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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from           to          
Commission File Number: 001-34949
ARBUTUS BIOPHARMA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
British Columbia, Canada98-0597776
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification No.)
701 Veterans Circle, Warminster, PA 18974
(Address of Principal Executive Offices and Zip Code)
267-469-0914
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares, without par valueABUS       The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒       No ☐   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒       No  ☐  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filerNon-accelerated filer Smaller reporting companyEmerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes       No ☒
As of August 5, 2020, the registrant had 80,909,259 common shares, without par value, outstanding.



ARBUTUS BIOPHARMA CORPORATION
TABLE OF CONTENTS
Page
   
           ITEM 2.
           ITEM 3.
           ITEM 4.
 
           ITEM 1.
           ITEM 1A.
           ITEM 2.
           ITEM 3.
           ITEM 4.
           ITEM 5.
           ITEM 6.



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
June 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$45,899  $31,799  
Investments in marketable securities, current36,489  59,035  
Accounts receivable1,108  1,204  
Prepaid expenses and other current assets2,040  1,790  
Total current assets85,536  93,828  
Property and equipment, net of accumulated depreciation of $6,643 (December 31, 2019: $5,642)
7,741  8,676  
Investments in marketable securities, non-current1,600    
Right of use asset2,575  2,738  
Other non-current assets173  293  
Total assets$97,625  $105,535  
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities$5,813  $7,235  
Liability-classified options150  253  
Lease liability, current364  340  
Total current liabilities6,327  7,828  
Liability related to sale of future royalties19,739  18,992  
Contingent consideration3,181  2,953  
Lease liability, non-current2,867  3,018  
Total liabilities32,114  32,791  
Stockholders’ equity  
Preferred shares
Authorized: unlimited number without par value
Issued and outstanding: 1,164,000 (December 31, 2019: 1,164,000)
143,258  137,285  
Common shares
Authorized: unlimited number without par value
Issued and outstanding: 71,256,579 (December 31, 2019: 64,780,314
916,066  898,535  
Additional paid-in capital58,300  55,246  
Deficit(1,004,014) (970,093) 
Accumulated other comprehensive loss(48,099) (48,229) 
Total stockholdersequity
65,511  72,744  
Total liabilities and stockholders’ equity$97,625  $105,535  

See accompanying notes to the condensed consolidated financial statements.
1


ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenue
Collaborations and licenses$825  $398  $1,660  $814  
Non-cash royalty revenue689  255  1,345  $518  
Total Revenue1,514  653  3,005  1,332  
Operating expenses  
Research and development10,465  12,740  20,881  27,452  
General and administrative3,566  8,189  7,119  12,601  
Depreciation and amortization501  505  1,001  1,014  
Change in fair value of contingent consideration116  130  228  255  
Site consolidation7  (266) 64  (149) 
Total operating expenses14,655  21,298  29,293  41,173  
Loss from operations(13,141) (20,645) (26,288) (39,841) 
Other income (loss)
Interest income200  606  545  1,206  
Interest expense(1,099) (2) (2,140) (14) 
Foreign exchange gain (loss)(47) 60  (65) 68  
Equity investment loss  (3,334)   (7,985) 
Total other loss(946) (2,670) (1,660) (6,725) 
Loss before income taxes(14,087) (23,315) (27,948) (46,566) 
Income tax benefit        
Net loss(14,087) (23,315) (27,948) (46,566) 
Items applicable to preferred shares:
Dividend accretion of convertible preferred shares(2,995) (2,762) (5,973) (5,477) 
Net loss attributable to common shares$(17,082) $(26,077) $(33,921) $(52,043) 
Loss per share  
Basic and diluted$(0.25) $(0.46) $(0.49) $(0.92) 
Weighted average number of common shares  
Basic and diluted69,604,726  56,805,583  68,656,566  56,275,795  
Comprehensive income (loss)
Unrealized gain on available-for-sale securities$122  $  $130  $  
Currency translation adjustment  (52) $  (74) 
Comprehensive loss$(13,965) $(23,367) $(27,818) $(46,640) 
See accompanying notes to the condensed consolidated financial statements.
2


ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
Convertible Preferred SharesCommon Shares
 Number of SharesShare CapitalNumber of SharesShare CapitalAdditional Paid-In CapitalDeficitAccumulated Other Comprehensive LossTotal Stockholders' Equity
Balance December 31, 20191,164,000  $137,285  64,780,314  $898,535  $55,246  $(970,093) $(48,229) $72,744  
Accretion of accumulated dividends on Preferred Shares—  2,978  —  —  —  (2,978) —    
Stock-based compensation—  —  —  —  1,460  —  —  1,460  
Certain fair value adjustments to liability stock option awards—  —  —  —  180  —  —  180  
Issuance of common shares pursuant to the Open Market Sales Agreement—  —  4,147,081  12,315  —  —  —  12,315  
Issuance of common shares pursuant to exercise of options—  —  34,000  249  (83) —  —  166  
Unrealized gain on available-for-sale securities—  —  —  —  —  —  252  252  
Net loss—  —  —  —  —  (13,861) —  (13,861) 
Balance March 31, 20201,164,000  $140,263  68,961,395  $911,099  $56,803  $(986,932) $(47,977) $73,256  
Accretion of accumulated dividends on Preferred Shares—  2,995  —  —  —  (2,995) —    
Stock-based compensation—  —  —  —  1,597  —  —  1,597  
Certain fair value adjustments to liability stock option awards—  —  —  —  (92) —  —  (92) 
Issuance of common shares pursuant to the Open Market Sales Agreement—  —  2,291,184  5,045  —  —  —  5,045  
Issuance of common shares pursuant to exercise of options—  —  4,000  (78) (8) —  —  (86) 
Unrealized gain on available-for-sale securities—  —  —  —  —  —  (122) (122) 
Net loss—  —  —  —  —  (14,087) —  (14,087) 
Balance June 30, 20201,164,000  $143,258  71,256,579  $916,066  $58,300  $(1,004,014) $(48,099) $65,511  


See accompanying notes to the condensed consolidated financial statements.



















3





ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
Convertible Preferred SharesCommon Shares
 Number of SharesShare CapitalNumber of SharesShare CapitalAdditional Paid-In CapitalDeficitAccumulated Other Comprehensive LossTotal Stockholders' Equity
Balance December 31, 20181,164,000  126,136  55,518,800  $879,405  $48,084  $(805,221) $(48,170) $200,234  
Accretion of accumulated dividends on Preferred Shares—  2,715  —  —  —  (2,715) —    
Stock-based compensation—  —  —  —  1,665  —  —  1,665  
Certain fair value adjustments to liability stock option awards—  —  —  —  47  —  —  47  
Issuance of common shares pursuant to the Open Market Sales Agreement—  —  614,401  2,248  —  —  —  2,248  
Issuance of common shares pursuant to exercise of options—  —  122,603  490  (202) —  —  288  
Currency translation adjustment—  —  —  —  —  —  (22) (22) 
Net loss—  —  —  —  —  (23,251) —  (23,251) 
Balance March 31, 20191,164,000  $128,851  56,255,804  $882,143  $49,594  $(831,187) $(48,192) $181,209  
Accretion of accumulated dividends on Preferred Shares—  2,762  —  —  —  (2,762) —    
Stock-based compensation—  —  —  —  3,915  —  —  3,915  
Certain fair value adjustments to liability stock option awards—  —  —  —  230  —  —  230  
Issuance of common shares pursuant to the Open Market Sales Agreement—  —  593,689  2,477  —  —  —  2,477  
Issuance of common shares pursuant to exercise of options—  —  679  3  (1) —  —  2  
Currency translation adjustment—  —  —  —  —  —  (52) (52) 
Net loss—  —  —  —  —  (23,315) —  (23,315) 
Balance June 30, 20191,164,000  $131,613  56,850,172  $884,623  $53,738  $(857,264) $(48,244) $164,466  

See accompanying notes to the condensed consolidated financial statements.
4


ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands of U.S. Dollars)
 Six Months Ended June 30,
 20202019
OPERATING ACTIVITIES
Net loss$(27,948) $(46,566) 
Non-cash items:
Depreciation1,001  1,014  
Gain on sale of property and equipment  (11) 
Stock-based compensation expense3,042  5,306  
Unrealized foreign exchange losses (gains)56  (95) 
Change in fair value of contingent consideration228  255  
Net equity investment loss  7,985  
Non-cash royalty revenue(1,345) (518) 
Non-cash interest expense2,092    
Net accretion and amortization of investments in marketable securities40    
Net change in operating items:
Accounts receivable96  (100) 
Prepaid expenses and other assets33  759  
Accounts payable and accrued liabilities(1,398) (2,637) 
Other liabilities(151) 423  
Net cash used in operating activities(24,254) (34,185) 
INVESTING ACTIVITIES
Purchase of investments(25,912) (484) 
Disposition of investments46,948  71,749  
Proceeds from sale of property and equipment  11  
Acquisition of property and equipment(66) (271) 
Net cash provided by investing activities20,970  71,005  
FINANCING ACTIVITIES
Issuance of common shares pursuant to the Open Market Sale agreement17,360  4,725  
Issuance of common shares pursuant to exercise of options80  290  
Net cash provided by financing activities17,440  5,015  
Effect of foreign exchange rate changes on cash and cash equivalents(56) 95  
Increase in cash and cash equivalents14,100  41,930  
Cash and cash equivalents, beginning of period31,799  36,942  
Cash and cash equivalents, end of period$45,899  $78,872  
Supplemental cash flow information
Preferred shares dividends accrued(5,973) (5,477) 
See accompanying notes to the condensed consolidated financial statements.





5



ARBUTUS BIOPHARMA CORPORATION

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

1.      Nature of business and future operations

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

The Company’s pipeline includes:

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

The Company’s research and development activities and commercialization of its products are dependent on its ability to successfully obtain adequate financing through a combination of financing activities and operations. The success of the Company is dependent on progressing its pipeline and subsequently obtaining the necessary regulatory approvals to bring its products to market and achieving profitable operations. It is not possible to predict either the outcome of the Company’s existing or future research and development programs or the Company’s ability to continue to fund these programs in the future, nor to predict whether it will be successful in obtaining the necessary regulatory approvals to bring its products to market.

COVID-19

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

6


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

2.      Significant accounting policies

Basis of presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial statements and accordingly, do not include all disclosures required for annual financial statements. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments and reclassifications necessary to fairly present the Company’s financial position as of June 30, 2020, the Company’s results of operations for the three and six months ended June 30, 2020 and the Company’s cash flows for the six months ended June 30, 2020. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company for the year ended December 31, 2019, except as described below under Recent Accounting Pronouncements.

Principles of consolidation

These unaudited condensed consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries, Arbutus Biopharma Inc. (“Arbutus Inc.”) and Arbutus Biopharma US Holdings, Inc. All intercompany transactions and balances have been eliminated in consolidation.

Net loss attributable to common shareholders per share

The Company follows the two-class method when computing net loss attributable to common shareholders per share as the Company has issued Series A participating convertible preferred shares (the “Preferred Shares”), as further described in note 11, that meet the definition of participating securities. The Preferred Shares entitle the holders to participate in dividends but do not require the holders to participate in losses of the Company. Accordingly, if the Company reports a net loss attributable to holders of the Company’s common shares, net losses are not allocated to holders of the Preferred Shares.

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

Revenue recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (”ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under a five-step model: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as a performance obligation is satisfied.

7


The Company generates revenue primarily through collaboration agreements and license agreements. Such agreements may require the Company to deliver various rights and/or services, including intellectual property rights or licenses and research and development services. Under such agreements, the Company is generally eligible to receive non-refundable upfront payments, funding for research and development services, milestone payments, and royalties.

In contracts where the Company has more than one performance obligation to provide its customer with goods or services, each performance obligation is evaluated to determine whether it is distinct based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative stand-alone selling prices. The estimated stand-alone selling price of each deliverable reflects the Company’s best estimate of what the selling price would be if the deliverable was regularly sold on a stand-alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if the selling price on a stand-alone basis is not available.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to the customer for the related goods or services. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

Segment information

The Company operates as a single segment.

Recent accounting pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

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

3. Fair value of financial instruments

The Company measures certain financial instruments and other items at fair value.

To determine the fair value, the Company uses the fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use to value an asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs based on assumptions about the factors market participants would use to value an asset or liability. The three levels of inputs that may be used to measure fair value are as follows:
 
Level 1 inputs are quoted market prices for identical instruments available in active markets.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. If the asset or liability has a contractual term, the input must be observable for substantially the full term. An example includes quoted market prices for similar assets or liabilities in active markets.
Level 3 inputs are unobservable inputs for the asset or liability and will reflect management’s assumptions about market assumptions that would be used to price the asset or liability.

8


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

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

To determine the fair value of the contingent consideration (note 8), the Company uses a probability weighted assessment of the likelihood the milestones would be met and the estimated timing of such payments, and then the potential contingent payments were discounted to their present value using a probability adjusted discount rate that reflects the early stage nature of the development program, time to complete the program development, and overall biotech indices. The Company determined the fair value of the contingent consideration was $3.2 million as of June 30, 2020 and the increase of $0.2 million has been recorded as a component of total operating expenses in the statement of operations and comprehensive loss for the six months ended June 30, 2020. The assumptions used in the discounted cash flow model are level 3 inputs as defined above. The Company assessed the sensitivity of the fair value measurement to changes in these unobservable inputs, and determined that changes within a reasonable range would not result in a materially different assessment of fair value.  

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value:
Level 1Level 2Level 3Total
As of June 30, 2020(in thousands)
Assets
Cash and cash equivalents$45,899  $  $  $45,899  
Short-term investments36,489      36,489  
Long-term investments1,600