UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2022
OR
For the Transition Period from to
Commission File Number: 001-34949
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |||||||
| Incorporation or Organization) | Identification No.) | |||||||
(Address of Principal Executive Offices and Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | Smaller reporting company | Emerging growth company | |||||||||||
| ☐ | ☐ | ☒ | ||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of November 8, 2022, the registrant had 156,467,085 common shares, without par value, outstanding.
ARBUTUS BIOPHARMA CORPORATION
| Page | ||||||||
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)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Investments in marketable securities, current | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ (December 31, 2021: $ | |||||||||||
| Investments in marketable securities, non-current | |||||||||||
| Right of use asset | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | $ | |||||||||
| Deferred license revenue, current | |||||||||||
| Lease liability, current | |||||||||||
| Total current liabilities | |||||||||||
| Liability related to sale of future royalties | |||||||||||
| Deferred license revenue, non-current | |||||||||||
| Contingent consideration | |||||||||||
| Lease liability, non-current | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity | |||||||||||
| Common shares | |||||||||||
| Authorized: unlimited number without par value | |||||||||||
Issued and outstanding: (December 31, 2021: | |||||||||||
| Additional paid-in capital | |||||||||||
| Deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Collaborations and licenses | $ | $ | $ | $ | |||||||||||||||||||
| Non-cash royalty revenue | |||||||||||||||||||||||
| Total Revenue | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Change in fair value of contingent consideration | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (loss) | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Foreign exchange loss | ( | ( | ( | ||||||||||||||||||||
| Total other income (loss) | ( | ( | ( | ||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Items applicable to preferred shares: | |||||||||||||||||||||||
| Dividend accretion of convertible preferred shares | ( | ( | |||||||||||||||||||||
| Net loss attributable to common shares | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Loss per share | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average number of common shares | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
| Comprehensive loss | |||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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)
| Common Shares | |||||||||||||||||||||||||||||||||||
| Number of Shares | Share Capital | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Certain fair value adjustments to liability stock option awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to the Open Market Sale Agreement | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to exercise of options | ( | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to ESPP | ( | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to Share Purchase Agreement | — | — | — | ||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Certain fair value adjustments to liability stock option awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to exercise of options | ( | — | — | ||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Certain fair value adjustments to liability stock option awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to the Open Market Sale Agreement | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to ESPP | ( | — | — | ||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
ARBUTUS BIOPHARMA CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In thousands of U.S. Dollars, except share and per share amounts)
| Convertible Preferred Shares | Common Shares | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Share Capital | Number of Shares | Share Capital | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Accretion of accumulated dividends on Preferred Shares | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Certain fair value adjustments to liability stock option awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to the Open Market Sale Agreement | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to exercise of options | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to ESPP | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Accretion of accumulated dividends on Preferred Shares | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Certain fair value adjustments to liability stock option awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to the Open Market Sale Agreement | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to exercise of options | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Accretion of accumulated dividends on Preferred Shares | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Certain fair value adjustments to liability stock option awards | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to the Open Market Sale Agreement | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to exercise of options | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to ESPP | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
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)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Non-cash items: | |||||||||||
| Depreciation | |||||||||||
| Gain on sale of property and equipment | ( | ||||||||||
| Stock-based compensation expense | |||||||||||
| Change in fair value of contingent consideration | |||||||||||
| Non-cash royalty revenue | ( | ( | |||||||||
| Non-cash interest expense | |||||||||||
| Net accretion and amortization of investments in marketable securities | |||||||||||
| Net change in operating items: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Deferred license revenue | |||||||||||
| Other liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchase of investments | ( | ( | |||||||||
| Disposition of investments | |||||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Acquisition of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Issuance of common shares pursuant to Share Purchase Agreement | |||||||||||
| Issuance of common shares pursuant to the Open Market Sale agreement | |||||||||||
| Issuance of common shares pursuant to exercise of options | |||||||||||
| Issuance of common shares pursuant to ESPP | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | ( | ||||||||||
| (Decrease)/increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental cash flow information | |||||||||||
| Preferred shares dividends accrued | $ | $ | ( | ||||||||
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
Description of the Business
Arbutus Biopharma Corporation (“Arbutus” or the “Company”) is a clinical-stage biopharmaceutical company leveraging its extensive virology expertise to develop novel therapeutics that target specific viral diseases. The Company’s current focus areas include Hepatitis B virus (“HBV”), SARS-CoV-2, and coronaviruses. In HBV, the Company is developing an RNA interference (“RNAi”) therapeutic, an oral PD-L1 inhibitor, and an oral RNA destabilizer to potentially identify a combination regimen with the aim of providing a functional cure for patients with chronic HBV infection (“cHBV”) by suppressing viral replication, reducing surface antigen and reawakening the immune system. The Company believes its lead compound, AB-729, is the only RNAi therapeutic with evidence of immune re-awakening, and is currently being evaluated in multiple phase 2 clinical trials. The Company has an ongoing drug discovery and development program directed to identifying novel, orally active agents for treating coronaviruses, including SARS-CoV-2. The Company is also exploring oncology applications for its internal PD-L1 portfolio.
Liquidity
At September 30, 2022, the Company had an aggregate of $190.2 million in cash, cash equivalents and investments in marketable securities. The Company had no outstanding debt as of September 30, 2022. The Company believes it has sufficient cash resources to fund its operations for at least the next 12 months.
The success of the Company is dependent on obtaining the necessary regulatory approvals to bring its products to market and achieve profitable operations. The Company’s research and development activities and the commercialization of its products are dependent on its ability to successfully complete these activities and to obtain adequate financing through a combination of financing activities and operations. It is not possible to predict either the outcome of the Company’s existing or future research and development programs or the Company’s ability to continue to fund these programs in the future.
COVID-19 Impact
6
2. Significant accounting policies
Basis of presentation and principles of consolidation
These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial statements and accordingly, do not include all disclosures required for annual financial statements. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These unaudited condensed consolidated financial statements include the accounts of Arbutus Biopharma Corporation and its one wholly-owned subsidiary, Arbutus Biopharma, Inc., and reflect, in the opinion of management, all adjustments and reclassifications necessary to fairly present the Company’s financial position as of September 30, 2022 and December 31, 2021, the Company’s results of operations for the three and nine months ended September 30, 2022 and 2021, and the Company’s cash flows for the nine months ended September 30, 2022 and 2021. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2022 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, 2021, except as described below under Recent Accounting Pronouncements.
Net loss attributable to common shareholders per share
Net loss attributable to common shareholders per share is calculated based on the weighted average number of common shares outstanding. Diluted net loss attributable to common shareholders per share does not differ from basic net loss attributable to common shareholders per share for the three and nine months ended September 30, 2022 and 2021, since the effect of including potential common shares would be anti-dilutive. For the nine months ended September 30, 2022, potential common shares of 15.9 million pertaining to outstanding stock options were excluded from the calculation of net loss attributable to common shareholders per share. A total of approximately 34.3 million outstanding stock options and if-converted Series A participating convertible preferred shares (“Preferred Shares”) were excluded from the calculation for the nine months ended September 30, 2021.
Revenue from collaborations and licenses
The Company generates revenue through certain 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.
The Company’s collaboration agreements fall under the scope of Accounting Standards Codification (“ASC”) Topic 808, Collaborative Arrangements (“ASC 808”) when both parties are active participants in the arrangement and are exposed to significant risks and rewards. For certain arrangements under the scope of ASC 808, the Company analogizes to ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) for some aspects, including for the delivery of a good or service (i.e., a unit of account).
ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under a five-step model: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as a performance obligation is satisfied.
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
7
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.
Deferred Revenue
When consideration is received or is unconditionally due from a customer, collaborator or licensee prior to the Company completing its performance obligation to the customer, collaborator or licensee under the terms of a contract, deferred revenue is recorded. Deferred revenue expected to be recognized as revenue within the 12 months following the balance sheet date is classified as a current liability. Deferred revenue not expected to be recognized as revenue within the 12 months following the balance sheet date is classified as a long-term liability. In accordance with ASC Topic 210-20, Balance Sheet - Offsetting the Company’s deferred revenue is offset by a contract asset as further discussed in Note 9.
Recent accounting pronouncements
The Company has reviewed all recently issued standards and has determined that such standards will not have a material impact on the Company’s financial statements or do not otherwise apply to the Company’s operations.
3. Fair value measurements
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 maximize the use of observable inputs and minimize 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.
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, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturity of these financial instruments.
8
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| As of September 30, 2022 | (in thousands) | ||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Investments in marketable securities, current | |||||||||||||||||||||||
| Investments in marketable securities, non-current | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Liability-classified stock options | $ | $ | $ | $ | |||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| As of December 31, 2021 | (in thousands) | ||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Investments in marketable securities, current | |||||||||||||||||||||||
| Investments in marketable securities, non-current | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Liability-classified stock options | $ | $ | $ | $ | |||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
9
The following table presents the changes in fair value of the Company’s liability-classified stock options:
| Liability at beginning of the period | Fair value of liability-classified options exercised in the period | Decrease in fair value of liability | Liability at end of the period | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||
| Nine Months Ended September 30, 2021 | $ | $ | ( | $ | ( | $ | |||||||||||||||||
The following table presents the changes in fair value of the Company’s contingent consideration:
| Liability at beginning of the period | Increase in fair value of liability | Liability at end of the period | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Nine Months Ended September 30, 2022 | $ | $ | $ | ||||||||||||||
| Nine Months Ended September 30, 2021 | $ | $ | $ | ||||||||||||||
10
4. Investments in marketable securities
Investments in marketable securities consisted of the following:
| Amortized Cost | Gross Unrealized Gain(1) | Gross Unrealized Loss(1) | Fair Value | ||||||||||||||||||||
| As of September 30, 2022 | (in thousands) | ||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| US government money market fund | $ | $ | — | $ | — | $ | |||||||||||||||||
| Total | $ | $ | — | $ | — | $ | |||||||||||||||||
| Investments in marketable short-term securities | |||||||||||||||||||||||
| US government agency bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| US corporate bonds | ( | ||||||||||||||||||||||
| US treasury bills | ( | ||||||||||||||||||||||
| US government bonds | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| Investments in marketable long-term securities | |||||||||||||||||||||||
| US government agency bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| US corporate bonds | ( | ||||||||||||||||||||||
| US government bonds | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
(1) Gross unrealized gain (loss) is pre-tax and is reported in accumulated other comprehensive loss.
| Amortized Cost | Gross Unrealized Gain(1) | Gross Unrealized Loss(1) | Fair Value | ||||||||||||||||||||
| As of December 31, 2021 | (in thousands) | ||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| US government money market fund | $ | $ | — | $ | — | $ | |||||||||||||||||
| Total | $ | $ | — | $ | — | $ | |||||||||||||||||
| Investments in marketable short-term securities | |||||||||||||||||||||||
| US government agency bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| US treasury bills | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| Investments in marketable long-term securities | |||||||||||||||||||||||
| US government agency bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| US treasury bills | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
(1) Gross unrealized gain (loss) is pre-tax and is reported in accumulated other comprehensive loss.
The contractual term to maturity of the $110.7 million of short-term marketable securities held by the Company as of September 30, 2022 is less than one year. As of September 30, 2022, the Company held $55.4 million of long-term marketable securities with contractual maturities of more than one year, but less than five years. As of December 31, 2021, the Company’s $46.0 million of short-term marketable securities had contractual maturities of less than one year, while the Company’s $35.7 million of long-term marketable securities had maturities of more than one year, but less than five years.
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5. Investment in Genevant
In April 2018, the Company entered into an agreement with Roivant Sciences Ltd. (“Roivant”), its largest shareholder, to launch Genevant Sciences Ltd. (“Genevant”), a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by the Company’s lipid nanoparticle (“LNP”) and ligand conjugate delivery technologies. The Company licensed exclusive rights to its LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties (the “Genevant License”). The Company retained all rights to its LNP and conjugate delivery platforms for HBV.
Under the Genevant License, as amended, if a third party sublicensee of intellectual property licensed by Genevant from the Company commercializes a sublicensed product, the Company becomes entitled to receive a specified percentage of certain revenue that may be received by Genevant for such sublicense, including royalties, commercial milestones and other sales-related revenue, or, if less, tiered low single-digit royalties on net sales of the sublicensed product. The specified percentage is 20 % in the case of a mere sublicense (i.e., naked sublicense) by Genevant without additional contribution and 14 % in the case of a bona fide collaboration with Genevant.
Additionally, if Genevant receives proceeds from an action for infringement by any third parties of the Company’s intellectual property licensed to Genevant, the Company would be entitled to receive, after deduction of litigation costs, 20 % of the proceeds received by Genevant or, if less, tiered low single-digit royalties on net sales of the infringing product (inclusive of the proceeds from litigation or settlement, which would be treated as net sales).
The Company accounts for its interest in Genevant as equity securities without readily determinable fair values. Accordingly, an estimate of the fair value of the securities is based on the original cost less previously recognized equity method losses, less impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or a similar Genevant securities. As of September 30, 2022, the carrying value of the Company’s investment in Genevant was zero and the Company owned approximately 16 % of the common equity of Genevant.
6. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are comprised of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Trade accounts payable | $ | $ | |||||||||
| Research and development accruals | |||||||||||
| Professional fee accruals | |||||||||||
| Payroll accruals | |||||||||||
| Other accrued liabilities | |||||||||||
| Total accounts payable and accrued liabilities | $ | $ | |||||||||
7. Sale of future royalties
On July 2, 2019, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with the Ontario Municipal Employees Retirement System (“OMERS”), pursuant to which the Company sold to OMERS part of its royalty interest on future global net sales of ONPATTRO® (Patisiran) (“ONPATTRO”), an RNA interference therapeutic currently being sold by Alnylam Pharmaceuticals, Inc. (“Alnylam”).
ONPATTRO utilizes the Company’s LNP technology, which was licensed to Alnylam pursuant to the Cross-License Agreement, dated November 12, 2012, by and between the Company and Alnylam (the “LNP License Agreement”). Under the terms of the LNP License Agreement, the Company is entitled to tiered royalty payments on global net sales of ONPATTRO ranging from 1.00 % to 2.33 % after offsets, with the highest tier applicable to annual net sales above $500 million. This royalty interest was sold to OMERS, effective as of January 1, 2019, for $20 million in gross proceeds before advisory fees. OMERS will retain this entitlement until it has received $30 million in royalties, at which point 100 % of such royalty interest on future global net sales of ONPATTRO will revert to the Company. OMERS has assumed the risk of collecting up to $30 million of future royalty payments from Alnylam and the Company is not obligated to reimburse OMERS if they fail to collect any such future royalties.
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The $30 million in royalties to be paid to OMERS is accounted for as a liability, with the difference between the liability and the gross proceeds received accounted for as a discount. The discount, as well as $1.5 million of transaction costs, will be amortized as interest expense based on the projected balance of the liability as of the beginning of each period. As of September 30, 2022, the Company estimated an effective annual interest rate of approximately 12 %. Over the course of the Agreement, the actual interest rate will be affected by the amount and timing of royalty revenue recognized and changes in the timing of forecasted royalty revenue. On a quarterly basis, the Company will reassess the expected timing of the royalty revenue, recalculate the amortization and effective interest rate and adjust the accounting prospectively as needed.
The Company recognizes non-cash royalty revenue related to the sales of ONPATTRO during the term of the Agreement. As royalties are remitted to OMERS from Alnylam, the balance of the recognized liability is effectively repaid over the life of the Agreement. From the inception of the royalty sale through September 30, 2022, the Company has recorded an aggregate of $16.5 million of non-cash royalty revenue for royalties earned by OMERS. There are a number of factors that could materially affect the amount and timing of royalty payments from Alnylam, none of which are within the Company’s control.
During the nine months ended September 30, 2022, the Company recognized non-cash royalty revenue of $5.4 million and non-cash interest expense of $1.4 million. During the nine months ended September 30, 2021, the Company recognized non-cash royalty revenue of $4.0 million and related non-cash interest expense of $2.3 million.
The table below shows the activity related to the net liability for the nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net liability related to sale of future royalties - beginning balance | $ | $ | |||||||||
| Non-cash royalty revenue | ( | ( | |||||||||
| Non-cash interest expense | |||||||||||
| Net liability related to sale of future royalties - ending balance | $ | $ | |||||||||
In addition to the royalty from the LNP License Agreement, the Company is also receiving a second royalty interest ranging from 0.75 % to 1.125 % on global net sales of ONPATTRO, with 0.75 % applying to sales greater than $500 million, originating from a settlement agreement and subsequent license agreement with Acuitas Therapeutics, Inc. (“Acuitas”). The royalty from Acuitas has been retained by the Company and was not part of the royalty sale to OMERS.
8. Contingencies and commitments
Arbitration with the University of British Columbia
Certain early work on lipid nanoparticle delivery systems and related inventions was undertaken at the University of British Columbia (“UBC”), as well as by the Company that was subsequently assigned to UBC. These inventions are licensed to the Company by UBC under a license agreement, initially entered into in 1998 and as amended in 2001, 2006 and 2007. The Company has granted sublicenses under the UBC license to certain third parties, including Alnylam.
On December 18, 2020, UBC delivered to the Company a notice of arbitration alleging that under the cross license between UBC and Arbutus, it is due royalties of $2.0 million plus interest arising from the Company’s sale to OMERS of part of its royalty interest on future global net sales of ONPATTRO, currently being sold by Alnylam. Oral hearings for this matter were held in April 2022 and, on July 11, 2022, the arbitrator issued his decision fully dismissing UBC’s claim for royalties. As a result, no payments are owed to UBC. In September 2022, the arbitrator awarded the Company $0.5 million for reimbursement of costs and attorneys’ fees, which the Company received from UBC in October 2022. This matter is now fully resolved.
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Stock Purchase Agreement with Enantigen
In October 2014, Arbutus Inc., the Company’s wholly-owned subsidiary, acquired all of the outstanding shares of Enantigen Therapeutics, Inc. (“Enantigen”) pursuant to a stock purchase agreement. The amount paid to Enantigen’s selling shareholders could be up to an additional $102.5 million in sales performance milestones in connection with the sale of the first commercialized product by the Company for the treatment of HBV, regardless of whether such product is based upon assets acquired under this agreement, and a low single-digit royalty on net sales of such first commercialized HBV product, up to a maximum royalty payment of $1.0 million that, if paid, would be offset against the Company’s milestone payment obligations. Certain other development milestones related to the acquisition were tied to programs which are no longer under development by the Company, and therefore the contingency related to those development milestones is zero .
The contingent consideration is a financial liability and is measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statements of operations and comprehensive loss (see note 3).
The fair value of the contingent consideration was $5.9 million as of September 30, 2022.
9. Collaborations, contracts and licensing agreements
Collaborations
Qilu Pharmaceutical Co., Ltd.
In December 2021, the Company entered into a technology transfer and licensing agreement (the “License Agreement”) with Qilu Pharmaceutical Co., Ltd. (“Qilu”), pursuant to which the Company granted Qilu a sublicensable, royalty-bearing license, under certain intellectual property owned by the Company, which is non-exclusive as to development and manufacturing and exclusive with respect to commercialization of AB-729, including pharmaceutical products that include AB-729, for the treatment or prevention of hepatitis B in China, Hong Kong, Macau and Taiwan (the “Territory”).
In partial consideration for the rights granted by the Company, Qilu paid the Company a one-time upfront cash payment of $40.0 million, net of withholding taxes, on January 5, 2022, and agreed to pay the Company milestone payments totaling up to $245.0 million, net of withholding taxes, upon the achievement of certain technology transfer, development, regulatory and commercialization milestones. Qilu paid $4.4 million of withholding taxes to the Chinese taxing authority on the Company’s behalf, related to the upfront cash payment. In addition, Qilu agreed to pay the Company double digit royalties into the low twenties percent based upon annual net sales of AB-729 in the Territory. The royalties are payable on a product-by-product and region-by-region basis, subject to certain limitations.
Qilu is responsible for all costs related to developing, obtaining regulatory approval for, and commercializing AB-729 for the treatment or prevention of hepatitis B in the Territory. Qilu is required to use commercially reasonable efforts to develop, seek regulatory approval for, and commercialize at least one AB-729 product candidate in the Territory. A joint development committee has been established between the Company and Qilu to coordinate and review the development, manufacturing and commercialization plans. Both parties also have entered into a supply agreement and related quality agreement pursuant to which the Company will manufacture or have manufactured and supply Qilu with all quantities of AB-729 necessary for Qilu to develop and commercialize in the Territory until the Company has completed manufacturing technology transfer to Qilu and approval of a product manufactured by Qilu, or its designated contract manufacturing organization, by the National Medical Products Administration in China for AB-729.
Concurrent with the execution of the License Agreement, the Company entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with Anchor Life Limited, a company established pursuant to the applicable laws and regulations of Hong Kong and an affiliate of Qilu (the “Investor”), pursuant to which the Investor purchased 3,579,952 of the Company’s common shares, without par value (the “Common Shares”), at a purchase price of USD $4.19 per share, which was a 15 % premium on the thirty-day average closing price of the Common Shares as of the close of trading on December 10, 2021 (the “Share Transaction”). The Company received $15.0 million of gross proceeds from the Share Transaction on January 6, 2022. The Common Shares sold to the Investor in the Share Transaction represented approximately 2.5 % of the Common Shares outstanding immediately prior to the execution of the Share Purchase Agreement.
The License Agreement falls under the scope of ASC 808 as both parties are active participants in the arrangement and are exposed to significant