:
 
Three months ended September 30,
 
2016
 
% of Total
 
2015
 
% of Total
Research, development, collaborations and contracts
$
15,738

 
80
%
 
$
16,354

 
26
%
General and administrative
3,720

 
19
%
 
7,706

 
12
%
Depreciation
291

 
1
%
 
153

 
%
Acquisition costs

 
%
 

 
%
Impairment of intangible assets

 
%
 
$
37,990

 
61
%
Total operating expenses
$
19,749

 
 
 
$
62,203

 
 

 
Nine months ended September 30,
 
2016
 
% of Total
 
2015
 
% of Total
Research, development, collaborations and contracts
$
44,097

 
19
%
 
$
36,601

 
36
%
General and administrative
34,705

 
15
%
 
18,084

 
18
%
Depreciation
760

 
%
 
420

 
%
Acquisition costs

 
%
 
9,656

 
9
%
Impairment of intangible assets
156,324

 
66
%
 
37,990

 
37
%
Total operating expenses
$
235,886

 
 
 
$
102,751

 
 






31


Research, development, collaborations and contracts

Research, development, collaborations and contracts expenses consist primarily of clinical and pre-clinical trial expenses, personnel expenses, consulting and third party expenses, consumables and materials, as well as a portion of stock-based compensation and general overhead costs. R&D expenses decreased in the three months ended September 2016 as compared to the three months ended September 30, 2015 partly due to our collaboration programs with the DoD, Monsanto, and Dicerna have wound down or ended since September 30, 2015. Research and development expenses increased in the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 as we increased spending on ARB-1467 for which Phase II clinical trials were initiated in December 2015. We also continue to incur incremental costs related to an increase in activities for the research and preclinical HBV programs, focusing on advancing the development of our candidates to support future clinical combination studies. This spending on our internal programs more than offset the decrease in research and development spending on collaborative programs for the nine month period.
R&D compensation expense increased in the three and nine months ended September 30, 2016 as compared to the three and nine months ended September 30, 2015 due to an increase in the number of employees in support of our expanded portfolio of product candidates, as well as from our merger with Arbutus Inc. In addition, in the three and nine months ended September 30, 2016 we incurred a total of $3.0 million and $29.0 million respectively, of non-cash compensation expense, as compared to $5.7 million and $11.0 million for the three and nine months ended September 30, 2015, related to the expiry of repurchase rights on shares issued as part of the consideration paid for the merger with Arbutus Inc. For the three and nine months ended September 30, 2016, $1.5 million and $4.5 million has been included as part of research, development, collaborations and contracts expense, and $1.5 million and $24.5 million included as part of general and administrative expense respectively.

A significant portion of our research, development, collaborations and contracts expenses are not tracked by project as they benefit multiple projects or our technology platform and because our most-advanced programs are not yet in late-stage clinical development. However, our collaboration agreements contain cost-sharing arrangements pursuant to which certain costs incurred under the project are reimbursed. Costs reimbursed under collaborations typically include certain direct external costs and hourly or full-time equivalent labor rates for the actual time worked on the project. In addition, we have been reimbursed under government contracts for certain allowable costs including direct internal and external costs. As a result, although a significant portion of our research, development, collaborations and contracts expenses are not tracked on a project-by-project basis, we do, however, track direct external costs attributable to, and the actual time our employees worked on, our collaborations and government contracts.

General and administrative

General and administrative expenses were lower in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to a decrease in non-cash compensation expense recorded related to the expiry of repurchase rights effective Q3 2016 due to the departure of two of the four former Arbutus Inc. shareholders in June 2016. General and administrative expenses were higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due largely to an increase in compensation expense linked to our increase in employee base and incremental corporate expenses to support the growth of the Company following the completion of our merger with Arbutus Inc. This includes a cumulative non-cash compensation expense of $24.5 million we incurred related to the expiry of repurchase rights on shares issued as part of consideration paid for the merger with Arbutus Inc. (see above). The following table summarizes the non-cash compensation expense recorded related to the expiry of repurchase rights:

<
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
2016
 
2016
 
2016
 
2015
 
2015
 
2015
 
2015
Research and development
$
1.5

 
$
1.5

 
$
1.5

 
$
1.5

 
$
1.4

 
$
1.0

 
$
0.3

General and administrative
1.5

 
18.5

 
4.5

 
4.5

 
4.3

 
3.1

 
0.9

Total non-cash compensation for repurchase rights expiration
$
3.0

 
$
20.0

 
$
6.0

 
$
6.0

 
$
5.7

 
$
4.1

 
$
1.2