Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
x             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017 
OR 
o             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
 
980,597,776
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
100-8900 Glenlyon Parkway, Burnaby, BC V5J 5J8
(Address of Principal Executive Offices)
 
 
 
604-419-3200
 (Registrant’s Telephone Number, Including Area Code):
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common shares, without par value
 
The Nasdaq Stock Market LLC
 
 
 
Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 o
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
(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 o No x
As of June 30, 2017, the last business day of the registrant's most recently completed second fiscal quarter, the approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $198,187,182 (based on the closing price of $3.60 per share as reported on the NASDAQ Global Market as of that date).
As of March 6, 2018, the registrant had 55,070,037 Common Shares, no par value, outstanding. In addition, the Company had outstanding 1,164,000 convertible preferred shares, which will be mandatorily convertible into 22,589,601 common shares on October 18, 2021.  Assuming the convertible preferred shares were converted as of March 6, 2018, the Company would have had 77,659,638 common shares outstanding at March 6, 2018.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders, which the registrant intends to file pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year end of December 31, 2017, are incorporated by reference into Part III of this Form 10-K.





ARBUTUS BIOPHARMA CORPORATION
 
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







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Cautionary Note Regarding Forward-looking Statements
This annual report on Form 10-K 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 annual report include statements about Arbutus’ strategy, future operations, clinical trials, prospects and the plans of management; the composition and roles of the management team; Arbutus’ continued listing on Nasdaq; the effects of Arbutus’ products on the treatment of cancer, chronic Hepatitis B infection and other diseases; improving upon the standard of care and contributing to a curative combination treatment regimen; using a combination of HBV drug candidates to effect patient benefit and develop a potential cure; improving our regimen in terms of efficacy, tolerability, duration, and convenience; the structure and timing of a trial for ARB-1467, with interim on-treatment results from this trial are expected in the second half of 2018 followed by final results in 2019; using a combination of HBV drug candidates to effect patient benefit and develop a potential cure; intervening at different points in the viral life cycle; evaluating combinations of two or more drug candidates in cohorts of patients with chronic HBV infection; conducting Phase III clinical trials intended to ultimately support regulatory filings for marketing approval; continuing to expand our HBV pipeline through internal development, acquisitions and in-licenses; the potential of ARB-1740 to be effective at lower clinical doses than ARB-1467; an IND (or equivalent) filing for AB-423 in 2018, with results of additional preclinical studies including AB-506 drug combinations including different MOAs presented in 2018; an IND (or equivalent) filing for AB-452 in 2018, with results of additional preclinical studies including AB-452 drug combinations including different MOA presented in 2018; nominating a HBV-targeting RNAi payload as a clinical development candidate in early 2018; finding partners to enable further development of various non-HBV RNAi asset programs; continuing to explore opportunities to generate value from our LNP platform technology; first regulatory approval for patisiran estimated by second half of 2018; expected payments from Gritstone for achievement of development, regulatory, and commercial milestones, royalties, and reimbursements; site consolidation and organizational changes resulting in increased efficiency, a more flexible variable cost structure, and additional preservation of our cash reserves; LNP technology group remaining intact; reducing our global workforce by approximately 31% and closing our Burnaby, BC facility; incurring restructuring costs related to one-time employee termination benefits, employee relocation costs, and site closure costs currently estimated to be $5.0 million, which will be primarily paid in cash in the second quarter of 2018; negotiating with Roivant, on an exclusive basis, the terms and conditions of a proposal to jointly develop our LNP and GalNAc technologies; the timing and outcome of the second phase of arbitration proceedings with the University of British Columbia in connection with alleged unpaid royalties; the expected return from strategic alliances, licensing agreements, and research collaborations; the use of proceeds from Roivant to develop and advance product candidates through clinical trials, as well as for working capital and general corporate purposes; receiving payments for the Alnylam license agreement; royalty and milestone payments to Blumberg and Drexel under the license agreement; royalty and milestone payments to Enantigen’s stockholders; a potential exclusive, royalty bearing, worldwide license with Blumberg; having sufficient cash resources for at least the next 12 months; milestone payments and royalties to Arcturus under the license agreement; when we will adopt recent accounting updates, and the expected impact; Arbutus’ intent to retain earnings, if any, to finance the growth and development of their business and not to pay dividends or to make any other distributions in the near future; statements with respect to revenue and expense fluctuation and guidance; predicted tax treatment; and the quantum and timing of potential funding.
With respect to the forward-looking statements contained in this annual report, Arbutus has made numerous assumptions. While Arbutus considers 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 factors discussed in this annual report on Form 10-K, including those discussed in Item 1A of this annual report 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. We explicitly disclaim any obligation to update these forward-looking statements to reflect events or circumstances that arise after the date hereof, except as required by law.



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PART I
1. Business Overview

We are a publicly traded (Nasdaq Global Market: ABUS) therapeutic solutions company dedicated to discovering, developing and commercializing a cure for patients suffering from chronic Hepatitis B virus (HBV) infection. To pursue our strategy of developing a curative combination regimen, we have assembled an HBV pipeline consisting of multiple drug candidates with differing and complementary mechanisms of action (MOA). In addition, we have a lipid nanoparticle delivery (LNP) platform with broad applications that extend beyond HBV, and related to the LNP platform we have a royalty entitlement on a drug that may be approved later in 2018. These assets have the potential to provide significant additional capital to fund our HBV development.

HBV represents a significant unmet medical need and is the cause of the most common serious liver infection in the world. The World Health Organization (WHO) estimates that more than 250 million people worldwide are chronically infected (WHO, 2017), and other estimates suggest this could include approximately 2 million people in the United States (Kowdley et al., 2012). Individuals chronically infected with HBV are at an increased risk of developing significant liver disease, including cirrhosis, or permanent scarring of the liver, as well as liver failure and hepatocellular carcinoma (HCC) or liver cancer. According to the Hepatitis B Foundation, HBV is the cause of up to 80% of liver cancers. Individuals with liver cancer typically have a five-year survival rate of only 15%. The WHO estimates that nearly 900,000 people die every year due to the consequences of HBV disease.

Given the biology of HBV (as shown in the graphic below), 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. Therefore, we are developing multiple drug candidates, each of which have the potential to improve upon the standard of care (SOC) and contribute to a curative combination treatment regimen.


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HBV Focused Product Pipeline

Our product pipeline, like our business, is focused on finding a cure for chronic HBV infection, with the objective of developing a suite of products that intervene at different points in the viral life cycle, and have the potential to reactivate the host immune system. We are conducting preclinical combination studies to evaluate combinations of our proprietary pipeline candidates with HBV SOC therapies and with our own proprietary assets. These results support the design and execution of drug combination studies in cohorts of patients with chronic HBV infection. We expect to use these results to adaptively design clinical studies for additional cohorts of patients, testing the combination and the duration of therapy. We plan to continue this process to select a regimen to conduct Phase III clinical trials intended to ultimately support regulatory filings for marketing approval.





Our very broad pipeline of HBV product candidates includes: our lead RNA Interference (RNAi) asset ARB-1467; two capsid assembly inhibitor programs, our first-generation asset AB-423, and a next-generation candidate AB-506; our novel HBV DNA Destabilizer AB-452 candidate; and multiple preclinical agents in development.

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We will continue to expand our HBV pipeline through internal discovery and development and possibly 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. For more information about this agreement please refer to the “Strategic Alliances, Licensing Agreements, and Research Collaborations” section of this annual report on Form 10-K below.

RNAi (ARB-1467)

The development of RNAi drugs allows for a completely novel approach to treating disease, which is why RNAi is considered one of the most promising and rapidly advancing frontiers in drug discovery. There are a number of RNAi products currently advancing in human clinical trials. RNAi products are broadly applicable as they can eliminate the production of disease-causing or disease-associated proteins from cells, creating opportunities for therapeutic intervention that have not been achievable with conventional drugs. Our extensive experience in antiviral drug development has been applied to our RNAi program to develop therapeutics for chronic HBV infection. Although small molecule nucleot(s)ide analog (NA) therapy has been the SOC for chronic HBV infected patients, many of these patients continue to express a viral protein called HBV surface antigen (HBsAg). This protein causes inflammation in the liver and is believed to be responsible for preventing the host immune system from clearing the viral infection.

Our RNAi HBV candidate, ARB-1467, is designed to block production of all the viral proteins including 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 being developed as a multi-component (3-trigger) 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 messenger RNA (mRNA) transcripts and viral antigens across a broad range of HBV genotypes and reduce the risk of developing antiviral resistance.


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In preclinical models, ARB-1467 treatment resulted in reductions in intrahepatic and serum HBsAg, HBV DNA, covalently closed circular 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 in healthy adult subjects. In the Phase I SAD study, dosing healthy volunteer subjects was well-tolerated to a dose of 0.4 mg/kg. The maximum tolerated dose was not determined.

The Phase II trial was a multi-dose study in virally suppressed (NA therapy) patients with chronic HBV. The study enrolled 4 cohorts and explored two doses of ARB-1467 (0.2 and 0.4 mg/kg) at two dose frequencies (monthly and bi-weekly) in two patient populations (HBeAg-negative and positive patients). Cohorts 1, 2, and 4 enrolled HBeAg- patients and Cohort 3 enrolled HBeAg+ patients. The first three cohorts each enrolled eight subjects; six received three monthly doses of ARB-1467, and two received placebo. Cohort 4 enrolled twelve patients, all of whom received five bi-weekly doses of ARB-1467, followed by monthly dosing if pre-defined criteria were met. ARB-1467 was administered at 0.2 mg/kg in Cohort 1 and 0.4 mg/kg in Cohorts 2, 3, and 4. Overall, treatment was well tolerated across all cohorts (Cohorts 1, 2, 3, and 4).

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Results from monthly doses in Cohorts 1, 2 and 3 demonstrated a significant reduction in serum HBsAg and a step-wise, additive reduction in serum HBsAg with each subsequent dose. The HBsAg reduction achieved after three monthly doses of 0.4mg/kg in Cohort 2 was greater than that seen at 0.2 mg/kg in Cohort 1, demonstrating a dose-response seen with repeat dosing. We observed no significant differences in serum HBsAg reductions between HBeAg-negative and HBeAg-positive patients. In Cohort 4, five doses of ARB-1467 were administered on a bi-weekly dosing schedule. Results after 5 doses of bi-weekly administration demonstrated a deeper reduction in HBsAg levels compared to the results observed during the monthly administration, with a mean reduction of 1.4 log10 and a maximum reduction of -2.7 log10 drop. Seven of the twelve patients met the predefined response criteria (a reduction greater than 1 log10 and HBsAg levels < 1000 IU/ml) at or before day 71. Five of the seven patients who met the response criteria had their serum HBsAg reduced to low absolute levels (below 50 IU/mL). Results for the extension suggested that monthly dosing was not sufficient to maintain or improve upon these reductions in HBsAg levels so this approach was discontinued and new studies combining the bi-weekly administration of ARB 1467 have been initiated.











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ARB-1467 Bi-weekly vs. Monthly Dosing
HBsAg Mean Log Change from Baseline
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We are in the process of initiating a 30-day triple combination study of our RNAi agent ARB-1467 with current SOC NA and pegylated interferon (PegIFN) therapy in treatment naïve patients, to determine if this regimen will result in patients reaching undetectable HBV DNA and HBsAg levels. The Phase II triple combination trial is a 30-week multi-dose study in HBV DNA positive chronic HBV patients. The trial will enroll 20 HBeAg- patients who will receive bi-weekly doses of ARB-1467 at 0.4 mg/kg and daily oral tenofovir (TDF) NA doses for 30 weeks. Predefined treatment responders at 6 weeks will qualify for the addition of weekly PegIFN treatment, while continuing to receive bi-weekly doses of ARB-1467 and daily doses of TDF for the remaining 24 weeks. Patients will be followed for 24 weeks after the treatment period concludes. Interim on-treatment results from this trial are expected in the second half of 2018 followed by final results in 2019. This combination treatment has the potential to result in HBV DNA and HBsAg loss in patients. If these endpoints prove to be durable in a significant proportion of patients this would put this Arbutus therapeutic on a potential late stage development and approval pathway.

ARB-1467 Phase II Combination Study Clinical Design

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RNAi (ARB-1740)

Our second-generation RNAi HBV candidate, ARB-1740, was chemically distinct from ARB-1467 (comprising variations to the trigger sequences) and employed the same LNP formulation as ARB-1467. In preclinical studies, ARB-1740 demonstrated greater potency over ARB-1467, therefore had the potential to be effective at lower clinical doses than ARB-1467. In early 2017, we initiated a Phase II MAD study with ARB-1740 that dosed HBV patients in two cohorts to enable a clinical potency comparison between ARB-1467 and ARB-1740. While ARB-1740 posed no safety concerns, the lack of a significant potency advantage led us to discontinue any further development of ARB-1740 and continue to invest in the development of our more clinically advanced RNAi agent ARB-1467.


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Capsid Inhibitors (AB-423 & AB-506)

HBV core protein, which assembles into the HBV capsid, is required for viral replication and may have a role in cccDNA formation. Current NA 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 that will fully 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.

Preclinical studies have shown that our first-generation capsid inhibitor AB-423 is a pan-genotypic, HBV selective agent with a dual MOA. It inhibits pgRNA encapsidation resulting in potent and highly selective inhibition of HBV replication. AB-423 also inhibits cccDNA formation via inhibition of the capsid uncoating step. Combination of AB-423 with ARB-1467 results in additive activity compared to each agent alone. Furthermore, we demonstrated that a combination of AB-423 with an RNAi agent (ARB-1740) showed synergistic activity against HBV rcDNA in vitro, as well as inhibition of HBV DNA and serum HBsAg in in vivo models. In an HBV mouse model, triple combinations consisting of AB-423+RNAi (ARB-1740) with entecavir (ETV) or PegIFN provide the greatest reduction in serum HBV DNA and the RNAi further increased host response when added to AB-423+PegIFN supporting the hypothesis that HBV antigen removal may promote immune recognition and viral clearance.

In 2017, AB-423 was evaluated in a Phase I SAD and MAD trial designed to assess the safety, tolerability, and pharmacokinetics (PK) of oral administration of our lead capsid inhibitor asset in healthy volunteers. We presented clinical data at the American Association for the Study of Liver Diseases (AASLD) annual meeting in October 2017 in a presentation titled, "Single Dose Safety, Tolerability and Pharmacokinetics of AB-423 in Healthy Volunteers from the ongoing Single and Multiple Ascending Dose Study AB-423-001," which showed that AB-423 was well-tolerated with no serious adverse events following single doses up to 800 mg. Multiple doses up to 400 mg twice daily were also well tolerated.

In addition to AB-423, our capsid inhibitor discovery effort generated promising back-up compounds in 2017, which led to the nomination of a next-generation capsid inhibitor AB-506 for Investigational New Drug (IND)/Clinical Trial Authorization (CTA)-enabling studies. AB-506 is a highly selective capsid inhibitor that has shown striking potency and improved PK in preclinical studies. We presented these preclinical data at AASLD annual meeting in October 2017 in a presentation titled, "Antiviral Characterization of a Next Generation Chemical Series of HBV Capsid Inhibitors In Vitro and In Vivo," which showed potent inhibition of HBV replication and pgRNA encapsidation, an accelerated rate of capsid assembly, and binding to the HBV core protein at the dimer:dimer interface that indicates improved target engagement compared to first generation capsid inhibitors.

We will continue to focus on rapidly advancing AB-506 into clinical testing before proceeding with additional clinical evaluation of AB-423. We plan to file an Investigational New Drug (IND)/Clinical Trial Application (CTA) in mid-2018 (pending successful IND/CTA-enabling studies) for AB-506, which has the potential to be a 'best-in-class' capsid inhibitor based on its favorable drug-like properties and potent inhibition of HBV replication. This molecule has the potential for once-daily oral dosing, making it an ideal candidate for inclusion in a combination regimen. Results from additional preclinical studies of AB-506 drug combinations with compounds acting through different mechanisms, will be presented in 2018. Based on comparative clinical data, we will select one of its capsid inhibitors for development as part of a proprietary drug combination.

HBV RNA Destabilizer (AB-452)

In addition to our established clinical programs, we have a number of research programs aimed at the discovery and development of proprietary HBV antivirals with different and complementary MOAs. One of our most advanced preclinical programs is an HBV RNA Destabilizer AB-452 (formerly known as our oral HBsAg inhibitor program), which has novel activity in destabilizing HBV RNA, broad activity against HBV RNAs, and reduces HBsAg. We presented these preclinical data at AASLD annual meeting in October 2017 in a presentation titled, "Identification and Characterization of AB-452, a Potent Small Molecule HBV RNA Destabilizer In Vitro and In Vivo," which showed that AB-452 has shown synergistic effects when combined with two of Arbutus’ proprietary HBV RNAi agents in vitro. In vivo, twice-a-day oral administration of AB-452 resulted in up to 1.4 log10 reduction of serum HBsAg in a dose dependent manner and correlated well with liver HBV RNA levels. This molecule has the potential for once daily, oral dosing. Pending successful IND/CTA-enabling studies, this product candidate could be the subject of an IND (or equivalent) filing in 2018. Results of additional preclinical studies including AB-452 drug combinations with different MOA will be presented in 2018.


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Research Programs

In addition to our clinical candidates, we have a number of research programs aimed at discovery and development of proprietary HBV candidates with different and complementary MOAs. We have also made progress in developing a proprietary N-Acetylgalactosamine (GalNAc) conjugate technology to enable subcutaneous delivery of an RNAi therapeutic targeting HBsAg and/or other HBV targets. We have designed a number of highly potent HBV-targeting RNAi payloads for use with our proprietary GalNAc conjugate platform to enable subcutaneous delivery. In preclinical models, our molecules display acute knockdown of viral proteins and a duration of effect that is highly competitive in the field. We observe a significant dose response and a stepwise reduction in viral proteins when multi-dosing. We expect to nominate a clinical development candidate in early 2018. We also have ongoing discovery efforts focused on cccDNA targeting and checkpoint inhibition.

Proprietary Lipid Nanoparticle (LNP) Drug 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 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 that can then successfully mediate nucleic acid-based therapies.

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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 with repeat dose administration for over 3 years. We are the leaders in LNP delivery and hold a dominant intellectual property position in this field. We have applied our extensive technical expertise and clinical experience gained from our LNP-based programs to further advance our platform technology and its broad application to mRNA delivery. We last presented LNP in vivo data at EuroTIDES in November 2017, showing potent LNP-enabled delivery of mRNA with very high and persistent expression levels.

In October 2017, we signed a licensing agreement with Gritstone Oncology for the development of their RNA-based neoantigen immunotherapy products (see Strategic Alliances, Licensing Agreements, and Research Collaborations) and continue to explore opportunities to generate further value from our LNP platform technology, which is well suited to delivery therapies based on RNAi, mRNA, and gene editing constructs.

In February 2018, we entered into an exclusive negotiating period with Roivant Sciences Ltd. (Roivant), during which we are negotiating the terms of a proposal and a structure to jointly develop Arbutus' LNP and GalNAc delivery technologies with Roivant. More information can be found under the “Reorganization” section of this annual report.


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Suspended Non-HBV RNAi Assets

We are focused 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. These programs are available for partnership to enable further development. Our non-HBV assets include:
LNP-based product candidates TKM-PLK1 for oncology, GI-NET, ACC, and HCC
LNP-based product candidates TKM-Ebola and TKM-Marburg for hemorrhagic fever viruses;
TKM-HTG for metabolic disorders; and,
TKM-ADLH for severe alcohol use disorder.

Partner Programs

Patisiran (ALN-TTR02)

Alnylam Pharmaceuticals, Inc., or Alnylam (Nasdaq: ALNY), 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 our LNP has been well tolerated and efficacy maintained with long term (>36 months) treatment.

Patisiran is Alnylam`s most clinically advanced RNAi therapeutic in development, targeting transthyretin (TTR) for the treatment of TTR-mediated amyloidosis (ATTR) in patients with FAP. In September 2017, Alnylam successfully completed its APOLLO Phase III clinical trial of LNP-enabled patisiran, which initiated in November 2013. Results showed that patisiran met its primary efficacy endpoint and all secondary endpoints in this trial. As a result, Alnylam completed a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) and a Marketing Authorisation Application (MAA) to the European Medicines Agency (EMA) for patisiran and first regulatory approval, which Alnylam has estimated by second half of 2018. We are entitled to low-to-mid single-digit royalty payments escalating based on sales performance as Alnylam’s LNP-enabled products are commercialized, therefore we could receive our first royalty payments in the second half of 2018.
 
Gritstone Oncology

In October 2017, we entered into a license agreement with Gritstone Oncology, or Gritstone, that granted them worldwide access to our portfolio of proprietary and clinically validated LNP products and associated intellectual property to deliver Gritstone’s RNA-based neoantigen immunotherapy products. Gritstone paid us an upfront payment, and will make payments for achievement of development, regulatory, and commercial milestones, royalties, and will reimburse us for conducting technology development and providing manufacturing and regulatory support for Gritstone’s product candidates.

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., or Spectrum, launched Marqibo through its existing hematology sales force in the United States. Spectrum has ongoing trials evaluating Marqibo in two additional indications, which are Pediatric ALL and Non-Hodgkin’s lymphoma. We are receiving mid-single digit royalty payments based on Marqibo’s commercial sales.

Alexion Pharmaceuticals Inc.

In March 2017, we entered into a license agreement with Alexion Pharmaceuticals, Inc., or Alexion (Nasdaq:ALXN), that granted them exclusive use of our proprietary LNP technology in one of Alexion's rare disease programs. Under the terms of the license agreement, Alexion paid us $7.5 million upfront, and was set to pay $75 million for achievement of development, regulatory, and commercial milestones, as well as single digit royalties. Arbutus conducted technology development and provided manufacturing and regulatory support. In July 2017, Alexion terminated its LNP licensing agreement with Arbutus driven by a strategic review of Alexion’s business and research and development portfolio, which included a decision to discontinue development of mRNA therapeutics. The preclinical work completed during this period enabled refinement of the LNP formulation process for mRNA development at a larger scale.

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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. We terminated the agreement with Dicerna in November 2016.  More information about our licensing agreement with Dicerna can be found under the “Strategic Alliances, Licensing Agreements, and Research Collaborations” section of this annual report.

Strategic Alliances, Licensing Agreements, and Research Collaborations

Acuitas Therapeutics Inc.

Consistent with the terms of the settlement agreement signed in November 2012, we finalized and entered a cross-license agreement with Acuitas Therapeutics Inc., or Acuitas in December 2013. The terms of the cross-license agreement provide Acuitas with access to certain of our earlier IP generated prior to mid-April 2010 in the fields of gene replacement therapy and antisense. Acuitas may only grant access to our LNP technology to its partners if it is part of a product sublicense. At the same time, the terms provide us with certain access to Acuitas’ technology and licenses in the RNAi field, along with a percentage of each milestone and royalty payment with respect to certain products. Acuitas has agreed that it would not compete in the RNAi field for a period of five years, ending in November 2017. Arbutus considered Acuitas to be in material breach of their cross-license agreement and in February 2018, Arbutus and Acuitas reached a settlement terminating Acuitas’ right to further use or sublicense Arbutus' LNP technology. Please refer to "Item 3. Legal Proceedings" for additional information.

Merck & Co., Inc. and Alnylam License Agreement

As a result of the settlement between Protiva Biotherapeutics, Inc. (Protiva), and Merck & Co., Inc. in 2008, we acquired a non-exclusive royalty-bearing world-wide license agreement with Merck. Under the license, Merck will pay up to $17 million in milestones for each product they develop covered by our IP, except for the first product for which Merck will pay up to $15 million in milestones, and will pay royalties on product sales. Merck’s license rights are limited to patents that Protiva filed, or that claim priority to one of Protiva’s patents that was filed, before October 9, 2008. Merck does not have rights to Protiva patents filed after October 9, 2008 unless they claim priority to a patent filed before that date. On March 6, 2014, Alnylam announced that they acquired all RNAi related assets and licenses from Merck, which included our license agreement.

Dicerna Pharmaceuticals, Inc.

In November 2014, we signed a licensing agreement and a development and supply agreement with Dicerna to license our third generation LNP delivery technology for exclusive use in Dicerna's PH1 development program (DCR-PH1). Dicerna's product incorporates its DsiRNA molecule, for the treatment of PH1, a rare, inherited liver disorder that often results in kidney failure and for which there are no approved therapies. Under the agreements, Dicerna paid Arbutus $2.5 million upfront with $22 million in aggregate in potential development milestones, plus a mid-single-digit royalty on future PH1 sales. This partnership also included a supply agreement under which we would provide clinical drug supply and regulatory support for the rapid advancement of this product candidate. Dicerna announced the discontinuation of its DCR-PH1 program in September 2016, and we terminated the agreement with Dicerna in November 2016.

Monsanto Company

In January 2014, we signed an Option Agreement and a Service Agreement with Monsanto Company, or Monsanto, and granted Monsanto an option to obtain a license to use our proprietary LNP delivery technology. Following the completion of the Phase A extension period in October 2015, no further research activities were conducted under the arrangement, as Monsanto did not elect to proceed to Phase B of the research plan. On March 4, 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of Protiva Agricultural Development Company Inc., or PADCo, and PADCo is no longer an indirect wholly owned subsidiary of us. In connection with Monsanto’s exercise of its option, on March 4, 2016, we entered into an amended Option Agreement. We also entered into an amended Service Agreement on March 4, 2016 to give effect to the grant back to Protiva of new intellectual property created by Monsanto in connection with the exercise of its option. In addition, we entered into an amended License and Services Agreement to recognize Monsanto’s early exercise of option before Protiva’s completion of Phases B and C, and introduce a new Technology Transfer Completion Criteria through the amended Option Agreement.

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Spectrum Pharmaceuticals, Inc.

In September 2013, we announced that our licensee, Spectrum, had launched Marqibo® through its existing hematology sales force in the United States. Since then commercial sales have occurred. Arbutus is receiving mid-single digit royalty payments based on Marqibo®’s commercial sales. Marqibo®, which is a novel sphingomyelin/cholesterol liposome-encapsulated formulation of the FDA-approved anticancer drug vincristine, was originally developed by Arbutus. We out-licensed the product to Talon Therapeutics in 2006, and in July 2013, Talon was acquired by Spectrum. 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. Spectrum has ongoing trials evaluating Marqibo® in two additional indications, which are: Pediatric ALL and Non-Hodgkin’s lymphoma.

Marina Biotech, Inc. /Arcturus Therapeutics, Inc.

 In November 2012, we disclosed that we had obtained a worldwide, non-exclusive license to a novel RNAi trigger technology called Unlocked Nucleobase Analog (UNA) from Marina Biotech Inc., or Marina, for the development of RNAi therapeutics. UNAs can be incorporated into RNAi drugs and have the potential to improve them by increasing their stability and reducing off-target effects. In August 2013, Marina assigned its UNA technology to Arcturus Therapeutics, Inc., or Arcturus, and the UNA license agreement between us and Marina was assigned to Arcturus. The terms of the license are otherwise unchanged.

U.S. National Institutes of Health

On October 13, 2010 we announced that together with collaborators at the University of Texas Medical Branch (UTMB), we were awarded a new NIH grant, worth $2.4 million, to support research to develop RNAi therapeutics to treat Ebola and Marburg hemorrhagic fever viral infections using our LNP delivery technology. In February 2014, we along with UTMB and other collaborators were awarded additional funding of $3.4 million over five years from the NIH in support of this research.

University of British Columbia

Certain early work on LNP delivery systems and related inventions was undertaken at the University of British Columbia, or UBC. These inventions are licensed to us by UBC under a license agreement, initially entered in 1998 as amended in 2001, 2006 and 2007. We have granted sublicenses under the UBC license to Alnylam as well as to Spectrum (Talon Therapeutics Inc., acquisition). Alnylam has in turn sublicensed back to us under the licensed UBC patents. In mid-2009, we and our subsidiary Protiva entered into a supplemental agreement with UBC, Alnylam and Acuitas Technologies, Inc., in relation to a separate research collaboration to be conducted among UBC, Alnylam and Acuitas to which we have license rights. The settlement agreement signed in late 2012 to resolve the litigation among Alnylam, Acuitas, Arbutus and Protiva provided for the effective termination of all obligations under such supplemental agreement as between and among all litigants. UBC filed a demand for arbitration against us for allegedly unpaid royalties based on publicly available information, and an unspecified amount based on non-public information. Please refer to "Item 3. Legal Proceedings" for additional information.

Cytos Biotechnology Ltd.

On December 30, 2014, Arbutus Inc., our wholly owned subsidiary, 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 from Cytos Biotechnology Ltd., or Cytos. The licensed compounds included Qbeta-derived virus-like particles that encapsulate TLR9, TLR7 or RIG-I agonists that may or may not be conjugated with antigens from the hepatitis virus or other licensed viruses. In partial consideration for this license, we would pay Cytos up to a total of $67 million 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 million 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 August 2016, we discontinued the TLR9 development program based on significant levels of research and analysis, and provided notice of termination of the license agreement with Cytos. This termination became effective in November 2016.


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The Baruch S. Blumberg Institute and Drexel University

In February 2014, Arbutus Inc., our wholly owned subsidiary, entered into a license agreement with The Blumberg S. Blumberg Institute, or Blumberg, and Drexel University, or Drexel, that granted an exclusive (except as to certain know-how and subject to retained non-commercial research rights), 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. No warrants were outstanding as at the date Arbutus merged with Arbutus Inc. Under this license agreement, Arbutus Inc. also agreed to pay up to $3.5 million in development and regulatory milestones per licensed compound series, up to $92.5 million 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. We are obligated to pay Blumberg and Drexel a double-digit percentage of all amounts received from the sub-licensees, subject to customary exclusions.

In November 2014, Arbutus Inc. entered into an additional license agreement with Blumberg and Drexel pursuant to which it received an exclusive (subject to retained non-commercial research rights), 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, we will be required to pay up to $1.0 million 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. We are also obligated to pay Blumberg and Drexel a double-digit percentage of all amounts received from its sub-licensees, subject to exclusions.

License Agreements between Enantigen and Blumberg and Drexel

In October 2014, Arbutus Inc., our wholly owned subsidiary, acquired all of the outstanding shares of Enantigen Therapeutics, Inc., or 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 our merger with Arbutus Inc.

Under the stock purchase agreement, we agreed to pay up to a total of $21.0 million to Enantigen’s selling stockholders upon the achievement of specified development and regulatory milestones, for the first two products that contain either a capsid compound, or a HBV surface antigen compound that is covered by a patent acquired under this agreement; or a capsid compound from an agreed upon list of compounds. The amount paid could be up to a total of $102.5 million in sales performance milestones in connection with the sale of the first commercialized product by us for the treatment of HBV, regardless of whether such product is based upon assets acquired under this agreement; and low single digit royalty on net sales of such first commercialized HBV product, up to a maximum royalty payment of $1.0 million that, if paid, would be offset against our milestone payment obligations.

Under the stock purchase agreement, we also agreed that Enantigen would fulfill its obligations as they relate to the three patent license agreements with Blumberg and Drexel. Pursuant to each patent license agreement, Enantigen is obligated to pay Blumberg and Drexel up to approximately $500,000 in development and regulatory milestones per licensed product, royalties in the low single digits, and a percentage of revenue it receives from its sub-licensees.

Research Collaboration and Funding Agreement with Blumberg

In October 2014, Arbutus Inc., our wholly owned subsidiary, entered into a research collaboration and funding agreement with Blumberg under which we will provide $1,000,000 per year of research funding for three years, renewable at our option for an additional three years, for Blumberg to conduct research projects in HBV and liver cancer. Blumberg has exclusivity obligations to us with respect to HBV research funded under the agreement. In addition, we have 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 us the right to obtain an exclusive, royalty bearing, worldwide license to any intellectual property generated by any funded research project. If we elect to exercise the right to obtain such a license, we 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.


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On June 5, 2016, we entered into an amended and restated research collaboration and funding agreement with Blumberg, 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 us 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

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-030). In 2015, we discontinued the OCB-030 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.

Financial Information

For financial information about our Company, please see Item 8. Financial Statements and Supplementary Data.

Patents and Proprietary Rights

Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our drug candidates, novel discoveries, product development technologies and other know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing or in licensing U.S. and foreign patents and patent applications related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business. We also rely on trademarks, trade secrets, know how, continuing technological innovation and potential in licensing opportunities to develop and maintain our proprietary position.

In addition to our proprietary expertise, we own a portfolio of patents and patent applications directed to HBV cccDNA formation inhibitors, HBV core/capsid protein assembly inhibitors, HBV surface antigens secretion inhibitors, HBV cccDNA epigenetic modifiers, STING agonists, LNP inventions, LNP compositions for delivering nucleic acids such as mRNA and siRNA, the formulation and manufacture of LNP-based pharmaceuticals, chemical modification of RNAi molecules, and RNAi drugs and processes directed at particular disease indications. A large number of patent applications filed with the US and European Patent Offices have been granted. In the US our patents might be challenged by interference or opposition proceedings. In Europe, upon grant, a period of nine months is allowed for notification of opposition to such granted patents.  If our patents are subjected to interference or opposition proceedings, we would incur significant costs to defend them. Further, our failure to prevail in any such proceedings could limit the patent protection available to our therapeutic HBV programs or RNAi platform, including our product candidates.

We have a portfolio of around 125 patent families, in the U.S. and abroad, that are directed to our therapeutic HBV product candidates and various aspects of LNPs and LNP formulations. The portfolio includes over 100 issued patents throughout the world, and an extensive portfolio of pending patent applications, including the following patents and applications in the United States and Europe (1):


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Subject Matter
Status
Expiration
Date*
LNP Compositions and Methods of Use (siRNA)
U.S. Pat. No. 7,982,027; applications pending in other jurisdictions
2024
LNP Compositions (interferingRNA)
U.S. Pat. No. 7,799,565; patents issued in other jurisdictions
2025
LNP Compositions (Nucleic Acid)
U.S. Pat. Nos. 8,058,069; 8,492,359 and 8,822,668; applications pending in other jurisdictions
2029
LNP Compositions and Methods of Use (PLK-1)
U.S. Pat. No.8,283,333; applications pending in other jurisdictions
2030
LNP Compositions (Nucleic Acid)
U.S. Pat. No. 9,006,417
2031
LNP
Manufacturing Process
U.S. Pat. Nos. 7,901,708 and 8,329,070; European Pat. Nos. 1519714 and 2338478; application pending in the U.S.
2023
LNP
Manufacturing Process
U.S. Pat. No. 9,005,654; application pending in Europe
2026
Lipid Compositions
U.S. Pat. No. 7,745,651; European Pat. No. 1781593; application pending in the U.S.
2025
Lipid Compositions
U.S. Pat. Nos. 7,803,397 and 8,936,942; European Pat. No. 1664316
2024
Modified siRNA Compositions
U.S. Pat. Nos. 8,101,741, 8,188,263 and 9,074,208; applications pending in other jurisdictions
2026
Modified siRNA Compositions
U.S. Pat. No. 7,915,399
2027
siRNA and LNP Compositions (Ebola Virus)
U.S. Pat. No. 7,838,658
2026
siRNA and LNP Compositions and Methods of Treatment (Ebola Virus)
U.S. Pat. No. 8,716,464
2030
siRNA and LNP Compositions (PLK1)
U.S. Pat. No. 9,006,191; European Pat. No. 2238251
2028
Immunostimulatory Compositions, Methods of Use and Production
U.S. Pat. No. 8,691,209; European Pat. No. 1450856
2022
siRNA and LNP Compositions (HBV)
Patent applications pending in U.S. and other jurisdictions
2035
HBV Capsid Assembly Inhibitor Compositions and Methods of Treatment
Patent applications pending in U.S. and other jurisdictions
2032
Non-Liposomal Systems For Nucleic Acid Delivery
U.S. Pat. No. 9,518,272
2031
Lipid Compositions For Nucleic Acid Delivery
U.S. Pat. No. 9,504,651
2023
(1)
Patent information current as of March 6, 2018.
* Once issued, the term of a US patent first filed after mid-1995 generally extends until the 20th anniversary of the filing date of the first non-provisional application to which such patent claims priority. It is important to note, however, that the United States Patent & Trademark Office, or USPTO, sometimes requires the filing of a Terminal Disclaimer during prosecution, which may shorten the term of the patent. On the other hand, certain patent term adjustments may be available based on USPTO delays during prosecution. Similarly, in the pharmaceutical area, certain patent term extensions may be available based on the history of the drug in clinical trials. We cannot predict whether or not any such adjustments or extensions will be available or the length of any such adjustments or extensions.

Scientific Advisers

We seek advice from our scientific advisory board, which consists of a number of leading scientists and physicians, on scientific and medical matters. The current members of our scientific advisory board are:


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Name
 
Position(s)/Institutional Affiliation(S)
Adrian Di Bisceglie, MD
 
Professor of Internal Medicine and Chairman of the Department of Medicine at St Louis University, St Louis University School of Medicine, Chief of Hepatology
Charlie Rice, Ph.D.
 
Maurice and Corinne Greenberg Professor in Virology, Rockefeller University
Scott Biller, Ph.D.
 
Chief Scientific Officer at Agios Pharmaceuticals
Ulrike Protzer, Ph.D.
 
Director, Institute of Virology, Technische Universität München / Helmholtz Zentrum München - German Center for Environmental Health
Fabien Zoulim, MD, Ph.D.
 
Professor of Medicine, Lyon University, Head of Hepatology Department, Hospices Civils de Lyon
Kyong-Mi Chang
 
Associate Professor of Medicine, Division of Gastroenterology, University of Pennsylvania Perelman School of Medicine

Site Consolidation

On February 8, 2018, we announced a site consolidation and organizational restructuring to better align our HBV business in Warminster, PA. These organizational changes are expected to result in increased efficiency, a more flexible variable cost structure, and additional preservation of our cash reserves. Our LNP technology group will remain intact.

To achieve this alignment, we will reduce our global workforce by approximately 35% and plan to close our Burnaby, BC facility. We will incur restructuring costs related to one-time employee termination benefits, employee relocation costs, and site closure costs currently estimated to be $5.0 million, which will be primarily paid in cash in the second quarter of 2018.

On February 14, 2018, we announced that we have entered into an exclusivity agreement with Roivant (Exclusivity Agreement) providing for a period that expires on March 15, 2018. Pursuant to the Exclusivity Agreement, during this period, we agree to negotiate with Roivant, on an exclusive basis, the terms and conditions of a proposal to jointly develop our LNP and GalNAc technologies, There are no assurances that we will reach an agreement with Roivant regarding any such transaction or that any such transaction will be consummated.
As a result of our site consolidation we expect to reduce our workforce by approximately 31%.

Employees

At December 31, 2017, Arbutus had 130 employees, 92 of whom were engaged in research and development. None of our employees are represented by a labor union or covered by a collective bargaining agreement, nor have we experienced any work stoppages. We believe that relations with our employees are good.

Corporate Information

     Arbutus Biopharma Corporation (“Arbutus”, “we”, “us”, and “our”) is a publicly traded industry-leading therapeutic solutions company focused on discovering, developing and commercializing a cure for patients suffering from chronic HBV infection.

Arbutus was incorporated pursuant to the British Columbia Business Corporations Act, or BCBCA, on October 6, 2005, and commenced active business on April 30, 2007, when Arbutus and its parent company, Inex Pharmaceuticals Corporation, or Inex, Inex, were reorganized under a statutory plan of arrangement (the Plan of Arrangement) completed under the provisions of the BCBCA. The Plan of Arrangement saw Inex’s entire business transferred to and continued by Arbutus.

On March 4, 2015, we completed a business combination pursuant to which Arbutus Inc. (formerly known as OnCore Biopharma, Inc., or OnCore), became our wholly-owned subsidiary. This combined company intends to focus on developing a curative regimen for HBV patients by combining multiple therapeutic approaches.

Effective July 31, 2015, our corporate name changed from Tekmira Pharmaceuticals Corporation to Arbutus Biopharma Corporation. Also effective July 31, 2015, the corporate name of our wholly owned subsidiary, OnCore Biopharma, Inc. changed to Arbutus Biopharma, Inc. (“Arbutus Inc.”). We have two wholly owned subsidiary: Arbutus Inc.and Protiva Biotherapeutics Inc. (“Protiva”). Effective January 1, 2018, Protiva was amalgamated with Arbutus. Unless stated otherwise or the context otherwise requires, references herein to “Arbutus”, “we”, “us” and “our” refer to Arbutus Biopharma Corporation, and, unless the context requires otherwise, one or more subsidiaries through which we conduct business.


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Arbutus’ head office and principal place of business is located at 100-8900 Glenlyon Parkway, Burnaby, British Columbia, Canada, V5J 5J8 (telephone: (604) 419-3200). The Company’s registered and records office is located at 700 West Georgia St, 25th Floor, Vancouver, British Columbia, Canada, V7Y 1B3. Arbutus has US operations located at 701 Veterans Circle, Warminster, Pennsylvania, USA, 18974.

Investor Information

We are a reporting issuer in Canada under the securities laws of each of the Provinces of Canada. Arbutus’ common shares trade on the Nasdaq Global Market under the symbol “ABUS”. We maintain a website at http://www.arbutusbio.com. The information on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered to be a part of this annual report on Form 10-K. Our website address is included in this annual report on Form 10-K as an inactive technical reference only. Our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, including our annual reports on Form 10-K (annual reports on Form 20-F up to year ended December 31, 2012), our quarterly reports on Form 10-Q (quarterly reports on Form 6-K up to quarter-ended September 30, 2013) and our current reports on Form 8-K, and amendments to those reports, are accessible through our website, free of charge, as soon as reasonably practicable after these reports are filed electronically with, or otherwise furnished to, the SEC. We also make available on our website the charters of our audit committee, executive compensation and human resources committee and corporate governance and nominating committee, whistleblower policy, insider trading policy, corporate disclosure policy, related persons transactions policy and majority voting policy, as well as our code of business conduct and ethics for directors, officers and employees. In addition, we intend to disclose on our web site any amendments to, or waivers from, our code of business conduct and ethics that are required to be disclosed pursuant to the SEC rules.

You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding Arbutus and other issuers that file electronically with the SEC. The SEC’s website address is http://www.sec.gov.

Executive Officers of the Registrant

Set forth below is information about our executive officers, as of March 15, 2018.
Name
 
Age
 
Position(s)
Mark Murray
 
69
 
President and Chief Executive Officer, and Director
Michael Sofia
 
60
 
Chief Scientific Officer
William Symonds
 
50
 
Chief Development Officer and Director
Peter Lutwyche
 
52
 
Chief Technology Officer
Elizabeth Howard
 
64
 
Executive Vice President and General Counsel
Koert VandenEnden1
 
39
 
Interim Chief Financial Officer
(1)
Bruce Cousins' employment with the Company ended on February 16, 2018. Koert VandenEnden has been appointed interim Chief Financial Officer and we are searching for a permanent CFO.

Dr. Mark Murray has served as our President, Chief Executive Officer and Director since May 2008, when Dr. Murray joined Arbutus in connection with the closing of the business combination between Arbutus and Protiva. He previously was the President and CEO and founder of Protiva since its inception in the summer of 2000. Dr. Murray has over 20 years of experience in both the R&D and business development and management facets of the biotechnology industry. Dr. Murray held senior management positions at ZymoGenetics and Xcyte Therapies prior to joining Protiva. Since entering the biotechnology industry, Dr. Murray has successfully completed numerous and varied partnering deals, directed successful product development programs, been responsible for strategic planning programs, raised over $30 million in venture capital and executed extensive business development initiatives in the U.S., Europe and Asia. During his R&D career, Dr. Murray worked extensively on three programs that resulted in FDA approved drugs, including the first growth factor protein approved for human use, a program he led for several years following its discovery. Dr. Murray obtained his Ph.D. in Biochemistry from the University of Oregon Health Sciences University and was a Damon Runyon-Walter Winchell post-doctoral research fellow for three years at the Massachusetts Institute of Technology.


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Dr. Michael Sofia has served as our Chief Scientific Officer since our acquisition of OnCore Biopharma, Inc. Dr. Sofia has won the Lasker-Debakey Clinical Medical Research Award for his outstanding discovery, contribution, and achievement in the field of medicine. Dr. Sofia has also won the Economist’s 2015 Innovation Award in the Bioscience category for developing a rapid cure for hepatitis C virus infection (HCV). Dr. Sofia was one of OnCore Biopharma’s co-founders and served as its Chief Scientific Officer and Head of Research and Development since July 2014. He previously served as President and a member of its board of directors from May 2012 to August 2014. Since April 2012, Dr. Sofia has been a professor at the Baruch S. Blumberg Institute and since March 2013, Dr. Sofia has been an adjunct professor at the Drexel University School of Medicine. Previously, Dr. Sofia was the Senior Vice-President, Chemistry, Site Head and then Senior Advisor at Gilead Sciences, Inc. from January 2012 to December 2012. Prior to that, Dr. Sofia was the Senior Vice-President, Chemistry at Pharmasset, Inc. from August 2005 to January 2012 where he was responsible for the discovery of sofosbuvir, which ultimately resulted in the acquisition of Pharmasset by Gilead for $11 billion. From 1999 to 2005, Dr. Sofia served as a Group Director, New Leads Chemistry at Bristol-Myers Squibb. From 1993 to 1999, Dr. Sofia established and directed the research programs at Transcell Technologies, first as Director of Chemistry and then as Vice-President of Research. Dr. Sofia received his B.A. degree from Cornell University, his Ph.D. degree from the University of Illinois at Urbana-Champaign and was an NIH postdoctoral fellow at Columbia University. 

Dr. William Symonds has served as our Chief Development Officer since March 2015. Dr. Symonds has served as a director of Arbutus and previously OnCore since August 2014 and as its Chief Development Officer since March 2015. Dr. Symonds is also currently Chief Development Officer at Roivant Sciences, Inc. Prior to that, Dr. Symonds served as Vice-President, Liver Disease Therapeutic Area at Gilead Sciences, Inc. from February 2012 until April 2014, and was the Senior Vice-President, Clinical Pharmacology and Translational Medicine at Pharmasset, Inc. from 2007 to January 2012. From 1993 to 2007, Dr. Symonds held various positions of increasing responsibility at GlaxoSmithKline, most recently as Director, Antiviral Clinical Pharmacology and Discovery Medicine. Dr. Symonds received his Doctor of Pharmacy degree from Campbell University and completed a fellowship in clinical pharmacokinetics at the Clinical Pharmacokinetics Laboratory in Buffalo, New York.

Dr. Peter Lutwyche has served as our Chief Technology Officer since 2015. Dr. Lutwyche’s responsibilities at Arbutus include manufacturing, process development and quality control for all Arbutus product candidates, as well as supporting Arbutus' collaborative partners as they advance products that utilize Arbutus's technology. Previously Dr. Lutwyche held various positions up to Director, Pharmaceutical Development at QLT Inc. from 1998 to 2008. During his tenure at QLT, Dr. Lutwyche contributed to the development and commercialization of Visudyne as well as leading manufacturing and chemistry efforts for numerous pre-clinical and clinical stage products. Prior to QLT, he was a research scientist at Inex Pharmaceuticals Corporation working with lipid-based formulations of nucleic acids and antibiotics. Dr. Lutwyche holds a Ph.D. in Chemistry from the University of British Columbia.

Dr. Elizabeth Howard serves as our Executive Vice President and General Counsel. Dr. Howard has been practicing law for more than 20 years.  Prior to joining Arbutus in March 2016, she was an intellectual property partner at Orrick, where she co-chaired Orrick's life sciences practice focusing on patent infringement litigation.  Her practice also included trade secrets disputes and handling anti-counterfeiting matters in the pharmaceutical industry.  In addition to litigating in numerous federal district courts and California state courts, Dr. Howard has appeared before the U.S. Patent and Trademark Office in interference proceedings, arbitrated before numerous tribunals, and litigated before the U.S. International Trade Commission (ITC).  Dr. Howard also served as a deputy district attorney in the county of Santa Clara.  Additionally, Dr. Howard counseled clients in negotiation and drafting of agreements in licensing or other technology transactions.  She also speaks and publishes regularly on intellectual property matters affecting the life sciences industry.  Dr. Howard has been listed as a "leading lawyer" in “PLC Which Lawyer" for her litigation successes in life sciences, and named to the Daily Journal's list of "Top 75 IP Litigators in California" in 2013.  Before law school, Dr. Howard was an NSF Plant Molecular Biology Postdoctoral Fellow at the CSIRO Division of Plant Industry in Canberra, Australia, and a Research Geneticist at the University of California, Berkeley. Dr. Howard obtained her doctorate with Dr. Elizabeth Blackburn (2009 Nobel Laureate, Physiology or Medicine).  Dr. Howard holds a B.A. with honors from the University of California, Santa Barbara, a Ph.D. in Molecular Biology from the University of California, Berkeley, a J.D. from the University of California, Hastings College of the Law, and is a member of the United States Patent Bar.


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Mr. Koert VandenEnden joined Arbutus as its Vice President of Finance in October 2016 and has since become the Company’s Interim CFO as of February 2018. He brings to Arbutus extensive global financial, technical and business experience from his tenure at a global public accounting firm followed by senior financial leadership roles in industry. Before joining Arbutus, Mr. VandenEnden was the Director of Finance with Global Relay, having joined in 2013. He led the accounting and finance team and oversaw the company’s financial operations, including operational accounting, long range financial planning, and various financial planning and compliance matters. Prior to that, Mr. VandenEnden was a Chartered Accountant with KPMG LLP for over 12 years. Mr. VandenEnden is a CPA and CA, and holds a BComm with Honors from the University of British Columbia.

Item 1A. Risk Factors

Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC and Canadian securities regulators, press releases, communications with investors and oral statements. All statements other than statements relating to historical matters should be considered forward-looking statements. When used in this annual report, the words “believe,” “expect,” “plan,” “anticipate,” “estimate,” “predict,” “may,” “could,” “should,” “intend,” “will,” “target,” “goal” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Any or all of our forward-looking statements in this annual report on Form 10-K and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those anticipated in forward-looking statements. We explicitly disclaim any obligation to update any forward-looking statements to reflect events or circumstances that arise after the date hereof, unless required by law. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC and Canadian securities regulators.

Risks Related to Our Business 

We are in the early stages of our development, there is a limited amount of information about us upon which you can evaluate our Hepatitis B (HBV) candidates and other prospects as well as our delivery technologies.

We have not begun to market or generate revenues from the commercialization of any HBV products and our other delivery technologies. We have only a limited history upon which one can evaluate our business and prospects as our therapeutic products are still at an early stage of development and thus we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan, we will need to successfully: 

execute research and development activities using our HBV technology; and technologies involved in the development of HBV therapeutics;
build, maintain and protect a strong intellectual property portfolio;
gain acceptance for the development and commercialization of any product we develop;
develop and maintain successful strategic relationships; and
manage our spending and cash requirements as our expenses are expected to increase due to research and preclinical work, clinical trials, regulatory approvals, and commercialization and maintaining our intellectual property portfolio.

If we are unsuccessful in accomplishing these objectives, we may not be able to develop products, raise capital, expand our business or continue our operations. The approach we are taking to discover and develop novel drug products is unproven and may never lead to marketable drug products.

     We intend to concentrate our internal research and development efforts in the future primarily on the discovery and development of therapeutics targeting chronic HBV in order to ultimately develop a cure for the disease. Our future success depends in part on the successful development of these therapeutics. Our approach to the treatment of HBV is unproven, and we do not know whether we will be able to develop any drugs of commercial value.


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There is no known cure for HBV. Any compounds that we develop may not effectively address HBV persistence. Even if we are able to develop compounds that address one or more of these key factors, targeting these key factors has not been proven to cure HBV. If we cannot develop compounds to achieve our goal of curing HBV internally, we may be unable to acquire additional drug candidates on terms acceptable to us, or at all. Even if we are able to acquire or develop drug candidates that address one of these mechanisms of action in preclinical studies, we may not succeed in demonstrating safety and efficacy of the drug candidate in human clinical trials. If we are unable to identify suitable compounds for preclinical and clinical development, we will not succeed in realizing our goal of a cure for HBV.

We also intend to continue research and development efforts on RNAi technology and products based on RNAi technology as well as capsid inhibitors and other assets. While RNAi technology is based on a naturally occurring process that takes place inside cells, which can suppress the production of specific proteins, and has the potential to generate therapeutic drugs that take advantage of that process, neither we nor any other company has received regulatory approval to market a therapeutic product based on RNAi technology. The scientific discoveries that form the basis for our efforts to discover and develop new products are relatively new. While there are a number of RNAi therapeutics in development, very few product candidates based on these discoveries have ever been tested in humans and there can be no assurance that any RNAi therapeutic product will be approved for commercial use.

If we are not successful in developing a product with our research and development efforts, we may be required to change the scope and direction of our product development activities. In that case, we may not be able to identify and implement successfully an alternative product development strategy.

We expect to depend in part on our existing collaborators for a significant portion of our revenues and to develop, conduct clinical trials with, obtain regulatory approvals for, and manufacture, market and sell some of our product candidates. If these collaborations are unsuccessful, or anticipated milestone payments are not received, our business could be adversely affected. 

We expect that we will depend in part on our licensing agreements with Alnylam, Gritstone, and Spectrum to provide revenue to fund our operations, especially in the near term. Furthermore, our strategy is to enter into various additional arrangements with corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, manufacturing, marketing and commercialization of our products. We may be unable to continue to establish such collaborations, and any collaborative arrangements we do establish may be unsuccessful, or we may not receive milestone payments as anticipated.

Should any collaborative partner fail to develop or ultimately successfully commercialize any of the products to which it has obtained rights, our business may be adversely affected. In addition, once initiated, there can be no assurance that any of these collaborations will be continued or result in successfully commercialized products. Failure of a collaborative partner to continue funding any particular program could delay or halt the development or commercialization of any products arising out of such program. In addition, there can be no assurance that the collaborative partners will not pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including our competitors, as a means for developing treatments for the diseases targeted by our programs.

We expect to spend substantial amounts to acquire additional drug candidates, to conduct further research and development and preclinical testing and clinical trials of our drug candidates, to seek regulatory approvals for our drug candidates and to launch and commercialize any drug candidates for which we receive regulatory approval. These expenditures will include costs associated with our and our subsidiary’s licensing agreements with Blumberg or Drexel. Under the terms of these agreements, we are obligated to make significant cash payments upon the achievement of specified development, regulatory and sales performance milestones, as well as royalty payments in connection with the sale of licensed products, to our licensors.

We rely on third parties to conduct our clinical trials, and if they fail to fulfill their obligations, our development plans may be adversely affected.


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We rely on independent clinical investigators, contract research organizations and other third-party service providers to assist us in managing, monitoring and otherwise carrying out our clinical trials. We have contracted with, and we plan to continue to contract with, certain third parties to provide certain services, including site selection, enrollment, monitoring and data management services. Although we depend heavily on these parties, we do not control them and therefore, we cannot be assured that these third parties will adequately perform all of their contractual obligations to us. If our third-party service providers cannot adequately fulfill their obligations to us on a timely and satisfactory basis or if the quality or accuracy of our clinical trial data is compromised due to failure to adhere to our protocols or regulatory requirements, or if such third parties otherwise fail to meet deadlines, our development plans may be delayed or terminated.

We have no sales, marketing or distribution experience and would have to invest significant financial and management resources to establish these capabilities.

We have no sales, marketing or distribution experience. We currently expect to rely heavily on third parties to launch and market certain of our products, if approved. However, if we elect to develop internal sales, distribution and marketing capabilities, we will need to invest significant financial and management resources. For products where we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including: 

we may not be able to attract and build a significant marketing or sales force;
the cost of establishing a marketing or sales force may not be justifiable in light of the revenues generated by any particular product; and
our direct sales and marketing efforts may not be successful.

If we are unable to develop our own sales, marketing and distribution capabilities, we will not be able to successfully commercialize our products, if approved, without reliance on third parties.

We will rely on third-party manufacturers to manufacture our products (if approved) in commercial quantities, which could delay, prevent or increase the costs associated with the future commercialization of our products.

Our product candidates have not yet been manufactured for commercial use. If any of our product candidates become approved for commercial sale, in order to supply our or our collaborators’ commercial requirements for such an approved product, we will need to establish third-party manufacturing capacity. Any third-party manufacturing partner may be required to fund capital improvements to support the scale-up of manufacturing and related activities. The third-party manufacturer may not be able to establish scaled manufacturing capacity for an approved product in a timely or economic manner, if at all. If a manufacturer is unable to provide commercial quantities of such an approved product, we will have to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for such an approved product could require us to conduct comparative studies or utilize other means to determine bioequivalence of the new and prior manufacturers’ products, which could delay or prevent our ability to commercialize such an approved product. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if we are unable to establish alternative arrangements on a timely basis or on acceptable terms, the development and commercialization of such an approved product may be delayed or there may be a shortage in supply. Any inability to manufacture our products in sufficient quantities when needed would seriously harm our business.

Manufacturers of our approved products, if any, must comply with current good manufacturing practices (cGMP) requirements enforced by the FDA and Health Canada through facilities inspection programs. These requirements include quality control, quality assurance, and the maintenance of records and documentation. Manufacturers of our approved products, if any, may be unable to comply with these cGMP requirements and with other FDA, Health Canada, state, and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturer’s failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, which would seriously harm our business.  

Risks Related to Our Financial Results and Need for Financing

We will require substantial additional capital to fund our operations. If additional capital is not available, we may need to delay, limit or eliminate our research, development and commercialization processes and may need to undertake a restructuring.


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Within the next several years, substantial additional funds will be required to continue with the active development of our pipeline products and technologies. In particular, our funding needs may vary depending on a number of factors including:

revenues earned from our partners, including Alnylam, Gritstone, and Spectrum;
closure costs associated with our organizational restructuring and expected savings from gains in efficiency:
the extent to which we continue the development of our product candidates or form collaborative relationships to advance our products;
our decisions to in-license or acquire additional products or technology for development;
our ability to attract and retain corporate partners, and their effectiveness in carrying out the development and ultimate commercialization of our product candidates;
whether batches of drugs that we manufacture fail to meet specifications resulting in delays and investigational and remanufacturing costs;
the decisions, and the timing of decisions, made by health regulatory agencies regarding our technology and products;
competing technological and market developments;
prosecuting and enforcing our patent claims and other intellectual property rights; and
impact of the potential spin out of certain of Arbutus' assets.

We will seek to obtain funding to maintain and advance our business from a variety of sources including public or private equity or debt financing, collaborative arrangements with pharmaceutical and biotechnology companies, licensing our LNP technology, and government grants and contracts. There can be no assurance that funding will be available at all or on acceptable terms to permit further development of our products especially in light of the current difficult climate for investment in biotechnology companies.

If adequate funding is not available, we may be required to delay, reduce or eliminate one or more of our research or development programs or reduce expenses associated with non-core activities. We may need to obtain funds through arrangements with collaborators or others that may require us to relinquish most or all of our rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise seek if we were better funded. Insufficient financing may also mean failing to prosecute our patents or relinquishing rights to some of our technologies that we would otherwise develop or commercialize.

We have incurred losses in nearly every year since our inception and we anticipate that we will not achieve sustained profits for the foreseeable future. To date, we have had no product revenues.

With the exception of the years ended December 31, 2006 and December 31, 2012, we have incurred losses each fiscal year since inception until December 31, 2017 and have not received any revenues other than from research and development collaborations, royalties, license fees and milestone payments. From inception to December 31, 2017, we have an accumulated net deficit of $738.1 million. As we continue our research and development and clinical trials and seek regulatory approval for the sale of our product candidates, we do not expect to attain sustained profitability for the foreseeable future. We do not expect to achieve sustained profits until such time as strategic alliance payments, product sales and royalty payments, if any, generate sufficient revenues to fund our continuing operations. We cannot predict if we will ever achieve profitability and, if we do, we may not be able to remain consistently profitable or increase our profitability.

We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates could impact our results of operations.

Prior to January 1, 2016, our functional currency was the Canadian dollar. On January 1, 2016, our functional currency changed from the Canadian dollar to the U.S. dollar based on our analysis of the changes in the primary economic environment in which we operate. As a result, changes in the exchange rate between the Canadian dollar and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, to the extent that foreign currency-denominated (i.e., non-U.S. dollar) monetary assets do not equal the amount of our foreign currency denominated monetary liabilities, foreign currency gains or losses could arise and materially impact our financial statements. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our Common Shares could be adversely affected.


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From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Any hedging technique we implement may fail to be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our financial results and the trading price of our common shares.

Changes in tax laws or exposures to additional tax liabilities could negatively impact our operating results.

Changes in tax laws or regulations could negatively impact our effective tax rate and results of operations. On December 22, 2017, the U.S. enacted The Tax Cuts and Jobs Act (the TCJA). The TCJA introduces significant changes to U.S. corporate income tax law that will have a meaningful impact on our provision for income taxes. Such changes include, among other things, reducing the marginal U.S. corporate income tax rate from 35 percent to 21 percent, introducing a capital investment deduction, limiting the current deduction for net interest expense, limiting the use of net operating losses to offset future taxable income and making extensive changes to the way in which income earned outside the U.S. is taxed in the U.S. Accounting for the income tax effects of the TCJA requires significant judgments to be made in interpreting its provisions. Due to the timing of the enactment and the complexity involved in applying the provisions of the TCJA, we made reasonable estimates of the effects and recorded provisional amounts in the financial statements for fiscal year 2017. These provisional amounts are based on the initial analysis of the TCJA. Anticipated guidance from the U.S. Treasury about implementing the TCJA, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the TCJA, may result in adjustments to these estimates which could materially affect our financial position and results of operations as well as the effective tax rate in the period in which the adjustments are made.

Risks Related to Managing Our Operations

Our planned reorganization, including a site consolidation and organizational restructuring, may cause disruptions in the operation of our business and may not yield the anticipated benefits.

On February 8, 2018 we announced a site consolidation and organizational restructuring to better align our HBV business in Warminster, PA. To achieve this alignment, we will reduce our global workforce by approximately 31% and plan to close our Burnaby facility. We will incur restructuring costs related to one-time employee termination benefits, employee relocation costs, and site closure costs currently estimated to be $5.0 million, which will be primarily paid in cash in the second quarter of 2018. The reorganization may negatively affect our current business operations, including disrupting clinical development and harming relationships with employees, existing or potential customers, and collaborators. Further, the restructuring may exceed estimated costs and may not follow the anticipated timeline. We may not experience the anticipated benefits of the restructuring to the extent expected.

If we are unable to attract and retain qualified key management, scientific staff, consultants and advisors, our ability to implement our business plan may be adversely affected.

We depend upon our senior executive officers as well as key scientific, management and other personnel. The competition for qualified personnel in the biotechnology field is intense. We rely heavily on our ability to attract and retain qualified managerial, scientific and technical staff. The loss of the service of any of the members of our senior management, including Dr. Mark Murray, our President and Chief Executive Officer, may adversely affect our ability to develop our technology, add to our pipeline, advance our product candidates and manage our operations. We recently experienced turnover in our Chief Financial Officer role and currently have an interim Chief Financial Officer in place. We will be searching for a new, permanent Chief Financial Officer which may prove difficult and may take an extended period of time due to the competition to hire from a limited pool of qualified candidates. This transition period may prove to be disruptive to our business and may inhibit our ability to execute our business plan efficiently. We do not carry key person life insurance on any of our employees.

We rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by other entities and may have commitments under consulting or advisory contracts with those entities that may limit their availability to us. If we are unable to continue to attract and retain highly qualified personnel, our ability to develop and commercialize our product candidates will be limited.


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We may have difficulty managing our growth and expanding our operations successfully as we seek to evolve from a company primarily involved in discovery and preclinical testing into one that develops products through clinical development and commercialization. 

As product candidates we develop enter and advance through clinical trials, we will need to expand our development, regulatory, manufacturing, clinical and medical capabilities or contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various collaborators, suppliers and other organizations. Our ability to manage our operations and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems or controls.

We could face liability from our controlled use of hazardous and radioactive materials in our research and development processes. 

We use certain radioactive materials, biological materials and chemicals, including organic solvents, acids and gases stored under pressure, in our research and development activities. Our use of radioactive materials is regulated by the Canadian Nuclear Safety Commission and the U.S. Nuclear Regulatory Commission for the possession, transfer, import, export, use, storage, handling and disposal of radioactive materials. Our use of biological materials and chemicals, including the use, manufacture, storage, handling and disposal of such materials and certain waste products is regulated by a number of federal, state and local laws and regulations. Although we believe that our safety procedures for handling such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. We are not specifically insured with respect to this liability.

Our business, reputation, and operations could suffer in the event of information technology system failures, such as a cybersecurity breach.

We are increasingly dependent on sophisticated software applications and computing infrastructure to conduct critical operations. Disruption, degradation, or manipulation of these applications and systems through intentional or accidental means could impact key business processes. Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, cybersecurity breaches and other forms of unauthorized access, as well as natural disasters, terrorism, war, and telecommunication and electrical failures. Such events could result in exposure of confidential information, the modification of critical data, and/or the failure or interruption of critical operations. For example, the loss of pre-clinical trial data or data from completed or ongoing clinical trials for our product candidates could result in delays in our regulatory filings and development efforts and significantly increase our costs. To the extent that any disruption or security breach will result in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed. While we have implemented security measures, including controls over unauthorized access, our internal computer systems and those of our contractors and consultants are vulnerable to damage from these events. There can be no assurance that our efforts to protect data and systems will prevent service interruption or the loss of critical or sensitive information from our or third party providers’ databases or systems that could result in financial, legal, business or reputational harm to us or that our insurance would provide any or adequate coverage of any such loss.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial reports, which could have a material adverse effect on our stock price and our ability to raise capital. 

A failure to maintain effective internal control over financial reporting or disclosure controls and procedures could adversely affect our ability to report our financial results accurately and on a timely basis, which could result in material misstatement in our financial statements, a loss of investor confidence in our financial reporting or adversely affect our access to sources of liquidity. Furthermore, because of the inherent limitations of any system of internal control over financial reporting, including the possibility of human error, the circumvention or overriding of controls and fraud, even effective internal controls may not prevent or detect all misstatements. Frequent or rapid changes in procedures, methodologies, systems and technology exacerbate the challenge of developing and maintaining a system of internal controls and can increase the cost and level of effort to develop and maintain such systems.

See Item 9A, "Controls and Procedures" in this Form 10-K for additional information and management's assessment of internal controls.

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We rely on and will incur additional expense in connection with our research collaboration with Blumberg.

In June 2016, Arbutus Inc. entered into an amended agreement with Blumberg under which Arbutus Inc. will provide annual funding in the amount of $1.1 million per year through October 29, 2018, and which is renewable for two additional one year terms at our option, for Blumberg to conduct research projects in HBV and liver cancer pursuant to a research plan to be agreed upon by the parties. In exchange, Arbutus Inc. has the right to obtain an exclusive, royalty bearing, worldwide license to intellectual property generated by Blumberg in the course of the funded research and we believe that Blumberg’s HBV research platform will continue to be a source of potentially novel hepatitis B targets, drug candidates, assays and other HBV specific technologies. As a result, we are dependent, in part, upon the success of Blumberg in performing its responsibilities under this research collaboration. Blumberg may not cooperate with us or perform its obligations under the agreement. We cannot control the amount and timing of Blumberg’s resources that will be devoted to research and development activities related to our research collaboration. Further, development costs associated with our research projects may be difficult to anticipate and exceed our expectations. If funding is unable to continue to financially support the collaboration, if we do not obtain exclusive licenses from Blumberg to the resulting intellectual property, or if we fail to comply with our obligations under those license agreements, its development efforts may be materially harmed.

Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates

If testing of a particular product candidate does not yield successful results, then we will be unable to commercialize that product candidate.

We must demonstrate our product candidates’ safety and efficacy in humans through extensive clinical testing. Our research and development programs are at an early stage of development. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of any products, including the following:

decreased demand for our product candidates;
impairment of our business reputation;
withdrawal of clinical trial participants;
costs of related litigation;
substantial monetary awards to patients or other claimants;
loss of revenues; and
inability to commercialize our product candidates.

Although we currently have product liability insurance coverage for our clinical trials for expenses or losses, our insurance coverage is limited to $10 million per occurrence, and $10 million in the aggregate, and may not reimburse us or may not be sufficient to reimburse us for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

The manufacture and sale of human therapeutic products are governed by a variety of statutes and regulations. There can be no assurance that our product candidates will obtain regulatory approval. 

To obtain marketing approval, U.S. and Canadian laws require: 

controlled research and human clinical testing;
establishment of the safety and efficacy of the product for each use sought;
government review and approval of a submission containing manufacturing, pre-clinical and clinical data;
adherence to Good Manufacturing Practice Regulations during production and storage; and
control of marketing activities, including advertising and labeling.


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The product candidates we currently have under development will require significant development, preclinical and clinical testing and investment of significant funds before their commercialization.  Some of our product candidates, if approved, will require the completion of post-market studies. There can be no assurance that such products will be developed. The process of completing clinical testing and obtaining required approvals is likely to take a number of years and require the use of substantial resources. If we fail to obtain regulatory approvals, our operations will be adversely affected. Further, there can be no assurance that product candidates employing a new technology will be shown to be safe and effective in clinical trials or receive applicable regulatory approvals.

Other markets have regulations and restrictions similar to those in the U.S. and Canada. Investors should be aware of the risks, problems, delays, expenses and difficulties which we may encounter in view of the extensive regulatory environment which affects our business in any jurisdiction where we develop product candidates.

Research and development goals may not be achieved in the time frames that we publicly estimate, which could have an adverse impact on our business and could cause our stock price to decline.

We set goals, and make public statements regarding our expectations, regarding the timing of certain accomplishments, developments and milestones under our research and development programs. The actual timing of these events can vary significantly due to a number of factors, including, without limitation, the amount of time, effort and resources committed to our programs by us and any collaborators and the uncertainties inherent in the clinical development and regulatory approval process. As a result, there can be no assurance that we or any collaborators will initiate or complete clinical development activities, make regulatory submissions or receive regulatory approvals as planned or that we or any collaborators will be able to adhere to our current schedule for the achievement of key milestones under any of our programs. If we or any collaborators fail to achieve one or more of the milestones as planned, our business could be materially adversely affected and the price of our Common Shares could decline.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our drug candidates and affect the prices we may obtain. 

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our drug candidates, restrict or regulate post approval activities and affect our ability to profitably sell any products for which we obtain marketing approval.

For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, or collectively the Affordable Care Act, was enacted to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Additionally, the Drug Supply Chain Security Act, enacted in 2013, imposed new obligations on manufacturers of pharmaceutical products related to product tracking and tracing.

Members of Congress and the Trump Administration have considered legislation to fundamentally change or repeal the Affordable Care Act. While Congress has not passed repeal legislation to date, the Tax Cuts and Jobs Act
(TCJA) includes a provision repealing the individual insurance coverage mandate included in the Affordable Care Act, effective January 1, 2019. Further, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On October 13, 2017, the President signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the Affordable Care Act. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, the Centers for Medicare and Medicaid Services has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Affordable Care Act for plans sold through such marketplaces. Congress may consider other legislation to replace elements of the Affordable Care Act. The implications of the Affordable Care Act, its possible repeal, any legislation that may be proposed to replace the Affordable Care Act, or the political uncertainty surrounding any repeal or replacement legislation for our business and financial condition, if any, are not yet clear.


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We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal and state legislative and regulatory developments are likely, and we expect ongoing initiatives in the United States to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop drug candidates.

Legislative and regulatory proposals have also been made to expand post approval requirements and restrict sales and promotional activities for pharmaceutical products. Any healthcare reforms enacted in the future may, like the Affordable Care Act, be phased in over a number of years but, if enacted, could reduce our revenue, increase our costs, or require us to revise the ways in which we conduct business or put us at risk for loss of business. We are not sure whether additional legislative changes will be enacted, or whether the current regulations, guidance or interpretations will be changed, or what the impact of such changes on our business, if any, may be.

Coverage and adequate reimbursement may not be available for our drug candidates, which could make it difficult for us to sell our products profitably.

Market acceptance and sales of any drug candidates that we develop will depend in part on the extent to which reimbursement for these products and related treatments will be available from third party payors, including government health administration authorities and private health insurers. Third party payors decide which drugs they will pay for and establish reimbursement levels. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for each of our drug candidates will be made on a plan by plan basis. One payor's determination to provide coverage for a product does not assure that other payors will also provide coverage, and adequate reimbursement, for the product. Additionally, a third party payor's decision to provide coverage for a drug does not imply that an adequate reimbursement rate will be approved. Each plan determines whether or not it will provide coverage for a drug, what amount it will pay the manufacturer for the drug, and on what tier of its formulary the drug will be placed. The position of a drug on a formulary generally determines the copayment that a patient will need to make to obtain the drug and can strongly influence the adoption of a drug by patients and physicians. Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. 

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Inadequate coverage and reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. If coverage and adequate reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize any drug candidates that we develop.

Additionally, there have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell any future drugs profitably. These legislative and regulatory changes may negatively impact the reimbursement for any future drugs, following approval.

We are subject to U.S. and Canadian healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, fines, disgorgement, exclusion from participation in government healthcare programs, curtailment or restricting of our operations and diminished profits and future earnings.

Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. Our future arrangements with healthcare providers, patients and third party payors will expose us to broadly applicable U.S. and Canadian fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and collaborative partners through which we market, sell and distribute any products for which we obtain marketing approval.


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Efforts to ensure that our collaborations with third parties, and our business generally, will comply with applicable U.S. and Canadian healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, contractual damages, reputational harm, disgorgement, curtailment or restricting of our operations, any of which could substantially disrupt our operations and diminish our profits and future earnings. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.

Risks Related to Patents, Licenses and Trade Secrets

Other companies or organizations may assert patent rights that prevent us from developing or commercializing our products. 

RNA interference and capsid inhibitors as well as our other novel HBV assets are relatively new scientific fields that have generated many different patent applications from organizations and individuals seeking to obtain patents in the field. These applications claim many different methods, compositions and processes relating to the discovery, development and commercialization of these therapeutic products. Because the field is so new, very few of these patent applications have been fully processed by government patent offices around the world, and there is a great deal of uncertainty about which patents will be issued, when, to whom, and with what claims. It is likely that there could be litigation and other proceedings, such as interference and opposition proceedings in various patent offices, relating to patent rights in RNAi, capsid inhibitors and other small molecule compounds targeted at HBV.

In addition, there are many issued and pending patents that claim aspects of RNAi trigger chemistry technology that we may need to apply to our product candidates. There are also many issued patents that claim genes or portions of genes that may be relevant for RNAi trigger drug products we wish to develop. Thus, it is possible that one or more organizations will hold patent rights to which we will need a license. If those organizations refuse to grant us a license to such patent rights on reasonable terms, we will not be able to market products or perform research and development or other activities covered by these patents.

Our patents and patent applications may be challenged and may be found to be invalid, which could adversely affect our business.

Certain Canadian, U.S. and international patents and patent applications we own involve complex legal and factual questions for which important legal principles are largely unresolved. For example, no consistent policy has emerged for the breadth of biotechnology patent claims that are granted by the U.S. Patent and Trademark Office or enforced by the U.S. federal courts. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued. Also, we face the following intellectual property risks: 

some or all patent applications may not result in the issuance of a patent;
patents issued may not provide the holder with any competitive advantages;
patents could be challenged by third parties;
the patents of others, including Alnylam, could impede our ability to do business;
competitors may find ways to design around our patents; and
competitors could independently develop products which duplicate our products.


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A number of industry competitors and institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to or affect our business. Some of these technologies, applications or patents may conflict with our technologies or patent applications. Such conflict could limit the scope of the patents, if any, that we may be able to obtain or result in the denial of our patent applications. In addition, if patents that cover our activities are issued to other companies, there can be no assurance that we would be able to obtain licenses to these patents at a reasonable cost or be able to develop or obtain alternative technology. If we do not obtain such licenses, we could encounter delays in the introduction of products, or could find that the development, manufacture or sale of products requiring such licenses is prohibited. In addition, we could incur substantial costs in defending patent infringement suits brought against us or in filing suits against others to have such patents declared invalid. As publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain we or any licensor was the first creator of inventions covered by pending patent applications or that we or such licensor was the first to file patent applications for such inventions. Any future proceedings could result in substantial costs, even if the eventual outcomes are favorable. There can be no assurance that our patents, if issued, will be held valid or enforceable by a court or that a competitor’s technology or product would be found to infringe such patents.

Our business depends, in part, on our ability to use RNAi technology that we have licensed or will in the future license from third parties, including Alnylam, and, if these licenses were terminated or if we were unable to license additional technology we may need in the future, our business will be adversely affected.

We currently hold licenses for certain technologies that are or may be applicable to our current and subsequent product candidates. These include a license to patents held or applied for by Alnylam and a license to UNA technology from Arcturus Therapeutics. The licenses are subject to termination in the event of a breach by us of the license, if we fail to cure the breach following notice and the passage of a cure period. The UBC license, which is sublicensed to Alnylam, is subject to termination with respect to one or more particular patents if we and Alnylam were to cease patent prosecution or maintenance activities with respect to such patent(s), or in the event of a breach by us of the license, if we fail to cure the breach following notice and the passage of a cure period. There can be no assurance that these licenses will not be terminated. We may need to acquire additional licenses in the future to technologies developed by others, including Alnylam. For example, Alnylam has granted us a worldwide license for the discovery, development and commercialization of RNAi products directed to thirteen gene targets (three exclusive and ten non-exclusive licenses). Licenses for the five non-exclusive targets and one exclusive target have already been granted. We have rights to select the gene targets for up to two more exclusive licenses and five more nonexclusive licenses from Alnylam, which would be made available to us only if they have not been previously selected by Alnylam or one of its other partners. This will limit the targets available for selection by us, and we may never be able to select gene targets or may be required to make our selection from gene targets that have minimal commercial potential. Furthermore, future license agreements may require us to make substantial milestone payments. We will also be obligated to make royalty payments on the sales, if any, of products resulting from licensed RNAi technology. For some of our licensed RNAi technology, we are responsible for the costs of filing and prosecuting patent applications. The termination of a license or the inability to license future technologies on acceptable terms may adversely affect our ability to develop or sell our products.

Our business depends, in part, on our ability to use the technology that we have licensed or will in the future license from third parties, including Blumberg, and, if these licenses were terminated or if we were unable to license additional technology we may need in the future, our business will be adversely affected.

We have licensed certain of our intellectual property from Blumberg. Our current technology licenses are important to our business and we expect to enter into additional licenses in the future.  If we fail to comply with our obligations under these agreements or any future license agreements, we may be subject to a bankruptcy, or if we grant a sublicense in the future and our sublicense does not comply with our obligations under these agreements or becomes subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to develop or market products covered by the license or may face other penalties under the agreements, which could have a materially adverse effect on our business. In addition, applicable laws involving bankruptcy or similar proceeding by licensors in some jurisdictions outside the United States may provide the trustee or receiver in such proceeding with the right to set aside or otherwise terminate or seek to modify the license. Any termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or amended agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property and technologies that form the basis of our technology, which may then be in licensed by one or more of our competitors.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.


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There has been significant litigation in the biotechnology industry over contractual obligations, patents and other proprietary rights, and we may become involved in various types of litigation that arise from time to time. Involvement in litigation could consume a substantial portion of our resources, regardless of the outcome of the litigation. Counterparties in litigation may be better able to sustain the costs of litigation because they have substantially greater resources. If claims against us are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses, and pay substantial milestones or royalties in order to continue to develop, manufacture or market the affected products. Involvement and continuation of involvement in litigation may result in significant and unsustainable expense, and divert management’s attention from ongoing business concerns and interfere with our normal operations. Litigation is also inherently uncertain with respect to the time and expenses associated therewith, and involves risks and uncertainties in the litigation process itself, such as discovery of new evidence or acceptance of unanticipated or novel legal theories, changes in interpretation of the law due to decisions in other cases, the inherent difficulty in predicting the decisions of judges and juries and the possibility of appeals. Ultimately we could be prevented from commercializing a product or be forced to cease some aspect of our business operations as a result of claims of patent infringement or violation of other intellectual property rights and the costs associated with litigation, which could have a material adverse effect on our business, financial condition, and operating results and could cause the market value of our Common Shares to decline.

Confidentiality agreements with employees and others, including collaborators, may not adequately prevent disclosure of trade secrets and other proprietary information.

Much of our know-how and technology may constitute trade secrets. There can be no assurance, however, that we will be able to meaningfully protect our trade secrets. In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our collaborators, employees, vendors, consultants, outside scientific collaborators and sponsored researchers, and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time consuming litigation could continue to be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We have licensed important portions of our intellectual property from Blumberg and Drexel, and are subject to significant obligations under those license agreements.

The rights we hold under our license agreements with Blumberg and Drexel are important to our business. Our discovery and development platform is built, in part, around patents exclusively in licensed from these parties.

We have licenses with Blumberg and Drexel, both directly and through its acquisition of Enantigen, that grant us the exclusive (except in some cases as to know how that is not unique or specific to the licensed products or compound series, which are non-exclusive and subject to retained rights for non-commercial research use), worldwide license to make, have made, use, import, offer for sale and sell products incorporating one or more licensed compounds, which include capsid assembly inhibitors, inhibitors of secretion of HBV antigens, cccDNA inhibitors and hepatocellular carcinoma inhibitors, either for general use in humans or for use in the field of HBV research, diagnosis and treatment.

Under our agreements with Blumberg and Drexel, we are subject to significant obligations, including diligence obligations with respect to development and commercialization activities, payment obligations upon achievement of certain milestones and royalties on product sales, as well as other material obligations. Under our direct agreement with Blumberg and Drexel, we agreed to pay up to $3.5 million in development and regulatory milestones per licensed compound series, up to $92.5 million in sales performance milestones per licensed product, and royalties in the mid-single digits in connection with the sale of licensed products. Under each of the three license agreements that our subsidiary, Enantigen, has with Blumberg and Drexel, we are obligated to pay up to $0.5 million in development and regulatory milestones per licensed product and royalties in the low single digits in connection with the sale of licensed products. If these payments become due under the terms of the agreements, we may be negatively affected.

If there is any conflict, dispute, disagreement or issue of non-performance between us and Blumberg and Drexel regarding our rights or obligations under these license agreements, including any conflict, dispute or disagreement arising from our failure to satisfy diligence or payment obligations under such agreements, Blumberg and Drexel may have a right to terminate the license. The loss of any of these license agreements could materially and adversely affect our ability to use intellectual property that could be critical to our drug discovery and development efforts, as well as our ability to enter into future collaboration, licensing and/or marketing agreements for one or more affected drug candidates or development programs.

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Some of our licensors have retained rights to develop and commercialize certain of our drug candidates to treat diseases other than HBV and, as a result, our development and commercialization efforts may be negatively affected.

Our license agreements provide us with the rights to develop and commercialize our drug candidates for HBV; however, some of our licensors have retained rights to develop and commercialize certain of its drug candidates to treat diseases other than HBV, and to license those rights to other third parties.

Risks Related to Competition

The pharmaceutical market is intensely competitive. If we are unable to compete effectively with existing drugs, new treatment methods and new technologies, we may be unable to successfully commercialize any product candidates that we develop. 

The pharmaceutical market is intensely competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs for the same diseases that we are targeting or expect to target. Many of our competitors have: 

much greater financial, technical and human resources than we have at every stage of the discovery, development, manufacture and commercialization process;
more extensive experience in pre-clinical testing, conducting clinical trials, obtaining regulatory approvals, and in manufacturing, marketing and selling pharmaceutical products;
product candidates that are based on previously tested or accepted technologies;
products that have been approved or are in late stages of development; and
collaborative arrangements in our target markets with leading companies and research institutions.

We will face intense competition from products that have already been approved and accepted by the medical community for the treatment of the conditions for which we are currently developing products. We also expect to face competition from new products that enter the market. We believe a significant number of products are currently under development, and may become commercially available in the future, for the treatment of conditions for which we may try to develop products. These products, or other of our competitors’ products, may be more effective, safer, less expensive or marketed and sold more effectively than any products we develop.

We are aware of several companies that are working to develop drugs that would compete against our drug candidates for HBV treatment. As a significant unmet medical need exists for HBV, there are several large and small pharmaceutical companies focused on delivering therapeutics for treatment of HBV. Further, it is likely that additional drugs will become available in the future for the treatment of HBV. We will face competition from other drugs currently approved or that will be approved in the future for the treatment of chronic hepatitis B.

We anticipate significant competition in the HBV market with several early phase product candidates announced. We will also face competition for other product candidates that we expect to develop in the future.

If we successfully develop product candidates, and obtain approval for them, we will face competition based on many different factors, including the following: 

safety and effectiveness of our products;
ease with which our products can be administered and the extent to which patients and physicians accept new routes of administration;
timing and scope of regulatory approvals for these products;
availability and cost of manufacturing, marketing and sales capabilities;
price;
reimbursement coverage; and
patent position.


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Our competitors may develop or commercialize products with significant advantages over any products we develop based on any of the factors listed above or on other factors. Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our competitive position and business. Competitive products may make any products we develop obsolete or uncompetitive before we can recover the expenses of developing and commercializing our product candidates. Such competitors could also recruit our employees, which could negatively impact our level of expertise and the ability to execute on our business plan. Furthermore, we also face competition from existing and new treatment methods that reduce or eliminate the need for drugs, such as the use of advanced medical devices. The development of new medical devices or other treatment methods for the diseases we are targeting and may target could make our product candidates non-competitive, obsolete or uneconomical.

We face competition from other companies that are working to develop novel products using technology similar to ours. If these companies develop products more rapidly than we do or their technologies, including delivery technologies, are more effective than ours, then our ability to successfully commercialize products will be adversely affected.

We face significant competition from other biotechnology and pharmaceutical companies targeting HBV.

As a significant unmet medical need exists for HBV, there are several large and small pharmaceutical companies focused on delivering therapeutics for treatment of HBV. These companies include Gilead Sciences, Johnson and Johnson, Assembly Biosciences, Roche, Replicor, Spring Bank, Alnylam, Arrowhead, ContraVir, Dicerna, Intellia, Cocrystal, and Enanta. Further, it is likely that additional drugs will become available in the future for the treatment of HBV.

We are aware of several companies that are working to develop drugs that would compete against our drug candidates for HBV treatment. Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, as well as in obtaining regulatory approvals of those drug candidates in the United States and in foreign countries. Our current and potential future competitors also have significantly more experience commercializing drugs that have been approved for marketing. Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a small number of our competitors.

Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing, on an exclusive basis, drug candidates that are more effective or less costly than any drug candidate that we may develop.

We will face competition from other drugs currently approved or that will be approved in the future for the treatment of HBV. Therefore, our ability to compete successfully will depend largely on our ability to: 

discover, develop and commercialize drugs that are superior to other products in the market;
demonstrate through our clinical trials that our drug candidates are differentiated from existing and future therapies;
attract qualified scientific, product development and commercial personnel;
obtain patent or other proprietary protection for our drugs and technologies;
obtain required regulatory approvals;
successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new drugs; and
negotiate competitive pricing and reimbursement with third party payors.

The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any drug candidate we develop. The inability to compete with existing or subsequently introduced drug candidates would have a material adverse impact on our business, financial condition and prospects.

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in license novel compounds that could make our drug candidates less competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, discovering, developing or receiving FDA approval for or commercializing medicines before we do, which would have a material adverse impact on our business.


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Risks Related to the Ownership of our Common Shares

If our stock price fluctuates, our investors could incur substantial losses.

The market price of our Common Shares may fluctuate significantly in response to factors that are beyond our control. The stock market in general has recently experienced extreme price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in extreme fluctuations in the price of our Common Shares, which could cause our investors to incur substantial losses.

There is no assurance that an active trading market in our Common Shares will be sustained.

Our Common Shares are listed for trading on the Nasdaq exchange. However, there can be no assurances that an active trading market in our Common Shares on these stock exchanges will be sustained.

We are incorporated in Canada, with our assets and officers located both in Canada and the United States, with the result that it may be difficult for investors to enforce judgments obtained against us or some of our officers.

Arbutus is incorporated under the laws of the Province of British Columbia and some of Arbutus' assets and officers are located outside the United States. While we have appointed National Registered Agents, Inc. as our agent for service of process to effect service of process within the United States upon us, it may not be possible for you to enforce against us or those persons in the United States, judgments obtained in U.S. courts based upon the civil liability provisions of the U.S. federal securities laws or other laws of the United States. In addition, there is doubt as to whether original action could be brought in Canada against us or our directors or officers based solely upon U.S. federal or state securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of U.S. federal or state securities laws.

Conversely, most of Arbutus’ directors and officers reside outside Canada, and with the reorganization around Warminster, PA, the majority of Arbutus' physical assets may also be located outside Canada . While we have appointed Farris, Vaughan, Wills & Murphy LLP as our agent for service of process in Canada, it may not be possible for you to enforce in Canada against our assets or those directors and officers residing outside Canada, judgments obtained in Canadian courts based upon the civil liability provisions of the Canadian securities laws or other laws of Canada.

If we are deemed to be a “passive foreign investment company” for the current or any future taxable year, investors who are subject to United States federal taxation would likely suffer materially adverse U.S. federal income tax consequences.

We generally will be a “passive foreign investment company” under the meaning of Section 1297 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), (a “PFIC”) if (a) 75% or more of our gross income is “passive income” (generally, dividends, interest, rents, royalties, and gains from the disposition of assets producing passive income) in any taxable year, or (b) if at least 50% or more of the quarterly average value of our assets produce, or are held for the production of, passive income in any taxable year. We have determined that we have not been a PFIC for the three taxable years ended December 31, 2017. If we are a PFIC for any taxable year during which a U.S. person holds our Common Shares, it would likely result in materially adverse U.S. federal income tax consequences for such U.S. person, including, but not limited to, any gain from the sale of our Common Shares would be taxed as ordinary income, as opposed to capital gain, and such gain and certain distributions on our Common Shares would be subject to an interest charge, except in certain circumstances. It may be possible for U.S. persons to fully or partially mitigate such tax consequences by making a “qualifying electing fund election,” as defined in the Code (a “QEF Election”), but there is no assurance that we will provide such persons with the information that we are required to provide to them in order to assist them in making a QEF Election.  In addition, U.S. persons that hold Common Shares issuable upon exercise of warrants are generally not eligible to make certain elections available under the Code that are intended to mitigate the adverse tax consequences of PFIC rules with respect to such warrant shares unless such holders also elect to make a deemed taxable sale of their warrant shares. The PFIC rules are extremely complex and investors are urged to consult their own tax advisers to assess the implications of these rules as applicable to their own facts and circumstances.

Our articles and certain Canadian laws could delay or deter a change of control.


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Our preferred shares are available for issuance from time to time at the discretion of our board of directors, without shareholder approval. Our articles allow our board, without shareholder approval, to determine the special rights to be attached to our preferred shares, and such rights may be superior to those of our Common Shares.

In addition, limitations on the ability to acquire and hold our Common Shares may be imposed by the Competition Act in Canada. This legislation permits the Commissioner of Competition of Canada to review any acquisition of a significant interest in us. This legislation grants the Commissioner jurisdiction to challenge such an acquisition before the Canadian Competition Tribunal if the Commissioner believes that it would, or would be likely to, result in a substantial lessening or prevention of competition in any market in Canada. The Investment Canada Act subjects an acquisition of control of a company by a non-Canadian to government review if the value of our assets, as calculated pursuant to the legislation, exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to result in a net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.

The exercise of all or any number of outstanding stock options, the award of any additional options, bonus shares or other stock-based awards or any issuance of shares to raise funds or acquire a business may dilute your Common Shares.

We have in the past and may in the future grant to some or all of our directors, officers and employees options to purchase our Common Shares and other stock-based awards as non-cash incentives to those persons. The issuance of any equity securities could, and the issuance of any additional shares will, cause our existing shareholders to experience dilution of their ownership interests.

Any additional issuance of shares or a decision to acquire other businesses through the sale of equity securities may dilute our investors’ interests, and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold. Such issuance may cause a reduction in the proportionate ownership and voting power of all other shareholders. The dilution may result in a decline in the price of our Common Shares or a change in control.

We do not expect to pay dividends for the foreseeable future.

We have not paid any cash dividends to date and we do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest future earnings, if any, in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their Common Shares, and shareholders may be unable to sell their shares on favorable terms or at all. We cannot assure you of a positive return on investment or that you will not lose the entire amount of your investment in our Common Shares. Prospective investors seeking or needing dividend income or liquidity should not purchase our Common Shares.

The value of our securities, including our Common Shares, might be affected by matters not related to our operating performance and could subject us to securities litigation. 

The value of our Common Shares may be reduced for a number of reasons, many of which are outside our control, including: 

general economic and political conditions in Canada, the United States and globally;
governmental regulation of the health care and pharmaceutical industries;
failure to achieve desired drug discovery outcomes by us or our collaborators;
failure to obtain industry partner and other third party consents and approvals, when required;
stock market volatility and market valuations;
competition for, among other things, capital, drug targets and skilled personnel;
the need to obtain required approvals from regulatory authorities;
revenue and operating results failing to meet expectations in any particular period;
investor perception of the health care and pharmaceutical industries;
limited trading volume of our Common Shares;
announcements relating to our business or the businesses of our competitors; and
our ability or inability to raise additional funds.

The concentration of the Common Shares ownership with insiders, as well as director nomination rights held by the largest shareholder, will likely limit the ability of the other shareholders to influence corporate matters.


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As of December 31, 2017, executive officers, directors, five percent or greater shareholders, and their respective affiliated entities of the Arbutus beneficially own, in the aggregate, approximately ~53% of Arbutus' outstanding Common Shares. As a result, these shareholders, acting together, have significant influence over most matters that require approval by Arbutus' shareholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other shareholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a corporate transaction that other shareholders may view as beneficial.

Further, on October 16, 2017 and January 12, 2018, respectively, Arbutus completed an issuance and sale to Roivant Sciences Ltd. of two tranches of series A participating convertible preferred shares in the capital of Arbutus, for an aggregate of 1,164,000 preferred shares. The preferred shares do not have voting rights prior to conversion (except as required by applicable law). The preferred shares plus an amount equal to 8.75% per annum, compounded annually, will initially be convertible into 22,833,922 Common Shares of Arbutus, no par value, which conversion will occur mandatorily four years after issuance. Assuming conversion of all of the preferred shares held by Roivant, Roivant will hold 38,847,462, or, without further dilution, 49.9% of the outstanding Common Shares in the capital of Arbutus (based on the total number of issued and outstanding Common Shares as at March 31, 2017, but assuming only the conversion of all of the preferred shares into Common Shares). The ownership by Roivant of these preferred shares and underlying Common Shares will likely further limit the ability of the other shareholders to influence corporate matters.

In addition, at the special meeting of Arbutus’ shareholders held on January 11, 2018, the shareholders approved amendments to Arbutus’ Articles such that Roivant has the right to nominate a certain number of directors to the board of directors of Arbutus, which right will terminate upon the earlier of (i) October 16, 2019 and (ii) when Roivant no longer meets certain beneficial ownership thresholds. With respect to the beneficial ownership thresholds, for so long as Roivant has beneficial ownership or exercises control or direction over not less than (i) 30% of the issued and outstanding Common Shares, Roivant has the right to nominate three individuals for election to the board of directors of Arbutus, one of whom must be “independent” within the meaning of applicable law and the rules and regulations of The Nasdaq Stock Market LLC, not including the rules related to the independence of audit committee members; (ii) 20% of the issued and outstanding Common Shares, Roivant has the right to nominate two individuals for election to the board of directors of Arbutus; and (iii) 10% of the issued and outstanding Common Shares, Roivant has the right to nominate one individual for election to the board of directors of Arbutus. For so long as Roivant has the right to nominate one or more directors to Arbutus’ board of directors, the total number of directors of Arbutus will not, without the prior written consent of Roivant, be permitted to exceed seven directors, the majority of whom must be “independent”.

If securities analysts do not publish research or reports about the business of Arbutus, or if they publish negative evaluations, the price of Arbutus' Common Shares could decline.

The trading market for the Arbutus Common Shares may be impacted by the availability or lack of research and reports that third-party industry or financial analysts publish about Arbutus. There are many large, publicly traded companies active in the biopharmaceutical industry, which may mean it will be less likely that Arbutus receives widespread analyst coverage. Furthermore, if one or more of the analysts who do cover Arbutus downgrade its stock, its stock price would likely decline. If Arbutus does not receive adequate coverage by reputable analysts that have an understanding of Arbutus' business and industry, it could fail to achieve visibility in the market, which in turn could cause its stock price to decline.

Item 1B. Unresolved Staff Comments

There are currently no unresolved staff comments.

Item 2. Properties
 
Our head office and principal place of business is currently located at 100-8900 Glenlyon Parkway, Burnaby, British Columbia, Canada, V5J 5J8. The Company leases a 51,000 square foot facility under an agreement that expires on July 31, 2019, but we have the option to extend the lease to 2024, 2029, and 2034.
 
Our U.S. Office is located at 701 Veterans Circle, Warminster, Pennsylvania, 18974 in approximately 35,000 square feet of leased lab facilities and office space. We believe that the total space available to us under our current lease will meet our needs for the foreseeable future and that additional space would be available to us on commercially reasonable terms if required.

As part of our reorganization (see Item 1. Business) we expect to move our principal place of business to Warminster, PA and close the Burnaby, BC site.

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Item 3. Legal Proceedings

We are involved with various legal matters arising in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. Although the ultimate resolution of these various matters cannot be determined at this time, we do not believe that such matters, individually or in the aggregate, will have a material adverse effect on our consolidated results of operations, cash flows, or financial condition.

Acuitas Therapeutics Inc.
On August 29, 2016, Arbutus provided Acuitas with notice that Arbutus considered Acuitas to be in material breach of their 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 disputed Acuitas' position and filed a counterclaim seeking, among other relief, a declaration that the cross-license agreement had been terminated.
  
On January 10, 2017, we filed an application seeking an order to enjoin Acuitas from entering into any further agreements purporting to sublicense Arbutus' technology from the date of the order to the date of trial or further order from the court. Acuitas filed a response to Arbutus' application and the matter was the subject of a hearing on January 26, 2017, which resulted in the Supreme Court of British Columbia granting a pre-trial injunction against Acuitas. Under the terms of the pre-clinical trial injunction, Acuitas was prevented from entering into any new agreements which include sublicensing of Arbutus’ LNP. On March 7, 2017, Acuitas appealed the injunction decision and on April 3, 2017, the appeal was denied. On September 29, 2017, the injunction order was extended by consent to March 2, 2018. On February 21, 2018, the contractual issues concerning the cross-license agreement (excluding the claims for damages) were settled out of court, resulting in the termination of Acuitas’ rights to further use or sublicense our LNP technology, making permanent the effect of the Court’s prior injunction. We have now consolidated our LNP intellectual property estate, which is the most clinically validated delivery technology suitable for RNAi, mRNA therapeutics, and gene editing applications. The settlement stipulates that the four non-exclusive viral vaccine sublicenses previously granted to Moderna are the only sublicenses to survive. These four sublicenses, previously granted by Acuitas to Moderna under the pre-April 15, 2010 LNP patent families are each limited to a specific viral target. Moderna has no other rights to Arbutus’ broad suite of LNP intellectual property. No other sublicenses of Arbutus technology were provided to third parties by Acuitas and accordingly, no other sublicenses of Arbutus technology by Acuitas survived the settlement. This milestone further establishes us as the owner and only source of an industry-leading LNP delivery technology with the ability to develop a full range of nucleic acid-based applications.

University of British Columbia (UBC)

Certain early work on liposomal delivery systems and related inventions was undertaken at Inex Pharmaceuticals Inc. and assigned to UBC. These inventions are licensed to us by UBC under a license agreement initially entered into in 1998 and subsequently amended in 2001, 2006 and 2007. We have granted sublicenses to these inventions to Alnylam.  Alnylam has in turn sublicensed these inventions back to us for discovery, development and commercialization of RNAi products.


37



On November 10, 2014, the University of British Columbia filed a demand for arbitration against Arbutus Biopharma Corp., BCICAC File No.: DCA-1623. We received UBC’s Statement of Claims on January 16, 2015. In its Statement of Claims, UBC alleges that it is entitled to $3.5 million 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. Arbutus filed its Statement of Defense to UBC’s Statement of Claims on April 27, 2015, denying that UBC is entitled to any unpaid royalties. Arbutus also filed a Counterclaim involving a patent application that Arbutus alleges UBC wrongly licensed to a third party rather than to Arbutus. Arbutus seeks any license payments for said application, and an exclusive worldwide license to said application. The proceeding has been bifurcated into phases, beginning with a liability phase, addressing UBC’s Claims and Arbutus’ Counterclaim, that took place June 2017. The arbitrator determined in the first phase which agreements are sublicense agreements within UBC's claim, and which are not. No finding was made as to whether any licensing fees are due to UBC under these agreements; this will be the subject of the second phase of arbitration. The arbitrator also held that the patent application that is the subject of the Counterclaim was not required to be licensed to Arbutus. A schedule for the remaining phases has not yet been set.

Item 4. Mine Safety Disclosures

Not applicable.


38



PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common shares trade on the Nsdaq Global Market under the symbol "ABUS" following our Company name change to Arbutus Biopharma Corporation on July 31, 2015. From November 15, 2010 to July 31, 2015 our common shares traded on the NASDAQ Global Market under the symbol “TKMR”. Our common shares previously traded on the Toronto Stock Exchange (TSX) in Canada under the symbol “TKM”. We voluntarily delisted from the TSX on March 3, 2015. As at March 6, 2018, there were 105 registered holders of common shares and 55,070,037 common shares issued and outstanding.

The following table shows the high and low intraday trading prices of our common shares on the Nasdaq Global Market periods listed:
 
Nasdaq
High
(US$)
 
Nasdaq
Low
(US$)
Year Ended:
 
 
 
December 31, 2017
$
8.25

 
$
2.35

December 31, 2016
$
5.48

 
$
2.35

Quarter Ended:
 
 
 
December 31, 2017
$
8.25

 
$
4.30

September 30, 2017
$
7.85

 
$
3.40

June 30, 2017
$
3.85

 
$
2.95

March 31, 2017
$
3.49

 
$
2.35

December 31, 2016
$
3.56

 
$
2.35

September 30, 2016
$
4.49

 
$
3.36

June 30, 2016
$
5.48

 
$
3.09

March 31, 2016
$
4.71

 
$
2.72

Month Ended:
 
 
 
February 28, 2018
$
5.95

 
$
4.85

January 31, 2018
$
5.90

 
$
4.90

 
Material Modifications to the Rights of Security Holders/Use of Proceeds

Not applicable.
 
Purchase of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.
 
Recent Sales of Unregistered Securities

None.

Stock Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
 
The following graph compares the cumulative shareholder return on an investment of US$100 in the Common Shares of the Company on the Nasdaq from December 31, 2012, with a cumulative total shareholder return on the Nasdaq Composite and Nasdaq Biotechnology Indices.

39




http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12133240&doc=21
 Geographic Breakdown of Shareholders

 As of March 6, 2018, our shareholder register indicates that our common shares are held as follows:
Location
Number of Shares
 
Percentage of
Total Shares
 
Number of Registered
Shareholders of
Record
Canada
16,379,874

 
29.7
%
 
85

United States
22,675,939

 
41.2
%
 
16

Other
16,014,224

 
29.1
%
 
4

Total
55,070,037

 
100
%
 
105

 
As of March 6, 2018 we also have 1,164,000 preferred shares issued and outstanding. These shares are held by Roivant Sciences Ltd, a company registered in Bermuda. These shares are convertible to 22,589,601 common shares on October 18, 2021. Based on the number of shares outstanding as at March 6, 2018, upon conversion to common shares on October 18, 2021, Roivant would own 49.9% of the common shares of the Company. The preferred shares are not voting. See notes to the Financial Statements for further information on the preferred shares.

Our securities are recorded in registered form on the books of our transfer agent, CST Trust Company, located at 1600-1066 West Hastings Street, Vancouver, BC, V6E 3X1. However, the majority of such shares are registered in the name of intermediaries such as brokerage houses and clearing houses (on behalf of their respective brokerage clients). We are permitted, upon request to our transfer agent, to obtain a list of our beneficial shareholders who do not object to their identities being disclosed to us. We are not permitted to obtain from our transfer agent a list of our shareholders who have objected to their identities being disclosed to us.


40



 Shares registered in intermediaries were assumed to be held by residents of the same country in which the clearing house was located.

 Dividends
 
We have not declared or paid any dividends on our common or preferred shares since the date of our incorporation.  We intend to retain our earnings, if any, to finance the growth and development of our business and do not expect to pay dividends or to make any other distributions, other than the coupon attached to the preferred shares, in the near future.  Our board of directors will review this policy from time to time having regard to our financing requirements, financial condition and other factors considered to be relevant.

Item 6. Selected Financial Data
 
The following table presents selected financial data derived from Arbutus' audited consolidated financial statements for each of the five years for the period ending December 31. You should read this information in conjunction with our financial statements for the periods presented, as well as Item 1 “ Business ” and Item 7 “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included elsewhere in this Annual Report.  Historical results are not necessarily indicative of future results.

Summary Financial Information
Under U.S. GAAP (in thousands of US dollars, except number of shares and per share amounts)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
$
 
$
 
$
 
$
 
$
Operating Data
 
 
 
 
 
 
 
 
 
Revenue
10,700

 
1,491

 
23,276

 
15,465

 
14,105

Expenses
121,630

 
493,130

 
127,195

 
27,617

 
27,050

Loss from operations
(110,930
)
 
(491,639
)
 
(103,919
)
 
(12,152
)
 
(12,945
)
Net income (loss)
(84,413
)
 
(384,164
)
 
(78,903
)
 
(147,063
)
 
29,611

Net loss attributable to common shares
(85,324
)
 

 

 

 

Weighted average number of common shares—basic
54,723,272

 
53,074,401

 
45,462,324

 
15,303,000

 
13,728,000

Weighted average number of common shares—diluted
54,723,272

 
53,074,401

 
45,462,324

 
15,303,000

 
14,321,000

Income (loss) per common share—basic
(1.56
)
 
(7.24
)
 
(1.38
)
 
(0.92
)
 
2.16

Income (loss) per common share—diluted
(1.56
)
 
(7.24
)
 
(1.38
)
 
(0.92
)
 
2.07

Balance Sheet Data
 
 
 

 
 

 
 

 
 

Total current assets
129,366

 
132,564

 
116,418

 
70,343

 
51,243

Total assets
237,161

 
275,919

 
118,178

 
71,716

 
52,595

Total current liabilities
14,627

 
10,585

 
20,206

 
12,522

 
10,954

Total long-term liabilities
40,061

 
62,329

 
9,937

 

 
722

Share capital
968,728

 
903,936

 
316,212

 
242,045

 
206,572

Total stockholders’ equity
182,473

 
203,005

 
88,035

 
59,194

 
40,919

Number of preferred shares outstanding
500,000

 

 

 

 

Number of common shares outstanding
55,060,650

 
54,841,494

 
22,438,169

 
19,049,000

 
14,305,356



41



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Arbutus is a publicly traded (Nasdaq Global Market: ABUS) therapeutic solutions company dedicated to discovering, developing and commercializing a cure for patients suffering from chronic HBV infection. To pursue our strategy of developing a curative combination regimen, we have assembled an HBV pipeline consisting of multiple drug candidates with complementary mechanisms of action. HBV represents a significant unmet medical need and is the cause of the most common serious liver infection in the world. The World Health Organization estimates that 257 million people worldwide are chronically infected, and other estimates suggest this could include approximately 2 million people in the United States. Given the complex biology of HBV, 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.

Arbutus’ head office and principal place of business is currently located at 100-8900 Glenlyon Parkway, Burnaby, British Columbia, Canada, V5J 5J8. This facility includes 51,000 square feet of combined research and development laboratory and office space. Our primary U.S. site is located at 701 Veterans Circle, Warminster, Pennsylvania, USA, 18974. This facility includes 35,000 square feet of combined research and development laboratory and office space. As part of our reorganization, we expect to move our principal place of business to Warminster, PA and close the Burnaby, BC site.

We continued the development of our lead clinical candidate ARB-1467 in 2017. We announced Phase II data demonstrating significant reductions in serum HBsAg, including step-wise, additive reductions with each subsequent dose of ARB-1467, proving both its safety and efficacy in patients. These data are the first of their kind for an RNAi product candidate in chronic HBV patients. We advanced ARB-1467 into the first drug combination study with HBV standard or care therapies for deeper reductions in HBsAg and HBV DNA in patients, which are the endpoints accepted as an HBV cure.

Our first-generation capsid inhibitor AB-423 entered into healthy volunteer clinical studies in 2017 and initiated Investigational New Drug (IND)-enabling studies on a next generation capsid inhibitor AB-506 as well as a novel HBV RNA Destabilizer AB-452 (formerly known as our oral HBsAg inhibitor program) for potential clinical advancement in 2018.

We continued a number of research programs aimed at discovery and development of novel HBV candidates with different and complementary mechanisms of action. We have designed a number of highly potent HBV-targeting RNAi payloads for use with our proprietary GalNAc conjugate platform to enable subcutaneous delivery and have ongoing discovery efforts focused on cccDNA targeting and checkpoint inhibition.

We presented clinical and preclinical data from our proprietary HBV assets in 2017.

Change in Functional Currency

Prior to January 1, 2016, our functional currency was the Canadian dollar. As such, all dollar amounts in this MD&A related to periods prior to and including the year ended December 31, 2015 are presented in U.S. dollars with the functional currency as the Canadian dollar. On January 1, 2016, our functional currency changed from the Canadian dollar to the U.S. dollar based on our analysis of changes in the primary economic environment in which we operate. The change in functional currency is accounted for prospectively from January 1, 2016 and financial statements for the periods prior to and including the year ended December 31, 2015 will not be restated for the change in functional currency. Past 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 shareholder's equity under accumulated other comprehensive loss.

42




CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The significant accounting policies that we believe to be most critical in fully understanding and evaluating our financial results are revenue recognition, stock-based compensation, and goodwill and intangible asset impairment.  These accounting policies require us to make certain estimates and assumptions. We believe that the estimates and assumptions upon which we rely are reasonable, based upon information available to us at the time that these estimates and assumptions are made.  Actual results may differ from our estimates. Our critical accounting estimates affect our net income or loss calculation.
 
Revenue Recognition / Our primary sources of revenue have been derived from research and development collaborations and contracts, and licensing fees comprised of initial fees and milestone payments.  Payments received under research and development agreements and contracts, which are non-refundable, are recorded as revenue as services are performed and as the related expenditures are incurred pursuant to the agreement, provided collectability is reasonably assured. Revenue earned under research and development collaborations and contracts where we do not bear any risk of product manufacture failure is recognized in the period the work is performed. Revenue earned under contractual arrangements upon the achievement of substantive milestones is recognized in its entirety in the period the payment has been received. We evaluate whether milestones under research and development arrangements are substantive by considering: whether substantive uncertainty exists upon the execution of the arrangement; the event can only be achieved based in whole or in part on our performance or occurrence of a specific outcome resulting from our performance; any future performance required and payment is reasonable relative to all deliverables; and, payment terms in the arrangement. Initial fees and non-substantive milestone payments are deferred and amortized into income over the estimated period of our involvement as we fulfill our obligations under our agreements.  

The revenue that we recognize is a critical accounting estimate because of the volume and nature of the revenues we receive.  Some of the research, development and licensing agreements that we have entered into contain multiple revenue elements that are to be recognized for accounting in accordance with our revenue recognition policy.  We need to make estimates as to what period the services will be delivered with respect to up-front licensing fees and milestone payments received because these payments are deferred and amortized into income over the estimated period of our ongoing involvement.  The actual period of our ongoing involvement may differ from the estimated period determined at the time the payment is initially received and recorded as deferred revenue.  This may result in a different amount of revenue that should have been recorded in the period and a longer or shorter period of revenue amortization. When an estimated period changes we amortize the remaining deferred revenue over the estimated remaining time to completion.  The rate at which we recognize revenue from payments received for services to be provided under research and development agreements depends on our estimate of work completed to date and total work to be provided. The actual total services provided to earn such payments may differ from our estimates. Refer to Note 2 to our consolidated financial statements for our analysis of the impact of the adoption of ASC 606 - Revenue from Contracts with Customers, effective January 1, 2018.
 
Our revenue for 2017 was $10.7 million (2016 - $1.5 million, 2015 - $23.3 million). Our deferred revenue balance at December 31, 2017 was $2.7 million (December 31, 2016 - nil).

Stock-based compensation / The stock-based compensation that we record is a critical accounting estimate due to the value of compensation recorded, the volume of our stock option activity, and the many assumptions that are required to be made to calculate the compensation expense.

Compensation expense is recorded for stock options issued to employees and directors using the fair value method.  We must calculate the fair value of stock options issued and amortize the fair value to stock compensation expense over the vesting period, and adjust the expense for stock option forfeitures and cancellations.  We use the Black-Scholes model to calculate the fair value of stock options issued which requires that certain estimates, including the expected life of the option and expected volatility of the stock, be made at the time that the options are issued.  This accounting estimate is reasonably likely to change from period to period as further stock options are issued and adjustments are made for stock option forfeitures and cancellations. Effective October 1, 2016, we early adopted ASU 2016-09 and elected an entity-wide accounting policy to recognize forfeitures as they occur. The term "forfeitures" is distinct from "cancellations" or "expirations" and represents only the unvested portion of the surrendered stock option. For the purpose of calculating fair value, the expected life of stock options granted is five years for employees and eight years for directors and executives. We amortize the fair value of stock options using the straight-line method over the vesting period of the options, generally a period of three years for employees and immediate vesting for directors.
 

43



We recorded stock-based compensation expense for our equity-classified awards in 2017 of $14.9 million (2016 of $38.2 million, 2015 - $22.1 million) which includes compensation expense related to the expiration of repurchase rights on certain shares held by the founders of Arbutus Inc. of $8.0 million (2016 - $32.0 million) - refer to Note 2 to our consolidated financial statements.

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 asset may not be recoverable, then management will perform an impairment test in an interim period by comparing the discounted cash flow values to each asset’s carrying value 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 loss 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; (d) adverse research and development program results; and (e) if applicable, a sustained decrease in share price.

In assessing impairment, significant judgments are required to be made 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 cash flows based on our corporate budgets 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, market-based discount rates and other market-comparative data. 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 each phase of these programs, management risk adjusts the estimated cash flows to reflect these uncertainties.

During the year ended December 31, 2017, we recorded a total net impairment charge of $23.9 million (impairment charge of $40.8 million less a corresponding income tax benefit of $16.9 million) against our identified intangible assets for the discontinuance of STING agonists, which represented the entire remaining acquired Immune Modulator drug class.

We perform our annual impairment analysis at December 31st each year. Effective October 1, 2017, we early adopted ASU 2017-04 and eliminated Step 2 from the goodwill impairment test, which required a hypothetical purchase price allocation, and permits a qualitative assessment to determine if a quantitative assessment (Step 1) is required. At December 31, 2017, we performed a qualitative assessment using factors including but not limited to: (a) macroeconomic conditions; (b) industry and market considerations; (c) cost factors; (d) overall financial performance; (e) other relevant entity-specific events; (f) events affecting a reporting unit; and (g) if applicable, a sustained decrease in share price in absolute terms and relative to peers. Based on our qualitative assessment, we concluded that as at December 31, 2017, it was not more likely than not that the fair value of the Company`s single reporting unit was less than its carrying amount; therefore, a quantitative assessment was not necessary.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors, and any key assumptions in the cash flow projections are interdependent on each other. A change in any one or combination of these assumptions could impact the estimated fair value of the reporting unit. 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. 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. 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 the "Risk Factors" in this annual report on Form 10-K for additional risk factors.



44




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.

(in millions $ except per share data) – unaudited
 
 Q4
2017
 
Q3
2017
 
Q2
2017
 
Q1
2017
 
 Q4
2016
 
Q3
2016
 
Q2
2016
 
Q1
2016
Total revenue
2.5

 
6.9

 
1.0

 
0.2

 
(0.2
)
 
0.8

 
0.3

 
0.6

Expenses
(62.8
)
 
(19.8
)
 
(20.5
)
 
(18.5
)
 
(257.2
)
 
(19.7
)
 
(195.6
)
 
(20.6
)
Other income (losses)

 
1.3

 
1.2

 
(0.3
)
 
(1.4
)
 
(0.6
)
 
0.4

 
4.1

Loss before income taxes
(60.3
)
 
(11.6
)
 
(18.3
)
 
(18.6
)
 
(258.8
)
 
(19.5
)
 
(194.9
)
 
(15.9
)
Income tax benefit
24.3

 

 

 

 
40.1

 

 
64.9

 

Net loss
(36.0
)
 
(11.6
)
 
(18.3
)
 
(18.6
)
 
(218.7
)
 
(19.5
)
 
(130.0
)
 
(15.9
)
Basic and diluted net loss per common share
$
(0.67
)
 
$
(0.21
)
 
$
(0.33
)
 
$
(0.34
)
 
$
(4.05
)
 
$
(0.37
)
 
$
(2.47
)
 
$
(0.31
)

Quarterly Trends

Revenue / Our revenue is derived from research and development collaborations and contracts, licensing fees, milestone and royalty payments.

In March 2017, we signed a License Agreement with Alexion that granted them exclusive use of our proprietary lipid nanoparticle ("LNP") technology in one of Alexion's rare disease programs. Under the terms of the license agreement, we received a $7.5 million non-refundable upfront payment in April 2017, which was recognized over the expected period we provide services to Alexion. In Q3 2017, we received notice of termination from Alexion for our LNP license agreement, and completed close out procedures. The termination was driven by a strategic review of Alexion's business and research and development portfolio, which included a decision to discontinue development of mRNA therapeutics. As such, we recorded the remaining deferred revenue of $6.7 million for the non-refundable upfront payment, as well as revenue for any work done related to closeout procedures.

On October 16, 2017, the Company entered into a license agreement with Gritstone that entitles Gritstone to research, develop, manufacture and commercialize products with our LNP technology.  The total potential payments under this arrangement include upfront, development and commercial milestone payments and royalty payments on future product sales. During Q4 2017, we recorded $2.5 million in revenue under this arrangement.

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 and goodwill is also included in operating expenses.

Since Q1 2016, we have incurred significant R&D expense related to our HBV programs, including initiation of our ARB-1467 in Phase 2 clinical trials, and incurred costs since Q4 2016 to advance our AB-423 to Phase 1 clinical trials. In Q2 and Q3 2017, we also incurred costs related to our recently nominated product candidates: a second capsid inhibitor (AB-506) and a HBV RNA destabilizer (AB-452, formerly known as our oral surface antigen (HBsAg) inhibitor program). In Q4 2017, we continued a number of research programs aimed at discovery and development of novel HBV candidates with different and complementary mechanisms of action, prepared for the initiation of combination studies for ARB-1467 and incurred R&D expense related to services provided to Gritstone.

In Q2, 2016, we recorded an impairment charge of $156.3 million (before deferred tax) 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. In Q4 2016, we recorded an impairment charge of $96.9 million for our intangible assets (before deferred tax) and impairment charge of $138.1 million for our goodwill which resulted from a change in estimated cost of capital and resulting discount rate used in our annual impairment assessment.

45




In Q4 2017, we recorded an impairment charge of $40.8 million (before deferred tax) for the discontinuance of our STING agonist program, which represented the entire remaining acquired Immune Modulator drug class.

Following the merger with Arbutus Inc. in March 2015, we have recorded non-cash compensation expense of $56.9 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". The final tranche of repurchase rights expired in Q3 2017 so no further expense will be recorded.
 
Other income (losses) / Other income (losses) consist primarily of changes in the fair value of our contingent consideration, interest income and expense and foreign exchange gains and losses. We have recorded increases in the fair value of contingent consideration since first recording this liability as a result of the merger with Arbutus Inc. in March 2015. This reflects the progress of our HBV programs that bring us closer to triggering the contingent amounts.

We have recorded foreign exchange gains and losses over the past eight quarters, largely related to Canadian 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 translation 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 compared to periods prior to January 1, 2016.

Income tax benefit / Income tax benefit primarily relates to the decrease in deferred tax liability associated with the impairment charge recorded on acquired intangible assets. In Q2 2016 and in Q4 2016, we recorded $64.8 million and $40.1 million in income tax benefit associated with the impairment charges described above. In Q4 2017, we recorded a total of $24.3 million of income tax benefit, which consists of $16.9 million related to the impairment charge and a $7.4 million benefit on our remaining intangible assets due to a reduction in US federal taxes - see Note 8 of our consolidated financial statements.
 
Net loss / Fluctuations in our net loss are explained by changes in revenue, expenses, other income (losses) and income tax as discussed above.
 
Fourth quarter of 2017 / Our Q4 2017 net loss was $37 million ($0.67 basic and diluted loss per common share) as compared to a net loss of $218.7 million ($4.05 basic and diluted per common share) for Q4 2016.
 
Revenue in Q4 2017 was related to the earned portion of the upfront payment received from our license agreement with Gritstone.
 
Research, development, collaborations and contracts expenses remained consistent at $17.8 million in Q4 2017 as compared to $17.2 million in Q4 2016. In Q4 2017, we incurred expenses related to our HBV programs as we continue to move candidates through clinical trials. In Q4 2017, we continued a number of research programs aimed at discovery and development of novel HBV candidates with different and complementary mechanisms of action, and incurred R&D expense related to our services provided to Gritstone. In Q4 2017, we recorded an impairment charge of $40.8 million related to our intangible assets (before deferred tax) as we discontinued our STING agonist program, which represented the entire remaining acquired Immune Modulator drug class.


RESULTS OF OPERATIONS
 
The following summarizes the results of our operations for the 2017, 2016, and 2015 fiscal years, in millions except per share data:

46



 
2017

 
2016

 
2015

Total revenue
$
10.7

 
$
1.5

 
$
23.3

Operating expenses
121.6

 
493.1

 
127.2

Loss from operations
(110.9
)
 
(491.6
)
 
(103.9
)
Net loss
(84.4
)
 
(384.2
)
 
(62.7
)
Net loss attributable to common shares
(85.3
)
 
(384.2
)
 
(62.7
)
Basic loss per common share
(1.56
)
 
(7.24
)
 
(1.38
)
Diluted loss per common share
(1.56
)
 
(7.24
)
 
(1.38
)
Total assets
237.2

 
275.9

 
712.3

Total liabilities
54.7

 
72.9

 
164.6

Total non-current liabilities
40.1

 
62.3

 
154.0

Deficit
(738.1
)
 
(652.7
)
 
(267.0
)
Accumulated other comprehensive loss
(48.2
)
 
(48.2
)
 
(49.8
)
Total stockholders’ equity
$
182.5

 
$
203.0

 
$
547.7

 
Year ended December 31, 2017 compared to the year ended December 31, 2016
 
For the fiscal year ended December 31, 2017, our net loss was $84.4 million ($1.56 basic and diluted loss per common share) as compared to a net loss of $384.2 million ($7.24 basic and diluted loss per common share) for 2016.
 
Revenue / Revenue is summarized in the following table, in millions:
 
2017

 
% of Total

 
2016

 
% of Total

Collaborations and contracts
 
 
 
 
 
 
 
Alexion
$
8.0

 
75
%
 
$

 
%
Gritstone
2.5

 
23
%
 

 
%
Dicerna

 
%
 
1.3

 
87
%
Other milestone and royalty payments
0.2

 
2
%
 
0.2

 
13
%
Total revenue
$
10.7

 
 

 
$
1.5

 
 

 
Revenue contracts are described in more detail in "Item 1. Business".

Alexion revenue

In March 2017, we signed a License Agreement with Alexion that granted them exclusive use of our proprietary lipid nanoparticle (LNP) technology in one of Alexion's rare disease programs. In July 2017, we received notice of termination from Alexion for our LNP license agreement. The termination was driven by a strategic review of Alexion's business and research and development portfolio, which included a decision to discontinue development of mRNA therapeutics. Revenue recorded for the year-ended December 31, 2017 included the upfront license payment, as well as services provided to Alexion related to technology development, manufacturing and regulatory support for the advancement of Alexion's mRNA product candidate.

Gritstone revenue

On October 16, 2017, we entered into a license agreement with Gritstone that entitles Gritstone to research, develop, manufacture and commercialize products with the Company’s LNP technology.  In October 2017, we received the upfront license payment, and are eligible to receive further potential payments for development and commercial milestone payments and royalty payments on future product sales. Revenue recognized for the year-ended December 31, 2017 relates to the earned portion of the upfront license fee, as well as services provided to Gritstone.


47



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 discontinuation of their DCR-PH1 program using the Company's technology. As such, we revised the estimated completion date of performance period to September 30, 2016, at which time we had no further remaining performance obligations, and recognized the remaining deferred upfront license payment.

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 millions:
 
2017

 
% of Total

 
2016

 
% of Total

Research, development, collaborations and contracts
$
62.7

 
52
%
 
$
61.3

 
12
%
General and administrative
16.1

 
13
%
 
39.4

 
8
%
Depreciation
2.0

 
2
%
 
1.1

 
%
Impairment of intangible assets
40.8

 
33
%
 
$
253.2

 
51
%
Impairment of goodwill

 
%
 
$
138.2

 
29
%
Total operating expenses
$
121.6

 
 

 
$
493.1

 
 

 
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 remained consistent during 2017 and 2016. In all periods presented, our R&D expense relates primarily to our HBV programs. During 2017, we initiated a Phase 1 clinical trial for AB-423 and incurred clinical costs as we continued our trials for ARB-1467, as well as costs for IND enabling studies for our recent candidate nominations, a second capsid inhibitor (AB-506) and a HBV RNA destabilizer (AB-452, formerly known as our oral surface antigen (HBsAg) inhibitor program). We also continued a number of research programs aimed at discovery and development of novel HBV candidates with different and complementary mechanisms of action, as well as incurred R&D expense related to our services provided to Alexion and Gritstone.

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. 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.
 

48



General and administrative
 
General and administrative expenses decreased in 2017 compared to 2016 due to a decrease in non-cash compensation expense related to the expiry of repurchase rights effective Q2 2016 related to the departure of two of the four former Arbutus Inc. founders in June 2016. As a result of this change, our quarterly non-cash compensation general and administrative expense decreased to $1.5 million per quarter. The repurchase right provisions for the other two Arbutus Inc. founders expired in Q3 2017, and no further compensation expense was incurred thereafter. We recorded a total of $4.0 million in non-cash G&A compensation expense for the year-ended December 31, 2017, as compared to a total of $26.0 million for the year-ended December 31, 2016. See the 2016 compared to 2015 discussion for further details.

Impairment of intangible assets and goodwill

During the year-ended December 31, 2017, the Company recorded a total impairment charge of $40.8 million and a corresponding income tax benefit of $16.9 million against its identified intangible assets, for the discontinuance of our STING agonist program, which represented the entire remaining acquired Immune Modulators drug class.

For the year ended December 31, 2016, we recorded a net impairment charge of $148.2 million on intangible assets ($253.2 million less deferred taxes of $105.0 million). $156.3 million was recorded in the second quarter 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. A further $96.4 million was recorded in the fourth quarter as a result of a change in the estimated cost of capital and resulting discount rate used in our annual impairment assessment. This change in discount rate was made to address the sustained discrepancy between our market capitalization and the carrying value of our intangible assets.

On December 31, we performed our annual impairment analysis for goodwill. No impairment was recorded for goodwill for the year ended December 31, 2017. We recorded an impairment of $138.1 million for the year ended December 31, 2016 resulting from our reassessment of the discount rate used in our valuation models used to assess the carrying value of goodwill and intangible assets for impairment as a result of the sustained discrepancy between market capitalization, carrying values and fair values.
 
Other income (losses) / Other income (losses) are summarized in the following table, in millions:
 
2017

 
2016

Interest income
$
1.5

 
$
1.4

Interest expense
(0.3
)
 

Foreign exchange gains
2.3

 
1.1

Gain on disposition of financial instrument

 
1.0

Decrease in fair value of warrant liability

 
0.5

Increase in fair value of contingent consideration
(1.4
)
 
(1.6
)
Total other income (losses)
$
2.2

 
$
2.4

 
Foreign exchange gains

We continue to incur substantial expenses and hold cash and investment balances in Canadian dollars, and as such, will remain subject to risks associated with foreign currency fluctuations. For the year ended December 31, 2017, we recorded a foreign exchange gain of $2.3 million, which is primarily an unrealized gain related to an appreciation in the value of our Canadian dollar funds, from the previous period, when converted to our functional currency of U.S. dollars.

Gain on disposition of financial instrument

On March 4, 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of our wholly-owned subsidiary, PADCo, as described below and paid us an exercise fee of $1.0 million.

Decrease in fair value of warrant liability

On March 1, 2017, any remaining outstanding warrants expired.


49



Increase in fair value of contingent consideration
 
Contingent consideration is a liability assumed from our acquisition of Arbutus Inc. in March 2015. In general, increases in the fair value of the contingent consideration are related to the progress of our programs as they get closer to triggering contingent payments that are based on development milestones and commercial sales. The first milestone is payable upon the commencement of first HBV patient dosing in our AB-423 program.

Income tax benefit

For the year ended December 31, 2017, we recorded an income tax benefit of $24.3 million due to the decrease in deferred tax liability resulting from the impairment charge to intangible assets of $16.9 million, and the reduction in federal tax rates from the U.S. tax reform of $7.4 million on our remaining intangible assets.
 
Year ended December 31, 2016 compared to the year ended December 31, 2015
 
For the fiscal year ended December 31, 2016, our net loss was $384.2 million ($7.24 basic and diluted loss per common share) as compared to a net loss of $62.7 million ($1.38 basic and diluted loss per common share) for 2015.
 
Revenue / Revenue is summarized in the following table, in millions:
 
2016

 
% of Total

 
2015

 
% of Total

Monsanto

 
%
 
13.4

 
58
%
Dicerna
1.3

 
87
%
 
2.9

 
12
%
DoD
$

 
%
 
$
6.8

 
29
%
Other milestone and royalty payments
0.2

 
13
%
 
0.3

 
1
%
Total revenue
$
1.5

 
 

 
$
23.3

 
 

 
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. We do not expect to record significant revenue from the DoD contract after December 31, 2015 and did not receive any revenue from the DoD contract in 2016.

Monsanto revenue

In January 2014, we signed an Option Agreement and a Services Agreement (together, the “Agreements”) with Monsanto. Under the Agreements, Monsanto had an option to obtain a license to use our proprietary delivery technology and related intellectual property for use in agriculture.
Under the Agreements, we established a wholly-owned subsidiary, PADCo. We determined that PADCo was a variable interest entity (“VIE”); however, Monsanto was 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 us an option exercise fee of $1.0 million. From the acquisition of PADCo, Monsanto received a worldwide, exclusive right to use our proprietary delivery technology in the field of agriculture. We recorded the exercise fee received as gain on disposition of financial instrument on our consolidated statement of operations and comprehensive loss for the year ended December 31, 2016.


50



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. Licensing fee revenue recognized for the year ended December 31, 2015 relates to the earned portion of the upfront payment of $2.5 million for the use our of technology, which was being recognized over the period over which we provided services to Dicerna. In September 2016, Dicerna announced the discontinuation of their DCR-PH1 program using the Company's technology. As such, we revised the estimated completion date of performance period from March 2017 to September 30, 2016, at which time we had no further remaining performance obligations. This resulted in the recognition of $1.1 million in Dicerna license fee revenue for the year ended December 31, 2016.
 
Other milestone and royalty payments
 
Under our licensing arrangements with Alnylam and Alexion we have the potential to earn further development and commercial milestones and royalties 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 millions:
 
2016

 
% of Total

 
2015

 
% of Total

Research, development, collaborations and contracts
$
61.3

 
12
%
 
$
51.5

 
40
%
General and administrative
39.4

 
8
%
 
26.4

 
21
%
Depreciation
1.1

 
%
 
0.6

 
%
Acquisition costs

 
%
 
9.7

 
8
%
Impairment of intangible assets
$
253.2

 
51
%
 
$
39.0

 
31
%
Impairment of goodwill
138.2

 
28
%
 

 
%
Total operating expenses
$
493.1

 
 

 
$
127.2

 
 

 
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 increased during 2016 as compared to 2015 as we increased our spending on our HBV programs as we continue to advance them through the clinic in 2016 when we initiated Phase 2 clinical trials for ARB-1467 and ARB-1740, and prepared to advance AB-423 to Phase 1 clinical trial. We also continue to incur incremental costs related to an increase in activities for research and preclinical HBV programs, focusing on advancing the development of our candidates to support future clinical combination studies.

R&D compensation expense increased in 2016 as compared to 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 year ended December 31, 2016, we incurred a total of $32.0 million of non-cash compensation expense related to the expiry of repurchase rights on shares issued as part of the consideration paid for the merger with Arbutus Inc. (see table of quarterly charges below and refer to notes to the financial statements for further details), of which $6.0 million has been included as part of research, development, collaborations and contracts expense, and $26.0 million included as part of general and administrative expense.
 

51



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 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 increased in 2016 compared to 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 non-cash compensation expense of $26.0 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). In Q2 2016, we incurred an acceleration of incremental non-cash compensation expense due to the expiration of repurchase rights triggered by the departure of two of the four Arbutus Inc. founders. The following table summarizes the non-cash compensation expense recorded related to the expiry of repurchase rights, in millions:
 
Q4
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
Q1
 
2016
 
2016
 
2016
 
2016
 
2015
 
2015
 
2015
2015
Research and development
$
1.5

 
$
1.5

 
$
1.5

 
$
1.5

 
$
1.5

 
$
1.4

 
$
1.0

$
0.3

General and administrative
1.5

 
1.5

 
18.5

 
4.5

 
4.5

 
4.3

 
3.1

0.9

Total non-cash compensation for repurchase rights expiration
$
3.0

 
$
3.0

 
$
20.0

 
$
6.0

 
$
6.0

 
$
5.7

 
$
4.1

$
1.2


Acquisition costs
 
In 2015, we incurred $9.7 million in costs for professional fees related to completing the merger with Arbutus Inc. - see "Item 1. Business". This cost is specific to the merger with Arbutus Inc., and such costs are only incurred when a business combination occurs.

Impairment of intangible assets and goodwill

For the year ended December 31, 2016, we recorded a net impairment charge of $148.2 million on intangible assets ($253.2 million less deferred taxes of $105.0 million). $156.3 million was recorded in the second quarter 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. A further $96.9 million was recorded in the fourth quarter as a result of a change in the estimated cost of capital and resulting discount rate used in our annual impairment assessment. This change in discount rate was made to address the sustained discrepancy between our market capitalization and the carrying value of our intangible assets. For the year-ended December 31, 2015, we recorded an impairment charge of $39.0 million, with an offsetting income tax benefit of $16.2 million based on our decision to discontinue our cyclophilin inhibitors program, OCB-030.

On December 31, we performed our annual impairment analysis for goodwill and recorded an impairment of $138.1 million for the year ended December 31, 2016. As discussed above, we re-assessed the discount rate used in our valuation models used to assess the carrying value of goodwill and intangible assets for impairment as a result of the sustained discrepancy between market capitalization, carrying values and fair values.
 

52



Other income (losses) / Other income (losses) are summarized in the following table, in millions:
 
2016

 
2015

Interest income
$
1.4

 
$
0.7

Foreign exchange gains
1.1

 
21.8

Gain on disposition of financial instrument
1.0

 

Decrease in fair value of warrant liability
0.5

 
3.3

Increase in fair value of contingent consideration
$
(1.6
)
 
$
(0.8
)
Total other losses
$
2.4

 
$
25.0

  
 Foreign exchange gains

On January 1, 2016, our functional currency changed from the Canadian dollar to the U.S. dollar based on our analysis of changes in the primary economic environment in which we operate. We will continue to incur substantial expenses and hold cash and investment balances in Canadian dollars, and as such, will remain subject to risks associated with foreign currency fluctuations. For the year ended December 31, 2016, we recorded a foreign exchange gain of $1.1 million which is primarily an unrealized gain related to an appreciation in the value of our Canadian dollar funds from the previous period, when translated to our functional currency of U.S. dollars. For the year ended December 31, 2015, the foreign exchange gain of $21.8 million was related to the appreciation in value of our U.S. dollar funds from the previous period, when translated to our functional currency of Canadian dollars in that year.

Gain on disposition of financial instrument

On March 4, 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of our wholly-owned subsidiary, PADCo, as described above and paid us an exercise fee of $1.0 million.

Decrease in fair value of warrant liability
 
In conjunction with equity and debt financing transactions in 2011 and 2012, we issued warrants to purchase our common share. We are accounting for the warrants under the authoritative guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, on the understanding that in compliance with applicable securities laws, the registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. At each balance sheet date, the warrants are revalued using the Black-Scholes model and the change in value is recorded in the consolidated statement of operations and comprehensive income (loss). In June 2016, the warrants from our 2011 debt financing expired and the fair value of unexercised warrants were recorded in decrease in fair value of warrant liability for the year ended December 31, 2016.

Generally, a decrease in our share price from the previous reporting date results in a decrease in the fair value of our warrant liability and vice versa.

Increase in fair value of contingent consideration
 
The contingent consideration represents the estimated regulatory, development and sales milestone payments payable to the previous Enantigen shareholders. Enantigen was acquired by Arbutus Inc. in 2014. As at the acquisition date of Arbutus Inc., the contingent consideration had an estimated fair value of approximately $6.7 million. Contingent consideration is a financial liability, and we determine 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. For the period ended December 31, 2016, we performed an evaluation of the fair value of the contingent consideration using the probability weighted assessment of likelihood of milestone payments as described above and determined the fair value of the contingent consideration has increased by $1.6 million to $9.1 million from $7.5 million as at December 31, 2015. The increase in fair value has been recorded in other losses in the statement of operations and comprehensive loss for the year ended December 31, 2016.

Income tax benefit

For the year ended December 31, 2016, we recorded an income tax benefit of $105.0 million due to the decrease in deferred tax liability resulting from the impairment charge to intangible assets.


53



LIQUIDITY AND CAPITAL RESOURCES 

The following table summarizes our cash flow activities for the periods indicated, in millions:
 
Year ended December 31
 
2017
 
2016
 
2015
Net loss for the year
$
(84.4
)
 
$
(384.2
)
 
$
(62.7
)
Adjustments to reconcile net loss to net cash used in operating activities
32.6

 
326.7

 
21.0

Changes in operating assets and liabilities
3.1

 
(0.5
)
 
(14.6
)
Net cash used in operating activities
(48.6
)
 
(57.9
)
 
(56.4
)
Net cash provided by (used in) investing activities
27.8

 
(99.1
)
 
7.7

Net cash provided by financing activities
49.3

 
12.6

 
143.9

Effect of foreign exchange rate changes on cash & cash equivalents
2.4

 
1.0

 
(0.6
)
Net increase (decrease) in cash and cash equivalents
30.9

 
(143.4
)
 
94.6

Cash and cash equivalents, beginning of year
23.4

 
166.8

 
72.2

Cash and cash equivalents, end of year
$
54.3

 
$
23.4

 
$
166.8

 
At December 31, 2017, we had cash and cash equivalents of $54.3 million, short-term investments of $72.1 million, and restricted investments of $12.6 million, totaling $139.0 million as compared to cash, cash equivalents, short-term investments and restricted cash of $143.2 million at December 31, 2016.

Since our incorporation, we have financed our operations through the sales of shares, units, debt, revenues from research and development collaborations and licenses with corporate partners, interest income on funds available for investment, and government contracts, grants and tax credits.
 
Operating activities used $48.6 million in cash in 2017 as compared to $57.9 million used in 2016 and $56.4 million used in 2015. The decrease in cash used from operating activities was primarily due to the upfront license payments we received from Alexion and Gritstone during 2017. Significant non-cash items to reconcile net loss used by operating activities include impairment of intangible assets of $40.8 million, deferred income tax benefit of $24.3 million (comprised of $16.9 million corresponding to the impairment charge, and a $7.4 million recovery in deferred tax liability on remaining intangible asset balance sheet value related to reduced US federal taxes), and stock-based compensation.
 
Investing activities provided cash of $27.8 million in 2017 compared to cash used of $99.1 million in 2016 and cash provided of $7.7 million in 2015. Cash provided increased in 2017 due to short-term investments that matured during the year.

On March 25, 2015, we completed an underwritten public offering of 7,500,000 common shares, at a price of $20.25 per share, representing gross proceeds of $151.9 million, and net proceeds of $142.2 million. On December 27, 2016, we obtained a $12.0 million loan from Wells Fargo, secured by $12.6 million in restricted cash. The loan is due on December 27, 2019, and we are able to partially or wholly repay the borrowings at any time. We used these proceeds primarily to renovate leased laboratory and office space in Warminster, Pennsylvania where we have expanded our U.S. research and development activities.

On October 16, 2017, we closed the sale of 500,000 Series A participating convertible preferred shares ("Preferred Shares") to Roivant for gross proceeds of $50.0 million. A second tranche of $66.4 million for 664,000 Preferred Shares closed on January 12, 2018, following receipt of the approval of Arbutus' shareholders on January 11, 2018. We are using these proceeds to develop and advance product candidates through clinical trials, as well as for working capital and general corporate purposes.
 
Cash requirements / At December 31, 2017 we held an aggregate of $139.0 million in cash, comprised of $54.3 million in cash and cash equivalents, $72.1 million in short-term investments, and $12.6 million in restricted cash (investments) and subsequent to December 31, 2017 we received an additional $66.4 million in cash from the close of the second tranche of Preferred Shares. On a proforma basis, including the second tranche proceeds, our 2017 ending cash balance was $205.4 million. We believe we have sufficient cash resources for at least the next 12 months. In the future, substantial additional funds will be required to continue with the active development of our pipeline products and technologies. In particular, our funding needs may vary depending on a number of factors including:

the need for additional capital to fund future business development programs;

54



closure costs associated with our organizational restructuring and expected savings from gains in efficiency:
revenues earned from our existing licensing agreements, including milestone and royalty payments from Gritstone, Alnylam and Spectrum;
the extent to which we continue the development of our product candidates, add new product candidates to our pipeline, or form collaborative relationships to advance our products;
our decisions to in-license or acquire additional products or technology for development, in particular for our HBV programs;
our ability to attract and retain corporate partners, and their effectiveness in carrying out the development and ultimate commercialization of our product candidates;
extent of cash inflow from licensing our LNP technology and royalty entitlements;
whether batches of drugs that we manufacture fail to meet specifications resulting in delays and investigational and remanufacturing costs;
the decisions, and the timing of decisions, made by health regulatory agencies regarding our technology and products;
competing technological and market developments; and
costs associated with prosecuting and enforcing our patent claims and other intellectual property rights, including litigation and arbitration arising in the course of our business activities.

We will seek to obtain funding to maintain and advance our business from a variety of sources, including public or private equity or debt financing, collaborative arrangements with pharmaceutical companies and government grants and contracts. There can be no assurance that funding will be available at all or on acceptable terms to permit further development of our products, especially in light of the current difficult climate for investment in early stage biotechnology companies.
 
If adequate funding is not available, we may be required to delay, reduce or eliminate one or more of our research or development programs or reduce expenses associated with non-core activities. We may need to obtain funds through arrangements with collaborators or others that may require us to relinquish most or all of our rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise seek if we were better funded. Insufficient financing may also mean failing to prosecute our patents or relinquishing rights to some of our technologies that we would otherwise develop or commercialize.

Material commitments for capital expenditures / As at the date of this discussion we do not have any material commitments for capital expenditures.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

CONTRACTUAL OBLIGATIONS
 
Facility lease

On June 23, 2014, we signed an agreement to renew the lease for our Burnaby office and lab facility. The lease term is for five years, commencing August 1, 2014 with three additional renewal terms of five years each.

On August 9, 2016, we signed a new lease agreement effective November 1, 2016, subsequently amended to October 7, 2016, to enable moving our U.S. operations to 701 Veterans Circle, Warminster, Pennsylvania. The new location has approximately 35,000 square feet of laboratory facilities and office space. The lease expires on April 30, 2027. We also have the option of extending the lease for two further five-year terms.
 

55



Product development partnership with the Canadian Government

We 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 our costs incurred prior to March 31, 2004, in the development of certain oligonucleotide product candidates up to a maximum contribution from TPC of $7.2 million (C$9.3 million).  As at December 31, 2017, a cumulative contribution of $3.0 million (C$3.7 million) had been received and we do not expect any further funding under this agreement.  In return for the funding provided by TPC, we agreed to pay royalties on the share of future licensing and product revenue, if any that is received by us 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, we agreed to pay a 2.5% royalty on any royalties we receive for Marqibo.
 
In September 2013, we began to earn royalties on Marqibo and the cumulative amount paid or accrued up to December 31, 2017 was $0.02 million resulting in the contingent amount due to TPC being $2.9 million (C$3.7 million).

Contingent consideration from Arbutus Inc. acquisition of Enantigen and License Agreements between Enantigen and Blumberg and 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. in March 2015.
 
Under the stock purchase agreement, Arbutus Inc. agreed to pay up to a total of $21.0 million to Enantigen’s selling stockholders upon the achievement of certain triggering events related to HBV therapies. The first triggering event is enrollment of the first patient in a Phase 1b clinical trial in HBV patients, which we expect may occur in the next twelve month period.

The regulatory, development and sales milestone payments have an estimated fair value of approximately $6.7 million as at the date of acquisition of Arbutus Inc. in March 2015, and have been treated as contingent consideration payable in the purchase price allocation. Contingent consideration is 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. For the period ended December 31, 2017, we performed an evaluation of the fair value of the contingent consideration using the probability weighted assessment of likelihood of milestone payments as described above. We determined the fair value of the contingent consideration has increased to $10.4 million. An increase in fair value of $1.4 million has been recorded in other losses in the statement of operations and comprehensive loss for the year ended December 31, 2017.

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 $0.2 million and issued warrants to Blumberg and Drexel. Under this license agreement, Arbutus Inc. also agreed to pay up to $3.5 million in development and regulatory milestones per licensed compound series, up to $92.5 million 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. We are obligated to pay Blumberg and Drexel a double digit percentage of all amounts received from the sub-licensees, subject to customary exclusions.
 
In November 2014, Arbutus Inc. entered into an additional license agreement with Blumberg and Drexel pursuant to which it received an exclusive, worldwide, sub-licensable license under specified patents and know-how controlled by Blumberg and Drexel covering epigenetic modifiers of cccDNA and STING agonists. In consideration for these exclusive licenses, Arbutus Inc. made an upfront payment of $0.1 million. Under this agreement, we will be required to pay up to $1.0 million 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. We are also obligated to pay Blumberg and Drexel a double digit percentage of all amounts received from its sub-licensees, subject to exclusions.
 

56



Research Collaboration and Funding Agreement with Blumberg

In October 2014, Arbutus Inc. entered into a research collaboration and funding agreement with Blumberg under which we will provide $1.0 million per year of research funding for three years, renewable at our 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, Arbutus 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 Arbutus the right to obtain an exclusive, royalty bearing, worldwide license to any intellectual property generated by any funded research project. If we elect to exercise its right to obtain such a license, we 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 $0.1 million; up to $8.1 million upon the achievement of specified development and regulatory milestones; up to $92.5 million 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, we entered into an amended and restated research collaboration and funding agreement with Blumberg, primarily to: (1) increase the annual funding amount to Blumberg from $1.0 to $1.1 million; (ii) extend the initial term through to October 29, 2018; (iii) provide an option for us 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 an exclusive, royalty-bearing, worldwide and all-fields license under Blumberg's rights in certain other inventions described in the agreement.

 
The following table summarizes our contractual obligations as at December 31, 2017:
(in millions)
Payments Due by Period
 
Total
 
Less
than 1 year
 
1 – 3
years
 
3 – 5
years
 
More than
5 years
Contractual Obligations
 
 
 
 
 
 
 
 
 
Facility lease
$
8.0

 
$
1.6

 
$
1.9

 
$
1.4

 
$
3.1

Loan payable
12.0

 
$

 
$
12.0

 
$

 
$

Total
$
20.0

 
1.6

 
13.9

 
1.4

 
3.1

 
 
We in-license technology from a number of sources. Pursuant to these in-license agreements, we will be required to make additional payments if and when we achieve specified development, regulatory, financial and commercialization milestones. To the extent we are unable to reasonably predict the likelihood, timing or amount of such payments; we have excluded them from the table above. Our technology in-licenses are further described in "Item 1. Business".
 
We also have contracts and collaborative arrangements that require us to undertake certain research and development work as further explained elsewhere in this discussion. It is not practicable to estimate the amount of these obligations.

IMPACT OF INFLATION

Inflation has not had a material impact on our operations.

RELATED PARTY TRANSACTIONS

On October 16, 2017, we closed the sale of 500,000 Series A participating convertible preferred shares ("Preferred Shares") to Roivant for gross proceeds of $50.0 million. A second financing of $66.4 million for 664,000 Preferred Shares closed on January 12, 2018, following receipt of the approval by Arbutus' shareholders on January 11, 2018. The Preferred Shares are non-voting and are convertible into common shares at a conversion price of $7.13 per share (which represents a 15% premium to the closing price of $6.20 per share on October 16, 2017). The purchase price for the Preferred Shares plus an amount equal to 8.75% per annum, compounded annually, will be subject to mandatory conversion into common shares on October 18, 2021 (subject to limited exceptions in the event of certain fundamental corporate transactions relating to Arbutus’ capital structure or assets, which would permit earlier conversion at Roivant’s option).


57



After conversion of the Preferred Shares into common shares, based on the number of common shares outstanding on October 2, 2017, Roivant would hold 49.90% of the Company's common shares. Roivant has agreed to a four year lock-up period for this investment and its existing holdings in Arbutus. Roivant has also agreed to a four year standstill whereby Roivant will not acquire greater than 49.99% of the Company's common shares or securities convertible into common shares.

We are currently negotiating a structure to jointly develop our LNP and GalNAc technologies with Roivant.


OUTSTANDING SHARE DATA

At March 6, 2018, we had 55,070,037 common shares issued and outstanding. In addition, we had outstanding 1,164,000 Series A participating convertible preferred shares outstanding, which will be mandatorily convertible into 22,589,601 common shares on October 18, 2021. Assuming the convertible preferred shares were converted as of March 6, 2018, we would have had 77,659,638 common shares outstanding at March 6, 2018.

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 we adopt as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Please refer to Note 2 to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this annual report on Form 10-K for a description of recent accounting pronouncements applicable to our business. 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk

We are exposed to market risk related to changes in interest rates, which could adversely affect the value of our interest rate sensitive assets and liabilities.  We do not hold any instruments for trading purposes and investment decisions are governed by a Board approved Investment Policy. As at December 31, 2017, we had cash and cash equivalents of $54.3 million and short-term and restricted investments of $84.7 million, as compared to $23.4 million of cash and cash equivalents and $119.7 million of short- and long-term investments as at December 31, 2016. We invest our cash reserves in high interest saving accounts and guaranteed investment certificates and term deposits with varying terms to maturity (not exceeding two years) issued by major banks, selected with regard to the expected timing of expenditures for continuing operations and prevailing interest rates.

The fair value of our cash investments as at December 31, 2017 is equal to the face value of those investments and the value reported in our balance sheet.  Due to the relatively short-term nature of the investments that we hold, we do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to our investment portfolio.  Our debt instrument sensitive to changes in interest rate is our liability-classified stock options, with its fair value determined using the Black-Scholes model, which uses interest rate as an input. We have estimated the effects on our liability-classified stock options based on a one percentage point hypothetical adverse change in interest rates as of December 31, 2017 and 2016. We determined the hypothetical fair value using the same Black-Scholes model, and determined that an increase in the interest rates of one percentage point would have had an immaterial change to our liability-classified stock option awards as at December 31, 2017 and 2016.

Foreign currency exchange risk
 
In addition, we are exposed to market risk related to changes in foreign currency exchange rates. We have not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.  We manage our exchange rate risk by using cash received in a currency to pay for expenses in that same currency, whenever possible. Our policy is to maintain US and Canadian dollar cash and investment balances based on long term forecasts of currency needs thereby creating a natural currency hedge. As of December 31, 2017 and 2016, an adverse change of one percentage point in the foreign currency exchange rates of Canadian to US dollars would have resulted in an incremental loss of $0.3 million and $0.4 million, respectively. We recorded foreign exchange gains of $2.3 million and $1.1 million for the fiscal years ended December 31, 2017 and 2016, respectively.


58



On January 1, 2016, our functional currency changed from the Canadian dollar to the U.S. dollar based on our analysis of changes in the primary economic environment in which we operate. We will continue to incur substantial expenses and hold cash and investment balances in Canadian dollars, and as such, will remain subject to risks associated with foreign currency fluctuations.
 

 

59



Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page

 

60



Report Of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Arbutus Biopharma Corporation

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Arbutus Biopharma Corporation (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB and in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG
Chartered Professional Accountants

We have served as the Company’s auditor since 2002.
Vancouver, Canada
March 15, 2018

 

61




Report Of Independent Registered Public Accounting Firm

 
To the Stockholders and Board of Directors of Arbutus Biopharma Corporation

Opinion on Internal Control Over Financial Reporting

We have audited Arbutus Biopharma Corporation’s (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated March 15, 2018, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB and in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG
Chartered Professional Accountants

Vancouver, Canada
March 15, 2018

 

62



ARBUTUS BIOPHARMA CORPORATION
Consolidated Balance Sheets
(Expressed in thousands of US Dollars, except share and per share amounts)
(Prepared in accordance with US GAAP)
 
December 31, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
54,292

 
$
23,413

Short-term investments (note 2)
72,060

 
107,146

Accounts receivable
402

 
273

Accrued revenue
128

 
128

Investment tax credits receivable
340

 
293

Prepaid expenses and other assets
2,144

 
1,311

Total current assets
129,366

 
132,564

Restricted investment (note 2)
12,601

 
12,601

Long-term investments

 

Property and equipment (note 5)
24,854

 
17,683

Less accumulated depreciation (note 5)
(12,671
)
 
(10,738
)
Property and equipment, net of accumulated depreciation (note 5)
12,183

 
6,945

Intangible assets (note 3)
58,647

 
99,445

Goodwill (note 3)
24,364

 
24,364

Total assets
$
237,161

 
$
275,919

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities (note 12)
$
10,646

 
$
9,910

Deferred revenue (note 4)
2,742

 
15

Liability-classified options (notes 2 and 6)
1,239

 
553

Warrants (notes 2 and 6)

 
107

Total current liabilities
14,627

 
10,585

Deferred revenue, net of current portion (note 4)

 

Deferred rent and inducements, long term
693

 

Loan payable (notes 2 and 9)
12,001

 
12,001

Contingent consideration (note 10)
10,424

 
9,065

Deferred tax liability (notes 3 and 8)
16,943

 
41,263

Total liabilities
54,688

 
72,914

Stockholders’ equity:
 

 
 

Preferred shares (note 6)
 
 
 
Authorized - 1,164,000 with no par value
 
 
 
Issued and outstanding: 500,000 (December 31, 2016 - nil)
49,780

 

Common shares (note 6)
 

 
 

Authorized - unlimited number with no par value
 

 
 

Issued and outstanding: 55,060,662 (December 31, 2016 - 54,841,494)
876,108

 
867,393

Additional paid-in capital
42,840

 
36,543

Deficit
(738,070
)
 
(652,746
)
Accumulated other comprehensive loss
(48,185
)
 
(48,185
)
Total stockholders' equity
182,473

 
203,005

Total liabilities and stockholders' equity
$
237,161

 
$
275,919


Nature of business and future operations (note 1)
Contingencies and commitments (note 10)
Subsequent events (note 14)
See accompanying notes to the consolidated financial statements.

63



ARBUTUS BIOPHARMA CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in thousands of US Dollars, except share and per share amounts)
(Prepared in accordance with US GAAP)
 
Year ended December 31,
 
2017

2016

2015
Revenue (note 4)
 

 

 
Collaborations and contracts
$
682


$
229


$
11,712

Licensing fees, milestone and royalty payments
10,018


1,262


11,564

Total revenue
10,700


1,491


23,276

 
 
 
 
 
 
Expenses
 


 


 

Research, development, collaborations and contracts
62,676


61,253


51,505

General and administrative
16,129


39,438


26,438

Depreciation of property and equipment
2,027


1,092


589

Acquisition costs (note 2)

 

 
9,656

Impairment of intangible assets (note 3)
40,798

 
253,197

 
39,007

Impairment of goodwill (note 3)

 
138,150

 

Total expenses
121,630


493,130


127,195

 
 
 
 
 
 
Loss from operations
(110,930
)

(491,639
)

(103,919
)
 
 
 
 
 
 
Other income (losses)
 


 


 

Interest income
1,538


1,391


674

Interest expense
(261
)
 

 

Foreign exchange gains
2,301


1,120


21,771

Gain on disposition of financial instrument (note 4)

 
1,000

 

Decrease (increase) in fair value of warrant liability (note 2)
(22