Arbutus Biopharma Corp 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ARBUTUS BIOPHARMA CORPORATION Condensed Consolidated Balance Sheets (Unaudited) (In thousands of U.S. Dollars, except share and per share amounts) June 30, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 45,899 $ 31,799 Investments in marketable securities, current 36,489 59,035 Accounts receivable 1,108 1,204 Prepaid expenses and other current assets 2,040 1,790 Total current assets 85,536 93,828 Property and equipment, net of accumulated depreciation of $ 6,643 (December 31, 2019: $ 5,642 ) 7,741 8,676 Investments in marketable securities, non-current 1,600 — Right of use asset 2,575 2,738 Other non-current assets 173 293 Total assets $ 97,625 $ 105,535 Liabilities and stockholders’ equity Current liabilities: Accounts payable and accrued liabilities $ 5,813 $ 7,235 Liability-classified options 150 253 Lease liability, current 364 340 Total current liabilities 6,327 7,828 Liability related to sale of future royalties 19,739 18,992 Contingent consideration 3,181 2,953 Lease liability, non-current 2,867 3,018 Total liabilities 32,114 32,791 Stockholders’ equity Preferred shares Authorized: unlimited number without par value Issued and outstanding: 1,164,000 (December 31, 2019: 1,164,000 ) 143,258 137,285 Common shares Authorized: unlimited number without par value Issued and outstanding: 71,256,579 (December 31, 2019: 64,780,314 916,066 898,535 Additional paid-in capital 58,300 55,246 Deficit ( 1,004,014 ) ( 970,093 ) Accumulated other comprehensive loss ( 48,099 ) ( 48,229 ) Total stockholders ’ equity 65,511 72,744 Total liabilities and stockholders’ equity $ 97,625 $ 105,535 See accompanying notes to the condensed consolidated financial statements. 1 ARBUTUS BIOPHARMA CORPORATION Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (In thousands of U.S. Dollars, except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue Collaborations and licenses $ 825 $ 398 $ 1,660 $ 814 Non-cash royalty revenue 689 255 1,345 $ 518 Total Revenue 1,514 653 3,005 1,332 Operating expenses Research and development 10,465 12,740 20,881 27,452 General and administrative 3,566 8,189 7,119 12,601 Depreciation and amortization 501 505 1,001 1,014 Change in fair value of contingent consideration 116 130 228 255 Site consolidation 7 ( 266 ) 64 ( 149 ) Total operating expenses 14,655 21,298 29,293 41,173 Loss from operations ( 13,141 ) ( 20,645 ) ( 26,288 ) ( 39,841 ) Other income (loss) Interest income 200 606 545 1,206 Interest expense ( 1,099 ) ( 2 ) ( 2,140 ) ( 14 ) Foreign exchange gain (loss) ( 47 ) 60 ( 65 ) 68 Equity investment loss — ( 3,334 ) — ( 7,985 ) Total other loss ( 946 ) ( 2,670 ) ( 1,660 ) ( 6,725 ) Loss before income taxes ( 14,087 ) ( 23,315 ) ( 27,948 ) ( 46,566 ) Income tax benefit — — — — Net loss ( 14,087 ) ( 23,315 ) ( 27,948 ) ( 46,566 ) Items applicable to preferred shares: Dividend accretion of convertible preferred shares ( 2,995 ) ( 2,762 ) ( 5,973 ) ( 5,477 ) Net loss attributable to common shares $ ( 17,082 ) $ ( 26,077 ) $ ( 33,921 ) $ ( 52,043 ) Loss per share Basic and diluted $ ( 0.25 ) $ ( 0.46 ) $ ( 0.49 ) $ ( 0.92 ) Weighted average number of common shares Basic and diluted 69,604,726 56,805,583 68,656,566 56,275,795 Comprehensive income (loss) Unrealized gain on available-for-sale securities $ 122 $ — $ 130 $ — Currency translation adjustment — ( 52 ) $ — ( 74 ) Comprehensive loss $ ( 13,965 ) $ ( 23,367 ) $ ( 27,818 ) $ ( 46,640 ) See accompanying notes to the condensed consolidated financial statements. 2 ARBUTUS BIOPHARMA CORPORATION Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) (In thousands of U.S. Dollars, except share and per share amounts) Convertible Preferred Shares Common Shares Number of Shares Share Capital Number of Shares Share Capital Additional Paid-In Capital Deficit Accumulated Other Comprehensive Loss Total Stockholders' Equity Balance December 31, 2019 1,164,000 $ 137,285 64,780,314 $ 898,535 $ 55,246 $ ( 970,093 ) $ ( 48,229 ) $ 72,744 Accretion of accumulated dividends on Preferred Shares — 2,978 — — — ( 2,978 ) — — Stock-based compensation — — — — 1,460 — — 1,460 Certain fair value adjustments to liability stock option awards — — — — 180 — — 180 Issuance of common shares pursuant to the Open Market Sales Agreement — — 4,147,081 12,315 — — — 12,315 Issuance of common shares pursuant to exercise of options — — 34,000 249 ( 83 ) — — 166 Unrealized gain on available-for-sale securities — — — — — — 252 252 Net loss — — — — — ( 13,861 ) — ( 13,861 ) Balance March 31, 2020 1,164,000 $ 140,263 68,961,395 $ 911,099 $ 56,803 $ ( 986,932 ) $ ( 47,977 ) $ 73,256 Accretion of accumulated dividends on Preferred Shares — 2,995 — — — ( 2,995 ) — — Stock-based compensation — — — — 1,597 — — 1,597 Certain fair value adjustments to liability stock option awards — — — — ( 92 ) — — ( 92 ) Issuance of common shares pursuant to the Open Market Sales Agreement — — 2,291,184 5,045 — — — 5,045 Issuance of common shares pursuant to exercise of options — — 4,000 ( 78 ) ( 8 ) — — ( 86 ) Unrealized gain on available-for-sale securities — — — — — — ( 122 ) ( 122 ) Net loss — — — — — ( 14,087 ) — ( 14,087 ) Balance June 30, 2020 1,164,000 $ 143,258 71,256,579 $ 916,066 $ 58,300 $ ( 1,004,014 ) $ ( 48,099 ) $ 65,511 See accompanying notes to the condensed consolidated financial statements. 3 ARBUTUS BIOPHARMA CORPORATION Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) (In thousands of U.S. Dollars, except share and per share amounts) Convertible Preferred Shares Common Shares Number of Shares Share Capital Number of Shares Share Capital Additional Paid-In Capital Deficit Accumulated Other Comprehensive Loss Total Stockholders' Equity Balance December 31, 2018 1,164,000 126,136 55,518,800 $ 879,405 $ 48,084 $ ( 805,221 ) $ ( 48,170 ) $ 200,234 Accretion of accumulated dividends on Preferred Shares — 2,715 — — — ( 2,715 ) — — Stock-based compensation — — — — 1,665 — — 1,665 Certain fair value adjustments to liability stock option awards — — — — 47 — — 47 Issuance of common shares pursuant to the Open Market Sales Agreement — — 614,401 2,248 — — — 2,248 Issuance of common shares pursuant to exercise of options — — 122,603 490 ( 202 ) — — 288 Currency translation adjustment — — — — — — ( 22 ) ( 22 ) Net loss — — — — — ( 23,251 ) — ( 23,251 ) Balance March 31, 2019 1,164,000 $ 128,851 56,255,804 $ 882,143 $ 49,594 $ ( 831,187 ) $ ( 48,192 ) $ 181,209 Accretion of accumulated dividends on Preferred Shares — 2,762 — — — ( 2,762 ) — — Stock-based compensation — — — — 3,915 — — 3,915 Certain fair value adjustments to liability stock option awards — — — — 230 — — 230 Issuance of common shares pursuant to the Open Market Sales Agreement — — 593,689 2,477 — — — 2,477 Issuance of common shares pursuant to exercise of options — — 679 3 ( 1 ) — — 2 Currency translation adjustment — — — — — — ( 52 ) ( 52 ) Net loss — — — — — ( 23,315 ) — ( 23,315 ) Balance June 30, 2019 1,164,000 $ 131,613 56,850,172 $ 884,623 $ 53,738 $ ( 857,264 ) $ ( 48,244 ) $ 164,466 See accompanying notes to the condensed consolidated financial statements. 4 ARBUTUS BIOPHARMA CORPORATION Condensed Consolidated Statements of Cash Flow (Unaudited) (In thousands of U.S. Dollars) Six Months Ended June 30, 2020 2019 OPERATING ACTIVITIES Net loss $ ( 27,948 ) $ ( 46,566 ) Non-cash items: Depreciation 1,001 1,014 Gain on sale of property and equipment — ( 11 ) Stock-based compensation expense 3,042 5,306 Unrealized foreign exchange losses (gains) 56 ( 95 ) Change in fair value of contingent consideration 228 255 Net equity investment loss — 7,985 Non-cash royalty revenue ( 1,345 ) ( 518 ) Non-cash interest expense 2,092 — Net accretion and amortization of investments in marketable securities 40 — Net change in operating items: Accounts receivable 96 ( 100 ) Prepaid expenses and other assets 33 759 Accounts payable and accrued liabilities ( 1,398 ) ( 2,637 ) Other liabilities ( 151 ) 423 Net cash used in operating activities ( 24,254 ) ( 34,185 ) INVESTING ACTIVITIES Purchase of investments ( 25,912 ) ( 484 ) Disposition of investments 46,948 71,749 Proceeds from sale of property and equipment — 11 Acquisition of property and equipment ( 66 ) ( 271 ) Net cash provided by investing activities 20,970 71,005 FINANCING ACTIVITIES Issuance of common shares pursuant to the Open Market Sale agreement 17,360 4,725 Issuance of common shares pursuant to exercise of options 80 290 Net cash provided by financing activities 17,440 5,015 Effect of foreign exchange rate changes on cash and cash equivalents ( 56 ) 95 Increase in cash and cash equivalents 14,100 41,930 Cash and cash equivalents, beginning of period 31,799 36,942 Cash and cash equivalents, end of period $ 45,899 $ 78,872 Supplemental cash flow information Preferred shares dividends accrued ( 5,973 ) ( 5,477 ) See accompanying notes to the condensed consolidated financial statements. 5 ARBUTUS BIOPHARMA CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular amounts in thousands of U.S. Dollars, except share and per share amounts) 1. Nature of business and future operations Arbutus Biopharma Corporation (the “Company” or “Arbutus”) is a clinical-stage biopharmaceutical company primarily focused on developing a cure for people with chronic hepatitis B virus (“HBV”) infection. The Company is advancing multiple drug product candidates that may be combined into a potentially curative regimen for chronic HBV infection. Arbutus has also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19. The Company’s pipeline includes: • AB-729, a subcutaneously-delivered RNA interference (“RNAi”) product candidate currently in a Phase 1a/1b clinical trial. Preliminary positive safety data in single-dose cohorts of healthy subjects and safety and efficacy data in the 60 mg and 180 mg single-dose cohorts in subjects with chronic HBV infection were reported in March 2020. Additional follow-on week 12 data for the 60 mg single-dose cohort were reported in May 2020. The Company is dosing two 60 mg multi-dose cohorts of subjects with chronic HBV infection with dosing intervals of every four and eight weeks, respectively. The Company is also dosing subjects in a 90 mg single-dose cohort and has initiated an additional AB-729 90 mg single-dose cohort in HBV positive subjects. Results from all of these cohorts are expected in the second half of 2020. Additionally, the Company intends to initiate two 90 mg multi-dose cohorts in the second half of 2020. As the Company awaits data from the 90 mg single-dose cohorts, the Company anticipates that the dose interval for the planned 90 mg multi-dose cohorts will be every eight and twelve weeks, respectively; • AB-836, a next-generation capsid inhibitor product candidate currently advancing through IND-enabling studies, which the Company expects to be completed by the end of 2020; and • other compounds early in the development process, including oral compounds that inhibit PD-L1 and next-generation oral HBV RNA destabilizers. The Company’s research and development activities and commercialization of its products are dependent on its ability to successfully obtain adequate financing through a combination of financing activities and operations. The success of the Company is dependent on progressing its pipeline and subsequently obtaining the necessary regulatory approvals to bring its products to market and achieving profitable operations. It is not possible to predict either the outcome of the Company’s existing or future research and development programs or the Company’s ability to continue to fund these programs in the future, nor to predict whether it will be successful in obtaining the necessary regulatory approvals to bring its products to market. COVID-19 In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) was identified in Wuhan, China. This virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to nearly every country in the world. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society. The pandemic has resulted in and will likely continue to result in significant disruptions to businesses. A number of countries and other jurisdictions around the world have implemented extreme measures in an attempt to slow the spread of the virus. These measures include the closing of businesses and requiring people to stay in their homes, the latter of which raises uncertainty regarding the ability to travel to hospitals in order to participate in clinical trials. Additional measures that have had, and will likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, and prohibitions in certain countries on enrolling subjects in new clinical trials. Despite the challenges of COVID-19, we have not had to alter our objectives for 2020. However, future disruptions related to the COVID-19 pandemic could negatively impact our plans and timelines, including enrolling and monitoring subjects in our clinical trials. 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 1 Level 2 Level 3 Total As of June 30, 2020 (in thousands) Assets Cash and cash equivalents $ 45,899 $ — $ — $ 45,899 Short-term investments 36,489 — — 36,489 Long-term investments 1,600 — — 1,600 Total 83,988 — — 83,988 Liabilities Liability-classified options — — 150 150 Contingent consideration — — 3,181 3,181 Total $ — $ — $ 3,331 $ 3,331 Level 1 Level 2 Level 3 Total As of December 31, 2019 (in thousands) Assets Cash and cash equivalents $ 31,799 $ — $ — $ 31,799 Short-term investments 59,035 — — 59,035 Total 90,834 — — 90,834 Liabilities Liability-classified stock option awards — — 253 253 Contingent consideration — — 2,953 2,953 Total $ — $ — $ 3,206 $ 3,206 9 The following table presents the changes in fair value of the Company’s liability-classified stock option awards: Liability at beginning of the period Fair value of liability-classified options exercised in the period Increase (decrease) in fair value of liability Liability at end of the period (in thousands) Six Months Ended June 30, 2020 $ 253 $ — $ ( 103 ) $ 150 Six Months Ended June 30, 2019 $ 479 $ — $ ( 338 ) $ 141 The following table presents the changes in fair value of the Company’s contingent consideration: Liability at beginning of the period Increase (decrease) in fair value of liability Liability at end of the period (in thousands) Six Months Ended June 30, 2020 $ 2,953 $ 228 $ 3,181 Six Months Ended June 30, 2019 $ 3,126 $ 255 $ 3,381 4. Investments in marketable securities Investments in marketable securities consisted of the following: Amortized Cost Gross Unrealized Gain (1) Gross Unrealized Loss (1) Fair Value As of June 30, 2020 (in thousands) Cash equivalents Money market fund 28,606 $ — $ — 28,606 US government agency bonds — — — — US treasury bills — — — — Total $ 28,606 $ — $ — $ 28,606 Investments in marketable securities US government agency bonds $ 15,357 $ 52 $ — $ 15,409 US treasury bills 4,494 6 — 4,500 US government bonds 18,108 72 — 18,180 Total $ 37,959 $ 130 $ — $ 38,089 (1) Gross unrealized gain (loss) is pre-tax and is reported in other comprehensive loss. Amortized Cost Gross Unrealized Gain (1) Gross Unrealized Loss (1) Fair Value As of December 31, 2019 (in thousands) Cash equivalents Money market fund $ 4,106 $ — $ — $ 4,106 US government agency bonds 1,511 — — 1,511 US treasury bills 1,499 — — 1,499 Total $ 7,116 $ — $ — $ 7,116 Investments in marketable securities US government agency bonds $ 19,863 $ 2 $ ( 1 ) $ 19,864 US treasury bills 15,926 2 ( 1 ) 15,927 US government bonds 23,246 — ( 2 ) 23,244 Total $ 59,035 $ 4 $ ( 4 ) $ 59,035 (1) Gross unrealized gain (loss) is pre-tax and is reported in other comprehensive loss. 10 The contractual term to maturity of the $ 36.5 million of short-term marketable securities held by the Company as of June 30, 2020 is less than one year. As of June 30, 2020, the Company held $ 1.6 million of long-term marketable securities with contractual maturities of more than one year, but less than five years. As of December 31, 2019, the Company’s $ 59.0 million of marketable securities had contractual maturities of less than one year. There were no realized gains or losses for the three and six months ended June 30, 2020 or 2019. 5. Equity method investment In April 2018, Arbutus entered into an agreement with Roivant Sciences Ltd. (“Roivant”), its largest shareholder, to launch Genevant Sciences Ltd. (“Genevant”), a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by Arbutus’ lipid nanoparticle (“LNP”) and ligand conjugate delivery technologies. Arbutus licensed exclusive rights to its LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties. Arbutus retained all rights to its LNP and conjugate delivery platforms for HBV. Arbutus is entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents. If Genevant sub-licenses the intellectual property licensed by Arbutus to Genevant, Arbutus would receive upon the commercialization of a product developed by such sub-licensee the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee. As of June 30, 2020, the carrying value of Arbutus’ investment in Genevant was zero and Arbutus owned approximately 40 % of the common equity of Genevant. On July 23, 2020, the United States Patent and Trademark Office before the Patent Trial and Appeal Board ("PTAB") announced their decision in Moderna Therapeutics, Inc.'s challenge of the validity of U.S. Patent 8,058,069 ("the '069 Patent"). In this decision, the PTAB determined no challenged claims were unpatentable. While Arbutus is the patent holder, this patent has been licensed to Genevant. The '069 Patent was included in this license agreement between Genevant and Arbutus. Arbutus is gratified by the recent decision of the Patent Trademark and Appeals Board, upholding the validity of one of the patents protecting its LNP technology that was licensed to Genevant. This decision reinforces Arbutus’ continuing belief in the potential of this technology. On July 31, 2020, Roivant recapitalized Genevant through an equity investment and conversion of previously issued convertible debt securities held by Roivant. Arbutus participated in the recapitalization of Genevant with an equity investment of $ 2.5 million. Following the recapitalization, Arbutus owns approximately 16 % of the common equity of Genevant. In connection with the recapitalization, the three parties entered into an Amended and Restated Shareholders Agreement that provides Roivant with substantial control of Genevant. Arbutus has a non-voting observer seat on Genevant’s Board of Directors. Arbutus’ entitlement to receive future royalties or sublicensing revenue from Genevant was not impacted by the recapitalization. 6. Accounts payable and accrued liabilities Accounts payable and accrued liabilities are comprised of the following: June 30, 2020 December 31, 2019 (in thousands) Trade accounts payable $ 1,182 $ 2,398 Research and development accruals 2,732 1,433 Professional fee accruals 304 809 Payroll accruals 1,589 2,314 Site consolidation accrual — 137 Other accrued liabilities 6 144 Total accounts payable and accrued liabilities $ 5,813 $ 7,235 7. Sale of future royalties On July 2, 2019, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with the Ontario Municipal Employees Retirement System (or “OMERS”), pursuant to which the Company sold to OMERS part of its royalty interest on future global net sales of ONPATTRO® (Patisiran) (“ONPATTRO”), an RNAi therapeutic currently being sold by Alnylam Pharmaceuticals, Inc. (“Alnylam”). 11 ONPATTRO utilizes Arbutus’ LNP technology, which was licensed to Alnylam pursuant to the Cross-License Agreement, dated November 12, 2012, by and between the Company and Alnylam (the “LNP License Agreement”). Under the terms of the LNP License Agreement, the Company is entitled to tiered royalty payments on global net sales of ONPATTRO ranging from 1.00 % to 2.33 % after offsets, with the highest tier applicable to annual net sales above $ 500 million. This royalty interest was sold to OMERS, effective as of January 1, 2019, for $ 20 million in gross proceeds before advisory fees. OMERS will retain this entitlement until it has received $ 30 million in royalties, at which point 100 % of such royalty interest on future global net sales of ONPATTRO will revert to the Company. OMERS has assumed the risk of collecting up to $ 30 million of future royalty payments from Alnylam and Arbutus is not obligated to reimburse OMERS if they fail to collect any such future royalties. The $ 30 million in royalties to be collected by OMERS is accounted for as a liability, with the difference between the liability and the gross proceeds received accounted for as a discount. The discount, as well as $ 1.5 million of transaction costs, will be amortized as interest expense based on the projected balance of the liability as of the beginning of each period. Over the course of the Agreement, the actual interest rate will be affected by the amount and timing of royalty revenue recognized and changes in the timing of forecasted royalty revenue. On a quarterly basis, the Company will reassess the expected timing of the royalty revenue, recalculate the amortization and effective interest rate and adjust the accounting prospectively as needed. As of June 30, 2020, the effective annual interest rate was approximately 22 %. The Company will recognize non-cash royalty revenue related to the sales of ONPATTRO during the term of the Agreement. As royalties are remitted to OMERS from Alnylam, the balance of the recognized liability will be effectively repaid over the life of the Agreement. From the inception of the royalty sale through June 30, 2020, the Company has recorded an aggregate of $ 3.0 million of non-cash royalty revenue for royalties earned by OMERS. There are a number of factors that could materially affect the amount and timing of royalty payments from Alnylam, none of which are within the Company’s control. During the three and six months ended June 30, 2020, the Company recognized non-cash royalty revenue of $ 0.7 million and $ 1.3 million, respectively, and $ 1.1 million and $ 2.1 million of related non-cash interest expense, respectively. The table below shows the activity related to the net liability for 2020: Six Months Ended June 30, 2020 (in thousands) Net liability related to sale of future royalties - beginning balance $ 18,992 Non-cash royalty revenue ( 1,345 ) Non-cash interest expense 2,092 Net liability related to sale of future royalties - ending balance $ 19,739 In addition to the royalty from the LNP License Agreement, the Company is also receiving a second, lower royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas Therapeutics, Inc. (“Acuitas”). The royalty from Acuitas has been retained by the Company and was not part of the royalty sale to OMERS. 12 8. Contingencies and commitments Product development partnership with the Canadian Government The Company entered into a Technology Partnerships Canada (“TPC”) agreement with the Canadian Federal Government on November 12, 1999. Under this agreement, TPC agreed to fund 27 % of the costs incurred by the Company, prior to March 31, 2004, in the development of certain oligonucleotide product candidates up to a maximum contribution from TPC of $ 7.2 million (C$ 9.3 million). The Company received a cumulative contribution of $ 2.7 million (C$ 3.7 million). In return for the funding provided by TPC, the Company agreed to pay royalties on the share of future licensing and product revenue, if any, that is received by the Company on certain non-RNAi oligonucleotide product candidates covered by the funding under the agreement. These royalties are payable until a certain cumulative payment amount is achieved or until a pre-specified date. In addition, until a cumulative amount equal to the funding actually received under the agreement has been paid to TPC, the Company agreed to pay 2.5 % royalties on any royalties the Company receives on sales of Acrotech Biopharma LLC’s Marqibo® (formerly Spectrum Pharmaceuticals, Inc.). For the six months ended June 30, 2020 and 2019, the Company earned royalties on Marqibo sales in the amounts of $ 0.1 million and $ 0.1 million, respectively. The resulting royalties payable by the Company to TPC were not material in either period. The cumulative amount paid or accrued up to June 30, 2020 was less than $ 0.1 million, resulting in the contingent amount due to TPC being $ 2.7 million (C$ 3.7 million). Arbitration with the University of British Columbia Certain early work on lipid nanoparticle delivery systems and related inventions was undertaken at the University of British Columbia (“UBC”), as well as by us that was subsequently assigned to UBC. These inventions are licensed to the Company by UBC under a license agreement, initially entered into in 1998 and amended in 2001, 2006 and 2007. The Company has granted sublicenses under the UBC license to certain third parties, including Alnylam. In November 2014, UBC filed a demand for arbitration against the Company and in January 2015, filed a Statement of Claim, which alleged entitlement to $ 3.5 million in allegedly unpaid royalties based on publicly available information, and an unspecified amount based on non-public information. UBC also sought interest and costs, including legal fees. The Company filed its Statement of Defense to UBC’s Statement of Claims, as well as a Counterclaim involving a patent application that the Company alleged UBC wrongly licensed to a third party. The proceedings were divided into three phases, with the first hearing taking place in June 2017. In the first phase, the arbitrator determined which agreements are sublicense agreements within UBC’s claim. Also in the first phase, UBC updated its alleged entitlement from $ 3.5 million originally claimed to seek $ 10.9 million in alleged unpaid royalties, plus interest arising from payments as early as 2008. The arbitrator also held in the first phase of the arbitration that the patent application that is the subject of the Counterclaim was not required to be licensed to the Company. The second phase of the arbitration took place in the second quarter of 2019. In August 2019, the arbitrator issued his decision for the second phase of the arbitration, awarding UBC $ 5.9 million, which includes interest of approximately $ 2.6 million. The Company paid the $ 5.9 million award to UBC in September 2019. The arbitrator also held that the third phase of the arbitration, which would address patent validity, should the Company choose to pursue a third phase, would not provide a defense to the award. An award for costs and attorneys’ fees is still to be determined. The Company has accrued $ 0.4 million for an estimate of a potential award for costs and attorneys’ fees as of June 30, 2020. Stock Purchase Agreement with Enantigen In October 2014, Arbutus Inc., our wholly-owned subsidiary, acquired all of the outstanding shares of Enantigen Therapeutics, Inc. (“Enantigen”) pursuant to a stock purchase agreement. Through this transaction, Arbutus Inc. acquired an HBV surface antigen secretion inhibitor program and a capsid assembly inhibitor program. Under the stock purchase agreement, Arbutus Inc. agreed to pay up to a total of $ 21.0 million to Enantigen’s selling stockholders upon the achievement of specified development and regulatory milestones for (a) the first two products that contain either a capsid compound or an HBV surface antigen compound that is covered by a patent acquired under this agreement, or (b) a capsid compound from an agreed upon list of compounds. The development milestones are tied to programs which are no longer under development by the Company, and therefore the contingency related to these milestones has been reduced to zero . An additional $ 102.5 million may also be paid to Enantigen’s selling stockholders related to the achievement of certain sales performance milestones in connection with the sale of the first commercialized product by Arbutus Inc. for the treatment of HBV, regardless of whether such product is based upon assets acquired under this agreement, and a low single-digit royalty on net sales of such first commercialized HBV product, up to a maximum royalty payment of $ 1.0 million that, if paid, would be offset against Arbutus Inc.’s milestone payment obligations. 13 The contingent consideration for this acquisition is a financial liability, which is measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statements of operations and comprehensive loss (see note 3). The fair value of the contingent consideration was $ 3.2 million as of June 30, 2020. 9. Collaborations, contracts and licensing agreements Revenue contracts are described in detail in the Overview section of Part II, Item 8, “Financial Statements and Supplementary Data” in the Company’s 2019 Form 10-K. Alnylam Pharmaceuticals, Inc. and Acuitas Therapeutics, Inc. The Company has two royalty entitlements to Alnylam’s global net sales of ONPATTRO. In 2012, the Company entered into a license agreement with Alnylam that entitles Alnylam to develop and commercialize certain identified products with the Company’s LNP technology. During the third quarter of 2018, Alnylam’s ONPATTRO, which utilizes the Company’s LNP technology, was approved by the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency. The Company is entitled to tiered low to mid single-digit royalty payments on global net sales of ONPATTRO. In July 2019, the Company sold this portion of its royalty entitlement for Alnylam’s ONPATTRO to OMERS. The Company recognizes non-cash royalty revenue for royalties on global net sales of ONPATTRO collected by OMERS. See note 7 for further details. The Company also has rights to a second royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas Therapeutics, Inc. (“Acuitas”). This royalty entitlement from Acuitas has been retained by us and was not part of the royalty entitlement sale to OMERS. Revenues are summarized in the following table: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) Revenue from collaborations and licenses Acuitas Therapeutics, Inc. $ 761 $ 288 $ 1,514 $ 645 Other milestone and royalty payments 63 110 146 169 Non-cash royalty revenue Alnylam Pharmaceuticals, Inc. 690 255 1,345 518 Total revenue $ 1,514 $ 653 $ 3,005 1,332 10. Stockholders’ equity Open Market Sales Agreement In December 2018, the Company entered into an Open Market Sale Agreement with Jefferies LLC (“Jefferies”) (the “Sale Agreement”), under which it could issue and sell common shares, from time to time, for an aggregate sales price of up to $ 50.0 million. For the three and six months ended June 30, 2019, the Company issued 593,689 and 1,208,090 common shares pursuant to the Sale Agreement resulting in net proceeds of approximately $ 2.5 million and $ 5.2 million, respectively. In December 2019, the Company entered into an amendment to the Sale Agreement with Jefferies (the “Amended Sale Agreement”) in connection with the filing of a new shelf registration statement on Form S-3 (File No. 333-235674), filed with the SEC on December 23, 2019 (the “New Shelf Registration Statement”). The amendment revised the original Sale Agreement to reflect that the Company may sell its common shares, without par value, from time to time, for an aggregate sales price of up to $ 50.0 million, under the New Shelf Registration Statement. During the three and six months ended June 30, 2020, the Company issued 2,291,184 and 6,438,265 common shares pursuant to the Sale Agreement and the Amended Sale Agreement, resulting in net proceeds of approximately $ 5.0 million and $ 17.4 million, respectively. During July 2020, Arbutus fully utilized the remaining availability under the Amended Sale Agreement resulting in an additional $ 36.5 million of net proceeds from the issuance of 9,548,780 common shares. 14 Stock-based compensation The table below summarizes information about the Company’s stock based compensation for the three and six months ended June 30, 2020 and 2019 and the expense recognized in the condensed consolidated statements of operations: Three Months Ended June 30, 2020 Three Months Ended June 30, 2019 Six Months Ended June 30, 2020 Six Months Ended June 30, 2019 (in thousands, except share and per share data) Options granted during period 566,513 1,171,100 2,667,550 2,775,600 Weighted average exercise price $ 3.00 $ 2.21 $ 3.27 3.57 Research and development $ 681 $ 817 $ 1,533 1,544 General and administrative 916 2,967 1,509 3,762 Total stock compensation expense $ 1,597 $ 3,784 $ 3,042 5,306 Series A Preferred Shares In October 2017, the Company entered into a subscription agreement with Roivant for the sale of 1,164,000 Preferred Shares for gross proceeds of $ 116.4 million. These Preferred Shares are non-voting and accrue an 8.75 % per annum coupon in the form of additional Preferred Shares, compounded annually, until October 16, 2021, at which time all the Preferred Shares will be subject to mandatory conversion into common shares (subject to limited exceptions in the event of certain fundamental corporate transactions relating to Arbutus’s capital structure or assets, which would permit earlier conversion at Roivant’s option). The conversion price is $ 7.13 per share, which will result in the Preferred Shares being converted into approximately 23 million common shares. After conversion of the Preferred Shares into common shares, based on the number of common shares outstanding as of June 30, 2020, Roivant will hold approximately 41 % of the Company’s common shares. Roivant agreed to a four year lock-up period for this investment and its existing holdings in the Company. Roivant also agreed to a four year standstill whereby Roivant will not acquire greater than 49.99 % of the Company’s common shares or securities convertible into common shares. The initial investment of $ 50.0 million closed in October 2017, and the remaining amount of $ 66.4 million closed in January 2018 following regulatory and shareholder approvals. The Company records the Preferred Shares wholly as equity under ASC 480, Distinguishing Liabilities From Equity, with no bifurcation of conversion feature from the host contract, given that the Preferred Shares cannot be cash settled and the redemption features are within the Company’s control, which include a fixed conversion ratio with predetermined timing and proceeds. The Company accrues for the 8.75 % per annum compounding coupon at each reporting period end date as an increase to preferred share capital, and an increase to deficit (see Condensed Consolidated Statement of Stockholders’ Equity). 11. Related Party Transactions Through the first quarter of 2019, the Company purchased certain research and development services from Genevant. These services were billed at agreed hourly rates and were reflective of market rates for such services. The total cost of these services during 2019 was less than $ 0.1 million, which was included in the Condensed Consolidated Statement of Operations under research and development. There were no such costs incurred during 2020. Conversely, Genevant purchased certain administrative and transitional services from the Company totaling $ 19.3 thousand and $ 38.5 thousand for the three and six months ended June 30, 2020, respectively. The total income from these services was $ 73 thousand and $ 189 thousand for the three and six months ended June 30, 2019, which were netted against research and development expenses in the condensed consolidated statements of operations. In addition, during 2019 Genevant had a sublease for 17,900 square feet in the Company’s Burnaby facility. Sublease income from Genevant was $ 62 thousand and $ 124 thousand for the three and six months ended June 30, 2019, and was netted against site consolidation costs and lease liability. The Company’s Burnaby facility lease and the corresponding sublease to Genevant expired on July 31, 2019. 15